“Business owners are busy people, most of their time and energy is spent on one thing – their business and driving it forward. Sometimes, this can be to the detriment of their personal and business financial planning. Our job is to understand the person, the business and their objectives in the short, medium and long term. Everyone’s objectives will be different, and no two plans will ever be the same – and so while a definitive list of financial planning requirements for business owners isn’t realistic, I can give an indication as to what businesses at different stages in their life cycles should be thinking about.
1. If your business is… young, and starting to make some profit
While an initial focus of a business at this stage is thinking about how best to extract capital – usually in the form of a salary and dividends – you should also make sure that starting a pension is on the agenda. This is an extremely tax efficient form of taking cash out of the business, but it also ensures that you start some longer term financial planning for you as an individual. Even if minimal amounts are paid in contributions, they can be caught-up at a later date when the business can afford it. If an income/dividend is taken, discussions can take place around paying down debt (mortgages, etc.), obtaining the best mortgage rates, building up cash savings and perhaps beginning some equity based ISA investments. Other considerations include personal life cover and business protection, as well as building a strong team of advisers – not just financial but also accountancy and legal too, for both yourself and your business.
2. If your business is… a rapidly growing business
A rapidly growing business will be accruing significant cash on the balance sheet. Again, the combination of salary, dividend and pension needs to be considered, as does reducing debt and building more substantial investments outside of and separate from the business. This gives you a safety net, as well as diversifying your risk. What else should you consider? The best use of your growing capital: whether it should be used to pay down debt, for example, or invested separately. For the business, one of your key issues will be attracting and retaining talent. Good remuneration packages and benefits (pension, death in service, private medical cover and so on) are all important here.
3. If your business is… an established SME
If your business is more mature, then staff benefits and corporate planning should be firmly on the agenda. Shareholders and senior staff might want to look at key-man cover, director share protection and bespoke pension planning, perhaps even using a pension to purchase business premises. By now, you should have an established investment portfolio with a combination of pension and non-pension investments that are not linked to business in any way. And you might have early thoughts about exit planning – trade sale, private equity investment or perhaps a management buyout. Again, having a trusted group of advisers is essential.
4. If your business is… at the impending or post-sale stage
For most business owners this is the end goal, and often they have a ‘magic number’ in mind when it comes to sale. This is the figure that you need in order to step away from a business you have nurtured and grown, perhaps in order to retire comfortably or move on to your next business idea. Advice is paramount at this point, to create a plan that sets out how a sale can provide you with the income can capital requirements you need – not just initially, but in the long term, too. Inheritance tax planning may then become an issue to protect future generations and to pass capital down the family efficiently.”
Steve Jordan is a director at Five Wealth with particular skills in advising business owners, entrepreneurs and high-income professionals. Use the links below to read his other blog posts, or to find out more.