Financial planning for business owners

The benefits of holistic financial planning to solicitors and their business clients 

We build strong relationships with solicitors and other advisers to ensure the best outcomes for our mutual clients. In this article, we discuss how, working collaboratively, we can provide financial planning to business owners as they consider selling their business, while taking care of loved ones and achieving their desired lifestyle and retirement goals.

We also consider how holistic financial planning can be supported by scenario building provided through cashflow modelling, budgeting and finding the most tax-efficient ways to structure their wealth to help them achieve their goals.

Three key questions business owners ask us when selling their business

The following three simple questions, aligned to key stages of the business ownership lifecycle, help form the foundation of how we will support you and your clients throughout and create a clear plan that grows and adapts as their needs change along the way.

1. Pre-sale: will I be able to make my money last?

The initial stage of the planning process is all about getting the business in the right shape, and this is where we work collectively with you and your clients. Prior to the transaction, we will engage with their solicitor to ensure that their Articles of Association are up to date, employment contracts are in place and any health implications that could affect the seller are considered. Prior to sale, it will also be important that Wills and Lasting Powers of Attorney are in place, and even keyman insurance and directors’ shareholder protection, to ensure all eventualities are covered during the process.

When a business owner is looking to sell their business, the primary concern is losing their main source of income. We consider how much they require from the sale to achieve all the things they plan to do next, by understanding their current lifestyle and what they envisage for the future.

If they are looking to retire, this is the time to understand what that retirement looks like. What are their plans? They will need to understand how long their capital can support their income needs.

This is where cashflow modelling will form an important part of the whole process and help business owners understand where they are and better visualise their future. They will have been so focused on building the business that often their personal affairs are not at the forefront of their minds. For them, the two things are inextricably linked yet need separate focus, and this is where they rely on having an experienced and expert team around them.

When discussing the future, we use cashflow modelling to play out a variety of ‘what if’ scenarios to help them understand how much money they will need to achieve their dreams and aspirations. This conversation is about what are they going to do next. This is a major change in their lives and having peace of mind that all will be well is a good starting point.

Market shocks can be incorporated into the modelling approach: both individual shocks and general stock market movements like those witnessed between 1998 and 2020. This means pragmatism and ‘defensive financial engineering’ can be fully incorporated into the approach.

This exercise will provide useful insight into how much money they might need. It can help determine if the business owner could sell for less and still be comfortable, allowing them to make an informed decision when an offer comes in and possibly even sell sooner. We make sense of the variety of complexity to give the client’s financial future a clear direction.

2. Selling: how will the sale of my business impact my tax position?

Prior to sale, we will ensure that all tax allowances are used such as maximising pension contributions and carrying forward any contributions that exceed the annual allowance and still benefit from tax relief. This may also be an opportunity to reduce cash held on the balance sheet.

When selling the business, Capital Gains Tax (CGT) may need to be paid on any profit. This can include anything involved with the business, such as land and buildings, machinery and even shares. It may be possible to reduce the potential tax bill using Business Asset Disposal Relief (BADR).

To qualify for BADR, which replaced Entrepreneur’s Relief in 2020, a business must have been owned for at least two years. If applicable, BADR can be used to reduce the CGT that business owners pay on qualifying assets down to 10%. This can be applied to the value of the business and its assets up to a lifetime threshold of £1m.

Any gains that don’t qualify for BADR, or are above the £1m threshold, will be charged at 10% or 20% for higher rate taxpayers, subject to any annual exempt amount and depending on the availability of the individual’s basic rate band.

Once all taxes have been covered on exit, it is now time to transition clients from the world of corporate tax to personal tax.

Post-sale, our role as financial planners is to ensure that all their allowances are used to provide the most tax-efficient income in retirement. If they are a married couple, then we have two sets of allowances to work with. This means that the gross income in retirement may not need to be as high as they may think, to achieve the net income required each year. We have their personal allowance, dividend allowance, savings allowance, capital gains tax exemption and tax-free cash from pensions, which combined will help to provide the most tax-efficient income in retirement.

Another tax to consider is inheritance tax (IHT). During ownership of a trading business, business relief would apply upon death, meaning that the value of the business will be partly or wholly outside the IHT net on death. Once the business is sold, all the proceeds, without any financial planning, would normally fall back into their estate for tax purposes.  Although we will often arrange life policies in trust as a useful way of providing liquidity in the short term, we work with our clients to make longer term plans for this, with a range of options including qualifying reinvestments and gifting, either outright or into trusts.

3. Post-sale: can I take care of my loved ones and live the kind of retirement I would like?

Once the sale is complete, there is time to bring their plan together by structuring investments to make sure they provide the level of income required to maintain their desired lifestyle going forwards. One key element of this is establishing attitude to risk. At this point in their lives, it will be based upon how much risk they need to take, rather than the risk appetite they had when building their business.

This is where we dovetail goals and objectives with inheritance tax planning. Now that the cash from the sale forms part of their estate, we want to protect it as much as we can and find a tax-efficient way to mitigate their IHT liability on death, thereby helping to ensure the maximum legacy for their family or loved ones.

Cashflow modelling will again support this part of the journey as this is the time when we can consider gifting, while at the same time securing their own future needs. Ongoing advice is essential at this stage as there may be changes in circumstances, legislation, and investment markets, which must be considered, year on year.

Working with you on financial planning for business owners

We can only achieve any of the above by collaborating with solicitors and other professionals and using their specialist services.

We know that, as their trusted adviser, your clients need your advice on a wide range of issues. Our complementary expert wealth management services will ensure that we’ll work with you to build your clients’ wealth with confidence. By providing them with a comprehensive proposition and a holistic approach to financial planning, we will support them through the personal challenges they face as a business owner, and beyond sale into the type of retirement they’ve worked hard to create.

Talk to one of our financial planners

To discover how we’ll work collaboratively with solicitors, accountants and your business owner clients, you can book a free consultation.

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. Past performance is not a reliable indicator of future performance.

The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.

The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.