Financial planning: Can we retire if we sell our business?

Monday, 11 April 2022

Almost every business owner is aware of how important it is to prepare for what the future holds, and will have an idealistic view of how and when their business should be sold.  The key question is: Will a sale produce enough cash for me to retire?  

The experts at wealth management firm, Saunderson House believe it’s important to consider finances holistically when determining whether objectives are realistic. Here they share their advice and practical tips for business owners when it comes to planning their future finances... 

Cash flow planning is a powerful tool

It helps determine whether future goals are achievable, the effect of structuring wealth more tax-efficiently and also provides some clarity on what the future could look like. It can be used to model various future scenarios and stress test these over the long term to ultimately provide peace of mind for the future.   

Take the case of Sam and Lianne1, both aged 46 with their own marketing business providing content for restaurant owners. Their long-term goal is to be able to retire after selling their business in approximately 14 years (aged 60).  

Away from the business, Sam and Lianne have a portfolio of around £520,000 (including pensions, ISAs and a joint general investment account) and illiquid assets (i.e. property) of £1,000,000 (minus a mortgage of £450,000) which consists of their main residence only.  

Having never received financial advice previously, they seek advice to understand whether they can afford to spend £50,000 per annum in today’s terms for the rest of their lives if they were to sell the business at age 60 for a value of £1,000,000 (with 50% of the proceeds received at age 60 and 50% at age 61), retained in cash for the purpose of their ‘base plan’ below. This is a conservative estimate of what they believe their business will be worth.  

Well, can they? The answer is yes, as explained below: 

 Graph 1: Current Situation 

The blue bars represent their cash flow which is initially met by the salaries they are taking of £50,000 each from the business in the pre-retirement stage. From age 60 (the beginning of the retirement stage), the spikes (at age 60 and 61) show the proceeds received from the business sale and from this point onwards, cash flow is met from their savings and investments as well as their state pensions when they commence at age 67. The above graph shows that they have no projected shortfall in liquid assets and they could afford to meet their expenditure up to age 100. 

Graph 2: Market Crash 

The market crash has been modelled in the year after the sale proceeds from Sam and Lianne’s business have been received (when they are no longer earning and therefore are required to draw from their existing assets to fund expenditure) and is depicted by the red dash at the bottom of the graph at age 62. We now have red bars at the end of the cash flow when Sam and Lianne reach age 96 which indicate a projected shortfall in liquid assets (the property is not touched in this scenario) to meet their ongoing expenses meaning they could be forced to downsize their main residence to fund ongoing expenditure.  

Better wealth structuring 

Sam and Lianne were distressed at the thought of having to sell their family home – but our advice was that they didn’t have to. We advised that there were things they could do to enhance the structure of their wealth over the long term.  

1. Pay themselves a salary of £9,500 per annum (the limit for when employees start to pay National Insurance contributions and which is sufficient to accrue national insurance credits — currently £6,240 per annum for employees) and then take the rest of their drawings from the business as dividends (given they are both directors) which would lead to tax savings; 
2. Transfer the maximum ISA contribution of £20,000 each from their joint general investment account to their respective ISAs each year thereby reducing ongoing tax charges;  
3. Whilst retaining a cautious investment profile, invest any excess cash they have (including proceeds from the business sale) into their investment portfolio whilst keeping an emergency fund equal to six months’ expenditure to protect their assets from being eroded by inflation and reducing their purchasing power over time. 
4. Consider making employer pension contributions in due course (once profits have fully recovered from the Covid-19 pandemic) to reduce the level of business profits that will be subject to corporation tax on an ongoing basis (this has not been modelled above, but is able to be added in the future, as applicable). 

As a result of the first three steps above and better structuring of their wealth planning, Sam and Lianne’s position after the modelled market fall changed and there was no longer a projected shortfall in their cash flow: 

Graph 3: Better Wealth Structuring 

The above helps to show the power of compounded investment returns and how making small structural changes in their planning continuously made over the long term can lead to very different outcomes – there is now no projected shortfall in the cash flow at all. The advice taken also led to Sam and Lianne’s tax bill reducing by over half whilst they are still working – these savings have been invested into their investment portfolio in the above, helping to increase their overall wealth over the long term.

In summary, the above scenarios illustrate the importance of preparing for future events, and also how careful planning and structuring can provide some resilience to adverse events. There are various other scenarios that can be modelled with cash flow forecasting, for example: analysing maximum expenditure scenarios, planning for less proceeds than expected from a business sale and understanding the affordability of gifts for life events (e.g. weddings) or for philanthropic reasons - the assumptions for these can be very malleable to personal circumstances.  

And finally, for business owners, cash flow planning can be particularly important as a means of ensuring assets are suitably structured given that a lot of business owners see their business as their ‘retirement pot’ making it even more important to plan for their future.  

If you would be interested in a discussion with one of our advisers regarding your personal circumstances, please contact Saisha Moyce on Saisha.Moyce@saundersonhouse.co.uk or call 020 7315 6685 for further information. 

Disclaimers: 

Saunderson House Limited is authorised and regulated by the Financial Conduct Authority. In the United Kingdom, this communication may constitute a financial promotion for the purposes of the Financial Services and Markets Act 2000. None of the commentary provided should be regarded as advice. It is general information based on a snapshot of these investors’ circumstances and represents our current understanding of law and HM Revenue and Customs practice as at 08 April 2021. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering any investment activity.