How Do You Use Your Business To Fund Life After a Sale/Exit? 3 Typical Ways We See It Happening:

Phil Hendry06/05/2021

As many owners will admit, the consistent view is that ‘my business is my pension’. This can definitely be true, but what can this actually look like? As with anything related to teeing up life after your business, it’s essential to plan early.

This comes down to understanding your business properly, and what a potential exit from it looks like….do you know this? Is it something you aspire to scale or is it something you want to run as more of a lifestyle business? This is important because the way in which you could fund your life after your business using your business will look very different.

Understanding what you want to do, and what this might need to look like, is essential, in order to successfully set yourself to fund your lifestyle after you leave your business.

If you can categorise how owners/founders tend to exit their business and ultimately fund life afterwards, it tends to follow three different routes:

Lifestyle Business With a Minimal Exit Value

This scenario reflects a business where the owner and founder have remained as the ‘rainmaker’ who is responsible for a number of aspects in the business such as business development, the service/product, and the distribution. This is by choice obviously and often this leads to a team around the owner/founder to make this as profitable as possible.

Because of the reliance on the business owner in so many functions, the business is not likely to be hugely valuable to a potential purchaser (short of having a truly unique product/service).

This ultimately means there needs to be a gradual process of taking company profits, and building up assets (properties, stocks and shares, cash etc.) out with the business, in the most tax-efficient way possible.

This allows a gradual move of the pressure away from the business, as assets build upon the personal balance sheet, which can also reduce risk significantly if done well.

Any sort of succession/exit tends not to represent a great deal of capital from the business in the grand scheme of things, not usually much more than a few years profits/turnover. This is, again, because of the reliance on the owner/founder to maintain and transition relationships. This also usually requires the owner to remain active in the business while doing this, not an appealing prospect to most business owners!

You Work Towards One Significant Exit

I think this is the scenario we all aspire to, isn’t it? Build up a business to walk away with a life-changing amount of money that will be able to fund the lifestyle you wish.

Obviously, this does increase risk if all your eggs are in one basket, but as always with risk and reward, the upside can be significant if you get it right. There tends to be less free cash flow along the way to extract and put onto your personal balance sheet, if you need to scale the business towards the value you aspire to. You may actually need to bring in investors at different points to help fund this.

Thinking ahead to what you want to provide yourself and your family does still give some good direction, to know just how big you will need to grow your business to walk away with the number you dream of.

It’s important to remember though, there is a big difference between what you sell your business for, and what you are left with. You cannot forget professional fees accrued while selling and importantly taxes on the sale. With the Business Asset Disposal (formerly Entrepreneurs Relief) Relief allowance maxed out at £1m, and capital gains taxes looking like they may rise, you will need to factor this in. Once you factor these in, you may well need to build the business more than your realised to achieve the figure you aspire to for your lifestyle going forward.

You Sell Part Of The Business But Remain Involved To Push It On

In this scenario, you sell part of your business to take risk off the table and have that capital on your personal balance sheet. But you retain some equity in your business (or the acquirer of the business) and work with your acquirer to grow it further. This means part of your business value during the partial sale remains in play for future growth. This could look like partnering with a financial buyer like a private equity firm where you retain a shareholding in your pre-existing business. Or it may involve taking on shares in your acquirer.

This is where knowing the lifestyle you want going forward afterlife in your business is, again, key. Can you partially exit and fund the lifestyle you dreamed of, so any retained ownership would only ever be the icing on the cake? Or are you reliant on a further exit for this? It provides an excellent guide as to what type of buyer you may want to entertain / approach. Also, it helps in negotiations if you have a clear number you want to work towards.

Obviously, some scenarios may evolve from one into the other at certain points, but without seriously thinking about what you want to happen, then reflecting on your business now, how can you take control of your future.

In each scenario, there are proceeds, which again, the earlier you plan, the better they can be arranged from a tax and investment perspective to fund your life ahead, as well as potentially leaving a legacy of what you have achieved. The earlier you plan this the better, as always.