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 one of ‘my business is my pension‘.
This can definitely be true, but what can this actually look like?
As with anything related to your life after your business, it’s essential to start planning early.

It all boils down to understanding your business properly.
And what a potential exit from it would look like.
Do you know what this is?
Is it something you aspire to scale up?
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 post work-life using your business will look very different.
Understanding what you want to do, and what this might need to look like, is essential.
That way, you’ll be able to ready yourself to fund your lifestyle after you leave your business.

We’ve seen many businesses and their owners over the years.
If we were to categorise how they sort their business exit and fund their life afterwards, it tends to follow three different routes:

Lifestyle Business With a Minimal Exit Value

A ‘lifestyle business‘ is one set up to generate a level of income and no more. Or to fund a chosen lifestyle. Think SMEs, sole enterprises or creatives, usually.
In this scenario, the owner or founder decides to remain as the ‘rainmaker’. One who is responsible for a number of aspects in the business such as business development, the service or product, and the distribution.
This is their choice and often this leads to a team forming around them to make this as profitable as possible.

With the business owner relied upon on to meet so many functions, the business may not look as particularly valuable to a potential buyer (unless they have a truly unique product or service).

There needs to be a gradual process of building up and taking out company assets in the most tax-efficient way possible.
This gradually moves the pressure away from the business, as assets build upon the personal balance sheet. If done correctly, it can also significantly reduce risk. 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.
With the owner required to remain active in the business while doing so, this may not be an appealing prospect to most business owners!

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Working Towards One Significant Exit

This seems to be the scenario we all aspire to, isn’t it?
You build up your business, sell it and walk away with an 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 up the business towards the value you aspire to.
Have you considered that 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 can give you direction. As will knowing 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 as well as HMRC taking their cut!

Remember that the Business Asset Disposal Relief allowance is maxed out at £1m.
Capital gains taxes will also have to be paid too.
Once these are factored in, you may well need to build the business more than you realised to achieve the figure you aspire to for your dream lifestyle..

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 put some capital on your personal balance sheet.
But you retain enough equity in your business and work with your buyer 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, similar to a private equity firm where you retain a shareholding in your pre-existing business. Or it may involve taking on shares in your buyer.

This is where knowing the lifestyle you want going forward afterlife in your business is, again, key.
Would you be happy to partially exit and fund a lifestyle you dreamed of? Knowing that 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 to what type of buyer you may want to approach. It also helps in negotiations if you have a clear number you want to work towards.

Don’t forget…

As broad as these scenarios are, they may evolve from one into the other at certain points. But without seriously thinking about what you want to happen, and taking a good hard look at your business now, how can you take control of your future?

Each scenario comes with different processes.
So the earlier you plan for these, the better the arrangement from a tax and investment perspective. As well as potentially leave a legacy of what you have achieved.

Just remember that the earlier you plan for this the better, as always.