Financial planning for business owners can be hard to navigate. With so many moving parts to figure out, it can feel like it’s taking too much time away from running your business.

This pressure often increases if you’re thinking about selling your company. For lots of owners, selling is the ultimate goal, allowing you to enjoy the rewards of all your hard work. This can come in the form of a full exit or a partial sale to crystallise some value and / or take some risk off the table. But it can be a tough time as there are lots of new challenges and variables to navigate.

We’ve helped lots of business owners plan ahead of a business transaction and navigate through this tricky period. We’ve listed our top five financial dos and don’ts for anyone thinking of selling.

1. Don’t rush into it.

A bit of careful planning will help you get the best outcome from the transaction. Make sure you start to seriously consider your options well before you begin any kind of negotiation.

At this early point, you’ve got a lot of choices available to you. You can do your research and run the numbers to try out different scenarios. Once negotiations have started, you’ll need to move fast and make quick decisions. During the transaction there probably won’t be sufficient bandwidth to do much analysis, so make sure you’ve got a plan in place and well organised ahead of time.

It’s also important to get the timing right on your sale. Hit the balance between getting the best number and selling it at the right time. Holding out for a higher sale price might feel like the right thing to do, but you could be harming your business in the process.

Working for longer might mean you lose the advantages that make your business special. Tech could change, making it easier to replicate what you do, or your competition could catch up with you. You could also be at a disadvantage personally — working for too long could cause burnout or health issues, plus you might miss out on time with the family.

If you’re considering when to sell, weigh up the potential downsides of delaying vs. the chance of getting a bigger number at a later date.

2. Do ask: what’s your magic number?

A lot of business owners struggle when it comes to linking the value of their company with their personal objectives. How much do I need to sell for, so that I can live the life I want? It might seem like a bit of guesswork, working towards a big round number that feels right.

The problem is, this approach doesn’t take into account how much cash you’ll actually need to live on after you’ve sold. It can leave owners who’d planned to retire being forced back into work if they run out of cash.

Instead, there’s a science to finding the right number, and it should be based on modelling your life goals. What do you want your life to look like after you’ve sold? Do you want to work again, live a life of luxury, or do some work on the side perhaps, like a non-exec position or investing your time in another business?

Answering these questions will start to lead you to your “magic number” — the amount you'll need to sell your company for, to live your dream life afterwards.

Now clearly, you could just add up all that expenditure and target that for your sale value, but you’ll likely be quite far wide of the mark. In order to get to this accurate “magic number”, you’ll first need to run some detailed financial modelling based on the goals and lifestyle questions above.

This modelling should stress test different scenarios, factor in how the sale proceeds could be invested to generate income, factoring in your various tax allowances, inflation, when you’ll actually require the capital for each of these goals etc.

Done right, this financial modelling will not only give you confidence in your “magic number”, but you may find when you factor in sensible financial planning with the sale proceeds, the number is less than you imagined.

3. Don’t panic if the sale value doesn’t match your number.

In reality, it’s unlikely you’ll sell your business for precisely your magic number, so there are a couple of different scenarios you’ll need to plan for:

You sell for less than your magic number

First, you need to check that your goals are realistic. Are there some palatable compromises that you are willing to make?

• Perhaps you want to buy a holiday home but could you rent this out for part of the year to allow it to cover its costs?
• Could you sell or downsize property in retirement for a capital injection?

Other compromises might not be so palatable like:

• Spending less
• Gifting less to the next generation
• Working harder for longer in an attempt to get the value you need

Then, what could you be doing now, ahead of the transaction, to build up your other savings / retirement pots?

• Could you make best use of your corporate structure now, whilst you have it, to build up these pots?
• Could you be taking more money out of the company now and making it work harder for you rather than leaving it as cash in the business?
• How can you make your position as efficient as possible to build up your other assets?

You sell for much more than your magic number

It sounds like this would be a big win, but there could be tricky implications for you further down the line, such as a large inheritance tax bill:

• Can you sell sooner allowing you to live your ultimate life earlier?
• Is gifting to the next generation an option to reduce your estate?
• Are you thinking big enough for your ultimate life?
• Are there tax efficient investment options available to help you keep more of your sale proceeds?

These are all great options to pursue, thinking about them now and stress-testing your position leading up to a sale allows you to put plans in place to react quickly and to, importantly, make the right decisions.

4. Do seek advice early

The idea of selling your business might feel overwhelming. But you don’t have to do it alone. Working with a financial planner like Octopus Wealth can reduce the burden on you as a business owner.

The key is starting early. Making sure the shape of your business deal fits with your personal objectives should be a priority. Building a plan with an adviser before you start the sales process will give you the best chance of achieving all of your goals and aspirations. This will give you time to plan properly and consider all your options.

Taking a holistic approach, we’ll start by looking at your goals and visualising your future. We’ll get to the bottom of what’s most important for you, how much appetite you have for risk, and what your perfect future looks like. Using this information, we’ll work backwards using detailed financial modelling to calculate your magic number.

We’ll also run different scenarios to take into account a higher or lower sales value, to stress test your position and allow us to plan for different eventualities. This means you’ll have the information you need to make informed decisions during the selling process.

Bringing in experts can help you get the best outcome. Our magic number analysis has helped clients realise they can sell earlier than planned, giving them a better quality of life. At the same time, we’ve helped people make the most of transaction values that have eclipsed their magic numbers.

5. Don’t forget to enjoy life post-sale

We’ll still be here to help if you need us. It’s important to regularly review your financial plan to make sure you’re still on course, tweaking and reviewing the strategy as the world around us inevitably changes. Likewise if something unexpected happens that impacts the finances, we can advise on the best way to get back on track, so you can keep living your best life after you’ve sold your business.

If you’re thinking about selling your company get in touch now to learn more about how we help people in your situation.

Disclaimer:

This blog post is a marketing communication for information purposes only and is not intended as an offer or solicitation to buy or sell any particular financial product. Personal opinions may change and in producing this article we have not taken into consideration any individual circumstances, therefore it should not be seen as advice or a personal recommendation.

Any references to past performance should not be taken as a reliable indication of future returns. The value of an investment, and any income from it, can fall or rise. Fees and commissions may have not been expressly indicated, and you should take into account the effects that these have on the performance of a financial portfolio.

Octopus Wealth is authorised and regulated by the Financial Conduct Authority.