As a financial planning company advising many small and medium sized business owners (SME’s) this is probably the most asked question we get. Most SME owners have a deep attachment to their business as it was them who grew the initial seed from a fledging idea, invested their own capital in the project and took significant risk to grow the company or partnership in to a profitable enterprise.
Not all will be natural or serial entrepreneurs but they will all have taken this personal risk for a variety of reasons and all are likely to have had a notion that one day the fruits of their labours may be worth some money and will allow them to stop working and be financially independent.
Most SME owners who work reasonably closely with a decent Accountant will have an idea of the possible worth of their business based on an approximate EBITDA multiple (Earnings Before Interest Taxation Depreciation and Amortisation), but very few have any real notion of whether this figure is enough to achieve personal financial independence.
It is at this point that we usually start to receive phone calls from Directors and Partners who want to start to understand how their business planning should dovetail with their personal financial planning. In truth these questions should have been considered earlier if a truly efficient financial plan is to be developed but most people treat them separately, with the Accountant looking after the business and an IFA looking after personal affairs.
A financial planner will bring the two together starting with what it is the client wants to achieve in terms of their lifestyle and be able to provide the answers to some key questions for the first time. The plan will take in to account the clients entire situation including all assets, liabilities, income and expenditure and through a process of discussion and cashflow analysis will provide the SME owner with much needed clarity. Having ascertained the age or date that the client wishes to be achieve financial independence the planner will be able to answer the following questions:
- How much wealth do I need in order to be financially independent?
- Given the existing pensions and savings I have how much do I need to sell my business for and when?
- What profit do I need within the business to achieve this number?
- What rate of growth do I need within my existing investments and pensions to achieve my goal?
- How much risk do I need to take with my invested assets and the proceeds I get from selling my business long term?
- What should I do with the proceeds from my business?
- How do I ensure the wealth I have created is passed to whoever I would wish to receive it efficiently and with the minimum exposure to taxation should I die?
In other words a Financial Planner with expertise in this field will be able to firstly qualify whether a particular objective is achievable or not and then crucially will be able to quantify the size of any shortfall or over provision. From this a plan can be constructed often in conjunction with the Accountant to get the SME owner where they want to be.
Read our latest case study with Mike the Dentist, on the blog.
Financial Planner & Director