Done well, running a business can be a wonderful way of securing financial freedom for you and your family. Here are my four best, quick tips for achieving this:
- Protect your business
- Protect your family
- Manage risk by separating personal and business finances
- How much do you need to sell it for?
Protect your business
You will have worked for years and years to build up the business, but that can be taken away in an instant by the death or critical illness of a director or key employee.
Imagine your best sales director died yesterday. What would you do? How long would it take to find and train a replacement? How much would it cost to recruit them?
Imagine your business partner died yesterday. What would you do? Their shares will pass to their family and they might not want anything to do with the business, they just want the cash from selling the shares to you. But you don’t have the cash. Or possibly worse, they want to take an active role in running the business and you don’t think they have a clue how to do so.
In both these situations, key person insurance policies can protect the business from death or critical illness of those vital to its ongoing success.
There are various ways of setting such policies depending on the business’s particular circumstances, e.g. how many business owners there are.
Life insurance is relatively inexpensive as death is statistically unlikely for those of working age. Critical illness is a bit more expensive, again for statistical reasons. The cost of the premiums really shouldn’t deter you from having such cover, most people we talk to are pleasantly surprised at the costs.
The fear of insurance companies doing anything they can to avoid paying out in event of a claim is very, very rare. In 2019, the ABI report that over 97% of life insurance claims and over 91% of critical illness claims were paid. The biggest reason for declining a claim was non-disclosure. Claiming against lapsed and cancelled policies also happens. So, if you declare all medical matters upfront, keep paying the premiums and don’t cancel the direct debit you have little to worry about.
Protect your family
Your income from running your business could well be a key part of funding your family’s lifestyle. What would happen to your family if you died or suffered a critical illness yesterday?
Again, life insurance and critical illness policies can be set up to cover this loss of income, either paying out as a lump sum or a regular income. I have both types of policies on my own life.
For life insurance, this can be done via a Relevant Life Plan where the company pays the premiums, which are legitimate business expenses, but the policy is held in trust or the business owner’s family. Again, I have one of these policies on my life.
The same comments about costs and the proportion of claims settled also applies here.
Manage risk by separating personal and business finances
Running a business can be all-consuming, you can spend so much time on and in the business, you neglect your own finances. At Chatfield, we ensure business owners are thoroughly well organised in all aspects of their finances, both corporate and personal.
A key element of successful financial planning is the discipline of extracting profits tax efficiently from your business and reinvesting them in your own name. This can be via personal pension, SIPP, or SSAS where you can also use your pension to buy and own your business premises.
You are already highly dependent on your business for income and insurance, it is, therefore, sensible to diversify your risk into other assets, e.g. shares, bonds, property, to fund the days you no longer want to go to work.
You also need an emergency fund in personally held cash. This, along with the insurance policies described above, will give you great peace of mind to make confident business decisions by knowing that you and your family are protected from disasters and emergencies.
How much do you need to sell it for?
This is a big question and distinctly different from ‘how much do you want to sell it for?’
We help you answer this by calculating what net sales proceeds you need to be financially secure for the rest of your life. We do this by stress testing your financial circumstances via cashflow forecasting and scenario modelling. This is a big equation covering all aspects of your finances and we show this elegantly and simply in a few charts.
I’ve often been told by a client they want to sell their business for as much as possible. That’s understandable, and you could sell a business for, say £5m in 10 years’ time but it might cost you a lot of time, stress, and health issues to achieve this.
Alternatively, you might only need to sell your business for, say £2m, which could be achieved next year, and we could demonstrate that your family would be financially secure now and for the rest of your life.
That psychological factor of financial wellbeing and security could make you approach your business and its sale very differently. It prompts a lot of other questions that deserve more time than I can give justice to here, but mainly around what you want out of life.
Philip Challinor
