Financial planning can be a challenge when simply dealing with your own personal wealth and finances. Trying to tie your pension, taxes, protection and estate planning into one coherent strategy requires considerable thought and ongoing review. For business owners, it can be even more complex; often blurring the lines between professional and personal financial planning.
At FAS, we have regular dealings with business owners; particularly those who want to discuss succession planning to ensure their business is passed on to successors in a sustainable, tax-efficient way. In this short guide, we explore a few ideas for you to consider. We hope you draw insight from this content and invite you to arrange a free consultation with a member of our financial planning team to discuss your own business plan with us in more detail:
Identify and balance goals for yourself, and for your business
It’s easy to conflate the ideal future of your business with your personal goals for retirement. For sole traders and family businesses, this can be especially difficult to differentiate. However, it’s important to identify separate financial goals for yourself and for the business, even if they might relate closely to one another.
For instance, if one of your own goals is to build a house deposit fund for your children, or to create provision for a comfortable retirement, be careful not to let your ambitions for future business expansion compromise this. Also, be careful not to hinge your own financial goals upon the success of your business.
Many people make the mistake of thinking that the future sale of their business will fund their retirement. Whilst this may indeed happen, it’s important not to put all of your eggs in one basket. What if the business fails due to unforeseen market events, or if you struggle to find a buyer? It will be sensible to discuss your plans with an experienced financial planner so that contingencies can be put in place.
Getting taxes right
In our experience, tax planning can often cause the biggest headache for business owners and sole traders. This is where consulting a financial planner can really help to bring clarity and peace of mind, particularly since the tax landscape can change with new government policy.
Consider the limited company business owner as an example. In 2019-20, dividend tax bands are lower than Income Tax bands. A Higher Rate taxpayer, for instance, could expect to pay 40% tax on their earnings over £50,000, but would likely pay 32.5% on dividend income (outside the dividend allowance). This might lead a business owner to lower their annual salary and increase their dividend income, to improve their short-term tax position. However, you need to factor in your business revenue and profit projections, as a poor business year is likely to have an adverse effect on dividends to shareholders. So, you need to work with your accountant and financial planner to ensure you are making the right financial decisions for your personal situation as well as the business.
Succession planning
The question is important for all business owners but especially for those involved in running a family business: “Who will take over when I’m gone?” This is often a painful question which we often delay asking ourselves, since we invariably become attached to the business that we have worked so hard to establish. However, you do owe it to the business to agree a timetable for handing the reins over. You also owe it to yourself to ensure this strategy ties in well with your personal financial plan, particularly around retirement planning.
Naturally, choosing a successor can be difficult and it takes time to find the right person and develop their skills to prepare them for their future role. However, it’s also a good idea to put robust protection measures in place, to keep the business on course in the event your plan is derailed in some way. For example, what would happen to the business, if either you or another key person suddenly died or fell critically ill and was no longer able to work? It makes sense to try to plan for all eventualities wherever possible and incorporate protection planning into your strategy, allowing you to access much-needed capital if the worst should happen.
At FAS we cover many other areas of financial planning for businesses. If you are interested in discussing what options are available to you when it comes to succession planning and protecting your business, we will be happy to help you put the necessary measures in place to help secure a better future for both you and your business.
This content is for information purposes only and does not constitute investment advice or financial advice.
