Why your business should not be your pension

Published on February 12, 2020 by Dan Haylett Category: From our team & Retirement

Work hard, work long hours, don’t spend enough time with the family, worry about the next deal, want to make sure you can pay the staff, want to keep the lights on, worry about the future, growing the business, chasing the pot of gold…

Sound familiar?

The challenges and stresses that a business owner faces are immense, but you are the heartbeat of the UK economy!

  • At the start of 2019 there were 5.82 million small businesses (with 0 to 49 employees), equivalent to 99.3% of the total business.
  • SMEs account for 99.9% of the business population (5.9 million businesses)
  • SMEs account for three fifths of the employment and around half of turnover in the UK private sector.

The average age of a small business owner in the UK is 49. This means you still have an unbelievable opportunity to make some changes in order to take away some of the stress, gain clarity, do more of the stuff that truly matters, and plan for a fantastic future.

If you run your own small business, either as the sole owner or as a partner or co-director, you have an incredible opportunity that must be maximised.

But…there are three questions that you need to answer. Those questions are:

  1. How much is enough?
  2. How much money do I need for the rest of my life?
  3. What’s my number?

The great news is that, as a business owner, you have an asset that could provide you with the resources and help you answer these questions.

However, these questions are not always easy to answer. It may take some soul-searching and some tough realisations as to how best to run your business and what needs to be done if you’re to achieve financial freedom one day in the future.

The two types of businesses

In our experience there are two types of small business that exist.

  1. A sellable business
  2. An owner-managed business

A sellable business is a business that functions superbly without depending on the day-to-day input of the owner. The owner(s) are mere shareholders in the ‘corporate entity’ that delivers the results of the business.

A great test to see if you have one of these businesses is to ask yourself this question:

“If I take 6 to 12 months off to go sailing (or whatever), will my business still exist when I get back?”

If you can honestly answer ‘yes’ to this question, then congratulations! The chances are you have a very saleable business.

An owner-managed business (as you’ve probably guessed) is a business which continues to exist only because of the sheer physical, mental and emotional input of the owner.

You are the driving force and might be involved in all the technical work: the accounts, marketing, HR, recruitment, business management, and so on.

For many, the business takes over your life. You get caught up in ‘doing it, doing it, doing it’ with the result being that you have no life.

The bad news is that the chances of selling this business are slim. Why? Because any new owner needs to replace you and your multiple roles. That will cost money.

Or, more commonly, you sell the business but have a deal that means that you work for the new owner for another three or four years. In this case you may have been better of keeping it and all the future profits!

The point here is simple. For many people their business is their greatest asset, and so it should be. But it needs to work without you not because of you. You need to work on it, not in it. Only then can you truly build it to sell it.

The most important and crucial point is that when you understand your number (how much is enough) you can start to engineer your business, so it one day delivers you that number. This then gives you the freedom, peace of mind and clarity to live an extraordinary life.

The trouble of relying on the sale of your business

Being financially dependent on the sale of your business can be very dangerous. When working with business owners, I always try and get them to become as financially independent of the sale of their business as possible.

That’s because businesses and business sectors have a very nasty habit from suffering from changing habits over time. Much like the housing market, a business is only worth what someone is prepared to pay for it. If you need to sell your business at a time of economic uncertainty or disruption in your sector, then you may get nowhere near the number you need.

If you can plan on being truly financially independent, without relying on the sale of your business, you can become detached from the outcome.

This will lead to some wonderful unintended consequences. It will result in less stress for you and your family, your working hours will decrease, and your focus will be on the longer term.

In fact, you may even see an increase in the value of your business. The money from the sale of your business will be the icing on the cake. You can live an even more extraordinary life!

How much I need vs how much I want

One of the biggest challenges of a small business owner is to distinguish between how much they want to sell their business for and how much they need to sell their business for. These two numbers are very different.

The ‘want’ number can cause stress, anxiety, less time with the family, long hours etc.

The ‘need’ number will provide clarity, focus, peace of mind and a sense of freedom.

Many business owners are on an eternal journey of growth with no idea as to when it ends or even what the destination is in the first place. You know you want to sell your business for a lot of money – the maximum possible – but you don’t know what that number is.

When you work out the number that you need, which is often way less than any number that you have thought about that you want, then all of your plans can start to be put into place.

The business owners that we work with have their ‘eureka’ moment when we go through this with them. It is one of the best reactions I see and is truly life-changing, not only for the business owner but also their family.

How to make it happen
  1. Think about the life you want, the life you don’t and the cost of each
  2. Create a workable financial plan to help you get and keep the life you want
  3. Calculate your number (how much you need NOT how much you want)

The simplest way to crudely calculate your number is:

Establish the cost of your desired lifestyle per year and then multiply that number by 25. This gives you an allowed withdrawal rate of 4% per annum.

For example:

Cost of desired lifestyle is £50,000 per year x 25 = £1,250,000

So, if your desired lifestyle will cost you £50,000 per year, you will need a pot of money of around £1,250,000 to give you enough to last your lifetime. It’s obviously a bit more complicated than this but this a great place to start from.

If used properly, your business can be engineered to give you the number you need. It gives you every chance of building your business so, one day, you can sell it. And, if you can’t or don’t want to sell, you have accumulated other resources to give you enough!

What you get from all of this
  • You will be able to fully enjoy your business
  • You will reach a point where you are not reliant on the sale of your business
  • You will understand your number and what you need

We only get one shot at this and life is not a rehearsal! So, act now and become the business owner that fully understands your number and that has a business that is your greatest asset to achieve financial freedom.

Create clear goals and have a financial plan in place to ensure that you can achieve everything you desire whilst still enjoying being a business owner and enjoying a wonderful life in the process.

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