Preparing for the big exit: why a financial plan is key when selling your business

Selling a business is a personal process and every business will have unique needs. For business owners, it is a significant milestone and can be complex, sometimes daunting, requiring expertise in several areas including legal, business strategy, and finance.

The time pressures of a business sale can often take precedence over financial planning. It’s not uncommon for business owners to have spent time working hard and concentrating on the business, neglecting personal finances.

With any business succession strategy, establishing a financial plan works towards making sure you succeed at meeting your personal financial goals, whilst protecting your family and your business.

Recently, a client expressed how he wished he’d created a more robust financial plan before retiring - he’d had a successful career but as soon as he stopped working, he felt disorientated. Despite paying into pensions and accumulating savings and investments whilst working, he didn’t have a ‘plan’.

The same principles apply when planning to sell a business.

If you fail to plan, you plan to fail -  Benjamin Franklin 1970

In summary, if you don’t have a financial plan, more time and effort is required to reach your end goals. Develop a comprehensive plan to help guide your actions and decision making.

Pre-sale preparation

Establish professional relationships

Even where you are early in the planning stages, establish professional relationships to allow time for them to better understand your business, and personal goals and objectives. This isn’t just reflected on the financial side, it’s important to work with a team of professionals who can take the time to understand your personal emotions and motivations behind important decisions.

Some firms will have a ‘ready-made’ team of professionals to encourage a collaborative approach.

Involve your ‘life plan family’

I always insist that financial planning meetings should include partners or family members. Financial planning can be more effective when devised as a family plan.

The first point to this is to ensure that everyone is engaged and understands the ‘plan’.

The second provides an opportunity for tax allowances to be shared between spouses or civil partners, where possible, creating additional tax efficiency.

Finally, provision can be made for longevity of family wealth, including future generation planning, as the wider family goals and objectives can be taken into consideration. 

Start planning early

A robust financial plan takes time to prepare.

Financial planning opportunities include taking advantage of annual tax allowances - early planning ensures these are utilised as soon as possible. With some annual tax allowances, such as Individual Savings Accounts (ISAs), it’s a ‘use it or lose it’ scenario.

It also takes time to build a trusted relationship, working with your professional connections, knowing that the business and your finances are in safe hands.

Establish what your current position looks like

This is key with any planning strategy. Before embarking on any plan, what do your existing financial arrangements look like? Are they still suitable? Is the charging structure still competitive?

It’s common for business owners to have existing plans in place, such as workplace pensions and life cover. It’s also easy to forget or sometimes lose details of old pension arrangements and policies. A financial adviser will be able to help you track these down.

The financial plan should start with a good understanding of where you are now, prior to putting anything new in place. No changes should be made to any financial arrangements without seeking proper financial advice.

Identify your goals and objectives

Whilst busy planning for an exit strategy, you may not have had time to think about what happens next. The original plan you had in mind when the business started may no longer be reflective of your circumstances or ambitions.

Whilst there are differences in the process for selling a business to retire, versus a sale to reinvest into a new business, the steps and importance of creating a financial plan remain the same.

Cashflow Planning

A significant tool to help plan for any business sale, or any financial plan, is cashflow planning to help understand and provide reassurance for how you will meet your financial goals.

This involves looking at personal budgeting; what do you spend now and how this will change when the business is sold? You may not spend as much on travel commuting to work but you might want to spend more on travel for holidays.

With UK life expectancy currently age 78.6* for men and age 82.6* for women, cashflow planning is essential to understand the long-term impact of no longer working, or potentially at a reduced rate.

Once the business sale is complete, you will benefit from a cash lump sum injection. You may no longer be in receipt of a regular income stream and need to rely on the lump sum and other existing assets to create a tax-efficient income equivalent. A well-prepared cash flow model helps to demonstrate the sustainability of your income, whilst reflecting on the impact on the value of your assets throughout your lifetime.

The aim is to design the cashflow based on your current position and reflect post-sale of the business. This can then be tweaked to include various ‘what if’ scenarios throughout your lifetime. For example, “what if” you downsize in ten years’ time?

The cashflow plan can also be used to help with the business sale such as working towards your ‘magic number’ or understanding the impact of an earn out agreement.

Post sale

Don’t be hasty

Whilst your impulses may tell you to invest once the sale is complete, take some time and let it settle.

It may take time to adjust to your new wealth position. During this time, ensure your funds are set side securely whilst earning a competitive rate of interest.

Trust your advisers

As easy as it can be, don’t be distracted by articles in the press or the latest TikTok influencer discussing current ‘trends’ on ‘which stocks and shares to buy’, or ‘how to save on inheritance tax’. Trust your advisers.

Put in place regular reviews

Once you have established a financial plan, it doesn’t end there. These plans should be reviewed on a regular basis and aligned to changes in your personal circumstances, legislative changes, and new opportunities.

This exercise helps to make sure you remain on track.

Financial planning opportunities

There are various tax allowances available which can be utilised within the sale proceeds. A suitable solution will depend on various factors, including your goals and objectives and investment risk appetite. These potential solutions include:

Pension contributions

The current pension allowance (2024/2025) is £60,000, subject to your level of income. In most circumstances, employer pension contributions sit as an expense in the profit and loss account and therefore attract corporation tax relief (currently a maximum of 25%). Funds can be withdrawn tax efficiently and the value of a pension scheme typically sits outside of your estate for inheritance tax purposes.

Individual Savings Accounts (ISAs)

The current allowance is £20,000 (2024/25) per annum which gives you the ability to build up significant amounts of wealth over a period of time in a tax-free environment which can be used to support a tax-free income stream.

Venture Capital Trusts (VCTs)

The scheme is designed to encourage individuals to invest indirectly in a range of unquoted smaller, higher risk trading companies. A VCT offers tax relief including 30% income tax relief up to £200,000, tax free dividends and tax-free growth.

Business Relief Investments

For large proceeds, for sums over £5 million, it may be possible to consider Family Investment Companies (FICs). A family investment offers control over significant decisions, while handing over the details of managing your wealth to a team of skilled investment experts that work for you.