The four key stages of planning a successful business exit

For many entrepreneurs the eventual sale of their business poses complex questions and challenges – as well as practical financial considerations – all of which require planning. Andrew Towers, Wealth Planning Director at Cazenove Capital, explains key areas for consideration.

From the outside, the accounts of entrepreneurs who create businesses and sell them successfully appear straightforward stories of good fortune. But for the entrepreneurs themselves, the process of readying a business and then achieving the sale – or “exit” – presents a series of challenges.

Entwined in all of this is a huge potential shift in the entrepreneur’s personal financial circumstances as they move away from a position where their wealth is primarily tied up in their firm, to a situation where much of that wealth is released

Many of these challenges are practical difficulties involving the business itself and the technicalities of the sale. Others are psychological challenges, relating to the entrepreneur’s likely need to adjust to a new role or lifestyle. And entwined in all of this is a huge potential shift in the entrepreneur’s personal financial circumstances as they move away from a position where their wealth is primarily tied up in their firm, to a situation where much of that wealth is released.

With that shift comes some difficult questions for the entrepreneur and their family – questions and issues they are unlikely to have faced before.

Pre-emptive planning

Having spent many years working with entrepreneurs, helping them through various stages of their business lives, I view the pre-sale period as the most important – and difficult.

The stresses at this point are intense. The entrepreneur is still having to run their business, but at the same time they are working hard on the sale. In practice that means reams of paperwork, lawyers and engaging with the purchaser’s due diligence process. Stress levels are at their highest in this period.

Eventually the deal completes. At that point, the adrenaline that the business owner has been living on for months evaporates. It’s almost like a switch from ecstasy to despair: people go from a state of extreme activity and involvement to sudden purposelessness. A large sum is in their bank account, but they’re left saying: ‘Now what?’.”

The psychological challenge: finding a vision for yourself and your wealth

Engaging with entrepreneurs well ahead of the moment of exit can help prepare them – and very often spouses or other members of their families as well – for the change.

Where someone has spent 20 or 30 years focusing solely on the growth of their single firm, the sale can arrive like a cliff-edge. The questions that have been their key concern for years, such as the business’s cash-flow, are suddenly gone

Some of the shock is due to a major adjustment in lifestyle and focus. For serial entrepreneurs, this tends to be less of a problem, as they are familiar with being intensely involved in a succession of projects. But where someone has spent 20 or 30 years focusing solely on the growth of their single firm, the sale can arrive like a cliff-edge. The questions that have been their key concern for years, such as the business’s cash-flow, are suddenly gone.

In their place are very different, and in some ways more philosophical, questions. “What’s the wealth for? What do I want it to achieve? How do I want to involve my children in – or perhaps protect them from – the money?”

It is because of these big, profound issues that we often advise entrepreneurs post-exit to take their time. We urge them not to make hurried decisions. If the questions are about the future of their family and the wider role of their wealth, they will need time.

Everyone’s vision for their future and for the way in which they want their wealth to work will be different

Everyone’s vision for their future and for the way in which they want their wealth to work will be different. The entrepreneur’s age – and the age of their children, if any – is just one of many factors. Personal lifestyle, or ambitions to give wealth away through planned philanthropy in support of a particular cause, are other factors.

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Top Tip

Entrepreneurs who are approaching or have recently made a business sale make up a significant proportion of our users. When realising the gains from perhaps decades of hard work, everything depends on deploying that money in the right way. The wealth managers on our panel are adept at looking at the whole picture – for both your overarching financial plan and investment strategy.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Practical financial planning

Aside from the psychological and philosophical aspects of this major life-change are a large number of purely practical financial considerations. Here a great deal of experience and knowledge is valuable. Again, planning should start well ahead of likely exit event.

Inheritance tax is one of several considerations. Most entrepreneurs are not at all worried about inheritance tax at the point of sale. But in many cases, the sale will mean a transfer of wealth from a potentially untaxed form to one where it’s likely to be part of the owner’s estate and potentially taxable. Such considerations, and the use of entrepreneurs’ relief, and the possible involvement of spouses or other family members, should all form part of the wider planning.

A business owner may have been used to drawing a regular salary or taking income in dividends. After the sale another arrangement will need to be made, and part of that will involve looking closely at their personal balance sheet

There is also the vital issue of future income. A business owner may have been used to drawing a regular salary or taking income in dividends. After the sale another arrangement will need to be made, and part of that will involve looking closely at their personal balance sheet. How much income will be needed? With their lives undergoing a potentially major change, they might not know the answer to that question – and so we would take their current income as a baseline and work from there.

The investment engine

Part of the long-term solution for entrepreneurs who create significant wealth from a business sale will be the careful structuring of their investments to serve a number of purposes. This investment “engine room”, for example, will need to generate income to support their lifestyle. Depending on their needs and other aims – and the scale of the wealth involved – this will be managed so as to serve a timeframe, which could be their likely lifetime, or much longer.

The structure will need to be flexible and appropriate from a tax point of view. Assets also needs to be invested in a way the owner wishes, taking into account their individual environmental or ethical priorities.

The sustainability of assets is likely to be a key consideration. Do we need to preserve capital value for a legacy within the family, or is there an ambition to generate income in perpetuity to support a charitable cause – or both?

The sustainability of assets is likely to be a key consideration. Do we need to preserve capital value for a legacy within the family, or is there an ambition to generate income in perpetuity to support a charitable cause – or both? Ultimately the investment engine needs to address all these requirements.

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