Financial Planning for Business Owners: Building Wealth Beyond Your Business

For many business owners, building and growing the company naturally becomes a major financial priority.

Profits may be reinvested, new people recruited and money put back into developing the business. With so much focus on the company's future, it's easy for personal financial planning to take a back seat, but a successful business and personal financial security are not necessarily the same thing.

If a significant proportion of your wealth is connected to one company, it can be useful to consider what you are building outside the business too, and how your business and personal finances fit together as part of a longer-term plan.

What should business owners consider when planning their personal finances?

There isn't one financial plan that will suit every business owner.

Your priorities will depend on your personal circumstances, the stage your business has reached, your future plans and what you ultimately want your wealth to enable you to do.

Some useful questions to consider might include:

• How much income do I need personally, both now and in the future?

• How much of my overall wealth is dependent on the business?

• Am I building assets outside the company?

• What would retirement or financial independence look like for me?

• How might pensions and investments fit into my wider financial plan?

• What would happen to my personal plans if the business experienced a difficult period?

• Do I eventually want to sell, pass on or retain the business?

• If I plan to sell, how much would I actually need from the business to achieve my goals?

These aren't necessarily questions that need to wait until retirement or a business sale is approaching.

Thinking about them earlier can help you understand whether the wealth you're creating through your business is also supporting the life you want outside it.

Should business owners build wealth outside their business?

There can be very good reasons for retaining or reinvesting money within a business. Capital might be needed to fund recruitment, equipment, acquisitions or future growth.

However, if your business represents a large proportion of your overall wealth, your personal financial future may also become heavily dependent on the continued success and eventual value of that one company.

Building assets outside the business may therefore form part of a broader financial plan.

Depending on your circumstances, this could include cash reserves, pensions or other investments.

Investments involve risk and can fall as well as rise in value, so the appropriate approach will depend on factors including your objectives, timeframe, attitude to investment risk and capacity for loss.

It doesn't have to be a choice between investing in your company and investing personally.

For many business owners, the more useful question is what balance is appropriate for their circumstances and longer-term plans.

What role can pensions play for company directors?

Pensions can form one part of longer-term financial planning for company directors and business owners.

Depending on the circumstances, a company may be able to make employer pension contributions on behalf of a director. The tax treatment and suitability of doing so will depend on both the company's and the individual's circumstances, and pension allowances and tax rules can change.

Beyond potential tax considerations, pensions can also provide a way of accumulating retirement assets separately from the business. This can be particularly relevant for owners whose company currently represents a significant proportion of their overall wealth.

However, pensions have rules around contributions and when and how benefits can be accessed. Whether pension contributions are appropriate, and how much to contribute, should therefore be considered as part of the wider financial picture rather than in isolation.

Is your business your retirement plan?

For some owners, selling their business may eventually provide a significant proportion of the money they expect to use in retirement. That can be a perfectly reasonable part of a long-term plan, but relying heavily on a future sale also involves uncertainty.

The future value of a business isn't guaranteed. Market conditions can change, potential buyers may value the company differently from its owner, and a sale may happen earlier or later than anticipated. Your own plans may change too.

It is therefore worth considering not only what your business might eventually be worth, but what you will actually need.

That means thinking about questions such as:

• What would you like your lifestyle to look like after leaving the business?

• How much might that lifestyle cost?

• What other assets and income will you have?

• When would you ideally like to become financially independent?

• How long might your accumulated wealth need to support you?

Financial planning can help bring these different elements together and explore whether your existing resources and future plans are aligned.

When should you start planning for a business exit?

Financial planning for a potential business exit doesn't have to begin when a buyer appears. Starting earlier can give you more time to understand what you want the proceeds of a future sale to achieve.

For example, would you like to retire completely, continue working in some capacity, start another business, support your family or simply have greater freedom over how you spend your time?

There are also practical financial questions to consider.

What assets have you already accumulated outside the business? What level of future expenditure are you planning for? How dependent is your financial plan on achieving a particular sale value?

Tax will often be an important consideration around a business exit too. Tax rules can be complex and are subject to change, so business owners considering a sale should seek appropriate professional tax and legal advice alongside financial planning.

Starting these conversations before an exit is imminent can help establish a clearer picture of what a successful sale would mean for you personally, rather than focusing solely on the headline valuation of the company.

How can financial planning help business owners?

Business owners often have financial arrangements that cross the boundary between business and personal life. Income may come from different sources. Wealth may be held within the company as well as personally. There may be pensions, investments, property and other assets to consider, alongside plans for the future of the business itself.

Financial planning can help to bring those different elements together.

Rather than looking at an investment, pension or business valuation in isolation, the starting point is your objectives: what you want your money and your business to enable you to do.

From there, it is possible to consider different scenarios and understand how decisions made today could affect your longer-term position.

When should a business owner speak to a financial adviser?

There doesn't have to be a major financial event on the horizon before you start planning.

Some business owners seek financial advice as they approach retirement or prepare to sell their company. Others begin earlier because they want to understand whether the success they're creating within their business is also translating into personal financial security.

The right approach will depend on your circumstances and objectives.

Ultimately, the important question isn't simply:

“What is my business worth?”

It is also:

“What does the wealth I'm building allow me to do?”

Understanding the answer can help you make more informed decisions about your business, your personal finances and the future you're working towards.

This article is for general information purposes only and does not constitute personal financial, investment, tax or legal advice. The appropriate course of action will depend on your individual circumstances.

The value of investments can fall as well as rise and you may get back less than you invest. Tax treatment depends on individual circumstances and may be subject to change in the future.

If you are considering significant changes to your financial arrangements, pensions or the sale of a business, appropriate professional advice should be sought.