Entrepreneurs choose different paths for their businesses based on their goals and priorities. Family business owners often seek to build a legacy, create long-term stability, and provide for future generations. They value continuity and tradition. In contrast, ‘grow and sell’ entrepreneurs focus on rapid growth and the potential for significant financial returns. They aim to scale their businesses quickly and capitalise on market opportunities. These different motivations influence their approach to business management, reflecting their distinct objectives and definitions of success.
Distinct long-term objectives
Planning for family businesses differs from planning for ‘grow and sell’ businesses due to their divergent long-term objectives. Family business owners are generally focused on preserving and growing their company for future generations, ensuring its long-term profitability and sustainability. This includes developing succession plans to transfer ownership to younger family members and balancing the financial needs of various family members. Additionally, they may aim to create a legacy that extends beyond mere wealth.
Conversely, ‘grow and sell’ entrepreneurs aim to maximise the business’s value for a future sale. Their focus is on identifying the optimal time to exit, structuring the business to be attractive to potential buyers, and gradually making themselves less critical to daily operations to facilitate a smooth exit.
Financial planning for family businesses
Given their long-term perspective, family business owners face unique financial planning challenges. There is often no major final capital exit, but each family member’s wealth and finances are intrinsically linked to the business. Effective financial planning for family businesses involves tax-efficient extraction of funds from the business and building separate investments for retirement.
Family members should pay themselves appropriately, whether through salaries, bonuses, or dividends, and use excess capital to build investment portfolios via ISAs and other tax-efficient wrappers. Pension contributions play a crucial role, as they are Corporation Tax deductible and free from employer/employee National Insurance.
A joint pension scheme, such as a Small Self-Administered Scheme, can be beneficial for family businesses. Family members can share the pension pot proportionally, using combined funds to purchase business premises. The business pays rent to the pension tax-free, which is shared among pension members. As older members retire and younger ones continue contributing, the proportional shares of the pension change, effectively passing the property down the generations within the pension.
Succession and tax planning
Passing business shares down through generations requires specialist tax advice and possibly the use of trusts. While Inheritance Tax (IHT) may not be a primary concern if the shares qualify for Business Relief, other tax implications like Capital Gains Tax (CGT) and Stamp Duty on shares must be considered.
Balancing the financial needs of different generations can be challenging. Founders may need sufficient capital or income to retire, while the younger generation aims to drive the business forward. Finding a fair balance often requires specialist advice, especially if capital is realised through an internal share sale. In such cases, older generations may receive meaningful capital sums, allowing younger generations to take over, making their planning more akin to ‘grow and sell’ entrepreneurs.
Financial planning for ‘grow and sell’ businesses
Financial planning for ‘grow and sell’ businesses focuses on growth and preparing for an eventual exit. Surplus profits are typically reinvested into the business to fuel growth. During this phase, the business owner’s financial planning might be minimal on the investment side and more focused on protections, both personal and business-related. However, ongoing pension contributions should always remain a priority.
The long-term goal for these entrepreneurs is a significant capital exit, potentially sufficient for retirement. Under current legislation, the first £1million of this sum is taxed at 10%, with the remainder taxed at 20%, making it a highly attractive prospect. However, planning must begin well in advance of the exit. Detailed planning around personal objectives and cash flow modelling can help determine the “number” needed to achieve desired lifestyle goals post-exit.
Preparing for the exit
When an entrepreneur exits their business, their largest asset often converts to cash, shifting from outside the scope of IHT to within their estate, and their income ceases. Pre-exit IHT planning might involve transferring shares into trusts for future generations or making pension contributions while still owning the company. Ensuring the funds received personally are sufficient to meet needs and provide tax-efficient income is crucial. Post-exit planning may involve ISAs, General Investment Accounts, Onshore/Offshore Bonds, trusts, and possibly structures like Family Investment Companies or tax-efficient investments like VCT/EIS or business relief investments, depending on individual circumstances and risk tolerance.
Personalised financial planning
Personal financial planning is vital for entrepreneurs, regardless of whether they own a family business or a ‘grow and sell’ venture. It helps balance personal financial goals with business demands, ensuring a secure future. For family business owners, planning focuses on tax-efficiently extracting funds and building separate investments while ensuring succession. For ‘grow and sell’ entrepreneurs, it centres on preparing for a lucrative exit and ensuring the resulting capital meets their long-term needs. Both paths require tailored strategies to navigate their unique challenges and opportunities, driving success and stability.
This article is written by Steve Jordan, director and co-owner at wealth management firm, Five Wealth; specialists in supporting business owners with financial planning and investment management services.
