Successful Business Owner? Plan to Retire or Exit Your Business Some Day?

Answer these 7 Questions as your first step …

Your dream may have always been to own your own business. But once you’ve achieved that and run it successfully for several years, you may be finding your life goals are shifting slightly. Are you beginning to wonder when you might be able to leave it all behind and do something entirely different instead?

If so, ask yourself these 7 important questions:

  1. When do you want to exit? Try not to answer with just a number of years, ie, ‘in the next ten years’, as the temptation is just to keep rolling that on. Instead, think about an ideal age range such as ‘not before 55’ or ‘not after 60’. This gives you something to focus on and helps you define how much time or how little you have left to plan a successful exit.
  2. What is your most likely exit strategy? There are, in fact, only four possible answers – passing the business on to a family member, selling it to an insider, selling it to an outsider and squeezing it dry. Think carefully about which best suits your particular circumstances. Also, consider whether your business growth strategy is compatible with your exit strategy.
  3. How much is your magic exit number? No doubt you’re accustomed to thinking about getting the maximum value for your business. But in fact, it’s more significant to consider how much you need from the business to achieve your financial freedom. That’s your magic exit number. The lower the number, the less dependent you are on the business and the more flexible you will be to leave. A good financial adviser using financial modelling tools can help you calculate that magic number.
  4. Where will it come from? Are you confident that you are fully aware of all the tax-efficient funds that may help you exit? Make sure that you identify strategies that convert both today’s current cash and tomorrow’s future equity into your personal wealth. Don’t delay everything in the hope that you will get paid eventually as that may not give you the results that you need.
  5. What risks do you face prior to exit? These can come from a number of sources – lost key employees, problems with co-owners, health issues. In fact, anything unexpected can, by definition, undermine your carefully prepared exit plan. Business owners often struggle with risk management because the right mindset to protect your business is very different from that used to build up your business in the first place.
  6. What will you do in life after exit? A successful exit is about so much more than just a financial transaction. Think carefully before you exit about how you want to spend your time and talents once you’ve left. What dreams do you want to fulfil? Do you want to travel? Or take up an interest you’ve never had time for? Spend more time with your family or lend your skills to a voluntary organisation? We would recommend you consider what steps you can take to make sure you’re as fulfilled as when you ran your business.
  7. Who should be in your exit planning team? You should involve people responsible for tax, legal, financial, family, business and HR issues. Ideally, they should all collaborate to come up with a sound exit strategy. Once you have identified your experienced team, one person should be in charge of driving the process forward. Meet up regularly to make sure you’re on track.

The steps to take to identify a good financial adviser

If you are looking for a new adviser, or are taking advice for the first time, it’s important to make sure that the adviser you choose is a good fit for your requirements. We know we won’t be the best fit for everyone looking for financial advice in the UK so using our industry knowledge, here are five things to consider as you review the advisory marketplace.

Independent or restricted?

An independent adviser will have access to what is known as the ‘whole of the market’, whilst a restricted or tied adviser will only be able to offer you solutions from a predetermined list of options. Whilst these options may contain a choice suitable for you, they also might not! Investigate your adviser’s status and assess any limitations.

Whole family, business and everything else

A good financial plan will take account of your family’s ongoing requirements. If you are a business owner, this is also likely to be a feature of a strong plan. Investigate how far your adviser is proposing to go. Are they limiting your plan to just you, or will your family and your business be involved too?

Client recommendations

Good advisers normally grow by referrals, which means that they’ll have plenty of clients only too happy to spend five minutes on the phone to you talking about their experience to date! Don’t be afraid to ask for a quick chat before you commit.

Technology

Technology has revolutionised financial planning over the last ten years or so. Most genuine planners will now use financial modelling software and other tools to demonstrate to you how the plan they are proposing can come to life. Without these tools, it can be difficult to get full insight into proposals and expected outcomes.

Pay attention to charges

Advisers will normally charge for their services as a percentage of your assets, but there may also be other charges involved; from the funds you are invested into, for example. This is normal, but pay close attention to what these charges are and compare them to alternatives. Even a 1% charge difference can be significant over a long period of time and dealing with reasonable amounts of money.

Planning for your ‘Financial Independence’

One of the critical aspects of Retirement Planning; or as we like to call it, your Financial Independence, is structuring your financial affairs to make sure that you have enough money to ensure that, if and when you stop working you can spend your time the way you want to, doing those things that you always intended to do.

 Too complicated to think about – A survey conducted by BlackRock’s Investor Pulse showed that in the main, the biggest financial priority for individuals surveyed was ‘funding a comfortable retirement’. Yet many people spend more time planning their holiday that their retirement – perhaps because planning for retirement seems too complicated to think about.

Don’t know where to start – We are all living longer, the State Pension Age is increasing and pensions legislation is ever changing. Understandably, we want an active, comfortable retirement but often don’t know where to start the savings process.  If confusion and a lack of understanding around your retirement needs have led to put you off planning and saving, you’re not alone – in fact, over half of people in the UK are in the same position.

However, the sooner you start to plan, the sooner you will start to consider the changes you can make to ensure that you are in control of your ‘financial independence’.

 Consider the following steps: –

Step 1 ~ Target

Know what you need – set yourself a target.

The closer you are to retirement, the more likely you are to know how much income you will need to cover your outgoings. If you have longer to go until retirement, it is still good to have an idea of what you are aiming for – and you should review this every year as you get closer.

Step 2 ~ Plan

Know what you already have.

Understanding what you already have will help you understand how far you are towards your retirement target. If you have several different pension plans, it may be worth considering bringing these all together into one account.  In addition to pension plans, your financial independence may also be reliant on other assets, investments or income so it’s important to consider these too.

Step 3 ~ Action

What you need to think about

  • Are you saving the right amount?
  • Are you invested in the right kind of funds?
  • When can you realistically retire / reach financial independence?

How close are you to reaching your financial independence? We can help you understand your own situation and retirement goals and then align these with what you already have in order to identify how close, or not, you may be to achieving your goals. We can then help you put appropriate measures in place to help you spend your future doing those things that you always intended to do.

Financial independence is not just about retirement

The traditional view of work is that it’s something we wouldn’t otherwise do, without the financial reward of getting paid… such that the whole point of work in the modern era is to earn and save enough to get to the point where you can “retire” and not need to work anymore.

Yet research on what motivates us reveals that “money” is a remarkably inferior motivator compared to the motivation we derive from interpersonal relationships with other people. Yet due to our inability to judge our own motivations, and what will make us happy in the future, we continue to pursue financial rewards… even as a growing base of research reveals that it doesn’t improve our long-run happiness.

The reason why all this matters is that it implies the whole concept of “retirement” may be based upon a mistaken understanding of our own motivator, a realisation that most people don’t have, until they actually retire, (or at least, are on the cusp of it) suddenly discover that “not working” isn’t nearly as enjoyable as expected, despite all the sacrifices of potentially undesirable work that was done to earn the money to retire along the way.

So what alternatives have we seen from our business owners and professional clients?  Many have come to recognise that work, at least some work, can be motivating and socially rewarding, where money doesn’t have to be the driving factor. Yet at the same time, often such work does at least have some financial rewards… which is important, because if “retirement” is simply about shifting the rewards of work from “mostly financial” to “only partially financial”, then the reality is that most people may not need nearly as much to “retire” in the first place.

This is important because if it is likely there is going to be at least some modest financial reward coming from mostly non-monetary work, it means many prospective “retirees” could make this switch even sooner. Assuming the retiree withdraws 4% per annum from the accumulated savings, then earning an extra £10,000 a year in part-time work in retirement reduces the target retirement savings needed by as much as £250,000! Carpenter Rees therefore do not talk about retirement, but about reaching the point of sufficient financial independence where “work” can be chosen based primarily for its non-monetary rewards.

We have seen many of our clients retire in the traditional sense but those that continue to work because they like the work they do or they can concentrate on the areas of work that they most enjoy or involve themselves in other projects can often have the more enjoyable financially independent lives.

All that glistens …….

Gold has always held a certain appeal for humans. Its lustre (due to a lack of oxidation), makes it pleasing to look at and to handle. Yet, it is simply a lump of metal that generates no income and will only be worth what someone else wants to pay for it at any point in time.  Given the lack of cash flow, common valuation models are not useful.

Warren Buffett is not a big fan, stating: –

“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

Gold has suffered lengthy, negative real returns over periods as long as 20 years. Between 1987 and 2017 it delivered an annualised return of just 1.5% p.a. after inflation – around 5% lower than equities – yet with similar volatility.  In its favour, gold prices are uncorrelated to equity markets.

Yet many investors seem enamoured by Golds fabled investment properties. So, do these claims stack up?

Claim 1: Gold is a good defensive asset at times of global equity market crisis

In the period under review, there were three

10 Guiding Principles to facilitate Family Business Succession Planning

I read recently about some of the more pertinent family business succession planning principles worthy of consideration. Having first-hand experience of dealing with family businesses, we have witnessed some of these principles in action together with the problems that can occur if these are not followed.

  1. Beware of the tax driven/cost saving succession plan: Research indicates that often, far too much attention is given to technical components such as tax, trusts, insurance and shareholders agreements, whilst insufficient time is given to softer touchy feely issues like wishes and aspirations of the family members, integrating and preparing the next generation and family harmony.
  2. Creating a legacy: Most successful family businesses adopt this concept. The founders of the family business have created a family asset that the family would like to continue to cultivate to establish a lasting legacy for the founders.  Applying this principle means that the family wants the business to remain in the family with all future generations acting as ‘stewards’ to safeguard the family business, grow it and make it better for future generations.
  3. Opportunity versus entitlements: Successful family businesses ensure that future

What is Evidence-Based Investing?

Often in my blogs, you will hear me refer to ‘Evidence-Based Investing’ which reflects the investment philosophy adopted by Carpenter Rees Ltd.    This week, I thought I would share with you an Infographic which explains how this differs to ‘Traditional Active Investing’.   Whilst the two offer very different approaches to investing, at Carpenter Rees we don’t believe in timing markets, making knee-jerk reactions or acting on ‘expert’ opinions; we prefer to work with long term academic evidence in order to allow investments the time they need to do what we feel is most important to our clients ….achieve long term returns aimed at meeting their personal aspirations and financial goals.

Click here to view in detail our one page investment philosophy comparison.

 

 

Inheritance Tax rule changes

This week, I thought I would outline how effective estate planning can help safeguard your wealth for future generations.

If you want to have control over what happens to your assets after your death, effective estate planning is essential.  After a lifetime of hard work, you want to make sure you protect as much of your wealth as possible and pass it on to the right people. However, this does not happen automatically. If you do not plan for what happens to your assets when you die, more of your estate than necessary could be subject to Inheritance Tax.

The rules around Inheritance Tax changed from 6 April this year. The introduction of an additional nil-rate band is good news for married couples looking to pass the family home down to their children or grandchildren, but not every estate can claim it.

Bereaved families

 This tax year, more than 30,000 bereaved families will be required to pay tax on their inheritance[1] according to the Office for Budget Responsibility,. So, it pays to think about Inheritance Tax planning while you can and work out how much potentially could be taken out of your estate – before it becomes your family’s problem to deal with.

A recent Inheritance Tax survey conducted by Canada Life [2]  shows that Britons over the age of 45 are either ignoring estate planning solutions or they have forgotten about the benefits these can provide.   Only 27% of those surveyed have taken financial advice on Inheritance Tax planning, despite all of them having a potential Tax liability.

Leaving an estate

Every individual in the UK, regardless of marital status, is entitled to

Hi Ho, Hi Ho it’s off to Uni we go…………………

Student loans have been a hot topic of late and the promise to scrap them by some politicians really engaged the younger voter in our last election!

Additionally, it is the time of year when many parents and students are looking at ways to fund university and this blog looks at the current merits of borrowing to fund education rather than relying on this being funded by family members.

So what are the rates of interest on Student Debt?

For loans taken out before 1st September 2012 the interest rate from 1st September 2016 is 1.25% and this rate is based upon the lower of RPI or the bank of England Base rate plus 1%.

For those taken out after that date interest rates have been set at RPI plus 3%. This rate is updated each September based upon the RPI figure from the previous March and interest is applied until the April after leaving the course and then on a sliding scale based upon earnings. The full rate of interest of RPI plus 3% is charged once earning exceed £41000.

The rise in inflation since March 2016 from 1.6% to 3.1%means that those who took out loans post 1st September 2012 now face a hike in interest rates from 4.6% to 6.1% which is 24 times the bank of England base rate! So a student now graduated will pay between 3.1% and 6.1%, depending on their income.

When does the loan have to be repaid?

The loan does not have to be repaid until income exceeds £21000. Once income exceeds this figure the individual will pay 9% of earnings over this amount deducted by their employer directly from salary.

Any of the loan still outstanding 30 years after the borrower become eligible to make payments is wiped off and the vast majority of students are unlikely to pay off their entire student loan.

Do Student loans make sense?

They do have soft merits such as maintain parity with peers; this is often very important to an 18 year old!

In addition, it provides a student with