Financial planning and your family business
First published 08 January 2014 • Updated 08 August 2017
They’re a source of immense pride and huge wealth creation in the UK, but family businesses can also be the cause of disputes and potentially huge financial errors. Scott Gallacher gives his advice.
Typically you have created the business from scratch and invested your life and soul with the intention that it will be your ‘pension’. Unfortunately this is often your first financial mistake as rather than making you financially independent, this makes you financially dependent on your business.
What about retirement?
What happens to you if your business fails before you retire? Starting and running your own business is high risk and high reward, and none of us know what is around the corner, so having all your eggs in one risky basket is not always the best idea.
Also, if your family business is your pension how are you going to use this to fund your retirement? Are you going to sell the business, or ask your children to run the business so you can continue to be paid an income in retirement?
Are you being realistic?
While you may be able to sell your business, you may have overvalued it. It’s your business which you love and naturally you never really wanted to sell it; consequently you may have put too high price on it, and when you come to sell you could be disappointed.
One way to address this over-valuation is to ask yourself how much you would pay for a similar company from one of your competitors? You often put a much lower and more realistic value on that business when there is no emotional attachment.
What lifestyle goals do you have?
Even if you are able to sell your business based on your valuation, have you looked at your current lifestyle, analysed your expenditure, worked out how much income you need in retirement, and considered whether or not the sale proceeds (after tax) will support that income?
We once had to disappoint one potential client as we explained that, at their current rate of expenditure, their million pound business sale would leave them penniless within 10 years. Unfortunately we had only been asked to help after the sale had been agreed and so our honest advice was not fully appreciated or particularly welcome.
Would you like to keep it in the family?
If you cannot sell the business, either for financial or emotional reasons, you may decide to pass the business onto your children with them paying you an ‘income’ for your retirement. Unfortunately this approach is fraught with danger. Ignoring the continued risk of business failure, arguably increased due to new management (your children), you have to consider if the business has not been sufficiently profitable to support your lifestyle and fund a separate pension pot for you, how can you expect it to now support your lifestyle and your children’s?
Unfortunately, we have seen families fall out as the children do not always appreciate the opportunity you have given them and may resent you ‘living off’ their hard work. In the worst cases, children have set up their own businesses in direct competition with the family business rather than ‘support’ their parents.
Financial planning is crucial to help you become financially independent of your business so you don’t have all your eggs in one basket. Once you’ve done this you should be able to pass the business onto your children without needing to draw an income from it and ensure you don’t become a burden on your life’s work.
Speak to a financial adviser near you.