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For budding entrepreneurs, long-term financial planning may be the last thing on their minds.
Time and money are tight and putting the success of your business ahead of your personal long-term financial goals may seem like an obvious choice.
However, running your own business, especially if you plan on hiring, brings a whole new world of financial considerations.
It can be a steep learning curve, especially if you are used to working as an employee where your employer often takes care of some financial considerations, such as pension contributions.
Plan Ahead: Wealth planning may not seem like a big deal when starting your business, but it pays to start early
And the wealth path often looks very different for entrepreneurs than for employees.
An entrepreneur often has a major liquidity event, such as the sale of their business or going public through an IPO, which can be planned in advance.
As a founder, if you can continue your estate planning throughout the life of your business, you can maximize the value you create for the business and yourself. Seeking guidance from a life coach might help you align your vision and aspirations during this journey.
While employee wealth planners say they tend to see more stable accumulation of wealth through salary and bonuses, over which individuals have significantly less control.
So what should entrepreneurs think about? We look at the financial considerations for entrepreneurs, how you can best prepare for the future and who you can ask for advice.
When should entrepreneurs start financial planning?
Phil Sidebottom of asset manager WH Ireland says entrepreneurs need to think about asset planning throughout the business lifecycle.
He divides it into stages. First of all, he says protection strategies should be considered both personally and for the company in the unfortunate event of illness or death.
Proper insurance must be in place to ensure that the company can continue to operate, or recruit, in the absence of the founder or key staff members.
At the very earliest stage, it is also necessary to work out the core structure of the company, as this will determine what will happen if a partner or employee wants to leave later.
“A lot of times people are so engrossed and excited about what they’re doing and they have to step back and think about what happens if you and your best friend don’t get along as well as they do now,” says Michael Stimpson of wealth management solid salt.
“Very much depends on the structure of their business, whether they are a limited liability partnership, sole proprietorship or business owner. They have to work hand in hand with their accountant.’
Once the company is established and up and running, investment diversification is an important thing to consider, Sidebottom says, so entrepreneurs can continue to build a portfolio in addition to their main business.
Planning for your retirement as an entrepreneur
Retirement planning should also be high on an entrepreneur’s to-do list. Not only does this ensure a comfortable retirement, but pension contributions can also be efficient for companies, as they can claim exemption from corporation tax.
“A pension will not only be a potential source of income in retirement, but also a tax-efficient structure to pass on to beneficiaries in the event of death,” Sidebottom says.
‘Also from an annual remuneration perspective, the company may have to pay larger pension contributions than if they were paid by a private individual.’
Finding the right advisor who understands your business and personal needs can make a big difference to your long-term planning
Even from the start, entrepreneurs should think about their exit strategy as inheritance tax can be a consideration.
Small businesses, for example, are likely to benefit from business deductions and are therefore exempt from estate taxes – but if a sale takes place for cash, the funds received will lose that exemption unless advice is sought.
It’s also important to plan what happens after a sale. What do you want to do now and what are your financial needs?
Entrepreneurs often spend a lot of time thinking about that moment, but not what to do next, says Stimpson.
“Your income position and inheritance tax are set for a capital event, but often entrepreneurs underestimate their needs after selling a business,” he says.
“A liquidity event such as a sale or IPO can be transformative for an entrepreneur,” adds Sidebottom. “Early and proper planning can help maximize the value of the company.”
How to get started with estate planning
Finding the right advisor who not only understands your business, but also your personal circumstances and goals is critical.
A first meeting with a well-qualified and experienced consultant is key. It may also be helpful to involve your other professional advisors, such as your accountant or lawyer, in the discussion to ensure that all parties are on the same page.
“Personal referrals, your existing network, and research are all good ways to find an advisor,” says Sidebottom.
Qualifications and experience are important factors, as is the ability to work with not only the business owner, but also the other professional advisors on the team.
Sidebottom adds that if there’s an existing relationship between the consultant and the firm’s accountant, attorney, or corporate finance agency, that’s all the better.
“Getting in the habit of checking in to your estate planning every year about where you are and what you’re doing can be very valuable,” says Stimpson.
‘All entrepreneurs need a good accountant and your accountant can often show you the way for your personal wealth, but also for your company.’
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