At a glance
- Success comes with its own challenges.
- It can take many years of struggling to grow your business to the point when you can sell it for what you had hoped.
- Yet getting it to that point is only part of the challenge. The next step is making sure you and your family can enjoy the benefits for many decades to come. But how?
Ask a professional
Building up a business generally requires very different skills to selling it, and success with the former may well provide only limited help with the latter. Before you even sell your business, you need to be sure that you’ve done all the necessary tax planning. Otherwise you could lose out unnecessarily.
Once the sale has gone through, the question is what to do with the money. Leaving it in the bank will probably see it grow only very slowly; in fact, it may well cause the value to go down over time,due to interest rates trailing the currently high levels of inflation.
That means you might want to invest at least some of the money.
“You may have invested every single penny into your business and so don’t have a great deal of experience in making personal investments,” says Steven Lea of St. James’s Place. “Now, almost overnight you might have several million in that account. A financial adviser will be able to help you carefully manage this nest egg.”
You may still need some income, which will mean either staying in work or ensuring you’re able to draw the right income from the sale money. After all, you’ll no longer receive any income the business used to provide for you.
“It is important to consider different types of tax wrappers, so you have the flexibility to draw your income tax-efficiently,” says Steven. “You may also decide to gift part of your wealth to your children or grandchildren, but would still like some control over the gift. You might consider a discretionary trust*, which has the added advantage of reducing the burden of Inheritance Tax on your estates, which might otherwise be considerable.”
Invest the rest
Having planned for an income, a financial adviser can help you consider where the money should be invested to help meet your financial objectives. A key consideration before you invest is to determine your capacity for loss and how much risk you are comfortable with. Once you know that, you’re in a better position to look across the different asset classes and diversify appropriately. That might mean investing in a portfolio of equities, government and corporate bonds and commercial property.
Another consideration is how much to invest. Ordinarily, it’s wise to keep at least some funds available, in order to cover short-term expenditure and for any unforeseen eventualities.
“Recently an entrepreneur wanted to invest all the £3 million proceeds from the sale of the business, and only then draw on the money in two years’ time, when he planned to start a new business,” says Steven. “Following conversations with the entrepreneur, he agreed to keep sufficient money on deposit to meet his objective and to cover short term liquidity.”
In all these decisions, age is a crucial factor. If you’re still in your 40s when you sell up, you may be starting a new business venture immediately – and not need much of an income. You may also be keen to gift money to your children, in which case certain forms of investment will be particularly beneficial for tax planning.
If you’re 60, your plans may well look very different. You may not want to start another business, in which case you are more likely to seek to draw an income from the proceeds of the sale. Ideally, that income will enable you to have the lifestyle you have been working towards.
“The level of income you require will depend on your expenditure and this is something you should discuss with your financial adviser, so that the appropriate investments can be selected to meet your needs,” says Steven.
You could use a pension to draw income. However, if you don’t actually need it, you might prefer to leave it intact for your children as a tax-efficient form of inheritance. In that case, you are likely to be investing for much longer, and might therefore want to take more risk.
On the other hand, if you are thinking about planning for school or university fees, you will probably be needing the money much sooner. With a shorter time horizon, you are likely to want to take on less risk.
In short, there are many life decisions that will affect what you do with the proceeds of selling your business. With the right advice, you can have a solution tailored to your needs.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
Equities do not have the security of capital which is characteristic of a deposit with a bank or building society.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
*Trusts are not regulated by the Financial Conduct Authority.
SJP Approved 09/03/2023