Financial planning and your family business

Updated December 3, 2020

3min read

Updated December 3, 2020

3min read

They are a source of immense pride and wealth in the UK, but family businesses can also be the source of disputes and potentially huge financial failures. Scott Gallacher gives his advice.

Financial planning and your family's business

Typically, you’ve started the business from scratch, investing your life and soul with the intention that it will be your “retirement”. Unfortunately, this is often your first financial mistake as you are not financially independent, but financially dependent on your company.

What about retirement?

What happens to you if your business fails before you retire? Starting and running our own business is high risk and high reward, and neither of us knows what’s around the corner. Therefore, having all your eggs in one risky basket is not always the best idea.

If your family business is your retirement, how are you going to use it to fund your retirement? Are you going to sell the business or ask your children to run the business so you can continue to receive an income after you retire?

Are you realistic

While you may be able to sell your business, you may have overrated it. It’s your business that you love, and of course, you never really wanted to sell it. As a result, you may have overcharged it and if you come on sale you may be disappointed.

One way to counter this overvaluation is to ask yourself how much you would pay for a similar company from one of your competitors. They often place a much lower and more realistic value on this business when there is no emotional attachment.

What are your lifestyle goals?

Even if you are able to sell your business based on your valuation, you’ve looked at your current lifestyle, analyzed your expenses, figured out how much income you need in retirement, and considered whether the sales proceeds (after tax) will be supported or not this income?

We once had to disappoint a prospect when we declared that selling millions of pounds at the current spending rate would leave them penniless in 10 years. Unfortunately, we were only asked for help after the sale was agreed, so our honest advice was not fully appreciated or particularly welcomed.

Do you want to keep it in the family?

If you cannot sell the company for financial or emotional reasons, you can pass the company on to your children, who will pay you an “income” for your retirement. Unfortunately, this approach is fraught with dangers. If you ignore the continued risk of business failure, possibly increased by new management (your children), then you need to consider whether the business has not been profitable enough to support your lifestyle and fund a separate pension fund for you. How can you expect this? Do you support your lifestyle and that of your children now?

Unfortunately, we have seen families fail because the children do not always appreciate the opportunity you have given them and may resent you for making a living from their hard work. In the worst case, children have started their own business in direct competition with the family business instead of “supporting” their parents.

Financial planning is critical to becoming financially independent from your business so that you don’t have all your eggs in one basket. Once you do, you should be able to pass the business on to your children without incurring any income and make sure you don’t become a burden on your life’s work.

Talk to a financial advisor in your area.

About the author

Nick Green

Nick Green is a financial journalist writing for Unbiased.co.uk, the website that has helped over 10 million people find financial, business, and legal advice. Nick has been a professional contributor to finance and business for over 15 years and has previously written for leading accounting firms PKF and BDO.

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