Can I afford to retire early? Using reverse cashflow forecasting to help sell your business
In last month’s newsletter, you’ll recall that I looked at how the Covid-19 pandemic had reinforced many financial lessons, and how taking control of your life now will ensure you have no regrets in the future.
This month I want to build on that theme and look at one particular outcome of the pandemic – the way that it has been a catalyst in encouraging many business owners to review their priorities and start to take steps to sell their business and move on to the next stage of their lives.
I will focus on a specific planning tool – reverse cashflow forecasting – which I believe can be crucial in encouraging business owners to take that all-important first step towards financial freedom and the life they want.
Taking back control
I have had regular conversations over the past few months with Seasons of Wealth clients who own their own business.
Several have divulged to me that while the pandemic has not affected their health, it has forced them to reassess their priorities and start to focus more on what they want to do, rather than what they feel they ought to do – a subtle difference, but a key one.
One thought many are having is whether to sell their business, and either stop work completely or move on to a less stressful lifestyle. They want to start doing the things they have been prevented from doing because of the time they have devoted to making their business a success.
This could include spending more time with their children, starting a new hobby, or even just spending time in the garden now that warmer weather is on the way.
One of the interesting side effects of lockdown is that some people, who’ve been forced to spend so much time at home, are now actually seeing the benefits of home working and are deciding that the commute is no longer for them.
Other reasons for uncertainty
It’s always been said that markets hate uncertainty, but the same can equally be said for businesses. If you’re looking to the future as a business owner, you need a certain level of reassurance that there won’t be any dramatic upheaval that could knock all your plans off course.
Obviously, you can’t legislate for a global pandemic. That’s very much a once in a lifetime event that few could possibly have predicted. But three other factors have given cause for uncertainty.
The UK’s withdrawal from the EU has thrown up many challenges. Anyone whose business involves trading on the European continent will be seeing increased red tape and associated export and import costs.
Clearly there are big opportunities globally. New trade deals are replacing the ones we enjoyed as an EU member. The government will be keen to encourage overseas trade development, so it’s likely there could be some tax incentives to boost that activity in a future Budget.
But how many business owners, with the potential opportunity to sell their business and retire early, will be prepared to start again from scratch, having spent years building a market in Europe?
The recent increase in Corporation Tax will have also given successful business owners pause for thought. In the 2021 Budget, the chancellor announced that the rate of tax would rise to 25% in 2023.
The announcement of new short-term tax incentives for business investment helped soften the blow of the tax rise. But if you already have an inkling of an idea to sell your business, any further long-term investment in your business, both in terms of financial and personal commitment, is likely to come a poor second to wanting to get out while the going is good.
Pension age increase
Finally, the recently announced increase to the age when you can start accessing your pension fund, from 55 to 57 in 2028, could be another contributory factor to uncertainty for business owners.
If you’re in your early 50s now, the possibility that you might have to wait a further two years before you can start drawing from your pension fund may focus the mind.
Reverse cashflow forecasting
The question business owners are asking me is ‘can I afford to sell my business now?’
It’s obviously a difficult question to answer without research and analysis. One way to help start addressing it, however, is the use of “reverse cashflow planning”.
Standard cashflow forecasting is a tool used by advisers with their clients that can help you assess your plans for retirement and to determine whether you need to make adjustments to help you achieve your goals. The idea behind the analysis is to attempt to project the impact of different factors that could have an impact on your income in retirement.
We start by inputting everything we know – current income and expenditure, along with pension and investment fund values and known future commitments.
We then project different external factors such as inflation, investment return and possible future expenditure in retirement, to assess someone’s projected financial circumstances once they stop working.
We can also “war-game” the impact of various potential scenarios. What if I buy a new property, or what if there’s a long-term financial downturn?
Understanding the assumptions that go into this forecast can improve your understanding of the results and its value to you.
Reverse forecasting effectively works backwards from a selected retirement date. It’s designed to answer the important questions – how much do I need to sell my business for, and how much does my pension fund, along with all my other assets such as investments and property, need to be worth to be able live comfortably?
So, we can then put plans in place to reach that figure as expeditiously as possible. It also means that we can work out the minimum price you need to sell your business for to get the money you need.
Rather than “can I afford to sell my business now?” reverse forecasting can help answer a far more pertinent question – “how much will I need to sell my business for to be able to live comfortably?”
Let’s talk about it
If the subject matter of this article resonates, especially if you recognise yourself in some of the descriptions of business owners looking to sell up and move on to the next stage of their life, then I’m here to help.
Even if your thought process isn’t fully formed yet, but you’ve had an outlier thought that maybe it’s time to start thinking what was previously the unthinkable, then it’s worth us having a chat.
To book a clarity call, complete the contact form or please call me on 020 3813 8265.