For many successful business owners, the answer is almost certainly yes. After years — perhaps decades — spent building a business, it may have become your largest financial asset, providing your income, supporting your family and representing a significant part of the wealth you expect to enjoy in retirement.

That can make it tempting to think of the business as your pension. However, there is an important difference between owning a valuable business and having a retirement plan.

As you approach the point where you might want to work less, step away altogether or eventually sell, some deceptively simple questions become increasingly important. How much do you actually need? How much wealth have you already accumulated outside the business? What do you need the business to provide? And what happens if things do not go quite according to plan?

Your business may be your biggest asset

Successful business owners often approach retirement from a very different financial position to employees. An employee might spend 30 or 40 years gradually accumulating pensions, ISAs and investments, while a business owner may have spent those same decades reinvesting profits in their company.

That can be entirely rational. Investing in your own business may have helped it grow, increased profitability and created considerable wealth. However, it can also result in much of your financial future being concentrated in a single asset.

You might, for example, have pensions and investments worth £500,000 alongside a business you believe could eventually be worth £2 million. On paper, you may be wealthy, but if most of that wealth remains tied up in the company, an important question remains: how do you turn the value you have created into the financial independence you want?

What is your business actually worth to you?

Business owners understandably spend a lot of time thinking about what their company might be worth. Perhaps you have a figure in mind based on profits, a multiple of earnings, recent transactions in your industry or conversations with your accountant.

That figure clearly matters, but from a personal financial planning perspective there is another question that may matter just as much: what do you actually need the business to be worth?

Suppose you believe you could eventually sell your company for £3 million. It is easy for £3 million to become the target, but what if your existing pensions and investments, together with £1 million from the business, would already be sufficient to support everything you and your family reasonably want?

Conversely, what if your retirement plans depend upon receiving £3 million, but the eventual proceeds are considerably less? Those are two very different financial positions, which is why we believe retirement planning for business owners should ideally begin before the business is sold, rather than after the proceeds arrive in the bank.

How much is enough?

This is one of the most important questions in financial planning, whether you own a business or not. For business owners, however, answering it can be particularly powerful because it can help separate the amount you might be able to obtain for the business from the amount you actually need.

Rather than beginning with the value of the company, it can be more useful to begin with the life you want to lead. When would you like to step back? Would you stop completely or prefer to remain involved in some capacity? What would you like retirement to look like, and how much would you like to spend each year?

There may also be larger ambitions to consider. Perhaps you want to travel extensively while you are still relatively young, buy a second home, help your children or grandchildren, or simply have the freedom to spend more without constantly wondering whether you can afford to do so. At the same time, you may have views about how much you eventually want to leave to the next generation.

Once you begin putting numbers around those objectives, you can start working backwards. Your pensions, investments, savings and other assets can be considered alongside different assumptions about what might eventually happen to the business.

Cashflow modelling can then help explore different scenarios. You might look at what happens if you sell the business at 60 rather than 65, receive less for it than expected, retain an interest after stepping back, or perhaps do not sell it at all.

The objective is not to predict exactly what will happen — nobody can do that — but to understand how dependent your future is on any one particular outcome.

What if your business is worth less than you expect?

This can be an uncomfortable question, but it is an important one. Business owners are understandably optimistic about businesses they have spent years building, yet the eventual value of a private company can be influenced by many factors outside the owner’s control.

Economic conditions and industries change. A major customer can leave, regulation can alter the commercial landscape and technology can disrupt an established market. Potential buyers may also simply value the company differently from its owner.

There is a more personal risk too: you may decide that you want to stop working sooner than expected.

If your entire retirement plan depends upon selling your company at a particular time for a particular amount, you have relatively little room for things to go wrong. That does not necessarily mean you should sell sooner, but it does mean it is worth understanding what would happen if reality were different from your central assumption.

If your financial plan still works with a substantially lower business value, that knowledge can be enormously reassuring. If it does not, discovering the potential shortfall several years before your intended retirement gives you time to consider what you might do about it.

What have you built outside your business?

Another useful question for a business owner approaching retirement is: if I ignored the value of my business for a moment, what would my personal financial position look like?

The answer might include pensions, ISAs and other investments, cash savings, property, your home, other business interests, your spouse or partner’s assets and your future State Pension entitlement.

Building personal wealth outside the business can reduce your reliance on a single asset and potentially give you greater flexibility over your eventual exit. That flexibility may ultimately be more valuable than simply maximising the theoretical value of the company.

For example, greater financial independence might allow you to turn down an unattractive offer for the business, gradually reduce your working hours or retain ownership while somebody else takes greater responsibility for running it. Perhaps most importantly, it may mean that when you eventually decide you have had enough, your finances do not dictate that you have to keep working.

Do you actually need to sell?

For some business owners, retirement and selling the business are treated as though they are the same event, but they do not necessarily have to be.

Depending upon the nature of the company and your personal circumstances, you might gradually reduce your involvement, allow management to assume greater responsibility, pass ownership to family members or other shareholders, or retain an interest while stepping away from day-to-day management. Alternatively, you may ultimately decide that a complete sale is the right answer.

These involve commercial, legal and tax considerations on which appropriate professional advice may be required, but they also have an important personal financial dimension. If you understand how much money you need and how much you already have, you can approach decisions about the future of the company from a very different position.

Instead of thinking “I need to sell the business before I can retire”, you may discover that the real position is “I am already financially independent, so I can now decide what I actually want to do with the business.”

That is an important distinction.

Start planning before you need an answer

There can be considerable value in thinking about these questions several years before you expect to step away. This is not because you need to decide today exactly what will happen to your company in five years’ time. Quite the opposite: planning earlier can give you more choices.

It allows you to understand the personal wealth you have already accumulated, consider whether you are overly dependent on the business and explore different retirement dates. You can also establish how much you genuinely need from an eventual sale and see what happens to your plans if the future turns out differently from expected.

Starting early also gives your financial planner, accountant, solicitor and other professional advisers time to work together where appropriate. Your accountant may advise on the company’s finances and tax position, while your solicitor may advise on the legal aspects of a sale, succession or estate planning. Other specialists may be needed to value or sell the business.

The financial planner’s role is different: it is to help connect those decisions to what they mean for you personally.

Bringing the business and your personal finances together

At Rowley Turton, we do not value businesses or arrange their sale. Our role is to help you understand how your business fits into your personal financial future.

That means considering the business alongside your pensions, investments, savings, expenditure and family circumstances, but most importantly understanding what you actually want from the next stage of your life.

For a business owner approaching retirement, therefore, the most useful question may not be:

“How much is my business worth?”

It may be:

“What do I need my business to provide for me to achieve financial independence?”

Once you understand that, conversations about retirement, succession and an eventual exit can look very different.

Ultimately, after spending decades building a successful business, retirement planning is not simply about extracting the maximum possible amount from it. It is about making sure the business you have worked hard to build enables you to enjoy the life you have worked hard to create.

Thinking about retirement from your business?

If you’re beginning to think about financial independence and life beyond your business, contact us to arrange an initial meeting.