What’s My Number
What’s my number is the starting point when I come to consider how we are going to sell a business. The number I refer to is the amount a client’s Retirement Pot needs to be in order for their retirement plans to be realised.
I need your help as a wealth manager to ascertain this number and, if necessary, what is required to obtain it. let me tell you why.
The pandemic has changed the attitude of business owners. For example, here are the results of a survey by The Value Builder carried out in January 2021.
Here are the numbers best describing owner’s long term goals for their business:
Pre-pandemic numbers in brackets.
Sale to a third party 56% (48%)
Shut Down 2% (2%)
Transition to a younger generation 12% (17%)
Transition to managers 23% (28%)
Other 7% (5%)
While those owners who propose to stick around, most are now planning to sell within five years.
< 1 year 2% (2%)
1 – 2 years 11% ( 11%)
2 – 5 years 21% (17%)
5-10 years 25% (21%)
10 years 41% (49%)
Here we can see there is a shift to look for an exit route earlier than had been the case prior to Covid.
The results of these questions therefore create an opportunity for you to discuss with your clients where they stand.
- What’s their retirement date?
- How much is the Retirement Pot worth now?
- Where does the client want to be in the future?
- How much income do they need in retirement?
- How long will it take to create it?
From my point of view, knowing what the number is, that’s the Retirement Pot is vital. It’s the starting point in determining how we are going to achieve the outcome the client wants.
Why is knowing the number so important?
If there is currently no shortfall in the Retirement Pot, the client has the freedom to decide what to do. The choices might be to sell now or transition to a younger generation, managers or employees.
Where there is a shortfall, then the client has less freedom of choice. Whilst the options just mentioned are still available, there is the additional complication of funding the shortfall. This is where you, the wealth manger, will be able to help. The tactics required to meet this gap need to be explored. Can it be funded by increased contributions? Alternatively, could these funds be invested in the business to improve its saleability and value? Is the answer a mixture of both? There are many other issues to explore.
I hope though you can see where my dilemma could be without this information. If there is a shortfall, then the decision is more complicated.Where I know there is no shortfall, the decision is for the client to decide if and when (s)he wants to leave the business. But there are still risks here.
Risk and the number
Consider this scenario: take a hypothetical client in their 30s. Their business value is probably very small in relation to their total wealth say 1%.
Moving on twenty years and the situation may change. The value of the business could be as high as 70%.If this is the case, then a high percentage of the client’s worth is in a high risk asset.
Knowing the client’s financial position as they age is crucial as part of the retirement planning. Say, the point has been reached where the client is free to decide what to do – the Freedom Point. Retaining a significant part of it in the form of assets in the business is risky. There is no guarantee a client will receive an offer for the business. Until it is marketed for sale, no one really knows the market value.
What’s the number?
So where there is no shortfall, the question becomes does the client want to look at their affairs with a view to leaving the business in some way.
Where there is a shortfall, then we need to know where the client stands now and what is required to achieve their objective. That’s a Retirement Pot to provide the standard of living they aspire to.
On my page where does the journey to sell my start, I cover this in more detail.
Taking action
Taking a client who has no idea what their Retirement Pot is now?
Sugget a valuation is obtained.
Does this value, excluding the business, reach the Freedom Point?
If so, by a simple assessment, is there too much of the wealth in the form of the business asset?
Where this is the case, does the client wish to consider leaving the business in return for a capital sum?
If so, how will they go about it and and when will it be reached?
Is this consistent with their plans?
Further reading
Am I ready to sell my businees?
So, how do you prepare for and go through the business exit process?
More reading, help and advice from Assynt Corporate Finance
Below you'll find links to other articles that offer help and advice about selling your business, what to look for, considerations and recommendations.
If you would like further help, contact us, we'd be only to happy to discuss your sale and can help if we can.