June 21, 2018
Life after exit[1]
Each day we’re met by what feels like a barrage of news and opinions on the latest steps and, more often, missteps in our nation’s exit from political union with the rest of the continent. So you’ll be relieved to read that ‘Life after exit’ isn’t about the UK and the EU. This is about our entrepreneurs.
Whether they’re just starting out, or much further down the road with their business, it’s important that they understand exactly where they’re trying to get to. At least, that’s what we think. So what’s the destination?
A wise baseball coach once said, “if you don’t know where you are going, you’ll end up someplace else”. We’ve taken Yogi Berra’s word’s to heart, and with this article we‘d like to help entrepreneurs decide where they’re going (their Golden Number®), and if that wasn’t enough we’re also going to help them plan the route to get there (strategies for optimising your finances post exit).
What’s your Golden Number®?
There are a million and one ways to go about hammering out the details of a personal exit and life after the exit. One method that’s straight forward and proven to work is the Golden Number®.
Okay, so what is a Golden Number®? For us, the Golden Number® is the foundation of effective wealth management. For entrepreneurs it’s the centrepiece of a strategy for achieving financial freedom. In fact, helping someone to unearth their Golden Number® is the very first step we take with them on their journey towards achieving their financial goals and aspirations.
To be specific, the Golden Number® is the total amount of cash, or near cash assets that someone requires to be financially free, which is, to have their basic and lifestyle expenses covered by the income those assets generate. Simple right?
We believe that the Golden Number® analysis should be right at the core of an entrepreneur’s business exit strategy; we believe this so much that we decided to write an article on why we think it’s so important. Simply put, the number helps the entrepreneur to plan for their current and future lifestyle expenses after exit. But, there is a little more to think about. Once someone has established their Golden Number® we’d recommend that they consider these few things.
Why do you need to know your Golden Number®?
The more free time someone has, the more they’re likely to spend on leisure activities. As a result, their personal spending is likely to increase quite substantially post exit. In our experience, entrepreneurs tend to take short breaks following an exit, and they often use this time to explore new business ideas. So at this point, it’s important to have enough cash to give them the time that they need to be creative without worrying about how they’ll finance their lifestyle. Simply put, Thinking Cash is the cash required to create the time that a person will need to think about what’s next for them.
The Golden Number® can improve an individual’s capacity to be self-sufficient in this way. Once they’ve reached their number, their assets will generate the income that they need to fund their ongoing lifestyle and expenses. This cash will give them the time that they need to think about what they’d like to do next.
How do you get to your Golden Number®?
Knowing the Golden Number is the cornerstone. Tailored guidance for a structured exit gives an entrepreneur the tools to create their own Golden Number ®.
Below, we’ve listed some other important ideas and strategies that are considered when working toward the number:
Optimising your income
Understanding someone’s long-term cash-flow is as important to their personal life as it is for their business, especially when it comes to looking at the income they need.
A business can allow the owner to access income in a way that’s tax-efficient. Dividends and, in extenuating circumstances, short-term director’s loans are two such ways for an entrepreneur to get their hands on a tax efficient income. Such tax efficiencies can be taken advantage of even more effectively if the business owner is in the fortunate position of working with close family.
Unless it’s appropriately structured, we’re likely to see a real increase in an entrepreneur’s income tax bill post exit. So optimising the way you access your income is important. It means that the exiting entrepreneur will need a lower exit value to reach their all-important Golden Number® and self-sufficiency. Optimised personal income taxes could also allow the individual to lower their investment risk, get a better night’s sleep, and still meet their ongoing cash-flow needs.
Protecting your legacy
Assuming we’re looking at a higher rate tax payer, with an estate valued over £650,000, and with most of their wealth concentrated outside of their main residence, for every £10,000 of income, HMRC takes £4,000 leaving the individual with £6,000. Without optimising the asset structure, in this example, the £6,000 remaining in the estate could incur an additional £2,400 inheritance tax charge, leaving the next generation with the significantly reduced sum of £3,600 (equivalent to an effective tax of 64%)[2].
Knowing the Golden Number® and ongoing cash-flow needs, an individual can better understand which of their assets should be restructured to make sure they’re passed to the next generation without incurring unnecessary taxes.
[1] All information provided is correct as at 21 June 2018.
[2] Based on the current tax regime in the UK. This information has been simplified for illustrative purposes.