When an owner is considering the sale of their business, a financial adviser is well placed to guide the business owner through a successful sale.
One of the tools an adviser has to help a client through the sale and beyond into retirement, and to help determine their financial goals, manage their tax liabilities and plan for the future, is a cash flow modelling tool.
This provides a detailed illustration of assets, investments, debts, income and expenditure, which is projected forward year by year using assumed rates of growth, income, inflation and interest rates.
An adviser should then regularly review the cash flow model to ensure that any situational changes that could impact on the assumptions made in the initial illustration are taken into account.
How does it work?
Cash flow modelling is used by financial planners to forecast a business owner’s future finances. It shows in real time how much money they could have in the future and whether they are on track to achieve their goals.
After collecting details about monthly income and outgoings, savings and other assets, a financial planner will analyse this information, alongside future goals and requirements, while considering life events such as retirement and one-off expenses like gifts to children.
It is essential for an adviser to help their client to understand how much money from the sale is needed to achieve all their plans.They will then use cash flow modelling to run through many different scenarios to see how these might affect the business owner’s finances, such as bringing the retirement age forward, changing the expected return on investments or simulating a fall in the market.
The model can also detail how taking income from different sources could affect their tax bill – and overall finances – over time. For additional peace of mind, it can also factor in future care home fees and a legacy for family members should the business owner die unexpectedly.
A financial planner will then use this information to create a long-term projection of the business owner’s finances, showing future requirements alongside any increase or decrease in their assets, helping to identify any potential surplus or shortfall.
How can cash flow modelling help business owners?
For business owners considering sale, cash flow modelling can help them make an informed decision about their future, especially when considered alongside the following key questions:
Pre-sale: Will I be able to make my money last?
A primary concern of most business owners is losing their main source of income. Many are also concerned about the size of their pension pot, with research last year suggesting that 45 per cent of small business owners are expecting to outlive their retirement funds.
It is therefore essential for an adviser to help their client to understand how much money from the sale is needed to achieve all their plans, especially if they are relying on this to fund their retirement.
Cash flow modelling forms an integral part of this process, as it can help business owners understand where they are and better visualise the future.
Post-sale: Can I take care of my loved ones and live the kind of retirement I would like?
Cash flow modelling will again support this part of the journey, as it is at this point that the now ex-business owner can start considering gifting, as well as securing their own future needs.
Ongoing financial advice is also important at this stage as there may be changes in circumstances, legislation, and investment markets, which must be considered year on year.
Review regularly
It is important for an adviser to review the cash flow model with their client on a regular basis to ensure it is up to date and reflects any circumstantial changes, however minor, as they can make a huge difference in the longer term.
Selling a business can be an emotive and complicated experience for business owners.
However, the role of an adviser and the use of cash flow modelling to forecast and test multiple scenarios can really help to provide clarity for business owners.
Duncan Macpherson is a chartered financial planner at Punter Southall Wealth
