If your business is a cash cow, do you eat steak for a year, or milk it for life?

If your business is a cash cow, do you eat steak for a year, or milk it for life?

If you own a business there are only three exit options for you: sell out, get kicked out, or get carried out. Harsh and possibly extreme, but true.

Your business is one of your most valuable assets, alongside your pension fund and your home. It pays to take care of it.

There will come a time when you have to make a decision: do you sell your business for a (hopefully) life-changing sum of money, or do you keep it and draw a comfortable lifestyle income for as long as you can? How do you know which option is best for you and your family?

Do you know how much you get from your business each year?

If asked how much you earn from your business, your response may be something like… “I draw about £300,000 a year”. That’s often the end of the conversation. But there is always more.

  • Does the business also employ your spouse and/or some of your children?
  • What about expenses?
  • Client entertaining?
  • Plus the company car and fuel?
  • Accommodation working away from home?
  • Overseas travel?
  • Life insurance?
  • Pension funding?
  • Private medical cover?
  • Social and golf club memberships?

It all adds up, doesn’t it? The cash cow of a business is really delivering. And this is very easy to overlook and undervalue.

Let’s increase the true drawings to £400,000 a year and add in all of those perks.

How much capital would you need to invest to replace that amount of annual benefit? In effect, if you sold your business, how much would you ask for? The sum needs to replace your lifestyle and account for future inflation.

How much is enough?

If you wanted to keep the sum of money you receive from the sale of your business in cash and earn 1.5% interest, you would need a lump sum of £27 million. Unfortunately, this isn’t inflation-protected.

You could buy a joint-life guaranteed annuity with a major insurance company. This would cost £13.2 million (based on a male age of 63, a female age of 60, with 50% to the survivor for life, excluding escalation. Source: Canada Life). If you wanted the income to increase with inflation for life it would cost much more.

One option is to invest in a basket of successful companies (shares or equities). As a simple example the yield on the FTSE All Share Index is close to 4.46% at the time of writing (this will change so please check yourself).

You would need about £9 million if the equity yield was maintained. History tells you that an investment portfolio does provide an inflation-protected return.

That’s a very wide range. From £9m to £27m simply to replace ‘income’ and retain capital values? Not a sensible approach to valuing your business.

To work out how much you’ll need from selling your business to fund the rest of your life, read this blog. 

What is the ideal safe withdrawal rate?

There is huge debate about the safe withdrawal rate (SWR) going on in the retirement planning sector.

The same factors apply to selling your business and living off your capital sum.

One thing you don’t want to do is run out.

“Successful investing means never running out of money before you run out of breath.”

It’s a fine line between drawing down enough to live well and drawing down too much and reducing your capital to a point where future income levels become unsustainable. You want the best of both worlds, but it is almost impossible to calculate this yourself.

By the time it goes wrong, it may be too late to recover the situation.

Whichever way you cut it, the SWR rests somewhere within the 3% to 4.5% region, depending upon circumstances.

What are the dangers of milking your cash cow?

Staying in control feels good (so long as you enjoy what you do every day). You could even step back into the shadows and still maintain an executive income for many years.

Your business is well known to you, inside out and upside down. You get it. On the other hand, selling out for cash and then investing the proceeds is well outside your comfort zone.

There are risks:

  • The management team may not be up to the job;
  • Your ‘product’ may become unpopular or obsolete;
  • The markets and competition could kill your business;
  • You could lose some key clients;
  • The business could drift into irrelevance;
  • The company balance sheet may not be able to take the strain of your withdrawals.

There are many more risks to add to this list.

A bird in the hand or two in the bush?

Big life-changing decisions are rarely simple and obvious. It’s often a long list of pros and cons and a great deal of crystal-ball gazing.

“Should I stay or should I go now?” The Clash

Francis Bacon famously said that ‘knowledge is power’ and this is highly relevant today. If you really could balance the probabilities, then the choice becomes clear. And that’s powerful. Your future security will depend upon making the right financial choice.

Milk or steak?

A difficult decision like this means getting professional and impartial guidance from experts.

This may be the first and only time you will face this dilemma, so seek out the counsel of those who have advised on it many times over.

Look out for vested interests when you seek opinions and support. What’s in it for the other party?

It may be your largest financial decision. Don’t live a life of regret.

If you think you might benefit from impartial wise counsel, contact Capital and one of our chartered financial planners will be happy to help.

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