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Navigating to exit in uncertain times

Personal financial plans and business plans need robust stress testing

Navigating to exit in uncertain times

Simplistically, entrepreneurs' exit plans should include: personal finance plans, with assumptions about the 'pot of money' needed to fund retirement; a business plan, which will spell out how the value of the business will be built; and how that value will be turned into cash i.e. how and to whom the business will be sold.

So far so good, but these plans have to be flexible enough to survive the uncertainties faced by entrepreneurs and their businesses. And in 2019, there is no shortage of uncertainty – think Brexit, an early general election, falling economic growth, a US-China trade-war, and technological disruption just for starters.

In this challenging environment, Simon Martin, tax and trust consultant at St. James’s Place, and Martin Brown, CEO of business growth advisor Elephants Child, offer some nuggets of advice to help entrepreneurs navigate a path to exit through this uncertainty.

Build in contingencies

When working with their financial planner, entrepreneurs should be trying to establish how much money they need for their chosen retirement lifestyle, which will in turn set a target ‘exit value’ for their business.

This is often calculated using the current tax regime and prevailing financial conditions as a base case scenario. But Simon stresses that the plan needs to go further: “The tax and financial environment is very uncertain at the moment. A number of politicians from different parties have suggested changes to Entrepreneurs’ Relief (ER), tax relief on pension contributions, and Inheritance Tax relief. On top of this, financial markets are facing uncertain times from things like Brexit and the US-China trade war. No-one has a crystal ball but it is important that any personal financial plan considers potential changes to the environment, so that entrepreneurs are as prepared as possible.”

He says scenario planning is important. For example, if ER is removed and Capital Gains Tax of 20% is payable when a business is sold (instead of the current 10%), will the original target pension pot still be big enough? If not, changes will be needed, such as re-visiting the target value of the business, retirement dates, or increasing tax-efficient savings. He continues: “It’s best to have an element of contingency built into the plan so that if the environment is not as favourable as initially assumed, the original plan can be adjusted as easily as possible.”

Simon also favours what he calls ‘cautious planning’. If, for example, a 10% investment return is needed on pension savings to reach the target pension pot within the required timeframe, the chances are this assumption is too aggressive. He says more conservative assumptions will naturally lead to an element of contingency being built into the plan.

Lastly, Simon recommends using insurance to mitigate as many uncertainties as possible. In particular, entrepreneurs sometimes overlook ‘protection insurance’. This pays out in the event of a business owner or key staff member dying or becoming critically ill. The pay-out will be designed to protect the continuity of the business because of such events – which can be significant for small businesses because of dependencies on key individuals.

Revisit the business plan

With a target exit value and timeframe in place, entrepreneurs will need to revisit their business plan, and make sure it is aligned to their personal financial plan. Martin emphasises that entrepreneurs should channel their energy towards those ‘controllable factors’ that impact their business, and not get overly distracted by macro factors beyond their control. In particular, he highlights four things to consider when revisiting the business plan in times of uncertainty.  

First, seek out certainty. Martin says: “It’s easy to get panicky about the factors that dominate UK news – Brexit, the general election, or a slowdown in GDP. But if you take a global perspective, that level of uncertainty doesn’t prevail everywhere. While the UK might be going through a period of low economic growth (around 1%) with heightened volatility, some of the world’s largest developing markets such as India and China are growing in the 5-6% range, and the world’s largest economy, the USA, has been growing in the 2-3% range1. So, it’s worth it for entrepreneurs to go back to their strategic plans and see if they can pivot their businesses towards these less uncertain environments.”

This might mean looking at exporting more - see Entrepreneur Club articles The Value of Brand Britain (which explains how popular British goods and services are in some developing markets), and How to crack the USA (the UK’s largest export market by far).

Second, take stock of which uncertainties will, or will not have an impact on the business. Brexit uncertainties might have a very real impact, such as having to change the terms of trade with European customers or suppliers. But Martin says larger ‘macro’ events might not impact smaller businesses to the same extent as larger ones: “A small business can continue to grow and gain market share in times of weak GDP growth. A very small change in market share or winning one or two new key accounts can have a far bigger impact on a small business than a change in GDP growth, so focus on those practical, controllable things. Small businesses can continue to thrive and prosper if they have their proposition correct and they are committing to their plan.”  

Third, look for opportunity arising from uncertainty. Martin points to his experience with a business he works with in the talent management and recruiting sector. In the past, this business was heavily reliant on finding staff for clients from the EU (as were its competitors). But access to those staff is likely to be more restricted post-Brexit. This business has been working hard to open up access to other markets for finding staff so they can continue to fulfil client needs and steal a march on slower-moving competitors.

Fourth, be agile and challenge the sacred cows. Some businesses, and especially family businesses, can be too wedded to their traditional business models, leaving themselves vulnerable to changes in the business environment, according to Martin. For example, technological advances and changing consumer shopping habits might make it essential that a traditional high-street retail chain moves from a store-only to a ‘bricks and clicks’ model to stay relevant. He says: “In times of uncertainty, it is useful to challenge the fundamental modus operandi of the business, which might not have been questioned before. And it is usually most useful to have that thinking challenged by an outsider to bring a fresh perspective.”

1Trading Economics, November 2019.

Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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