Small businesses are one of the success stories of the UK and are arguably the envy of many other countries. I know of people that specifically came to the UK to set up businesses here because it was much easier than in their own countries.
The success of small businesses in the UK, of course, overlooks that a large number of small businesses that fail in the first few years, and financial advisers tend to deal with those more established businesses. This can give business owners, and even their advisers, a false sense of security.
Because of that apparent success, business owners can be unwilling to engage with financial advisers as they feel that they can make better returns by investing in their own business. Some will profess that ‘their business is their pension’.
Whilst investing in your own business should give better returns than those from a well-diversified investment portfolio, this isn’t a free lunch due to the risk of the business failing.
I aim to help business owners achieve financial independence, i.e. having sufficient resources outside, and separate, from their business so that the client is completely financially secure, and their future can be funded entirely independently from the business.
There are a number of reasons why this is important.
Firstly, one of things that the current Coronavirus situation has brought home to many people is that almost no business is entirely secure, and we have seen very long-established businesses wiped out by the pandemic. Pandemics might not happen every day, but unfortunately business failures do.
Business sales often fall to realise what the owner believes the business is ‘worth’.
Death or ill health can hit at any time, and that can devastate not only the client and their family but also the business.
If you want to pass the business onto children then having your own financial independence means the business doesn’t have to support two separate groups (the original owners and their children) and you can be much more relaxed about how the children are running the business.
So, financial independence is crucial regardless of the client’s plan for the business as it enables the client to have much greater freedom. Whether they want to retain the business, sell it, or pass it onto their children, there is almost no scenario where acquiring financial independence by building up assets outside the business is a bad idea.
Scott Gallacher is a Chartered Financial Planner (CFP) at Rowley Turton Private Wealth Management