Why it's vital tech entrepreneurs have a financial plan

Every successful tech company has a detailed business plan, but how many tech and software entrepreneurs have a detailed financial plan for their lives? The answer to that is ‘not enough’.

 

I’ve worked with a lot of entrepreneurs and they share some common personality traits. They’re energetic, committed and full of self-belief. Their entrepreneurial mindset is what helps them propel the germ of an idea into living, breathing and growing business. They are comfortable with taking risks and can cut out external distractions with a laser-like focus on their business.

 

While this complete commitment is great for their business’ bottom line, it can often come at the expense of their personal lives. It’s not just that they can’t find the time to devote to their own financial planning, many entrepreneurs’ personal lives are so tightly tied together with their business that they can’t see the difference between the two.  

 

It’s vital for entrepreneurs to plan well for their financial future because not doing so comes with so many risks – and not the positive, calculated risks that they’re used to taking with their businesses. The danger from poor planning – for all of us, not just entrepreneurs – is that it can lead to a life that isn’t what we dreamed it would be. With their own lives so bound up with their business it’s particularly important for entrepreneurs to get the planning right from day one and be focused and ready for the opportunities and challenges that come their way, like selling the business, retiring comfortably, preparing for a management buy-out and having a safety net in place if life throws you a curveball.

 

The entrepreneur’s circumstances are unique so they need specific life and retirement planning to address them. But in my experience, all too often this isn’t the case, with entrepreneurs clinging on to the wrong plan or even carrying on with no plan at all. The main reason for this is, I think, because we don't talk about life planning by design, certainly not in the detail we do with our businesses. I’m going to look at an example of what having the wrong plan can do before showing you how important and effective having the right plan can be.

 

The wrong plan – what to avoid

 

A tech entrepreneur, let’s call him Fred, is 55. He has a loving wife and two kids at private school, and a big mortgage to service. Fred’s business is successful, it makes a profit of around £1.7million, and life is generally good.

 

He receives an offer of £3.5 million for the business but decides to turn down because he doesn’t think it’s enough. The figure Fred thinks he needs is £7 million, but he’s plucked this out of the air without any planning. Nevertheless, he thinks in the next five years before he retires in 2022 he can increase profit margins, start to distance himself a bit more and improve operations sufficiently to attract increased offers of double this amount.

 

While Fred might be right about this – he is a proven, successful businessman – the offer of £3.5 million is more than enough for him to meet all his commitments in life and set himself up for a comfortable and happy retirement. But he turns it down because he hasn’t done the correct planning and doesn’t truly know how much is enough.

 

Fred has also failed to take into consideration the future unknowns. What if something happened out of Fred’s control like illness of a key member of staff or himself? What if a new regulation or technology enters his market (like Uber did to black cabs) slashing his valuation? What impact is Brexit likely to have on his business? He hasn’t objectively considered all the risk factors before declining the offer and might not attract this level of interest again. Given his entrepreneur’s personality he’d be naturally reluctant to accept a lower offer in future which might then lead to working longer and retiring later with no exit strategy in place.  

 

The right plan – the best way forward

 

Now, let’s imagine that five years down the line, in 2022, Fred gets the exact same offer of £3.5m for his business but instead of turning it down he speaks to his lifestyle wealth manager to analyse his situation properly. If Fred were a client of mine we would start with his life goals, before proceeding into a Life & Financial Roadmap - a blueprint if you like - for his future. This is what Fred’s estate looks like with a sale in 2022 for £3.5m.

 

 

As the above shows, Fred has done a proper wealth and life plan, and plugged in all his numbers, along with some sensible assumptions about future tax, investment returns, property growth, yields, and (the big one) inflation so he can get a clear idea of what he needs for the rest of his life. In this case, if he sells for £3.5m including an earn out, he would still never feasibly run out of money. His estate is still projected to be worth £10m at age 85. Using some quite conservative assumptions about inflation, growth on assets, tax and so on, we establish that Fred could sell his business and go on to live his dream life and perhaps leave a financial legacy to his children and grandchildren, and the causes he holds dear.

 

The additional life options open to Fred if he sold are endless – part-time consultancy, start another business, write a book, invest into another business, or try and do it all over again (this time very well capitalised whilst his entire family’s future is not only de-risked but secure). The important thing is, he’s thought through his circumstances with his financial planner, using life and cash flow modelling to help work through different scenarios to arrive at one that makes the most sense to him.

 

The value of strategic planning

 

Our experience is that the value of a business can change rapidly, and that many owners over-estimate this value. A business owner putting too much emphasis on their business being worth X amount at Y date, is not planning effectively for a sale. Often, owners don’t receive anywhere near the sale value they had hoped for and earmarked for their retirement which can be an uncomfortable and undesirable position to land in.

 

The risk and variables in both business valuations and succession are varied and pervasive. The market, for one, will decide the optimal time to sell your business, while new and disruptive tech, increases in regulation and competition, or a local or global recession, are all factors that can derail a business - and your life plans. If you’re an entrepreneur, syncing your business’ values and goals with your most essential personal values and goals is crucial. Constructing a robust and well-thought-through financial life plan with a financial planner is the best way to do this – and the surest route to long-term success.

 

Use our Return on Life scorecard to start working out how a financial plan can meet your goals in life or get in contact if you’d like to discuss your plans in more detail.

Robert Wilcocks

 

 

 

 

 

 

01 March 2019