Napoleon famously described the British as a “nation of shopkeepers.” Today, however, it might be more accurate to describe the United Kingdom as a nation of start-up founders. Over the past decade or so, entrepreneurs have achieved something close to mythical status. They are celebrated on television, courted by politicians as the future drivers of jobs and growth, and encouraged by increasing amounts of funding from VCs (Venture Capital), and business angels. And as the nature of the workplace changes, more and more Britons are opting to go into business for themselves. Now that’s a good thing but financial planning is essential, especially for those making the transition to entrepreneurship from relatively safe careers.
The upsurge in entrepreneurial activity that we’ve seen in recent years is frequently defined in terms of the, often, very young founders who launch technology business, based in and around innovation economy clusters such as London, Cambridge, Bristol or Manchester. But businesses opportunities are not confined to the digital economy, nor to any demographic. And a great many entrepreneurs are not fresh-out-of-university ‘techies’ armed with computer science degrees and an in-depth knowledge of blockchain or A.I., but people who have already carved out successful careers who now want to move on to new challenges.
And arguably it is those who have already achieved a great deal in their previous careers who have the most to lose when they strike out into business for themselves. Yes, a young business founder may be taking on a considerable risk – including financial – when he or she borrows from friends or family or invests savings into the launch of a start-up, but the stakes are possibly much higher when someone in their thirties or forties makes the same move. Yes, there may be a financial cushion in the form of valuable assets and cash reserves, but at the same time there could well be the welfare of a young family to consider over the longer term.
So it’s important not to simply ‘bet the farm.’ The capital deployed to start a new business may come from savings or investment after a successful career in, say, investment banking. Equally, the money could be provided by a severance settlement, an inheritance, or the sale of assets. Substantial sums, perhaps, but not unlimited. So the question is how to allocate the available assets wisely.
The first step in any planning process is to consider the requirements of the business itself, mapped onto the capital available.
The calculations will, of course, depend on the nature of the business. Some ventures – a consultancy would be a good example – require very little investment, other than the financial headroom to enable bills to be paid and a lifestyle to be maintained while a client base is built up.
Other businesses – and this could include anything from starting a restaurant to launching a software company – will require a significant cash investment. So where does that money come from? How much personal investment is required and how much can (and should) be raised from other sources, such as angels, seed funds, VCs, debt finance and/or business partners? And when third parties are involved, what degree of financial commitment will they expect from the founder? Or to put it more bluntly, how much of your own cash will they expect you to invest?
This is the point at which personal financial planning comes into play.
Often the best starting point is to look at the individual’s own life goals. For instance, what role will the proposed business itself play within the context of a wider life plan. Is the expectation that it will be a fast-growth company that can be sold for a life-changing sum? If so what is the timeline? What are the milestones that will define success and failure? Alternatively, is the plan to create a steady but profitable company? If so, that may require a different set of financial decisions.
Set against those considerations are life’s other goals, such as protecting the family from hardship and paying for education, retiring early or being able to work from home, perhaps somewhere overseas. Then there are financial requirements: how much money is needed to maintain a standard of living?
In this context, starting a business becomes a wealth management issue and it is important to seek advice to ensure that you not only raise the necessary sums required but also fulfill the wider goals in your life.
The Route – City wealth club is ideally placed to provide that advice. The Route offers a service for members who are typically High Net Worth individuals who have carved out successful careers. The Route’s team takes a goal-based approach to wealth management and offers two bespoke financial reviews every year.
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