BLOG: Retiring wealthy requires entrepreneurship
To achieve sufficient wealth for ‘independence’, one alternative is to build and sell your own business. In the second of a mini-series, we look at the pros and cons.
The return expected by a quoted company for equity capital today is 15 per cent, yet because the price of shares has been bid up, savers and investors are likely to end up with just 6.5 per cent to 8 per cent p.a. (before charges and tax), according to PricewaterhouseCooper’s 2012 report for the FSA. The option of creating one’s own business can offer two to three times the return.
A London-based consultant, Dr. Milani, comments “In my circle are businessmen who rely solely on their businesses to provide them with income. They share a great deal of revulsion for stock markets.”
However the risks of using one’s own business for independence are high. 90 per cent of new businesses fail within 10 years: and even though a failure may not bankrupt an individual, lost time may force an individual to work beyond age 70. Businesses fail mostly due to mismanagement – for example, stripping cash out of the business; or
insufficient market research; or timing a product launch badly. Since a firm competes from the start with established and well-funded competitors, planning a launch can take two years.
Even in success, there are still hard decisions to take. For the best sale price – ten or twenty times turnover – one wants to sell a growing company with a trained team and a strong marketing and sales process. But finding and developing a team is another difficult task.
Will Saunders, a founder and 40 year veteran of a £3m design business explains: “The Maggie Thatcher era ended and I had to reduce to 12 staff, and then slowly down to three PAYE staff, supported by freelancers. Downsizing proved to be demoralising, very expensive and the company’s profitability suffered accordingly. Today, I am having to work hard (I’m very hands on) and we are highly profitable, but without my work, we will not be viable. I can’t sell as a going concern: I have to sell my goodwill only, and the best price I can expect is one times turnover.”
The company information provider, Duedil reported in 2014 that young people have spearheaded the 70 per cent increase of new ‘lifestyle’ businesses since 2006, commenting that the trend aims to exploit an existing hobby or passion. A ‘lifestyle’ business is a most difficult way to create the £1m target capital than many consider to be sufficient for ‘retirement’. Since one’s profit motive is moderated, one often has to work far longer and harder than those whose intention is untrammelled by personal preference.
Starting a business is the fastest way to financial independence, with the least tax, and least burden of financial service charges, but it requires skill, training, an unfettered understanding of what the market wants, and a dedicated intention to deliver.
Rob Noble-Warren, Independence Wealth Management Ltd.