Personal assets will consist almost exclusively of shares in the company. While the business is still new and growing, the main consideration will be lifestyle needs rather than how to invest surplus wealth outside the business. Young entrepreneurs will want and need to take some reward for their efforts, but will have to balance that against the need to leave cash in the business to fund its organic growth.

The longer-term aspirations of the young entrepreneur should be an overriding factor in planning their personal wealth, and will often derive from considerations of family and dependants. Some of the factors that need to be taken into account include:

• When do they wish to retire?
• Do they want to stay with the business or step back and move on to the next project?
• Do they want to retain control of the company or would they consider a partial or full disposal in due course?

Although a large extraction of cash may not be feasible until later in the life of the business, it is important to plan early for such an event. This will allow the entrepreneur to take advantage of strategies that may cease to be available due to legislative changes, the time it can take to realise maximum benefits, or simply because they end up with insufficient time to implement any kind of strategy.

As the business continues to grow successfully, however, it becomes increasingly important to consider taking accumulated wealth out of the business. The funds realised might be used to acquire a larger family home, make investments elsewhere, or to free up cash for the next big business idea. Although the business will often generate higher returns than traditional investment media, there comes a stage when it is prudent for the entrepreneur to diversify and reduce the risks inherent in having ‘all their eggs in one basket’.

There are several ways in which entrepreneurs can extract wealth from their company; an obvious route is for them to simply pay themselves a large dividend or bonus, but the total tax payable where profits are extracted in the form of salary or dividends will generally be between 40 per cent and 48 per cent of those profits.

A sale of shares in the company might be a more tax-efficient alternative, if a single large extraction of cash, rather than a series of annual withdrawals, is being considered. A sale of shares in a trading company, after two years ownership, may be subject to an effective capital gains tax rate of only 10 per cent. There are several options, depending on the individual’s longer-term plans together with tax efficiency. One option is a trade sale, although this will usually involve the founder handing over control and relinquishing the business after a short period.

An alternative route could be a management or family buy-out. Using a buy-out to enfranchise current and future management in the business enables entrepreneurs to motivate their people, to plan succession and at the same time to realise some of the accrued value in the business. Even when the founder intends to continue running the business it may be possible to raise the funds for a partial sale of their equity by involving institutional/private equity investors. A public listing is a further option.

Other important considerations for the young entrepreneur include pension planning and making an effective will. Pension plans can be funded personally (although wealth may need to be extracted from the company as salary to achieve this) or by the company itself.

The company’s articles of association or a shareholders’ agreement may specify what happens in the event of death while the entrepreneur still owns the majority of the business. But it is important to take explicit action to ensure that the entrepreneur’s shares in the business will be inherited by the person or people who are intended to benefit. Without a will, quite distant relations who have no real knowledge of the business may become shareholders in the company and infighting between beneficiaries has been the cause of problems for many businesses.

Wealth management, particularly when it concerns exiting the business or their eventual retirement, is not often at the forefront of a young entrepreneur’s mind. But with some careful planning you can ensure that you are flush for the future and that the cash is available to launch that next venture.

Article in partnership with Ernst & Young: