Planning Points: Considerations for business owners who approach retirement

Very often the retirement strategy a business owner has in mind is selling the business itself, to extract its value and then use the proceeds to fund their retirement. Picture:

Very often the retirement strategy a business owner has in mind is selling the business itself, to extract its value and then use the proceeds to fund their retirement. Picture:

Published Apr 16, 2023


Retirement planning is crucial for everyone, but for business owners, it can be particularly complex. Unlike salaried employees who can rely on employer-provided retirement benefits, business owners have to take full responsibility for planning and saving for their own retirement.

Very often, the retirement strategy a business owner has in mind is selling the business itself to extract its value and then use the proceeds to fund their retirement. Either way, it is important to start planning for retirement as soon as possible, regardless of how old you are.

Here are some important considerations to help you plan for retirement as a business owner:

Plan for Business Succession

As a business owner, you need to plan for the future of your business as well as your own retirement. This means creating a business succession plan. A business succession plan outlines how your business will be transferred to a new owner or owners when you retire or in the event of your death.

Creating a business succession plan can help ensure that your business continues to thrive even after you retire. More importantly, planning well ahead can go a long way to helping you extract the most value from the business you’ve invested many years to create.

Take Some Chips Off the Table

Too often, entrepreneurs make the mistake of reinvesting all profits into their business, thinking that it is best to reinvest into an entity they have full control over and where they have an intimate knowledge of the business and an ability further grow the funds.

If we apply the principle of diversification, or not putting your eggs in one basket, one quickly realises that this is an inherently risky strategy. Instead, a unit trust investment or equity portfolio, as an example, actually allows you to invest in businesses established and run by other equally accomplished entrepreneurs with a different skill set to yours. Better yet, you needn’t do the lengthy due diligence and ongoing monitoring yourself and can instead outsource this to ably qualified portfolio managers and financial planners!

Determine your Retirement Goals and Desired Lifestyle

The first step in planning for retirement is to determine your retirement goals and the kind of lifestyle you wish to lead then. This will help you determine how much money you need to save and how you should invest it. To do this, you need to estimate your future living expenses and the lifestyle you want to maintain during retirement. One also needs to factor in medical expenses, where you will live, travel expenses, and any other expenses that you expect to incur during retirement.

Again, a financial planner can assist you in building out this scenario, advise on the correct products and then put an appropriate investment strategy in place to ensure that you attain your goals in a cost and tax-efficient manner.

Consider all your expenses and settle your debt

Some expenses may currently be carried by the business. It’s important to consider the fact that once retired and the business has been sold, you will need to carry these expenses yourself. One of the most important things you can do to plan for retirement is to settle your debt well before you retire.

Are there options other than selling your business?

For some, it may, out of necessity, be preferably to keep the business so that you can continue to earn some form of income from it. It’s therefore worthwhile to consider the options available to you:

Become an Asset Owner – Transitioning from self-employed to an asset owner requires that you invest time and effort to document operating processes and training manuals and record institutional knowledge so that you can hire paid personnel to operate the business while you remain a shareholder.

A tapered exit/retirement – where a business is unlikely to exist beyond you, an alternative to consider may be to slow down operations over time as your time and abilities allow.

Outright sale – Here, your business succession plan may involve selling your business to interested parties such as employees, a competitor, or younger entrepreneurs. Even with this option, it is best to prepare well in advance so that the value you can extract is maximised.

Consult with a Financial Adviser

Finally, it's important to consult with a certified financial planner who can help you navigate the complexities of retirement planning as a business owner. A financial planner can help you determine how much you need to set aside now to adequately provide for your retirement. Importantly, they will assess your planning holistically to ensure that your strategy remains relevant to your changing circumstances. They can also help you create a business succession plan and provide guidance on reducing debt.

Retirement planning is essential for business owners, and it's important to start planning as soon as possible. By determining your retirement goals, creating a retirement investment plan, reducing your debt, planning for business succession, and consulting with a financial advisor, you can ensure that you have a comfortable retirement and that your business continues to thrive.

Dube, CFP® is a Director and Wealth Manager at Wealth Creed and is the Financial Planning Institute of Southern Africa and is the Financial Planner of the Year 2022