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Planning for retirement as a business owner

I have assisted numerous clients into a successful retirement, many of which have been owners of their own businesses. What sets business owners apart is the complexities involved in their planning. Over time I have noticed some common stumbling blocks.

No separation between personal and business expenses

Personal expenses often get muddied with business expenses, making it tricky to budget for life after the business. The solution is to run separate budgets, one for business expenses and one for personal expenses. Although actual payments may be processed together, like medical aid contributions, cell phone and internet expenses, it is a great habit to allocate these payments across two budgets. Doing this helps form a clear picture of your personal requirements and will go a long way in planning for scenarios where the business may not exist, i.e. retirement, liquidation, disability or severe illness.

The notion of only investing in your own business

Running a business can be very costly and complex. It is tempting to plough every available cent back into your business, but consider what you are spending the money on. Is it a capital investment expense like a business property, or perhaps new machinery to increase productivity, or are you funding business overheads with personal cash flow, or worse, personal savings?

Like with all investments, it is crucial to diversify. It is great to back yourself, but there are risks to every investment. I recently met with business owners desperate to retire to a different life; unfortunately, they never contributed to a personal retirement fund or liquid portfolio. The property market was not doing well, and when they needed to sell their hospitality business, the projected proceeds were not sufficient to sustain them. On top of that, their occupancy rates had fallen drastically due to increased competition. The result was they were burning through the little cash reserves they had to fund salaries and other costs. This is an extreme outcome, but we have seen this issue more commonly, especially during Covid. What we have learned is that “Black Swan” events are becoming more common, and diversifying investments outside of your business is absolutely crucial to survive these events.

When you are your business

Most often, the plan is to grow your business and sell it when you retire. But what happens when you are the business? It becomes virtually impossible to step away, and your business becomes tough to sell. This often leads to disappointment or despair, but it doesn’t have to.
The most crucial element of any business is a succession plan (which is a whole chapter in itself). A succession plan isn’t only good business practice; in some cases, it’s the only way to realise a return on investment as well as a return on life.

Mentoring a junior with the intention to take over from you creates the unique opportunity to:

  1. Realise an income after you exit the business. You could step aside and draw a passive income or consult to your business and continue your mentorship role while freeing up time to focus on a new chapter of life.
  2. Create an arrangement where you know exactly who you are selling to (your Mentee).
  3. If you foster layers of mentorship into your business, you then have a genuine going concern that can be sold on the open market; after all, now there are multiple yous in the business.
  4. You can protect your family’s interest while having a plan for your business should something happen to you. This is commonly known as a buy and sell arrangement between business partners; however, for this to work; you need to have someone in your business to take over, or a family member eager to take over. Either way, this person should be equipped and ready to step in when the time comes.

Owning and running your own business is one of the most rewarding things you can do, from both a lifestyle and financial perspective. However, it is crucial to get independent advice along the way to ensure that your business compliments and doesn’t complicate your financial and estate planning. In many cases, a business fits in beautifully with a meaningful retirement. It can fill so many areas of your balance wheel if you choose to embrace the planning sooner rather than later.