Asking anyone how their retirement plans are going will usually send their blood pressure soaring. This is mostly because retirement and death are two life realities that we least enjoy talking about and are most ill-prepared for.
For the small business owner (SBO), retirement planning is especially complex, with considerations that are unique to entrepreneurs…
Separating business from personal
In the infancy of their business, most SBOs fail to clearly distinguish between their business’s finances and their personal finances. The two become conflated and the business carries costs it should not. This can cause confusion and tax complications. The smart advisor will coach the SBO client to make a clear distinction from the outset, recommending that the business bank account and the owner’s be strictly separated.
As the business grows and starts to generate positive cashflow, the business owner can pay themselves a salary, dividend, interest on a loan account or they can draw profits depending on the entity used and the tax treatment recommended by the tax adviser.
A culture of savings
Two clients of mine once started a private company together. We encouraged them to each start a provident fund. They started small with debit orders that they felt in their cashflow at first. As time went by, they adjusted. Today – 20 years later – they each have more than R2 million saved for their retirement – built tax-deductibly in small monthly amounts. Their business hardly felt it!
Most people intend to start saving one day but never get going and are left wondering what might have been.
A great strategy for building personal wealth is to buy your business premises. Property investments appreciate steadily, and the property can generate annuity income in the form of rentals to supplement retirement income.
The SBO should get advice from their Certified Financial Planner and plan to cover retirement savings as well as the risk of premature illness, disability and death that may impact the business and their ability to extract value for themselves and their heirs.
Thinking about retiring?
Retiring is a big deal for anyone, especially the SBO. The smart adviser would ask them questions like: How can you make your business attractive to an investor? (if the strategy is to exit the business and retire) Are you planning to hand the business over to a child or family member? How will you fund your medical aid after retirement?
The age-old advice about when to start saving for retirement is “as soon as possible”. As soon as the business has the tiniest free cashflow, this should be appropriately set aside for the long-term benefit of the SBO. Some advisers suggest savings be categorised into emergency, medium term and long term. Again, discuss options with your financial adviser. Don’t procrastinate or make the excuse that you’re too busy running your business to worry about the future – if you have the cashflow, do it!
In the final planning stages, seek advice about the amount to be drawn from retirement funds in a lump sum and the tax consequences. A helpful strategy for SBOs approaching retirement is to have the discipline of reducing personal living expenses so that these are in line with his or her post-retirement earnings.
Should the business pay all its debts before the SBO takes any money out to provide for retirement?
SBOs should only incur debt when they’re confident the business can repay it. It’s irresponsible to take out a pile of money to fund a retirement annuity in February for the tax deduction, if the business is unable to pay salaries that month! It’s irresponsible for an SBO to place the cashflow of the business under pressure.
The responsible approach is for the SBO to work out with the trusted advisor/financial planner what level of remuneration allows the business to meet its ongoing commitments and growth objectives. That level of remuneration should include an appropriate portion to fund retirement savings, healthcare and risk premiums like life cover, disability and dread-disease cover.
In preparing for retirement, the SBO must consider whether to dispose of surplus assets, bearing in mind associated costs like agent’s commission (for property sales) and tax.
Many SBOs forget about sureties and guarantees provided during their business’s growth phase. When retiring or selling a business, it’s vital that these be cancelled to avoid a future disaster.
Information is power
The modern SBO has the significant advantage of being able to access up-to-date financial information on the business through modern cloud-accounting software and online banking/investment platforms. There’s therefore no excuse like “I don’t know what my profit is” or “I don’t know how much money’s in the bank”, or “I don’t know what the business owes”.
This information should be used and will help the SBO make these decisions with the help of the trusted adviser.
The SBO also needs to value the business at regular intervals – to monitor its growth and to be aware of estate-planning considerations like estate duty payable upon death. If the strategy is to sell the business, advice should be sought on the tax implications.
A financial adviser can determine what return can be generated from the after-tax proceeds of selling the business. This can be used to estimate the post-retirement income of the SBO. If it appears that selling the business will not generate a reasonable return, it may be better to keep the business running until its value increases.
Get your business into shape
The best advice for any SBO is to get the business into the best possible shape so it can:
- Be sustainable in the long-term – 10 to 20 years at least;
- Maximise its value – in providing returns for the SBO and other stakeholders; and
- Be attractive to a buyer who can give the SBO fair value for what he/she has built.
- Billy Nield is a partner at BDO,