News24 | Why you shouldn’t use your business as your retirement plan

It’s easy to think of your business as a way to save for retirement, but turning it into a source of retirement income might not be as easy as you think.

Not planning for retirement is also a mistake, as you never know how you’ll feel about continuing your business when you’re older and potentially have health problems. Running a business without putting your all into it can also cause it to lose momentum.

Small business owners often think they can solve the problem of securing retirement income by selling the business and investing the proceeds or transferring the business to a family member who will pay them the income from the business.

We recommend that you consider the following:

• What are your financial needs after retirement?
• How much will your business be worth at the time of your retirement?
• Will the business bring in enough revenue to support you for the rest of your life?
• If a family member takes over running the business, will the business be able to pay them an adequate income and afford to remunerate you, the shareholder?

The problem with planning your retirement with the sale of your business in mind is that you can’t be sure how much your business will sell for, or if you will be able to sell it at all.

According to a study conducted by the American Business Exit Planning Association, only 20% to 30% of small businesses that are put up for sale actually sell. There are no similar statistics in South Africa, but it’s a big gamble.

Here are some reasons why selling a small business can be difficult:

• Small businesses often rely heavily on the expertise and connections of their owners to succeed, so when the owner sells the business or retires, the value of the business declines without that key person.
• If you become ill or disabled before retirement age, your expertise and customer relationships could be lost, eroding the value of your business. Ideally, you want to protect yourself against the following:diseaseorhindranceThroughout your working lifeProtect your business from losing key talentIf you have a partner, including yourself,Sales contractWe also back it with life insurance to ensure that you and your heirs receive their share of the business’s value in the event of your disability or death.
• Because you are emotionally invested in your business, it’s easy to overestimate its value. If you ask for too high a price for your business, you’ll struggle to sell and will end up feeling disappointed and frustrated when you realize you were too highly quoted. Having a professional value your business each year will help you track the growth of your business and determine what you need to do to increase its value.

Succession planning issues

If you expect family members to take over the business and provide for your retirement, you need to have a succession plan in place and an exit strategy in place.

According to PWC’s 2021 African Family Business Survey, 76% of family-owned businesses in Africa have no succession plan, so it’s important to address the next question together with your family.

• Do they want to continue in the business or take it over?
• Who will manage the business?
• Can the company afford to pay you a consistent monthly income while providing a sustainable income for the new owner?

Brick and mortar value

How you invest in your business can have a big impact on your retirement. Even if you can’t sell the business, if you own the physical building you can sell it when you retire.

The risk of relying on the sale of a physical building is that you don’t know what the property market will be like when you retire.

It’s important to remember that neighborhoods change over time and the value of your property may decrease or increase significantly.

Real estate may seem like a valuable asset, butDiversification– Your retirement life depends on one or a few establishments. If things don’t go as planned, your retirement income is at risk.

Alternatively, you could sell the business but not the building and collect rent from the new owner.

You will now be the landlord and new issues will arise, such as the risk that your tenants won’t pay rent. Managing tenants is not easy, so you might consider appointing a management company and paying them to manage the property for you.

Protect your future

Small business owners should plan for retirement while building their business.

First, understand your retirement financial needs and set your retirement investment goals.Financial AdvisorWe can provide guidance and advice based on your needs and goals.

Then, choose the right investments that will diversify your assets and income as you build towards that goal.

Commit to saving a set amount each month and stick to it. If you’re having a good year and have some extra cash, put a lump sum towards your retirement savings to help boost your savings.

When you use a superannuation scheme to save for retirement, your investment is protected from creditors, so your savings are safe no matter what happens to your business.

Your business can be an asset in your retirement plan, but it shouldn’t be your only asset, and you should carefully estimate its value at retirement.

Tax issues

There are tax benefits to investing your retirement money in a retirement fund rather than investing it solely in a business.

Contributions to superannuation fundsTax deductibleWithin certain limits, the fund’s growth grows tax-free, and if you preserve your savings, you may be able to withdraw some capital tax-free in retirement.

On the other hand, if you sell your business when you retire,Capital Gains Tax.