How can your business boost your retirement planning?
- Financial Planning
There is no doubt that small business is a fundamental part of the Australian economy – and it’s important that it is supported, which includes planning for a future without the founder or owner at the helm. If you are a small business owner, how would you answer the following questions?
- How much is your business worth?
- How saleable is it?
- Do you know how to maximise its sale value?
- What age do you want to retire?
- Are you depending on the sale of your business to fund retirement?
- Have you discussed the possibility of business succession with family members?
- How much of a retirement nest egg do you want when you finally put your feet up?
If you can’t definitively answer these questions, or if you find it a little unsettling to even think about them, then you may need to stop and really take stock of the situation.
Every business needs a succession plan
Without a plan for how you will exit your business, you may well end up working in your business longer than you really want to. And, in many cases this means that you will end up exiting the business out of necessity rather than choice. If a health issue or some other dramatic life event strikes, you may need to leave the business abruptly, resulting in a fire sale situation that forces you to accept a sub-par value.
Lack of a succession plan may also mean you will enter retirement with only a very grey idea of what you will actually need to enjoy retirement in terms of income and lifestyle. Consequently, you may be leaving your retirement severely underfunded.
A sound business succession plan will relieve this kind of uncertainty and should therefore be a priority as early as possible – ideally well before the shadow of retirement looms.
Look beyond the business first
If you do decide that you want to take the initiative on business succession, (rather than letting fate decide it for you), the first step is to start to project a picture of what type of life you want to live after you have retired out of the business. Ask yourself some questions that relate to what you really want to achieve and enjoy in retirement:
- What ongoing income level will you need to live comfortably?
- What major expenses or purchases will you want to make (travel, boat, motor home etc)?
- What type of activities will you want to get involved in, such as sports and hobbies?
- What will your ideal housing situation be?
- What legacy do you want to leave to family?
Developing your own idea of your ideal retirement is an essential first step in being able to cost it, which in turn will enable you to project the retirement capital needed to fund it.
Once you have that ‘big picture’ of your retirement wants and needs, you can then make a realistic assessment of how your business can fit into those plans, how you can extract value out of the business to help fund it and what additional retirement funding needs to be in place outside of the business.
Extracting value from the business
For many business owners, the first question to address is the likelihood of family members being willing and able to take over the business. If there is interest from family, then it helps to get some concrete ideas of the timeline for the transition to take place, as well as an agreement on how you can be compensated and when you will receive it.
Of course, valuing the business accurately is critical to the process, whether you are passing on to family or whether you are selling it on the open market. This is where the assistance of an accountant and financial planner can be invaluable.
The key to making sure you get top dollar for your business is to get a proper analysis done as early as possible. This will enable you to make any adjustment to business fundamentals that will affect sale value. Having the right professional assistance on board can make this process as effective and efficient as possible and will ensure that you don’t have to ‘re-invent the wheel’ by trying to figure it all out yourself.
Many business owners make the mistake of assuming that having loyal customers and a good track record of business income is sufficient in itself. Of course these factors are vital, but there are less obvious issues that may greatly affect business valuation and may need to be addressed, such as:
- Reducing redundant stock in the business – this can boost liquidity
- Documenting your financial records thoroughly – this makes valuation more transparent for potential buyers
- Reviewing and revising your approach to debtors – this can improve cashflow and make your business financial position more attractive.
Planning and acting on issues such as these may take some time, so starting as early as possible before your projected sale date is essential to maximising value.
Don’t go it alone
Leaving succession planning to the last minute or trying to do it all yourself can seriously impact your financial position in retirement, so seek assistance to get the ball rolling early. Using professional resources to analyse your retirement strategy and to help you plan for extracting optimum value from your business can make a world of difference.
What do you feel is the most important factor in planning business succession? Join the discussion below.