Making the leap from small business to retirement

Transitioning into retirement can be a challenge for many small business owners, but how you choose to meet those challenges can make a big difference to your retirement lifestyle.

For many small business owners, a retirement plan may never amount to anything more than a vague notion that you will one day be able to cash in on the business and put your feet up. While you may be running a very successful business, failing to plan for a successful exit strategy can leave you working well past the age you want to retire at and you may receive an inadequate return from the many years of hard work and dedication.

It doesn’t need to be that way. Planning around some key issues and getting the right advice can make all the difference.

Making a conscious decision on a retirement age can bring all other questions relating to your retirement into sharp focus

Start with the basics
The most profound question relating to your retirement is simply deciding when you want to retire. Too often small business owners leave this question unaddressed and as a result, end up working until ill health forces retirement. Making a conscious decision on a retirement age can bring all other questions relating to your retirement into sharp focus, and provide the catalyst for other key planning decisions that need to be made.

The next question to consider is how much you will need to enjoy the comfortable retirement you deserve. We all want to have the financial freedom to do what we want in retirement, but leaving this as a vague wish is not sufficient. Make it a point to seek out a qualified financial planner who can guide you through the process of mapping out your desired retirement lifestyle.

This will include issues, such as:

  • What your living expenses will be to allow you a comfortable lifestyle into the future?
  • What specific activities you want to pursue, such as, international travel, and what this will cost?
  • How many debts and mortgages can be paid down as this may simplify your situation?
  • What accommodation you want to live in? For example, will you downsize? Do you want more than one residence?
  • What legacy you want to leave for your children?

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Start thinking about what your retirement lifestyle will be like and what it will cost to achieve it

Turning your business into retirement cash
Once you know when you want to retire, what your retirement lifestyle will be like and what it will cost to achieve it, you can then address the practicalities of how you will get there. The first question to be answered is how your business sale or succession will fit into your retirement plan.

A key decision at this point is whether the business is to be passed on to family members or sold. If it is to be passed on, there needs to be a timeline for transition drawn up and an agreement for how any cash value you want to extract from the business will be paid. For example, will there be a single cash payment or a staged set of payments over a specific time period?

Regardless of whether you take the family succession or sale route, there needs to be a sound and sober valuation made as early as possible. This can be performed by an accountant in conjunction with a financial planner. By making the valuation early it will point out any issues that may need to be addressed to help maximise the value to you and to make the business a more attractive proposition for potential buyers.

Having loyal customers and healthy turnover are all well and good, but there may be other business planning issues that can impact the cash value you are able to extract, such as:

  • Reducing redundant stock in the business
  • Getting financial records up-to-date and well-documented
  • Making a plan to reduce debtors so that business cashflow is as healthy as possible

Identify any tax concession opportunities that may be available

Once the business value and succession plan is taken care of you can then gain a realistic picture of any shortfalls that may exist between the amount you need to fund your retirement and the amount you will gain from selling your business.

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Planning properly can help you enjoy retirement better

Your financial planner can help guide you through how any shortfall can be overcome using superannuation and other investments. In conjunction with your accountant, they can identify any tax concession opportunities that may be available to help you maximise your net retirement savings position and meet your retirement goals more efficiently.

Once the business value and succession plan is taken care of you can then gain a realistic picture of any shortfalls that may exist between the amount you need to fund your retirement and the amount you will gain from selling your business.

Your financial planner can help guide you through how any shortfall can be overcome using superannuation and other investments. In conjunction with your accountant, they can identify any tax concession opportunities that may be available to help you maximise your net retirement savings position and meet your retirement goals more efficiently.

Don’t leave it too late
The steps outlined here may sound deceptively simple, but all too often they are taken for granted and left on the back-burner. You don’t want to be left in a ‘fire-sale’ situation so take action now.

Top 6 tips to remember

  1. Be decisive about when you want to retire.
  2. Enlist the help of a financial planner and your accountant.
  3. Identify your retirement lifestyle goals.
  4. Decide on whether the business is to be passed on to family or sold.
  5. Take steps to maximise the value of your business and make it attractive to buyers.
  6. Calculate any shortfall in retirement funding and use tax-effective superannuation and investment strategies to make up the difference.

What do you feel is the biggest challenge for business owners transitioning to retirement? Join the discussion below.