It is often said that your business life and personal life should never mix. But if you own your own company, this is simply not feasible. Your entire livelihood depends on the business, and inevitably considerations about the well-being of yourself and your family will influence the decisions you make.
Nowhere is this more evident than in later life planning. When it comes to considering their retirement, business owners inevitably have critical decisions to make about the company. The first priority is how to turn the controlling stake in the business into a viable retirement income.
In some circumstances, plotting their own end game may also involve planning the end of the business altogether.
Asset management and investment specialist Fiducia Wealth assists clients with financial planning for retirement. Here Fiducia looks at the key considerations for small business owners who need to build their own pensions or alternative income sources in preparation for later life.
The need for an exit strategy
It is easy for business owners to be caught up in the here and now. The reasons for starting a business are to see it grow, to keep pushing to make it more and more profitable and successful. All of your time and energy can be consumed in pursuing that goal. After you take out what you need to live, every spare penny of profit is reinvested back into the business.
Once you get into this mindset, it can be difficult to take a longer term view.
It is important for any business owner to step back once in a while and ask – what is all of this for? The continual push for growth is in itself not a business strategy – you need a clear goal to work towards, otherwise you risk just pushing yourself harder and harder for little ultimate gain.
Businesses have all sorts of strategies and goals in the short, medium and long term. For any entrepreneur, the longest of the long term goals is to ask – what do I want to achieve when I leave? Do I want to build the business to the point where i can sell it for a huge profit and retire on the proceeds? Do I want to pass it on to my children? Do I want to shut it down and prop myself up financially with the remaining assets?
Answers to these questions will shape a lot of the other decisions you make in how you run your business over the years. But just as importantly, they will give you a strategy to work towards for your own retirement plans.
Save or grow?
Business owners face a dilemma when it comes to planning financially for later life. For most SME operators, it is difficult to extract enough capital from the business to save for a comfortable retirement whilst simultaneously investing in growth.
But if you ignore growth in favour of putting away a nest egg, you risk the business stagnating and deny yourself a potentially substantial windfall from selling a successful company. If, on the other hand, you focus only on growth, you take a huge gamble with your future if your business ends up not being worth as much as you hoped and you have no savings to fall back on.
However challenging, the sensible option is to hedge your bets a little, aim to put money aside personally and push to grow your business. Growth gives you that cushion to fall back on if you end up not saving quite enough for a comfortable retirement – the larger your business becomes, the more it will sell for.
The critical thing is to be smart in everything you do. Take professional advice both on your saving plans and your growth strategy, learn as much as you can about financial planning and investment, always strive to make the most of your available resources. Working hard is important for achieving a comfortable future, but working smart is even better.