For many small to medium sized business owners, the ability to have a comfortable retirement relies heavily on the financial success of their business. In other words their business becomes their retirement plan.
If you fall into this category, ask yourself if you are taking advantage of the three key strategies for maximising the value of your business to your family in both the good times and the bad.
1. Extracting and Protecting Money from Your Business Before Retirement
Money left inside your business is at risk of being lost if the business suffers a downturn or goes into liquidation. Therefore the first strategy to protect wealth for your family is to extract as much cash as possible (via salary, dividends, superannuation contributions, repayment of shareholder loans etc) from the business each year and putting this money to work for your family outside of the business. This is best achieved if you can move this money to a family trust or fund where it will be protected from creditors in the future.
“But I never have any spare cash” I hear you say. This can be true for many businesses but does not need to stop you protecting wealth for your family.
For example, if you have retained earnings and franking credits and you receive a payment from a debtor but you owe money to a creditor, pay yourself a fully franked dividend first, then loan the money back to the business under a secured loan to pay the creditor. This means you (or your family trust) now rank ahead of your creditors if the business runs into trouble.
Better still, if your business does not need the money or you can borrow from the bank to fund working capital, invest the money in lower risk investments in your family trust or superannuation / retirement fund.
2. Preparing for a “Planned” Exit Strategy
At some stage you are going to want to stop working in your business and start enjoying yourself. Right? This is when your business really becomes your retirement plan.
As such, you need a “planned exit strategy”. This involves getting your business ready to hand over or sell to the next owners / managers. Do not underestimate the work and time it takes to exit your business at its maximum value. Typically it takes three years to prepare, one year to execute the sale and up to two years to complete the earn out phase.
In other words, you should allow six years to fully exit your business at the maximum value.
Key issues which can maximise the value of your business at sale time are:
- ensuring the business is not reliant on you;
- getting your ownership structure right;
- getting the right business management systems in place;
- recruiting and retaining key staff;
- optimising profitability; and
- identifying the potential buyers and negotiating and implementing the sale
You will also want to plan to take advantage of the array of tax benefits which help business owners minimise tax on the sale of their business. Again, this can take time and preparation, as a small error can costs tens or even hundreds of thousands of dollars in unnecessary tax.
3. Preparing for an “Unfortunate” Exit
Life doesn’t always go as planned, and due to illness or injury, you may not be able to work in the business until retirement. An early “unfortunate” exit could negatively impact the value of your business which can have a disastrous impact on your retirement plan.
As such, you should plan for what would happen if you could not turn up to run your business tomorrow.
What would you do with the business? Would it shut down or would it continue on?
Either way, you need to identify:
- Who will do what to whom (i.e. who will run the business or shut it down)?
- How much money will it cost? and
- Where will the money come from?
For example, if you would like to sell the business what is the right price, who is the buyer (another owner, staff, external parties, or perhaps a competitor), and how will they fund the purchase?
Next you need to consider the liabilities. Have you loaned the business any money (e.g. shareholder loans) and if so, how much and how will the business repay it?
Have you borrowed from the bank? Have you lodged directors’ guarantees or worse, your house as security? If so, how much are these loans, and what would the bank need to release your guarantees or security. If they require a reduction in the debt, how much do they require and how will this be funded?
If the business is to be kept going, in addition to the above, does the business need more capital to fund the transition to the new owners or until a replacement for you is found? If so, how much is needed and where will it come from.
And finally, on the personal side, once all of the above is taken care of, is this enough to support your family’s financial needs? If not, how much money does your family need and where will it come from?
Whilst all of this may sound daunting, it doesn’t have to be. A good “unfortunate” exit plan can be summarised on one page.
And the money required to meet each need can be sourced from any combination of the following:
- existing capital from the new owners
- new debt facilities
- insurance
So, just like everything else, failing to plan is planning to fail. With the right help, getting each of the above strategies right does not have to be too time consuming or costly.
Paul Barrett is an Owner and Wealth Advisor at Absolute Wealth Advisors. Paul specialises in providing strategic financial advice and investment management services to Business Owners, Professionals and Retirees.
Author
Bernadette Eichner
Bernadette Eichner has had a successful career in hospitality sales, real estate, and recruitment. In 1999, she founded HRM Resolutions, a strategic human resource consultancy, and later became a founding recruiter and investor at RecruitLoop.
