*This article is brought to you by Sanlam Business Market
By Jannie Roussouw*
Business owners, who hope to one day sell their businesses at a profit and retire comfortably, need to heed the difference between a retirement plan and a business venture, says Jannie Rossouw, Head of Sanlam’s Business Market.
Rossouw says while expanding and paying off debt is vital to secure the sustainability of the business, it does not necessarily support the ultimate goal behind starting the business in the first place: to create wealth and to enable the business owner to work towards financial independence and a comfortable retirement.
“Key to remember, though, is that a business is not a retirement plan and that there is grave risk in banking on the sale of a business to fund one’s retirement.
“Consider the fact that expanding a one-man DVD rental shop into a national franchise or getting into a traditional metered cabs business would have been considered a solid business strategy in the past decade! Fast forward to 2016, there is Uber and video on demand streaming services….and you see the unlikely potential of securing a retirement from the sale of such ventures.”
While many businesses become obsolete due to digitisation and technology, many entrepreneurs continue to plough their profits back into their businesses by expanding operations and investing in upgrades – hoping that they will one day be able to sell the business at a profit and retire.
Rossouw says the unfortunate reality is that few South African entrepreneurs are ever able to sell their businesses in order to attain financial independence.
“They are often not able to achieve the selling price that they had hoped for. The price of a business is what someone else is prepared to pay for it, i.e. there needs to be a willing buyer and willing seller. It might happen that your business won’t be nearly as valuable as anticipated many years ago. It may be in an industry which is likely to be phased out due to technological innovation. Or there may be an economic downturn.”
Another mistake entrepreneurs make is thinking their children will look after them after they have taken over the business.
“If your children, who are taking over your venture, are also expected to look after you from business proceeds, it may cause resentment. It may be better in this case to sell the business to them so that you have your own retirement capital. If you think it is risky running a business, try living off a business in your old age that your children are running,” says Rossouw.
The problem is that for many entrepreneurs, it is almost unthinkable to start taking profits from the business and apply it elsewhere – like investing in property, in unit trusts, the stock exchange, or in a retirement savings vehicle, he says.
“Paying yourself by taking money from your business and moving it into investment vehicles, especially to save for your retirement, doesn’t mean you’re gambling with your hard-earned cash – it’s being smart, and it ensures that you have a strategy in place to protect your wealth on a personal level so that you don’t run into financial hardship after retirement.
Rossouw argues that entrepreneurs are intrepid innovators and tenacious wealth accumulators, but that many may find the complexities of financial planning overwhelming. He says it is therefore essential for business owners to entrust their financial planning to skilled professionals.
“In the end, tracking both your business and personal financial success comes down to one key consideration: Are you working for your business, or is your business working for you and your personal financial well-being when you retire?”
- Jannie Rossouw is the Head of Sanlam Business Market. You can email him [email protected].
