Is Your Business Good Retirement Capital?

Why don’t entrepreneurs diversify for retirement?

Apart from optimism, confidence and risk tolerance, the main reason entrepreneurs keep reinvesting in their businesses as opposed to building up a separate investment portfolio, is that they believe that the return on capital from the business is greater than the return on other investments.

The concept of retirement is also almost alien to entrepreneurs because they enjoy what they do and live for the challenge that only the business provides.

Business owners can also be motivated to keep reinvesting all spare funds in their businesses to lower their tax liability. For example, when income is invested in physical assets, such as equipment, the purchase of that equipment can be written off as a depreciation expense.

Why is your business not the sure thing?

The risk of relying on your business as retirement capital is that you can never be sure you’ll sell it. Research indicates that only 20% to 25% of privately owned businesses ever get sold. Often the value of the business is linked to the owner’s skills and personal relationships with customers. Having family members in top management positions also diminishes the prospect of selling.

What’s more, as markets and methods change many businesses become less and less relevant. Unless you’re an early adopter throughout your career, your business may no longer be at the cutting edge when you wish to retire. Not to mention factors beyond your control, such as increasing interest rates, aggressive competitors and disruptive technologies.

It’s important to accept that although you may feel invincible when you’re young and your business is thriving, you will age and slow down…Which could very well result in diminishing revenues and reduced business value.

Balancing business

If you accept the possibility that you may not be able to sell your business, it’s far easier to commit to investing in unrelated assets for retirement. A well-diversified portfolio can include your business, home, retirement funds (such as RAs or pension funds) and other investments such as unit trusts and shares. Diversification is a fundamental risk management technique which entails investing your capital across many different asset classes, geographical regions and industry sectors to spread your risk exposure. As a privately-owned business is a risky asset, it’s good to invest relatively conservatively outside your business.

Another benefit of diversifying from your business is that it allows you to make the most of a few irresistible tax breaks. A maximum of 27.5% of your remuneration or taxable income (whichever is higher), and no more than R350,000, is tax deductible in each tax year. There is no tax on the growth of assets within retirement funds, which accelerates their growth. Think of investing in retirement funds such as pensions, RAs and tax-free savings accounts as locking in the profits of your business.

Increase the chance of selling

Once you’ve accepted that it’s very risky to rely on the sale of your business for retirement, there’s still plenty of reason to work hard at increasing its saleability at every stage of its development. One of the best ways of doing this is to employ a skilled marketing professional and create a brand that represents more than just you, the owner. Try to build a brand that’s contemporary and embraces ongoing change, especially in the use of technology.

It’s also wise to invest in business assets that can be sold separately. Your business premises could be a valuable asset – if you’re not overly exposed to property in the rest of your wealth portfolio, that is.

Diversification within your business also lowers the risk of failure and will increase the likelihood of being able to sell it. This includes a diversity of clients, sources of revenue and funding. It’s also wise to cede some control and ownership to external stakeholders who bring the benefits of new ideas and business experience.

The bottom line

Business owners’ greatest strengths are often also their greatest weaknesses. Resolve, willingness to bear risk and persistent pursuit of success may be desirable traits for building a business, but they aren’t necessarily suited to sound retirement planning. Although diversification will slow down the growth of your business, it will also help to ensure that you have enough capital when you do retire.

Are you an entrepreneur or business owner? Speak to us about how best to structure your retirement plans. The sooner you get started, the better.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

Share This Article:

When Risk No Longer Feels Risky

After years of market turbulence followed by surprisingly resilient recoveries, many investors are asking an unexpected question: “Am I being too cautious?”
Let’s look at how recent experience shapes our perception of risk, why discipline still matters, and the role thoughtful financial advice plays in keeping emotions from driving investment decisions.

Why Markets Keep Finding Their Way Back to the Same Place

This year, just about everything that could go wrong has gone wrong. But despite the turmoil markets have shown remarkable resilience. Time and again, investors have been confronted with events that seemed destined to derail global growth, only for fundamentals to reassert themselves. As wars, technology, and economic policy continue to pull markets in different directions, one question remains: why do markets keep ending up in almost exactly the same place?

While Wall Street Wobbles, South Africa Gains Momentum

Since the year dot, narratives have driven investor sentiment. June’s narrative was largely positive for South Africa as investors uprated our investment potential, but it was decidedly rocky for US investors, with chipmakers leading stock markets to heady highs before driving them down to disconcerting lows.

What Does Financial Planning Look Like if You Don’t Have Kids?

For generations, financial planning followed a familiar script: build a career, buy a home, raise a family and, eventually, pass wealth on to the next generation. While that path still resonates with many, modern lives are far more diverse. The reasons for not having kids may differ, but the financial question is often the same: if your wealth is not destined for children, how can it best enrich your life, reflect your values and leave a meaningful legacy long after you are gone?

Click to start your journey