Is Your Business Your Retirement Plan?
There is a frightening trend in self-employed people and business owners (‘SEBO’). Except for the very successful ones, SEBOs generally aren’t investing for the future.
Compare this to the humble employee. Even if living hand to mouth their employer is still contributing to their super. Year after year.
There is nothing magical about how a super fund grows over time. For many people about half of their retirement balance is made up of employer contributions. You can read our insights about it here. Wealth accumulation is about discipline, not magic.
SEBOs need to take this seriously.
Self employed
Regardless of their structure (ABN, company, trust), self employed people are often the sole income generator whether that be through a service or product. All of the profit comes to them.
With that comes all of the pains of entrepreneurship - maintaining cash flow, suppliers, outsourcing, marketing, delivering quality products and services, no sick leave, no super, etc.
3 key problems exist here.
They generally don’t have an investment mindset because they are absorbed in their day-to-day. They are often happy just to turn enough profit to make ends meet and have a holdiay each year.
Any profits that are generated may be ‘invested back into the business’. That may increase income but where does that extra income go? Is there a plan for it or does it disappear?
There actually isn’t a ‘business’ to sell at the end of it all. THEY are the business.
Operating through a company struture may sound important but it doesn’t change anything. Many people are merely sole traders operating through a company for specific reasons.
Business owners
Business owners, those with a true business with their business having a identity distinct from the owner and with some sense of process and autonomy behind it, have the same risk of not investing for themselves but it goes further.
Setting up a successful business can simply take longer as it is more complex, meaning years of not investing elsewhere.
“My business is my super” approach.
Having worked in valuations at a Big 4 consultancy, it is typical for business owners to overvalue their business (I can’t remember someone undervaluing their business actually…). Please don’t take this personally, but it’s not about how much a business owner thinks it’s worth, it’s what the market thinks, and that can change quickly. Initiate conversations with professional business specialists years in advance to prepare your business for sale and be conservative in your expectations.
Allow for capital gains tax and seek advice re strategies to minimise this well in advance
It’s undiversified.
It can be blinkered and lacks planning. Years of effort go into working in/on the business without thought to how much one will need in retirement. Maybe the business value just isn’t going to cut it? What might that mean?
The Association of Superannuation Funds of Australia provides some guidance of standards of living in retirement.
https://www.superannuation.asn.au/resources/retirement-standard
So please consider this.
If you are a SEBO, are you putting all your eggs in the one basket via your product/service/business?
Are you headed where you need to be?
Book a call to consider your options. We can also put you in touch with a business valuation specialist to get your business ready for sale when the time comes. Ideally, you would be speaking with them well in advance.
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The information contained in this blog has been provided as general advice only. The contents have been prepared without taking account of your personal objectives, financial situation or needs. You should, before you make any decision regarding any information, strategies or products mentioned on this website, consult your own financial advisor to consider whether that is appropriate having regard to your own objectives, financial situation and needs.