One of the simplest financial traps that self-employed and small business owners can fall into is assuming that their business will be able to fund their retirement. Small businesses, particularly new start-ups, require a lot of capital and many people focus on directing cash flow and profit into building the business, with a view that over the long term they will build value that will release capital at a future point in time when they sell. In following this strategy the first casualty is usually not making any ongoing contributions to their personal superannuation.
Key risks to this strategy include unrealistic valuations on what the business is worth, business valuation being linked to key person revenue (if they leave the value goes), and the business value being undermined with little warning due to changes in the industry. Therefore, if an individual’s plan for retirement is being able to fund retirement income from a future business sale, it makes sense to have some security in place to mitigate against these risks. This can include the following:
· Start with the end in mind. Get a realistic business valuation done so that you can quantify the underlying business value, and understand how you can work to grow this sustainably over time, so that you have a robust business model with sound financials to put to the market.
· Make yourself / the key person redundant. Part of building a strong sustainable business is to make sure it’s success isn’t anchored to one key individual; in essence you need to make yourself or the key person redundant to the business models successful operation. Easier said than done for one-person operations, but could include having someone available at short notice who can step in to cover short periods of absence.
· Stay current. Technology and social media means that the business world is evolving more rapidly than ever before, so it is important to remain on top of current trends and developments to ensure your business remains relevant and retains its underlying value.
But there is also another simple way to ensure you save for retirement as a self-employed business owner; pay yourself first. While self-employed business owners may be able to take advantage of lump sum tax concessions when they sell their business, they are also able to contribute regularly to their superannuation, which means their super will continue to accumulate capital to fund their retirement. In the event that the business doesn’t realise the value that was being relied upon, then at least the ongoing contributions to super will help to offset this lower value.
Another valuable reason for making contributions to super is to ensure that appropriate levels of Life and TPD Insurance can be held for the business owner, which they can structure and fund cost effectively through their superannuation fund.
The bottom line for self-employed business owners is pay yourself first – look after number one! Regular contributions take advantage of the effects of compounding interest within superannuation, and structuring insurance through your super is a cost effective strategy to ensure you are protected while growing your business. This is by no means an exhaustive list or discussion of the considerations that you need to undertake as a self-employed or small business owner. If you would like to discuss your individual circumstances, then please contact the Carey Group on (07) 4760 5900 or email email@example.com to request an obligation free appointment with our professional business advice team.