How to get ready for retirement if you own a business

1. Develop a business succession plan

If you own your own business, a key part of planning for retirement should be developing a detailed exit strategy. Documenting your plan can help ensure you maximise the value of your business and provide a smooth handover to the new owners. Your exit plan should cover issues such as who will take over the business, whether you intend to sell or close the business, and how much you are likely to achieve when you go to market.

A good business succession plan can also help increase the potential sales value of your business, as it allow you to identify potential buyers (such as current employees), structure an appropriate purchase agreement, and work out how to successfully transition the business to new owners without losing customers.

It’s also important to have a strategy in case you are forced into retirement earlier than anticipated. Ill health or changing business conditions can upset the best laid plans, so consider what you would do in that situation and how you would fund your retirement.

2. Consider your personal transition strategy

Aside from business succession, you also need to think about what you intend to do after you finish full-time work. Successful retirement planning is about setting and realising your life-after-work goals while ensuring you have the necessary financial resources to achieve them.

Also give careful thought to where you want to live, how much that will cost, other expenses you’re likely to have, and where you plan to source your retirement income. It’s just as important to consider your personal preferences for retirement as it is to work out your business succession.

3. Work out how much your retirement will cost

Once you have a retirement plan, you can start working out how much that lifestyle will cost and how much you’ll need in your nest egg to fund it. The actual amount will depend on your desired lifestyle, other assets, current super balance, debts and any dependants you will need to support.

A good place to get a rough estimate of retirement costs is the Association of Superannuation Funds of Australia’s (ASFA) Retirement Standard, which benchmarks the minimum annual cost of a ‘comfortable’ and a ‘modest’ standard of living in retirement for singles and couples.

4. Establish your retirement time schedule

Once you have some clarity around what you intend to do with your business and your time in retirement, the next step is to develop a plan with some actual dates.

The key task here is to set a date for your retirement. While that date may change, it’s important to have a time in mind so you can work back from it and set deadlines for the various personal and business pre-retirement tasks you need to complete.

When it comes to your business, you should be setting deadlines for things like easing out of your business (say, over the next three to four years), or training up a chosen successor (over the next three years).

5. Maximise the return from your business

As part of your business succession plan, you need to ascertain how much your business is worth currently and the value – if any – of goodwill you could achieve when you sell.

Good succession plans also consider the potential for increasing the value of your business in the years prior to retirement. This may come through the introduction of new systems and processes, or through expansion into new markets.

You should also develop an operational transition strategy that trains your successors or key employees in the operational aspects of your business, so it no longer depends on your presence to continue functioning.

6. Learn about small business super contribution strategies

Business owners have access to some generous opportunities to contribute to super when they exit their business, so it’s worth taking advantage of them.

In addition to some valuable capital gains tax (CGT) exemptions, you could also qualify for higher limits on how much you can contribute to your super account.

To take full advantage of these CGT exemptions and higher contribution caps, your business must be set up appropriately and in line with the current tax and super rules. As this is a complex area with ongoing rule changes, it’s worth paying for specialised professional tax and financial advice to ensure you’re eligible.

7. Think about your estate plan

Transitioning from being a business owner to a retiree is also an excellent time to develop and implement an estate plan.

Planning the distribution of your assets should start early, as ensuring tax-effective inheritances for beneficiaries requires careful structuring of how your assets are held.

Distribution of your super assets and pensions are not governed by your Will, but by your super fund’s trust deed. This makes it important to structure asset ownership the correct way to ensure the right beneficiaries receive the right assets and pay the minimum required tax when they inherit.

Careful estate planning can also avoid family disputes and arguments, particularly when it comes to your super and other significant assets.

8. Consider your legacy

Successful business owners often want to leave a legacy and give something back to the community. This can include creating a charitable trust from some of the proceeds of selling your business assets.

Part of your business succession plan should include considering this issue and whether you plan to use existing philanthropic organisations, or set up your own trust structure. The role of your children in any philanthropic activities should also be considered.

9. Act now

You are much more likely to enjoy a successful retirement if you devote sufficient time and thought to how you want to exit your business and live in retirement.

Most experts in this area recommend giving yourself at least three years to plan the sale of your business, as potential buyers will want to see several years of financial statements prior to purchase. You may also need time to restructure the business if necessary and to make additional personal contributions to your super if it needs a last-minute boost.

10. Consider getting professional help

Developing a succession plan for your business can be complex – particularly if you intend to sell or restructure.

It’s worth paying for expert advice to negotiate the tax, super and legal aspects of succession planning. This can help maximise your potential return, minimise your tax bill and take advantage of all the super contribution opportunities.

Accounting firms can assist with issues such as business valuations, taxation, business structures and the sale process, while licensed financial advisers can provide advice on super strategies, wealth creation and protection, estate planning and investing to create a retirement income stream.