Your Business Is Not Your Retirement Plan

For many business owners, their company represents far more than a source of income. It may be their largest asset, the result of decades of work and, in many cases, a significant part of their retirement plans.

It’s therefore understandable that many business owners think:

“My business is my pension.”

And sometimes it can be.

A successful business may eventually be sold, passed on to the next generation, or continue providing an income after the owner steps back.

The problem isn’t relying on a successful business to contribute towards retirement.

The problem is relying on assumptions about what that business will do in the future.

Building a successful business isn’t the same as building personal wealth

Running a business demands time, energy and capital.

Profits are often reinvested. New employees are hired. Equipment is purchased. Cash is retained for future opportunities or difficult periods.

Meanwhile, personal financial planning can easily move further down the list.

Over time, this can leave a business owner in an unusual position: they may own a valuable and profitable company while having relatively little wealth outside it.

Their income comes from the business.

Much of their wealth is represented by the business.

And their future retirement plans depend on the business too.

That’s a considerable amount of financial responsibility resting on one asset.

Assumption 1: “I’ll sell the business when I retire”

For many business owners, the long-term plan sounds straightforward:

Build the business. Grow its value. Sell it. Retire.

But there are two important questions to consider.

How much would the business actually need to sell for?

And:

Would that amount be enough to provide the lifestyle you want for the rest of your life?

A business valuation can sound substantial until it is placed within the context of perhaps 20, 30 or even 40 years of future spending.

There may also be tax considerations, inflation, investment risk and changing expenditure throughout retirement.

Knowing what the business might be worth is therefore only one side of the equation.

The other is understanding how much you actually need.

Assumption 2: “Someone will want to buy it”

Before considering the potential sale price, there is another question:

Is the business actually sellable?

Many successful owner-managed businesses are built around the knowledge, relationships and reputation of their founder.

That can create an excellent business while the owner is there.

But it can also make transferring the business to someone else considerably more difficult.

If clients expect to deal personally with the owner, every important decision depends on them and the business struggles to operate in their absence, a potential buyer may reasonably ask:

What exactly am I buying?

A business with value beyond its owner is generally better positioned for succession or sale.

That might mean developing a strong management team, creating repeatable processes, establishing recurring income, reducing reliance on individual client relationships and planning succession well before an exit is anticipated.

Making a business less dependent on its owner can therefore be important for two reasons.

It may increase its attractiveness to a future buyer.

And it may give the owner greater freedom long before retirement arrives.

Assumption 3: “I’ll simply keep taking an income”

Selling isn’t the only retirement strategy.

Some owners plan to retain the business, appoint someone else to manage its day-to-day operations and continue receiving an income after they have stepped back.

That can work very well.

But it isn’t passive income simply because the owner is no longer sitting behind the desk every day.

Someone still needs to run the company.

Management needs oversight.

Important decisions still need to be made.

Performance can change.

Key employees can leave.

Customers can move elsewhere.

And the owner may find that stepping away completely is much harder than expected.

There is also a more difficult possibility to consider.

What if stepping back isn’t entirely your choice?

Health, family circumstances or simply having less energy for the demands of running a business can change the timetable.

Planning to remain involved until 70 is very different from needing to step away unexpectedly at 60.

A retirement strategy that depends on the owner continuing to oversee a business indefinitely therefore carries its own risks.

A successful business can change

A business that has performed successfully for decades isn’t guaranteed to continue doing so.

Markets change. Technology changes. Competition changes. Customer behaviour changes.

And sometimes owners continue supporting a struggling business because they remember what it once was, and believe it can become that business again.

Imagine a couple who have run a successful company for many years and always expected it to support their retirement.

Trading becomes increasingly difficult.

They use some personal savings to support the business.

Then some more.

They keep going because closing a company they have spent decades building feels unthinkable.

Eventually, the business has to close.

Perhaps there are no debts left behind, but much of the personal wealth that might have supported their retirement has disappeared with it.

The lesson isn’t that they shouldn’t have believed in their business.

It’s that no business should have to carry the entire weight of someone’s financial future.

The concentration risk business owners often overlook

Diversification is one of the most familiar principles of investing.

Few investors would deliberately place their entire portfolio into the shares of one company.

Yet business owners can inadvertently find themselves in a remarkably similar position.

Their business may represent:

• their current income
• their largest asset
• their future retirement income
• their expected capital from a future sale
• and sometimes even their family’s financial security.

If the business performs well, that concentration may create significant wealth.

But if circumstances change, several parts of the owner’s financial life can be affected at the same time.

That doesn’t mean investing in your own business is a mistake.

It means building wealth outside the business can be just as important as building wealth within it.

Building a financial plan alongside the business

Financial planning for a business owner should consider both sides of their financial life.

The business matters.

But so does the person behind it.

Depending on individual circumstances, this may involve considering areas such as:

• building pension and investment assets outside the business
• deciding how much cash the company genuinely needs to retain
• extracting profits in an appropriate and tax-efficient way
• protecting the owner, their family and the business against unexpected events
• reducing personal debt
• planning for succession or a future business sale
• understanding how much income will be needed in later life
• calculating the level of wealth required to achieve financial independence.

Most importantly, these shouldn’t be isolated decisions.

They should form part of one financial plan connecting today’s business decisions with the owner’s longer-term personal goals.

A business should create choices

A successful business can be an extraordinary asset.

It can create wealth, provide income, support a family and eventually become an important part of a retirement strategy.

But it doesn’t have to be the only retirement strategy.

Building personal wealth alongside the business creates something particularly valuable:

choice.

The choice to sell when the timing is right rather than because money is needed.

The choice to turn down an unattractive offer.

The choice to reduce working hours.

The choice to hand management to somebody else.

And, perhaps most importantly, the choice to step away if life changes sooner than expected.

One question worth asking

Instead of asking:

“How much is my business worth?”

There may be a more useful question:

“If my business didn’t perform exactly as I expect, would my financial future still work?”

If the answer is uncertain, it may be worth spending as much time planning your financial future outside the business as you spend planning for the business itself.

Because the goal isn’t simply to build a successful company.

It’s to make sure that success gives you the freedom to live life on your own terms.