Hand putting Coins in glass jar with retro alarm clock for time to money saving for retirement

There are many small business owners who are not financially prepared for retirement. In fact, a study from Mississauga, Ont.-based Investment Planning Counsel Inc. published earlier this month found that 42% of Canadian small business owners are unsure about their future and their plans for retirement, and 21% of them are not sure if they have enough money to retire or if their business will attract potential buyers.

There are many unique challenges for an entrepreneur’s retirement strategy. Financial planners and financial advisors can offer a better value proposition to entrepreneurs if they focus on understanding small business owners’ retirement challenges and crafting specific solutions for these individuals; and if they articulate how using personal financial planning in conjunction with business financial planning can make them more successful.

The two major retirement strategy challenges for entrepreneurs are how to turn their businesses into retirement assets and how to establish diversified retirement savings personally and outside of their businesses. A survey conducted by Bank of Montreal in 2016 confirmed that entrepreneurs were not prepared properly for either of the aforementioned challenges.

Retirement planning for private business owners can be complex. Financial planners and advisors can help entrepreneurs develop the necessary business succession plan and personal financial plan that work together. They also need to help entrepreneurs make the personal commitment for both of these plans in order to create an overall retirement plan that can be achieved successfully.

The business succession plan has many components and its purpose is to set an overall process and time schedule for the business owner’s full or partial withdrawal from the business. In addition, the plan should outline:

  1. The steps to transfer the management of the business, its core values, culture and traditions.
  2. Technical concerns, such as legal, accounting and tax matters.
  3. Softer interpersonal issues that will be of utmost importance for family members, key employees and other business stakeholders.

Before the succession plan can be implemented, the entrepreneur needs to determine whether the business can be converted into retirement capital — and by what method?

The following are some options:

  1. Sell to an unrelated third-party.
  2. Wind down the business.
  3. Transfer at no cost to family member(s).
  4. Sell to family member(s).

Depending on the transaction type, the business will need to be valued by one of these three common methods:

  1. Income approach, which uses an appropriate multiple to the value of future cash flows or income.
  2. Market approach, which is based on the prices obtained from similar companies.
  3. Asset-based approach, which is the value of assets in the business minus the liabilities.

Regardless of which business valuation method is used, the market will ultimately determine the selling price. Furthermore, depending on the transaction, the entrepreneur may need to finance the buyer or take payment through long-term dividends to help fund retirement.

Getting to the retirement stage is a long journey, so financial planners and advisors need to act as both a business advisor and personal financial planner. When the business financial plan and its owner’s personal financial plan are in harmony, then the chance of the business succeeding increases. Here are some considerations;

  • Cash flow: Although many entrepreneurs may understand their businesses, they may not be good at cash-flow planning. Using financial planning to monitor spending patterns and expenses, prudent spending, tax planning and careful budgeting will help save money both in the business and personally for retirement. Many entrepreneurs don’t make a distinction between their personal money and the business’s money.
  • Utilization: The entrepreneur needs to understand that the money left over after expenses need not necessarily be spent, but utilized appropriately by investing outside the business or re-investing in the business.
  • Debt reduction: Personal financial planning can teach the entrepreneur to manage both personal debt and company debt to ensure that the business has the ability to borrow in the future for growth.
  • Emergency fund: The entrepreneur needs to have an emergency fund both for personal expenses when his or her business underperforms, and contingency money to put into the business as needed. Each emergency fund should be in separate accounts and never intermixed.
  • Risk management: Having proper insurance — both personally and for the business — is a must for the entrepreneur. Assets should also be titled properly to avoid any legal issues. Being sued either personally or within the company without insurance could be devastating.

These are but a few personal financial planning activities that can be harmonized with business financial planning to assist entrepreneurs on the road to retirement. Thus, financial planners and advisors who can become both a business advisor and personal financial planner for entrepreneurs will earn their trust and business.