Relying on your business to help fund retirement? Start preparing for your exit now

Over half of Australian SME owners under 50 haven’t done any retirement planning and experts say that they are leaving it too late to prepare their businesses for sale.

The latest instalment of MYOB’s SME Snapshot highlighted that one third of surveyed small business owners are not contributing to their superannuation and while 44% believe they will need $1 million for a comfortable retirement, more than half have little belief they’ll get there.

Allied Business Accountants director David McKellar told SmartCompany business owners should be looking beyond their own business to fund their retirement and diversifying their options with superannuation.

“You need to look at possible succession plans and how you plan to make a sale, but I also encourage most small businesses to pay yourself too. This gives you a base of security,” he says.

This is particularly important given the best retirement plans have a range of investments, which can continue to grow while a business owner builds up and then prepares to sell their business. While DIY super funds might seem attractive, McKellar says they are not necessary for SME owners to take control of their savings.

“I’d say the decision to start a SMSF [self-managed super fund] isn’t based on whether you have a business,” says McKellar.

Des Caulfield, director of MGI South Australia, says the number of business owners without retirement plans doesn’t surprise him, but he believes more people need to realise that business owners should plan their exit strategies many years before they exit. Buyers want to see the strength of the business, so it’s important to build the basics into your company early on, he says.

“You just have to make it attractive to a buyer. There are things that are different in small businesses – like many small businesses will put through things that may be of a personal nature, that won’t look good to sellers,” Caulfield says.

“Particularly in family businesses, people often don’t get salaries that are at the market rate. You really need to bring salaries into line with the market as you prepare to exit, so buyers can see that. And get your debtors under control – they need to see that you get paid.”

If the plan is to sell a business from one family member to another, understand that this might affect how much you collect from exiting the operation. Having a solid and long term superannuation strategy can offset this reality.

While $1 million was the magic number mentioned in the MYOB survey, Caulfield says small business owners should always reverse engineer the final sum by breaking down what they need to live on comfortably.

“If you think you’ll need $60,000 a year – and that’s not a lot – you’ll need between $1.2 and $1.4 million in retirement savings,” he says.

With proposed caps to concessional superannuation contributions on the horizon, it’s more important than ever to add what you can to a super fund.

“I understand there’s not much surplus cash, especially when you’re starting to plan your business, and people can give up. But the concessions available are still significant – and will be even if they do get limited,” says Caulfield.