Small business owners have to juggle a lot of responsibilities – and pension planning is one that too often gets overlooked. Plan ahead and be realistic about what your business is actually worth to avoid unpleasant surprises down the road.
Retirement planning is particularly tricky for small business owners, because there’s a lot more they need to think about than the average retiree.
They are also more likely to pay a steep price for making a mistake, especially if most of what they own is tied up in their business.
According to Jean-Pierre Laporte, a pension expert and the head of Integris Pension Management, one of the biggest mistakes business owners and entrepreneurs make is to overestimate what their company is worth.
“If you are a professional, your real value is your skill,” said Laporte.
“You cannot sell your business because once you retire, all the knowledge and skills and connections go with you. Once you get out of the business, there’s nothing left.”
Laporte points to the work of John Mill, an Ontario tax lawyer whose book, Hire Your Buyer, looked at this marketplace and found that the majority of people who are self-employed have not created a business, but rather a job for themselves.
“They don’t have any actual business that has any multiplies or any intrinsic value outside of themselves,” said Laporte.
“It’s only a very small proportion of what we call the self-employed business people who have something to sell at the end of the day.”
That’s a particularly big problem if you’re hoping to sell your small business and retire on that income.
“People are banking on an enterprise value of, say $3 million, and when they start looking for people to buy the business, they realize that people are discounting a lot of what they thought was valuable,” Laporte said.
“Well, that means you have to readjust your retirement plans, but unfortunately, you have no time because you haven’t planned ahead.”
Or, said another way, you may not have been investing in the right things.
When entrepreneurs invest, they tend to invest into their business – a risky proposition that puts everything into a single pot.
“What they’re not realizing is that proper financial planning requires you to have a diversified, well-balanced approach,” said Laporte.
“You can’t be all in risky private equity, which is what your business is.”
Putting all your money into your business also leaves you at risk if you are sued, because your company assets wouldn’t be creditor protected as they would be if they were held within a pension fund.
It also means you may not benefit from certain tax breaks when you sell your business, such as a $800,000 capital gains exemption on the sale available to small businesses in Canada.
To make the right decisions, Laporte says, it’s important to look at all the options available to save for retirement and to speak with a financial advisor who is well-versed on the topic.
Otherwise, you may miss out on the chance to build a decent retirement plan.