Are you a successful entrepreneur and your business is booming? Though it may be tempting to invest all your profits back into the business, it is advisable and wise to put some aside for retirement.
The benefits of diversification apply to everyone. Unless carefully managed, the very traits that make you a winning business person — innovation, risk-taking, optimism — can be a recipe for retirement disaster. The key to long-term investment success is a diversified portfolio.
Reinvesting profits may offer excellent returns, and the tax benefits can be appealing. You likely convinced yourself that as your golden years approach, you will be able to sell your business for a hefty amount and ride smoothly into retirement.
But study after study shows that only 20 per cent to 25 per cent of privately owned businesses get sold. The value of a small business often comes down to the owner’s skills, network and customer relationships. In the fast-changing world, businesses can become obsolete in the blink of an eye.
Unless you are one step ahead of technology (and employing top talent), you need to accept the possibility of a business becoming less saleable over time. You should, therefore, have a separate and sound retirement plan.
No matter how much money your business is making, one of the cornerstones of financial planning is mitigating risk. For the self-employed, this means having a sufficient life cover and a comprehensive medical scheme option — not to mention the all-important (and extremely affordable) gap cover, which covers the difference between what your medical scheme pays out and the actual cost of care.
A well-diversified portfolio might comprise your business, your home and a selection of retirement funds, not to mention other investments such as unit trusts, shares and perhaps some rental property.
Diversification lies at the heart of risk management as it lessens your exposure to risk by spreading your capital across a number of different asset classes, countries and sectors, which each operate on their own cycle of peaks and troughs.
A privately owned business is regarded as a risky asset (even venture capital), so it is essential that you diversify away from your industry sector in your investments to make up for the remainder of your portfolio.
It is recommended you do not invest more than 25 per cent of your capital in any single investment or with any fund manager. The same advice would apply to your business, and you need to look for ways to diversify away from a single investment (your business) for later years.
Realising that your business is not a retirement plan should not stop you from doing everything in your power to increase the probability of a sale. You can do this by embracing innovation and technology, by building a team and a brand that goes beyond your personal skill set, and by investing in business assets that appreciate in value (your business premises), and which can more easily be sold.
If you are in business with someone else, it is also advisable to put a buy-and-sell agreement in place, which would allow you to buy out your partner’s heirs should your partner pass away and vice versa. For such an eventuality, you could have an insurance policy that will provide the funds to purchase the deceased partner’s share from the heirs. Another policy that you could have is one that covers your liability for any bank borrowings. This one would help your heirs to pay off the liabilities to the bank,
Sensible, measured investment does not often come easily to natural entrepreneurs. So, find yourself an experienced and qualified adviser and listen to their advice. There is no denying that diversification might slow the short-term growth of your business, but it will go a long way towards ensuring a more comfortable retirement, and you can regard the possible sale of the business as a bonus.
Do not invest more than 25 percent of your capital in any single investment or with any fund manager. The same advice would apply to your business, and you need to look for ways to diversify away from a single investment (your business) for later years.
The writer is chief executive officer, APA Life.