Don't let retirement sneak up on you

Retirement lurks around the corner and many owners have no idea what to do. Putting in some time and effort now can not only avoid a mess down the track but can save you tax dollars.

Retirement is the elephant in the room for many family business owners. Many ignore it, some won’t let go and others don’t have enough to retire on.

An RMIT-MGI study released earlier this year found that 58 per cent of family business owners saw themselves working in the business beyond 65 years of age. Furthermore, 65 per cent indicated that their businesses were not exit or succession ready. Significantly, 56 per cent indicated that they had no plans to do anything about it in the next 12 months. And while two out of three said they believed they had an adequately funded retirement program, that left 33 per cent saying they would have to rely on either continuing family business ownership or the sale of the business for cash to fund their retirement.

Furthermore, a Federal parliamentary inquiry into family business found we are about to see a wave of small business closures in the coming decade as the baby boomers retire.  But while the great baby boomer sell off is coming, most small businesses are unprepared strategically or structurally for this transition. Indeed, an InformationWeek survey from 2010 revealed that only 10 per cent of businesses consider themselves either “prepared” or “well-prepared” for a sale.

So how should family business owners prepare for retirement?

David Hunt, who runs the Hunt Professional Group in Sydney, and is an accredited family business adviser, knows about this first hand. Seven years ago he and his brother bought out their father. There was an important reason why it was done that way.

“Some family businesses are handed to the next generation. In our case, because we had three other siblings, we thought the equitable thing was to buy Dad out,” Hunt says.

His father no longer holds any equity but still comes in for a few hours a week. He has an office to pursue his own interests and provides no-strings advice.

“Dad runs his interests from our office and he talks to the occasional client. Also he’s a great sounding board from our point of view with years of experience. We bounce questions off him and he gives very experienced advice, but he doesn’t have a management role.”

Of course, that’s an arrangement that suited his family business. But every business, like every person, is different and what works for one will not necessarily work for another.

“Every family is different and you don’t get one structure. Every one of them has different permutations and combinations. Because tax is a massive part of this retirement, you really need to get on top of the structure because it ultimately affects what’s left over for retirement,” he says.

And the structure is critical because tax consequences will flow from that. Obviously, companies have one set of tax rules and trusts have another. Trusts have capital gains tax exemptions that don’t apply to companies. Similarly, there would be different tax rules if the business is held in a partnership or if the business property is held in a super fund.

Hunt will advise clients to look at changing structures to improve their tax position post-retirement. For example, a property owned by a business could be rolled over into a self-managed super fund. The family business owned by their children will pay rent to the super fund and the retiree will receive a pension that includes the rent.  Also, there would be tax savings from putting the property into a super fund rather than having it in their own name.

To put more money on the table, he says every retirement plan needs to maximise the small business capital gains tax concessions available for businesses with a turnover of less $2 million and assets less than $6 million.

Hunt says the first thing to do with clients looking at retirement is to ask what their plans are, when they want to retire and their age. How much do they need in their retirement? What sort of legacy do they want to hand on? Or would they prefer to give it in gifts now?

What happens if there isn’t enough in the retirement pool?

“Will their share of the dividends be enough to provide them with what they want, or will they have enough to invest in passive assets? They might need to adjust their plans or extend their time to begin retirement,” he says.

He says people refusing to let go is a common feature in many family businesses. Simply put, the patriarch or matriarch refuses to move on, creating massive tensions with the next generation. To address that, he says every family business needs a written succession plan.

Putting one together, he says, requires open communication between all the parties. The more communication there is, the less likely will it be that issues will come up about the takeover and operations of the business.

How long does it take to put together?

“It can take a few months or it can take a couple of years depending on the complexity of the structures, the number of siblings involved and the valuations obtained,” he says. “Other factors include whether employees want to be involved in the management, how it’s announced to the employees and clients. And those are just a sample of the large number of considerations that need to be addressed.”

With complexity like that, it’s understandable why so many family businesses don’t have succession and retirement plans.

But as Hunt says, they don’t have much choice. “They all have to do it,” he says. “Either it happens when you’re alive or you’re dead. It’s not something a family can walk away from and it’s better to do it when you’re alive than to leave a mess when you’re dead.”

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