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How does your business fit into your overall retirement plan? That’s the question Andrew Adams thinks more business owners need to ask themselves – and the sooner the better.
“If you’re always working head down in the business, you can quickly reach the point when you decide you want to retire – only to realize you’re not in a position to do so. That’s a terrible place to be,” Adams says.
Based in Prince George, Adams is a business advisor with MNP LLP, a national accounting and business consulting firm. He is also involves in a small family business and understands first-hand the challenge of balancing daily demands with long-term planning.
Adams notes it’s often the spouse of a successful business owner – not the business owner themselves – who starts the conversation about when and how to begin stepping back from the business.
“The key is to consider what you want your life to look like as you start to transition into retirement,” he advises. “Then you can work backwards to where you are today and start making decisions that take you closer to where you want to go.”
As an example, Adams notes some business owners pay themselves dividends instead of a salary because it’s beneficial from a tax perspective. However, this could have unintended consequences on your retirement by reducing your RRSP contribution room and CPP benefits.
“Either option can work,” he clarifies, “but it depends on how much you are relying on your business to fund your retirement.”
In some cases, the business may not have enough value to meet the owner’s ongoing financial needs in retirement. In other cases it may not even be saleable.
“In general, the more valuable an owner is to their business, the less valuable the business is to a potential buyer,” Adams cautions. “In order to sell, we need to take the owner out of the equation so the buyer can step in and successfully run the company on their own.”
To determine if your business is ready to transition, Adams suggests asking one simple question: Am I so vital to the operation of my business that I can’t step away?
“If the answer is yes, then you have some planning to do,” he advises.
Whether your goal is to sell the business to a third party, transfer it to a family member or sell to an employee group, there are many steps that need to be taken to prepare the business for a transfer of ownership. That’s why Adams recommends you start planning now.
Tax considerations are another important consideration.
“Depending on how your business is structured and exactly what you sell, taxes could account for upwards of 40 percent of the value you have built,” explains Michael Johnson, a business advisor with MNP in Terrace. “There are often ways to reduce this with some up-front tax planning, but you need to start early as some rules require your company to be onside for a few years prior to exiting the business.”
Johnson offers these questions as a starting point:
Adams says the key is to plan for how and when you will exit your business within the larger context of your overall retirement plan. Your plan should be flexible enough to deal with uncertainties, while providing you with a clear path to your desired lifestyle in retirement.
“If you’ve done a good job of planning and made yourself less central to the day-to-day operations, and you’ve determined how your business fits into your retirement plan, you may even find you can take the time off your spouse really wants and still have a business that is building in value and working for you,” Adams concludes.
“That’s a much better place to be because then you’ve got options.”
For more information, contact Andrew Adams, CPA, CA, CFP at 250.956.8311 or
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