Retirement and the risk entrepreneurs forget

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The prospect of being successful in business but cash starved in retirement has been highlighted by Lara Warburton, managing director of Imara Asset Management South Africa, a company often consulted for financial planning expertise by business people, executives and professionals

Entrepreneurs fall into a special category, she says, because the value they believe has been built up in their businesses may fall far short of expectation.

"Assumed net worth of several million rands can turn out to be worth nothing at all," says Warburton. "This comes as a major shock. The client then has the difficult job of preparing for retirement after failing to make adequate provision for decades."

Those who build a micro or small businesses are particularly prone to this shock.

Often, the entrepreneur's skill and energy built the business. It may have impressive turnover and the books may reflect a solid, profitable business, but the biggest asset is the founder and business leader.

Without him or her, the business may be worth very little, notes Warburton.

Presumed value is sometimes based on misconceptions around stated values in financial products such as buy-and-sell agreements backed by life policies. These arrangements ensure business continuity on the death of the owner or owners.

Warburton explains: "The business owner sees the business value for these purposes is quite substantial and a large portion of monthly cash-flow has to be committed to keep these arrangements in place.

"The owner assumes high cover means high business value, but that might not be the case. At the end of the day, a business is only worth what you can sell it for and when the dynamic founder quits the business to retire, the realised value may fall a long way short of expectation.

"Many of these businesses are only as good as their key-men and women. When they leave, values can plummet."

In many cases, self-made entrepreneurs made their start in business because barriers to entry were low. These barriers may still be low. A later generation of entrepreneurs may therefore prefer to start from scratch rather than buy an established operation.

"Often the retirement plan of the committed entrepreneur was to sell up and cash in," says Warburton. "There was no Plan B.

"Another reason for failing to plan is the intense level of business commitment. These entrepreneurs work long hours. They have little time for anything else.

"Suddenly they're well into their 60s, and without a Plan B it's too late to achieve the sort of life in retirement they envisaged."

Many problems can be addressed by timely commitment to retirement annuities and other investment products.

"But the key decision," says Warburton, "is to consult a qualified financial planner long before exiting the business you worked so hard to build up."