Retirement for Business Owners
January 31, 2022
Not all businesses are created equal. Here are some insights on how your business might help in your retirement planning.
I’m fortunate to work with many business owners and entrepreneurs at different stages of their business journey. During a presentation on financial management and retirement planning to a group of business owners and self-employed individuals, I shared a key distinction this group needed to know about their business to better understand how they might reach their retirement goals.
The key step is to be clear on whether you are your business or if you’re building a business larger than yourself. When you are building a business larger than yourself, you can build a business that scales and makes money without yourself physically doing the work clients are paying for. This is the road of the Entrepreneur. When you are at the center of your offering and your skilled work is what clients ultimately pay for, you are charging a fee for your services. This is the road of the Freelancer. This isn’t to say these two business models can’t change or adapt over time but it’s important to make the distinction and to know what kind of business you are running now, where you want it to go during your career and what that means for your retirement options.
For Entrepreneurs, it’s common for their business to be a large part of their retirement plans. Because the business can likely generate revenues without them someday, it makes the business more attractive to potential new owners. If the business can eventually be sold for enough money, it’s entirely possible that the business becomes the most valuable asset Entrepreneurs owns. If the business’ value is high enough, it’s entirely possible that the sale of the business will be more important to funding his retirement than traditional savings. This is not to say Entrepreneurs shouldn’t be making efforts to save and diversify their assets along the way. But it does mean than they have another considerable asset that can help support them through retirement.
Freelancers on the other hand will have a much harder time selling their business because they are the business. It’s very difficult to sell a business that can’t offer products and services once the service provider has left. These kinds of businesses are therefore much less attractive to potential new owners and don’t usually build as much business value beyond the assets the business already has. This means that Freelancers will likely not be able to rely heavily on the sale of their business at retirement and will likely have to look at other ways to accumulate enough assets such as traditional savings to support them through retirement.
Both Entrepreneurs and Freelancers need some retirement planning which includes investment decisions and risk management. The main difference is that Entrepreneurs can invest in their business with the hopes that it comes back to them in retirement from the sale of the business. For Freelancers, it’s usually very important to save a considerable part of their earned income because they can’t rely as heavily on selling the business to fund retirement. If they invest in their business, it’s to increase revenues to be able to save more in preparation for retirement. In the end, retirement planning is about understanding where you are at now, determining where you’d like to go and how you’ll get there.
Marcel LeBlanc, CFP®, CIM® is a Financial Planner and Associate Portfolio Manager with Louisbourg Investments. You can find more from him on Facebook and LinkedIn. Comments or questions may be submitted to Marcel at firstname.lastname@example.org, or he may be reached at (506) 383-5204
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This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. If you are not sure how to proceed with a request for further information, seek help from a professional. Any opinions expressed are my own and may not necessarily reflect those of Louisbourg Investments.