retiringMany business owners believe that their business will sufficiently fund their retirement.

However, on taking a closer look at this type of “retirement funding” one will notice that there are many factors to consider:

When would the business owner like to retire?
Who is the ideal person to take over the business?
How will the business be valued?
Will the business owner continue to be involved post-retirement?
There are two funding methods that can be considered:

1.  A business owner who wishes to remain involved in the business can enter into a contract with the new owner whereby the purchase price can be paid off over an agreed period of time.  The retiring business owner will continue to be employed and receive a supplemented income.

2.  The second option can be considered should the business owner want to exit the business completely and the successor is an employee:

  •  The employer and employee enter into an agreement where they decide on the price and time at which the sale will occur.
  • The employee takes out a savings policy (minimum 5 years) to accumulate the purchase price.
  • The employer increases the employee’s salary by the premium amount (taking tax into account).
  • The employee cedes the policy to the employer as security.
  • The increase in salary is a tax deduction for the employer.
  • The employee will receive the payout tax free.
  • If the policy proceeds are less than the sale price, business can be sold in proportion to the funds available.  The owner will then retain partial ownership.  The new owner can purchase the balance over an agreed period of time.

Kindly note this is a summarised extract taken from the “Retirement exit strategy for the business owner” as published by Momentum Group Limited.

Should you have any queries or wish to find out more about the options available to you as a business owner please do not hesitate to contact Lisa Hudson-Peacock on 021 701 1161.