Securing Lifetime Wealth Through Entrepreneurship

By Lisa Kaplan CFP® CIPM®
Associate Director | Wealth Manager – Sterling Private Wealth

Understanding your ability to create lifetime wealth from which you can draw an income during your retirement years requires holistic financial and strategic planning in your pre-retirement years – particularly if a sizeable asset on your balance sheet is your business.

Your personal balance sheet should categorise your net assets into business, lifestyle, and lifetime assets – this is critical to understanding your capacity to fund your monthly income requirements in retirement.

Your lifetime assets are generally investable assets that may or may not be under the direct management of a wealth manager. This is the pool of assets that will provide you with your income in retirement – which should outperform inflation in order to provide you with an income that remains relevant in real terms and this capital pool needs to be sufficient to comfortably cover your income needs for the rest of your life, perhaps even leave a legacy for your heirs.

In our experience, the lack of strategizing and planning for the translation of a business asset into a lifetime asset is a risk which can have catastrophic consequences for realising a comfortable retirement in line with your needs and expectations – as the conversion of this asset has not been secured or planned. Many of our clients are entrepreneurs and come to us with business assets valued at R20m – R50m+ on their balance sheets.

If there is no plan in place to convert this into a lifetime asset that can ultimately provide the liquidity required for income in retirement – the balance sheet valuation can be very misleading in terms of lifestyle expectations and even delay planned retirement dates in order to facilitate the conversion process and allow for the building up of a sufficient lifetime asset pool.

Every business owner will exit their business at some point, usually through the selling of their stake, retirement, or death. If your exit is inevitable, what is your exit strategy?

Important considerations for strategic planning are:

• Have you had your business independently valued? Is it worth what you thought?
• Does the valuation reflect the economic climate or business marketplace? Is there a buyer for your business at that valuation?
• If a partner should buy you out, do they have the liquidity to do so? Are they contractually obligated to execute the transaction? Individuals seldom sit on the levels of liquidity required to buy out a major stakeholder and when that day comes, will they write the cheque?
• Who will inherit your business if you die? Are they both willing and able to step into your shoes? Spouses and children seldom meet these requirements.
• Without you in the business is there a differing distinction between ownership and management? You may have fulfilled both roles, but your heirs may only fulfil the capacity of ownership – who takes over operationally?
• What are the tax consequences of inheritance? Does your portfolio have the liquidity to fund the tax triggered by the transfer of your business to your heirs at death? Lack of estate liquidity can have ruinous consequences for your heirs requiring them to engage in fire sales of assets to address the problem.
• Does the value of the business change without you there? If your specialised skills or niche offering are the core of the business (e.g. architecture, accounting, consulting, professional services, your network), there is a need to ensure value extraction; perhaps regularly through the distribution of dividends, and/or by contractually securing your exit value.
• Do you have a valid shareholders agreement with business partners? A handshake agreement may seem secure today, but circumstances change, and once partners have passed away, is a handshake sufficient, will it secure spouses and children left behind?
• Is everything you own in your business? Is your business value the bulk of your balance sheet? Concentration risk is often synonymous with outsized returns in business ventures, but planning is essential in managing this risk and securing the extraction and translation into diversified lifetime assets.
• What does your dividend distribution profile look like? Are there sufficient funds for savings and investment after accounting for your living costs? When the dividend stops or reduces are there other sources for income provision?

The answers to these questions shape the bespoke solutions and strategies required to ensure optimised financial outcomes – there is no one-size-fits-all.

Appropriately structured Wills, investment solutions that align to the wealth extraction profile of the business, considered tax and estate planning, Assurance (Key Man, Buy-and-Sell, life insurance), careful legacy planning, liquidity management, and wealth building and cash flow management strategies – are some of the tools used in developing a workable solution.

As with all complex financial planning matters – these are dynamic and ongoing exercises, which are planned and implemented over a long-term period and thus should be addressed early on and regularly with a trusted partner.

A wealth manager with the ability to provide balance sheet consulting and holistic financial planning can help you develop a strategy for lifetime wealth creation.