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Planning To Retire Do you have a Small Business Succession Plan

Succession Planing for Retirement

You may already have a date in mind, a particular birthday or after
a certain number of years in the CEO’s position, but will the money
be there to support your retirement needs when the date rolls around?
Many people get to their hoped for retirement date only to find their
finances are insufficient and their dreams need to be put on hold.

Planning
for your retirement from the business should be a long term and well
thought out process so that it can happen on your terms. There
are a number of steps you can take to set a realistic retirement
date.

First,
you must determine what your financial needs will be during your
retirement, and that means budgeting for an unknown number of years.
Some financial planners use 70 percent to 75 percent of
pre-retirement income as a general rule, but this only applies if
your financial needs actually decrease after your retirement.

Similarly,
a little forward planning can allow you to minimise your expenses and
reduce or eliminate many debts by the time you expect to retire, for
example, by paying off existing mortgages and other long term debt
obligations.

Regardless
of the post-retirement income you think you’ll need, experience
shows that most retirees find they need more than they originally
anticipated, so it’s always wise to include a contingency in your
estimates of the income required.

Still,
for many business people what they are really relying on is a good
sale price for their business as the major contributor to their
retirement income. That means some expert advice from an evaluator.

But
there is still a piece of the jigsaw missing – you could be taking
the opportunity of the years between now and your retirement to
actually improve the value of your business by improving its cash
flow.

As
an experienced business owner you’ll have an appreciation of the
importance of cash flow. It’s always referred to as the ‘lifeblood’
of a company and rightly so, and it will also have a major bearing on
the value of the business at time of sale, and therefore on when you
can actually retire from your company.

Cash
flow is what buyers want

The
first consideration is that when you’re looking for someone to buy
your business they’ll be looking carefully at its cash flow. The
cash flow generated by the organisation is what gives the business
its real value. To put it another way, nobody pays for ‘potential’;
what they purchase is a machine that makes money.

It’s
cash flow that will enable the buyer to pay you for the business, and
that’s equally important if you’re selling out to employees or
expecting a member of the younger generation to take over and provide
an income flow for your years of retirement.

It’s
absolutely essential that you have a forecast of your cash flow up to
the time of your projected retirement – and as far beyond as
estimates can be made. If the forecast indicates that the firm’s
cash flow won’t be sufficient to cover all your objectives then you
may have to do one of the following:

  • Set
    a later retirement date

  • Phase
    out your departure from the business

  • Find
    a purchaser with cash instead of financing a relative into the
    business

  • Find
    ways to increase the value of the business so it brings a higher
    sale price

  • Reduce
    your retirement lifestyle expectations

Take
steps to improve your cash flow

It
might prove a painful reality check, but preparing an estimate of the
business’ future cash flow is an essential part of retirement
planning and a reminder that your long term dreams rely on how well
you manage the business’ operations to maximise it.

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David

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