14 questions before you retire from the family firm

| April 3, 2018

Whether it’s because of underfunded retirement plans, lack of succession or sales options, or a sheer unwillingness to relinquish the reins, family business leaders are increasingly delaying the transition to retirement.

Part of the issue may be that family business owners often have more complex retirement situations than their non-family counterparts.

First, there is the issue of transferring management or ownership of the business, as well as the issue of transitioning to non-working life. Some owners choose to retire while maintaining an ownership stake; others sell or pass on the business as part of retirement.

After the global financial crisis (GFC), many business owners have found capital and potential buyers in scarce supply, complicating the financial transition.

A 2013 survey found that just 24 percent of family business owners had experienced increased profitability in the previous three years. Fewer than 40 percent expected their business and market prospects to improve in the succeeding year.

Owners who have not planned ahead for succession may find themselves forced to put off retirement until they can find either a buyer or a successor who is trained and ready to take over.
Start the retirement planning process soon

Retirement and succession can’t happen overnight. Much like you wouldn’t take an extended trip without some forward planning, it’s not possible to successfully make the retirement transition without advanced preparation and a roadmap.

Think carefully about the financial and business requirements for an eventual retirement. Ask questions such as these:

• What structures will need to be in place before you can leave?

• Who is qualified to take over your role within the business?

• How will you fund retirement?

• Are your personal and family assets separate from the business?

• How will you financially exit from the business?

• Will you need external sources of capital to provide liquidity for an exit?

Value the business and identify options

Funding retirement looks different for every family business owner. Whether a sale is intended or not, understanding what a business is worth is critical to preparing for the ownership transition.

Unfortunately, most family business owners haven’t undertaken a valuation exercise and may have unrealistic expectations of the value of their business.

Realistically, most buyers will be more interested in the potential cash flows and book value of the business. Poor capital and management structures can take away from the value as can a business that depends too much on the contribution of the owner or other key employees.

Understanding the key drivers of growth and profitability will be key to preparing a business for sale or transition and also prevent a business owner from being blindsided by issues during the sales process.

Re-purpose and re-focus life

Retirement comes with emotional and psychological ramifications.

For many business owners, work is their life. Emotionally, retirement can seem like being put out to pasture rather than a well-earned period of relaxation and enjoyment.

Many Australians can look forward to living well into their eighties or nineties. Sitting around at home for that length of time isn’t realistic for healthy, active, ambitious people and many find fulfilling roles in second careers or through volunteer work or philanthropy.

Likewise, family business owners should rethink their vision of retirement: rather than treat it like a never-ending vacation, think of retirement as simply another phase of life with a different focus.

Thinking ahead about creating a fulfilling next phase of life can make the work-retirement transition much more appealing. To help delve into the issues involved, ask questions such as:

• What gives you pleasure and fulfillment?

• Where is your ideal place to live?

• What would you like more of in life?

• What would you like less of?

• Who would you like to spend most of your time with?

• What other business or personal interests do you have?

• What gives your life purpose once your basic needs are covered?

• What would you like to be remembered for?

The bottom line

Ultimately, today’s business leaders are going to have to confront their eventual need to exit the business.

Whether they leave on their own terms and move on to comfortable, fulfilling retirements or are forced out of their careers by illness or age, a change is coming.

My hope is that family business leaders will take the time now to think about their personal vision of retirement and take steps to prepare for a comfortable financial, business and psychological transition to a post-work life.

This article was first published by family business advisors FINH.

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David Harland

David Harland is the founder and Managing Director of FINH, a business consultancy specialising in succession planning. David has worked extensively with family businesses across Australia, New Zealand and South East Asia, many of whom have transitioned into and beyond their third generations.