For an entrepreneur, building a retirement fund is different

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SIMON BROWN: I’m chatting now with Palesa Dube. She’s a director and wealth manager at Wealth Creed. Palesa, I appreciate the time today.

If you own your own business you need to look at retirement differently, I suppose. The first [point] is you don’t work for a corporate, so you don’t have a monthly deduction going off into your pension or provident or retirement fund. You’ve actually got to manage that yourself, and always start earlier rather than later.

PALESA DUBE: Exactly, Simon. It’s a much more straightforward exercise for an employee, as you’ve said. When we talk to them, we work towards a 75% income-replacement ratio. We can already start to tell them early in their career what percentage of their income they should be saving.

And then as you move along the journey, we can give you a rule of thumb to say, well, if you’ve worked for 20 years, you should be at X amount of your annual salary. If you’ve worked for 30 years, you should be at an X multiple of your annual salary.

But for an entrepreneur, it’s slightly different and more difficult because you’d expect in the early years of a business, building it up, the income is very small.

It’s erratic sometimes. It takes a long time before a business can really be churning and generating sufficient income for you.

So how does one in that kind of scenario sufficiently build up a retirement fund? That’s why I absolutely agree with you that you need to be far more deliberate when you’re a business owner, because yes, the system is not as straightforward.

SIMON BROWN: Yes. And it’s not really geared for the private business owner. In a recent piece you wrote you make a great point; you say take some chips off the table. Usually when you’re running a business, you’re putting money back into the business left, right, and centre. Often, you’re not even paying yourself a full salary. You’re saying, hang on a second, grow the business but also your retirement. Take some of that money out, build a retirement portfolio and start that. Be cognisant and treat it almost as [being as] important as the business.

PALESA DUBE: Exactly, Simon. I think entrepreneurs can often miss a trick there, because intuitively it probably makes sense to you to say, well, this is an entity that I have full control over. I go through it on a daily basis, and I have far more control as to what happens. I can double that money in X amount of time.

But actually when you start thinking about the investment alternatives that are out there, other businesses, if you invest in an equity portfolio – even a unit trust – it essentially gives you an opportunity to be investing in other businesses, in other words [with] people who look like you, who are entrepreneurs like yourself, who have probably been equally – if not more – as successful as you have been.

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So investing in listed companies and so forth gives you the opportunity to, number one, take the chips off the table, as I’ve said, but also to de-risk. You are investing in other businesses. As much as you have control over what happens in your own business, things can go wrong.

So from a diversification perspective, it makes sense to be investing in other businesses. If you are investing in an equity portfolio it gives you an opportunity to invest in companies in South Africa, in the UK, in Japan and so forth. So yes, from a de-risking perspective, it certainly makes sense to be investing your excess money elsewhere.

SIMON BROWN: I like that point – those other businesses you are investing into are also entrepreneurs. They might be bigger than you, but they are broadly the same.

You also talk around planning for succession. You don’t want to wake up one day and say, right, time to sell. You want to plan that. That succession could be bringing staff on and giving equity to them. It could be finding perhaps an exit plan and selling out or something. But have that in the back of your mind with time to go – not as a last-minute thought and process.

PALESA DUBE: That’s right, Simon. When entrepreneurs think about succession planning it’s usually around ‘if I am not around, if I die’. Again, the system is almost geared towards that because that’s easier to provide for. You conclude a contract with someone. Usually, you can put a life policy in place to enable them to buy into your business, and so forth.

But it’s not straightforward for a retirement scenario. I don’t know about you. Is there life cover for somebody retiring? There isn’t. So, I think it just makes the case. As you’ve stated, you need to be a lot more deliberate, start planning earlier for it because, number one, the person or the people you’re looking to sell to need to have the money to buy your business.

If not, they’re going to approach a funding institution to give them money to do so. Any lending institution wants to be sure what they’re buying into.

So, the value of the business needs to be clearly demonstrable. The systems need to have been put in place and it needs to be clear that there’s an actual asset that they’re buying into. That requires of the business owner to start planning and thinking about this much sooner.

SIMON BROWN: A last point, and a great one that you made in the piece that you wrote, is what you call the ‘tapered exit’, or sort of retirement. What we are looking at there is the idea that you might continue to own the business, but you will gradually exit it. That means training up staff, which means putting in processes and manuals and all of those boring things, but the important things that enable the business to continue while you can go and enjoy retirement.

PALESA DUBE: Yes. I think the point there is to say, again, think about it and, yes, you do have some alternatives. You may say you want to get out of the day-to-day running of the business and have other people come in and run it for you so that you can retain the shareholding and continue earning some kind of dividend from it into the future.

To your point, a certain amount of planning needs to go into that to make sure that the processes are documented, that you can easily transfer the knowledge to somebody who takes the reins after you.

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But sometimes it’s not as straightforward. You are talking about the tapered exit strategy. I think of somebody who is an engineering consultant, as an example. The IP of the business may reside with that person. And, as soon as they’re gone, essentially the business no longer [exists]. So, in that scenario, unless you’ve built a brand and you have the systems in place, that business is going to go out as soon as you have.

So one needs to think about those things and think about what your retirement is going to look like, and how you can extract the most value from what you’ve worked so hard to build up over the years.

SIMON BROWN: That’s a great point. Different businesses are going to have to have different processes because they’re not all the same. It might be more of an IP business than perhaps a manufacturing or retail business.

We’ll leave it there. Palesa Dube, director and wealth manager at Wealth Creed, I appreciate the insights.

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