Starting a business is one of the best ways to control your income, financial freedom, and safeguard your retirement. However, retirement planning for small business owners is often overlooked.
In fact, more than half of Canadians are behind on retirement savings. Only a few small business owners actually have a plan on how and who to pass on the business to.
As always, we are here to help. This article outlines multiple ways retiring business owners can plan for the day they exit their business. From identifying the correct succession plans to the best retirement saving options, our aim is to support and empower you.
A retirement plan for a small business may seem like a faraway journey. But the sooner you start exploring your small business retirement plan options, the better. Diversifying your retirement savings can improve your chances of having a healthy nest egg.
Planning your exit strategy
We understand that you’ve worked hard to build up your business. From endless nights to multiple overtime hours, running a successful company is not an easy feat. To ensure you reap the rewards of all the hard work, you need a solid plan before you sell your business.
Having a thought-out business exit strategy is extremely important. A checklist, a calculated plan, and how you are going to transfer your business to its new owner when retiring is a must.
Here are some crucial steps to integrate into your exit strategy before becoming a retired business owner:
Set realistic long-term goals
An exit strategy is designed to make the transition to retirement as simple and stress-free as possible. To achieve this, a few questions need to be asked:
- What are your exit strategy goals? Knowing what you want from your retirement will help you define the financial goals of your business. For example, if you plan to live a lavish retirement, you’ll need to ensure you’re consistently hitting financial targets. If your business is experiencing a regular decline in revenue, you’ll need to adjust your expectations for retirement.
- How much retirement income are you looking for? Everything has its price. Knowing your current living expenses and adjusting for inflation will help you get a better idea of how much retirement income you will need to live comfortably.
- Will your employees continue to work under new ownership? A good exit strategy will have the best retirement plans for small business owners with employees. After all, they have been alongside you as the company flourished.
- Who will you sell the business to? There are multiple ways to sell your business. Listing it on the open market, selling it to a family member or friend, and liquidation sales are just some of the options available. Each exit strategy has its pros and cons.
Research and plan
Small business retirement planning can be stressful. Knowing the ins and outs of each exit strategy, talking to other business owners in your position, and being up to date with the latest strategies are crucial.
Reading news articles, going to seminars, and even joining groups on social media platforms will help keep you informed. Each category can offer insightful information about finding the perfect exit strategy for a small business.
Even if you are not ready to leave the business for a few more years, it's never too early to start planning. Oftentimes, it takes years to get everything sorted. Waiting for the market to be in your favor, finding a buyer, and getting all your paperwork in order does take a while.
Build a support team
Let’s face it: if you want your exit strategy to be effective and tax-efficient, a dedicated and reliable team is a must. Financial advisors, lawyers, and accountants will help make the process as smooth as possible.
- Financial planners. They provide options to find a retirement plan for business owners like yourself. From ensuring you are financially comfortable after you leave the business to making sure you overcome any financial challenges that may come up, a trusted financial planner is invaluable.
- Dedicated accountant. From accurately reporting taxes to CRA to bookkeeping, a dedicated accountant will manage the entire financial part of your small business.
- Lawyer up. A lawyer can help you navigate the legal ins and outs of selling a business, including contracts, agreements, and any other complex legalities.
Get an accurate business valuation
A fair business valuation is integral for an effective exit strategy and also uncovers risks and potential opportunities. It is a complex process that needs several factors to work in perfect harmony. An accurate valuation from a professional business service is not only encouraged but also necessary.
Develop a contingency plan
Life throws curveballs when you least expect it. Contingency plans are necessary as unforeseen situations can derail any retirement plan for small businesses.
Contingency plans can include any of the following:
- Buyer abandons a deal at the last minute: Buyers can get cold feet when buying a business. While you may not be able to completely avoid this, conducting thorough due diligence on the prospective buyer is imperative.
- Illness or death: If the owner or a partner falls ill or passes away, having a contingency plan for a family member or key employee to take over the business and continue the selling process is necessary.
- Economic downfall: We live in uncertain times, and the economy is in a volatile state. In order to realize your retirement exit strategy, having a contingency plan for economic downfall should be considered. This may include having to sell the business at a later date, downsizing, or finding new revenue streams.
- New government regulations: The Canadian Government updates rules and regulations constantly. Your financial consultant and attorney will help you stay compliant or put off selling your small business until it is.
Having certain contingency plans put in place will help safeguard and ensure your retirement savings plan comes to fruition.
How to fund your retirement in Canada
A well-thought-out retirement strategy is what’s going to make or break your golden years. Retirement planning for business owners is similar to traditional employee retirement plans.
Here are a few types of retirement plans to consider:
Registered Retirement Savings Plan (RRSP)
One of the most popular ways to supplement your Canada Pension Plan (CPP) and Old Age Security plan (OAS) is by contributing to a RRSP. The good news for business owners is that RRSPs are tax deductible. On top of that, any income earned in the RRSP is tax-free, given the money does not get withdrawn before retirement.
Small business pension plans are available for both an employer and employees in Canada. However, if you are the sole proprietor of the business, you must contribute as both an employee and employer. Incorporated small business owners can opt out for a salary or dividends that do not require CPP contributions. Doing so will significantly reduce your government pension when retiring.
Tax-Free Savings Account (TFSA)
A TFSA is another traditional savings strategy used by many Canadians, including those looking to retire. There are some drawbacks to TFSAs, such as a current annual deposit limit of $6,500. Overall, a tax-free savings account is a great way to add additional income to your retirement.
Individual Pension Plans (IPP)
Proper financial planning for business owners looking to retire should include individual pension plans. Incorporated businesses are the ones who benefit most from IPPs. Individual pension plans provide substantial benefits. They offer several withdrawal options at retirement, such as a lump sum or equal monthly payments. Finally, IPP investments grow on a tax-deferred basis and are protected from creditors.
Brokerage accounts and mutual funds are great examples of small business owner retirement strategies. Unlike registered accounts, there are no tax benefits. However, the accessibility and greater flexibility offered are a definite plus.
Real Estate Investments
Having a diverse portfolio is a great strategy for maximizing your retirement fund. Real estate investments are one of the best options. Properties appreciate in value, and once they are paid off, they provide a steady source of income.
Sell the Business
On top of traditional retirement strategies, selling is one of the best retirement plans for business owners. The profit earned can sustain and even enhance your quality of life when retiring. However, you should not solely rely on the profits from the sale as your only income source.
As a business owner considering the strategies stated above, a good legal and financial team is critical. As experts in their respective fields, they are able to help you navigate the unknown. Embarking on your retirement journey blind is risky. Remember that laws and regulations change frequently, and without proper guidance, your nest egg may not be as big as you thought it would.
What is the best retirement plan for a business owner?
The best retirement plan for small businesses depends on the individual goals and income of the owner. The most popular strategies include RRSPs and TFSAs. However, investing in real estate and the stock market can also help add to your net worth.
What is the best way to manage retirement money?
There is no specific formula for the best way to manage retirement money, but a good strategy includes:
- Diversifying investments: Never keep all of your eggs in one basket. Spread your investments across different platforms. If one plan falls through, there are several options left to help realize your financial goals.
- Contribute on a regular basis: Think of your contributions as monthly bills. Set out a budget and stick to it.
- Adjust as needed: If a certain strategy doesn't perform as you’d wished, adjust it or cut it out altogether. Periodic portfolio reviews help keep you informed on what is and isn't working.
- Create a plan: A retirement checklist is vital to realizing your goals. Be sure to adjust for inflation, cost of living, and future needs.
- Minimize debt: Living on a fixed budget can be challenging. Minimizing or eliminating debt prior to retirement ensures a comfortable and stress-free situation.
Which retirement plan is best for self-employed Canadians?
The most popular retirement plan option for self-employed Canadians is a RRSP. It guarantees an income once you retire and offers flexible withdrawal options. On top of that, RRSPs offer multiple investment options, including stocks, bonds, and more to help grow your money.
Can you get a pension as a business owner?
Yes. You can get a pension from CPP (Canada Pension Plan) or QPP (Quebec Pension Plan), given that you paid your employee and employer CPP contributions.
The bottom line: planning your retirement
Owning a successful small business is a dream that, for you, has become a reality. But the thought and planning for retirement often gets overlooked. As previously mentioned, a successful retirement requires planning.
Take the time to set clear goals and think about the day you will hang up your hat for good. Put in the effort early, and you will be rewarded. A clear exit strategy is vital to ensuring a stress-free retirement.
Be sure to read our latest article on tax considerations when selling a business. It will help give you a better understanding of capital gains tax, tax exemptions, and more.
Ready to sell your business and start your retirement? You can advertise your business for sale with us and find a buyer who will continue to grow your business.