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Unfortunately, John got a nasty shock when he put his shop on the market last year – technological advances had led to many DVD rental stores closing down and there were very few buyers interested in John’s business. He still has the store, and has had to make comprehensive changes to his retirement plans.

John’s story is not unusual. It seems many South African business owners are reluctant to take profits out of their businesses and allocate these towards a dedicated wealth creation strategy as a means to become financially independent. “As John’s situation has shown, this is very risky financial behaviour. The biggest mistake a business owner could ever make is to regard his business as his retirement savings plan, says Jannie Rossouw, head of Sanlam Business Market.

Rossouw says many entrepreneurs plough all their profits back into their businesses by expanding operations, investing in upgrades and assets or paying off debt. While this strategy is vital to secure the sustainability of the business, it does not necessarily support the ultimate goal behind starting the business in the first place: to create wealth and to enable the business owner to work towards financial independence and a comfortable retirement.

“Most entrepreneurs are successful risk takers for whom their businesses are everything. They remain fixed on the short-term goals – to keep fuelling the business in order to produce as much profit over the short term, in the hope that the long-term goals will automatically fall into place,” he says.

However, the unfortunate reality is that not many South African entrepreneurs are ever able to sell their businesses in order to attain financial independence. “They are often not able to achieve the selling price that they had hoped for. For one, the business may not be nearly as valuable as anticipated many years ago. The price of a business is what someone else is prepared to pay for it i.e. there needs to be a willing buyer and willing seller. Or there may be an economic downturn. Or the business may be in an industry which is likely to be phased out due to technological innovation, as in John’s case.”

For many entrepreneurs, their businesses provide much more than a job – they also afford a livelihood in both the material and psychological sense. After 20 or 30 years of building up your own business, it may seem unfathomable to just cash in, move on, and live off the proceeds.

Another mistake entrepreneurs make is thinking their children will look after them after they have taken over the business. “If your children are not only taking over your venture, but are also expected to look after you from business proceeds, it may cause resentment. It may be better in this case to sell the business to them so you have your own retirement capital. If you think it is risky running a business, try living off a business in your old age that your children are running,” says Rossouw.

The problem is that for many entrepreneurs, it is almost unthinkable to start taking profits from the business and applying it elsewhere – like investing in property, in unit trusts, the stock exchange, or in a retirement savings vehicle, he says.

“But paying yourself by taking money from your business and moving it into investment vehicles doesn’t mean you’re gambling with your hard-earned cash – it’s being smart, and making sure that you have a strategy in place to protect your wealth on a personal level and ensure you don’t run into financial hardship after retirement.

“It is simply addressing the basic principles of personal finance: ensuring that you keep your eye on both your business as well as personal budget and that you are suitably protected to ensure that any potential future business losses will have no impact on your personal financial goals,” he explains.

The concept of investing is simple, but the execution can be complex, however, with a myriad of investment vehicles to choose from, with varying degrees of risk, tax considerations and the like. “Entrepreneurs are intrepid innovators and tenacious wealth accumulators, but the complexities of financial planning can often be overwhelming. It is therefore essential to entrust your financial planning to skilled professionals.”

“A qualified and skilled professional will best be able to shed light on potentially complex topics such as diversifying your investment across different asset classes, the liquidity of your portfolio and local versus offshore investment,” he says.

“In the end, tracking both your business and personal financial success comes down to one key consideration: Are you working for your business, or is your business working for you and your personal financial well-being when you retire?” Rossouw concludes.

Sanlam Life Insurance is a licensed financial service provider.
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