2. The End game

People go into business for many reasons, yet whatever the reason or reasons, the end game is about creating sufficient wealth to enable retirement with the desired level of income.

In order to achieve this goal it is necessary to have the business operate at a level which will generate sufficient funds to create the wealth. It goes without saying that to plan for a period of time ten to thirty years away is difficult. We set out below, a simple ‘rule of thumb’ formula which can be used to target what is required each year to generate your wealth goal. Once this has been established the business owner/s will be in a position to determine the achievability of the goal or at least what is the performance gap that must be bridged.


The formula is:-
1. Determine the level of income that the business owner desires in their retirement in today’s dollars.
2. Multiply this annual income figure by 15. This will determine the amount of wealth required in
income producing assets that must be accumulated between today and the date at which
retirement is contemplated. This figure in income producing assets is outside of the family
home and any other non income producing assets which the business owner might
choose to hold, eg holiday home, boat, ski chalet in France, etc.
3. Calculate the number of years between today and the contemplated retirement date.
4. Divide the amount of wealth required in income producing assets by the number of
years to retirement.

This figure represents the amount of savings required each year from the business to achieve the required annual income during retirement. You will note that no allowance has been made for inflation or the earnings on the savings. This is because each of those attributes cancel each other out and are therefore not required to be taken into the rule of thumb equation.

Now that the amount of saving required is determined, you can assess the capabilities of your business to generate this amount of excess cash flow that will be set aside outside the business. If, at this stage, your business cannot support this requirement, then it is necessary to examine your business plan and your goal in business so that the business can become more profitable, and help to achieve this cash flow.

It is our opinion that retirement decisions should be based on the wealth that can be created outside the business. This will ensure that your retirement is not reliant on the sale of your business. As we are all discovering, the pace of change can have dramatic effects on the value of an existing business.

Good examples of this are the recent deregulation of the dairy industry, which has caused over 8,000 dairy farms to cease operation in the last five years. This has destroyed the value of the farm and for older farmers the ability to retire in the style that they previously planned. Another example is greengrocers and butchers. With the advent of 24 -hour trading by the major supermarkets many greengrocers and butchers simply closed their doors. Many of those butchers and greengrocers had planned to sell their business to help fund their retirement.

Over the coming months we will expand on this issue of planning for your retirement and the various methodologies that may be employed to create wealth through investment as well as providing articles on tools that may be used in your business to increase the business profitability and free cash flow.

For more information on business and financial matters please visit www.rgconsult.com.au