Risks in retirement funding plan

Fairfax Media

RISKY: Business owners are relying on selling up to retire, an assumption that will leave many forced to sell cheap, accounting firm Grant Thornton says.

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Seven out of 10 business owners are relying on selling up to retire, an assumption that will leave many forced to sell cheap, accounting firm Grant Thornton says.

An international survey showed 69 per cent of New Zealand business owners were counting on selling their companies in the next decade to fund their golden years.

The figure was nearly three times the global average of 25 per cent, and a long way ahead of Australia, where 45 per cent had a business sale in mind.

Grant Thornton Wellington chairman Peter Sherwin said it was a serious issue because New Zealand had hardly anyone to buy the businesses.

Most Kiwi business owners had most of their savings tied up in their homes and their businesses, and relying on the sale of their firms to fund retirement was risky.

"It's not going to work," Mr Sherwin said.

The current climate highlighted the vulnerability of poor succession planning.

"New Zealand is working its way through a demographic bubble, characterised by a proportionately high number of businesses being owned by people rapidly approaching retirement age.

"It's a twin-edged sword. You have a bubble of people looking to sell their businesses against an economic environment with a low appetite for risk and tight capital markets."

The businesses surveyed were typically mid-sized, with between $2.5 million and $100m in turnover.

New Zealand was too small to have enough private capital to give businesses options, and banks were steering clear of taking equity in businesses to fund business buyouts.

Mr Sherwin said he had met a business owner in his mid-70s who had no way out of his business, and with the recession, his business was not as attractive as it might once have been.

It was going to be a more frequent scenario as the demographic bubble worked through, and many retirees would find themselves in a forced-sale situation.

"It might be at a time that is not opportune, like right now, and you'd have to take a less than optimum price," Mr Sherwin said.

The businesses surveyed were mostly too small to rate on the sharemarket radar, and there was no obvious network of potential private investors.

The combination of low incomes, relatively high taxes and a tendency to tie up capital in housing meant few Kiwis had the capital to even consider buying a business.

Mr Sherwin said there were options within businesses, such as grooming senior managers to take over or looking at employees taking equity in the business.

The problem was that the process could take years.

- © Fairfax NZ News