Speaking about the Unspeakable:
The Entrepreneur’s Ship That Never Comes In
Meet Ernie. Ernie is a 55-year-old engineer and entrepreneur with a wife and two kids at UCT. He has a lovely home in Newlands and a holiday house in Pringle Bay, which are both bonded to the max. Ernie also owns the building his company works from in Montague Gardens.
Ernie doesn’t have any retirement savings. He thinks these offer poor returns and are a rip-off. He believes all financial advisors are conmen. All the money he makes, he uses to buy more stock with, which he believes will give him the greatest return (greater than paying off his bonds, or saving to retirement funds or other financial products). For when Ernie turns 63, he is going to sell his company for a very high multiple and retire happily. He believes the value of his business will be realised and his Ship will sail in.
But, what if the unthinkable happens, and Ernie’s Ship never comes in?
Or, what if the economy hits a bad crunch? If that were to happen, Ernie will likely be saddled with bad debts, and if business slows down, he’ll be sitting with stock he’s purchased with money he’s taken from his bond. What if the industry he operates in changes drastically over the next few years, rendering his business worthless?
What Ernie doesn’t realise is that he and his family are carrying all the risk. His lifestyle assets (homes, cars) are choking him with debt: debt which should be nearly paid off by your mid-50’s. He has been using his business assets (salary, bonus, dividends, shares, stock, commercial property) to fund his lifestyle. And, because he has massive liabilities and no lifetime assets (no RA’s, no savings) to draw from in a time of crisis, he is in big trouble, if faced with the crash of his business. He will have no salary or dividends, and his equity is in his stock, which will likely be massively discounted in a fire sale. What are Ernie and his family going to live off of then?
What Ernie should have been doing over the years is taking the profit out of his business and using it to pay off his personal debts and diversifying his risk. But this is often a difficult one for entrepreneurs, who are passionate about growing their businesses, and let’s face it…they have to be in order to succeed. The thing is, it’s great to have a positive attitude and hope that you will be handsomely rewarded for your hard work, but you should never forget that you are taking a risk. You need to plan for the chance that your ship doesn’t come in.
What Ernie should be doing is shifting his liability to ensure his family is secure, and stop taking so many risks. It’s fine to take those risks in your 30’s and 40’s, but by your 50’s, you shouldn’t continue along that path; and if you are, make sure you (and your family) are doing it knowingly. Ernie’s priorities should be to reduce his debt on lifestyle assets and save for retirement. It makes sense to be putting 15% of his earnings into retirement annuities rather than handing it over to SARS, who unlike an RA, will not be there for him upon his retirement.
Separating yourself from your business is one of the healthiest things you can do, for yourself, your family and for your business. It’s time for Ernie and all the other entrepreneurs who have steered away from unit-based retirement annuities — either because they chose to put more money into their businesses, or because of their distrust of financial advisors – to live a consistent, more secure financial lifestyle. The evolving regulation of our industry, which has changed so much for the better already, will continue to strengthen even more over the next couple of years, making investors’ experiences more sound and protected.
What does the year ahead look like for you?