Buying a business for retirement - is it a good idea?

A typical cafe could deliver returns in the order of 10 per cent. Picture: Supplied

Historically low interest rates mean many of today’s retirees are getting 90 per cent less income from their term deposit investments than retirees 15 years ago. Some have just accepted this as the price of security but others have decided to do something about it, particularly those with a flair for business.

Purchasing a private business is one pathway that if executed well can provide strong returns in excess of term deposits and well in excess of property and sharemarket returns for that matter.

Rad Benicky, a licensed business agent with CORE Business Brokers, says: “The typical situation is a retired couple who have a sum of money to invest and are looking for a business that can be operated by their children or children in-law.

“If done right it can be a win-win situation whereby the retired parents can generate an income by drawing down business profits while the children benefit from a stable wage in the family-owned business that they are likely to inherit at some stage in the future.”

Benicky says returns are variable but income returns of 10 to 20 per cent per year are pretty common.

Drilling down into the numbers, say a cafe with a 15 per cent profit margin that generates $200,000 revenue is sold on a 1.5 times multiple ($300,000).

The investor would collect $30,000 per year, which is a 10 per cent return on the $300,000 investment.

And some businesses are even more profitable. There are online businesses where profit margins can be up to 40 per cent which sell for two times multiple, making potential income returns 20 per cent per year.

Benicky says the risks need to be considered.

“When you buy a business, what you are buying is the expected future income of the business,” he says.

“This is not guaranteed and things can change quickly.

“What if the product you sell isn’t used in the future? What if you lose clients of the business?

“These are all things that need to be considered in the due diligence process before acquisition.”

Some retirees are moderately active in management. Others opt for a more passive approach.

Benicky says: “I am currently facilitating the sale of a transportation business to a retired couple who want to live off the income that it generates. It is a small fleet of eight trucks and eight drivers with a long-term transportation contract in place. One of the drivers gets paid more than the other seven to arrange sick leave, overtime, repairs and other operations and HR-related matters.

“The ongoing involvement of the retired couple as new owners is expected to be minimal.”

When thinking about how to structure a private business investment, an SMSF is an attractive option given the potential for tax-free returns.

However, Caxton Pang, managing director at Sydney-based advisory firm Linton Advisory Group, says: “An SMSF is only allowed to purchase and operate a business if it is allowed by the trust deed and if it does not contravene the sole purpose test.

“However, this is where it gets tricky. Even if a family member working in the cafe on fully commercial terms makes a cup of coffee for his/her self, this would be treated as breach of the sole purpose test. Some will tread the lines carefully, others will find using an SMSF too difficult.

“For those with a high risk tolerance who want to be more than just an anonymous shareholder in an ASX-listed company, purchasing a private business can be a good source of income in retirement. However, thinking through all the potential things that could go wrong and weighing up those risks and getting professional advice is absolutely essential before proceeding”. 

James Gerrard is principal and director of Sydney financial planning firm www.financialadvisor.com.au