JACOLINE LOEWEN
Special to The Globe and Mail
Published Tuesday, Feb. 10 2015, 8:13 AM EST

Liquidating a part of the company to invest into a portfolio for retirement may seem like a logical move, yet for many entrepreneurs it contradicts their core beliefs. Putting money back into the company is essential to fuel growth, but as entrepreneurs get older they often become more risk adverse and no longer have the time to recover from faulty decisions or strategic missteps.

David C. Bentall, founder of Next Step Advisors, says that successful businesses often remove substantial funds from the company for retirement. This regular act will have positive results as owners gain confidence and feel more secure.

“My grandad built the [family] business by annually reinvesting virtually all earnings back into the business,” he says. “Many fortunes have been built by this simple formula.”

If multiple generations of family members are involved in the business, however, Mr. Bentall suggests taking a different approach. Once a company has depth to its balance sheets, it should set up a formal funding arrangement to ensure an after-tax income sufficient to cover living expenses and retirement.

Mr. Bentall says that after he and his siblings had put a funding process into place, he noticed that his father started to relax and begin to pass management control over to the successors. It is actually a significant principle of good financial sense, but it has the domino effect of helping succession happen.

“How can the next generation expect to be given management authority and responsibility if the prior generation’s retirement is at risk and dependent upon the decisions their inheritors will make?” he asks.

Business owners may be reluctant to hand over the keys to their enterprises if they don’t feel like their retirement is secure. Daughters and sons of family business owners, eager to take over management control of the business, may not realize why older generations are reluctant to step aside. Too often the elephant in the room is ignored.

Mr. Bentall suggests families develop a plan that lets older generations fund their retirement and lifestyle needs. “If the next generation expects the elder generation to take their hands off the steering wheel … then the successors ought to develop a plan to provide financially for their elders,” he says.

He recommends making investments outside of the company, that way retirement funding will not be subject to risk related to any management decision made by the next generation.