How and Why Business Owners Should Diversify Their Wealth

by Kevin Ward, Advisor

When you start a business, you are putting your life, sweat, tears, and finances behind it. As that business grows and revenues increase, you are often faced with the difficult decision of “do I continue to reinvest in the company or begin to diversify my wealth in other assets?” Depending on the timing of this question and a number of other factors, our clients will often look to us to help guide them through this thought process.  

There are many situations (especially early on) when it does make sense to retain earnings and capital within the business. This could be an acquisition opportunity, hiring a new team member, leasing a new office or manufacturing plant, or anything else that requires your valuable time and money.  

 As the business’s balance sheet matures, however, business owners should begin to build asset diversification from both a business and personal perspective. This can be accomplished by creating and starting a plan that allows you to strike the right balance between growing the business and extracting value from it to accumulate assets outside of the business. 

 A major component to this is to assess the inter-woven connection of your business and your family’s financial future and how you can attempt to insulate both from potential disruption in the future. On average, 80-90% of an owner’s net worth is made up of the business. This doesn’t have to be the case, as maintaining a comprehensive and well-balanced personal or family financial plan can help you create wealth diversification between the two.  

 We’ve worked with business owners who earn more than $250,000 annually but have virtually no investments outside of their business. Often this is because individuals don’t know how or when to start diversifying their assets. Having a discussion with a trusted advisor can help you create a long-term plan and come up with ideas to begin diversifying your net worth. Oftentimes a starting point can be implementing a 401(k) plan for you and your employees. If you are the sole employee, an individual 401(k) can be a cheap and efficient way to begin contributing to a retirement plan. Once opened, we often recommend contributing an increasing amount until you are annually maxing out the contribution limits; at that point, it might be prudent to make regular contributions to a non-qualified brokerage account.  

 An owner and/or his or her family’s financial future should not be 100% reliant upon a successful transition or exit of the business to achieve their financial goals. A successful transition or exit should be the cherry on top. Very broadly speaking, business transitions or outright exits are only successful approximately 20-30% of the time. Obviously, this outcome depends a lot on the circumstances. Work with your advisors to build a plan that strikes the right balance between earnings retention and extracting value from the business over time to accumulate assets outside of the business. This can help de-risk your personal or family risk profile and position you more favorably for financial independence regardless of the outcome of a future business transition or exit. 


© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment adviser does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

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