Business Owners Ought To Be Thinking Like Wealth Managers
Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve.
__ Talmud (c.1200 BC-500 AD)
A conversation I recently had with a music retail owner made a lasting impression on me. He said if his father had not had the foresight to establish his own retirement investments, separate and apart from the assets of the store, he would have been forced to ask his son for a 7 figure check to support his retirement. It was good that the father made the prudent decision, early on, to diversify his investment portfolio.
The concept of managing risk through diversification was recognized more than 2,000 years ago. If applied today, the overall portfolio asset allocation would be one-third fixed income and two-thirds equity investments; a 70/30 well diversified portfolio. Stated another way: Don’t put all your eggs in your current business.
In this respect, there is much business owners can learn about risk management from observing how wealth managers mitigate risk for their investment clients.
There are three stages of wealth management:
Accumulation-> Preservation-> Distribution.
During the Accumulation stage, the goal is all about growing the value of the portfolio by regularly adding money to your investment pool and aligning the asset allocation (combination of stocks, bonds, cash) with your risk tolerance.
During Preservation, the goal is to have a comfortable standard of living through the end of your life, while having the financial resources to take care of all your needs, without running out of money.
And finally, the Distribution stage is about tax efficient strategies to distribute your assets while you are alive or after you die.
Each stage requires a unique set of skills as well as a different mindset for the investor.
The life cycle of the business owner suggests that the start-up of your business is similar to the investment Accumulation stage. Instead of investing in an asset allocation consisting of stocks, bonds and cash, your business asset allocation may consist of inventory, marketing and services.
The Preservation stage is likened to the mid-life cycle of your well-established business. Cash flow is positive, and your emphasis might be holding on to the clients you currently have and focusing on customer service while training the next generation of leadership.
The Distribution stage occurs at the end of the life cycle when you transfer ownership of the business- whether it’s a succession plan or selling to a competitor.
However, if the appropriate diversification plan has not been established early in the business life cycle, an impasse may result that prevents your dream of selling your business to a family or key manager. There is no alternative source of retirement funds for the retiring owner other than cash flow of the business while the family or key manager needs this cash flow to purchase the business.
By implementing an investment 401(k) retirement plan for your business, you can create a retirement nest egg for you and your employees (great for employee retention if properly designed) as well as realize meaningful tax benefits.
As the good book says, asset diversification can lead you to financial heaven.