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Managing Assets Outside of the Business |
James Parker considered selling his company in 1999 when it was worth $10 million. Instead of cashing out and retiring, he decided to wait to see if the value of the company would continue to appreciate. When the economy slowed, the company’s value plummeted to roughly $2 million. Not wanting to walk away with comparatively little, Parker put his retirement plans on hold.
Parker made a mistake common among business owners. He relied solely on his business for a comfortable retirement and failed to protect himself against a decline in its value. Too often, business owners are so focused on building up their companies that they fail to plan adequately for the future.
Planning for a secure financial future
The first step you can take in planning for a more secure financial future is to build a portfolio of investments that is separate from your primary asset – your business. The asset allocation and individual investments you choose will depend on what you need to provide for yourself and your family. Are you generating income for lifestyle needs? Accumulating a nest egg for retirement? Building wealth for future generations?
As a business owner, with much of your wealth tied up in your company’s assets, you have to approach investing differently than non-business owners do. Specifically, you need to build a portfolio that moves independently of your company’s business cycle to reduce the risk associated with large holdings of generally illiquid assets. In other words, your investment portfolio shouldn’t mimic what your business does.
It is natural to invest in what you know, and you probably know your own industry rather well. However, resist the urge to invest heavily in other companies operating in your own sector. Otherwise, if the industry hits a down cycle, your business’s cash flow may decline at the same time as the value of your outside investments, leaving you exposed on both sides.
Instead, diversify into other sectors. If your business makes software, consider limiting your investments in the technology sector to stocks or mutual funds that are less likely to move in tandem with your own business.
Staying liquid
You may also wish to keep a greater percentage of your holdings in cash, given that your largest asset is illiquid. And depending on the nature of your business, its financial situation and your lifestyle, you may need to keep a larger percentage of your outside portfolio in stable and easily accessible assets. If your business is highly leveraged, for example, and you don’t have a lot of income from other investments, you want to make sure you can cover expenses and debt payments even if your business slows.
In general, your choice of investments can depend on the nature of your business and the stability of its revenues. If income from the business is quite unpredictable, investing in short-term cash instruments might be a good choice. Business owners may wish to be more conservative than other investors when constructing an investment portfolio.
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Merrill Lynch, Pierce, Fenner & Smith Incorporated is a registered broker-dealer, not a bank, and the WCMA account is not a bank account. Banking services are provided by licensed banks or by third parties through arrangements with licensed banks. Unless otherwise indicated, investment products are not FDIC-insured, not guaranteed by a bank and may lose value.
Working Capital Management Account and WCMA are registered service marks of Merrill Lynch & Co., Inc.
Merrill Lynch, Pierce, Fenner & Smith Incorporated is a registered broker-dealer, not a bank, and the WCMA account is a brokerage account, not a bank account. Banking services are provided by licensed banks or third parties through arrangements with licensed banks. Unless otherwise indicated, investment products are not FDIC-insured, not guaranteed by any bank and may lose value.
Business Investor Account and BIA are service marks of Merrill Lynch & Co., Inc.
The Business Investor Account is a product of Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is a registered broker-dealer, not a bank, and the BIA account in not a bank account. Banking services are provided through licensed banks or by third parties through arrangements with licensed banks. Securities, mutual funds and other non-deposit investment products available through the account are not FDIC-insured, not guaranteed by a bank and may lose value.
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