Would You Put 80% of Your Net Worth in One Stock?
By Brian Wheeler, Director of Wealth Management & Business Brokerage
If you own a business, you may already have.
I heard an interesting comparison recently that got me thinking about the way business owners view their wealth. If you came into my office with 80% of your net worth invested in one stock, we’d probably have a conversation about risk. It could be a great company. You might know the company better than anyone and believe its best years are still ahead. But having that much of your financial future riding on one investment would still deserve some attention. Now let me change one thing. What if that investment is YOUR business?
When the “Stock” Is Your Business
For many successful business owners, that’s exactly what their personal balance sheet looks like. The business may represent the majority of their net worth, but the concentration often goes even further.
It may also provide their paycheck, bonuses and retirement contributions. They may own the building the company occupies. Their future retirement and financial independence may ultimately depend on what that business is worth when they’re ready to leave.
That’s a lot riding on one company.
Of course, there’s a good reason this happens. Concentration is often exactly how entrepreneurs create wealth. You put your time, money and energy into something you believe in, take risks other people aren’t willing to take, and hopefully build something valuable.
But creating wealth and preserving wealth aren’t necessarily the same thing.
Why Concentration Risk Matters
The problem with concentration is that you rarely worry about it when everything is going well. You notice it when something changes. A major customer leaves. Margins get tighter. A key employee moves on. The economy slows. A competitor changes the game. Or maybe nothing is wrong with the business at all. You simply reach a point where you don’t want to work this hard anymore.
That can be a difficult time to discover that your income, retirement and net worth are all tied to the same asset.
Taking Chips Off the Table
So, how do you take a few chips off the table without leaving the table?
If you owned a stock that had appreciated significantly over the years, you probably wouldn’t have to choose between owning all of it and selling all of it. You could sell some shares, diversify the proceeds and reduce your exposure while still participating in the company’s future growth.
A privately held business isn’t nearly that liquid, but I think the concept is worth considering.
Taking some chips off the table could be as simple as becoming more intentional about moving excess cash out of the business and building investments elsewhere. It might mean accumulating retirement assets, investments or real estate that aren’t dependent on the company. For other owners, it could eventually mean selling a minority interest, bringing in a strategic or financial partner, creating an employee or management ownership strategy, or completing a partial sale that provides some liquidity while allowing the owner to continue participating in the future growth of the company.
There isn’t one answer that works for every business owner, and taking chips off the table doesn’t necessarily mean you’re getting ready to sell.
In fact, I think the better time to have this conversation is long before you’re ready to sell.
Two Questions Worth Asking
Here’s a question I think every successful business owner should ask occasionally: if my business disappeared from my personal balance sheet tomorrow, what would be left?
Not because I expect that to happen. The answer simply tells us something about how dependent your financial future is on that one asset.
And there’s another question I think may be even more important: does my business have to be sold before I become financially independent?
If the answer is yes, that’s worth knowing now.
Building Wealth Outside the Business
At Keystone, we spend a lot of time helping business owners look at the relationship between the value they’re building inside their business and the wealth they’re building outside of it. We believe those are two very different things, and ideally, over time, both should be growing.
Your business may very well be the best investment you’ve ever made. The goal isn’t necessarily to change that. The goal is to reach a point where you continue to own the business because you want to, not because your financial future depends on it.
Maybe that’s what taking a few chips off the table is really about.
The Goal: Choice, Not Dependence
If most of your wealth is tied up in your business, you may not need an exit plan today. But it might be worth having a conversation about how you begin creating financial independence from the business long before you’re ready to leave it.