Investing Beyond Your Business

For most business owners, the company is the largest asset on their personal balance sheet — and also the least diversified and least liquid. Your income depends on it. Your net worth depends on it. Often, your retirement and your family's security depend on it, too.

That isn't a problem to be solved by selling. It's a reality to plan around. The right investment strategy for an owner isn't the one you'd build for someone with a salaried job — it starts with the business and works outward.

Your Business Is Already a Big Bet

Diversification exists to keep any single outcome from badly hurting you. Yet many owners hold most of their wealth in one private company, in one industry, often tied to one local economy — and then build an investment portfolio that adds to the same exposures.

Consider a contractor whose business depends on the housing market, who also owns rental properties and invests in homebuilder stocks. A housing downturn hits every part of that balance sheet at once — just when the business might need extra capital. Your portfolio should do the opposite: hold up when your business is struggling.

Build a Portfolio That Complements Your Business

• Avoid doubling up on your industry. If your business is in technology, you probably don't need extra weight in tech stocks. If it's in real estate, your portfolio may need less real estate, not more. Your industry expertise is invaluable for running the business — but it's also the risk you already carry.
• Match your portfolio to your business's cycles. Owners of cyclical businesses — construction, manufacturing, hospitality — often benefit from a more conservative personal portfolio and larger reserves. Owners with steady, recurring revenue may be able to take more risk with their investments.
• Count your future earnings as an asset. The income your business will produce is a large, illiquid asset in its own right. The more volatile that income is, the more your portfolio should lean toward stability.
• Diversify globally. Spreading investments across countries, sectors, and asset classes reduces your dependence on any single economy — including your local one.

A Framework for Business Owners

These are starting points, not rules. The right allocation depends on your full balance sheet, your goals, and your timeline.

Move Money Out of the Business — Deliberately

Many owners reinvest every spare dollar into the company. Some reinvestment is essential, but keeping all of your wealth inside the business leaves it exposed to business risks and business creditors. A deliberate plan to move money out over time is one of the most important things an owner can do.

• Pay yourself a reasonable salary — and save from it. If your business is an S corporation, the IRS expects owner-employees to take reasonable compensation before distributions.
• Make retirement plans your primary diversification tool. A Solo 401(k) or Safe Harbor 401(k) with profit sharing, or a cash balance plan, can move substantial income out of the business each year on a tax-advantaged basis. Cash balance plans in particular can allow owners in their 50s and 60s to contribute well into six figures annually.
• Take distributions when the business can afford them. A regular distribution policy — after funding operations, reserves, and growth — steadily converts business profits into personal, diversified wealth.
• Don't let excess cash pile up. Cash beyond what the business needs for operations and reserves is often better off in your personal accounts, where it can be invested for the long term and is generally separated from business liabilities.

Where Business Cash Should Live

The money that does stay in the business deserves a strategy too. Operating cash and reserves should prioritize safety and liquidity over return:

• Operating accounts for day-to-day needs, with balances above FDIC limits spread across banks or held in insured sweep programs.
• Treasury bills and government money market funds for reserves. They typically pay competitive yields with minimal credit risk and can be sold quickly.
• A defined reserve target — often several months of operating expenses — so there's a clear line between money the business needs and money that can be distributed.

Operating cash generally shouldn't be invested in stocks. The day you need to sell is too often the day the market is down.

Protect the Downside

• Build a larger personal emergency fund. An owner's income is less predictable than a paycheck. Six to twelve months of personal expenses is a reasonable target.
• Insure the risks you can't diversify. Disability insurance, key-person coverage, and an umbrella liability policy protect against the events that would hurt most.
• Be careful with personal guarantees. Each guarantee ties more of your personal wealth to the business. Know what you've signed, and negotiate limits where you can.
• Keep business and personal finances separate. Commingling makes it harder to protect personal assets — and harder to value the business when the time comes.

Planning for a Liquidity Event

If you expect to sell some or all of your business, the years before the sale are a critical window:

• Start diversifying before the sale. A portfolio outside the business reduces the pressure to accept a particular offer — or any offer at all.
• Plan the tax strategy early. Depending on your situation, tools such as installment sales, charitable trusts, or the qualified small business stock exclusion for eligible C corporation shares can significantly reduce taxes — but many must be in place well before a deal is signed.
• Prepare to shift from owner to investor. After a sale, your portfolio becomes your primary source of income and security. That usually calls for a different approach than the one you used while the business carried most of the risk.

Our business succession planning guide covers the full exit process, and our guide on how to invest a lump sum covers what to do once the proceeds arrive.

The Bottom Line

Your business has likely been your best investment. But the concentration that builds wealth isn't the same as the diversification that protects it. The owners who end up most secure deliberately build wealth outside the business — a portfolio designed to hold steady when the business doesn't.

Learn more about our investment management and tax strategy services for business owners.

This article is for general educational purposes only and is not tax, legal, or investment advice. All investing involves risk, including the possible loss of principal, and past performance does not guarantee future results. Consult a qualified professional before acting.