The Diversification Challenge
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How business owners can avoid holding all their wealth in one enterprise

Savvy investors don’t put their entire portfolio in a single stock, yet owners of privately held businesses often keep the bulk of their wealth in one enterprise — their own. This concentration means that business owners face a myriad of financial risks that non-business owners don’t have to worry about.

For one, if anything hurts the business’s revenue — such as an economic downturn, a natural disaster or a new competitor entering the market — the owner’s family finances and lifestyle may be exposed. “Unfortunately, many business owners don’t think of their business as an asset that needs to be managed to protect their personal wealth,” says David Puckett, a Regions Wealth Advisor.

Especially as the business grows more valuable, it’s important for owners to consider diversifying their investments. Fortunately, business owners have a number of ways to reduce their financial risks that don’t necessarily involve forfeiting control of the business.

Accumulating Personal Assets

Business owners should start by ensuring they have a reserve fund by stockpiling cash from good business years in secure, short-term investments that can help them ride out inevitable market fluctuations and economic rough patches, Puckett says.

They should also save money in retirement accounts that are invested in a portfolio of diversified securities. Business ownership is generally considered high risk because many outside forces can affect a company’s value. So business owners should consider putting their personal assets in lower-risk, less-volatile investments such as bonds and broad U.S. stock funds, he adds.

One efficient way to amass retirement savings is by setting up a tax-advantaged qualified retirement plan such as a Simplified Employee Pension (SEP) IRA or an employer-sponsored defined contribution program such as a 401(k), depending on the business’s structure. If a business has employees, the owner may be required to set up and contribute to retirement accounts for them, as well.

Selling Equity

Another common diversification strategy used by business owners is monetizing the underlying value of their business. This can include selling equity to key employees, family members or third parties. “One way to maintain some management continuity is to begin a process for taking out a measured amount of ownership each year, formulating how the ownership would be valued, based on the previous year’s results, and selling a stake interest in the business a little at a time,” Puckett says.

The diversification strategy a business owner uses depends on his or her long-term goals and succession plan. For example, if a core team of employees will eventually take over the company, the owner might set up an Employee Stock Ownership Plan, or ESOP. Vested employees can buy shares outright at a predetermined price, be given shares as part of their compensation, or receive shares as part of a profit-sharing program or through a qualified retirement plan.

The biggest drawbacks to selling equity, of course, are the potential of giving up future rights to any increased value in the company and sharing some of the current cash flow with other equity holders. For many owners, though, the real issue is losing control. “Most business owners see their business as an extension of themselves, so giving up some of that control is inhibiting,” Puckett explains. A potential strategy to address this concern is to divide equity into voting and non-voting shares, selling only the non-voting stock, he adds.

Leveraging Value

Business owners who aren’t ready to share ownership may have another option: recapitalizing the company using debt. Leveraging real assets or projected cash flow — or a combination of the two — allows owners to securitize a loan against the business and use the cash to invest in a diversified portfolio of securities. The portfolio could be held as a personal asset, while cash flow from the business is used to pay off the loan.

The advantage of using debt instead of equity is that the business owner can retain 100% ownership in the company. Also, a loan can be executed quickly and confidentially. The lender, however, may ask for a personal guarantee from the business owner as a secondary source for repaying the loan.

Getting Guidance

These are just a few of the options available to business owners for protecting and preserving their most vital asset. A good first step is for business owners to sit down with their Regions Wealth Advisor to discuss their needs and goals and determine how diversification can benefit their personal financial situation.

Their Wealth Advisor can conduct a Regions Wealth Assessment®, a tool that provides a clear view of a client’s wealth and risk allocation and identifies potential ways to improve diversification. Moreover, the Wealth Advisor can build a team of experts to help the business owner with his or her other needs, including succession planning, estate planning, insurance and financing goals.

“We have teams of specialists at Regions who understand how businesses operate and how owners build the value they have created through their own time and effort,” Puckett says. “We learn the unique needs and objectives of our business-owner clients and provide the information and solutions they need to make informed decisions.”

“_Unfortunately, many business owners don’t think of their business as an asset that needs to be managed to protect their personal wealth.”

David Puckett, Regions Wealth Advisor

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The Diversification Challenge Infographic
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This information is general in nature and is provided for educational purposes only. Regions makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented. Information provided and statements made by employees of Regions should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Regions encourages you to consult a professional for advice applicable to your specific situation.