Private business owners pour a lot into their businesses, investing all of their money, time, and passion into keeping the company successful.
This is admirable and necessary in many cases. However, once that business starts bringing in profit and the owner starts seeing some personal wealth, it is time for them to look at diversifying their assets. This is important because the owner’s business really shouldn’t be their sole investment.
But what exactly does diversification mean, and how can owners go from pouring everything into their business to investing in other wealth preservation endeavors? We’ll cover that and more in this guide.
What Does “Diversify” Mean in the Context of Family Business?
To diversify one’s assets is to invest in assets that are not solely a person’s business. Essentially, it is a form of risk management.
For example, a restaurant owner may invest all of their money and time into the launch and maintenance of their restaurant for approximately three years. During those three years, the restaurant becomes very successful and starts bringing in a substantial amount of revenue. Now, all of the business owner’s assets lie within that restaurant. What would happen if the restaurant endured a scandal or eventually became less successful? The business owner could lose all of the concentrated wealth they gained from the restaurant by only investing in it. This could have been prevented by investing some of that wealth into something outside of the restaurant.
So what should a family business owner invest in outside of that business, and how can they go about it? Let’s take a look at some strategies.
Strategies to Diversify Outside of Your Family Business
There are many ways to diversify your assets, but these four methods are the most common for family business owners.
1. Invest in an employer-sponsored retirement plan
One of the easiest ways to diversify your own wealth as a business owner while also saving for retirement is through an employer-sponsored retirement plan, like a 401(k). Monetary contributions to such plans can be made after taxes or before taxes, which allows a business owner to save taxes on a schedule of their choice and build up a portfolio that will eventually give liquidity during retirement. The earlier you start saving for your retirement, the more compound earnings will bulk up your portfolio.
2. Sell (or gift) some business interests to other family members
Diversifying your ownership in the family business can involve transferring some of the company to the next generation of owners. Many families with a common business will make it a goal to teach the younger generation about running the business, managing money, and making smart financial choices.
There are a number of ways to diversify your assets while doing so, including:
- A family limited partnership (FLP)
- A grantor-retained annuity trust (GRAT)
- A defective grantor trust (DGT)
Philanthropy is a great way to give back to the community that built your business’s success. You can incorporate philanthropy into your diversification plan by sending gifts, donor-advised funds, or trusts that are charitable. Such donations will avoid capital gains tax.
4. Start an employee stock ownership plan (ESOP)
This could be an excellent strategy for diversification as well as minimizing the negative consequences a company and its employees may endure when the business owner eventually leaves the company.
An ESOP can be a great tax investment for both employees and business owners as well.
What do you think about our guide of strategies to diversify outside your family business? We want to hear your thoughts! Feel free to contact our team if you have questions, thoughts, or feedback, or if you want to discuss how these strategies may apply to your own family business.