SBJ: Special Investing Considerations For Business Owners

Industry Insight


If you’re like many entrepreneurs, your company may be your biggest investment asset. You’ve put in blood, sweat, and tears, and probably a good deal of capital along the way. Maybe you’re plowing most or all of your profits right back into the business…and when it comes saving for retirement, maybe right now your company is your retirement plan. You’re not alone, we’ve heard this many times.

But if you understand the stock market investing concept of diversification—that it’s unnecessarily risky to put too much money into any single publicly traded stock—you should also know the same risk applies to having all of your retirement planning eggs in one basket. Even if that basket is your own company.

Sure, you know your company books better than any investor ever knew Enron’s or WorldCom’s books (and you know your books are clean!)…but that doesn’t make your business a risk-free investment.

So seek some diversification of your retirement savings away from your own business, perhaps by investing in tax-advantaged stock and bond markets in line with your investment risk tolerance. Include the value of your own company as a single “stock” when calculating your aggressive-to-conservative (stock-to-fixed) investment allocation.

For example if the value of your business is $750,000, you would need an additional $750,000 in conservative investments (bond funds, CD’s, cash, etc.) to achieve a “moderate” investment risk posture on a $1.5 million portfolio.

If your risk tolerance is aggressive because you are still several years from retirement, and your total portfolio is $3 million including your company, you might shoot for an 80% aggressive growth risk posture by owning $600,000 of bond funds and $1,650,000 of well-diversified stock funds in addition to your $750,000 business.

Now this still far exceeds the rule of thumb against having more than about 5% of your total portfolio in any single stock, but it’s a step in the right direction.

If you’re in a position to install a tax-advantaged retirement savings plan for your employees, choose a structure with your own retirement planning in mind too. Even if you’re the only employee, there’s nothing stopping you from launching a Simple IRA or even a 401(k), which may allow dramatically more tax-deductible contributions each year than a traditional IRA.

Weigh pros and cons with your advisor, and as with all investments, watch your fees—for the advisor, the investment company, and for the investments themselves. Fees directly affect your investment outcome, and therefore ultimately your retirement income.

If you want to save more than IRS rules allow for your tax deferred vehicles, open a separate non-tax-advantaged (“non-qualified”) account, but look for Federal and/or State tax-free investment choices such as municipal bond funds to help manage the tax burden. Your working spouse can open a separate IRA as well, up to IRS limits.

If a good portion of your retirement hinges on the future sale of your business despite your best efforts to diversify, get ahead of that process five to ten years ahead of your retirement date. Seek professional valuation of your business, and look for ways to increase its worth in terms of expenses, debt load, consistency of cash flow and other factors that affect profitability—which can improve your position now as well as when it’s time to sell. And don’t neglect to protect your investment with business overhead insurance, key-person life insurance, a properly funded buy-sell agreement if appropriate, and other products and techniques to shield your personal business investment from hazards.

If your plan is to eventually sell the business to family or employees, there are better and worse ways to go about that, so work with an experienced professional. For example if you pass the business to family members or employees at your death, they may receive “stepped-up basis” under current tax rules. This can potentially save you a significant capital gains tax bill compared to selling the business outright during your lifetime (and this is an important planning consideration for any appreciated asset, not just your business).

And remember, the important thing is not the amount of the lump sum you have on hand at retirement, it’s the amount of income you can generate from that money to supplement Social Security and fund the comfortable and enjoyable retirement you earned. Plan carefully and adjust your long-term projections regularly, account for inflation all the way through a potentially long retirement, and seek professional advice for income-generating investment options as the big day approaches.

CERTIFIED FINANCIAL PLANNERTM consultant Kenny Gott is President at Piatchek & Associates and author of the book "Bottom Line Financial Planning". He can be reached at