As entrepreneurs we have a very specific mindset.  We tend to control everything and have a hard time delegating (the good one’s delegate well!).  We also have ideas of where to put our money.  That idea is almost always back into our company.  After all, we’ll sell our company and make what we’ll need for retirement, right?  I’ve been working with a lot of entrepreneurs and their businesses and have found that there are some overarching misconceptions.

1. My business is the best place to invest

Our President, Paul Adams, was recently quoted on Inc.com as saying, “Investing money into a company doesn’t necessarily guarantee a steady return for life. It may grow the company and your income stream, but when it comes to selling the company, that’s when you can really run into trouble and the reality that your company is only worth what someone else wants to pay.” 

It’s important to have money outside your company just in case you don’t (or can’t) sell it for what you thought you could. Just like the market, you have no control over what someone will pay you for your business. Imagine selling it for half of what you thought you’d get.  How does that affect your retirement plans? This particular example is near and dear to my heart.  

My father was once a partner at an IT consulting firm in the 90’s and early 2000’s. The company was doing quite well and considered going public.  All of the partners were excited about the prospects of getting wealthy and put everything they had into the company. Several years of profits were coming in and they wanted to cash out on the IPO. However, there was a little turn in the economy, one of the partners changed his attitude, and the entire company imploded.  They’re no longer in business and they lost everything. My father definitely learned that it’s important to have a plan that’s outside the company so that his entire plan isn’t contingent upon what someone will pay for it.   

2. Investing in the same vertical market outside of your business.

Financial balance is just as important as asset allocation. Having your money in different buckets can help you have less risk and more diversity. Everyone remembers the 2008 downturn in the economy. Say you owned a construction company 2008. You knew you didn’t want all of your money in your company, so you decided to invest elsewhere. The choice you made was to invest in mortgage companies and manufacturing businesses. Unfortunately, because you had all of your eggs in the same basket by having invested in the same vertical market, your portfolio took a bigger hit than it should have. 

My firm and I had another client who was in construction who had almost lost his business after the 2008 crash. In his first conversation with me after his company rebounded, he said he’d like to invest outside of his company, maybe buying more property and land. It made sense that he wanted to invest in that, since it’s what he knew! My job, however, was to make sure he took all things into account. I asked him how properties and land in the ’08 crash.  He answered “Not good”.  With this, I explained to him that, although he was putting his money outside of his company, he needed to diversify so that if that vertical market had a down year, his entire portfolio wouldn’t follow suit.  

3.  Working with a planner or advisor that is not holistic

Many business owners have a financial advisor or planner. The traditional model focuses on investments and rate of return. Risk tolerance, cash flow and a tax-deferred model is mostly spoken about. Tying in your personal insurance, a will or trusts, and life and disability insurance tend to be overlooked or barely considered. The fact is, personal insurance is closely tied to one’s finances.  

When’s the last time you looked at your auto and home insurance? Do you have an umbrella policy? Should you? This is important to look at. If you have a major gap in coverage, one dip in the economy could wipe away your balance sheet. Make sure you speak with a professional who understands your business. They’ll help you build a strategy during the accumulation phase and plan your exit strategy.  

Most business owners have several professionals talking to them about their finances: A CPA, an insurance agent, a lawyer or a wealth advisor, just to name a few. How’s a business owner to have an efficient cash flow and the correct amount of protection if their business advisors all have their own opinion? It’s best to work with an advisor that takes a holistic approach and uses math and academics to back up their approach.

I’ll end on another quote by Paul Adams.  “When you sell a business, that doesn’t necessarily guarantee your retirement. It just guarantees your unemployment.”