For many business owners, the land, building, equipment and proprietary client list associated with the business become both your income generator and the majority of your net worth.
Making your business your primary source of building wealth is effective as long as you also have a plan in place to manage the risks from inflation, changing trends, labor shortages, insurance spikes, local regulations, natural disasters, or a recession.
From the perspective of a retirement plan, many owners assume “the business is my retirement.” However, most business owners should also consider building assets outside the business itself to provide more control over the timing of your retirement and the quality of life you can expect.
A Practical Approach
Common sense may have already pointed you in this direction, but let’s examine some practical steps you can take to build wealth beyond your business. The right mix of investments depends on a variety of factors:
- Current age and retirement timeline
- Debt level on the business
- Cash flow stability
- Whether the business is seasonal or year-round
- How much active management you want to continue
Unfortunately, money doesn’t grow on trees, so we all have to make decisions about how to divide up the budget. A useful framework for getting started and picking your priorities includes:
- Strengthen the business first
- Diversify into passive or semi-passive assets
- Build liquidity and retirement security outside the business
Maximize Existing Assets
Your first priority should be maximizing the value of your existing business. Before diversifying heavily, business owners usually get the best return from fixing operational weaknesses and increasing NOI (net operating income). Examples of strengthening your business’ value include:
- Upgrading infrastructure
- Adding premium products or services
- Improving your online presence
- Adding recurring revenue
- Reducing labor dependency
- Improving reviews
- Maximizing production or service capacity
Diversify Your Portfolio
Once your business is financially healthy and reserves are adequate, diversification becomes important. While the first step may come naturally as your specialty, this second step may feel more difficult.
Owners may consider good investment options outside the business, which might include:
- Broad stock index funds
Best for: long-term wealth building and retirement
Examples: S&P 500 index funds, total market ETFs, dividend growth funds
Why this works well: it’s liquid, passive, diversified away from a single industry, and has provided historically strong long-term returns
Many business owners are heavily exposed to the whims of one industry and dependent on the local economy. Public equities diversify those risks.
- Retirement accounts
Best for: tax efficiency and long-term security
Examples, depending on structure: SEP IRA, Solo 401(k), defined benefit plan, Roth IRA
Business owners often underutilize tax-advantaged investing because so much cash gets reinvested into the operating budget. This becomes especially important when owners assume “the business is my retirement,” as mentioned earlier. That can work, but it also ties retirement to the eventual sale price and market timing.
- Treasury bonds / cash reserves
Best for: resilience
Businesses can be vulnerable to a variety of risks outside the owner’s control, such as natural disasters, economic downturns, or emergency infrastructure failures
Strong reserve funds matter more than many owners expect. Maintaining 6–18 months operating reserves, capital expenditure reserves, and emergency insurance gap funds can prevent forced borrowing during downturns.
Think Outside Your Industry
Sometimes it is just as important to understand what not to do as it is to know the action steps. Along those lines, business owners may want to be cautious about some types of investments, such as:
Overextending within the same industry
This is actually a common cautionary tale for a variety of small businesses. Hospitality operations, for example, can be more difficult to scale than you might think. Restaurants will often open a second venue that doesn’t live up to the original location’s success. “Replicating the original” at scale is not as easy as many expect. However, a second location can make sense if:
- Systems are already strong
- Management is delegated
- Cash flow is stable
- Debt is manageable
The risk to consider when scaling is that owners become asset rich, cash poor, and operationally overwhelmed.
Adding speculative assets
Some owners may operate an already relatively cyclical business. Adding speculative assets can increase stress rather than reduce risk.
Tying It All Together
Consider a practical allocation approach to finding the right mix of investments to balance your net worth. A healthy long-term structure for many successful business owners looks something like:
- 40–70% business equity
- 20–40% diversified market investments
- 10–20% cash and fixed income
- Optional additional real estate or passive businesses
The key is making sure the business is not 95%+ of total net worth forever. The most financially successful business owners will usually create a balanced portfolio using the following steps:
- Build a highly profitable flagship business
- Systematize operations
- Pull cash out strategically
- Invest outside the business consistently
- Avoid lifestyle inflation
- Maintain liquidity
- Treat the business as one asset, not your entire financial identity
This strategic approach creates much more resilience and flexibility when selling, retiring, facing downturns, passing the business on to family, or expanding. The best advice may be the old adage: “don’t put all your eggs in one basket.”
For more information about building wealth strategically, contact a wealth management specialist at a Lake Ridge Bank location near you.
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