The first steps towards viewing – and treating – your business as an investment
It is estimated that 75% of all private businesses are owned by households for which the business constitutes over half of the household’s net worth.
If you own a private business, it’s likely that the value of your business represents most of your net worth, but do you know what the value of your business investment is or what your returns on your business investment have been over the past few years?
Make Your Private Business a Part of Your Wealth Planning
It’s a wise move to think about your private business as a part of your total wealth portfolio.
Private businesses are risky assets. It is not uncommon to see a 20+% return on a private business one year, and then a negative return the next year. And since your private business is likely a significant portion of your total wealth, this can create large swings in your net worth.
This means that it’s important to incorporate your business into your personal wealth planning – in order to fully understand your true asset allocation (including your business investment) which will allow you to work towards diversifying your portfolio so you can reduce the overall volatility of your investment portfolio returns. When structuring a wealth management plan, wealth managers typically don’t recommend putting all your eggs (or most of them) in one basket, and generally recommend mixing in assets with more stable expected returns to reduce overall risk and volatility of returns.
So, it is strongly recommended that the stake you have in your business and the valuation of your business be considered and accounted for in your overall asset allocation strategies and planning.
When you complement this approach with investments in actions and plans for reducing risks affecting the value of your business, enhancing returns from your business investment, and diversifying away from your business investment over time, you’ve taken a positive step toward a comprehensive wealth management strategy that will protect and grow your overall wealth portfolio.
Set a Budget for Managing the Wealth of Your Business
Similar to how you pay a wealth manager for managing personal or family financial assets, we recommend setting a budget for managing the wealth of your business ownership investment based on a percentage of your businesses’ value. This budget would be used for annual valuations, annual reviews of legal documents, reviews of insurance needs, succession planning activities and estate and tax planning.
Over the long-term, the benefits of treating your business as a part of your total investment portfolio will far outweigh expenses , and will significantly increase the likelihood of achieving your personal and family financial goals.
Let’s Discuss Best Practices for Managing the Wealth of Your Business
For a much more thorough discussion of managing the wealth in your business, please download our whitepaper, How Smart Business Owners Protect and Grow Their Wealth, or contact me (Tom Insalaco, 716-332-2667, email@example.com) or another member of the Freed Maxick Business Valuation Team.
Let’s discuss getting an updated business valuation as a key milestone. Freed Maxick will conduct a comprehensive analysis of your company, perform market research, and develop documentation showing the true financial operating potential of your business.