What investment strategies should you consider while you continue to grow your business
You have worked countless 80+ hour work weeks, dealt with more sleepless nights than you can remember, and have spent an inconceivable amount of time on the phone with loan officers. You are a Business Owner. The good news is that after many years of hard work and sacrifice, you are able to extract wealth from your business, whether that be from profits that do not need to be reinvested in your company, or from the sale of shares to new partners. What investment strategies should you consider while you continue to grow your business?
Business owners should build wealth outside the company
Business owners should also build wealth outside the company. For successful business owners that have capital that does not have to be reinvested in their business, the most important consideration is diversification. The concept of diversification as it pertains to their investments is counterintuitive to most entrepreneurs. Consider the fact that business owners make concentrated bets with their time and capital to building a business that is focused on a single industry, and to their credit it has been profitable venture.
The goal should be to diversify and build wealth
However, with the profits from a business that represents the bulk of your net worth, the goal should be to diversify and build wealth in other assets that do not share the same attributes as your business. This can be achieved by investing in a basket of publicly traded stock portfolio, investing in real estate, or financing a new venture in an unrelated industry.
A common pitfall for some business owners is to invest in an ancillary business whether that be a private or a public company would not be diversifying their wealth. This particularly applies if the business owner does not intent to eventually manage the company themselves. A business owner’s sense of confidence in understanding the dynamics underpinning an industry may lead them to invest in a public company they admire or invest in a new venture in a similar market segment. Therefore, an owner of a catering company would not be diversifying their investments if they took dividends from their business and invested in a local restaurant or invested in shares of food delivery company DoorDash.
Diversification with alternative investment strategies
A great way to diversify your wealth is by investing in alternative strategies. Therefore, in addition to building a portfolio of traditional assets such as stocks and bonds that provide excellent exposure to capital markets, business owners can further diversify by investing in strategies that have low correlation with stocks and bonds. While investors need to be attentive to the investment risks associated with investing in real estate, hedge funds, and in private debt and equity funds, investors can generate attractive returns to compensate for risks taken.
The importance of the IPP
Another effective strategy for business owners it to maximize contributions to individual pension plans, registered-retirement savings plans and tax-free saving plans. Business owners often prioritize building wealth from growing their businesses, and do not have the financial flexibility to direct funds to these accounts that provide Canadians the opportunity to build their wealth while deferring or avoid paying taxes on investments. Business owners should also consider contributions to registered accounts for their spouse or common-law partner to fully capitalize on tax benefits from the investments.
Working with an investment manager
Lastly, business owners should seek the advice of a trusted investment manager who can assist in diversifying their wealth. As they continue to dedicate their valuable time towards managing their business, it would be well worthwhile to have an individual help them in making investment decisions whether it be how to optimally invest in tax-advantaged accounts or what alternative strategy that should be investing in.
Entrepreneurs take on huge risks when they decide to operate their own business. When all the hard work and risk taking is rewarded with financial payoffs from dividends or a sale of a business, business owners should rely on strategies to continue to preserve and grow the wealth for both for themselves and their families.