Many think of their business and personal wealth as one and the same, but in our opinion that is a risky approach to financial planning.
A family-owned company is subject to risk from market swings just as much as a stock portfolio is. Family business owners are proud of the wealth their business has created, and rightfully so.
However, if an owner has aspirations of retiring, he or she needs to build his or her own personal financial security outside of the business.
An understanding of how the performance of his or her business correlates with his or her personal investment portfolio is also important. If the two are highly correlated, the risk exposure may be much more than anticipated.
Personal risk tolerance is typically different from business risk tolerance and needs to be assessed differently. Managing day-to-day business decisions requires a risk tolerance in line with the business’ ability to absorb worst-case results, and the time horizon can be into perpetuity.
On the other hand, personal risk tolerance is often influenced by time horizon and family dependency. One comment we heard consistently in our interviews with family business owners was, “I am young and not planning for retirement right now. If something catastrophic happens to me, the business can be sold.”
My sad rebuttal to this comment involves a family business owner and personal friend. He was in his early 40s with a stay-at-home wife and two young children, and he was a partner in his father’s tool and die company. He recently passed away at the age of 41 due to brain cancer.
Immediately after the diagnosis, he spent the remaining six months of his life organizing a buy-sell agreement with his father, so his wife at least received his 10 percent stake in the business.
Had he planned earlier, establishing life insurance and building a personal financial portfolio, his widow and children could have been less financially dependent on the family business.
Lori Gervais is senior vice president and Roger Gervais is senior investment consultant at The Gervais Group of Robert W. Baird in Mequon. This is an excerpt from their whitepaper, Maximize What You Have Built, which can be found here.
