It’s a comment commonly heard from business owners: “This company IS my financial plan.” Or, you might hear, “My retirement plan is this business.” However it may be stated, it’s a fact that most entrepreneurs, corporate leaders, and business owners have the bulk of their net worth concentrated in their business or company stock. In fact, 80 to 90% of business owners have the majority of their wealth tied up in the companies they have built. In a recent article, we mentioned that insulating the owner’s financial well-being from that of the company is a major challenge faced by many small business owners: a challenge that requires careful planning with consideration given to taxation, estate planning, business succession, and other areas.
In this article, we’ll take a look at a situation that many entrepreneurs and small business owners find themselves in: a disproportionate concentration of their wealth, represented in their business. We’ll look at some key areas of concern and suggest some ways that owners can work on protecting themselves from having their financial well-being too closely tied to their business.
Victims of Their Own Success?
Consider a typical small business owner. They may have spent decades building their business. Over time, they have acquired the trust of customers, suppliers, bankers, and most important, their employees. These people are the backbone of the American economy; small business accounts for nearly half of the US gross domestic product (GDP).
Not only that, but millions of small business owners plan to retire over the next several years. In fact a survey by the Exit Planning Institute indicates that 70% of business owners age 50 or older plan to sell their businesses within the next 10 years, and the Small Business Administration estimates that some 10 million Boomer-owned businesses will be sold from 2019 to 2029. These people are reaching the age where they no longer desire to be actively managing their businesses. But here’s the problem: the average small business owner has 80% of their wealth tied up in the business. They want to back away from the day-to-day management of the business, but how will they do that and still fund the retirement lifestyle they desire?
The answer, of course, is diversification. These business owners have a highly concentrated position in their businesses, and they need to find ways to unwind that position and re-allocate assets into a more diversified portfolio that can help them fund retirement.
Diversifying Assets for the Small Business Owner
Fortunately, there are ways for small business owners, with some advance planning, to diversify their assets without compromising the business’s profitability or ongoing viability. Let’s take a look at a few of these.
- Employer-sponsored retirement plan. One of the greatest wealth-building tools for Americans is participation in a workplace retirement plan. And now, the SECURE 2.0 Act has made it easier and less costly than ever for small business owners to establish and maintain a 401(k) plan for themselves and their employees. With a 401(k) plan, small business owners can funnel a portion of the income generated by the business into a tax-favored plan that can allow for investment in a range of different financial assets, creating the opportunity for tax-free growth within the plan and funding for future retirement needs. A business owner participating in a company-sponsored 401(k) can deposit as much as $23,500 (in 2025), plus an additional $7,500 in catch-up contributions for those 50 and older. Not only that, but studies show that offering a company-sponsored plan for retirement saving provides an advantage for attracting and retaining the most qualified employees, which can make the business even stronger for the future.
- Succession planning. Especially for business owners in their 40s and 50s, for whom retirement may not yet be top of mind, succession planning might seem like something to think about “someday, when I’m ready to sell.” But succession planning isn’t just about selling your business. It’s about securing your legacy, protecting your financial future, and aligning your business with your personal values, goals, and objectives. Succession planning is simply good business strategy, it is value management that makes the timing of your exit less relevant. And remember: a well-executed succession plan doesn’t just benefit you; it also provides stability and growth opportunities for your employees, who have invested their time and talents in your business. Especially for those who intend to pass the business to a child or trusted employee, having a solid succession plan in place—including an appropriate funding mechanism—is an investment in not only your peace of mind, but also that of the employees, family members, and others who depend on the business for their financial welfare. In other words, succession planning isn’t just about exit strategies; it’s also about long-term growth. It forces you to evaluate your business, identify areas for improvement, and create a roadmap for future success.
- Know your value. And speaking of evaluating your business, don’t overlook the importance of having a solid valuation for your business as you begin your diversification efforts. This may seem obvious, but too many small business owners spend so much time in the business that they lose track of the business. Especially for those who anticipate using the proceeds from selling a company to fund a significant portion of their retirement, having an accurate valuation is a must. A professional valuation expert can help you take into consideration cash flow, customer base, assets, and other factors that directly impact the value you can justify to a potential buyer. For some businesses (construction, manufacturing, and others), seasonality and business cycle considerations may also be important. The more you know going in, the better prepared you’ll be to get the maximum value from the sale.
At The Planning Center, we know that just as no two small businesses are alike, neither are their owners’ plans and needs. We work with small business owners to build strategies for successfully transitioning from the day-to-day management of the company to a satisfying, secure retirement. To learn more, please contact us.
