Business owners spend much of their working lives deciding where best to put their capital. Do you hire more people? Expand into a new market? Buy a competitor? Or simply keep some cash back for the next opportunity?
There is another decision that can sometimes get less attention: what should you do with the wealth you build outside the business?
For many entrepreneurs, their company is both their greatest asset and their primary source of income. That can create considerable concentration. Your salary, dividends and a significant proportion of your net worth may ultimately depend on the fortunes of a single business.
An investment portfolio can provide an important counterbalance.
Build your portfolio around the business you already own
For a business owner, portfolio construction should not happen in isolation.
Take someone whose company is heavily exposed to the UK economy. They may have good reason to look internationally when investing their personal wealth. Likewise, if most of someone’s net worth is already tied up in a growing private company, simply adding more equity risk outside the business may not always be the right answer.
The objective should not simply be to maximise returns. It is to build a portfolio that complements the business, diversifies personal wealth and reflects when that capital might eventually be needed.
That could mean combining global equities with bonds, cash and other asset classes, with the balance tailored to your circumstances and capacity for loss. Tax wrappers and the ownership of different assets also matter, particularly when building wealth over many years.
Investing for life beyond the business
Portfolio structure becomes increasingly important as retirement, succession or a potential sale approaches.
If you expect your investments eventually to replace income from the business, the portfolio may need to evolve. A strategy designed primarily for long-term capital growth can be very different from one required to support regular withdrawals.
Establishing what you will need financially, and when, therefore, provides an important starting point. From there, investments can be structured around different time horizons, future expenditure and income requirements, rather than relying on the eventual value of the business to fund everything.
At Rathbones, our starting point is that a business owner’s company and personal investments shouldn’t be viewed separately. The business has its own risks and opportunities. The investments outside it should complement them, while gradually building the financial independence that gives you more choice over what comes next. Of course, investing carries risk to capital, but we will be happy to discuss this with you”
