Wealthyist E13: Why You Should Grow Your Wealth As You Grow Your Business
In this episode of "Wealthyist", hosted by Brandon Lehman, Director of Annex Private Client at Annex Wealth Management, the focus is on the importance of diversification for business owners. Lehman emphasizes that many business owners invest all their time, energy, and resources into building their businesses, often neglecting to diversify their assets. This lack of diversification can leave them vulnerable to various risks, such as economic downturns, regulatory changes, or shifts in market conditions, which could render their business worthless or unsellable.
Key points from the podcast include:
- Risk of Non-Diversification: Business owners who pour everything into their business without diversifying may find themselves with nothing to fall back on if the business fails or cannot be sold. Lehman highlights the importance of understanding that even a successful business may not have a high resale value.
- Importance of Diversification: Diversifying outside the business provides flexibility, options, and risk mitigation. This involves investing in assets uncorrelated to the business, such as avoiding investments in the same industry or market as the business.
- Practical Steps for Diversification:
- Cash Flow Management: Using excess cash flow (e.g., from a $600,000 net income) to invest in diverse assets like money markets, treasuries, brokerage accounts, or retirement plans.
- Retirement Accounts: Leveraging tax-advantaged options like 401(k)s, SEP IRAs, or solo 401(k)s to save for the future while reducing current tax liability.
- Portfolio Diversification: Ensuring investments are not concentrated in the same sector as the business to avoid compounded risk.
- Real Estate and Alternative Investments: Owning property through a separate LLC or investing in unrelated businesses to create additional income streams, while understanding the associated risks and illiquidity.
- Tax and Long-Term Planning: Diversification enables efficient tax strategies, such as harvesting losses to offset gains or setting up structures like S-Corps to optimize tax outcomes.
- Liquidity and Illiquidity Risks: Businesses are often illiquid assets, taking years to sell. Lehman advises building liquidity through diversified investments to prepare for retirement or unexpected events, reducing reliance on a business sale.
- Post-Business Life: Diversification ensures that when a business ends—whether sold or closed—owners have financial security and can focus on personal goals and new ventures.
Lehman stresses integrating business planning with personal finance, tax, and estate planning to build a robust financial future. He cautions that external events (e.g., the 2008 financial crisis) can unpredictably impact a business, making diversification essential. The episode concludes with an invitation for listener feedback and a reminder that the content is for educational purposes, not specific investment advice, encouraging consultation with professionals.
This podcast underscores the message that while passion and hard work are critical to building a business, diversification is equally vital to protect and sustain wealth over the long term.
