By Rich Best

Ryan Bachus spent 20 years building a highly successful business, turning a small two-person jogging accessory retailer, operating out of mall kiosks, into a $6 million a year company with 10 stores. Ryan rarely considered his financial future, focusing instead on maximizing the growth of his company, which he always saw as the true source of his financial security. Like most successful business owners, Ryan was convinced his business was his best investment, so that’s where he invested his profits and most of his personal money. He did establish a retirement plan for his company and after 15 years of setting aside 10 percent of his earnings, he had accumulated more than $1.5 million. He set up what he considered to be a conservative allocation of stocks and bonds, so he wouldn’t have to bother watching his account.

Then the recession hit in 2007, followed by the financial crisis, which led to the closing of three of his stores. Sales revenue fell from $6 million to less than $4 million within the span of a year. He was in crisis mode, trying to keep his business afloat, so he didn’t pay much attention to the fact that his retirement account had lost nearly 40 percent of its value. On top of everything else, he had a serious health scare, which opened his eyes to the realization that, if he were unable to keep working in his business, he may not be as financially secure as he thought.

For years, Ryan’s financial advisor had been urging him to diversify his assets. Ryan had always felt that he was diversified with a retirement portfolio of stocks, bonds and other paper assets. If taken in its isolated context, one might agree. Except Ryan wasn’t considering the context of his overall investment portfolio, which includes his business. Like most business owners, Ryan overestimated his personal level of diversification, and underestimated his risk exposure.

His business represented nearly 75 percent of his net worth, which means that his family’s future financial security is tied inextricably to the success of his business. Being a specialty retail business, Ryan’s company is especially susceptible to the ebb and flow of the economy, which, as of late, has been doing more ebbing than flowing. Although business has been picking up, with plans to re-open some stores, Ryan now realizes he needs greater diversification if he is to preserve the wealth he has created.

Creating an Overall Asset Allocation Plan to Reduce Risk and Build Wealth

Working with his financial advisor, Ryan developed an asset allocation strategy that would incorporate his business. He also realized that simply having a conservative investment strategy for his retirement portfolio is not enough to offset the down business cycles. After all, when the retail business cycle turns downward, so do stocks. So he allocated a larger portion of his investments to alternative investments that had a low correlation with retail stocks.

He also committed to increasing his allocation toward investments outside his business by selling a portion of his stake to an Employee Stock Ownership Plan. His goal is to reduce his ownership stake to 60 percent over the next five years. That would reduce the allocation to his business assets to around 50 percent of his overall investment portfolio. In addition to seeking ways to diversify his product line, he is also engaged in a 10-year exit plan in which he will cash out except for a minority stake, and his two sons will take over the business.

Ryan was fortunate that he was able to correct the flaw in his overall investment strategy. Most business owners aren’t so lucky and many see their entire fortunes rise and fall with their business. Of course, fledgling business owners often have little choice but to put everything they have in their business just to keep it afloat. However, it is never too early to focus on an asset allocation strategy that incorporates the business in the context of an overall investment plan.

Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. 


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A.