By Jonathan Penta, Senior Wealth Advisor, Founder & Managing Director CEPA®
Business owners often dedicate their energy and capital toward growing their companies, which can result in a significant portion of their personal net worth being tied up in the business itself. While this commitment can yield substantial returns, it also creates a concentration risk that can leave owners financially vulnerable if the business underperforms, market dynamics shift, or an unforeseen event disrupts operations.
At Penta Wealth Management, we advise entrepreneurs to take a broader view, one that includes building wealth outside of their company. A well-structured investment strategy allows owners to mitigate risk, enhance financial stability, and create alternative sources of income that provide long-term flexibility.
The Risk of Overconcentration
It’s common for entrepreneurs to view reinvesting in their business as the best use of capital. However, depending too heavily on one asset, their company can pose significant financial risks. Industry-specific disruptions, regulatory changes, or even health issues can have a direct impact not only on the business but also on the owner’s entire financial life. Diversifying outside of the business creates a buffer against these risks, helping to protect both lifestyle and legacy.
Create a Personal Investment Framework
Just as a business runs on a clear strategic plan, so should your personal investments. One of the best tools to establish this discipline is a written Investment Policy Statement. This document outlines your target asset allocation, risk tolerance, liquidity needs, and long-term goals. It also sets rules for rebalancing and monitoring your portfolio. For business owners whose income and assets may fluctuate over time, an IPS provides consistency and structure to guide decision-making.
Invest Beyond Your Industry
If your business operates in a particular sector, it’s wise to avoid mirroring that same exposure in your personal investments. For instance, a business owner in real estate may already be heavily exposed to property markets, making additional real estate investments personally redundant or risky. Instead, personal portfolios should focus on asset classes that aren’t tied to the same economic cycles. This may include a blend of domestic and international equities, fixed income, alternative investments, and other diversified instruments.
Strategic diversification isn’t just about owning many different assets; it’s about owning the right ones that behave differently in various market environments.
Tax-Efficient Investment Strategies
Income variability is a reality for many business owners, particularly in seasonal or growth-phase companies. This fluctuation can be leveraged to your advantage through smart tax planning. Business owners have access to retirement vehicles like SEP IRAs, Solo 401(k)s, and even defined benefit pension plans, which can allow for significant tax-deferred contributions.
Additionally, investing through taxable accounts offers opportunities for tax-loss harvesting, capital gain management, and charitable giving strategies. When designed thoughtfully, a personal investment plan can reduce your overall tax burden while building wealth more efficiently.
Liquidity and Emergency Planning
A key difference between business wealth and personal wealth is liquidity. Business assets, such as real estate, equipment, or customer contracts, often can’t be quickly converted into cash. A strong personal investment strategy includes planning for immediate needs and emergencies, without having to rely on the business.
This means building a liquid reserve outside of your company, whether through a dedicated emergency fund, short-term fixed income instruments, or dividend-paying investments that generate steady cash flow. Liquidity planning ensures that you can weather downturns, cover large expenses, or seize new opportunities without disrupting your long-term investment goals or business operations.
Plan Early for Your Exit
Every business owner will eventually exit the business, whether through a sale, succession plan, or wind-down. Too often, owners delay financial planning until that moment is on the horizon. Starting early gives you more options and greater control over outcomes.
Consider annual business valuations, stress-testing your personal financial plan without relying on a perfect sale and exploring partial liquidity events such as minority share sales. It’s also essential to engage in estate and tax planning to ensure the value you’ve created can transfer effectively to heirs or charitable causes.
Final Thought: You Are More Than Your Business
Your company might be your passion, but it shouldn’t be your only plan. At Penta Wealth Management, we help business owners design personal investment strategies that complement the work they’ve done building a successful enterprise. We believe wealth should exist with your business, not depend entirely on it.
If you’re looking to reduce concentration risk and build long-term financial independence, we’re here to help you take the next step.
