How to Protect Your Assets: A Business Owner’s Guide

Surviving the ups and downs of the business world, stock market, or economy can be a challenge. Here are a few ways to protect your wealth and maintain the strength required to grow your business, in any financial situation.

I’ve been fortunate enough to grow up in a family of serial entrepreneurs, so I learned a lot about business and how to see the world of business at an early age. But one of the most crucial things my father ever told me was to never count the value of your business as part of your net worth.

This advice is more applicable to small and medium-sized businesses than to large corporations, but there are always examples (e.g., Enron, Arthur Andersen, Blockbuster, etc.) that any size company can disappear.

Now imagine that your business isn’t loaded with assets such as property, plant, and equipment that you can sell off; instead, you own an online business where an algorithmic change from Google can destroy your biggest asset–your website!

Whether you own a traditional or online business, you need to be prepared to weather the financial ups and downs. When times are good, business owners must learn how to protect their assets, family, and business.

As a business person, it is hard having a large sum of money in cash earning little or no return, but during a time of financial distress or illiquidity, you’ll be happy to have that cash readily available without absorbing losses.

While most personal finance experts recommend the equivalent of 3 to 6 months of living expenses in an emergency fund, as a business owner, your needs are a bit more demanding; I would recommend at least 12 months. The reasoning for this is simple–if you need to keep your business afloat through a personal loan, you can do so relatively comfortably without endangering your family’s financial security.

It’s more than likely that a large part of your net worth is tied up in your company, meaning you have a very strong need to diversify your investments. While the concept is similar to what Silicon Valley moguls are doing with the proceeds of their IPOs, you don’t need to invest in “alternatives” such as farmland and municipal bonds to minimize your risks.

First, you must determine your risk tolerance and financial goals. If your business has long-term contracts and is not very susceptible to swings in the economy or stock market, then you can afford to be a little more aggressive in your investing. On the other hand, if your business is already risky, consider a more conservative and defensive investment strategy.

Next, you have to decide how to execute that strategy. This is where many entrepreneurs turn to a financial advisor; however, there is a new trend in the asset management industry worth noting. Robo-advisors–companies that offer automated wealth management services–may offer a better value for some investors.

Robo-advisors like Wealthfront and Betterment will ask you a series of questions, such as you age, income, and risk tolerance, and then provide an investment plan based on your risk profile.

The best part about robo-advisors is that they are human interaction and error free, and therefore charge less than a 0.50 percent annual fee. This is important because fees and expenses are one of the fundamental reasons portfolios underperform.

Finally, as you invest in stocks and bonds all around the world, don’t forget to diversify between asset classes by buying rental real estate, other businesses in different industries, or even commodities.

Most people don’t like to discuss insurance because it involves planning for something that isn’t likely to happen. Nevertheless, insurance is a financial tool. If it can minimize risk and is affordable, an insurance policy is worth considering. If it doesn’t make sense for your particular financial situation, don’t bother wasting your money on premiums and find a better return on investment.

With life insurance specifically, business owners should have enough to secure their family’s financial future. The amount of coverage you purchase will depend on your assets (cash, investments, real estate, etc.) versus liabilities (loans) as well as a few ancillary considerations, such as how long you want to provide for your family after death, the lifestyle you would like them to live, and whether you want to pay for your children’s education.

Ultimately, the biggest misconception Americans have about term life insurance is cost. According to MyLifeInsuranceQuotes123 , the average cost of term life insurance for a 35-year-old, non-smoker interested in purchasing a 20-year, $250,000 policy (the most popular type of policy) is approximately $30 per month. If you are relatively young and healthy, the cost of coverage is probably a lot less than you think.

As Warren Buffett said, “If you buy things you do not need, soon you will have to sell things you need.” With that in mind, when times are good, resist the urge to overspend and instead pay off high-interest debt. When business is booming, many business owners succumb to lifestyle inflation and buy new and more expensive homes, cars, gadgets, and toys. Avoid that temptation and use your excess earnings to pay down debt and invest.

Developing the financial strength to survive the volatility of the business world is a gradual, consistent process. Do you have any specific financial management advice that has helped you secure your business and family’s future?

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