Selling Your Business is an Investment Decision For Your Portfolio

There is an expression that states that you should not put all of your eggs into one basket. The principle behind that expression is rooted in portfolio theory that espouses diversification. Many small business owners are not properly diversified in their investment portfolios. In fact, there are many business owners who only have their business as their main asset and come to rely on the sale of their company to fund their retirement.

This article will examine some reasons why a small business owner should view business ownership through the lense of a well-diversified portfolio.

Diversification Reduces Overall Risk
Owning a business that represents a major proportion of your holdings means that you likely have a high degree of variability in your assets base. A simple real world example is an owner that does not have much money saved in RRSPs and has a business that is failing. The scenario, when looked at objectively, is one where a large asset class is under-performing and there no other assets in the basket of investments to compensate for this risk. Not a very good spot to be in.

The truth is, however, that many small business owners find themselves in the situation where all they own is their business and when it suffers then the entire “portfolio” suffers.

The key take-away is to take a hard look at all of your investments, use a professional investment advisor to consult you on an asset mix that fits your risk tolerance and then plan from there.

Some entrepreneurs may be fine with a risk profile that is heavily weighted to one investment (the business). Unfortunately, the majority of small business owners are not because they do not have the right information.

The Exit Strategy for a Business is a Key Factor
The return on small business is usually measured by the annual recurring profits that the venture makes as well as the capital gain realized by the owner on the sale of a the business. In other words, in a normal situation the total return on investment is measured by those two metrics.

The first measure (recurring profit) is relatively easy to realize – it is the ongoing economic profit that the business generates for the owners. The second one (capital gain as a result of a sale) may not be so easy. The reason is that not all businesses do sell and that is a fact that many business owners are startled to learn about.

The fact that not all small businesses are sold is a key factor when looking at your total portfolio. As a business owner, you need to have a clear grasp on the valuation of the company that the marketplace would likely deem it to be and also to be ready with that potential outcome. The problem is that many business owners expect a higher return than what the market will bear. Selling at a lower amount is not only personally difficult but also has real portfolio implications also. There are things you can do to increase your chances of successfully selling your business, which include working with a good business broker.

The key is to be well-informed when planning your portfolio with a small business as big part of it. This may require dealing with several professionals including an investment advisor, business broker, attorney and chartered accountant.