Most asset managers preach diversification. But for owners of small, growing companies, the only religion they want to practice is their business.
What to consider when managing company assets?
Asset managers realize this, and admit that most of their conventional advice — such as allocating money into a separate investment portfolio, thus balancing the risk involved with a business — goes unheeded by many entrepreneurs.
“There really is a limited number of things” that a small-business owner can do, says Glenn Johnson, a senior portfolio manager at Wells Fargo Private Client Services, St. Paul. “Typically, most of their assets they’re investing back into the business in order to make it successful.”
Numbers, not hubris, drive such an attitude among owners. Often, the rate of return owners get from investing or reinvesting in their company exceeds what they would get investing outside of it.
That owner is “going to look you in the eye and say, ‘you’re asking me to put money away that I can do at a 10 percent, when I’m getting a 25 percent return on my business,’ ” says Jim Donicht, a Golden Valley-based senior financial consultant with Thrivent Financial for Lutherans.
There’s also a bit of anxiety involved with handing off control of a portion of their finances to someone other than, well, themselves. “It’s the owner’s baby — they’ve grown it, they’ve nurtured it, they’ve built this thing, they know it inside and out. They’re usually not as comfortable investing on the outside,” he says.
Nevertheless, there are some steps small-business owners can take to ensure not all their eggs are in one basket — that is, the company — when it comes to their financial security.
Retirement planning
Retirement plans are a tried-and-true standard for companies, small and large, to help employees and owners allocate funds for the future. Such accounts are tax-deferred, and owners will want to look at a variety of instruments to invest in, including stocks, bonds and mutual funds, says Bob Kincade, a founder and portfolio manager with Stonebridge Capital Advisors, a St. Paul-based investment management firm.
A 401(k) plan is a popular tax-deferred plan that allows owners a number of options to invest, he says. He advises making the maximum contribution; the limit to how much you can put in increases as the years go along.
Another alternative is to invest in a non-qualified, deferred compensation plan, says Kincade. Because it’s non-qualified, owners need not offer it to all employees. Instead, owners can target certain individuals — themselves and other high-ranking officers — within the company that they feel need special compensation.
Usually funded with some kind of life insurance product, these plans also defer income taxes. The catch, however, is that the beneficiary of that policy is not the owner of the investment; the company retains ownership. “It’s essentially a promise by the company to pay them some time later for their services,” says Kincade. The risk is that “if the company goes bankrupt, that’s a general asset of the company that would be wiped out.”
Sometimes a simple emergency fund is enough. Donicht recommends everyone, but especially small-business owners, have such reserves, just in case. “If the company goes down, they’ll have the wherewithal to carry themselves for six months, or however long it’s going to take them to get back on their feet.”
Stability of firm counts
Whatever the plan, it needs to be structured with the company’s nature in mind, says Jeanne Whitehill, a senior trust and financial advisor at Wells Fargo Private Client Services, who works with many of Johnson’s clients. High-risk businesses might need to balance out with more conservative on-the-side investments.
Fairly stable companies from which owners can count on a certain amount of cash flow each year might look at investing in aggressive instruments. Some owners buy rental real estate as a counterweight.
A company’s industry is an important consideration. An owner of a technology company, for example, shouldn’t invest in a lot of tech stocks, says Johnson. And suppliers and vendors, which may have a concentrated customer base in one industry, should be especially careful.
“You’re dependent on the success of that company. If that industry or specific company goes out of favor or has some financial trouble, you don’t want to have a huge exposure to that same type of company in your investment portfolio,” says Andrew Turner, a principal at Riverbridge Partners, a Minneapolis-based investment management firm.
Age is another good compass for determining what direction to take an investment plan. Younger business owners, between the ages of 30 and 40, typically can afford to take more risks, whether that means putting together an aggressive portfolio, or putting everything they’ve got into their business.
Unless they’re at the helm of an older, established business with a healthy cash flow, more often than not they’re still hunting for financing for their fledgling businesses. “They’re less concerned about where to invest cash, and more worried about getting cash,” says Frank Jandric, senior vice president and regional manager of Wells Fargo Private Client Services.
Those owners approaching retirement age might want to take a more conservative approach to their investments, such as buying bonds.
They should also ponder how they’ll handle the proceeds from any sale of their businesses. “For a lot of these folks — they’ve worked so hard, their business has been so much a focus, and they’ve never really had cash to manage — this becomes a real surprise for them,” says Kincade. “They don’t have an income stream, and they need that for normal life operating situations.”
Pool of cash
Still a young man at 37, Troy Kerin had to face such a predicament earlier than most of his peers. He had to determine what to do with a pool of cash he earned from the 1999 sale of an electrical distribution company he part-owned.
Through Johnson of Wells Fargo, Kerin has invested most of the proceeds — the dollar amount of which he won’t reveal — into stocks and mutual funds. The rest is being managed at a different local investment firm. Kerin says he asked Johnson to apply a conservative approach.
His Wells Fargo portfolio produced a steady income stream when he needed one, says Kerin. As part of the acquisition deal, he stayed onboard the sold company for 28 months. But once that time ran out, Kerin didn’t have a consistent gig.
He worked for a nonprofit for awhile, and during a brief period of unemployment he traveled and scoped out new possible business ventures. With a stay-at-home wife and two small children, Kerin’s investments ensured the family had some money coming in..
In April 2003, Kerin and his brother Todd became majority owners of Machine Tool Supply, an Eagan-based industrial distribution company for which he’s also vice president of sales. That company had revenue of more than $10 million in 2004.
Now, Kerin’s outside investments allow him to balance out the risk of his new company. “I’m less dependent on the business, and all the ups and downs that go with that.”
[contact] Jim Donicht, Thrivent Financial for Lutherans: 763.595.9999; james.donicht@thrivent.com; www.thrivent.com. Frank Jandric, Wells Fargo Private Client Services: 612.667.1761; frank.jandric@wellsfargo.com; www.wellsfargo.com. Glenn Johnson, Wells Fargo Private Client Services: 651.205.6707; glenn.e.johnson@wellsfargo.com; www.wellsfargo.com. Troy Kerin, Machine Tool Supply: 800.288.0717; troyk@machtool.com; www.machtool.com. Bob Kincade, Stonebridge Capital Advisors: 651.251.1000; info@stonebridgecap.com; www.stonebridgecap.com. Andrew Turner, Riverbridge Partners: 612.904.6230; andrewt@riverbridge.com; www.riverbridge.com. Jeanne Whitehill, Wells Fargo Private Clients Services: 651.205.5785; jeanne.m.whitehill@wellsfargo.com; www.wellsfargo.com.
