As many small business owners approach retirement, a significant portion of their wealth remains tied up in their companies—often as much as 80%. Jonathan Kruger, a financial expert at Rothschild Wealth Partners in Chicago, offers insights into why diversification is essential and how small business owners can begin the process to secure their financial futures.
The Necessity of Diversification
According to Kruger, diversification is critical because small business owners frequently face the risk of having most of their wealth concentrated in one asset: their business. “Business owners often dedicate years, even decades, to growing their company, but relying solely on this asset for financial security is precarious,” Kruger explains. He notes that external factors like market changes, industry shifts, or unforeseen challenges can significantly impact the value of their business. To mitigate these risks, diversifying financial assets is crucial, creating a stable foundation for long-term financial security, especially when preparing for retirement.
Exploring Retirement Options
For business owners looking to diversify their assets, one of the most straightforward strategies is to establish an employer-sponsored retirement plan, such as a 401(k). Recent changes through the SECURE 2.0 Act have made these plans more affordable and accessible to small businesses. “A 401(k) allows business owners to channel income into a tax-advantaged account, which will grow over time,” Kruger notes. For 2025, owners can contribute up to $23,500, with an additional $7,500 for those aged 50 and above. This not only helps in building retirement savings but also offers the added benefit of attracting and retaining valuable employees.
The Role of Succession Planning
Succession planning is another crucial aspect of diversification that many small business owners overlook. Kruger emphasizes that succession planning is more than just a strategy for selling the business when retirement comes. “It’s about ensuring the continued success and stability of the business through a well-thought-out leadership transition,” he says. Whether transitioning leadership to a family member, a trusted employee, or an external buyer, having a clear succession plan in place helps preserve the business’s legacy and provides peace of mind to both owners and employees.
Understanding Business Valuation
Kruger also stresses the importance of business valuation in the diversification process. “Knowing the value of your business helps owners make informed decisions about how to transition or sell,” he explains. A professional valuation takes into account factors like cash flow, customer base, assets, and market conditions. Additionally, for businesses in cyclical industries like construction or manufacturing, understanding seasonal fluctuations can impact future negotiations with potential buyers.
The Growing Trend of Business Ownership Transitions
With many business owners over the age of 50, a significant number are preparing for an eventual sale or transition of their business. The Exit Planning Institute estimates that 70% of business owners in this age group plan to sell within the next decade. However, Kruger points out that many of these owners have not adequately planned for the sale, leaving them vulnerable to financial shortfalls if their expectations are not met. He urges early preparation, including asset diversification and strategic planning to ensure the business remains attractive to buyers.
Overcoming Misconceptions About Diversification
Kruger identifies several common misconceptions that can hinder diversification efforts. One such myth is the belief that diversifying will weaken the business. “In fact, strategic diversification, such as offering retirement plans or creating a succession strategy, strengthens the business and shows that it’s resilient and well-managed,” he clarifies. Another misconception is that diversification should wait until retirement is imminent. Kruger advises that starting early allows business owners more time for their assets to grow and gives them the flexibility to adjust strategies as needed.
Starting the Diversification Process
For those who feel overwhelmed by the idea of diversification, Kruger recommends taking small steps. “Begin by establishing a retirement account if you haven’t already. From there, collaborate with financial experts and business appraisers to assess the current state of your business and identify opportunities for growth or transition.” Diversification is a gradual process, but with consistent effort, it can lead to long-term financial benefits.
Final Thoughts on Planning for the Future
Kruger concludes with a crucial reminder: “Your business is a major accomplishment, but it doesn’t have to be your only source of financial stability.” Diversification is essential for providing a safety net and paving the way for financial independence and a comfortable retirement. The earlier business owners begin planning, the more opportunities they will have in the future.
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