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Money Matters
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Small-Business Owners and Concentrated Closely Held Stock Positions

7 Jun 2017 by: Brian Matter 

“Reinvesting in my business has been the best investment I’ve ever made.  And it’s a good thing, since that is where all my money has gone!”  These are the enthusiastic words of a childhood acquaintance I was speaking with at a recent social gathering when the conversation turned to investments.  Like many small business owners, he has continued to pile money back into his business to help it grow.  As a result, he now has all of his wealth concentrated in a closely held stock.

Business owners and entrepreneurs are risk takers.  Many like to test themselves and their capabilities.  They take chances.  Some are thrill seekers.  They have to be confident to succeed and they are used to making decisions quickly.  These attributes are necessary to establish and grow a business.  However, those skills, which have served them well in starting and growing their business, can sometimes lead to financial ruin if they continue to take unnecessary risks in their financial lives by investing everything in the equivalent of a single stock portfolio – their closely held business.

Holding a single stock portfolio can be alluring and can build massive wealth if you happen to invest in a company that has incredible growth – imagine investing in Apple or Microsoft at the very beginning!  However, for every person that has a success story with a concentrated stock position in a publicly traded company, there are news headlines that provide stories about public companies like Enron or WorldCom, that illustrate the dangers of holding concentrated stock positions.  The stories usually involve former employees whose entire financial futures were tied to company stock, and when the company went under, the former employees lost everything and are now working well past retirement age because they need to recoup what was lost.

Concentrated closely held stock is no different than the publicly traded single stock portfolio identified above – it can lead you to financial freedom, financial ruin, or somewhere in between.  So, what’s a business owner to do?  Here are a few tips to consider if you are a business owner with all your wealth tied up in your business:

  • Reduce concentration – try to avoid having too many eggs in one basket. Spread your money and investments around among a variety of different holdings to help reduce overall risk.  Options include buying real estate, investing in a retirement plan with diversified holdings (more on this below), or taking cash distributions and starting a taxable investment account outside of your business.
  • Fund Retirement Accounts – fully funding a retirement account annually is a disciplined way to build your wealth and invest in something other than your business. While it may not have the same returns as your business in some years, it allows you to set aside money for your future and can offer some great tax advantages.
  • Keep Time On Your Side – the sooner you can start diversifying your investment holdings, the better chance you will have to avoid a concentrated position later in life.
  • Have a (Financial) Plan – in our experience, business owners who have gone through the financial planning process better understand the exposures that come with a concentrated business. Part of this process is understanding all the risks to which they are exposed, such as illiquidity risk, management succession issues, tax planning, and many more. Establishing a long-term plan to address some of these risks so that the business owner has a safety net in place can provide tremendous peace of mind.  For business owners who find themselves with concentrated stock positions, a financial plan can help determine the best way to deal with the complex questions of how to divest from their concentrated stock in a tax efficient manner and ultimately reach their goal of financial independence.

If you are a small business owner with a concentrated stock position, give CCMI a call to see how we can assist you.




CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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