Building a Business Versus Building Wealth

The market for small businesses has been less than ideal over the past few years. In the third quarter of 2010, just 1,117 small businesses were sold in the United States. That’s equal to the number sold in the same period in 2009 but down from the 1,462 that sold in the third quarter of 2008. Half of businesses sold during the third quarter of 2010 were listed for more than $245,000, but the average sales price was about $140,000 – a 6% decline from the same period in 2009.¹

Many of the reasons for the lackluster market may be due to external forces: Weak economic conditions mean many businesses are earning less than in years past. Tighter lending standards have reduced the pool of eligible buyers. Qualified buyers may be waiting for a stronger economy before they assume additional risk.

In other words, your efforts to build a successful business may not always translate to an increase in personal wealth.

One way to help insulate your personal financial situation from the fluctuating small-business market is by investing outside your company. Doing so can have some important benefits.

If you were forced to sell unexpectedly, perhaps because of an illness or a partner’s departure, your post-business lifestyle wouldn’t fully depend on the sales price.
You might be better able to withstand low-ball offers or a buyer’s market if you are in a position to wait for the right buyer.
Think of it as diversification. Allocating too much of your personal wealth to one company — even your own — is a risky proposition. Diversification does not eliminate the risk of investment loss; it is a method used to help manage investment risk.

It’s natural to want to believe that the effort and dedication you pour into your business will help increase the selling price, but there’s always the risk that it won’t. Call today to learn more about how to help insulate your financial future from the risks facing your business.

1) The Wall Street Journal, October 14, 2010

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