Great Lakes Investment Group
April 02, 2024
Money Financial literacy Economy Entrepreneurs CommentaryCalling All Business Owners - How Risk Tolerance in Business Creates an Investing Mindset
We have spent decades working with small and large business owners and their families and have noticed two distinct views regarding how they feel about managing their financial affairs.
Both views revolve around risk and its perception in business and the markets. Each category has one thing in common: it is exceedingly rare for us to encounter an entrepreneur who takes on a lot of risk in managing their business and is also willing to take on a lot of risk in their investment portfolio. As humans, we have a finite capacity for risk-taking regarding the well-being of the people who depend on us, regardless of whether those are employees or family members.
The first group of entrepreneurs run their businesses conservatively; they tend to be very steady in their cash flow and growth rates. There doesn't seem to be a strong relationship between those who've taken over a family business and those who have built it all on their own regarding how they feel about the risk in the business.
As a rule of thumb, those with a steady and methodical income generation and growth rate are more open to taking on a moderate amount of risk in their portfolios. Obviously, there are exceptions to this rule, but it happens often enough to be statistically valid. We've seen risk aversion to the extreme, as well as a few that just love the penny stocks, but by and large, the trend holds true.
The second group has businesses that tend to be more cyclical in nature, experiencing more variation in cash flow and profitability from one year to the next. This group tends to be more conservative in their approach to investing, focusing much more on capital preservation than growth. It's as if they take on their fill of risk in the business and can't stomach taking it on in their portfolio as well.
When it comes to planning, most entrepreneurs are focused on transferring wealth. This typically means having their offspring take over the business when they are ready. Forbes conducted a study a few years ago in the US, revealing that 75% of entrepreneurs plan to pass ownership to the next generation[i]. That same article points out that 50% of those business owners have no official succession plan in place.
The plans required for succession are multifaceted and combine several areas of wealth management, including insurance and tax planning. Pulling these resources together and coordinating a comprehensive and cohesive plan takes time, effort and experience.
Fortunately, insurance is often woven into the solution regarding wealth transference and tax planning/mitigation. Insurance within the business, on its key personnel, and on the owners is earmarked to solve very specific planning issues. Separating the ongoing insurance needs from those aligned more toward estate planning isn't difficult, but it pays to engage in an overall planning exercise before starting down the path.
At Great Lakes Investment Group, we rely on our wealth management planning process to produce your bespoke Financial Blueprint™. Tapping into decades of experience allows us to provide business owners with tailored advice we know works. You make up the majority of our client population, which has allowed us to hear it all, see it all and learn how to help you best. Utilizing our extensive professional network and resources gives our clients a single point of contact to resolve many interlaced and complex issues.
[i] Four Considerations When Passing The Family Business To The Next Generation (forbes.com)