The reason why most businesses fail to thrive is because business owners fail to see it as a fluctuating asset. Sure, a privately-held business is a great boost to your investment portfolio but if you don’t know how correlated its value is to the overall economy, chances are you are not protecting your financial wealth. An excellent strategy to ensuring financial wealth is to start thinking about how your business will transition in the future, possibly before the next major economic downturn.
Here are some tips on how to correlate your business value to the overall economy.
1. Diversify, diversify, diversify
As a business owner, you should be aware of the existence of a “free lunch”. A “free lunch” is referred to as the diversification of your liquid portfolio of investments. When there is diversification, there is little to no cost beyond a bit of transaction costs. Other than that, the investor benefits from diversification because you are not concentrated in just one investment.
The different types of assets or investments rise in value depending on the market while some others would fall. Therefore, you as the investor are reducing the volatility of your investment return.
But when your biggest asset is your privately-held business that is illiquid, then how can it become diversified?
2. How does your business respond to the economy?
When the economy is struggling, how does your business fare?
It’s easy for a business to become profitable if the economy is on an upturn. But like all other business, yours would also experience profitability and value issues when the economy falters.
An understanding of what “Beta” is will help determine your business risk relative to market. “Beta” is determined by how the value of the investment asset changes depending on the economy, not on the totality of the investment market. Therefore, your company has a high “Beta” and is considered more risky if its performance closely follows the overall economy. If this is your company, then you’re hoping for the economy to improve so your business value increase too.
But you can’t control the economy – no one can. What you can do, instead, is to protect and even harvest the value of your business right before the next economic downturn.
3. Learn to shift the risk.
Before we discuss further, please be reminded that your business can never be 100% immune to an economic downturn. No business has that power. But you don’t have to see your business value suffer either because you can definitely shift the risk to another investor. That means you should take on a business partner and you tie your largest financial asset to his/her business so you have a better chance of surviving the next economic downturn.
4. Continued control vs. Abundance of capital
The capital market today is littered with investment capital that is just parked and ready to be deployed into any profitable business. A private equity group will be highly attracted to you if you have a profitable business, probably with more than $1 million in annual profits.
With so much investment capital available, you earn the privilege of choosing your partner or capital that you want in your business. Since you have the upper hand, then you have the opportunity to control parts of the operations while continuing to increase its overall value.
The diversification of your wealth will serve as the catalyst for further grow and the security of your financial future. Don’t forget to always pay attention to the sources of your business capital as closely as you would the economy.