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Whenever I ask a contractor whether he's diversified and he'll almost always say yes. He does residential, commercial, and the occasional favor for his brother-in-law.
That's diversification in the business. I'm talking about diversification in your life.
For most owners I meet, the business is almost everything. It's their income, their retirement plan, their kids' education fund and their safety net, all in one company, in one industry, and usually in one city.
A few years ago I worked with two owners who were selling at around the same time. They had similar businesses, similar size, and similar numbers.
The first owner's business was nearly all of his net worth. When the market softened partway through the process, the buyer came back with a lower offer. He didn't like it, but he took it. He was 62, and he needed that money to retire. He had no other plan.
The second owner had spent years quietly building wealth outside the company. When his buyer tried the same move, he said no thanks and walked away. Six months later he sold to someone else at a better price.
The businesses were the same. The difference was who needed the deal more.
Why this is riskier than it feels?
As a CFA myself, I'll put it this way. If a financial advisor told you to put 90% of your savings into one small private company, you'd find a new advisor. But that's exactly the position most owners are in, and it's worse than it looks for four reasons.
Your paycheque and your savings are in the same place. If the business has a bad stretch, your income drops at the same time your biggest asset loses value.
You can't sell a little. With stocks, you can sell 10% on a Tuesday. With a private company, it's usually all or nothing, and it takes months.
The value depends partly on you. If your health changes, the business's value can change with it.
You don't control the timing. The market decides what buyers will pay the year you want to sell. A downturn at the wrong time can cost you years.
None of this means owning a business is a mistake. Owning a business is how most self-made wealth in this industry gets built. It means the job isn't done until some of that wealth lives outside the business.
How to take some chips off the table?
1. Pay yourself on purpose. Don't just take what's left over. Set up a regular, planned way to move money out of the business and into investments you don't control day to day. Your accountant can help you do it tax-efficiently.
2. Stop using the business as your personal bank. Big shareholder loans and personal guarantees tie your family's finances even more tightly to the company. Reduce them over time.
3. Look at what's inside the company that doesn't need to be. Real estate, excess cash and investments may be better held separately. Get advice before you move anything.
4. Protect the downside. Disability and key-person insurance won't make you rich, but they protect your family if the worst happens before you've diversified.
5. Know your "enough" number. Figure out how much wealth outside the business would let your family be fine even if the business had five bad years. Once you have that number, work toward it every year.
6. Know that partial exits exist. Some owners sell part of their company, to a partner, a key employee or an investor, years before they sell the rest. It isn't right for everyone, but it's worth knowing it's an option.
The Number This Week. What percentage of your personal wealth is tied up in the company?
Here's the formula: estimated value of your business ÷ your total net worth.
Be honest about the value. Use what a buyer would realistically pay, after taxes and fees, not what you'd like to get.
Almost every owner's number is high, and that's normal. What matters is the direction. Is your number going down a little every year as you build wealth outside the business, or is it staying the same?
If it's staying the same, you're building a business. You're not yet building wealth for your family.
The Question This Week?
What would your family's finances look like if the business had a bad five years?
Build Deliberately.
P.S. We are now on YouTube. Same no-fluff advice, but you can listen between job sites. Please SUBSCRIBE and SHARE it with an owner who could find it useful.
Why am I writing this? I've spent over 20 years working alongside construction and trade business owners across Canada. My firm, N3 Business Advisors Inc., has helped hundreds of contractors buy, grow, value, and sell their businesses. I started my career as a teacher, and that part of me never left. So once a week, I put one lesson in your inbox, for free, to help you build a business that buyers line up for. If this was useful, pass it to one owner who needs it. If it wasn't, reply and tell me what you'd rather read about.
Nitin Khanna, CFA · Founder, N3 Business Advisors · Mastering the Business of Construction