How to protect your capital while growing your business
If you are the owner of a business which—like many in our province—has enjoyed financial success and generated significant profits, you have to make ongoing decisions about how to put those profits to the best use.
It will seem self-evident that the most prudent use of profits, particularly for a growing business, will be to pump them back into your company where they can support research and development, expansion, human resource needs and paying down debt. Certainly, from an investment perspective, the greatest expected return is offered by the option of returning your money to your company so it can fuel continued growth, develop opportunities and increase the company’s underlying value.
Whether you are investing your money in your own company or someone else’s, it is wise to keep in mind the fundamental approaches to successful investing. For example, proper diversification reduces risk of catastrophic loss because it ensures your assets are held in different areas, each of which would respond differently to the same event. Diversification is a risk management tool that is very broadly used: countries ensure that they have multiple sources of energy, farmers grow a strategic range of crops, companies strive for a resilient mix of services and products.
Within your own business, you could achieve the benefits of diversification through developing product lines or services that would react differently to changes in the market or economic environment. You might diversify the capital inside your business by owning your own real estate.
However, truly effective risk management involves stepping back and taking a bird’s eye view of your entire financial picture, with its commingled personal and business assets, interests and financial goals. From this broader perspective, you might see the need to further mitigate risk and diversify outside of your operating business assets. As with all your strategic business decisions, this critical step requires careful thought, analysis, planning and execution. Clearly, investing some of the profits of your company in areas outside your business immediately takes some of your operating company’s risk off the table. At the same time, it also lowers your expected return on capital. On balance, it works to manage your overall risk as part of your long-term wealth management strategy. On balance, it works to manage your overall risk as part of your long-term wealth management strategy.
There are many outside investment opportunities for the successful business owner, both globally and locally. You could invest in other local small businesses, in commodities, in other commercial properties, or in shares of companies around the world. Purchasing shares in global companies can achieve significant diversification of assets away from your operating company and across global boundaries.
Within Saskatchewan itself there are many opportunities to purchase shares in other businesses. Obviously, owning shares and real estate in another company brings issues of control, expected returns and risk to the equation. The risk you assume varies depending on where these companies are in their growth trajectory, the resilience of their products and services, and the experience and integrity of their management. On a small business level—as Dragon’s Den has so entertainingly demonstrated—if you have the time, energy and appetite for risk, you might invest in a fledging business that shows promise. Along with your capital, you could bring a significant value-add to the deal with your skill set, experienced advice and guidance, and your mentorship abilities.
A common diversification strategy for business owners is the purchase of additional real estate assets. Although this is a viable strategy, it requires a great deal of capital to buy enough properties to properly diversify some of the risk away.
Given the complexity of these diversification decisions, business owners often seek our advice on how to proceed. Typically, we suggest that you set aside enough liquid financial capital in shares of global companies and bonds issued by governments and corporations around the world to provide a type of pension for your retirement. Professional advice on properly structuring and building the investment portfolio that will provide this income flow is strongly recommended.
This article was first published in the June, 2013 issue of Sask Business, authored by Daryn Form.
Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Rates are not guaranteed and are subject to change at any time without notice.