Four entrepreneurs discuss their investment schemes and several experts offer investment tips to business owners.
What do you do with the assets that aren't tied up in your business? First, make sure there are some. Second, consider how these four entrepreneurs have invested theirs
Suppose you're on an airplane, and you get into a discussion with the person next to you about personal investing. Your fellow passenger tells you his assets are pretty much tied up in just one stock. It isn't part of the Standard & Poors 100, and it isn't quoted on NASDAQ. In fact, the stock isn't actually traded at all, so there isn't much liquidity (maybe none, he concedes). But your seatmate knows the business well and has tremendous confidence in its management. And by the way, he and his wife are counting on the equity value of this one investment to take care of all their retirement needs.
Your first reaction would probably be that it sounds like a pretty poor investment strategy. But when you learn that your fellow traveler is talking about his own business, you realize he's giving you a pretty good description of your own approach to personal finance.
Most business owners have, at some point, made a decision to invest in themselves, and consequently, their own companies are their largest assets. Traditional investment advice holds that an investment portfolio should be thought of as a pyramid: a broad base of stable, low-risk holdings -- bond funds, say -- building to a narrow tip of riskier investments, such as options and illiquid direct-equity plays. But company builders typically turn the pyramid on its point. After scraping together start-up capital, and then plowing every available dollar back into the business, they share a belief peculiar to their breed: "Investing in my own business will yield the highest rate of return I can get on my money."
Sure, if the business succeeds. But where are you if it doesn't?
So far, Michael Troy hasn't had that problem. Nor has Maynard Howe, nor Jeanne Bayless. Each runs a young company that is flourishing; all three are the beneficiaries of earlier entrepreneurial endeavors. A fourth business owner, Pamela Barefoot, has confronted the issue recently as her 10-year-old company has labored through some tough times.
All four are typical company builders. They're in their thirties and forties; three are married, and two of them have children. Each is firmly focused on making the business grow, and with at least half of their total assets in their enterprises, their investment strategies reflect that. They don't dispute that there's a very good case to be made for broadening their investments; in fact, three of the four have had some success in doing so. But they contend that business ownership is a special situation -- one that allows the view that there are stages of life and company growth when it's absolutely defensible to have most of your assets in the business.
Troy, Howe, Bayless, and Barefoot share many of the traditional ideas about personal finance. It's in the details of their "outside" investments, and in how they value professional financial advice, that they differ dramatically.
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Like many entrepreneurs, Michael Troy started young, buying candy for a nickel a piece and selling it for a dime to his San Marino, Calif., elementary school classmates. At age 45, Troy is the founder and president of KnowledgePoint, a Petaluma, Calif., publisher of software that assists businesses in writing personnel policies, job descriptions, and performance reviews. Troy's seed capital for KnowledgePoint came from the sale of his stake in Native Sun Energy Systems, a former Inc. 500 company in which he had been a principal but not the lead player. KnowledgePoint was founded in 1987 and has grown to 33 employees and 1994 sales of $3.9 million, earning its own place on the Inc. 500.
As company builders go, Troy is pretty typical in that he has the bulk of his personal wealth in his business. One-fifth of his total assets are diversified: "Although we've always been cash-short, and I've lived on a very meager salary, I've saved a portion of what I've earned and put it into other investments. I can probably get the best return for my money by putting it into the company, but that's a real high-risk move. So I try to balance my personal finances as much as I can."
Troy set some money aside earlier than many business owners do, perhaps because he'd had some early career successes. His personal portfolio now amounts to several hundred thousand dollars, mostly invested in growth-oriented no-load mutual funds and bond funds. Troy chooses his own mutual funds; about one-third of his portfolio is managed by his brother, a stockbroker. Overall, the investments have done well. Troy has covered most of the items on the traditional financial-planning checklist: He has a will, key-man insurance in the business, and a 401(k) plan to which he regularly contributes. He has also set aside a chunk of an inheritance for a college fund for his 9-year-old son, Dana, but he hasn't added to the fund the way he'd like to. "His college fund is the success of this company," says Troy.
In addition to his initial cash investment (and to his forgoing a salary for a year), Troy financed KnowledgePoint with his credit cards; a personal equity line on his house (which he later converted into a term loan with the house as security); and a line of credit, which he signed for personally. "My personal assets are at risk if the company fails," he concedes.
To date, KnowledgePoint's success means that Troy's personal portfolio remains intact. He has stayed the course with a strategy that he expects to ultimately leave him with a substantial -- and valuable -- equity position in KnowledgePoint. "I purposely took additional risk myself by not bringing in other investors and diluting my ownership until I could build more value in the company. What I could do -- and I have resisted this until we get into a crisis -- is move my mutual-fund investments into the business," he says. But that would work against a more diverse portfolio. "I don't want to have to commit any more of my personal finances to fund the business's growth. Now I'm ready to spread the risk by bringing in outside money."
