I stared at the business valuation report on my desk, and my first reaction was pride. After years of building Harford Financial Group, the numbers reflected all the hard work our team has put in.
Then panic set in.
The calculation showed that 80% of my net worth is tied up in this business. As a wealth manager who regularly tells clients never to put more than 10% of their wealth in a single stock, I realized I was living the exact concentrated risk scenario I warn against.
The Wake-Up Call Every Business Owner Needs
If you're a business owner, there's a good chance you're in the same boat. According to the Exit Planning Institute, 70-80% of most business owners' wealth is wrapped up in their company. We build these valuable enterprises, but in doing so, we create a massive concentration risk that could jeopardize our entire financial future.
Here's why this realization scared me—and why it probably concerns you too.
3 Reasons Why Business Concentration Risk Keeps Me Up at Night
1. I Practice What I Preach (And I'm Breaking My Own Rules)
As a financial advisor, I constantly remind clients about diversification. My friend Dave puts it perfectly: "Concentration can make you rich, but diversification can keep you rich."
I've worked with executives from Apple, Microsoft, and UPS who had too much company stock. We always recommend keeping single-stock exposure under 10% of net worth. Yet here I am with 80% of my wealth in one "stock"—my business.
Companies that seemed invincible—Sears, JC Penney, K-Mart—were once the Amazon and Walmart of their day. No business is immune to rapid change or decline.
2. Small Businesses Face the "5 D's" Risk
Unlike Fortune 500 companies with deep leadership benches, small businesses are vulnerable to what we call the "5 D's":
- Death
- Disability
- Divorce
- Disagreement
- Distress
When Steve Jobs passed away, Apple had Tim Cook and a strong leadership team ready to step in. The company not only survived but thrived. Most small businesses don't have that luxury. If something happens to me or another key person, our business value could drop significantly or disappear entirely.
3. I'm Approaching the Preservation Phase
At 57, I'm transitioning from the accumulation phase to what we call the preservation phase of wealth building. Using our Bucket Plan® methodology, this means moving some assets from higher-risk, growth-oriented investments to more stable options like bonds and annuities.
But with 80% of my wealth locked in the business, I can't easily diversify or access funds for retirement income. I'm stuck in accumulation mode when I should be planning for distribution.
Getting a Real Business Valuation (The Right Way)
Before you can address concentration risk, you need to know what your business is really worth, not what you think it's worth.
I made the investment to get formal valuations from two independent mergers and acquisitions (M&A) specialists who focus on wealth management firms. This wasn't cheap, but it was essential. They required three years of financial statements and asked detailed questions about our operations, expenses, and growth trajectory.
The process felt invasive (I jokingly called it a "financial proctology exam") but both firms came back with similar valuations, giving me confidence in the numbers.
I share this so you don't make the common mistake of guessing at your business value based on industry multiples or what you heard another company sold for. Get a professional valuation. It's the foundation of any exit or diversification strategy.
What I'm Doing About It
Recognizing the problem is just the first step. Here's how I'm addressing this concentration risk:
- Updating my estate plan to protect my family
- Creating succession and continuity plans for the business
- Securing key person life and disability insurance for myself and critical team members
- Establishing buy-sell agreements with clear valuation methods
- Exploring diversification strategies to gradually reduce my business concentration
This is significantly more complex planning than most employees need, but it can be essential for business owners who want to protect their wealth and their families.
Are You Making the Same Mistake I Was?
If you're a business owner, there's a good chance you're in a similar situation—with 70-80% of your wealth tied up in your company. Most successful business owners are so focused on growing their companies that they never address the massive concentration risk they're creating.
Ask yourself: What would happen to my family's financial security if something happened to me or my business tomorrow?
If that question makes you uncomfortable, you're not alone. And more importantly, you don't have to navigate this alone.
We Understand Because We're Living It Too
At Harford Financial Group, we specialize in helping business owners address exactly these challenges. As a Certified Exit Planning Advisor (CEPA®) and Certified Value Growth Advisor (CVGA), I combine personal experience with professional expertise to help business owners protect and optimize their wealth.
Part of this work involves understanding where your business stands in its value journey using our Five Stages of Value Maturity framework. This helps us assess your current position and plan your path forward, whether that's growing value, preparing for exit, or managing concentration risk.
The bottom line: Recognizing concentrated risk is the first step toward managing it. With proper planning, you can protect the wealth you've worked so hard to build and finally sleep better at night.
Schedule a complimentary consultation when you’re ready to assess your own business concentration risk and explore your options.