A business owner suspended an open panel at the door of his restaurant.
Many owners of small businesses plan to retire in the coming years, but have 80% of their wealth linked in their companies. We chat with Jonathan Kruger from Rothschild Wealth Partners In Chicago on the means of relaxing this position of concentrated wealth.
Larry Light: Why is diversification such an essential subject for owners of small businesses?
Jonathan Kruger: Diversification is vital because most owners of small businesses have a concentrated position. They have spent years, sometimes decades, to build their business and, often, up to 80% of their wealth is linked to this unique asset. Although their business can prosper now, it is risky to rely only on it for financial security. Market changes, industry changes or unforeseen challenges can have an impact on its value. Diversification helps protect itself against these risks and creates a safer basis for financing retirement and other financial objectives.
Light: It makes a lot of sense. Let’s talk about retirement planning. What options should small businesses explore to start diversifying their financial assets?
Kruger: One of the most accessible options is the implementation of a retirement plan sponsored by the employer, such as a 401 (K). The Secure 2.0 Act made these plans more affordable and simple for small businesses. A 401 (K) allows owners to channel income in an avant-garde account, which can increase over time. For 2025, owners can contribute up to $ 23,500, with an additional $ 7,500 for those over 50. Beyond the construction of retirement savings, offering a 401 (K) can also attract and keep the best talents, strengthening the company overall. He is a win-win for the owner and their employees.
Light: What about the planning of the succession? How does it integrate into the diversification strategy?
Kruger: Planning the succession is critical and often neglected. It is not only a question of selling the company when retirement approaches. It is a question of creating a roadmap for continuity and growth. A solid succession plan ensures that the company can prosper under a new leadership, whether it is a family member, a trusted employee or an external buyer. It is also a way to align the future of the company with your personal values and your financial objectives. Succession planning can provide stability to employees and stakeholders and, with appropriate financing mechanisms, ensure the financial security you need for retirement.
Light: This is well linked to the idea of knowing the value of your business. How should business owners approach the evaluation?
Kruger: Evaluation is an essential step for any owner who plans to diversify. Understanding the value of your business means that you can reasonably expect if you sell. A professional assessment takes into account cash flows, customers, assets and market conditions. For companies in sectors such as construction or manufacturing, seasonality and commercial cycles also play an important role. By knowing your value, you can make informed decisions on diversification strategies and negotiations with potential buyers.
Light: You have mentioned that many owners of small businesses are approaching retirement age. To what extent is this trend significant and what challenges do they arise?
Kruger: It is a significant change. The Exit Planning Institute estimates that 70% of business owners greater than 50 plan to sell their businesses over the next decade. And Small Business Administration estimates that around 10 million companies belonging to boomers will be sold from 2019 to 2029. The challenge is that many owners have not prepared for this transition. With most of their wealth linked to their business, they can face financial deficits if the sale does not give what they expect. Planning early, diversifying assets and ensuring that the company is attractive for buyers can help meet these challenges.
Light: Are there false ideas that owners of small businesses have on diversification?
Kruger: Absolutely. A false common idea is that diversification will weaken their business. In reality, strategic diversification – such as contributing to a retirement plan or implementation of a succession strategy – often strengthens the company. It shows to employees, investors and potential buyers that the company is well managed and resilient. Another false idea is that diversification can wait for retirement to be close. Start early allows more time for assets to develop and owners to adjust their strategies if necessary.
Light: What advice would you give to owners of small businesses who feel overwhelmed by the idea of diversification?
Kruger: Start small and ask for advice. Start by configuring a retirement account if you don’t already have one. Then work with financial and evaluation experts to assess the current state of your business and identify the growth or transition areas. Diversification does not occur overnight, but taking small deliberate measures can lead to significant long -term advantages.
Light: Final reflections for owners of small businesses?
Kruger: Yes, do not underestimate the value of planning. Your business is an important achievement, but it should not be your only financial resource. The diversification guarantees that you have a safety net and opens up opportunities for a comfortable retirement and financial independence. The sooner you start, the more options you have on the road.