Most business owners we meet are 90% concentrated in one asset and call it diversified.
The asset has their name on the wall. Sometimes it has their father’s name on the wall. It employs the people they grew up with, drives the trucks they bought, occupies the building they signed a personal guarantee on.
That isn’t a portfolio. That’s a concentration risk wearing a polo shirt.
Ask any institutional investor what they’d do if 90% of their fund sat in a single privately-held, illiquid, operationally complex position that required their daily attention to hold its value. They’d tell you it’s negligent. Then ask a successful business owner the same question about his own balance sheet and watch him get defensive.
Both are right, technically. It’s just that one of them has looked at the math and the other one hasn’t.
The framework we use with owner-clients is three buckets. It’s not fancy. The value is in the honesty of the conversation, not the elegance of the structure.
Bucket One: Ownership Equity. The business. The building it sits in. The related entities, the side LLC that holds the equipment, the piece of the strip mall you bought with your cousin in 2014. Everything that would be valued by somebody looking at your life and saying, “this is what he owns.”
For most owners we meet, this bucket is 70–95% of total net worth.
Bucket Two: Tax-Advantaged Retirement. The 401(k), the profit-sharing piece, the cash balance plan if you’re using one (most owners aren’t, and most owners should be), the Roth IRA, the HSA nobody uses correctly. Money that’s inside a tax wrapper the IRS is willing to leave alone for a while.
For most owners we meet, this bucket is a rounding error. It shouldn’t be.
Bucket Three: Accessible Liquidity. The taxable brokerage account. Real cash. Short-term reserves that aren’t earmarked for operations. The money you can actually spend without selling a business, liquidating a building, or paying a 10% penalty.
For most owners we meet, this bucket is thin to empty. “The business is my liquidity” is what they say. They mean it. It isn’t true.
Here’s the diagnostic that separates the owners who’ve done the work from the ones who haven’t.
Imagine your business value drops 50% tomorrow. Happens. It happened to plenty of good businesses in 2008, and it happened to plenty of good businesses during the 18 months we don’t talk about anymore.
How does your family live for the next two years?
If the answer is “we’d sell stuff” – which stuff, to whom, at what discount, on what timeline? A distressed owner selling a distressed business is not a negotiation that ends well.
If the answer is “we’d borrow against the business” – with what collateral, at what rate, from a lender who just watched your business lose half its value?
If the answer is “we’d burn through the retirement accounts” – at what tax cost, and what happens to the compounding you’ll need in your sixties?
If the answer is “we have 18 months of family expenses in a brokerage account we can access in three business days” – you’ve done the work. You’re in the minority.
Most owners fail this test. Not because they’re reckless. Because the business has been the best use of every dollar they’ve ever had, and it’s been right, and it’s been right for so long that they’ve stopped auditing the assumption.
The assumption stops being right somewhere between a health scare and a buyer walking away and a key employee getting poached. Usually not with a lot of warning.
The fix isn’t dramatic. It’s almost always a re-routing of existing cash flow, not a new source of capital.
The business is generating more free cash than the owner is using. Most of that cash is being reinvested into the business. Some portion of it doesn’t need to be.
The question we ask is: what percentage of next year’s free cash flow can we redirect into buckets two and three without compromising the operating plan?
For most owners, the honest answer is 15–25%. It’s never zero. It’s almost never 50%. Whatever it is, the worst version is whatever you’re doing right now by accident.
Here’s what that redirection usually looks like in practice:
Max out the retirement plan first. If you have no employees and are running a SEP IRA and haven’t looked at a Solo 401(k) with profit-sharing, or a cash balance plan layered on top of either, you’re almost certainly leaving significant tax deductions on the table. The contribution limits are an order of magnitude higher than what most owners are using.
Build the brokerage account second. A diversified portfolio, built for your actual time horizon and risk tolerance, with regular contributions automated so the decision is made once and not re-litigated every month. This is the bucket that gives you the two-year cushin in the diagnostic above. It’s also the bucket that buys you optionality — the ability to say no to a bad deal, slow down a transition, walk away from a client who’s hurting you.
Keep a real cash reserve third. Not operating cash — that’s bucket one. Your cash. Personal, outside the business entirely, boring savings account, enough to cover family expenses for six months without touching anything else.
This isn’t a sophisticated strategy. It’s the absence of a mistake most owners are making by default.
If you’ve never run the three-bucket math on your own balance sheet, it’s worth an afternoon. You can do it in a spreadsheet. You can do it on the back of a legal pad.
What you probably shouldn’t do is assume the answer is fine because it’s been fine so far.
Concentration risk doesn’t announce itself. It just shows up one Tuesday and asks you how you’re planning to live.