Investments  

Entrepreneurs should diversify

  • Identify ways that entrepreneurs can diversify away from their main business
  • Describe why a businessman should diversify
  • Describe the advantages of liquid assets
CPD
Approx.30min
Entrepreneurs should diversify

When watching the news at the moment, you would be forgiven for assuming that some kind of economic shock – and possibly a recession – is imminent.

In the UK, uncertainty has been the norm for the best part of three years.

As we approach the looming Brexit deadline of October 31, though, the potential for a no-deal Brexit becomes a little bit more real, and so do the implications for business owners and investors.

We are also beginning to see global stock markets suffering off the back of concerns about the US-China trade war, weak global economic data and pessimistic global outlook signals from central banks.

For entrepreneurs, now is as good a time as any to consider how best to protect their business interests.

While at UBS our base case is not a no-deal Brexit, nor do we anticipate a recession in the near future, we would always encourage business owners (clients or otherwise) to consider safeguards from external developments beyond their control.

Looking out for number one

Entrepreneurs typically have much of their wealth tied up in their businesses.

This concentration of capital can generate significant returns, minting 34 new entrepreneur billionaires in Europe in 2017, according to the UBS/PwC Billionaires Report 2018. However, the same report shows that for every billionaire created, often a proportionate number may drop below billionaire status.

Becoming a billionaire is of course a top end example of when this single-minded strategy works perfectly. This applies to any individual business, though.

But any individual business, no matter how skilfully managed, is exposed to a wide range of risks.

In a worst-case scenario, they can lead to business failure and loss of wealth. A blinkered focus on one’s own business may therefore have been the best way to create wealth, however it does not follow that preserving it requires the same perspective.

External investments are therefore a crucial way to help mitigate these risks, as well as discover new opportunities.

Why diversify?

Everyone faces some degree of concentration – even salaried employees are highly dependent on the fortunes of the companies they work for or industry they work in.

For entrepreneurs, though, this risk is more acute. This is because they often hold much of their financial wealth in one place: their business. Equally, executives are often largely paid in their company’s stock, leading them to hold far more of it than they might by choice.

This focus is often the main reason entrepreneurs have achieved great wealth. But it is also a source of vulnerability.

This comes back to the point that however skilfully you manage your business, political, economic, social and/or technological events and developments beyond your control can be disruptive.

In the past two decades alone, we have seen the tech crash of 2001 and the global financial crisis of 2008 as notable examples. Though it would be sensationalist to predict what might come next, it is nonetheless sensible to take preventative measures.

CPD
Approx.30min

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