Avoiding common pitfalls in managing assets

“Entrepreneurs are tempted to invest too much in the same asset category as their own business, because they know so much about it,” said Anita D. Grossman, a wealth management specialist with Sagemark Consulting in Cherry Hill. “We encourage them to diversify.”

And business owners typically look for liquid investments, like money market funds that can quickly be converted to cash.

“They want to be able to get their hands on their money if a business opportunity suddenly arises,” she said. “At the same time, you want to find investments that offer long-term growth potential.”

Some entrepreneurs think their retirement will be funded from an eventual sale of their business, said Laura Mattia, a wealth management principal at Baron Financial Group in Fair Lawn.

“But what if your exit strategy doesn’t work the way you planned?” she asked. “Instead, we advise them to set up 401(k) plans or other appropriate retirement vehicles.”

Employees just need to worry about their own retirement investments, but a business owner must comply with a maze of rules, said Gary K. Hager, chief executive officer of Integrated Wealth Management in Edison.

“Some defined-benefit profit sharing plans, like a 412(i), may offer significant pre-tax savings, and may be designed to benefit certain classes of employees,” he said. “But there are many [Internal Revenue Service] compliance issues to consider.”

Another concern is whether or not an owner really knows the market value of the business, he said. “This can be vital when it comes to designing a buy-sell agreement,” he said, referring to a contract that uses insurance or other investments to let surviving business partners purchase the business interest of a deceased partner.

Valuation also comes into play for estate-planning purposes. “In this weak economy, interest rates are low, and many companies have seen a decline in their market value,” Hager said. “It may be a good time to consider using a trust to take a portion of your business out of your estate [where it may be taxed at a high rate upon the owner’s death] and transfer it to a family member or someone else while minimizing any tax liability.”

E-mail to mdaks@njbiz.com