How to get rich in 3 difficult steps
In May, like so many of us, my wife and I escaped for a very much-needed vacation. The airports were getting back to having people, and the planes were packed. Much to my disappointment, I still could not enjoy my favorite air travel activity — getting a shoe shine. To use my travel time wisely, I took along a book I had not read for a long time. It was the classic, Rich Dad, Poor Dad by Robert Kiyosaki. The biggest takeaway from this book is a shift in the mindset about life, income and wealth, or building value. Becoming wealthy may not be your primary goal, but if it is, there is a reasonably predictable way to get rich in America.
Step 1: Ignore Your Parents
Parents around the world typically encourage their kids to get educated so they can get a “good job.” This may mean becoming a doctor or lawyer, although neither tends to be a path to significant wealth. High-paying professions provide an excellent income stream, but two insidious forces undermine the professional’s ability to create significant wealth: tax and spending. I related personally to this first step. Some who know me will recall that I have been a victim of three corporate layoffs in my life. The last was as director of marketing services for a prestigious hospital in Omaha, NE. My parents were so proud when I accepted that position. After that layoff, it led me to the decision to control my own destiny and purchase our first business. It just happened to be a cleaner. Building a successful business took several years, and about that same amount of time for my parents to express that same level of pride. I have always been a believer in working hard and I feel fortunate that my wife and I have passed this down to our children (though sometimes I think they want to ignore me).
It is difficult to become wealthy on the basis of salary alone. Since income is taxed at the highest possible rate, you are left with not much more than 50 cents on the dollar. As many of those reading this have done, personally owning the real estate you operate in provides income not subject to normal withholding taxes.
The other problem with having a high income is that is creates a “wealth effect” that triggers spending. Thomas J. Stanley, the famous author of the research-driven classic, The Millionaire Next Door, points out that some professionals — in particular, lawyers — spend a large portion of their income to give the impression that they are successful. In other words, when you spend $500,000 a year, you buy a Range Rover or send your kids to an elite private school at least in part because you want people to think you are wealthy. There is a balance to looking successful and creating an image which is difficult to maintain.
A great friend of mine who has been very successful still drives an old Volvo. I had this conversation with my daughters many years ago when they were in high school after one of their friends received a brand new BMW for their birthday. I promised I would never encumber them with providing them a nice car to drive. They could earn it.
Step 2: Start Something
Most wealth in America is created through owning a business. Recently, Mass Mutual looked at the proportion of business owners who make up a number of wealth cohorts. They found that 17% of people with between $100,000 and $500,000 to invest were business owners.
Keep in mind that there are about 8 million employer-based companies in the U.S., meaning that the incidence rate of business ownership (the natural rate at which you find business owners in the general population) is about 3%. Said another way, if you grabbed 100 people with investable assets of between $300,000 and $800,000, 17 of them would be business owners, meaning you’re over five times more likely to find a business owner in the $300,000 to $800,000 wealth segment than you are to find an employee in the same segment.
The trend becomes more pronounced the higher up the wealth ladder you go. If you look at wealthy investors with between $800,000 and $1,500,000 in investable assets, you’ll see the proportion of business owners in this segment goes up dramatically to 27%.
The Very Rich
Among investors with between $1.5 million and $10 million in investable assets, the proportion of business owner jumps up to 52%. As for those investors with $10 to $50 million sloshing around in their bank accounts, 67% are business owners. Finally, for investors with $50 million more in investable assets, 86% are business owners. Simply put, if you meet someone who is very rich, it’s highly likely they are (or were) a business owner.
Step 3: Get Liquid
The next step for you as a business owner is to focus on improving the value of your business so that you can sell it for a premium or operate very profitably. Just being a successful entrepreneur is typically not enough to become rich. You have to find a way to take the equity you have locked up in your business and turn it into liquid assets. When it comes to selling your business, the three most common options are:
- Acquisition: This is the headline-popping way some entrepreneurs choose to trade their shares for cash. When Facebook acquired WhatsApp for $19 billion, funders Brian Action and Jan Koum got very rich.
- Re-capitalization: A minority or majority “re-cap” occurs when you sell a stake in your company (often to a private equity firm) yet continue to run your business as both a manager and part owner, with a chunk of your wealth in liquid assets outside of your business. This has happened a few times in our industry with various results.
- Management Buyout: In an MBO, you invite your management team (or a family member) to buy you out over time, usually with a mixture of some cash from the profits of your business as well as debt that the managers take on. There are other, less common ways to turn your equity into cash (e.g. an IPO), but the key is turning the illiquid wealth in your business into diversified liquid wealth. The best part about selling a business is that the wealth created is taxed at a very low rate compared to employment income, so you get to keep the most of what you make. I cannot stress enough, consult with your tax expert before this type of transaction. The difference can be extreme.
You might argue it is better to keep all of your wealth tied up in your business as it grows, but that can be a risky proposition — just ask the folks you read about that were the darlings of Success magazine who are not on any lists today. If you keep your money locked up in your business, it also means you may not be able to enjoy the benefits of wealth. You can’t use illiquid stock in a private company to buy an around-the-world plane ticket or a ski chalet in Aspen. You have to get liquid first.
There are many good reasons to build a business. For you, wealth creation may not be as important as making an amazing product or leading a great team. But, if money is what you’re after, there is no better way to get rich than to start and sell a successful business.
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How Business Coaching Can Help
Service companies, trades, restoration companies, dry cleaning businesses, laundry businesses come to me for assistance in:
- Developing systems to create smoother operation, improving processes and removing bottlenecks
- Implementing team management practices including meetings, delegation and working with challenging communication issues
- Interpreting financial statements and using the information to make better decisions and become more profitable
- Sales and marketing help to get better clients and bigger projects
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