If you want to learn how to do something well, it’s usually helpful to look at others who are doing that same thing very well and emulate their behavior. In this blog, we will look at wealth creation, one measure of business success. We will likely identify some trends in what some of the most ‘successful’ people are doing to create wealth.
Who is Making the Most Money?
Reading through the Forbes 400 list of the world’s wealthiest people, there’s an obvious trend linking most of these individuals. The vast majority of these people have created their wealth vis-a-vis ownership. Their wealth was predominantly created by owning and/or selling successful businesses- in other words, having equity. What you will not find on the list are individuals who have a “regular job” or even a very high-paying profession. You can work at a very high-paying job your entire life and never even get close to being on the Forbes list. The point here is that most of the wealth of the richest people in the world was not created by working for someone- but rather, through ownership.
What Can We Learn From Ownership?
Now of course, not everyone will reach (or desire to reach) this upper echelon of wealth. But as mentioned, it is good practice to observe and learn from what successful people are doing and then apply these principles to our own situation. The average person earns 1.4 million dollars (before taxes and inflation) over their working career. Furthermore, according to the Federal Reserve, the average family, with the head of the household being 65 years of age or older, has a median retirement savings of $148,900. On the other hand, small business owners with less than one year’s experience were earning up to $75,000 per year in 2010- about double the national average for salary! Business owners with 10 or more years of experience are pocketing upwards of $105,000 per year - about double the average family income! This is not to mention the various other benefits that come with owning a business: time flexibility, tax benefits, etc.
Ownership in a profitable business is a true financial gem. Businesses can produce an attractive income and a high-quality lifestyle for decades if executed properly. As an added bonus, they can also be transferred via a sale when the owner wants to cash out and exit. One of the best parts about privately held businesses is that they are available at a great price compared to most public companies, mutual funds, and other investments. These opportunities fly under the radar in that many sophisticated investors do not have them as part of their portfolios when they should.
What If I Can't Afford to Buy a Business?
Buying a business may seem out of reach for some people, but there are options available allowing the purchase of a business to be affordable. SBA loans (Small Business Administration loans) are business-acquisition specific loans that are guaranteed by the government. These loans can cover up to 80% of the purchase price, generally up to a maximum of five million dollars. In addition to leveraging an SBA loan, business sellers often provide financing (negotiable) for a portion of the remaining purchase price. This means that businesses are actually more affordable than most people think since it is only required to provide 10-15% of the total purchase price upfront. What will happen is that if you successfully purchase the business, you will begin to pay off these debts from the company's cash generation. As you do so, you will begin to own more and more of the business. Remember, ownership is what creates wealth.
Although this all seems pretty clear cut, there are some important points to understand as a potential buyer seeking financing. First off, secure the capital you will need for the initial equity portion- as mentioned above, generally, around 10-15% of the total price. Whether this money is from your savings account, from family and friends, or raised from outside investors, it doesn’t much matter. You will also want to make sure that you have a good credit score of at least 700. These items (and more) will be considered when seeking other financing routes- SBA and seller financing- and will vastly improve your chances of making a positive impression on both the bank and the seller- which together, can push you closer to closing the deal.
Related: SBA Loans: The Basics