The following is a guest post from Anton Ivanov from Financessful.
Get a good job, live below your means, save as much as you can and invest in index funds. With time, your discipline will be rewarded with a successful retirement. We’ve all heard this financial advice time and time again. It’s the traditional way of building wealth. But is it the only (or the best) way?
The Limitations of a 9-5 job
One of the problems with working a regular 9-5 job is limited income potential. Sure, you can graduate from a good school, land a high-paying job and work your way up the corporate ladder. You may even be entitled to matching 401k contributions, free healthcare or a retirement pension. But it will likely take you decades to save enough for retirement, and that’s if nothing happens to you or your career in the process.
And what if you didn’t graduate from college and didn’t get your dream job? What if you are working overtime and still barely making ends meet? There are only so many hours in a day and your income earning ability is limited by your hourly wage. Aside from hoping for a raise once in a while, you have little control over your income.
Building Wealth Faster
So how do you solve the problem of limited income potential? You become an entrepreneur and start your own business.
A successful business will allow you to exponentially increase your income. As an entrepreneur, your hard work can translate directly into building wealth. There is no ceiling to your success – you can emerge a multimillionaire in less than 10 years. That’s nearly impossible with a regular salary job, unless you occupy high-level executive positions.
Don’t get me wrong – being an entrepreneur is not for everyone. You’ve probably heard the gruesome business failure statistics. Most business start-ups do, in fact, fail within a few years. Managing a company requires tremendous dedication and hard work. It may mean years of 80-hour work weeks with little income.
But if you aspire to join the ranks of the super wealthy; if you want to retire at age 40, or even 30; and if you want to afford a luxury lifestyle for you and your family, entrepreneurship is probably your only option.
Picking the Right Business
Not all businesses are created equal. The guy selling hot dogs at a baseball stadium will tell you that he is self-employed, but I doubt he is better off because of it. If you don’t pick the right business model, you will just trade one job for another. Your business growth will be limited and your take home pay low, despite the countless hours you put into your enterprise.
There are two ways of quickly building wealth with businesses – developing an organization that is increasingly passive or building up your company to a liquidation event.
Passive Income – Generating Machine
A passive business is exactly what it sounds – it is an income-generating machine that doesn’t require your direct involvement. No business will ever be passive from the beginning – it’s something you will need to work hard to achieve. But once done, you will have an enterprise that virtually runs itself, while you simply collect the paychecks.
Different businesses have different potentials for being passive. You can make a business more passive through automation or hiring employees.
Automation allows business tasks to be performed without your (or anyone else’s) involvement. It may be expensive and tricky to set up, but it is great for increasing profit margins and supporting growth. Hiring employees to do the work for you is another way of making a business more passive. Due to their salaries, employees are more expensive to maintain and will cut into your profit margins, but they are able to perform tasks resilient to automation.
So what are some businesses that have good potential to become passive? Lead generation, brokerage systems, equipment rental, software sales and subscription-based online services are good examples.
Liquidation – Selling Your Business
By growing your business and brand, you exponentially increase its value. One way to estimate business value is to multiply earnings before interest and taxes (EBIT) by an industry-specific multiplier. By picking businesses that can grow quickly and operate in industries with high multipliers, you increase your chances of selling your business for a large profit.
After deciding on an industry, your job becomes to grow business revenue and earnings as quickly as possible. That’s not an easy task by any means and requires a keen understanding of your market, an extremely useful product or service, creative marketing campaigns and flawless customer service.
Once your business grows and you begin to get noticed by individuals or companies looking for acquisitions, it’s important to pick the right time to sell your business. Selling prematurely may mean millions of lost profit. But waiting may result in a change of industry conditions and lower business value.
Determining industry business value multipliers is not an exact since. One way is to look at past business sales. Historically, the following industries have had high multipliers: insurance, e-commerce, internet, building materials, biotechnology and healthcare.
The Choice is Yours
You may not like risks, be comfortable with your current job and have solid plans for your financial future. Or you may have a burning desire to achieve something great and be willing to risk trying to start your own business. Which road you choose is entirely up to you – you are in control of your own destiny.
If you want to learn more about quickly building wealth through business ownership, I highly recommend The Millionaire Fastlane by MJ DeMarco.
Anton Ivanov is an aspiring financial writer, a successful investor and a zealous entrepreneur.
For 2018, Joe plans to diversify his passive income by investing in US heartland real estate through RealtyShares. He has 3 rental units in Portland and he believes the local market is getting overpriced.
Joe highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help every investor analyze their portfolio and plan for retirement.