It’s been a few years since I graduated from business school, but I’ll never forget the first thing I learned.
Professor Culbertson looked like he was straight out of central casting. He had a paunch, a neatly trimmed beard, and a tweed jacket with leather elbow patches. He slowly paced up and down the center aisles of the classroom eyeing the students, all of whom were sacrificing our precious evenings and weekends to earn an MBA. After a long silence he pronounced, “If any of you plan on getting rich, you will never do it by working for someone else.”
Aside from a few uncomfortable murmurs you could almost hear a pin drop. “How rude!” I thought to myself. The whole room was filled with working stiffs, many of us only able to get a graduate degree thanks to tuition assistance from large employers like Boeing, Microsoft and Verizon. “Who does this guy think he is?”
But the more I thought about it, the more I realized he was right. I made a mental list of the richest people I knew. They were all business owners, or enjoyed a legacy of wealth left by an entrepreneur relative. As much as I didn’t like what I’d heard, I knew there was truth in what Culbertson had said.
Building wealth through business ownership seems straightforward enough, so why doesn’t every entrepreneur do it? For every success story you can point to there are many more that end in failure. What’s the trick?
After more than a decade of business ownership and as much time spent advising other owners, I’ve seen at least three mindsets when it comes to entrepreneurs and money.
The first stage to wealth-building for any entrepreneur is to get the business off the ground and into the black. Many fail even before this milestone is reached, but a good number succeed in running what I call a Lifestyle business. A Lifestyle business provides a nice income for the owner — usually at least as much as they would receive in salary from an employer — and the ability to set your own schedule. A Lifestyle business doesn’t provide significant wealth to most owners, but it provides them with enough.
Owners who make it past the Lifestyle stage often build the business to a point where it generates excess cash. At this stage several different mindsets emerge. The first is fixated on doing everything possible to lower taxable net income. While nobody wants to pay more taxes than necessary, minimizing taxes isn’t a fully formed business strategy. It seems like a good idea, but stunts profitability, hinders borrowing capacity and growth, and leads to a stagnant business and little meaningful wealth for the owner.
The second response to excess cash flow is quite the opposite. These owners take every last dime they can out of the business. Prudent business decisions take a backseat to personal gain. We’ve all met these owners, whether we know it or not. They typically engage in conspicuous consumption and appear wealthy. While treating a business like your own personal piggy bank may be tempting, it is not a business strategy either. Ironically, this mindset often renders the owner anything but wealthy.
A third set of business owners realize there is a balance between reinvestment in the business, and the need to pull some money out of the business to diversify their assets. These owners know that having all their eggs in one basket is OK up to a point. They use excess cash flow wisely, both in and outside of the business, and begin to accumulate meaningful wealth.
The trick is to be realistic about your business and personal financial goals, and how they affect one another. Building wealth requires having an end game and sticking with the long-term plan. It takes thinking beyond the business providing a salary, a lifestyle, or a tax deduction. It takes a mix of courage, risk, and discipline. The kind of rich that my college professor was referring to doesn’t take an MBA. It does take planning, discipline and patience.
Barbara Taylor is the co-founder of Allan Taylor & Co., a boutique mergers and acquisition firm in Bentonville. You can follow her on Twitter @ballantaylor visit her company website at www.allantaylor.co.