In building our businesses, we get completely wrapped up in the daily demands and pressures that govern our lives. Suddenly, we look up and January is December and your 35 years of age is 55 years of age. Being clear on what we are doing and why is likely to be the most important decision any business owner can make. That requires ‘starting with the end in mind’ to turn daily action into behaviour that will deliver that end.
There are two types of business outcome you can decide to pursue. An equity or income model with both offering advantages and disadvantages. Understand them, contemplate them and then decide which you want at the end of your work effort. This way, your time will yield a return rather than a nasty surprise when its too late to do anything else.
Listen to the podcast from The Money Show on 702 & CapeTalk or read on:
1. What is an income or equity business?
An income business generates income mostly based on you and your effort. It requires little outside investment and little access to resources. Think of a self-employed masseuse, chiropractor, consultant, business coach or master craftsman. All make money by being present and at work. Should anyone of them not be investing their time in delivering a service to clients or customers, there is no income to be had.
Most of us begin there and many of us remain there. We begin there because there are very few barriers to entry and to income. We also begin there because we have no capital to begin anywhere else. It’s a very good place to begin because if your intent is to build a business there, the personal relationships you develop through this model can give you great insight into your sector, industry and related opportunities.
An equity business is one that requires you to make investments into resources to deliver a service to the customers you serve. Think about a restaurant chain, media house, garage or bakery. All these businesses offer a service or product that are more complex and made up of many more parts or activities. Each of these often requires different skills and capabilities needing people and machines or tools suited to them. Once built and operating, you are not the central cause of the service or product being sold and delivered. You have a team and systems that do this for you. To get this done takes investment. You need to invest in people, plant and machinery, tools and equipment, space and furniture, consumables and administration. Once done, the income comes into the business and this can take time – often a lot longer than you think. Eventually you earn a salary but mostly you invest any spare cash generated by the business back into its resources.
2. How does it end?
An income business ends when you end your service and work effort. Since it’s built on you, your talent your skill, its you that is the root cause of the business. without you, there is nothing.
An equity business can end in one of two ways:
A sale that yields a capital profit. You end it by selling it and if it’s built into an asset, you have a buyer who pays you for it. They do this because that’s the nature of an income generating asset. The asset, in this case your business and not you, will continue to generate revenue. This happens with around 5% of all businesses globally. Success here sees a multiple of profits being paid for the business.
Mostly, the remaining 95% of all business built with an intention to be an equity business, fail to sell, they either close at great cost to the owner or are handed down to family facing a 28% chance of succeed. The rest eventually close.
3. Which option creates wealth best for you
Both do. Wealth is created through 2 strategies. The first is marriage. Alternatively, you need to make money, grow it and then protect it.
An income business creates wealth based on your work generating income. That makes money. It then relies on you saving some of that money and investing it. Through these investments, if well selected, you grow that money that you made. That growth should come through in capital growth and income growth, for example a share that increases in price and producing dividends. With the money that you make, some should be spent on protecting the money you have made and its source. That means sensible insurances for incapacitation, life, dreaded disease etc. anything that prevents you working outside of your control can be insured away to protect your future income stream.
An equity business creates wealth by ensuring that you build it into an Asset of Value. Done right, a business grown over 5 or 15 years can generate a handsome capital pay-out. In the meanwhile, you’d have been earning a salary (income) to put food on the table. Think of it as a very large pension. Put differently, it’s a return on the risk you took for giving up on the income option where the money that you earn is spent and saved into more certain assets rather than your own business. Hard to get right but when you do, the reward is significant.
4. What’s best for you
It’s deeply personal. Many feel that, depending on your risk appetite, family background and upbringing, timing and country you live in - and luck - your choice is seldom a choice and more often a happenstance.
Alternatively, you can practice insight and foresight and make a call today about what you want tomorrow. Act and build towards that but get it right. There is little worse than failing in both. This means that a business built for equity wealth compromises its income wealth. Failure to secure a capital exit on sale, means a failure in both options. It’s completely avoidable if not realised too late.
At Aurik, we don’t like happenstance. We believe that by starting with the end in mind, putting a plan and path to reach that end, building an Asset of Value offers the best return on time. It’s what we do in our business and what we do for all our clients. Let’s chat and see if you are building an income business or equity business. Either way, we can help you reach that end point with less risk and in a shorter period.