Chapter 10 Wealth versus Income – Profit

CHAPTER 10

Wealth versus Income

Entrepreneurs are in a great position to make the system work for them. But to do this you have to accept the idea of delayed gratification.

Tom Corley, an accountant and financial planner, surveyed a number of high net worth individuals. Many of them were self-made millionaires.3 He found the following facts and traits in them:

1. 21 percent reported they were A students in school.

2. 41 percent were B students.

3. 29 percent were C students.

Corley writes:

. . . success in life does not come easy. It is fraught with pitfalls, obstacles, failure, and mistakes. Success requires persistence, mental toughness and emotional toughness in overcoming these pitfalls. Its pursuit pushes you to the edge emotionally and physically. You must grow a thick skin and become accustomed to struggle if you hope to succeed.

Individuals who struggle academically may be more accustomed to dealing with struggle and making it a daily habit to overcome pitfalls.

Jeff Haden writes the following:

For example, successful people are great at delaying gratification. Successful people are great at withstanding temptation. Successful people are great at overcoming fear in order to do what they need to do. (Of course, that doesn't mean they aren't scared—that does mean they're brave. Big difference.) Successful people don't just prioritize. They consistently keep doing what they have decided is important.

Notice the similarity of what we discussed earlier about some salesmen having a fear of failure and staying away from certain sales and what Jeff Haden has to say about successful people being great at overcoming fear.

Delayed gratification4 is a key to success. I want to discuss how this can help you increase your net worth down the line if you take less income now.

In our restaurants, I and my partners (who weren’t working full time in the restaurants) took very little of the profits. Remember, we went with a C corp. for the business and formed a partnership for the buildings and equipment. We increased the rent that the restaurant paid and used the money in our partnership to pay off the real estate and equipment loans (all approved by our CPA). On a store producing a profit of $200,000/year before rent, we paid about 9 percent rent to our partnership. On a store doing $1,300,000/year, the rent was about $117,000/year. The store made about $80,000. I and my partners could have rented from an investor and each could have taken a salary of about $15,000/year and then paid the IRS about 30 percent of this and had only about $10,000 left over. By owning the assets, we also got the depreciation. In about 12 to 15 years we had a piece of real estate worth about $1,300,000. Let’s check that, one-third of $1,300,000 is about $430,000 when compared with a salary after taxes over 15 years of $150,000 which we probably would have spent a portion of every year; so, it wouldn’t have added much to our net worth.

Additionally, owning the real estate, you have an exit strategy when you decide to get out of the business. If you sell the business only, it sells for about two to three times profit or cash flow. The real estate goes for about 10 to 13 times rent. Business $250,000, real estate $1,300,000? This difference requires delayed gratification. Is it worth it? Does signing your name to a $1,000,000 mortgage cause some fear? You bet. However, remember what we said about fear of failure. Now stating all this, I must add that a lot of businessmen have tried what I have laid out and did fail, and I have worked with some of them. It would take another book to go into all the reasons for their failures. However, it might prove interesting to see if they had all the characteristics, traits, and work ethics described previously.

Truth Pays

I believe in ethics in business as well as morals. A friend of mine who had been a managing partner at one of the large law firms stated that when he worked with a client he went through the following process: Is it legal? Is it moral? Is it ethical? I have observed that there are some business people who don’t follow this, and I have, if possible, tried not to work with them.

Now for the truth statement. When I had my house built, I worked with a contractor who had built about 1,000 houses in our area. We signed a contract and I thought I noticed a $2,000 addition error in my favor. About 3 months later when the house was under construction, he called me and asked if we could correct the error. I said yes. Three years later when I and my partners wanted to build our first restaurant, we didn’t have the cash or net worth to go ahead with it. I called this builder and asked if he would consider a build-and-lease agreement with an option for our buyout. We met and he never opened my 30-page proposal; he talked to me for 10 minutes and said yes. He wanted to own it for 5 years to take the depreciation and then we could buy it. As it turned out, in 3 years he was making a deal to build a large strip mall and needed the cash. He came to me and wanted to do the buyout. We still didn’t quite have the financials required by most banks. He then introduced us to his banker from whom he was getting his loan and with whom he had done business for a long time. They did our loan.

Truth pays.

I hope this book has given you some insight and direction to help you use your passion and earn a profit.

 

3J. Haden. 2017. “8 of 10 Self-Made Millionaires Were Not ‘A’ Students. Instead They Share This Trait.” INC Magazine.

4J. Haden. 2013. “8 Simple Steps To Extreme Personal Productivity.” Huffington Post.