I nearly didn’t write this one.
For a few reasons.
First I told myself “everybody already knows this, it’s not a secret wealthy people build businesses”.
Then I realized the real reason I was hesitant: I wanted to keep this mental model and these tactics to myself.
Greedy little bugger.
So instead I am going to do the opposite and tell all.
How Wealth is Built
Even if it doesn’t make a penny of profit a business can be a very valuable thing to have, believe it or not. You can employ a less-than-employable cousin and make any number of charitable decisions like that.
A successful business becomes a valuable asset in itself.
If you can manage to make the business flow cash and generate profit, it will gain enterprise value.
Companies with enterprise value can be sold for a substantial profit, adding significantly to your net worth. This is similar to how real estate can appreciate over time. Compared to other wealth-building methods like investing in stocks or real estate, starting a business can offer a faster path to wealth accumulation. This is because the potential for growth and profit is often higher. You can “partial exit”, enjoy a massive liquidity event and still earn distributions from the profits.
Cash flow matters just as much as your equity and net worth… often it matters more. Owning a business can significantly increase your income potential. It allows you to generate profits beyond what you might earn in a traditional job, leading to greater financial security and the ability to invest further. Owning multiple wealth engines is when things start to get fun.
Businesses offer various tax deductions and incentives that can significantly reduce your tax burden. These benefits are not typically available to those who are solely employed.
Of course, owning a business provides a sense of control over your financial destiny. You are not limited by a fixed salary and have the freedom to pursue your vision and potentially create something impactful.
It's important to remember that building a successful business requires hard work, dedication, and often involves taking risks. However, the potential rewards can be substantial, both financially and personally.
The Dirty Details
Let’s unpack where this value really comes from. It’s a blend of leverage, tax benefits and the ability to turn expenses into a real force for economic good.
Equity and Ownership Appreciation
This is arguably the most significant wealth-building advantage. Unlike a salary, which is capped, the equity (ownership stake) in a successful business can appreciate exponentially. As the business grows in revenue, profitability, and market share, the value of that ownership stake skyrockets. This is amplified further if the business goes public (IPO) or is acquired by another company, often resulting in a massive payout for the founders and early investors. The elite understand that building a valuable business creates an asset that can generate wealth far beyond a high salary, and this wealth can be passed down through generations, creating lasting financial legacies.
It's the difference between renting wealth (salary) and owning wealth (equity).
Leveraging Other People's Money (OPM) and Time (OPT)
Successful businesses are rarely built solely on the founder's personal capital or effort. The elite leverage OPM through various forms of investment, like venture capital, angel investors, private equity, and even bank loans. This allows them to scale their business much faster than they could with their own funds. Simultaneously, they leverage OPT by hiring skilled employees, delegating tasks, and building management teams. This frees up the business owner's time to focus on strategic, high-impact activities like vision, innovation, and securing further funding.
The combination of OPM and OPT creates a powerful engine for accelerated growth and wealth creation.
Control Over Income and Cash Flow
Unlike a fixed salary, a business owner has significantly more control over their income. They can influence revenue generation through strategic decisions, pricing strategies, and expansion efforts. They also control the timing and structure of their compensation, potentially deferring income to lower-tax years or reinvesting profits back into the business for further growth. This control allows for strategic financial planning and optimization that is simply not possible with a traditional employment structure.
The ability to actively influence income streams, rather than passively receiving a paycheck, is a cornerstone of wealth building.
Creation of Multiple Revenue Streams
A successful business can often be expanded to create multiple, diverse revenue streams. This might involve launching new product lines, expanding into different markets, franchising the business model, or creating licensing agreements. This diversification not only increases overall income but also reduces risk. If one revenue stream underperforms, others can compensate, providing a more stable and resilient financial foundation.
The elite understand that reliance on a single source of income is precarious, and they actively seek to build multiple streams to protect and grow their wealth.
Building a Brand and Intangible Assets
Beyond the tangible assets of a business (like inventory or equipment), a successful business builds valuable intangible assets, primarily its brand and reputation. A strong brand commands premium pricing, attracts loyal customers, and creates a barrier to entry for competitors. This brand equity can be incredibly valuable, often exceeding the value of the business's physical assets. Other intangible assets, such as intellectual property (patents, trademarks, copyrights) and proprietary processes, also add significant value.
These assets contribute to the overall valuation of the business and can be leveraged for further growth or a lucrative exit strategy.
Legacy and Generational Wealth Transfer
Building a successful business allows for the creation of a lasting legacy that extends far beyond the founder's lifetime. The business can be passed down to future generations, providing them with a source of income, employment opportunities, and a platform for continued wealth creation. The elite often structure their businesses and estates with long-term generational wealth transfer in mind, using trusts and other legal instruments to ensure that their wealth benefits their families for decades to come. This ability to build a lasting financial empire is a key driver for many entrepreneurs and a significant advantage of business ownership.
The ability to form a large empire comes down to, sadly might I add, taxes.
That’s another reason the wealthy leverage business building to power their empires.
Death and Taxes
This is a big one.