Personal Financial Goals – An alternative to cash in the bank

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When asking entrepreneurs about personal financial goals, the most common response is “I want to have enough money in the bank to not have to worry about making money.” Drilling in a bit deeper, and asking for a specific dollar amount, it’s usually liquid assets between $5 million and $10 million. With $5 million liquid, and an expectation of earning 4% per year, that results in $200,000 per year in annual income before taxes.

While having the cash in the bank earning passive investment income is awesome, I like to point out that it’s often more attainable to build a business with recurring revenue that pays out $200,000 in annual dividends. Meaning, a better goal is to build a company that is self sustainable without the entrepreneur that then helps the entrepreneur meet his or her financial goals without the requirement of a large liquidity event. Liquidity events are rare, incredibly rare. 99% of companies sell for less than $30 million and only a handful of companies sell for over $100 million each year. The odds of a large exit aren’t great, while the odds of building a business that can make money on an annual basis in a manner that provides individual freedom are 100x better.

What else? What are your thoughts on personal financial goals and the idea of a sustainable business paying dividends as more achievable than a large exit?

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8 responses to “Personal Financial Goals – An alternative to cash in the bank”

October 25, 2013

Raymond King

I understand the thought process here and it makes sense. I would think a challenge with this alternative is that it can leave your family/estate in a difficult position in the event of your death. At least something extra to think about if this is the scenario.

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1. October 25, 2013
  
  Whit Ferguson
  
  Raymond- I have to respectfully disagree. With proper business succession planning and funding (trusts, life insurance, etc), these concerns are almost completely eliminated, regardless the size of the business or number of equity partners.
  
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  1. October 25, 2013
    
    Raymond King
    
    HI Whit – I would certainly agree that IF all the proper planning is done, the problem can be dealt with. Thanks.
October 25, 2013

Tom

Nice post David, it’s the argument of recurring cash flows over a lump sum in the bank – many people think you need that a large balance in the bank is what they need and therefore there goals appear unachievable but really it’s more achievable to aim for healthy recurring cash flows.

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October 25, 2013

Daryl Lu

It’s interesting how many entrepreneurs I speak to (or aspiring/ outsiders) gun for the billion dollar idea raving about the need to find something “viral”. As much as I can appreciate the “shoot for the stars” mentality, I also see too many people focus on the wrong aspect of building a business, and one that the entrepreneur is passionate about. The risk here is the chance of missing out on building a business that may not be a billion dollar idea, but one that can be seven or eight figures (or just six), but then could EXPLODE to be a massive idea.

The other thought that occurs is the term “lifestyle” entrepreneur which seems to be a bit of the message you’re writing about. Lifestyle entrepreneurs, to me, seem like other still-successful small businesses that can grow to also be larger businesses. It really depends on the founder(s) on if they want to deal with growing pains and managing more people.

To Raymond King’s comments above, I would contend that with sound management and yes, equity distributions, even if the founder passes away, there can be specific clauses that still protect families in the event of a tragedy. That being said, I also don’t believe David is writing about just a sole proprietor as much as a business with a team, that even in the event of a passing, the business can still continue. Just hope the founder(s) was a good leader and manager so that the business can move forwards.

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October 25, 2013

Owen McGab Enaohwo

David I love this blog post because it opened my eyes to a different perspective on my goals.

One of my goals after reading The Millionaire Fastlane by MJ DeMarco has been to build a SaaS app with recurring revenue which I can sell (<<<— at least my equity stake) for a minimum of $5mill and invest the cash at a minimum annual interest of 4% and the end result will be $200k annually. (<<<— not have to worry about money + move to somewhere where the US dollar is way higher than their currency)

Now after reading your article I see a whole different perspective to the argument which is create a business that generates revenue enough for you to secure $200k annually in dividends from it.

If I were to go the dividend route instead of the big sell route, from a personal tax perspective what is the best way to structure the SaaS company to reduce the potential taxes on the dividends?

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October 25, 2013

Andrew

Fun to imagine whether or not I have $5 million in the bank or $200k annual income from a passive management position. I have to say neither would disappoint. But I also don’t think they are equivalent. 4% on cash in the bank is pretty risk free. A dividend stream from a young company is not. Who’s to say what the future holds? In quantitative terms, the dividend route pays a higher return because of the higher risk associated with a newish venture. It’s the same reason nobody wants to pay $5M for a startup that throws off a projected $200k of cash per year without growth prospects.

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October 27, 2013

Robert Whitis

As an entrepreneur, my goals have always been based upon this exact mantra. It started out with replacing the paycheck from my traditional job, and then began to incorporate expenses on improving the business, streamlining functionality for the customer as well as on the back end, and then scaling up marketing efforts. I have found this to be a good formula for me, personally. Ultimately, the goal isn’t to sell the business, but to find a replacement for yourself so that you can take a step back and spend your time on a new project, while still being able to keep a keen eye on the previous project(s) by keeping the organization extremely small. There are tools out there that make this possible, by leveraging your time first, and then allowing your small number of employees to do the same. Once you’re in the profit, focus on leveraging your time, and growing your business, until you get close to the point that it’s too much to handle on your own, and you’re out of ideas on how to leverage your time. At that point, you have to decide if you want to run your business yourself forever, and one day sell it when you retire, or you can hire 1-2 people to handle your workload, and start another project, rinsing and repeating the approach.

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