- Passionate Income
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- Equity, Income or Both?
1,800 Words | 7 Min 30 Sec Read
Welcome to another issue of Passionate Income.
Today we’ll be discussing whether you should build a business that generates income, equity or both.
In particular, the upsides and downsides of each path, and what your options are for doing both at the same time.
Let’s dive in.
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Not sure how you should try to make your millions?
The other day, I was listening to an Alex Hormozi video where he discussed one of the big downsides of building an equity business.
If you’re unfamiliar with the concept, a business that has equity value is one that can be sold to an entrepreneur or investor.
On the flipside, if nobody’s willing to pay money for your business, it probably doesn’t have any equity value.
In the video, Alex mentions how if you’re ambitious enough to actually build and sell a business for 7 to 9 figures, you’re probably not going to want to just stop working after you sell the company.
In my experience, this has been 100% true.
While I myself have never sold a business, I’ve worked one-on-one with multiple founders who’ve sold their companies for nine-figures.
In every single case, each of these guys ended up going back to work.
In one case, the founder took a couple of years off before realizing having an unlimited amount of downtime can lead to dark and destructive places.
The other was ready to start building a new company within 48 hours of receiving his 9-figure check.
Which raises an interesting point:
While selling a company for a huge lump sum is looked at as the pinnacle of success in the world of business, there are some downsides.
For starters, once you sell your company, your income will go to zero.
In the beginning, this won’t be much of an issue given you will have just received a large payout as part of the acquisition.
However, as you will very quickly learn, most multimillionaires attempt to live off 4% of their liquid investments.
Meaning, if you have $1 million in the bank, you would live off of $40,000 per year.
With the average income needed to buy a home in the US currently at $108,000, trying to live on $40,000 per year—pretax—would require a major lifestyle downgrade.
And if you’re trying to have kids and raise a family in a country like Canada, the US, or the UK, forget about it.
In fact, the 4% rule is a good test re: how much you would need to retire on.
Doing basic math, you will need $2.5 million invested for every $100,000 in pretax income you want to receive.
And for you to put $2.5 million in the bank after an exit, you’ll need to sell your company for somewhere around $4 or $5 million (given you’ll need to pay Federal and may even have to pay State tax on the entire lump sum).
In addition, even if you sell your company for $4 million, you’re probably going to want to spend some of that money to reward yourself.
So let’s say you need to make $6 million ($3.6M after 40% taxes) to enjoy $1 million and put $2.5 million in the bank.
Sure, everyone reading this would love to deal with the “problems” above.
What you might not enjoy, however, is realizing that even if you sell your company for $5 million, you will probably still need to continue working. Why?
Because $100,000 in pretax income breaks down to approximately $70,000 - $80,000 per year after taxes.
Which, on a monthly basis, is between $5,900 and $6,650.
If you use the million dollars to pay off your house in full and buy a car or two, you will eliminate what are two of people’s largest expenses: accommodations and transportation.
With that said, you’ll still have property taxes on your new home, car insurance for your vehicles, food, entertainment, and maintenance for both your home and vehicles.
Not to mention, depending on where you buy a house, $1 million might not even get you that much.
As an example, in Southern California the average home costs $778,000.
Add in closing costs for the realtor, furniture, and any remodeling that needs to be done, and your $1 million will be gone before you know it.
On the flipside, if you live in a less expensive area and live a more humble lifestyle, that million dollars can take you very far.
But it’s not just the money side of things you’ll need to think about.
As any post-exit founder will tell you, once the euphoria of the fat paycheck wears off, the anxiety starts to set in.
Am I done?
Was I a one-hit wonder?
Will my spouse understand if I decide to launch another company?
Am I a bad parent if I decide to go back to work even though we’re set for life?
And worst of all:
What am I supposed to do all day given everyone else is working?
All of these and more are direct quotes I’ve heard from founders shortly after they exited their company for generational wealth.
So what’s the alternative?
Build a high cash flow business.
While building a high cash flow business will not help you retire at a young age, it solves most every other problem that founders deal with after selling their companies.
First, unless you’re trying to live a truly extravagant lifestyle, there’s almost nothing you can’t afford when you’re making $30,000 per month.
Sure, you won’t be able to buy a Bugatti or fly private at that level.*
*Nor would you be able to after a $10M exit.
But with a $7,500 per month mortgage and a $3,000 per month car payment, you can live pretty damn luxuriously.
First-class flights. Five-star hotels. All of the above and more will be within your grasp.
Second, by building, growing and maintaining a high cash flow business, you will not have to deal with the existential anxiety of “not having to work.”
See, there’s something paradoxical about making money and retiring at a young age.
Mainly, that the people who are ambitious enough to actually make that much money won’t feel satisfied if they stop working. Especially if they're younger.
At the same time, the people who would feel satisfied not working are too lazy to ever achieve that level of wealth.
Meaning, if you have it in you to build and sell a $5+ million company, odds are quitting work will leave you horribly unfulfilled.
However, by running a high cash flow business—which you can do in as little as 1 to 2 hours per day once you scale it to a certain level—you can live a relaxed lifestyle without having to deal with the anxiety of having nothing to do.
Second, running a high cash flow business allows you to scale your income as your lifestyle situation changes.
While the post-exit founder has a fat nest egg, dipping into those funds for lifestyle expenses can result in that person’s money disappearing very quickly.
And remember, if they try to follow the 4% rule, they will be stuck living on just ~$6,000 per month.
On the flipside, as long as you’re still running your business, you can scale it up or down depending on your anticipated expenses.
For example, if you know one of your children is going to be going to an expensive college, you can scale the business up to generate extra cash.
On the flipside, if you plan to spend a year surfing in Central America—where your living costs will be almost nothing—you can scale the business down since your expenses will be lower.
Admittedly, running a high cash flow business has one major downside compared to building and selling a company with equity value:
You don’t get the multi-million dollar payout.
As I’ve tried to argue here, between taxes and the cost of living in the West, you would need to sell your company for well over $10 million to enjoy a truly luxurious lifestyle where you never have to work again.
But there’s no denying having millions of dollars in the bank provides a level of peace and comfort you just don’t get from actively running a business.
Mainly because, no matter how much your business is making, there’s no guarantee it will make that much next month.
From a debilitating injury to an AI improvement that makes your company’s product or service irrelevant, there are serious risks inherent to being an entrepreneur.
At the same time, just because you build a company with equity value does not guarantee that somebody else will be willing to buy the business from you.
In short, both career paths have their Pros and Cons.
Further, there’s no reason you can’t do both at the same time.
While many of today’s most popular online business models do not have equity value (e.g. freelancing, personal brands, etc.), some of them do.
In particular, agencies, software companies and e-commerce brands.
In addition, while they sell for lower dollar amounts, Amazon FB stores, Amazon Kindle brands, dropshipping stores, and even faceless page brands can be sold for six to low seven figures.
Admittedly, you won’t be able to retire off of that much. But many of these businesses can be built in just 10 to 20 hours per week through proper delegation.
In conclusion, the question of whether or not to build an equity business comes down to personal preference.
If you’re someone who is highly risk-averse - and values safety and comfort - maybe you’d prefer having a couple of million in the bank and figuring something else out from there.
If you’re a hustler, however, it’s very possible you will get more fulfillment out of—and be in a better financial position as a result of—building a high cash flow business.
What matters is understanding the risks and benefits of both, and being willing to pay the price for success no matter which path you choose.
💡 Takeaway: As an online entrepreneur, one of the most critical decisions you will make is whether to build a cash flow or equity business. More important, understanding the Pros and Cons of each can have a massive impact on your financial future.
🎁 Resources:
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