He was a smart young guy [AJC: aren’t they all?] who was setting up his own Internet design studio, building Internet-based software projects for other business owners.
His business is essentially a professional service business, and my advice to him was pretty much the same as I give to all professional service business owners (consultants, accountants, attorneys, doctors, etc.):
Except in rare circumstances, you don’t have a business, you have a high-paying job … with perks!
[AJC: the perks are around the tax benefits that attribute to business owners but not to paid employees; ask an accountant for examples.]
Most of these kinds of businesses don’t scale very well i.e. they can’t grow very large; they rely on the owners’ personal exertion (sometimes called ‘partners’); and, either can’t be sold, or can only be sold for small multiples of annual profit or turnover.
In short: you can’t rely on selling these businesses to fund your retirement.
But, what they do generally provide is income …
Because they are professional services, the owners are able to sell their own labor – and, those of their employees – at high multiples, usually generating excellent recurring revenue.
And, because they often take years of hard work and relationship building over many, many clients they can be quite “bullet-proof” (if well managed) in terms of providing that income reliably.
This was certainly the case for the young guy that I met.
Even though his agency was still quite young/small, it was already generating a nice income and showing signs of growing well.
My advice for him was to grow his personal income very slowly (this is advice that I would give to any business owner), and to pull as much money out of the business as possible (this is not advice that I would give to other business owners) …
… my advice was to treat the business as his personal ATM
[AJC: but not to the detriment of the business, or his partners, employees, clients, backers, etc.]
But, my advice was not to spend that ATM-cash on personal lifestyle building (homes, cars, vacations, etc.), but on passive investments.
I recommended that he use that cashflow to fund an aggressive investment portfolio, outside of his business: one that would one day grow to replace his personal income as generated by the business.
When the day comes that his passive income surpasses his personal business income, he becomes free.
What would you advise?