Some people start or buy small businesses to get rich. Others do it because they are passionate about the industry they want to enter, or are excited to build a small business that might give them more freedom over their time.
What if you’re in the first camp? Will it work? Is a small business your path to riches? Let’s explore that question and what needs to be true for a small business to make someone rich.
What Does Rich Mean Anyway
How do you define “rich”?
Rich means something different to everyone, but I have to come up with a universal definition of rich to answer the question of whether a small business is the path to riches. Here are some possible definitions:
- You can be rich in time
- You can be rich in friends
- You can be rich in happiness
You can define rich in all sorts of non-monetary ways (and you probably should). But that’s a topic for a different forum. I think it’s fair to say that in the context of this post and this question, rich is a monetary measurement. So I’m going to have to come up with a dollar figure.
According to Statista the average income in the United States is $89,930 and the median household wealth is $692,100. However, being rich is not average. Rich is relative. If everyone had the same amount of money no-one would stand out as rich. So given that it’s relative, I’m going to take the top 10% as “rich” in monetary terms.
Again, according to Statista the top 10% have:
- An average annual income of over $200,000.
- An average household wealth of over $2,500,000.
Those are some pretty lofty heights. But which one are we talking about?
Are We Talking Income or Assets
There are two ways to build wealth through a small business:
- Through the earnings you distribute from the business as dividends.
- Through the value of the business you own, if you were to sell it.
The second is essentially the future value of the first. Let me explain, the way a professional will place a value on your business is by looking at the earnings from the business into the future. A simple way to think about it is if you have yearly earnings of $100,000 and the professional valuer decides to use a multiple of 10 times earnings on your business, it’s assigned value is $1 million.
Because earnings also determine value, we can take earnings as our unit of measure to see what it takes to be rich. So our target number is $200,000 in yearly distributable earnings.
It All Comes Down to Margins (and Multiples)
We can now goal seek to $200,000 in earnings.
Based on the data available on various government websites that report small business statistics, the average profit margin for small businesses hovers around 5% net operating profit. That means you’ll need to generate $4 million in revenue to put $200,000 into your pocket each year.
If we consider a 10% net operating profit, that’s $2 million. Let’s face it, you’re not average and will not set out to build a small business that only achieves a 5% net operating profit after you’ve worked on it.
So to earn $200,000 per year from a small business, you’ll need to generate $2 million in revenue. Here’s how that can be done:
- Sell 200,000 items for $10.
- Sell 20,000 items for $100.
- Sell 2,000 items for $1,000.
- Sell 200 items for $10,000.
That’s a lot of sales at the low end! And a big ticket item at the high end!
Your $200,000 goal to be considered rich is a very tall order. And it’s important to know this before you start. Rich small business owners are impressive people with market savvy, excellent planning ability and able to be relentless with operational execution.
What Are The Chances
To find helpful information on the chances of exceeding $2 million in revenue, I had to travel (virtually, of course) to Australia. So we’ll have to remember that these figures are in Australian dollars, which will inflate the chances.
According to Australian Small Business and Family Enterprise Ombudsman, here are the percentage of businesses by revenue band:
- 25.0% have less than $50,000
- 34.1% have between $50,000 and $200,000
- 33.9% have between $200,000 and $2,000,000
- 4.0% have between $2,000,000 and $5,000,000
- 1.4% have between $5,000,000 and $10,000,000
- 1.6% have more than $10,000,000
If we add up businesses with over $2 million in revenue, that’s 7.0%.
You could say that there is a 7% chance that a new business you start will have over $2,000,000 revenue and enough to make you rich. Remember, these figures are in Australian dollars so it’s likely slightly lower, and revenue of $2 million or more is achieved only by the strongest, most experienced operators.
I’ll leave it up to you to decide whether a small business is the road to riches.
What Does It All Mean
A small business that does $2 million in revenue is likely to require a large physical footprint, plant and equipment, a well-trained and reliable workforce and much more. Start-up costs could be in the millions. Of course, you can buy a small business with $2 million in revenue already, but that likely means you are already rich or have access to capital.
Here are some activities you might need to complete:
- Get access to millions in startup capital.
- Secure a large site in a high traffic location.
- Negotiate a favorable real estate deal.
- Recruit and lead a team in the tightest labor market we’ve ever seen.
- Offer a product that has lots of demand in your chosen market.
- Execute consistently and market effectively.
- Maintain a high level of customer service every single day.
Only then could you reasonably expect to achieve revenue of $2 million and the goal of becoming rich.
That’s a lot of effort, a lot of work and a healthy dose of risk.
Yes, a small business makes a certain number of people rich. There’s a 7.0% probability it can make you rich too. However, owning a small business is more likely to make you comfortable.
The average earnings for a small business owner is $69,593. That’s a good living for most people around the world. Maybe becoming rich here isn’t the goal.
So not everyone will become rich if they start a small business. And that’s okay. For most, a small business represents the chance to earn a good salary that you can get mostly on your own terms.
Before you go...
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