This is the affluent entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money and scale your life while creating a
deeper impact and living with complete freedom. Because that's what it really means to be an absolute entrepreneur. Well, there's this impression that if you are a business owner, you must be wealthy. It's not really the case. Here's the thing. The problem. There's certain problems with business owners that they don't, they don't run their business in a way that allows them to build
wealth at the same time. It's one of the reasons that I wrote my, my recently released USA Today best selling book, building your money machine, is because it's one of the things that I was getting wrong in my businesses. I saw that my business was my wealth. It's one of the big mistakes. Now let's just look at some statistics really quickly because now you'll start to understand where this all comes from and I'll break it down for you here. And take this as a lesson
of what to do if you are a business owner. If you want to be a business owner, you want to use business ownership as a path to wealth, what you need to do differently, what do you need to do better and what you need to not do. All right, so the US Bureau of Labor Statistics said the failure rate of most businesses is 20% in the first two years, 45% in the first five years, and 65% over a decade. Okay.
So when you just look at the success metrics, using business ownership as the vehicle to wealth creates a bit of risk because the likelihood of success and depending on the kind of business, like if you're going to start a restaurant business, the failure rate on those is even higher. Now, I'm not saying not to do it. Look, I've got multiple businesses. I've started businesses. I've bought and sold businesses over the years. I've worked with
clients that have had their businesses built business. I sit on a board of directors of a business that was founded in the, in the late 18 hundreds. So businesses do exist. I'm just trying to give you a little dose of reality and not to convince you not to do it, because that's talking out of both sides of my mouth, because I'm doing it I'm trying to convince you how to do it right.
Okay. If you start to look at this, one of the other statistics in some of the studies that I've seen, saw Washington, that small business owners, when they started their business, over half, 54% of them, said they didn't have a good understanding of financial management before starting their business or financial literacy before starting their business. Y'all, you're gonna go out there and you're gonna bet the farm on building wealth by starting a business.
But you don't understand the financial metrics and the financial analysis and the financial methods and methodologies and all the stuff that drives business. No wonder the failure rates are high. So it's not about not doing it. It's about understanding it. Now, here's where the challenge is. A lot of business owners come to business because they were working for someone else. And they said, I can do this better on my own. And you are a tactician.
You are someone that has expertise, knowledge, experience, and you want to take that and put it in the world. That's great. You have specific set of skills that you can go out there and serve and create a solution that itself doesn't create a business. That is simply a specific set of skills that you can take out to the world and solve a problem. You have to bring and create business around it. You have to create a structure
around it. You have to create operations around it. That's a different skillset that many business owners, when they first come to it, don't have now. Some of us, the reality is some of us become business owners or entrepreneurs by necessity. We got outsourced, downsized, laid off, fired, whatever it is. But by necessity, we said, I just got to do this on my own. So you took the skills to the marketplace, but you didn't take a business to the marketplace. And
so I think this is one of the statistics that I found staggering. That overhead. Half, over half of small businesses didn't have a good understanding of financial management. If you're thinking of starting to build a business and use the business to build wealth, I think it's important for us to understand the financial management of the business and the wealth. Okay. 48% same study said 48% of business owners plan to build their personal wealth by growing their business.
Yo. 54% said they don't have a good understanding of financial management. But almost 50%, 48% said that they want to grow their wealth through the business. Well, if we're betting that much of our financial future on the business, it's going to help us to make sure that we have the skills, the knowledge, the wisdom, and everything to take it forward. There was another study that I read that said business owners have 70% to 80%, 70% to 80% of their net worth tied up
in the company. This is a problem. This is a problem. And I'm saying it from the perspective of understanding that what we're trying to do when it comes to wealth isn't just some lofty number. We can build wealth. You can acquire a bunch of assets and you build wealth. But if those assets create wealth, but no cash flow, you are poor. You are asset wealthy, but you are cash flow poor
when it comes down to building your money machine. Like I talk about, the whole purpose of the money machine is that. That when you build the money machine through these assets, through things like a portfolio or residual income streams or asset based income streams, through the five incomes that I talk about, when you build that, it isn't about just having this asset. It's about having an asset that can support your lifestyle through
cash flow. When I decided to stop everything in the middle of my cancer, we had a pool of assets. The money machine that could produce cash flow, that allowed us to live, allowed us to continue, allowed us to without shrinking our life. We weren't selling things to do it. What I don't want to do is dismantle the machine to be able to survive, because then the machine
isn't there to take care of us. And if 70% to 80% of our net worth is tied up in a company, then the only way to get the money out is either sell the company or hope that the company is cash flowing enough that it's going to support us. But if I have to continually run the company, where's the freedom in it? The whole purpose of building a money machine, the whole purpose of financial freedom, is to separate your ability to earn cash flow from the efforts to earn it. And many
businesses are illiquid. In fact, just. And I bought and sold businesses over the years. I valued businesses over the years that were being bought and sold. Do you know that 40% of businesses, less than 40% of businesses that get listed for sale ever sell? What that means is over 60% get put up for sale
and never transact. So this is why it's important if we start to look at it and say business owners, 70% to 80% of their net worth is tied up in the company, and if their way of now getting cash out is to sell the business, yet more than 60% of businesses do not sell. This is a problem, okay? It's a focus and a concentration of risk that can get you into trouble. It's one of the things that I think we need to think about. Why do I say they'll never
be rich? There's some things that I see habitually happening in businesses, and I'm going to walk through some of them for you here so you can understand where they come from. The first is this number one, and this is huge. Is this hyper focus on revenues, y'all. Okay? Revenues is a vanity metric. Revenues is a vanity metric. I don't care what your revenues are. Revenues are the top line, OKAy? The more important thing is, what are your profits and cash flow? If it doesn't end up in my
bank account, it doesn't end up in my net worth account. And yet I can't tell you how many times people are looking at the revenues, how much sales and focus on the revenues. Let me give you a for instance. In my situation, my partners pushed me out the door. We're going back into the nineties a long time ago, okay? They decided that we were going to go our separate ways. At the time, we had 29 people working for us. And at the time, it would cost us
month just to open the doors and break even. So it was costing us 1.2 million to open the doors and break even before we took a dime out. Because we had office, we had staffing, we had all that stuff. When we separated, I asked them, I said, here's what I want. Give me a couple of phone lines on the phone line bank, someone that's going to answer the phones. Access to the infrastructure, like copiers and things like that, and access to one assistant and an
office. That's it. So I paid them office rent and all that stuff, and that was it. So I went from a staff and overhead of 29 people to me and a couple part timers. That's it. That first year, I build, revenue wise, I build 60%, 65% of what they did as a Firm with 29 people. But I took, took home three and a half times more than the other partners did. So what happened? What happened is that my revenues went down, but my profits and cash flow went up.
I'm not living on revenues, I'm living on profits and cash flow. I build wealth on profits and cash flow. Your focus in business is on profits and cash flow? Yeah. We need the revenues because without revenues, we'll have zero profits and cash flow. But revenues alone isn't enough. We have to look from the revenues and say, how can I make it profitable and have the cash flow? Okay. The second thing that I see with owners is they, they put themselves last. Okay, now I get it.
You're going to invest your time, your effort into a business. But if you don't ever take a salary, if you don't ever take compensation out, then you're doing basically work for free. You're betting on the fact that the business will grow and someday you will get paid. But we already said that 60 plus percent of businesses that get listed for sale never get sold. So it's
a fool's game to do that. What we need to do, and I did this in a special training that I did called entrepreneurial cash flows, is that you need to have a plan. And in that plan, implicit to that plan is you getting compensated for the work that you do. Because if you are an operator, if you stepped away, you would have to pay someone to do it. You should be planning for
that. If your business can't be profitable and doesn't have the margins to carry paying for the functions that you are serving and everyone else is serving, then there is a problem with your profit structure and we need to go back. But I watch over and over again people that do not pay themselves, which means that they have no additional cash, which means that they are not building wealth. It's all in the business. They're or 70% to 80% of their net worth is tied up in
the company. Okay, now I get it. At the beginning you might be reinvesting and doing that, but long term, make sure that you're taking money out of the business for yourself. If it can't afford it, you have to evaluate and take a critical look, line item by line item, about the company to see where the profitability structure is, where it's bleeding and how to fix it. Okay, so that's number two. Number three is I see them stop reinvesting in
the business. Now you're going to feel like some of these are in conflict with each other, but the reality is what we're trying to do is balance these things. Okay? You're investing in the business to get it to grow. You're investing the business to develop marketing plans, to develop clients, to develop products, to develop services, to develop people. So there is an investment that you need to do. But if we start to rest on our laurels, complacency is the first step to crisis.
Okay. Even though you may have been tremendously successful in the past, it doesn't guarantee their success in the future. And if you get complacent, someone is coming to steal your lunch just the way it is. Especially if your business is profitable, if you have high margins, high profit business. The one thing I can guarantee is going to happen is competition.
Someone's coming for a piece of that profit and they're going to find a different way, a better way, and they're going to take your market share if you're not here. So bottom line is you can interpret this as stop reinvesting the business or stop being the leader in your market or your industry or your community. You need to stay at that cutting edge. You need to stay as sharp as you were when you began the business, throughout the
business, or you start to fall behind. Okay, then, number four, this is a huge one, not running two journeys. This is, in fact, the basis and everything that I talk about in my book, building your money machine. All right? And it's important for you to understand this because I made this mistake. I thought that as long as I grew my business, as long as I grew my revenues, as long as I got more clients and more clients and more projects and I was generating income, I was going to be
fine. The problem was I was running on a treadmill. I was constantly running on a treadmill. And the only way for me to increase my revenues, my profits and my cash flow was to run longer, harder, faster on the treadmill. And the only thing that that assured me of was burnout, breakdown and disaster. Okay? The problem is that is the one journey we are taught called an earnings journey. We are. We are raised in school, growing up, go get a good job, get a good career, a good
professional path. Build a business, make money, make money, make money. You make money, you make money. That's going to solve all the problems. It don't solve all the problems. I promise you this. Financial freedom isn't in the making of the money. Financial freedom and wealth isn't in the making of the money. Financial freedom and wealth is what you do with the money that you make. It's why in the book I say you're on two journeys. The
first journey is the earnings journey. That's the business side of it. But the business is meant to optimize value and optimize cash flow. It isn't meant to give you freedom. It's meant to give you the cash flow. Then there's the second journey called the money journey, and I break it all down for you in the book. But it is the money journey. This is how you take the cash flow from the earnings journey and build something that doesn't require as much effort to create
the earnings. This is where you optimize assets and time. You get your time back. You get to live by choice. This is where you build freedom. This is where you get control. This is where you create a legacy by creating something that is separate and apart from you. The money machine that we've created, the portfolio that we've created, the
assets that we created. Yes, there is some effort, but is nowhere close to the effort that it took to write the book, or it's nowhere close to the effort that it takes for me to do the work that I do. And when it gets large enough that I can stop the work that I do and allow it to pay, that is freedom. That's the money machine. That's what we're trying to do. So when you get in this game, and why most business owners end up will never be rich, is they're running one. One game
earnings twice, 70% to 80% of their. Their net worth is tied up in their business. They need to run both games, earnings, money, same time. Okay, same time. The answer to all of this is the money machine. But here's some other things to think about. And I hear this all the time when you talk to an entrepreneur. A lot of times I want to take that piece of Cash. I want to take a slice of their
profit, and I want ThEM to build the money machine. And their response back to me is, but, Mel, I can make more money if I put that money back in the company. So why would I take $100,000 out of the company and put it into an investment that might make me 1012 percent max in a diversified portfolio when I could get 2020 5% by investing it in the growth of the company? And you know what? They're right. From a return perspective, it is really important to sit back and say, just a return
perspective. I can get a better return on the company than I can in these other investments in many cases. But they're only looking at one side of the equation. My work is to create an unshakable foundation. Safety first, growth second. If 70% to 80% of your net worth is tied up in the company, because all you're doing is reinvesting in the company, what happens
when we can't sell it? What happens if the company has a problem? What happens if a pandemic happens and now it declines, or you can't do business anymore, and now you lost 70% to 80% of your net worth. One of the reasons you take money out of the company and invest and build a money machine is diversification. See, they're focused on the return. But you cannot look at the return on investment without looking at the risk of the investment. And if 100% of everything's going into one pot, the
business, the risk is way high. If you can't run it, if he can't run. If you have a health issue, you decide you want to get out. I can't sell it 60% plus, don't get sold. Now, all of a sudden, I've built this big monstrosity by reinvesting in it, but I can't turn it into wealth that's usable. And so I get the concept of I can make more by keeping investing in my company, in my business. But we're forgetting the risk. What I want to do is allow the business to
grow for the sake of growing. And may we get something out of it, but also use it as the funding vehicle to create diversification and wealth outside the business. Okay? And so it's important for us to look at it through those eyes. The other thing to think about is this. There is a difference, and I talked about this in another episode, there is a difference between get wealthy and stay wealthy. There is a difference between an entrepreneurial mindset and a wealth mindset
or a richness mindset. The entrepreneurial mindset is a lot of times is determination. It's perseverance, it's risk taking. It's looking for significant financial rewards. It's doing some things that really start to build things, and you can do it. But when we start to want to build wealth, we have to expand that mindset. We have to start thinking broader. We got to look at more diversified view. We cannot look at one line of success, the business,
for our wealth. And we need to look at other ways to make sure that we're increasing the probability of success by diversifying and building something outside the business. Okay? It's important to look at it through that set of eyes
from a long term perspective. So I hope that this was a little different of an episode, but I hope that it made sense for you to start to understand, if you're starting business or you're in business, to think it through and say, how do I create something that becomes the fuel to create wealth that isn't tied to the business? Knowing that 70% to 80% of net worth is tied in a company, you don't want that. And 60% of companies don't sell after being listed, you don't want that. What you want
is you want your wealth to stand alone. And when we build the business, we get a chance to sell it. If it sells, it becomes the gravy, it becomes the frosting, the icing on the cake. But we are not dependent on it. And the reason most business owners will never be rich is they become dependent on the business. The business is dependent on them and their efforts. They have no assets outside of or very little assets outside of the business. And when they cannot
sustain it, they cannot run it any longer. They decide not to run it any longer or they can't sell it. Their ability to be rich goes away or shrinks tremendously. I don't want that for you. I want you to follow the right recipe. I want you to do the right things to increase the probability of success in business and in wealth and in life. And the way to do that is to build a money machine. If you want to understand the nuances and the details of that, get my book, building
your money machine. You can go to your book, yourmoneymachinebook.com, to grab it. But bottom line is this. Most business owners will never be rich because they don't understand some of the things that we talked about here. But now you do. All right? So let's get it going. Let's build it the right way, and let's give you the financial freedom you deserve. All right? I hope that you found some value. And I look forward to seeing in another episode or on the road as I speak,
just on the streets where we chat. All right? Until then, always, always strive to live a life that out lose you. Thank you for listening to the affluent entrepreneur show. With me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group, and I'll see you there.