Create Your Fountain of Wealth
Recently I was asked by a coworker to help train one of their new janitorial business owners on profit and loss statements (P&Ls), balance sheets and how to budget for the upcoming year. This new owner purchased the business with her younger sister from their boss who was retiring. For this article’s sake, we’ll refer to these two sisters as Cathy and Holly. While training Cathy, I learned that she and her sister had been working for the previous owner as a side job. Cathy was working as a full time public school teacher and Holly was still in college. I am unaware of the entire story, but these two young women decided to purchase an international franchise business at the ripe old age of 24 and 21 respectively.
Can you believe this?!! In their early 20’s, they are buying a business, and not just any business, but a top franchise in the nation! When I was 21 years old, I was too busy backpacking through Europe to be worrying about any real responsibilities back home. I was like Holly, working as a janitor to pay my way through college. However, I used my excess cash to travel the world. I don’t feel that traveling is wrong, nor would I change anything about my travel during those carefree times, but I am just so impressed by these sister’s decision to purchase an ASSET at such a young age. As a side note, these two women could still travel if they wish once they get settled into their new roles as owners.
After doing the virtual training with Cathy, I expressed how excited I was for her and her sister to be starting so young on building an ASSET. A few days ago, I had the privilege of meeting Holly while presenting in Las Vegas on customer service programs. Holly is 21 years old, but don’t let her age fool you. She kept up with many owners. Including business owners who do millions of dollars a year in revenue. I couldn’t help but be envious of Cathy and Holly. They are starting so young on building their “empire”.
Since I am a fan of scenarios, I’m going to put one together for Cathy and Holly. I don’t know the details of how they got the capital together to purchase their janitorial franchise, or how much revenue the franchise produced the year they bought it, so I will be making some assumptions in these scenarios. The goal is to show how buying ASSETS at a young age can pay off.
Cathy and Holly purchase this $250,000 a year janitorial franchise from their retiring boss for $85,000. I’m assuming a low price because sometimes owners shrink their businesses as they near retirement. Again, I have no idea what the actual numbers are, I am just guessing here for the example’s sake. Let’s assume that Cathy and Holly put $10,000 down ($5,000 each) to the retiring owner, and agreed over the next 5 years to pay $1,415.34 a month until the remaining $75,000 was paid off. This is an interest rate of 5%. Having a selling owner finance the deal is a great way for people with little to no capital to get their foot in the door of ownership. The business could easily produce that payment each month, as well as pay the sisters a living wage (notice I didn’t say a good wage, just a living wage). At this time, they are probably paying themselves less than what they were earning before the purchase. However, the magic of owning your own business is that you can build an ASSET while paying yourself a salary.
Take a look at the tables below. I’m assuming in the first scenario that they grow the janitorial business at 10% a year and that the business pays the note to the previous owner and any other debt incurred.
The second table shows their return on their $10,000 investment if they grew their business gross revenue by 20% each year.
I know these are very simplistic scenarios. No business grows perfectly by 10% each year. The estimated value of the business is just given a flat 40% of Gross Revenue. This could go higher or lower depending on how well the business is run, their margins, and the value of assets with in the business. But 40% is a good conservative middle of the road estimate.
A small initial investment into an ASSET, like a well run business, can give outstanding returns on your money. In this scenario, you could get as much as 67,000% return on your $10,000 investment! Show me a mutual fund with that kind of return! Also in this scenario, after 20 years of working very hard (like many of us do), these sisters could be millionaires and retire/semi-retire in their early 40’s. What dreams do you have? Where do you want to invest your money? Take your next tax return and see what you can do with it!