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If you are reading financial and wealth blogs, there is a chance you are trying to build or increase your financial position. When I think of fortunes or empires I think of Andrew Carnegie, John Rockefeller, Warren Buffett and Bill Gates. You can name many more tycoons who create a family fortune. What were their secrets to creating wealth?
If I were to start today on a path seeking fortune, I would start by starting or acquiring a business. This is the foundation to creating a vast amount of money. Of course, you can invest, run a hedge fund or buy a lottery ticket. But to create an empire that has lasting sustainability, you need to own a business that can be grown over time.
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The first characteristic would be a business that has strong cash flows. In order to grow your business, you must have the capital to reinvest or expand the business. The business must be self-sustaining by providing a reasonable return to you. In finance, you may guage this as return on invested capital. The higher the ROI, the more profitable and efficient the business is at creating value. As the value increases, so does the owners wealth. Some industry’s have high ROI such as drug companies, consumer staples and information based companies. I usually think of Proctor & Gamble, Clorox, Intel, Aflac and others as high ROI companies.
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The next thing to look for is growth or scalability. It takes a significant amount of revenue increases to create an empire. You can do this by growing your business or by expanding your scable resources. I think of this as being similar to franscising a business. Each new location opened by a new franchisee will expand your geographic reach and increase your incremental revenue. So, the business should be able to grow to be a strong empire maker.
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The last characteristic but maybe the most important is compounding returns. To do this as an owner, you want to own as many shares or a large portion of the business over an extended time period. If you think of Buffet and Gates, they each hold the largest stakes in their respective companies. As an owner, you need to be careful how you dilute your share of the pie or your empire will fail to materialize.
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Many business owners exchange shares of their business for capital from investors. In some cases, this is required to invest and grow your company. However, let this be one of your last choices if you want to be a business tycoon. You should hold on to the largest piece of equity as possible.Â
