Capitalized Earnings

Someone wrote asking why business owners seem to make a lot more money and build wealth faster than those who make large amounts out of the gate (lawyers, doctors, et cetera). I thought the answer might be useful to those of you who want to do more than invest, but want to grow very, very rich.

The reason has to do with something known as capitalized earnings. When you own a business that earns, say, $2 million per year, it’s a pretty good guess that you could sell the company for $20 million or $30 million plus you have that cash flow that will let you invest or spend. Now, if you had to actually make that money, because of the way the tax laws are written, you’d actually have to generate somewhere between $31 million and $46 million. It's a whole lot more difficult to make $46 million pre-tax than it is to build a business that makes $2 million.

It really is that simple. That's not to say it's easy, but it is simple.