JOBS: MILLIONAIRES VERSUS HEIRS
THEY CHOSE THE RIGHT OCCUPATION.
About ten years ago, a reporter from a national news magazine called. She asked the question we are most frequently asked:
Who are the affluent?
By now you probably can predict the answer. Most of the affluent in America are business owners, including self-employed professionals. Twenty percent of the affluent households in America are headed by retirees. Of the remaining 80 percent, more than two-thirds are headed by self-employed owners of businesses. In America, fewer than one in five households, or about 18 percent, is headed by a self-employed business owner or professional. But these self-employed people are four times more likely to be millionaires than those who work for others.
The reporter followed with the next logical question:
What types of businesses do millionaires own?
Our answer was the same one we give everyone:
You can’t predict if someone is a millionaire by the type of business he’s in.
(242 of 277)
After twenty years of studying millionaires across a wide spectrum of industries, we have concluded that the character of the business owner is more important in predicting his level of wealth than the classification of his business.
But no matter how hard we try to make our point, reporters want to keep things simple. What a great story, what a great headline, it would make if they could tell readers:
Here are ten businesses millionaires own!
We have gone out of our way to emphasize that there are no sure steps one can take to become wealthy. Too often reporters ignore the facts. They sensationalize and twist our research findings. Yes, you are more likely to become affluent if you’re self-employed. But what some of these reporters don’t tell you is that most business owners are not millionaires and will never come close to becoming wealthy.
We do tell reporters that some industries tend to be more profitable than others. Thus, those who own businesses in the more profitable industries tend, by definition, to realize more income. But just because you’re in a profitable industry does not guarantee that your business will be highly productive. And even if your business is highly productive, you may never become wealthy. Why? Because even if you earn big profits, you may spend even bigger amounts on nonbusiness-related consumer goods and services. You may have been divorced three times or have a habit of gambling on the horses. You may not have a pension plan or own any shares in quality, publicly traded corporations. Perhaps you feel little need to accumulate wealth. Money, in your mind, may be the most easily renewable resource. If you think it is, you may be a spender and never an investor.
But what if you’re frugal and a conscientious investor and you own a business that is profitable? In this case, you’re likely to become wealthy.
It is easier to earn higher profits in some industries than others. We identify several of these profitable industries in this chapter. But again, we caution readers not to oversimplify our findings and suggestions. Too often people want a “sound-bite” answer to the question of how to become wealthy in America. Even worse are those who distort our data-based findings. Consider, along these lines, the message that was recently left for us by a business broker:
(243 of 277)
I thought you would like to know that someone has printed a brochure stating that you are a professor at Stanford University and that you found that 20 percent of the millionaires in America are dry cleaners.... Is this true?
First, neither one of us ever taught at Stanford. Second, neither of us has ever stated that one in five millionaires is at this moment pressing shirts. We did find in the mid-1980s that dry cleaning was a profitable small-business industry. But again, profits don’t automatically translate into affluence or accumulated wealth. This is like those sons of ours and perhaps yours who thought they would make the varsity basketball team because they bought a pair of Air Jordan shoes. A label does not make a varsity player. Nor does an industry label make the business owner wealthy. It takes talent and discipline to generate profits and ultimately wealth. That is why we are offended by people who tell the American public:
Just buy my educational/study-at-home kit and your new business venture will be a success. Start your own business today—you will be wealthy tomorrow. I did it in this industry. You can do it, too! It’s so easy!
Again, it’s not the kit, not the idea, not the industry. For example, the profitability data for hardware/lumber retail establishments twenty-five years ago never got us excited. They didn’t convince us to invest in a business of this type. But think what the founders of the highly profitable Home Depot did. They reinvented the industry. They did not allow industry standards for profits, sales volume, or overhead to dictate how they operated their business and invested their money. These founders had tremendous talent, discipline, and courage. They became wealthy and helped make a lot of their employees and other investors financially independent. Most people who make it big in business set their own very high standards.
(244 of 277)
ONLY CHANGE IS PREDICTABLE
Things do change, even in the so-called owner/manager business envi-ronment. Take, for example, the industry we mentioned previously—dry cleaning. (In fact, the appropriate title is laundries, dry cleaning, and garment services.) With regard to this industry, Tom Stanley reported in 1988:
In 1984 there were 6,940 partnerships; 91.9 percent have net income, while the average return on receipts (net profit as a percent of receipts) was 23.4 percent (Thomas J. Stanley, Marketing to the Affluent [Homewood, I11.: Irwin, 1988, p. 190]).
What about the profitability of this industry in the 1990s? We analyzed the IRS’s federal income tax return data. In 1992, we determined that there were 4,615 partnerships; only 50.5 percent had any net income, while the average return on receipts was 13 percent. Also in 1992, there were 24,186 soleproprietorship dry cleaners in America. What was their average net income? On average, it was $5,360. This placed dry cleaners 116th out of 171 sole proprietorships based on average net income criteria. The industry at that time ranked 119th in return on receipts, which equaled 8.1 percent. What percentage of dry cleaners generated a net income? Nearly three in four, or 74.1 percent, made at least one dollar of net income. In this regard, dry cleaning ranked 92 out of 171 industries analyzed.
What a difference eight short years can make. But the dry cleaning industry is not the only one to encounter such changes. The data in Table 8-1 contrast selected industries. You will notice that several have experienced significant changes in profitability over the years. The number of men’s and boys’ clothing and furnishings stores, for example, more than doubled from 1984 to 1992. In 1984, all of the sole proprietorships in that industry made a profit. But in 1992, only 82.7 percent were profitable. Its rank in this regard dropped from first to fifty-seventh among the 171 sole proprietorships studied. The highway and street construction contractors industry moved from a ranking of 8 to 138, while coal mining moved from 14 to 165.
(245 of 277)
Many external and often uncontrollable factors influence the profitability of industries and firms within those industries. Often the presence of high numbers of profitable firms within an industry attracts more and more people to the industry, which can have a dampening effect on profits. Changes in consumer preferences can also affect profits. So can the actions of our government. If it had an energy policy that favored the use of coal, perhaps the number of soleproprietorship coal mining businesses would not have dropped from 717 to 76 in just eight years. Note that only 34.2 percent of the 76 coal mining businesses made a net profit. But in spite of this, sole proprietors in this business earned an average net income of $196,618. Obviously a minority of coal mining operations owners ignore industry trends and standards, and many of these people have been rewarded for their tenacity and contrary beliefs about the coal industry. Many successful business owners have told us that they enjoy “short periods of rough times” in their chosen industries because they weed out much of the competition. This seems to be the case in the coal mining industry. The 34.2 percent of the businesses in the industry that were profitable had a net income of approximately $600,000.
TABLE 8-1 RANKINGS OF SELECTED CATEGORIES OF SOLE PROPRIETORSHIPS ACCORDING TO THE PERCENTAGE WITH NET INCOME!: 1984 VS. 1992
(246 of 277)
Category : (1984 : Total Number of Businesses ; Percent with Net Income; Rank ) [1992 : Total Number of Businesses ; Percent with Net Income; Rank ] ; Average Net ($000's).
• Men’s and boys’ clothing and furnishings stores : (1,645 ; 100.0 ; R1) [ 3,410 ; 82.7 ; R57 ]; AN8.2 .
• Offices of osteopathic physicians : (1,001 ; 100.0 ; R3) [10,598 ; 96.3 ; R13]; AN 7.16 .
• Mobile-home dealers: (4718 ; 95.4 ; R7) [6,844 ; 92.3 ; R23]; AN10.1 .
• Highway and street construction contractors : (6,812 ; 92.5 R8) [8,641; 56.0 ; R13.8]; AN12.7 .
• Carpentry and flooring contractors : (312,832 ; 92.0 ; R9) [497,631 ; 92.0; R25] ; AN8.9 .
• Offices of chiropractors : (18,928; 91.5; R10) [32,501; 85.1; R49]; AN47.5 .
• Roofing and sheet metal contracting : (53,539 ; 91.4 ; R11); [98,235 ; 86.9; R42]; AN9.1 .
• Drug stores and proprietary stores :
(14,128 ; 90.9 ; R12); [8,324 ; 82.2; R60]; AN45.5 .
• Coal mining : (717 ; 90.7 ; R14); [76; 34.2 ; R165 ]; 196.6 .
• Drapery, curtain, and upholstery stores : (17,508 ; 90.3 ; R1) ; [29,827; 79.2 ; R74] AN6.2 .
•Agriculture /veterinary : (16,367; 89.7; R16); [19,622 ; 92.5 ; R22] ; AN41.7 .
•Taxicabs /passenger transportation : (42,975 ; 89.5; R17); [38,907 ; 97.1; R11] AN7.0 .
• Other local and interurban passenger transportation : (16,945; 894; R18); [30,666 ; 93.6 ; R20]; AN8.8 .
• Dental laboratories : (15,246; 89.4; R19); [28101; 96.0; R15]; AN15.2 .
• Primary metal manufacturing : (4,972 ; 89.2 ; R20); [3,460; 100.0; R1]; AN26.1
• Painting, paper-hanging, and decorating contractors : (180,209 ; 88.8 ; R21); [235,599; 91.1; R28]; AN7.6 .
• Offices of dentists : (77,439; 88.2; R22) [996,746 ;49 ; R16]; AN73.1 .
• Bowling alleys: (1,456; 88.1; R23); (1,547; 13; R7 ] AN574 .
• Offices of optometrists: (16,919; 86.9; R25); [12,576 ; 96.1; R14] AN60.1 .
'Nat income was computed from the 1RS's federal income tax date for 1984 and 1992.
Many people ask us, “Should I go into business for myself?” Most people have no business ever working for themselves. The average net income for the more than fifteen million sole proprietorships in America is only $6,200! About 25 percent of sole proprietorships do not make one cent of profit during a typical year. It’s even worse for partnerships. Forty-two percent, on average, make no profits in a year. What about corporations? Only 55 percent have any taxable income during a typical twelve-month period.
(247 of 277)
SELF-EMPLOYED PROFESSIONALS VERSUS OTHER BUSINESS OWNERS
Fewer than one in five millionaire business owners turns his business over to his children to own and operate. Why? Give credit to wealthy parents. They know the odds of succeeding in business. They understand that most businesses are highly susceptible to competition, counter consumer trends, high overhead, and other uncontrollable variables.
So what do these millionaires advise their children to do? They encourage their children to become self-employed professionals, such as physicians, attorneys, engineers, architects, accountants, and dentists. As stated earlier, millionaire couples with children are five times more likely to send their children to medical school than other parents in America and about four times more likely to send them to law school.
The affluent know the risks and the odds of succeeding or failing in business. They also seem to understand that only a small minority of self-employed professionals fail to make a profit in any given year, and that the profitability of most professional service firms is substantially higher than the average for small businesses in general. We will elaborate on these issues with hard numbers. But first let’s discuss the other attributes associated with being a self-employed professional.
For a moment assume you are Mr. Carl Johnson, the sole proprietor of Johnson Coal. You’re the owner of one of the twenty-six coal mining businesses that made a profit last year out of the seventy-six in the industry. Not long ago, 717 sole proprietors were still in your industry. More than nine of every ten made a profit. Now the industry has been reduced in number by 90 percent. But you’re tough, you’re resourceful, and you’re intelligent. In spite of the withdrawal of most of the other operators, you hung in there. Now you’re reaping the benefits. You made a net profit of $600,000 last year. And you’re doing well this year. Now you have two children in college who are outstanding students. You begin to ask yourself some questions:
◆ Should I encourage my David and Christy to become involved in the coal mining business?
◆ Should I encourage them to eventually take over my parents’ coal mine?
◆ Is coal mining the best place for my children?
(249 of 277)
Most of the millionaire business owners we have interviewed would not encourage their children to take over such a business. This is especially true in cases in which the children are outstanding students. They would suggest that David and Christy, the young scholars, consider other avenues.
Most businesses today require some investment in land, equipment, and buildings. The Johnson Coal Mining business owns mountains that contain coal. It owns millions of dollars’ worth of equipment. It employs many miners and must constantly upgrade the safety of its operation. It must conform to OSHA’s mandates. It must deal with the uncontrollable price the market places on a ton of coal. It must constantly be vigilant about competitors who are trying to steal its customers. It must keep a careful watch on changes in America’s energy policy. It also must keep its workers happy and safe. It must constantly deal with the possibility of a mine cave-in and halted production. Finally, the operation is in a fixed location. Mountains can’t be moved to a warmer climate or closer to a more efficient railroad operation. What happens if there is a prolonged railroad strike?
Ask yourself these questions. If you do, you will soon realize you’re in a precarious position. So what if you run a superior operation? The uncontrollable factors outlined above can kill your business. Given these considerations, that $600,000 you eared last year seems smaller. How many $600,000 years are in your future? What if the uncontrollable factors drive you bankrupt next year? Can you use your skills to teach coal mining at the technical university? Probably not. Your skills are more hands-on, not intellectual.
We once asked an affluent business owner who had fled Europe because of the Holocaust why all his adult children were self-employed professionals. His response:
They can take your business, but they can’t take your intellect!
What does this mean? A government and/or a creditor can confiscate a business composed of land, machinery, coal pits, buildings, and so on. It can’t confiscate your intellect. What do professionals sell? Not coal, not paint, not even pizza. What they sell most of all is their intellect.
(250 of 277)
Physicians, for example, can take their intellect anywhere in America. Their resources are quite portable. The same is true for dentists, attorneys, accountants, engineers, architects, veterinarians, and chiropractors. These are the occupations held by a disproportionate number of the sons and daughters of affluent couples throughout America.
What about the income characteristics of professionals as compared with the Johnson Coal Mining operation? Only a minority of self-employed professionals have ever made as much as $600,000 profit in a single year. And most self-employed professionals spend many years in training, which is costly both in dollars and time. Nevertheless, most affluent parents believe that the lifetime benefits associated with being a professional greatly outweigh the costs. Remember, most of these parents pay all or a significant portion of their sons’ and daughters’ tuition and fees for training. Their vote is with their hard-earned money.
How will you vote? Notice that coal mining, on average, produced a higher net income ($196,600) than any of the sole proprietorships listed in Table 8-2. But what proportion of coal mining operations made any net income during the same period of time? Only about one in three (34.2 percent). This is in sharp contrast with the percentages of profitable businesses in each of the professional service categories listed in ‘Table 8-2. What percentages were profitable? About 87.2 percent of the offices of physicians, 94.9 percent of the offices of dentists, 92.5 percent of the offices of veterinarians, and 86.6 percent of the offices providing legal services.
Also examine the average return on receipts. On average, it would take $2.4 million in receipts for a coal mining operation on average to generate a net income of $196,600 (approximately 8.2 percent of $2.4 million in receipts). What about physicians? The average net income of a physician’s office is $87,000—that’s 56.2 percent of the $154,804 receipts generated. With that kind of return on receipts, how many dollars in receipts would a physician’s office have to generate to earn the same average net income that coal mining businesses earned ($196,600)? Only $349,800, a far cry from the $2.4 million required of coal mining operations. The figure’s even lower for osteopathic physicians; on average, they require receipts of $340,138 to earn the expected $196,600 in net income. Legal service providers, on average, would need to generate $414,800 in sales to earn what the average coal mine operation earned in net income.
What will you advise David and Christy to do? If you’re like most successful business owners, you will advise them to become professionals. So it is with the affluent in America.
(251 of 277)
The first-generation affluent are typically entrepreneurs. They beat the odds. Their businesses succeed, and they become affluent. Much of their success depends on their living a frugal existence while building their businesses. Luck is often involved. And most who succeed understand that circumstances could have gone against them.
(252 of 277)
TABLE 8-2 THE TOP TEN MOST PROFITABLE! SOLE-PROPRIETORSHIP BUSINESSES
TYPE OF BUSINESS : NUMBER OF BUSINESSES ; AVERAGE NET INCOME ($00O'S) ; RANK ACCORDING TO AVERAGE NET ; PERCENT WITH NET INCOME ; AVERAGE RETURN ON RECEIPTS ; AVERAGE RECEIPTS REQUIRED TO GENERAITE AVERAGE NET INCOME ($000'S) ; AVERAGE RECEIPTS REQUIRED TO GENERATE THE AVERAGE NET OF COAL MINING ($000'S) .
• Cool Mining : 76 ; 196.6 ; R1 ; 34.2 ; 8.2 ; 2,397.6 ; 2,397.6 .
• Offices of Physicions : 192,545 ; 87.0 ; R2 ; 87.2 ; 56.2 ; 154.8 ; 349.8 .
• Offices of Osteopathic Physicians : 10,598 ; 77.6 ; R3 ; 96.3 ; 57.8 ; 134.3 ; 340.1 .
• Offices of Dentists : 96,746 ; 73.1 ; R4 ; 94.9 ; 34.2 ; 201.9 ; 543.1 ;
• Offices of Optometrists : 12,576 ; 60.1 ; R5 ; 96.1 ; 30.7 ; 195.8 ; 640.4 ;
• Bowling Centers : 1,547 ; 57.4 ; R6 ; 91.3 ; 31.0 ; 185.2 ; 634.2 .
• Offices of Chiropractors : 32,501; 47.5 ; R7; 85.1 ; 39.3 ; 120.9 ; 500.3 ;
• Drug Stores : 8,324 ; 45.5 ; R8 ; 82.2 ; 8.7 ; 523.0 ; 2,259.8 .
• Veterinarian Services : 19,622 ; 41.7 ; R9 ; 92.5 ; 22.5 ; 185.3 ; 873.8 .
• Legal Services : 280,946 ; 39.8 ; R10 ; 86.6 ; 47.4 ; 84.0 ; 414.8 ;
'Net income was computed from the IRS's federal income tax date for 1992. At that time, there were more thon 15 million sole proprietorships in 171 classifications in the U.S.A.
Their children will have it better. They will not have to take significant risks. They will be well educated. They will become physicians, attorneys, and accountants. Their capital is their intellect. But unlike their parents, they will postpone entering the job market until they are in their late twenties or even their early thirties. And most likely they will adopt an upper-middle-class lifestyle as soon as they start working, a much different lifestyle then their frugal parents had when they started their businesses.
Often their children are not frugal. How could they be? They have high-status positions that require higher levels of consumption and thus lower levels of investing. As a consequence, they may require economic outpatient care (EOC). In spite of earning high incomes, as most professionals do, they are obligated to spend. Thus, because there are corresponding high levels of household spending requirements for many high-income-producing categories of business, it is difficult to predict levels of wealth based on the income characteristics of various types of businesses.
(254 of 277)
No comments:
Post a Comment