Have you calculated your personal Net Worth recently? If you want to become a millionaire, you might have missed something important.
Your agency’s true future value is probably much higher than its on-paper value.
Managed right, your agency can produce millions of dollars in value for you and your partners—via profits, salaries, and other compensation—without ever needing to sell the business.
This is helpful even if you do want to build an Equity-oriented agency—the money you make today helps you insist on a good exit and push back on a bad exit.
Be sure your financial advisors are aware of your assumptions about the future business, since they can help you make the projections… and minimize your tax liability. (I’m not a lawyer, CPA, or CFP.)
How to Calculate Your Personal Net Worth
The technical calculation for personal Net Worth is simple:
- Add up your assets (brokerage account, retirement accounts, bank accounts, value of business shares, equity in real estate, Rothko paintings, Faberge eggs, etc.), and then
- Subtract your liabilities (mortgage balances, credit cards, loans to the business, lines of credit, gambling debts to the neighborhood loan shark, etc.).
- The result of that addition and subtraction is your Net Worth. It’ll fluctuate daily, based on movements in the stock market.
Yet Some of That is More “Liquid”…
But there’s a catch. Your accountant or financial planner is probably “discounting” the value of your illiquid assets.
- Liquid assets are things like mutual fund shares, stock in publicly-held companies, and certificates of deposit. These are assets where people or entities would pay you cash, when requested, within a business day (or a matter of minutes or seconds, when it comes to most publicly-traded securities). Cash itself is the most liquid of all—and so are checking or savings accounts, since they’re effectively already cash.
- Illiquid assets include things like artwork, antiques, cars, real estate, and shares in privately-held businesses. These are things that take time to sell (where “liquify” = “turn into cash”). Here’s more on the concept of “illiquid assets.”
Your CPA or CFP is reasonable in discounting the value of illiquid assets—for instance, you think that abstract painting in your living room is worth $200K… but that’s only true if someone pays $200K for it, and that won’t happen overnight. Likewise, no one’s going to suddenly buy your agency tomorrow.
Your Agency Can Help You Become a Millionaire
Although illiquid, your agency ownership stake is an unusually active asset—it pays you a salary, and you’re entitled to a percentage of profits.
The fun part is that you get to choose your salary, and you get to choose what you do with the profits. Your mutual fund shares don’t let you do that.
This is a key difference between being a business owner vs. an employee—as an owner, you have supreme control over what you pay yourself. (Within the bounds of what’s legal, ethical, and what your business can afford.)
When things are running smoothly and profitably, you bring home bank. In contrast, drama and/or a pattern of unprofitability can make agency ownership feel worse than working for someone else.
The True Value of Your Salary
My benchmark is that agency owners should pay themselves a six-figure salary. In my agency consulting work, I’ve seen agency owner salaries range from $40K to nearly $600K.
(Agency finances are a big driver, but people sometimes choose to underpay themselves. If that includes you, read Overcoming Underearning to help fix that.)
Add-Up That Six-Figure Salary
Let’s say you’re paying yourself $100K/year today via salary. Over 10 years, that totals $1 million in today’s dollars. (To simplify the examples in this article, I’m not accounting for inflation—but inflation will definitely have an impact.)
What if you decided you’d start at $100K and give yourself a 15% raise each year? In 10 years, you’d be making $350K/year… and the 10-year total would be ~$2 million in today’s dollars. That extra 15% a year certainly adds up!
If you’re already paying yourself something higher—say $200K/year—you can become a millionaire even faster.
Take That Raise Sooner, Rather Than Later
Time is of the essence—changes today will “compound” over time. Say you decide to stretch from $100K this year to $150K next year, and you stay there for the next eight years, that’s $1.45 million over the coming 10 years, in today’s dollars.
You’ll have to pay taxes, and inflation will de-value the future cash flows—but it’s still a tidy sum.
Takeaway: You don’t have to sell your agency to become a millionaire from your agency—your salary alone can total millions of dollars over time.
The True Value of Your Profits
Those hefty salary projections don’t include what you do with the profits from the agency.
Imagine 20%+ Net Profits Each Year
Ideally you’re getting 20-30% net profits—and that’s after paying yourself a market rate salary.
- At $1MM in revenue, that’s at least $200K in profits each year.
- At $5MM in revenue, that’s at least $1MM in profits each year.
- At $10MM in revenue, that’s at least $2MM in profits each year.
You’ll split that if you have business partners, of course. And don’t try to take all or most of your compensation via distributions—the IRS or other tax authority will eventually catch you. (They expect you to take a reasonable salary, payroll taxes and all.)
After taxes, I hope you’re saving some of that for retirement and other priorities… and finding ways to give back, in whatever way makes sense for you. With privilege comes responsibility.
Read The Millionaire Next Door for their “Prodigious Accumulator of Wealth” (PAW) formula on how much money you “should” have at different points in your career.
Close Your Profitability Gap
If you’re not consistently getting 20%+ net profit margins, you’re hurting yourself.
QUESTION: Are you on track to become a millionaire from owning your agency? How do you feel about that?