What’s the most reliable way to create financial independence?
Let’s set aside lottery winnings and inheritances because you have very little control over either. Let’s also eliminate endeavors like staring in Hollywood movies or playing professional sports because the odds of becoming wealthy in either pursuit are slim.
Instead, let’s focus on a career in business, where the options are working for a big company or doing something entrepreneurial.
For folks pursuing a traditional career path, there is a well-worn path to success. It involves getting a business education and fighting your way up the corporate ladder. Get an Ivy League business education, and your journey up the ladder will generally be faster and higher. But the number of people who earn an MBA with badge value is relatively small. For example, Harvard only mints around 700 MBAs a year. Those grads will go on to make serious money at the big investment banking houses, consultancies, and technology companies that recruit them. Harvard reports the average compensation for one of their new MBAs is around $200,000 a year, and it goes up fast from there.
But for every Harvard, there are thousands of lesser-known schools whose graduates are far less upwardly mobile. Instead, many become middle managers in large corporations where their earnings tend to be capped by rigid compensation bands and taxed at the highest rates. If they do receive stock options, these are at the mercy of their company’s leadership and may end up being worthless.
A rare few will be handsomely rewarded for reaching the top rung of the corporate ladder. Forbes reported that the average compensation of an S&P 500 CEO was $15.5 million in 2021. That pay package is 299 times higher than what the average worker in an S&P 500 company receives. There can be only one CEO, and most business school graduates will spend decades toiling in good but not great jobs.
Contrast the traditional career path of a business school graduate with a career in entrepreneurship. True, many small businesses fail, but you don’t have to start the next Tesla or Amazon to create more wealth than the company man or woman. And when you decide to sell your business, you may get rich in a tax-efficient windfall.
How Anthony Fracchia Got Rich
Look at the story of Anthony Fracchia, who built Altruis Benefit Consulting to $2.5 million in revenue on the backs of a dozen employees. Benefits consulting is a relatively simple business. There is no product to build, no factory to maintain. There are no enormous capital outlays of any kind.
Like many small business owners, Fracchia ran an efficient operation and managed to squeeze out EBITDA margins of around 60% on his $2.5 million in revenue. In his early 40s, Fracchia was already much wealthier than the average middle manager at a similar age. Then he decided to sell Altruis, negotiating a deal worth around eight times EBITDA.
Fracchia is now turning much of his attention to his charitable work with school-aged children in Detroit.
Did Fracchia get lucky? I don’t think so. He built a well-run service company with a dozen employees. He made a killing running a company most new business graduates would see as beneath them.
In the absence of a lucky lottery ticket or an Ivy League MBA, the safest, most reliable way to get rich is not to join the corporate world but to start and sell a successful small business.