October 2012: Business Building

October 2012

Business Building

Profit Is Overrated

By George Hedley

Ask 50 construction company owners what a perfect business would be like for them. You’ll likely get 49 different answers. But, one common focus will stand out: Business owners want to create equity and build wealth. Equity and wealth are the outcome of consistently making a profit, retaining it, and using it to seek other business opportunities, create passive income, buy real estate investment property, and grow net worth.

Are you the company CEO? Think of CEOs of Fortune 500 companies. Every week, the newspaper business section reports on their company’s success or failure. Did they make a profit? Did they grow their revenue? Did their stock prices go up or down? CEOs of major companies focus on increasing the value of their company’s stock price. As the stock price increases, their companies become more valuable. When your company makes a profit, the equity created can be reinvested back into your company, used to seek new business opportunities, or distributed back to the stockholders as dividends. When companies don’t make a real profit or all of the profits are distributed to owners, your company is not able to grow, expand or seek new business ventures.

Are you creating wealth? Profit creates equity, which allows for building wealth. To me, wealth includes investments, money, family, time, freedom, peace of mind, contentment, enjoyment, success, or owning a business that works for you. Wealth creation can be an outcome of a financially successful business that generates a positive cash flow and increasing profits. Financial success allows you to enjoy and design your life to do and get what you want. Wealth allows you to make choices about how to spend your time and money. The lack of wealth will keep you stressed out and constantly working to make ends meet.

Wealth is created from assets that make money without you doing much hands-on work. Wealth-building assets create regular positive cash flow, rise in value over time, reduce debt, and are passive instead of needing constant attention and supervision. Owning a multi-tenant apartment or industrial building and renting it is an example of a wealth-building asset. The building creates a net income every month without much effort or work. Wealth-building real estate assets can include joint-venture projects with customers, your own building and yard, buying an old property to renovate, owning a residential duplex, or buying rental houses at great prices. Assets also can include owning stock in growing and successful public or private companies.

What business are you in? Think about your priorities and the purpose for your business. The right purpose is to give the business owner what he wants. Your business purpose is not to build buildings, erect steel, lay bricks, install pipe, hang drywall, paint projects, or move dirt. You are in business to make a profit, build equity, seek wealth-building opportunities, and enjoy the benefits of business ownership.

After 20 years as a commercial general contractor, I finally realized why I was in business. Year after year, I worked hard to scrape out a 1 to 3 percent pre-tax net profit. I endured lots of stress and took extreme risks building projects for customers who made millions of dollars owning and developing real estate. I started realizing that, while our construction company did most of the work, our customers made most of the money. Why? Because I was in the profit business, and my customers were in the wealth-building business.

Get into the opportunity business Finally, I made a decision to change our business model and get into the “opportunity business,” seeking equity and wealth-building opportunities. Our construction company would continue as a general contractor and seek real estate investment and development opportunities. We already knew how to build projects, so why couldn’t we also participate in the overall development process and profits? In order to make this happen, we decided to work differently and spend at least 25 percent of our time seeking wealth-building opportunities.

Create a wealth-building machine Think about what you do. How can you convert your construction company from what it currently does into a wealth-building machine? Continue doing what you do well, and dedicate at least 25 percent of your time seeking investments. My first investment was small. I put $5,000 down and bought a residential duplex in the low-income part of town. I fixed it up myself and then raised the rent. This allowed me to get a higher appraised value than what I had purchased the property for. I refinanced it and got a new loan, which generated extra cash. With this, I purchased another duplex and did it again. A year later, I sold these two properties and bought a 16-unit apartment. Following my proven formula, I fixed it up, raised the rents and then refinanced it. This, again, generated cash for me to reinvest into other assets.

A small start in low-cost residential real estate will allow you to build wealth and start buying, investing and developing more assets. When you have a few wealth building properties, you start looking at your business differently. You change your priorities and stop working so many hours building projects for others, and start working on building for your future as well. Getting started is the key. Don’t wait until it’s too late. It’s never the perfect time. Make it your goal to seek one wealth-building asset within the next three to six months.