Owning a successful business is the best path to wealth. However, not all businesses are created equal. To determine the right kind of business, let’s work backwards.
We want a business that produces consistent, growing cash flows for us every month for years and requires zero time on our part. We also want one we can start now without a large amount of money. Here’s what that requires:
- Low startup costs
- Good products and good service so we have happy customers
- A large enough market so we can grow our sales year-after-year
- A business that can be run by other people
Charlie Munger, billionaire business partner of Warren Buffett, is a huge proponent of inversion thinking. Rather than thinking only of what it takes to solve a problem, think through what we don’t want and how to avoid that. As he says, “All I want to know is where I’m going to die, so I’ll never go there.”
With that in mind, what do we not want in a business? We don’t want our business to…
- Require a large amount of capital far beyond our means to start
- Sell terrible products that will eventually hurt our ability to grow sales
- Have unhappy customers who never buy again from us
- Succeed in a market too tiny to ever make us financially free
- Depend on us as business owners to succeed
Here are the right kind of businesses to consider:
- Ecommerce business selling your own brand of products
- Software business
- Service business only if you plan to hire other people to perform the service in the future and someone else to manage those people (two BIG requirements most service businesses don’t meet)
- Information product business (e.g., online course, review site, non-personal blog, etc.), like the service business, only if you get other people to create the information products and someone to else to manage those content creators
- Mobile app business
Here are business I don’t consider the right kind of business if you want to build wealth fast and for the long-term:
- Professional service business if it always requires you to perform some of the services
- Local retail, restaurant, or service business because the startup costs are too high
- Photography business if you have to take and edit the photos forever (applies to any other type of service business)
- A blog about your personal life because it will be hard to remove you from the work
- Social media influencer business because you are the product
The end goal is to build a business that produces cash flow and has a sellable value even if you decide to never sell it. By following the criteria of the right kind of business above, you will own a wealth-building, cash-producing asset.