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MATH: Building a Sellable Business vs Getting a Job

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AgainstAllOdds

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Should I quit and get a job? Or should I keep going?

Those were questions that I kept asking myself over two years ago:


(Notable! - I rather be a failed entrepreneur than an average employee that never took a risk)

Each day I concentrated on the fastlane, but while building it, I kept questioning myself in the background.
  • "Am I messing up?"
  • "Should I quit and get a job?"
  • "Am I slowly becoming a loser and don't even realize it?"
It was a daily psychological struggle to keep going, but I pressed on because I knew that logically what I was doing was the right thing. Even though I wasn't making much money right now, I knew that the math made sense.

Below is some of that math.

If you're like I was, and questioning whether you should build a sellable business or get a job, then I strongly recommend you read this thread and study these numbers.

For some of you it makes more sense to build a sellable business. For others, things aren't working out and you'd be better off getting a job at least for now to build capital.

Before going any further, I want to outline a few assumptions. In this thread I'm assuming the following:

Now let's get into the numbers.

I used the following site to calculate post-tax salary: Illinois Income Tax Calculator | SmartAsset.com. You can adjust the calculator based on where you're living. I was living in Chicago when I started, so for the calculations below, I'll assume you're paying a 3.75% state tax.

Here's an example of how the site calculates:



So if you make a salary of "$50,000 per year", you're really making $38,835 per year. If you're making "$100,000 per year", you're really making $70,635.00 (but don't let that stop you from bragging to your friends that you're making 6-figures).

Alright, let's continue onto the formula.

So the question I wanted to answer was:

How much in business income do I have to create in one year to equal salary income?

And here's the formula that I came up with:

Post Tax Salary from a Job = (Business Income)*2.25 + (Business Income)*1
Here's what those numbers mean...

Post Tax Salary from a Job = Money you have from a job after paying taxes
Business Income = How much money you make from the business and will be recorded as income when you sell the business.
*2.25 = The multiple on an online business after paying a broker
*1 = The amount of money that you'll make in that one year while creating the business income (even though you're not getting paid a lot, you are getting paid to create the business)

Now having those numbers, we can go onto calculating equivalents and seeing exactly whether you should get a job or build a business.



In this chart I chose annual salaries starting from minimum wage to $250k a year. Then I calculated the post tax salary. Then used the formula above to calculate the business income equivalent, and finally, the "BI Exit Equivalent", which takes into account a 15% capital gains tax rate. The first and last column are most important for you.

BI Exit Equivalent = this is how much money you need to make in your business to be the equivalent of what you'd get from a job.

Ok, so how do you use this chart?

Easy.

-------------------------------------------------------

Let's say you graduate college and now have two options: get a job or build your own business. Your job offer is $55k a year. You want to build your own business but you're concerned because you don't think you could create $55k in income your first year in business.

If you're like most people, you'd give up now. But if you use the chart above, then you're more likely to push forward.

You can start by looking in the "Annual Salary" column for $55,000. Your post tax salary from this job will be $42,015.00. If you want to go the creating a business route, then you have to create $15,209.05 in business income your first year to equal your job.

If you believe that you could create over $15,209.05 in business income your first year then you should go forward with building a business. But if you don't think that you can create an income higher than that, you should strongly consider getting that job. The cashflow from the job will help you later on if you want to want to get back into entrepreneurship.

Now let's justify these numbers.

If you made $15,209.05 in your first year of business, and it's a sellable business, then you can sell the business for 2.25*15,209.05 = $34,220.36. On top of that you've made $15,209.05, so 15,209.05+34,220.36= $49,429.41. Deducting a 15% capital gains that from that 49429.41*.85 = $42,015.00 you end up with the same amount that you would post tax from a job.

-------------------------------------------------------

This is just one of many examples. You can use this chart as you see best fit in order to calculate whether you should quit your business, quit your job, keep going with your business, keep going with your job etc.

In the slowlane, most people think that all these numbers are equivalent, but in the fastlane, these numbers have multipliers and tax implications attached to them.

Keep these numbers in mind and don't get discouraged if what you could have from a job doesn't equal your business income yet.

P.s. Obviously there's certain businesses that aren't sellable like being a freelancer. This chart only applies to businesses that are sellable, so please don't make the mistake of using the chart to justify making $15k a year doing fiverr gigs. You need to read The Millionaire Fastlane again and restructure your life/business so that this chart can work for you. Good luck.
 

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CareCPA

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I like the thought process, but wouldn't that mean you would have to sell a business every year? Otherwise you're just making roughly a third of the income you would be making from a job.
 

amp0193

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I like the thought process, but wouldn't that mean you would have to sell a business every year? Otherwise you're just making roughly a third of the income you would be making from a job.

In the short-term cash-flow, sure. I can't use the potential sale price of my business to pay my bills.

However, the growth of the sale price is real value though, it's just not liquid.

Also, businesses grow year after year (if you do it right). So the growth of a business's sale price isn't linear, it's exponential when you add in the multipliers.
 

CareCPA

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In the short-term cash-flow, sure. I can't use the potential sale price of my business to pay my bills.

However, the growth of the sale price is real value though, it's just not liquid.

Also, businesses grow year after year (if you do it right). So the growth of a business's sale price isn't linear, it's exponential when you add in the multipliers.
Yes, in the long term, I completely agree. I guess my umbrage is with the part where he claims:
You can start by looking in the "Annual Salary" column for $55,000. Your post tax salary from this job will be $42,015.00. If you want to go the creating a business route, then you have to create $15,209.05 in business income your first year to equal your job
This assumes that someone can live off of ~$15k per year while building a business. Also, why do we factor income taxes into the salary, but not the business?
 

amp0193

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This assumes that someone can live off of ~$15k per year while building a business.

It's a decision helping tool. If you can't swing a $15k lifestyle, then get the job.

Also, why do we factor income taxes into the salary, but not the business?

I think because of this:

"You're using cash-based accounting, end of the year investing in product or marketing to minimize your tax bill (Publication 334 (2016), Tax Guide for Small Business)"

I'm not going to comment on that though... you're the CPA here.
 

CareCPA

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I think because of this:

"You're using cash-based accounting, end of the year investing in product or marketing to minimize your tax bill (Publication 334 (2016), Tax Guide for Small Business)"

I'm not going to comment on that though... you're the CPA here.
Ha! Good call on that one (been a long week).
Of course if you're cash based and pay a bunch of expenses at year-end to reduce income, you probably don't have the $15k to pay yourself anyway.

Either way. I think the idea of the post is solid. Don't let my minor quibbles with the details detract from that.
 

Owner2Millions

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Should I quit and get a job? Or should I keep going?

Those were questions that I kept asking myself over two years ago:


(Notable! - I rather be a failed entrepreneur than an average employee that never took a risk)

Each day I concentrated on the fastlane, but while building it, I kept questioning myself in the background.
  • "Am I messing up?"
  • "Should I quit and get a job?"
  • "Am I slowly becoming a loser and don't even realize it?"
It was a daily psychological struggle to keep going, but I pressed on because I knew that logically what I was doing was the right thing. Even though I wasn't making much money right now, I knew that the math made sense.

Below is some of that math.

If you're like I was, and questioning whether you should build a sellable business or get a job, then I strongly recommend you read this thread and study these numbers.

For some of you it makes more sense to build a sellable business. For others, things aren't working out and you'd be better off getting a job at least for now to build capital.

Before going any further, I want to outline a few assumptions. In this thread I'm assuming the following:

Now let's get into the numbers.

I used the following site to calculate post-tax salary: Illinois Income Tax Calculator | SmartAsset.com. You can adjust the calculator based on where you're living. I was living in Chicago when I started, so for the calculations below, I'll assume you're paying a 3.75% state tax.

Here's an example of how the site calculates:



So if you make a salary of "$50,000 per year", you're really making $38,835 per year. If you're making "$100,000 per year", you're really making $70,635.00 (but don't let that stop you from bragging to your friends that you're making 6-figures).

Alright, let's continue onto the formula.

So the question I wanted to answer was:

How much in business income do I have to create in one year to equal salary income?

And here's the formula that I came up with:

Post Tax Salary from a Job = (Business Income)*2.25 + (Business Income)*1
Here's what those numbers mean...

Post Tax Salary from a Job = Money you have from a job after paying taxes
Business Income = How much money you make from the business and will be recorded as income when you sell the business.
*2.25 = The multiple on an online business after paying a broker
*1 = The amount of money that you'll make in that one year while creating the business income (even though you're not getting paid a lot, you are getting paid to create the business)

Now having those numbers, we can go onto calculating equivalents and seeing exactly whether you should get a job or build a business.



In this chart I chose annual salaries starting from minimum wage to $250k a year. Then I calculated the post tax salary. Then used the formula above to calculate the business income equivalent, and finally, the "BI Exit Equivalent", which takes into account a 15% capital gains tax rate. The first and last column are most important for you.

BI Exit Equivalent = this is how much money you need to make in your business to be the equivalent of what you'd get from a job.

Ok, so how do you use this chart?

Easy.

-------------------------------------------------------

Let's say you graduate college and now have two options: get a job or build your own business. Your job offer is $55k a year. You want to build your own business but you're concerned because you don't think you could create $55k in income your first year in business.

If you're like most people, you'd give up now. But if you use the chart above, then you're more likely to push forward.

You can start by looking in the "Annual Salary" column for $55,000. Your post tax salary from this job will be $42,015.00. If you want to go the creating a business route, then you have to create $15,209.05 in business income your first year to equal your job.

If you believe that you could create over $15,209.05 in business income your first year then you should go forward with building a business. But if you don't think that you can create an income higher than that, you should strongly consider getting that job. The cashflow from the job will help you later on if you want to want to get back into entrepreneurship.

Now let's justify these numbers.

If you made $15,209.05 in your first year of business, and it's a sellable business, then you can sell the business for 2.25*15,209.05 = $34,220.36. On top of that you've made $15,209.05, so 15,209.05+34,220.36= $49,429.41. Deducting a 15% capital gains that from that 49429.41*.85 = $42,015.00 you end up with the same amount that you would post tax from a job.

-------------------------------------------------------

This is just one of many examples. You can use this chart as you see best fit in order to calculate whether you should quit your business, quit your job, keep going with your business, keep going with your job etc.

In the slowlane, most people think that all these numbers are equivalent, but in the fastlane, these numbers have multipliers and tax implications attached to them.

Keep these numbers in mind and don't get discouraged if what you could have from a job doesn't equal your business income yet.

P.s. Obviously there's certain businesses that aren't sellable like being a freelancer. This chart only applies to businesses that are sellable, so please don't make the mistake of using the chart to justify making $15k a year doing fiverr gigs. You need to read The Millionaire Fastlane again and restructure your life/business so that this chart can work for you. Good luck.

@AgainstAllOdds So how did you get 10k per month in income? what was your process like? trust me I feel the pain mentally everyday of just questioning yourself and trying to stay strong mentally. Thanks for the websites by the way.....
 

AgainstAllOdds

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I like the thought process, but wouldn't that mean you would have to sell a business every year?

No. You just have to keep growing and add on business income every year.

Let's say you want the equivalent of $50k per year, then your business income would look like:

Year 1: $14k business income.
Year 2: $14k + $14k = $28k business income for the year.
Year 3: $28k + $14k = $42k business income for the year.

A big reason for this thread is to highlight what I believe is the proper mentality when growing a business. Growing a business takes time. However, if you get bored of your business, then it's not like all of your efforts went to waste. You can always cash out if your business is sellable.

In the above example, if you cash out after year 3, then you would have cleared 2.25*$42k + $42k + $28k + $14k = $178.5k pre-tax over 3 years.

However, if you stop after year 1, then you're right. You're just fooling yourself.
 

AgainstAllOdds

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This assumes that someone can live off of ~$15k per year while building a business. Also, why do we factor income taxes into the salary, but not the business?

This is one of the problems with my argument if look at it from the perspective of someone that has trouble putting a roof over their heads. However, that could be easily mitigated with working for a couple years and saving money before starting the business.

If you can't feed yourself and are on the brink of homelessness, then you shouldn't be starting a business.

If you can't sacrifice the couple years in financial preparation to "jump in", then you shouldn't be quitting your job to start a business.

If you're in one of those scenarios, then ideally you'd work your job while working on your business nights and weekends.

But if for some reason someone's arrogant enough to start a business without the capability of putting a roof over their heads, then it's still not the end of the world. I personally don't advocate it, but there's Food Stamps, free healthcare, and free housing available for individuals that really need it.

All of these scenarios are workable but take some planning ahead of time.

This chart doesn't encompass the decision making fully and does require some significant preparation before even being considered.

It's a decision helping tool. If you can't swing a $15k lifestyle, then get the job.

Also like @amp0193 says, it's not necessarily the easiest route. However, if you can succeed with sacrifice, then you'll be a lot better off long-term in terms of creating wealth and not spending money recklessly.
 

AgainstAllOdds

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@AgainstAllOdds So how did you get 10k per month in income? what was your process like? trust me I feel the pain mentally everyday of just questioning yourself and trying to stay strong mentally. Thanks for the websites by the way.....

I got to $10k passive selling art and prints in a few galleries and online. I have the thread on the inside: https://www.thefastlaneforum.com/co...ress-thread-of-a-starving-artist.57281/page-4

But how I got to $10k doesn't matter. There's millions of viable businesses out there for you to get into. I'm doing something completely different now.

If you care about process then read any of the process threads on this forum. Read The Millionaire Fastlane again. Study value creation and create a business that brings people value and that people will pay you for.
 

KLaw

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Nice post. I think the chart makes sense if you are young and have no other financial responsibilities (mortgage, kids, etc...) and disciplined enough to live a minimalist lifestyle. Also, 15% on capital gains? That's mind boggling to me. Is this a loop hole or something. 39% is what I've paid. What am I missing?
 

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CareCPA

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Nice post. I think the chart makes sense if you are young and have no other financial responsibilities (mortgage, kids, etc...) and disciplined enough to live a minimalist lifestyle. Also, 15% on capital gains? That's mind boggling to me. Is this a loop hole or something. 39% is what I've paid. What am I missing?
In the US, short term capital gains are taxed at ordinary income rates. Long term capital gains get preferential treatment (0%, 15%, or 20% depending on your income level).
 

KLaw

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In the US, short term capital gains are taxed at ordinary income rates. Long term capital gains get preferential treatment (0%, 15%, or 20% depending on your income level).
Can you define, in layman's terms, the difference between long term and short term? If this is a derailment. I apologize.
 

CareCPA

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Can you define, in layman's terms, the difference between long term and short term? If this is a derailment. I apologize.
Cutoff is a year. If you hold the investment less than a year = short term. If you hold more than a year = long term.
 

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