Mike Andes explains how small business owners can grow personal/net worth tax-efficiently by building business equity rather than extracting taxable profit. Valuation depends primarily on predictability of future cash flows, so businesses with recurring revenue (subscriptions, maintenance plans, low churn) command much higher earnings multiples than one-off project businesses. Wealthy owners often borrow against equity — loan proceeds are not taxed and interest can be deductible — so increasing a company’s valuation enables tax-efficient liquidity. Andes recommends contractors and service businesses create recurring revenue streams (warranties, maintenance subscriptions) to improve valuation, reduce churn, and ultimately enable tax-free access to capital. He draws comparisons to high-multiple subscription businesses (SaaS, AWS, Netflix) and frames early-year growth as equity-building even when cash flow is limited.
Chapters
Today I'm going to be sharing with you exactly how you can massively improve your net worth and not to pay a single dime in taxes on the added value to your company.
One of the most underrated ways of building wealth in America is building a business. Because when you build equity, you don't have to pay taxes on equity. So if I build something from nothing and I build it from zero and in several years it's worth $500,000, I never had to pay any taxes on my shares or the valuation of, of that equity. And so today what I talk about is how do I improve or increase that equity? How do I improve the valuation of my small business? Because on average, the vast majority of businesses that sell, that are small businesses in America sell for less than three and a half times earnings. And I don't mean income, I don't mean revenue, I mean bottom line profit. Most small businesses sell for less than three and a half times earnings. Now if you look at the stock market, the average on the s and P500 is somewhere around 19 to 20 price to earnings, which means that the multiples on those companies is much, much greater. The question is, why is a large company significantly valued at a higher rate than small businesses? And honestly, this is what it comes down to. Valuation is going to be determined by growth and what your profit margins are and expected growth in the future. But really what it comes down to, you really want to boil down valuation of a small business or of a large company. It comes down to one thing and that was what is the predictability of future cash flow. That is really what the valuation of your small business hinges on. Let me break that down and explain to you how this is so important because most people already have clicked off this video and honestly, by this time probably 60% of the people have stopped watching the video. But this is so important for your small business because growing the equity, growing the valuation of your business is honestly the most tax efficient thing you can do. Because if you can increase the valuation or the equity of your business to say a million dollars, it's worth a million dollars. The businesses, you can literally, literally take loans against that, take money out of the business, write off the interest expense as an expense to your business and not have to pay taxes on that loan like that money comes back like you can use it as a farm to be able to be able to take loans against your equity and you don't have to pay taxes on that. In fact, you get to write off the interest expense. It's insane. And Honestly, this is how billionaires operate. This is why Elon Musk is buying Twitter. This is why he does massive amounts of things. This is why people always get mad at the rich for not paying taxes. The bottom line, they just take loans against their equity. They take loans against the equity and the shares they have in their businesses. And so it's in the best interest of us as small business owners to ask ourselves, how do we improve the equity? How do we build value in the valuation of our small business so it doesn't get sold at a 3 or a 2 or a 1 multiple of earnings? So how do we do that? How do we improve the predictability of our cash flows? The number one way to do this is make sure you focus on recurring revenue, revenue that comes in over and over and over and over again. Because I don't know for certain that tomorrow there's going to be work and that tomorrow I'm going to have a big project or tomorrow I'm going to get the big job, the contract. If I don't know that for certain, the predictability of that cash flow is low. Therefore the effect that it has on my valuation of my business is also low. This is why subscription based businesses are valued so much greater than one time project work. Now, everyone right now is thinking about lawn care, landscaping, contracting. But let's step back for just a second and if you look at the stock market, the companies that have subscription based revenue have the highest multiples. Whether you look at things like aws, Amazon web services, whether you look at Netflix, whether you look at any subscription box service, all of these services, the reason they get a great valuation is because they have a recurring revenue, monthly amount of revenue coming in and it's very sticky. They want to keep customers on for a very long time. Customers don't churn very much and the predictability of cash flow in the future is very, very high. This is why software as a service or SaaS, companies have a very high valuation. If they have good software is because most people, if it's good software, they're not going to leave, they're gonna stay on for years and years and years. And so therefore the predictability of the cash flow is so great and the software is so sticky that the valuation is therefore much greater. However, if you have high churn in your small business and you're losing customers all the time, if someone was to buy your business, it's not worth a whole lot because there's no, there's not any predictability, there's no certainty that the cash flow is gonna keep, keep coming in because of churn. And so when you look at your business and when I look at lawn care landscaping, for example, it's not that I think landscaping is bad or projects are bad, there's lots of money to be made there. But when I step back for a moment and realize that generating profit and cash out of the business is actually going to lead to a lot of taxes versus just building the equity in the business, I start to really reconsider the fact that in the long term I would actually be better served in building a recurring base of revenue. And this is why I encourage every single contractor, regardless of what industry you're in. If you're doing project based work where the jobs are 10, 15, $20,000 or it's always based upon getting the next customer and you don't have a dependable forecast of recurring revenue coming every single month, I highly recommend you start trying to think about diversifying into some form of maintenance, some sort of plan that you can sell people that gives you recurring revenue over the course of time. Just about for every home improvement business, you can create some form of recurring revenue around maintenance. So if I install a water heater, I can install a warranty and I give a plan over the course of time, I come back and check it every six months or something like that. When it comes to landscaping, I can install massive projects, but I also am going to try to sell that recurring package of maintenance to come back. Seal the pavers, clean it, pressure, wash it. These are all things we can do in our businesses that allows us to dependably know and forecast what the cash flows are going to be for the business down the road. This is what leads to valuation being increased. And if you're ever going to sell, that's great. But even if you don't sell, sell. And this is the secret of wealthy people in America that have lots of stake in small and large businesses is the fact that they take their equity, they run a loan against it. That cash that is brought out is not only not taxed, but also then any interest that's paid on that loan is actually taken as a tax deduction. So this is in my opinion one of the flaws of small businesses is we grow, grow, grow for the first few years and we get so disappointed because there's no cash coming out, there's no profit. But if you're growing top line revenue, you're growing what is going to be in the future. Dependability of cash flow. And that's why businesses that Actually don't make any money, can also have a high valuation is because they're growing so fast. But what people are really looking at is down the road, how predictable will the cash flows be once a certain size is achieved. So in those first few years of business when you're growing really fast, you're not going to have a lot of cash flow, you're not going to have a lot of profit. And that's why most people give up. But what they got to realize is they're building equity. And if you build a business from zero and maybe in three years it's doing three or $400,000 in revenue, you have to realize you probably built a 200,000 dol thousand dollars asset. An asset, something that actually has real value and you didn't get taxed on that and unless you sell it, it'll never be a taxable event. And so those first few years are very demoralizing because you don't see a lot of cash flow. As you begin to reduce the amount that you're growing year over year and maybe go from, you know, 1002-000003-00000 and only it's 353, 63, 90, 400. Those years where you're doing less growth, that's when you actually start to see the profits. And that is why I highly recommend you shift your marketing dollars away from going after one time jobs and big projects and on trying to build at least a trickle, a little trickle of cash flow that's based on recurring work that is scheduled, that is guaranteed a subscription, a warranty, something that gives money and cash flow on a consistent basis because that will improve your cash flow. So whether you're trying to sell your business or you're trying to improve the equity and the valuation of your business to one day take loans against it and do it a very tax efficient way and build massive amounts of wealth. Either of those strategies require that you build value in your small business. And if you don't want to be like the vast majority of small businesses that make pennies on the dollar equity when they go to sell or they try to take out a loan against the equity of their business, you've got to make sure you have recurring revenue. I'm Mike Andes and I've spent millions of dollars trying to figure this out. Nine years building Augusta Lawn Care. If you want to know the one thing that I've learned, watch this video here. I break down exactly what I've learned and I wish I would have known it a long time ago. Instead of spending millions of dollars and years and years trying to figure it out.
