How wealthy people avoid paying taxes..my new plan
Summary
- Selling a business isn't as glamorous as it seems; it involves transition documents, earnouts, seller financing, equity rolls, and taxes, leading to less cash in hand than expected.
- The wealthiest individuals often buy and build businesses rather than sell because exiting typically comes from a place of pain rather than opportunity.
- To reduce risk, consider using debt to take money out of your company, since most of your net worth is tied to your business.
- Think of your business like a house that you've built and filled with tenants (customers) who provide cash flow.
- For a $1 million business, you could potentially keep 20% equity and receive an $800,000 tax-free loan, leveraging the asset while still retaining ownership.
- By taking a debt on a growing business and investing that money elsewhere, you could potentially increase your net worth more than by simply owning 100% of the business.
- CEOs of publicly traded companies often live off asset-based loans rather than selling equity, allowing their assets to grow tax-free while the loan sizes can increase with asset value.
- A strategic use of debt can allow you to de-risk and diversify your investments without giving up ownership, a technique less understood but extremely powerful.
- I encourage considering these financial strategies to grow your net worth in a lower-risk environment and avoid being "broke."
Video
How To Take Action
I would suggest thinking about your business as if it were a house you built from scratch. Much like you add rooms and rent them out, your business grows with customers providing cash flow. Now, if you're feeling stuck or wanting to cash out, don't rush to sell. Selling often leaves you with less money than you think after taxes and fees.
Instead, I’d say consider taking a loan against your business, like putting a mortgage on that house. This way, you can get cash based on the value you've created without having to pay income tax on it. It’s a smart move because you still own your business and can now use that loan to diversify and invest elsewhere. It's like having the best of both worlds.
Here’s an actionable plan for you:
- Calculate the value of your business, just like you’d appraise a house. Look at your cash flow and potential growth.
- Reach out to financial institutions to talk about asset-based loans. Show them how your business is like that house generating rental income.
- If approved, use the loan to invest in other safe assets or opportunities to grow your net worth. This spreads out your risk rather than having all your eggs in one basket.
Remember, you want to keep making money from your business while also growing your wealth in other areas. By using debt strategically, you can still own your business, avoid big taxes, and have cash to invest. Wealthy folks often do this—they don't sell their companies; they build and grow, using loans to help them along.
It's like having two opportunities to make money: your business that keeps growing and the investments you make with the loan. Make sure you also invest in learning how to manage debt wisely so it works for you and not against you. This low-cost strategy is a powerful way to de-risk and it can be more beneficial than you think.
Quotes by Alex Hormozi
"The wealthiest people in the world, they buy and they build; most times, they don't sell"
– Alex Hormozi
"I have realized this, that the times I want to sell is when I'm in the most pain"
– Alex Hormozi
"It's like there's a Chinese saying, to kill a mosquito with a cannon"
– Alex Hormozi
"Because this is a loan against your building, this is not income. Which means you guessed it, it's tax free"
– Alex Hormozi
"You can still refinance at regular intervals as the value of the property, or as your business grows"
– Alex Hormozi
Full Transcript
in this video i'm going to explain to you how you can get paid for your business tax-free without giving up any equity so hi if you're new to the channel my name is alex shimozzi i own acquisition.com in a portfolio of companies that is about 85 million a year i just made this channel because a lot of people are broke and i do not want you to be one of them so welcome to mosey nation so today the topic is going to be talking about debt and this is going to be one of the more um interesting chats we've had because this is something that i have spent a lot of time learning about and probably not in the traditional sense of like you know personal finance but more so in the kind of mergers and acquisition sense of how debt is used right and so one of the first things that i had to understand what as like as a business owner is understanding why we want to sell a business because a lot of people want to exit their business because it seems like this big aspirational goal and as somebody who has now exited six different businesses i can tell you it's not nearly as inspiring there's the story of the exit and there's the reality of the exit the reality of exit is that you've got transition documents not all of that cash is up front most of the time you're gonna have earn outs you're gonna have seller financing that's involved you have to roll a certain percentage of equity and you've got uh and then finally you've got cash once you have cash you have bonuses distributions you've got uh financing costs that are associated with the act transaction costs and then finally you have your chunk of money but wait there's another 20 that's going to go to uncle sam and then you're left with x right and sometimes x is very different from the enterprise value of what you've sold out and so one of the things that i can tell you about the wealthiest people that i know who are all over 10 figures is that the wealthiest people in the world they buy and they build and most times they don't sell even though us as entrepreneurs we have this dream of it it's usually because we're trying to get out of some sort of pain right because i have realized this that the times that i want to sell is when i'm in the most pain the times when i don't want to sell is when i everything's uh going well and so what i should be doing is figuring out how to get out of pain rather than trying to you know it's like there's i think there's a chinese saying to kill a mosquito with a cannon right which is like it's overkill it's like hey why don't we just solve the problem by hiring the one or two people you need to hire rather than sell the entire business right and so one of the things i want to introduce today along that concept is how can you still get paid or de-risk because for most business owners or entrepreneurs the majority of your networth is in your business right and or business is and so if the majority of your net worth is in this thing it's a high risk asset class i'd like to ideally share some of that risk with other people and so there are multiple different debt functions you can use but i think the easiest analogy for this is a house okay or an apartment building doesn't really matter so let's imagine you have a house and let's imagine that you started this except this house you were able to build without land and you were able to build it just using your own money and you actually built it yourself all right so you paid money out of pocket month over month over month and you slowly started assembling this house piece by piece by piece right and then you started getting tenants inside of it right you got little tenants in here and you know for us those are our customers but it functions more or less the same way you got these people that you you've been slowly filling it up and so now all of a sudden this thing spits out cash flow every month just like a rental you know apartment unit might the similarity here and i'm using this analogy because it was the one that made the most sense to me is that everything up to this point you own 100 in cash all right this is equity that you have in this house now in a normal home or you're a real estate investor you would say hey i would like to get higher returns because i can get all you know eighty percent of this financed through a bank right you can get a loan in the form of debt and so the example here is let's say you've got a one million dollar uh business you've got a one million dollar business right which we'll still use as this house right if this business over the next five years goes to two million dollars a year right or two million dollars in value excuse me then you would have 2x your net worth right because you own 100 of this thing now what if you were able to have your one million dollar thing and then split it into you keep 20 in the business right and then you get a check for 800 000 now realistically i'll tell you what the the more realistic outcome of something like this might be uh and there are two ways to do this but let's say that you did uh 30 and then 70 right so then this would be 300k and this would be 700k okay so that's that's what we would get so this would be 70 and this would be a loan now here's what's cool because this is a loan against your building this is not income which means you guessed it it's tax free so remember before i talked to you earlier if you were to sell a business you probably have to keep a certain percentage in because no one's going to you know just most people are not going to want you to have a full exit especially if you're a smaller business and so you would have this 80 but then this 80 would then get nixed and cut it's not going to be all cash anyways but even if it were all cash you then have to pay 20 right of that uh of that amount which would be 16 off um from whatever that number is which you know for math sake let's you get 760k but you have to take the 20 out so you have 560k after taxes and with you holding your 20. so this is what you'd get but here's what's crazy is that through debt you can get a 700 000 loan and still own the darn thing but here's what's cooler you now have your 1 million business that's growing to 2 million for example but then you have this this 700 000 that you have a loan from off of this that you can also still try and grow you know let's say two million dollars in that same time period and now you own the delta which overall your net net worth is now 3.3 million versus the original 2 million you had before and so there are two ways there are there's a lot of ways that you can you can take out a debt in the company you can do minority you can do majority you can do dividend recap there's more things that that i can get into but fundamentally just understanding that from an exit perspective this changed the way i saw business is that if you don't want to sell because you want to keep your thing forever totally fine but as you're keeping it it's just like an apartment building you can still refinance at regular intervals as the as the value of the property or as your business grows so that you can then then excuse me take this money out de-risk yourself and put it in other assets because let's be real we have all been through a crazy last couple years anything could happen and so for you to de-risk a little bit i think for many is a beneficial thing and candidly it's also how every ceo of a publicly traded company lives is they don't they never sell their equity or some of them but majority of the time they're not selling their equity they're living off of loans that are asset-based they loan against the equity that they have and the the stocks grow tax-free because they compound and then the loans are locked in which you can then refinance them later because now the asset is worth more and so you basically just gained that money for truly for you don't even have to pay it back uh or even if it was uh the same price overall you actually still got a discount because you didn't have to pay income tax on the loans you took against your assets right and so um i wanted to explain this because in my mind i didn't know a way to uh to to have any kind of de-risking event for myself without selling the business uh i just didn't know if there was another way and so i'm making this like i make everything in this channel is because a lot of people are broke and i know what you're one of them and i've learned you know a fair amount in the transactions that we've done and growing the companies that we have and i just want to share those lessons to you guys so hopefully enjoy this hopefully this is a frame shift or perspective in terms of how you see the equity uh growth in your business how you ultimately can can grow your net worth faster in a lower risk environment um that way and i'll tell you one more thing i was talking to a private equity uh managing partner andy was saying how for some of our companies for example he was like you guys don't even have uh you have you have negative leverage you say you have cash on your balance sheet he's like it's ridiculous he said you should be taking loans against that equity so that you can redeploy it and and do x y and z and so uh it was just a very interesting perspective i thought i would share it with you um it's something that we look to you know continue to do uh in our businesses and i figured i would share it with you because i love you guys and keeping awesome so enjoy this video enjoy the next video and i'll see you soon bye
