Building Compound Wealth

I talk a lot here about financial planning for SMBs, acquisitions, and taxes. Here's how I plan to use my toolkit to build a $25M+ net worth in the next 10 years (template at the end for you to model this for your self):

My wealth-building strategy has 5 pillars 1. Distribution 2. Acquisitions 3. Leverage (responsibly used) 4. Systems thinking 5. Tax efficiency Let's dive into each component (the order is important)

1. Distribution Distribution is without a doubt the most important lever of the 5 listed. Without it, everything else is more difficult. In a little less than 600 days, I've built a distribution asset with more than 11.4K followers in it. Why is this important?

The distribution network empowers everything else that I'm doing. Whether that be: - Finding clients ✅ - Finding business partners (@smbtaxattorney ✅) - Finding acquisition targets - Finding coaches (@pinpulleddrmf) , mentors, and friends

But that's not all. Here's why distribution is even more powerful than that Every time I add an asset to my personal balance sheet, the inherent value of the distribution network grows

I have one business that's well on its way to 1M ARR in less than 2 years (this started with no book of business. launched from scratch in my apartment in October '22 with no clients) What if I acquire another biz that I can funnel clients to? The value of distribution doubles!

If you don't believe me, ask @sweatystartup distribution is a force multiplier Many business titans have known this for centuries

2. Acquisitions Starting businesses from scratch is fun and can be cheaper than buying businesses, but buying great business assets at fair prices is extremely effective for building wealth. Some old guy named Warren figured it out a while ago.

The main thing to remember when executing acquisitions is that you should stick to your zone of competence. Ed Thorpe called this playing games where you have an edge.

For me, this will be professional service businesses. Companies on my target list (in priority order) - CPA / bookkeeping - IT/technology consulting - marketing - financial planning - Property mgmt

The main goal is growing Builders CPA. But over time we want to serve our ideal client in multiple areas. Here's how the value creation looks excluding any leverage or organic growth [img:x8mMxFBZ7]

3. Leverage Leverage can have a meaningful impact on returns over time. It can also be incredibly destructive. I plan to use a modest amount of leverage to fund acquisitions without requiring massive dilution of ownership and control

Here's what the prior plan looks like if I use 50% equity and 50% debt. Because I'm using modest leverage, DSCR never dips below 3.5. For simplicity, this is using 10 year amort and 10% interest [img:56Pm4ybRQ]

If I can assume a 5X EBITDA valuation in 10 years, the multiple on equity invested is over 3X. This is with some modest multiple expansion and no organic earnings growth.

4. Systems thinking Systems thinking is a necessity for anyone growing wealth through small businesses. You don't have the luxury of passive involvement that you get from stock investing. Even if you're not doing all the work, you must design systems to execute every phase

Agile Method As I attempt to remove myself from billable work in the CPA firm to focus on more strategy, this is just one example of a system I put in place. It's from the Agile method and it's called a scrum. I picked it up from my Big 4 days [img:rZ_eJEGE1]

Why? To visualize the team's open tasks, understand capacity, and prioritization My manager and I will review this every week. She will go over key items with staff to ensure there are no blockers and that everyone understands their assignment\

These systems will become the bedrock of the organization as we scale from less than 1M revenue to 10M+ The goal is to have methods to ensure every person knows what they're doing, why they're doing it, and when it should be done (and in what order)

5. Tax Efficiency This thread wouldn't be truly fun if we didn't put a little tax talk in. Let's talk about the simple but effective tactics I'm using to compound wealth efficiently.

6. Entity selection Entity selection is the foundation of tax planning for SMBs. I'm going to show you what I call the "CSP" method. It's a twist on holding companies that group business activities into portfolios that share favorable tax attributes

By the way shoutout to @smbtaxattorney for making this strategy abundantly clear to me. Hit us up if you want to do something similar!

What does CSP stand for? C-Corporation S-Corporation Partnership At a basic level, these are the 3 entity types that you can bucket your business interests into to.

C-corporations Any biz that will RETAIN and DEPLOY earnings for a long period should be held under a C-corp. This is because Federal tax rates for C-corps are 16% lower than the pass-through rate top bracket. I'll be using a C-corp for acquisitions to redeploy cash

BONUS: If I decide to divest, I'll qualify for QSBS under the C corp. Although I'm not selling much anytime soon!

S-corporations S corps are great for service entities. If you have a shared service/management arm that charges fees to your portfolio companies, an S corp is ideal because you'll avoid dividends on this distributable cash.

I'll be using an S corp entity to charge management fees to my Op Co's for services performed by me and my shared service team Between sales & marketing services and accounting/CFO services, I'll pay about 15% of earnings from the C corps into the S mgmt corp

NOTE: This needs to be for real services at fair market value, otherwise it could be scrutinized as a dividend from the C corp

Partnerships (disregarded entities) Partnerships are best for complex operating agreements and real estate investments. DO NOT use S corps for real estate activities. The loss limitation rules, single stock class rules, and others make it a terrible RE vehicle.

Disregarded entities for real estate are a beautiful thing because, with the right types of debt and accelerated depreciation, I'll be passing tax losses to my tax return to offset pass-through income from the S corp

NOTE: This doesn't work without one spouse being a qualified RE pro. I won't be deploying this strategy until I have that piece locked down (more on this later)

So over the next 10 years, the plan is: - Use distribution assets to build wealth in an SMB holding corp - Mix organic growth w acquisitions using modest leverage - Prevent compound wealth from becoming a compound headache w/ systems - Use tax efficiency to increase what I keep

If you want to do the same, shoot me a DM! I help acquisition entrepreneurs compound wealth using these tactics. If you want the spreadsheet I used to build this plan, RT the top tweet and comment "Compounding" twitter.com/BoilerPlateCPA/status/1758248073782788344