by MJ DeMarco
For example, the sale of this book extricates me from the Slowlane wealth equation and its universe. This book puts me into the Fastlane universe, which is governed by its wealth equation of net profit and asset value. This book is a business system that has unlimited leverage in both time and money!
First, it survives time and it is capable of earning income long after my original time investment. This book effectively transfers the act of income generation from me (the human asset) to the book (the business asset).
From start to finish, this book cost roughly 1,000 hours of my time. If I sell 100,000 books at $5 profit each, I earn $500,000, or roughly $500 per hour invested. If I sell 500,000 books, I will earn $2,500 per hour invested. The more I sell, the greater the return on my original time investment, as I already paid the time. I finished this book in 2010 and specifically wrote it to be transcendent and relevant no matter what the year (the rules of mathematics don’t change!) and years later, it still sells consistently. I earn $5 from a time investment I made years ago!
But it gets better!
If I guest-speak on a radio show for 10 minutes and that appearance yields 1,000 book sales, this 10-minute investment yields $5,000 in income (1,000 books × $5 profit) and yields a return on my time at $30,000 per hour.
Can you get rich trading your time for $30,000 per hour?
Yes you can, and awfully fast.
You see, when you unlock yourself from the handcuffs of time imposed by the Slowlane roadmap, you assign income to a system that leverages unlimited mathematics, and fast wealth becomes possible.
The variables in my wealth universe can be controlled and leveraged.
In the next chapter you will discover why the Fastlane can deliver financial freedom and wealth faster than any indexed-fund can.
Chapter Summary: Fastlane Distinctions
➡Producers are indigenous to the Fastlane roadmap.
➡Producers are the minority as are the rich, while consumers are the majority as are the poor.
➡When you succeed as a producer, you can consume anything you want.
➡Fastlaners are producers, entrepreneurs, innovators, visionaries, and creators.
➡A business does not make a Fastlane—some businesses are jobs in disguise.
➡The Fastlane wealth equation is not bound by time and its variables are unlimited and controllable.
[18] - How the Rich Really Get Rich
Only those who will risk going too far can possibly find out how far one can go.
~ TS Eliot
The Burning Question: “How Did You Get Rich?”
Drive any car that costs more than most people’s homes and strangers will accost you with the question, “What do you do for a living?” This seemingly innocuous question “fronts” for the real question burning inside . . . “How did you get rich?”
People want to know the road I’ve taken so they can assess their likelihood to travel that same road. When I prompt for a guess, the answers are typical: Athlete. Actor. Plastic surgeon. A spoiled brat indulged by rich parents. A lottery winner.
These speculative “answers” unmask the reality behind people’s perceptions: To get rich you have to get famous, inherit or win money, or be a high-paid professional. That’s what I thought, until I met that stranger in his Lamborghini so many years ago.
The Fastlane Wealth Equation
Living wealthy in youthful exuberance has to shatter the myth of “Get Rich Quick.” If you’re 30 years old and worth millions, and you aren’t rich or famous via inheritance, you dirty all fabrics of normality. We can’t have that, now can we?
Once again, the secret is unmasked in the universal language of mathematics. The secret is to divorce yourself from the communist dictatorship of the Slowlane equation (ULL) and trade up to the free-wheeling libertarian—the Fastlane equation (CUL).
Wealth = Net Profit + Asset Value
Underneath this equation lies the true power of the Fastlane and how to build wealth fast. Its variables are controllable and unlimited. If you can manipulate the variables inherent to your wealth equation, you can get wealthy. Those variables are:
Net Profit = Units Sold × Unit Profit
~ and ~
Asset Value = Net Profit × Industry Multiple
All business owners leverage this equation, in which [units sold] × [unit profit] determines net profit.
Using my Internet company as an example, my unit profit was approximately $4 for every website conversion. (A conversion was a user who generated a lead). On any given day, I had 12,000 people visiting my website. This means my “units sold” variable had an upper threshold of 12,000 per day. I had the opportunity to “sell” 12,000 people per day.
Let’s compare this variable to the Slowlane’s counterpart of hours worked. Under my wealth equation, my upper limit of wealth is “units sold” and currently stood at 12,000. Of course, 100% conversion is unreasonable, and “converting” all 12,000 is unlikely. Likewise, in the Slowlane, the unreasonable upper limit is 24 because there are only 24 hours in the day. Logically, the real upper limit is 8 to 12 hours per day.
What is going to make you rich? An upper limit of exposure to 12,000 people per day? Or maximizing your hours worked in the day? That’s 12,000 vs. 24. No contest. I get rich and the Slowlaner gets old.
Controllable unlimited variables will make you rich. So how did I control this variable? How is it unlimited? Simple. My average conversion ratio was 12%. If I want to make more profit, I don’t walk into the boss’s office and ask for a raise. No, I have several weapons available for deployment.
1) Raise Units Sold by Increasing Conversion Ratio
A 1% increase from 12% to 13% would give me an instant raise of about $480 per day. That’s $14,400 per month. If I redesign the website, hit a home run and get conversion to 15%, now I’ve expanded my income to over $43,000 PER MONTH.
2) Raise Units Sold by Increasing Web Traffic
To raise profit, I can increase traffic. If I increase web users to my website from 12,000 to 15,000 and conversion stays at 12%, my daily income rises by $1,440 per day, or $43,200 per month! Not likely? It happened! On some days I would have traffic spikes where over 20,000 users would visit.
3) Raise Unit Profit
If I detect a weakness in supply for my service or improve value, I can raise prices and increase my unit profit. If my unit profit moves from $4 to $4.50, I raise my income to $10,800 per day from $8,000. That translates to an additional $84,000 per month! Is your mouth on the floor yet?
Isn’t it wonderful to have control? These were my options to create wealth. I had reasonable control over both variables, “unit profit” and “units sold,” whereas in the Slowlane you’re left pleading with the boss for a measly 3% salary raise.
Second, notice how my wealth variables are virtually unlimited. I controlled only a small part of my market, and conceivably my upper threshold of traffic wasn’t the current 12,000 people but upward of 50,000–100,000 users PER DAY. Unit profit is also pliable. I could experiment with increased prices or new services.
I remember when I introduced a new service that cost me nothing and I sent an email to my advertisers outlining the program. Within minutes, I made a few thousand dollars in reoccurring yearly income. My invested time was negligible and the results were accumulative. Limitless variables = high speed limit = high potential income.
The power of this example is to illustrate why I got rich and most others don’t. I changed my universe because my wealth equation was unlimited and controllable.
When I make tiny, incremental changes in my strategy, I explode my income. A mere 1% increase in the variables could mean thousands and a new Lamborghini. When your wealth variables have high leverage, so does your income potential—or would you rather stick with the ceiling of 24 hours native to intrinsic value?
Unfortunately, many enthusiastic business owners engage in opportunities with low, punitive speeds. For example, if you sit outside th
e Home Depot and sell hot dogs from your hot dog cart, you’ve muzzled your speed with no accelerative leverage. The variables are limited because your reach is confined to a small area. How many hot dogs could you conceivably sell in the day? 40? 100? Is it possible you can go home and rave to your wife “Honey! I sold 20,000 hot dogs today!” It would never happen! Again, this isn’t much different from the 24-hour cage on intrinsic value. Small numbers have a strong gravity toward mediocrity.
Another example is this book itself. How many people are interested in financial independence or early retirement? My market, my upper speed limit, is virtually hundreds of millions of people all over the world. To weaponize the Fastlane wealth equation, you must deploy a Fastlane business that has the potential for leverage or high speed limits. Retarded numbers retard wealth!
Millionaires Create and Manipulate Assets (Asset Value)
In a survey of 3,000 pentamillionaires ($5 million net worth) the Harrison Group (HarrisonGroupInc.com) reported that almost all pentamillionaires made their fortunes in a big lump sum after a period of years. Worth repeating: a big lump sum, not “by saving 10% of his paycheck for 40 years.” “A big lump sum” is just another phrase for “asset value.” Furthermore, 80% either started their own business or worked for a small company that saw explosive growth. Explosive growth is another phrase representing asset value. And yet, none of these multimillionaires had a cushy union job down at the DMV. Surprised? Don’t be.
The primary wealth accelerant of the rich boils down to one concept: Appreciable and controllable assets. Within our Fastlane wealth equation, this second component is called “Asset Value.” Asset value is simply the worth of any property you own that has marketplace value.
Slowlaners and Fastlaners have two antagonistic views of “assets.” Slowlaners and Sidewalkers buy and sell depreciating assets that decline in value over time. Cars, boats, electronics, designer clothes, gizmodos, and sparkly bling to impress that newly divorced woman in the adjacent cubicle—these are all assets that lose value the moment your credit card is charged.
Contrary to this, Fastlaners buy and sell appreciating assets: businesses, brands, cash flows, notes, intellectual property, licenses, inventions, patents, and real estate. As it relates to the Fastlane wealth equation, the power of “Asset Value” lies in your ability to control the variable in a virtually limitless fashion.
Wealth Acceleration by Asset Value
The rich accelerate wealth by accelerating asset value and selling those upgraded assets in the marketplace.
Twenty-four-year-old Sheila Hinton quits her job to start a business as a roving computer technician. At first, her business operates in the local city, but growth forces her to hire additional technicians, expanding into nearby cities. In a few years, Sheila owns a company that operates in 6 Midwestern states. She moves from a technician to a facilitator of the system, and her company enjoys an impressive $3 million profit. After enjoying the profits (and saving $6M of it), she sells her company for $21 million to a large computer manufacturer. She built an asset from nothing to something. While she never enjoyed “passive income,” the asset was her system, and now with a $27 million nest egg, she has passive income for life, never needing to work again.
The preceding story best represents the two variables that comprise “asset value”:
Asset Value = (Net Profit) × (Industry Multiplier)
Any time an asset has sustainable profits, an industry multiplier governed by prevailing market conditions determines the asset’s value. Other people or companies will buy that asset based on the asset’s net profit multiplied by the assessed multiple. For example, if you own a manufacturing company that nets $100,000 and the average multiple for your industry is 6, your asset value is worth $600,000. Industry multipliers are subject to intense negotiating as they rise and fall with the economy and within industry sectors.
You already might be familiar with “multipliers.” Stocks trading on the public markets define the multiplier for each respective company by the price-to-earnings ratio, or PE. If a company’s stock trades at 10 times PE, investors are purchasing that company at a multiple of 10 times. Price-to-earnings is relevant regardless of whether your company is a small private company or a large publicly traded company: The valuation of your company is predicated on the subjective PE for your particular industry.
For example, in my particular web space, industry multipliers ranged from 2 to 6. For this analysis, let’s use the middle: 4. This means that any time I increased my net profit, the value of my business increased by a minimum factor of 4, or 400%.
400%!
Where can you get a return of 400% in today’s financial market? Are there any mutual funds paying 400%? Forget about today, how about ever?
In effect, this puts a phenomenal wealth-building tool at your disposal. Since net income, profit, or earnings can determine asset value, I experienced asset growth of 400% every time I increased net profit. For every dollar I profited, the value of my company would increase by a factor of 4, or $4. If my net profit increased $500,000 for the year, my company’s valuation increased by $2 million.
Below is a list of average multiples per respective industry.
Advertising
Beauty Shops
Bars/Drinking Places
Carpet Cleaning
Computer-Related Services
Employment Agencies
Engineering Services
Gasoline Stations
Grocery Stores
Medical Labs
Misc. Retail Stores
Patent Owners and Lessors
Physical Fitness Facilities
Plumbing/HVAC Services
Surgical and Medical Equipment
Used Merchandise Stores
2.85
4.10
2.70
5.22
8.19
5.40
6.32
3.70
11.34
2.62
3.62
14.56
3.56
4.52
17.32
4.92
Source: Inc. Magazine, June 2009
The Wealth Acceleration Factor (WAF)
Suppose you’re a disgusted engineer employed by a multinational corporation. You’ve been employed for three years and diligently save 10% of your paycheck and invest it into a indexed-fund earning an average of 8% a year.
Your Wealth Acceleration Factor (WAF) is 8%.
Now suppose you quit your job and take your experience and set off to create a company manufacturing medical devices. You estimate that your total market (potential buyers) for your medical product(s) is 16 million. According to our chart above, the average multiple for the “medical devices” industry is over 17. This means within your scope of wealth acceleration, you can accelerate wealth at a FACTOR of 17, or 1,700%.
Your Wealth Acceleration Factor (WAF) is 1,700%.
Let’s extend this example further. For the next six years, you grow this company to the point that its net income is $1.2 million per year. This means you now earn $100,000 per month (your net profit) AND your company (the asset) is now worth in the neighborhood of $18.4 million based on the average multiple ($1.2MM × 17.32 multiple). You could continue to grow the business (grow wealth via asset value) and cash flow (grow income) or seek to liquidate (sell asset value) to realize wealth acceleration.
Contrast the two wealth acceleration options for the Slowlaner and the Fastlaner. Your wealth acceleration options if you stay as an employed engineer:
✓Raise your intrinsic value and HOPE the boss gives you a pay raise.
✓HOPE the company doesn’t lay you off, so you can continue receiving your income.
✓Save 10% of your paycheck in an indexed-fund and HOPE for an 8% return for the next 40 years.
Your wealth acceleration options if you owned your own medical device company:
✓Grow net income with an income potential only limited by
the number of devices you can sell, that is, 16 million.
✓Grow asset value at a factor of 1,700%.
✓Liquidate asset value and turn paper money into real money.
Can you see now why some 30-year-olds are worth $50 million and some are worth $19,000? The Fastlane universe operates on gains of 1,700% and millions, while the Slowlane universe 8% and 40. One plan is about HOPE while the other is about CONTROL.
Breaking news: 8% and 40 makes millionaires in 40 years.
1,700% and 16 million makes billionaires in four years.
Wealth’s Dual-Flanked Attack
Zealous pursuit of net profit is a double-flanked attack at creating wealth. Since asset value is tied to net profit, raising net profit simultaneously elevates asset value by the average industry multiple. Of course, this works in the opposite as well; if your company stalls and net income falls, so will the corresponding asset value. When I repurchased my company, I paid $250,000. Then for the next several years I manipulated the asset and increased its value.
➡I expanded my customer base by 30%.
➡I reduced expenses, improving profitability.
➡I streamlined operations, which created passivity.
➡I elevated “net income.”
Over this process, my net income exploded and, with it, asset value. Then, subsequently, and after profiting millions passively, I put the company up for sale and entertained multimillion dollar offers. I bought an asset for $250,000, appreciated and manipulated the variables, and then sold it for millions.
