Wealth Creation: Part 7
I changed my mind. I am going to save my real estate example for my last example in Part 10. Instead I am going to warm you guys up with some other asset wealth examples. This one is for business owners.
This strategy is predicated on turning one of your biggest business expenses into an asset. The Inspired Member Chris Carroll is going to love this one! Feel free to share what you have acquired recently for your business Chris and how it’s going for you!
Cahill Contractors ([https://cahill-sf.com/](https://cahill-sf.com/)) is a very successful privately owned construction company out of San Francisco. I know them well cause they hired my Pops to run it for 20+ years.
Cahill builds buildings, campuses and hospitals. Being a contractor is a notoriously low margin high cost business. We are talking hundred million dollar plus jobs with 3% margins. And that is if you bid correctly. You can just as easily lose money on a big job. My Dad was the person who submitted the bids!
The owner of Cahill realized that outside of labor costs, his largest expense by far were the heavy machinery and equipment his company would rent for just about every one of their construction jobs. This included things like cranes, fork lifts, trucks, and even smaller items like fencing and porta-potties. All the things you see on a big construction job. They were renting these items from third party vendors who were obviously charging a significant mark-up to rent out their equipment for each construction job. Also, they were not exclusive to Cahill, so sometimes Cahill had to wait to get equipment when they needed it, which delayed their jobs, costing them money.
Recognizing an opportunity, Cahill started a separate LLC to enter into the heavy equipment business. Initially, they took out loans to begin purchasing the equipment they used the most. Loans are easy to get for equipment because the equipment acts as collateral, just like a car. If you cannot make the payments, the lender repossess the equipment.
Their first client would be their own company Cahill and it would be an exclusive relationship. Cahill rented all of its job site equipment from this LLC. And when Cahill wasn’t using it, they could rent to other builder friends as well.
They set the LLC up so that only Owners & Executive Team members could participate in its ownership. If a member of the LLC left the company (retirement, job switch or fired), they had to give back their membership units. It created really strong incentive to keep getting construction jobs and to stay with the company.
When my father was hired to become the new President of Cahill, his participation in the equipment company LLC was mentioned in his comp package, but he did not pay it much mind. As most people do, he was focused on his salary and bonus potential. As a father of five, he had many mouths to feed, so he wasn’t focused on wealth building. Fortunately for him, the owner of Cahill was.
Over time, my father would come to appreciate his minority position in the equipment company. It paid him more annually than twice his salary and all at a much lower capital gains tax rate. By the time he retired, he had received over $10 mm in additional compensation from the equipment company. This created substantial wealth for retirement. Meanwhile,Ike most people, nearly all of his salary had been used up to provide for his family.
This is one of the best examples of what I am encouraging you all to do. If you are a business owner, find one of your top three non-labor expenses and see if you can turn them into assets that perform for you, rather than a vendor or a bank.
