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At BCL of Texas, we believe in closing the racial wealth gap, and that includes creating generational wealth that can be passed on to future generations.
As Director of Entrepreneurship at BCL of Texas and working with diverse small businesses for over 20 years, I have a lot of aspiring entrepreneurs come to me and want to start a business as a means to build wealth, or have something to pass on to their children. That leads us to the question: Can your small business be a way to create generational wealth? The answer is maybe. Entrepreneurship, through a successful and profitable business model, can be a great source of consistent income to build wealth.
We know that over 75% of small businesses owned by people of color have no paid employees besides the owner. In this case, the business is not a vehicle for wealth building as much as it simply replaces the income from the owner’s day job - as long as the costs of running the business don’t eat into the revenues too much. But, let’s say your business is in the 25% of businesses that grow beyond a single employee, and on top of that, it even becomes a highly profitable business. In order to build wealth, the business needs to both generate substantial profits (revenue minus expenses) and be sustainable in the long term to produce consistent income.
One thing we see is startup entrepreneurs coming from a side hustle or hobby business with what appear to be high revenues, but they fail to account for the expenses of supplies, marketing, shipping, and everything they put into the business to keep it running. If, after costs, your business is highly profitable, then it needs to be strong enough and well-managed enough to survive past the typical failure period of businesses and in fact last across generations so it can be passed on to children and potentially grandchildren.
For a strong, well-managed, financially sound business that survives across decades, then yes, we can begin to build wealth that can be transferred across generations, either in the form of profits from the business, or the business itself as an asset.But for generational wealth, the wealth and assets need to be maintained. One pattern we see is that generational wealth can be quickly lost if children choose to cash out assets, sell a business or a home, or otherwise spend or dissolve the assets passed down to them. In order for wealth to be maintained, the second and third generations need to be committed to maintaining the assets.
So, what can small business owners of color do to create and pass on generational wealth? First, understand that a business can be one tool in the toolbox - but you need the other tools of smart investments, financial management, and possibly assets like homeownership to support and round out the toolbox. Secondly, your business management needs to be in top shape if you want it to grow to become a sustainable and highly profitable business. Nonprofits like BCL offer professional business coaching to assist with this. Finally, financial management is key for both the current and future generations. Money and assets can only be passed on when they are maintained and developed in a strategic way.
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