One of the first books I read in my entrepreneurial journey was “Multiple Streams of Income” by Robert Allen. It’s a practical guide to exploring multiple ways of generating income from real estate to royalties, and a must-read for any aspiring entrepreneur.
Early in the book, Robert talks about his M-O-N-E-Y T-R-E-E formula for success in picking the right business, and it’s worth emphasizing in this post. Think of it as a filter for passing through any business idea that comes your way (as entrepreneurs, we are exposed to may of them!) and a guard against “next shiny object syndrome.”
To summarize in simplistic terms: the goal of any business is to set up a consistent, inexhaustible stream of income that flows into your bank account with little or none of your effort. You may need to work it hard on the front end to set it up (correction- you WILL need to work hard at it), but over time the goal is to remove yourself and have the business continue to pay you, regardless of your efforts.
Here is the MONEY TREE Formula:
M- Multiple Streams:
The business you set up should be a source of multiple streams of income. If you cannot identify, potentially, at least 5 different future income streams, then it’s not a business worth pursuing. In real estate- you can always buy another property. In a physical products business- you can always launch another product. A restaurant or small “mom and pop shop”- is it franchisable? Etc. If you cannot clearly identify the expansion potential on the front end, don’t consider that business opportunity.
O- Outstanding:
The product or service you offer should be of outstanding quality and easily distinguishable from the rest. Competition is a reality in business, and you should have a clear idea of how to separate yourself from the pack. If you’re selling widgets- what is your differentiation strategy? If you’re selling real estate- are the quality of your rehabs exceptional? Or, the neighborhoods you buy in better? Or, excellence in customer service on the management side? Recessions are inevitable in business, the businesses that offer outstanding products and services will survive multiple economic downturns. Competing solely on price is a surefire way to get whipped out, people gravitate to quality. So, make sure your business provides a clear path to offering customers an outstanding product and/or exceptional customer service.
N- Nothing Down:
Nothing down doesn’t literally mean “no money down.” The truth is, you need to put some money into a business to get it started. But, not necessarily $100,000 to buy a franchise- and that’s just the rights! Not to mention equipment, inventory, building, hiring employees, etc. Starting a brick-and-mortar business can require a considerable outlay of cash. My first Real Estate deal was a true “nothing down” deal- I borrowed 100% of the purchase price, and just paid a few thousand in closing costs (see “My First Deal” blog). And, in the online world, you can start businesses with a fraction of the cost of buying a franchise. So, ‘Nothing Down’ means looking for business opportunities that require as little of your personal money as possible.
E- Employee-Resistant
At some point you’re going to need help to build a business, but employees often come with baggage that can be dangerous. They are entitled (“you can’t fire me”!), you have to compensate them with benefits, often their throughput is affected by events in their personal lives, and they can sue you if you fire them. There are businesses that you can build autonomously with most of your own efforts and, perhaps, hiring Virtual Assistants or contractors on a “one-off” basis instead. When you reach a point where your business grows and you need help, carefully evaluate each potential candidate and, as Dan Kennedy eloquently put it: “hire slow and fire fast.” But, better yet, look for employee-resistant businesses- they are becoming more common in the world of e-commerce.
Y- Yield
Look for businesses and income streams that yield a high return and can be build quickly. Robert Allen give an example- imagine $20 million in the bank earning 5% per year- that’s the kind of yield you should be looking for when evaluating the potential of a business.
T- Trend and Timing
Timing is everything- in life, and in business. Building a business that is on trend is like swimming down stream, you let the currents take you with much less of your own efforts. A good business for trend and timing is Real Estate. Real Estate markets are cyclical by nature, and typically rise and fall every 8-10 years or so (give or take, not an exact science). If you can be on ‘trend’ and ahead of the wave, you can get in right after the market bottoms out, ride it back up and create a fortune. Another trend is online- with the explosion of social media, e-commerce platforms like Amazon, podcasting, etc. the tools are there for people to self-brand and create a huge following that can lead to opportunities to monetize. The key is to be ahead of the trend and catch it early, like the saying goes in business: “there are the innovators, the imitators, and the idiots.” Be ahead of the curve as much as possible.
R- Residual
There are 2 types of income: linear income, and residual income. Linear income is from a job (trading time for money) and it’s like trying to walk “up” the “down” escalator, you have to walk twice as hard just to make a little progress. With linear income, you have to battle inflation (3-5% per year) and taxes (the more you make, the more you pay). Residual income flows into your account, regardless of whether you work or not. Robert Allen gives some examples of Residual Income: songwriters, authors, software creators, game designers, and inventors earn royalties; insurance agents get residual business; entrepreneurs get business profits; real estate owners get passive cash-flow; franchisors get franchising fees, etc (pp. 37-38). Look for ways to add residual income streams to your life each day.
E- Essential to Everybody Every Day
Pick a niche or product that is needed (essential) to as many people in society as possible. Real Estate- everybody needs a place to live (own or rent). If there’s a downturn in the economy and people had to pull back on their spending habits, which products or services would still be needed vs. the ones that are expendable? Think that through when evaluating a potential business or product.
E- Enthusiasm
You have to love what you do in order to be any good at it. The money may be great, but if you hate what you’re doing you likely won’t be able to sustain it for long, and you won’t be motivated to continue to work on your craft. I love the saying: “don’t chase money, chase management.” It’s true whether or you’re looking for a job or starting a business- look to surround yourself with good people who can give you solid advice and cheer you on, and follow your passion. Love what you do and you’ll never work a day in your life!
Entrepreneurship is a never-ending journey and we’re constantly exposed to new ideas and new business opportunities. Before “leaping” into a new business, take your time to carefully filter the opportunity through the M-O-N-E-Y T-R-E-E formula, and ask yourself if it is the right path to pursue.
Get a copy of Robert Allen’s book here- https://www.amazon.com/Multiple-Streams-Income-Generate-Unlimited/dp/0471714550
