Lessons for the would-be wealthy

RIGHT across the country, final year high school students are breaking out the pre-mixed drinks and preparing to toast the final days of their secondary education. Once the exams, muck-up days and school formals are finished, thoughts will turn to university and other forms of tertiary education.

But while there will be plenty of ideological human rights lawyers, marine biologists and research scientists hoping to land a place at a top university, what about those budding young star who have another dream – to become a fabulously wealthy entrepreneur.

What university should they attend? Why isn't there a course for them?

As we showed in last week's column, Australia's rich have a wide variety of educational experience. For every university graduate, there is a billionaire who only finished high school, or never got that far.

But that's not to say education isn't important. So let's assume for a minute that there was a course or even a school for training the rich. What exactly would it look like?

Below I have set out eight core subjects that budding wealthy entrepreneurs should pass before building their gigantic empires.

The course (which could be taken over a semester, a year or, for those impatient types, a few night classes) has been designed to be non-industry specific and does not cover those talents that every entrepreneur needs – an appetite for risk, a great sense of timing and a passion for business.

Unit 1 – Debt: It's uses and abuses

One thing that sets entrepreneurs apart is their appetite for risk. They are more than willing to put everything they own – their home, their wife's home, their parent's home and their reputation – on the line to drive their business forward.

A key part of this is a willingness to take on debt to fund expansion. Indeed, entrepreneurs such as Nathan Tinkler and New Zealand's Graeme Hart have proved how effectively debt can use used. Both used small amounts of their own money and relatively large amounts of other people's to build their empires - buying and selling assets, repaying one lot of debt and moving onto the next deal.

However, a would-be rich lister must learn that at the heart of every big corporate collapse lies an unsustainable level of borrowings.

Eddy Groves, Christopher Skase, Ric Stowe, Matthew Perrin – all were brought down by borrowing too much too quickly. In Groves' case he did it twice – once inside ABC Learning Centres and again with his own personal use of margin loans.

Key reading: Graeme Hart's success secrets

Unit 2 – The numbers game

We assume that all rich people have a detailed and instinctive understanding of finance and financial statements. Many do, but certainly not all. For a lot of entrepreneurs, financial statements – which tend to look backwards – are not nearly as important or interesting as the Next Big Idea.

However, an understanding of the importance of a clean set of numbers is crucial, particularly for entrepreneurs that intend to get investors or lenders on board.

As well as the basics of cashflow, balance sheets and profit and loss statements, entrepreneurs need to learn about the different types of financial reports investors and lenders will want to see – and why number should always be treated as sacred.

As we saw in the cases of Babcock & Brown, MFS, City Pacific and ABC Learning, accounts that are complex are a major red flag.

Key reading: Five lessons from the spectacular fall of Eddy Groves

Unit 3 – Business and family

The art of running a family business is one that few entrepreneurs get completely right and Australian corporate history is littered with bitter family feuds, including the Moran family, the Belgiorno-Nettis family and the Fairfax family.

However, some families appear to do a very good job of getting the balance right between strong family collaboration and giving younger family members the autonomy to spread their winds.

For example, Richard Pratt's model of giving his children specific parts of the empire and joint control of the head company appears to have been very successful. Similarly, the Myer, Smorgon and Baillieau family have continued to grow their collective fortunes with very few (public) disagreements.

Key reading: Australia's richest family feuds

Unit 4 – Connections

The wealthy are experts at using their personal connections to grow their fortunes. Partnerships and deals with old friends from school, political connections to smooth out those planning regulation obstacles and special access to juicy investment opportunities are all par for the course.

While building connections is difficult to teach, it's crucial that would-be richies learn how to extract the maximum value from networking events, political donations, club memberships, directorships and, perhaps most importantly of all, philanthropic works.

Key reading: Australia's biggest corporate political donors

Unit 5 – Wealth protection

There are many things that can lead to the destruction of a fortune – too much debt, poor business decisions, economic conditions and even bad luck. But entrepreneurs also need to be aware of some of the non-business problems that can destroy wealth.

Top of the list is divorce, as rich list members such as Greg Norman and Tom Cruise can attest. The breakdown of a friendship or business partnership can also take down a fortune, as can legal problems, succession issues and even illness.

While entrepreneurs often love to embrace risk, protecting your assets in all these circumstances is essential.

Key reading: How divorce destroys (and creates) fortunes

Unit 6 – Public versus private

One important question for entrepreneurs to consider as they grow their empires is whether or not to keep the company private or take it public via a sharmarket float or similar.

For entrepreneurs like Frank Lowy and James Packer, the ability to access capital markets – particularly offshore markets – has been a key reason for the rapid and continued growth of the businesses.

But for entrepreneurs like the late Richard Pratt, David Hains and Gina Rinehart, remaining private has been equally crucial. Without the scrutiny of the sharemarket, these billionaires have been able to take a longer-term approach to expansion. Avoiding the distraction of dealing with analysts, journalists and shareholders every six months is also a huge benefit.

It's a tough call, particularly when you consider public companies are typically easier to exit.

Key reading: Australia's wealthiest recluses

Unit 7 – Exits

Knowing when to sell up and step away is a skill that many entrepreneurs struggle with, so some instruction in this area is important.

While billionaires like Rupert Murdoch like to joke they will be carried out of their empire in a pine box, rich list members like Lang Walker, Greg Poche and John Van Lieshout have been able to time their exits to perfection, selling out at the top of the market – and investing again.

Others, such as Simon Clausen and Peter Brookes have been smart enough to realise they were struggling to build the scale to compete in their globalised sectors, and so saw selling up at a good price as a strategic move.

Timing is everything in business, and there is no more important lesson than when to cash out.

Key reading: The big (stinking rich) sell-off

Unit 8 – The pitfalls of being rich

A little reality check for the would-be wealthy is never a bad idea, so some information on some of the disadvantages wealth can bring is a good idea.

Issues to be covered include:

  • Scrutiny from the ATO
  • Pestering by charities
  • Old friends who suddenly want a loan
  • Gold digging spouses of both genders
  • Unwanted media attention and other invasions of privacy
  • The steady stream of would-be business partners.

Read more ...

Why the wealthy are in the firing line

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This article first appeared onSmartCompany.com.au, Australia’s premier site for business advice, news, forums and blogs.


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