The personal wealth statistics supplied by the IRS (which I’ve blogged about in other posts here like Joining the Top Five Percent or Top One Percent and Caricaturing the Top One Percent) paint an interesting picture of just who the one percent are.
For small business owners, however, the picture gets really interesting. You can see how these individuals operate. And lots of what’s going on with these folks connects to small business and entrepreneurship.
In the paragraphs that follow, therefore, I summarize some of the financial features that jump out.
And one note: I’m going to call this group the top “one percent.” The group, however, really represents the top half percent.
Lots of Cash
The IRS data shows the cash holdings for each of the five tiers of wealth the study uses to break out the the wealthiest Americans.
|Wealth Tier||Percent Holding Cash||Mean Balance|
|Under $5 million||93.05%||$283,079|
|$5 million to under $10 million||94.08%||$688,138|
|$10 million to under $20 million||98.25%||$1,477,553|
|$20 million to under $50 million||99.65%||$2,556,336|
|Over $50 million||99.10%||$8,651,264|
As a rough number, then, the wealthy often seem to have ten percent of their net worth available in cash. And that’s thought provoking.
Cash obviously provides two big benefits which are easy to identify—and easy to underrate. First, cash provides cushioning so a personal or business setback is dealt with more easily.
A second benefit to holding wads of cash? With big cash balances, someone may be able to exploit unusually excellent opportunities. Hard money loans, distressed real estate properties offered at fire sale prices, right-time-right-place business investments, and so on.
The IRS data also show the debts carried on average by each of the five tiers (see table that follows)
|Wealth Tier||Percent Borrowing||Mean Debts|
|Under $5 million||85.93%||$1,383,017|
|$5 million to under $10 million||71.31%||$498,009|
|$10 million to under $20 million||77.25%||$862,088|
|$20 million to under $50 million||76.51%||$2,081,520|
|Over $50 million||88.77%||$5,123,236|
Looking at the data, one can see that most rich people borrow money. But the great majority seem to borrow sparingly.
Look at those mean debt values, for example, and one can’t help but think that the wealthy may often only have a mortgage on their primary residence. (If you want to compare these debt mean values to the home mean values, here’s link to that post.)
Low borrowing sounds surprising if you’ve had someone explain the math of financial leverage. (Oftentimes, this subject receives frenzied attention from get rich quick writers and seminar promoters.)
But like holding lots of cash, relatively modest borrowing means that the richest one percent’s finances are much sturdier. They may be using their strong balance sheets to more easily withstand economic storms.
Management-heavy, High-return Investing
One final smart wealth strategy seems pretty clear from the IRS statistics: A really significant number of these people own either a closely held corporation, or an interest in a non-corporate business (like a professional partnership), or a farm.
Some of these business opportunities produce very high rates of return. All offer the chance not only to boost profits via hard work and clever decisions but also the chance to exercise more control over how long one works.
Here are the ownership percentages and mean values for closely held businesses
|Wealth Tier||Percent Holding||Mean Small Business Value|
|Under $5 million||28.83%||$930,352|
|$5 million to under $10 million||31.56%||$1,689,207|
|$10 million to under $20 million||43.04%||$3,779,313|
|$20 million to under $50 million||58.99%||$8,306,461|
|Over $50 million||58.35%||$39,879,890|
Look closely, and you can see what may be a trend: The richer someone is, the more likely he or she owns an interest in a closely held corporation. That’s pretty interesting…
Note: Price-to-seller-cash-flow multiples for small businesses of the size referenced in the lowest tiers are often very low. A business that’s worth $1,000,000, for example, might commonly deliver $400.000 in total salary, benefits and return on investment. And, I kid you not, I have seen businesses that produce $2,000,000 of cash flow sell for prices right about $5,000,000.
And, of course, closely held corporations (like Subchapter S corporations and small C corporations) are not the only forms of small business ownership.
Take a peek at the table below which shows ownership percentages and mean values for the rich who own interests in non-corporate business entities like professional service partnerships: law firms, consulting practices, physicians’ groups and so on
|Wealth Tier||Percent Holding||Mean Entity Value|
|Under $5 million||34.36%||$912,146|
|$5 million to under $10 million||44.76%||$1,497,521|
|$10 million to under $20 million||52.67%||$2,541,408|
|$20 million to under $50 million||65.63%||$5,703,355|
|Over $50 million||69.00%||$20,962,279|
The same pattern emerges, right?
Let me give you one other example of this small business focus. Here are the same numbers for top one percent, actually probably the top half a percent, engaged in farming:
|Wealth Tier||Percent Farming||Mean Farm Value|
|Under $5 million||18.91%||$3,599,928|
|$5 million to under $10 million||14.93%||$2,477,547|
|$10 million to under $20 million||14.34%||$4,146,960|
|$20 million to under $50 million||14.30%||$4,004,091|
|Over $50 million||23.80%||$19,416,667|
Looking at these small business ownership statistics, it seems that many and perhaps even the majority of the wealthiest Americans make and store their wealth in small businesses.
Obviously, these small business ventures entail much greater risk than something like a generic, low-cost index fund. And success in these ventures over any long period of time required to become wealthy demand both management effort and expertise.
But here’s the big interesting takeaway for entrepreneurs: For the some small business owners, success leads to membership in the one percent club.
Some Other Interesting Resources
The IRS personal wealth statistics are available for download as an Excel workbook here: SOI Tax Stats Personal Wealth Statistics.
We’ve also talked elsewhere here about what longitudinal surveys say about the impact of self-employment on income and personal wealth and if you’ve found this blog post useful, you may find those articles useful too: Defending the Millionaire Next Door: What Stanley’s Critics Got Wrong and The Millionaire Next Door Business Plan.