The FIRE Flywheel Strategy to Financial Independence
Updated on October 28, 2021
The “financial independence retire early” (FIRE) movement is centered on achieving financial independence earlier than the traditional retirement framework, which, at least for Americans, is set up to enable people to retire at age 65 or older.
Trending particularly in millennial and personal finance groups, FIRE is normally accomplished by saving as much of your income as possible to allocate towards investments, eventually building up that nest egg to the point where the returns on your investments are enough to cover your monthly living expenses.
As a business owner, you might be putting every penny back into your business and have zero capital to spare. You might not want to live in a $350 per month apartment in Southeast Asia just to hit extreme savings goals. You might want to retire earlier than in 15–25 years.
If this describes you, the good news is that there is a FIRE strategy where business owners are actually at an advantage and that could position you to hit FIRE in five years. We call this the FIRE flywheel strategy.
In this article, you’ll learn how the FIRE flywheel method can reduce the timeframe to FIRE to even as short as five years, how it can increase the diversity of your income sources, and how it can improve the likelihood of achieving your end goal.
The FIRE Flywheel
The FIRE flywheel strategy can also be described as an asset flywheel approach to FIRE.
The asset flywheel is a term we use to explain the method of buying and selling online businesses to increase the speed of wealth-building. While you might still have other investment strategies and portfolios, with this strategy your active income sources are focused on growing, selling, and buying online business assets. The more you repeat this cycle, the faster you “spin the flywheel,” exponentially increasing your monthly income.
The FIRE flywheel method, therefore, is a way of systematically buying and selling business assets to achieve your FIRE figure far faster and with less risk than if you were to rely on only one income-producing asset.
To describe the strategy, let’s start by explaining the phases of the asset flywheel.
The Four Phases of the Asset Flywheel
1. Running and growing your first online business
This might be your first or current business. If you’re just starting out, during this phase, your goal is to save as much capital as possible while you focus on growing the business to where it’s generating at least a few thousand dollars per month in net profit.
This is the startup phase, and it is inherently the slowest part of the entire strategy.
If you are a business owner with an existing online business, the good news is that you have the advantage of starting with a flywheel that is already spinning, even if only slightly. If your online business is generating enough revenue, you might even be able to skip ahead to phase two, selling your online business.
2. Selling your online business
Once your business is consistently making at least $3,000–$4,000 in monthly net profit, you’re at the level where you’re likely able to sell the business for around $100,000 or more.
This figure will, of course, vary depending on the characteristics of your business. If you’d like a better prediction of your business valuation, feel free to check out our free valuation tool.
For the sake of this example, let’s say you sell your first business for $100,000. If it took you two years to build the business to this level and you were able to save an average of $2,000 per month ($48,000 total), you’d have $148,000 in capital towards buying your next online businesses.
3. Buying online businesses
You now have the capital injection from the sale and the knowledge of how to build this particular type of business. Your next goal is to purchase multiple smaller businesses and grow them to a similar level as your previous business.
For example, you might purchase two $70,000 businesses or three $50,000 businesses. Your goal is to then grow these businesses and resell them.
To ensure you’re able to quickly find quality businesses that match your specific criteria and size, we recommend looking at brokerage business marketplaces. Trying to do this manually can be a slow and daunting process.
However, it’s important to note that different brokerages have varying standards for the quality of businesses they approve in their marketplaces. To ensure you’re buying a quality asset, we recommend looking for brokerages with a vetted marketplace.
The buy–grow phase is usually much faster, as growing purchased businesses tends to be much quicker than starting from scratch. Purchased businesses have already reached a degree of product–market fit and are more primed for growth. You will also likely have skills and knowledge from your previous business that you can apply to your new acquisitions to simply step on the growth gas pedal.
Overall, the timeline from when you buy a business to when it’s ready to be resold could be as quick as 6–12 months.
4. Repeat
To continue our example, let’s say you grew your three $50,000 businesses each to $100,000 and sold all three of them in a year. After saving about $4,000 per month, you now have $300,000 from the sales of your businesses and $48,000 from profit savings, totaling $348,000 in one year.
This is where things start to speed up. Continuing with the example, let’s say you purchase three more businesses, each for $100,000, and after one year, using the same method you used to grow all of your previous businesses, you were able to double the valuations to $200,000 each, giving you $600,000 in capital from the sale of the businesses.
Assuming you saved $3,000 per month in profit from each of those three businesses, you would also have saved $108,000 in total profit, leaving $708,000 in total capital by year four.
You could now purchase multiple smaller businesses to repeat the buy–sell process. Alternatively, you could purchase one large business to consolidate your funds and operations into one business. Let’s assume you purchase three $200,000 businesses, and by the end of year five, you have doubled the size of each business to $400,000. You now have a total of $1.2M in business assets and are likely generating between $30,000 and $40,000 in profit per month.
This, of course, describes a very aggressive strategy and makes several assumptions—but we’re seeing this type of growth by brand aggregators each year.
Now that we’ve described the asset flywheel strategy, let’s explain how this works with the FIRE movement and how it can build different FIRE strategies.
Different Types of FIRE
LeanFIRE
LeanFIRE is for those whose goal is to enter retirement when the return on their investments is sufficient to cover basic living expenses. This implies a more frugal lifestyle or living in a location where you can keep your annual expenses lower. However, it usually means reaching the end goal of early retirement and financial freedom faster.
Depending on your financial goals, you might be able to achieve leanFIRE by building or buying and growing your first business. This will likely start out as a side hustle, but will eventually become your full-time source of income.
For those who want to reach the next level of FIRE, the leanFIRE phase represents initiating the “spin” of the flywheel.
As you work on your business, you are simultaneously developing your skills, learning more about what business model you prefer to work on, and validating your ability to grow a business. This is important for the business acquisitions you’ll make in the next phase.
In the leanFIRE phase, we recommend keeping it simple: focus on one business model, invest small amounts initially to test hypotheses, double down on what works, and grow progressively.
In addition to growing your income, true to traditional FIRE philosophy, it will also be important to keep expenses low to reach your savings number more quickly. For some FIRE followers, this looks like living a more minimalist lifestyle, paying off credit cards and student loans,
As a business owner, the end goal of leanFIRE can be objectively defined as generating enough revenue to cover your basic living expenses and to save 50% of your remaining income for growth or investments.
For example, if your basic living costs are $3,000 per month, then your leanFIRE goal would be to build your business to make $6,000 per month and to save the remaining $3,000 for paying taxes, saving capital, or outsourcing work for a more passive income system.
For some, this is the endpoint. But for many, this is just the beginning—a stepping stone towards achieving the next phase: fatFIRE.
FatFIRE
FatFIRE is for those whose goal is to enter early retirement making well above basic living expenses. You may want to live in a location with much higher living costs, you may have a family to support and are the primary income earner, or perhaps you simply don’t want to live at the bare minimum (we don’t blame you).
The asset flywheel becomes instrumental if you want to achieve fatFIRE far faster than normal. You initiate the fatFIRE phase by selling your first business and proceeding with the buy–sell cycle described earlier.
To determine your asset flywheel strategy, you first want to define what your fatFIRE monthly income amount is, then determine your total net worth required to realistically produce that monthly amount, and then reverse engineer a strategy towards hitting that number.
For example, let’s say your fatFIRE number is $10,000 per month and your goal is to generate this income through lower-risk investments, such as an index fund. For an index fund that produces an average of 8% return per year, you would need to have a net worth and retirement savings of $1.5M invested to generate $120,000 per year, or $10,000 per month.
With this number in mind, you can set up your asset flywheel approach by deciding on the number of buy–sell cycles to go through and whether your plan is to keep a portion of your online business assets to live off the income or to fully liquidate and reallocate your capital to other assets.
BaristaFIRE
BaristaFIRE is defined as generating enough money to retire early but using a part-time job or a job for enjoyment to supplement your lifestyle. The job might also be used for healthcare, social security, or certain traditional retirement accounts.
A liberating thought behind baristaFIRE is having the freedom to pursue career paths and activities for reasons other than money. This could be a job you’re passionate about or a career calling, such as being a teacher, an actor, a volunteer at a nonprofit—or, as the name suggests, a barista.
This can also be extremely liberating for business owners who might feel pressured to build businesses or choose niches purely for the money but who are now able to pursue a path that they find highly creative and rewarding.
If your FIRE strategy is to supplement only a portion of your income, fortunately, this means your timeline to becoming an early retiree can be much shorter—and applying the asset flywheel system would shorten the timeline to reaching your retirement goals even further.
Selling vs. Saving Approach to FIRE
You may be wondering, instead of selling the businesses you’ve built or bought, why not just save the monthly profits to reach FIRE?
This is definitely an option. We are certainly not advocating against saving an emergency fund, putting money into a Roth IRA, or increasing your savings rate.
However, the more capital you allocate towards saving, the more your growth will slow and you will be unlikely to reach your fatFIRE goal in as short as five years. It is the exit that gives your flywheel the first real spin. Without this, your strategy becomes similar to a traditional FIRE approach.
Buying vs. Building
Another common question is whether it’s better to buy or build businesses. For this strategy, buying is ideal for a couple of reasons:
First, there is lower risk when purchasing vetted businesses. Assuming you’re buying the businesses in a reputable marketplace, the implication is that these businesses have reached product–market fit and their monthly income is consistent. This gives you a greater chance to grow the business to the necessary level and timeline compared to a business that has not yet been proven to work.
Second, a purchased business requires less time to grow. Building a business from scratch requires a ramp-up period for generating income; it’s not uncommon to see $0 on the P&L for several months. Buying a business means you’re generating income from day one. This is important in enabling the accelerated FIRE plan.
Ultimately, building a business from scratch brings you back to a more traditional FIRE approach to saving money.
If you want to make the asset flywheel accelerate faster, you shouldn’t be building a new business after each sale. To continuously hit the ground running, you should be focused on buying businesses that already have traction.
FIRE Flywheel vs. Traditional FIRE
Advantages of the FIRE flywheel
The FIRE flywheel approach has several advantages over the traditional FIRE approach.
First, you can start with the asset you’ve already built to initiate the spin of the flywheel. Starting the flywheel from zero is the hardest part of the entire process, so starting past this phase can be a serious advantage.
Second, it’s faster and more scalable than the traditional FIRE approach.
Third, it takes less time than building businesses, as you’re acquiring already established businesses generating income from day one.
Fourth, if you’re acquiring businesses you have prior experience growing, you can apply your current skillset without needing to learn everything from scratch. To make this strategy work, you mostly need to learn how to sell and buy businesses.
Risks of the asset flywheel
The main risks with the asset flywheel are the risks of running online businesses in general. Whether it’s a Google algorithm update or an Amazon terms of service violation, most online business owners are dependent on third parties, which means their businesses are vulnerable to changes often out of their control.
Business owners understand and accept these risks as part of doing business. However, to mitigate these risks, the FIRE flywheel approach encourages business owners to diversify their revenue streams by allocating capital from a sale to multiple business acquisitions.
Compare this to an online business owner who is solely dependent on one business and one source of income. We’ve seen many businesses hit by algorithm updates, but we’ve also seen many businesses built on proper foundations and able to weather the storms.
The First Step to Your Five-Year Plan to Financial Independence
If you’re bootstrapping or just starting out, continue to build your business to a point where you can sell it. If your business is more established, consider selling it and laying a plan to acquire multiple smaller businesses to grow and sell or keeping your business and investing your spare capital into purchasing other businesses to scale and grow.
If you think you’re ready to sell, your first step is to get some expert advice by scheduling an exit planning call with one of our expert business advisors.
If your plan is to jumpstart your asset flywheel by acquiring an online business, your first step is to create a free account with Empire Flippers, where you’ll get access to search tools to narrow in on businesses in your niche within minutes.
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