Episode 258: They Built a Successful Business. Then Their Income Dropped – Here’s the System They Were Missing

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What happens if your main income engine slows down before your backup plan is even moving?
If you’re building a business, growing retained earnings, or counting on a future exit to fund your freedom, this episode is a timely reality check. Jon Orr and Kyle Pearce unpack why so many Canadian entrepreneurs pour everything into one flywheel—the business or job that funds life today—while neglecting the second flywheel that’s supposed to protect them later. This conversation speaks directly to anyone who wants more stability, more options, and less financial stress when business gets unpredictable.

In this episode, you’ll hear how to:

• think about wealth in terms of two flywheels: your active income engine and your passive income engine
• stop relying on a future business sale as the only path to long-term freedom
• start building a second flywheel early by allocating profits strategically between safe, liquid assets and longer-term growth assets

Press play now to learn how to build financial momentum that keeps working, even when your first flywheel hits turbulence.

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Explore how financial flywheels can help Canadian business owners build passive income, strengthen wealth planning, and reduce dependence on a future business sale. This episode of Canadian Wealth Secrets unpacks practical investment strategies for entrepreneurship, including corporate wealth planning, tax-efficient investing, RRSP optimization, salary vs dividends in Canada, and personal vs corporate tax planning. Learn how a clear Canadian wealth plan uses financial buckets, financial vision setting, and an investment bucket strategy to support financial independence Canada, financial freedom Canada, and a realistic early retirement strategy. From real estate investing Canada and corporation investment strategies to capital gains strategy, business owner tax savings, legacy planning Canada, and estate planning Canada, this conversation focuses on wealth management, financial diversification Canada, and building long-term wealth Canada through smarter financial systems for entrepreneurs.

Transcript:

Kyle Pearce: All right, John, I had a conversation with an awesome couple. They are entrepreneurs, they’re doing what appears to be all the right things. But they came off a tough year in the books as they were trying to slowly remove themselves from the business from that first flywheel, as we always talk about. And it really hit them hard.

Kyle Pearce: After that conversation, first and foremost, I want to say this particular couple — I trust fully that they’re going to get this thing back on track because they did it the first time. They were all in on their business. They were doing all the right things. But today, what I want to chat about and kind of just riff on here — and we’ll keep this one short — is just about our two flywheels and about how or when we should start that second flywheel. And this is not just for business owners. I think it’s also for our employees, our T4 employees as well.

Kyle Pearce: Because remember, whether we’re building a business and manually pushing that flywheel, or whether our T4 job is allowing us to keep that first flywheel going, it’s when things sort of surprise us that things get tough. And then you want to almost just be able to look over to that second flywheel and go, all right, that thing’s already moving and we’re going to be okay to navigate maybe these sort of muddy waters or wavy waters, so to speak.

Jon Orr: Before we get any further into the moves that we want to make, let’s define the flywheels. Because if you’re just listening in for the first time or maybe you’ve listened to a couple of episodes before and you’re like, what are they even talking about — let me explain. We always view as part of a successful, healthy financial system there are four components, but in a way, what you’re really looking to build is two flywheels that don’t necessarily operate independently, but could operate independently.

Jon Orr: And I think what a lot of people do — and this applies to both business owners and T4 employees — is that one flywheel is your income generator. This is your primary source of income, whether it’s your business if you’re a business owner and you’re paying yourself through salary or dividend, or it’s your job if you’re a T4 employee or a sole proprietor. It’s this thing that actually allows you to live your lifestyle. And a lot of times we focus on that as the primary source. As business owners, a lot of people we’ve been talking with are actually viewing that flywheel as both flywheels together.

Jon Orr: So let me define the second flywheel. The second flywheel is almost like your passive income source. It generates income, it spins on its own, and it will spin even if the first flywheel goes away. The way these two interact is that when you’re in your accumulation years and building your income, you need to also be building the second flywheel so it will spin on its own.

Jon Orr: So if you’re a T4 employee, people are filling up their RRSP buckets, filling their tax-free savings accounts, putting them into investments, maybe buying real estate. Those other passive income sources — if they’re generating income or generating capital appreciation — are in a form your second flywheel. Because when you have financial freedom, that flywheel is supposed to spin on its own. It’s supposed to generate enough lifestyle money so that you can keep living, or maybe it generates income and it gets stronger every year. That’s the ultimate goal. These are the two flywheels that we need to build.

Jon Orr: And a lot of times as a business owner, you’re so focused on the first flywheel and sometimes you’re relying on it as your retirement strategy. Like, someday I’m gonna sell this business and when I sell it, I’m gonna take that chunk of change and that’s what I’m gonna live on in retirement. In a way, if you’re relying on that sale, you’re still building two flywheels — it’s just you haven’t thought about the second flywheel as operational until the first one stops. It’s like you’re gonna take the first flywheel’s chunk, move it into the second flywheel, and really you’re just replacing the first flywheel and that large sum of money just spins on its own because of compound interest and compound return.

Jon Orr: But I think that’s some of the faulty thinking that we need to warn business owners about. We need to continually build both flywheels at the same time. You don’t want to get to a point where you were relying on your business to be saleable and it’s a lot harder than you think to find people to do what you do, to find replacements. And if you think you’re just going to sunset and it’s going to flow without you and you’re going to get that passive income as a shareholder of this business, it’s much, much harder than you think.

Jon Orr: What we would recommend is like what we do — we have both flywheels moving. And what we’ve done is almost assume that the first flywheel will go to zero. Even though we don’t want it to go to zero, someday it will stop generating income. And if we sold it and it’s worth $0, the second flywheel is already spinning. We’ve talked about F-U money in past episodes. As a business owner, you want that F-U money in the second flywheel to be spinning so that it doesn’t matter what the first flywheel is doing. You can feel confident.

Jon Orr: So let’s make sure that the second flywheel is going, which means you’ve got to build both at the same time. You’ve got to start funneling money — almost do the profit-first model. It’s like pay yourself first in a very important, strategic way, so that the vision you’re creating means the second flywheel is turning and fueled, and when the first one does go away, you don’t have to worry so much anymore.

Kyle Pearce: And the other one is already moving. When you think about as an employee and non-business owner, a T4 employee, maybe a contractor, you’re getting a fairly consistent income coming in. There are actually podcasts that focus on just people saving the 10% or the 20% or whatever of their income to pay themselves first, which is something that we need to do.

Kyle Pearce: But then we enter into the business world. And sometimes we lose that a little bit because the business is doing well or it’s scaling up well, or we’re going to reinvest into our business and you feel like you are actually doing what a T4 employee would be doing, which is putting away something for retirement. The employee doesn’t have the potential for a sale. But remember, the vast majority of businesses don’t sell either. So we don’t want to put too many eggs in that basket and use the eventual sale as our later flywheel that’s suddenly going to start moving. We’ve got to be a lot more strategic.

Kyle Pearce: And what I’m hearing you say is we need to make sure that early and often we start that second flywheel. And I’m going to argue it does not matter what the size is. It really just matters what profit the business has and how we’re going to allocate it. And this may look and sound a little different depending on the stage the business is in.

Kyle Pearce: When you’re first getting started, you’re like, I gotta hang on to more capital. That’s where we go — we need more liquidity, we need safety, we need no volatility. We’re gonna lean on things like permanent insurance as an option to get started there. As the profits increase and you’re able to allocate more of that profit to longer-term investments, that’s where we start to look at things that are more longer term and more volatile — real estate, the market, any other alternative asset class or private equity, whatever it might mean.

Kyle Pearce: I would argue though, the easiest one is probably just going into the markets. It doesn’t matter if it’s just with the bank. Maybe you’ve got a great advisor who can start you a corporate account, or you might wanna work with our team on doing something along those lines. But the key here is to get that process started, even if it doesn’t feel like it’s doing a whole lot at the start. Because it’s the habit. You talk about micro habits all the time and we’ve got to get into this habit of looking at that profit and deciding how much of it do we need to keep available to make sure that the first flywheel keeps turning.

Kyle Pearce: Because we certainly don’t want to see that one come to a halt. But we also don’t want to under-allocate towards these longer-term assets. What we see with so many business owners is that the checking account just slowly increases. And again, that’s a good problem to have. But had we started the habit along the way of looking each and every year, or maybe every quarter, at the balance sheet and going — we’ve got this extra money, how much do we need to get us through the next quarter, how much might we need to reinvest back into the business if we want to scale up — what’s left over for us to start this other flywheel?

Kyle Pearce: Making sure that we are appropriately allocating is key. When people reach out to us and we hop on a call, usually our conversation starts in a very similar spot — let’s look at the retained earnings you already have and let’s look at any retained earnings you might expect to continue over the next few years and look at that runway. And what we often start the conversation around is using a 50% safe asset allocation and a 50% longer-term asset allocation. We use that only as a starting point.

Kyle Pearce: Some of this money we can’t rely on to pull back at any given time — that would be our longer-term investments. We’ve got volatility, sometimes we have a lockup period if we’re gonna put in a private credit fund or do any of those things. We can’t let a dollar from the business slip into that pot unless you’re truly able to say, yep, that’s going to go long term. You’re allowed to pull it back, it’s just we don’t want to put that dollar in that position should we need it pulled back.

Kyle Pearce: On the other hand, the other 50% might be the money that you need as a business owner to feel comfortable and confident that the first flywheel can keep going. What if in a given year our profit goes away because we tried to hire more people and tried to scale, and let’s say profit margins go to zero like they did in this particular business? Well, we’ve got this bucket over here that’s safe, non-volatile, and leverageable so that we can utilize it to make sure we keep that flywheel going, correct whatever we need to correct, and figure out how do we get that going.

Kyle Pearce: And guess what’s operating in the background? That policy sits in between the two flywheels and it’s there to help both in different ways. But we also want to make sure we have that longer-term investment mindset going in that second flywheel. Some of those dollars that are going to be there down the road will just keep that flywheel going so that when — and I don’t even want to say if, it’s a when — our first flywheel runs into problems, we can look over to this other flywheel feeling confident that not everything is relying on the first one. We’ve started the process, that flywheel is going, and we will be able to get back to pushing the first flywheel even harder as long as we’ve got time and opportunity to focus on it as well.

Jon Orr: Yeah, great insights specifically on the two flywheels. And I think our recommendation for today is really just to think about, do I have two flywheels operating? Am I positioned to optimize those flywheels? Do I have the right tools to make the flywheels turn in the right ways so that I am having that safe and liquid availability when needed? These are important questions to ask.

Jon Orr: That’s our call to action here today — just stop and reflect on the flywheels. When you think about the flywheels and a healthy financial wealth planning system, the flywheels live in kind of stage two, which is where your wealth reservoir resides. Having that wealth reservoir — part of that is the flywheel approach and the dynamic between the two flywheels. That’s the framework we think about when we’re doing wealth planning.

Jon Orr: Stage one is about vision and being clear on what you’re looking for in terms of retirement or business planning and next steps. Vision is so important for clarity and so that you can design your wealth plan. The third zone or stage is the optimization stage — when we have a clear vision and we’ve thought about our two flywheels inside of our wealth reservoir and how the dynamic works there, how do I optimize? What are strategic moves we’ve been making with the tools that we currently have?

Jon Orr: And then the fourth stage of any healthy financial wealth planning system is your estate and legacy planning. So today we zoomed in specifically on stage two to talk about the wealth reservoir, but more specifically these two flywheels and the dynamic between them. So again, just a reflection here today — take a step back and ponder about your two flywheel approach.

Jon Orr: We’d love to hear about your approach and how you think about those two flywheels. This conversation started from a call with some people who are digging into that planning, and we would love to dig into that planning with you. That’s what we do every single day. Reach out to us at CanadianWealthSecrets.com forward slash discovery. And if you want to learn a little bit more about those four phases, head on over to CanadianWealthSecrets.com forward slash pathways. Take our assessment and get a report on those four phases.

Kyle Pearce: Just as a reminder, Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of Canadian Wealth Secrets. And do note that we have a securities arm as well for assets under management.

Jon Orr: Just a reminder as well, the content you heard here today is for informational purposes only. You should not consider this information as legal, tax, investment, or financial advice.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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