Looking at virtually every study and research paper that has come out on the topic in the past few decades, the best chance the average person has to reach the top 1% of wealth in the United States is to invest in a successful small business that is profitable, providing a stream of dividends for the owners.  The reasons are fairly simple.  

• A small business investment provides an opportunity for a hardworking person who may not have a lot of money to spare to contribute their time and effort (called "sweat equity" in finance).  By bootstrapping their way in the beginning, doing tasks themselves such as painting or repairing the facility, negotiating necessary supplies for work, and striking deals within the community, a family with little or no resources has a shot at reaching $50,000 or $100,000 per income fairly quickly.  To receive a comparable level of dividend income from publicly traded blue chip stocks would require $2,000,000 to $3,000,000 in savings.  That is out of reach of practically all families on the planet.

• A small business can grow into a large business.  Wal-Mart Stores, Microsoft, eBay, Coca-Cola, Procter & Gamble, Tiffany & Company, ExxonMobil, and Johnson & Johnson all began as small firms owned by a single entrepreneur, a handful of investors, or a core family sometime within the past 150 years.  Combined, they now generate more than $1 trillion in sales per annum.  Many descendants of the original founding investors are still living off of massive trust funds established for their benefit.

The downside of this success is that a family that has invested in a successful small business often finds itself with most, if not all, of the wealth tied up in a single asset.  Even worse, many founders, as well as their children and grandchildren, are likely to work in the business on salary for the paychecks that provide the cash to cover their month-to-month living expenses.  That can be great when times are good, but a single industry-specific or firm-specific disaster can be catastrophic.

What can a small business investor do to protect his or her family?

 It comes down to diversification.  There are several different paths you can take, none of which are mutually exclusive.

Diversify Your Income Streams By Investing In Adjacent Market Opportunities That Leverage Your Knowledge and Expertise

By definition, a successful small business investment generates a lot of cash.  That money can be reinvested in other, profitable projects.  One of my favorite examples in history is a business called The Marcus Corporation.  It was founded in 1935 by an entrepreneur who owned a small town movie theater.  He grew his business until Marcus Theaters became the sixth largest operator of movie theaters in the United States.  

However, the family didn't want all of their money tied to the vicissitudes of Hollywood hits, so they took earnings out of the main enterprise, movie theaters, and began using their real estate expertise to develop hotels.  Years later, they used their experience in the hotel industry to develop restaurant concepts, taking advantage of their own facilities and scale.  Today, the business has a market capitalization of $400 million and generates between $13.5 million and $17.2 million per year in after-tax income.  Roughly half of the profits are mailed out to stockholders as cash dividends, and dividends have been paid for more decades.

It may take years, but given enough time, it should be possible to diversify into multiple businesses that generate cash income for the family owners.  You see this constantly play out by the wiser entrepreneurial families.  Bill Gates has his holding company, Cascade Investment LLC, which holds investments in shipbuilders, railroads, silver mines, soft drink giants, conglomerates, power utilities, and hotels, serving as a diversified source of wealth away from his main cash cow, Microsoft.  Despite owning $100 billion worth of shares of Wal-Mart, the Waltons have their holding company, Walton Enterprises LLC, which owns newspapers and banks, among other assets, funded, in part, by the dividends Wal-Mart Stores sends the family firm each year.  

Sell The Business In a Liquidity Event and Reinvest the Proceeds

Another alternative is to sell the company outright and reinvest the proceeds into a diversified portfolio of investments.  There are benefits and drawbacks to this approach.  

The main drawback is that the founding family will have to pay capital gains taxes on their asset, effectively reducing the amount of equity wealth working for them.  They then have to turn around and make investments in industries that they understand less than the industry in which they just sold, having spent years developing their company.  That can sometimes lead to bad results.  

The main benefit is simplification.  If you built a $10 million estate in the form of a successful retail store or a family farm, that can get messy by the time the resource reaches your grandchildren.  They may live several states away, not want to be involved in the day-to-day operations, and frankly, not care about the asset or its history.  The old saying is appropriate: "You can use a family to run a business but you cannot use a business to run a family."  In such a case, everyone is better off if the money is divided among the shareholder heirs, who can then live off the passive income and work with their own financial advisors.