Monthly Archives: April 2009

What if you don't want to exit?

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I wrote a post about the real (nay, ONLY) succession plan for any small business: sell it!

But, Steve asks about the alternative:

What if you don’t plan to leave? I mean, Maybe the plan is to run it till you can’t any longer, then the wife runs it till she is ready to sell, or pass to the kids(if they are even interested in that type business). My idea is to find Businesses that provide (mostly Passive income) where you don’t need to spend much time at the shop daily. Where your biggest job is probably gonna entail paperwork.

This is the ‘pipe dream’ of many a small business owner – and, was certainly my father’s ‘dream’ … bring the kids into the business and then pass it on to them. After all, look at the advantages:

– Continuing ‘passive’ income … your kids will eventually run the business and look after you

– You’ll be smart enough to keep a chunky % of the business for yourself to ‘guarantee’ a healthy share of the ongoing profits

– No issues around selling the business, finding the right buyer, or handing it over

– It’ll keep the kids off the streets (probably, my father’s greatest motivation)

And, that’s certainly the central theme of a book that I reviewed some time ago, called Get Rich, Stay Rich, Pass It On: where the authors suggest that the ONLY way to ensure that your wealth carries on through the generations is to have roughly 50% of it in “continually innovative enterprise/s” a.k.a. a business:

What we mean here by a continually innovative enterprise is one that either offers a product or service that breaks new ground or changes a traditional product or service so much that it becomes virtually new.

As I said in my review: “that is something that you do before you retire so that you can retire rich … you take risks, you innovate, then you sit back and reap the profits (or sell)”.

But, there’s a serious flaw in this logic: 99.9997% of small businesses are inextricably tied to the owner; large companies know this, that’s why when they buy a small business, it usually comes with an employment contract to tide them over until they can ‘wash out’ the Owner/Founder Effect:

This is the truism that the business IS the owner/founder and the owner founder IS the business!

The reality is that owner/founders and their businesses cannot be parted so easily and these large companies should NEVER buy small businesses because of the Owner/Founder Effect … inevitably, the owner falls afoul of the new management, leaves disappointed [AJC: hopefully, with bundles of cash in her pocket to help console her 😛 ], and the business goes downhill thereafter.

Eventually, the business becomes ‘absorbed’ in the overall enterprise and they conveniently ‘forget’ that they totally stuffed it up … and, more often than not the old owner eventually buys back his own business for 25 cents in the dollar.

Friends of mine started a computer company and sold/bought it three times … each time selling high, buying low and making a heap on each subsequent sale 😉

Do you think it’s any different, Steve, when you ‘sell’ your business to your wife and/or children?

Because that’s exactly what you are doing: selling it to the least qualified purchasers; you may be able to teach them some of what you know … perhaps even a lot … and, there’s a VERY slight chance that you will be able to teach them (assuming that they have the will and ability to take on what you teach) 98% of what you know …

… but, you can NEVER pass on that last 2%: the Owner/Founder Effect ‘magic’ that made your business one of the few small-to-medium business success stories.

That’s why I called the book’s concept of encourage people to start/buy, then keep, these innovative enterprises “the most dangerous idea in retirement planning that I have ever read”, because that last 2% – the bit that is IN you and ONLY in you – is the bit that you CANNOT pass on and will eventually send your family broke.

Of course, there’s at least (my best guess) a 0.0003% chance that your business COULD become the next Walmart and pass on to at least ONE more generation, but I wouldn’t be willing to bet my family’s financial future on that.

So, instead of trying to fit your business into your Life, here’s what to do:

1. Find Your Number, the one that allows you and your family to live their Life’s Purpose

2. Apply a FULL 100% of YOU to molding the business into something that can be sold for at least Your Number (LESS the value of any investments that the excess cashflow that you truly outstanding business has been able to fund)

3. Spend your free time TEACHING your kids how to fish for themselves

… that’s what I’m doing for you, and that’s what I suggest you do for them 🙂

The Time/Money Paradox

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The uber-blogger, John Chow uses a surprisingly interesting visit to the park with his daughter to make a REALLY IMPORTANT POINT about the “trading time for money (and, money for time) dilemma” that afflicts most people … and, how he is one of the lucky few who avoids it by blogging …

… BUT, there are VERY FEW ways that you can earn money that don’t involve time. So, for the rest of us, we can separate our lives into two portions:

1. Earning/Investing until we reach our Number

2. Having both the time and money to live our Life’s Purpose

The aim is to accelerate the transition to 2. from 1. … how will YOU do it?

Guaranteed Returns?

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In choppy and down markets it’s natural to be nervous … so, it’s no wonder that investors start to look at funds that purport to ‘guarantee’ your initial capital, your return, or some combination of both.

I have a close friend who is a financial adviser, who works strictly on a fee basis, yet his practice is associated with the products of one major insurance and fund management company.

He was telling me of the rise of these Absolute Return funds that work on the basis of not only guaranteeing the original amount that you invested, but also lock in your returns to date …

– in other words, if you invest $1,000 this year and the market falls, the fund guarantees to pay you back at least $1,000

– then next year is a good year for the market and your fund increases by 10%; now the fund guarantees to pay you back at least $1,100

– but, next year there’s another market crash and the market drops by 15%; but, the fund STILL guarantees to pay you back at least $1,100

– if you remain with the fund and the market eventually totally recovers, as soon as the fund value rises above your new $1,100 ‘guarantee’ then so does your return.

There have been plenty of systems that have produced similar results … they usually do this by some combination of insurance and/or derivatives (e.g. stock options). In fact, you could replicate some of these results for yourself simply by buying the right type and duration of stock option along with the underlying stock (or index).

The problem is that all of these end up costing you money: the insurance premium and/or options are bought out of your initial (or ongoing) investments. The ‘cost’ of these ‘guarantees’ comes as some combination of increased fees or reduced returns when compared to a similar fund that does not offer the ‘guarantee’ …. it’s that simple.

You can provide yourself a similar – or better – result at far less cost: buy a low-cost Index Fund and wait 30 years to cash it out; I can virtually ‘guarantee‘ an 8.5% minimum return 🙂

A little rain must fall …

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triffids1We left Chicago just before Christmas … it was one of the coldest winters that most could remember, certainly the coldest that I have experienced. The last day of school was canceled due to the cold, so my children didn’t even get a chance to say a final goodbye to their friends.

When we packed the house, we moved into a hotel down the road for a week – for the life of me, I don’t understand why suburban-Chicago hotels don’t have underground parking lots:

In the morning, ice built up on the inside of the windshield …

… I remember, when the temperature ‘warmed up’ for a day or so back to mere freezing (circa 32 degrees) that it felt quite comfortable: no heavy coats, hats or gloves required.

When living inside a refrigerator feels ‘comfortable’ you just know that something’s screwy with the weather!

So, we arrived in Melbourne on Christmas Day to one of the hottest summers on record. Our children’s first day of school was also canceled just a few weeks later, as the hot spell continued, due to the extremely hot weather … that’s the definition of ‘irony’.

And, I got around to contemplating the various ways to water the garden in our rental house, as Melbourne has been plagued by a drought with strict water restrictions:

The house has a rainwater tank – it fills up from rainwater that lands on the roof and is funneled via the gutters – with a fancy automatic pump that starts up as soon as you squeeze the spray-fixture attached to the hose … I used up the whole tank in just one watering of the garden and it hasn’t refilled itself since (well, it is finally full again now). Needless to say, I wasted my time … without another watering, the garden looked as bad as before.

Then, I noticed that I didn’t really need to water the back garden and most of the grass, because there is a very efficient ‘water dripping system’ in the back (but, not in the front of the house … that part of the garden that now looks, well, dead) that just drips the smallest amounts of water under a timer that is only allowed to run 2 hours twice a week … that seems just enough to keep the plants and much of the grass alive.

Finally – and, this is what filled the water tanks – it rained!

In fact, we had a whole series of rainy days (surprising, since it’s summer) that finally put out all of those horrible bush-fires that you may have heard about …

… not only did it douse the fires, but the whole garden has sprung up, and in the space of just a week or so even the weeds look like something from The Day Of The Triffids … seriously!

So, what I learned it that there are two ways to water your garden that work and one that doesn’t:

– You can drip, drip, drip feed your lawn water in the most efficient way, or

– You can water more deeply, less often, but it must be done a number of times, but

– BUT, you cannot simply dump your entire water supply on the garden once and expect miracles.

And, this story actually has something to do with money …

… you see, I think that there’s only two ways to make keep your ‘financial garden’ healthy, and at least one way to guarantee failure:

1. You can follow the Making Money 101 steps of drip, drip, dripping money into your savings account – being very careful not to soak up too much with excess spending – and gradually find your veggie patch bearing small fruit; enough to live on, if you have spartan needs,

or

2. You can regularly ‘deep soak’ your financial future by large – but, not too large (such that you are left with nothing in reserve) – and regular applications of finances into various Making Money 201 ‘income acceleration techniques – such as small businesses and/or ‘buy/hold, income-producing’ investments – some of which may actually take root and bear an abundance of fruit on their own,

but

3. You must not be foolish enough dump all of your financial resources into the One Big Thing [Insert Speculation of Choice: Lottery; Business Deal; Sports Contract; Stock Market Holding; etc.; etc.] and hope that it solves all of your financial problems in one fell swoop …

… it rarely does, and it’s no fun going back to ‘drip, drip, drip’ once you have tried and failed 🙁

7million7year's April Fools Day Joke!

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april-foolOK, I promised myself that after my March Fools Day joke-with-a-message (you know, the horse racing system one) that I would NOT do an April Fools day post …

… apparently, promises are made to be broken 😛

So, yesterday’s April Fools Day Post was another joke-with-a-message: no matter how much you have, you can always spend more.

Yesterday’s post is actually (slightly) rooted in fact; I have made some errors recently, and the market has turned, so let me come clean:

– We bought our current home for about $1.6 Mill.; naturally, we paid cash.

But, after we cashed out on the second part of our 7m7y journey (the part that I have NOT yet written about on this blog, because it’s a business success story, not a personal finance success story like my 7 million 7 year journey), things took a turn for the ‘worse’:

– We upgraded to a $4.5 mill. home (plus $1 Mill. renovations to come: house/swimming pool/tennis court), and again paid cash … unfortunately, the market correction has probably wiped $500k – $1 mill. of value … but, this is ‘value’ that will only be realized when we sell (hopefully, we’ll be there for at least 10 to 15 years).

– We bought $300k of cars (for cash) but also managed to sell the Maserati

– I did indeed lose $600k in the stock market; this is the ‘cost’ of my experiment in letting somebody else manage a small part of my portfolio for me, and trying to time the market (bad AJC … bad boy!)

– And, I was due to receive a $3 Mill. ‘bonus’ from my ex-employer, that was to be delivered in cash, but ended up being delivered in now-reasonably-worthless stock (that 30 pence to 7 pence slide is real).

The two mistakes that we made were:

– We tried to time the market … however, $1 Mill. represents a small’ish % of our total portfolio

– We spent money on a house that we assumed that we would have, but didn’t get (i.e. the UK cash-to-stock thing).

So, right now, we have broken the 20% Rule … but, I counted cash, and after all of this (including completing the renovations) we still have a LOT of cash in the bank, plus the houses, plus equity in a number of apartments / commercial property, not to mention a ‘passive’ business or two floating around … I won’t have to ‘downgrade’ my $7 million 7 year mantle anytime soon [AJC: because, say, $3 million in 11 years just wouldn’t have the same ring to it, would it?] 🙂

Still, how are we going to ‘correct’? After all, we have broken so many Rules, it hurts me to think …

Well, exactly the same way that you would:

Some of it will come from simply waiting for the market to correct (that $600k stock loss will partially reverse, as will the 30-pence-to-7-pence UK stock slide) … some of it will come from making long-term buy/hold investments in this soft-to-recovering market over the next year or three … some of it will come from applying a large portion of the equity in the home (and selling the old one, when the market recovers) to investments (thus bringing us back within the 20% Rule).

But, the lessons are clear: always obey the Rules … do NOT speculate … and, heed Rick Francis’ Making Money 301 advice:

You really should [not] have to worry about affording needs anymore- you just have to control your wants. Also, you can afford to be more conservative in your investments. Making Money 301 should be a lot less risky as you only need to maintain your principle against your spending and inflation.

Where were you when I needed you, Rick? 😛

PS: In case you didn’t get to see the masthead that went with yesterday’s post, here it is … I’m particularly ‘proud’ of the by-line (something to do with noses, white powder, fast cars/girls) … unfortunately, all-too-true for too many people (but, definitely NOT me! Well, the fast car – singular – maybe). I don’t even know who the photo is of? Do you?

picture-1

My 7 million dollar skid off the rails ….

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richard-gal-400I wrote a post showing my journey up the steep hill from $30k in debt to over $7 million in the bank in just 7 years …

… but, there’s no amount of money that you can have in the bank that protects you from excess and market corrections; just check out what’s happened to me over the last 12 or so months:

– I bought $8 Mill of property (my current $2 Mill. house plus my new $6 Mill. home) at the peak of the market using the 110% finance available to me (because of my status as a high net worth individual).

– I bought $300k of new cars (the BMW and the Lexus), again on finance

– I stuck most of the rest of my money in the stock market:

=> Gave $1 mill to my accountant to invest … lost $600k in a few weeks

=> Bought $3 mill of stock in my former employer’s company on the UK stock exchange at 30 pence per share … now worth 7 pence per share … lost 70%+

– Spent excessively on trips to Tuscany, around the world, around the US

– Bought expensive jewelery (that’s me in the picture) … also for my wife

– Picked up a nasty poker gambling habit and lost over $3 Mill to Joe Hachem (the Aussie who won the World Series of Poker a couple of years back) over a series of highly publicized heads up matches

Let this be a lesson that there’s NO AMOUNT OF MONEY THAT YOU CAN EARN/FIND/STEAL/MAKE/WIN/INHERIT/PRINT THAT CAN’T BE SPENT QUICKER THAN YOU GOT IT …

… got it?!

Let my pain be your gain …. read my new Net Worth IQ Profile and weep:

https://www.networthiq.com/people/7m7yApril1/

Good luck to you and your families … I quit!