Installing an ATM in your business …

I met a small business owner a few weeks ago …

He was a smart young guy [AJC: aren’t they all?] who was setting up his own Internet design studio, building Internet-based software projects for other business owners.

His business is essentially a professional service business, and my advice to him was pretty much the same as I give to all professional service business owners (consultants, accountants, attorneys, doctors, etc.):

Except in rare circumstances, you don’t have a business, you have a high-paying job … with perks!

[AJC: the perks are around the tax benefits that attribute to business owners but not to paid employees; ask an accountant for examples.]

Most of these kinds of businesses don’t scale very well i.e. they can’t grow very large; they rely on the owners’ personal exertion (sometimes called ‘partners’); and, either can’t be sold, or can only be sold for small multiples of annual profit or turnover.

In short: you can’t rely on selling these businesses to fund your retirement.

But, what they do generally provide is income …

Because they are professional services, the owners are able to sell their own labor – and, those of their employees – at high multiples, usually generating excellent recurring revenue.

And, because they often take years of hard work and relationship building over many, many clients they can be quite “bullet-proof” (if well managed) in terms of providing that income reliably.

This was certainly the case for the young guy that I met.

Even though his agency was still quite young/small, it was already generating a nice income and showing signs of growing well.

My advice for him was to grow his personal income very slowly (this is advice that I would give to any business owner), and to pull as much money out of the business as possible (this is not advice that I would give to other business owners) …

… my advice was to treat the business as his personal ATM

[AJC: but not to the detriment of the business, or his partners, employees, clients, backers, etc.]

But, my advice was not to spend that ATM-cash on personal lifestyle building (homes, cars, vacations, etc.), but on passive investments.

I recommended that he use that cashflow to fund an aggressive investment portfolio, outside of his business: one that would one day grow to replace his personal income as generated by the business.

When the day comes that his passive income surpasses his personal business income, he becomes free.

What would you advise?

How to increase sales …

If you’ve chosen ‘business’ as your primary vehicle to reach your own $7 million in 7years, then it’s best that you focus on increasing the amount of profit that you get to take home each day, week, month, and year.

To non-business readers this may sound like obvious advice, but you would be amazed at how many business owners focus on two numbers:

1. Sales Volume – usually expressed as “my business turned over $2.3 million last year”, and

2. Profit Margin – usually expressed as “my business makes 7% net profit, before tax”.

These may be key numbers for a large business – particularly if listed on a stock exchange, because the market punishes stocks that don’t grow their sales (sales $) fast enough, with comfortable margins (profit %) – however, for a small business …

these are simply ‘vanity metrics’.

The only number that really counts is:

3. Net Profit After Tax – usually expressed as “Last year I took home from my business $738,000 in my pocket”

This is the number that you get to spend and / or invest (preferably the latter) each year, and the one number that you want to grow year-over-year.

So, when aspiring or new business owners ask me:

What is the best way to increase sales volume for a small business?

I say:

According to Jay Abraham (master marketer), there are only three ways to increase sales volume:

1. More customers (customer acquisition e.g. marketing, advertising, referrals),

2. Higher sales per customer (up-selling and cross-selling e.g. bundled offers),

3. More sales per customer (customer retention e.g. backend products)

You only need small improvements in each to make major improvements in your overall sales volume i.e. a 10% improvement in each area means a 33% increase in sales volume, overall.

An example strategy (for, say, an eCommerce site) that encompasses all three elements might be to:

1. Improve your Google search rankings and run some Adwords and FaceBook ad campaigns to bring in some new customers.

2. Create some bundled packages and add some special checkout offers to entice some of your customers to increase the size of their order.

3. Capture their e-mail addresses and send out special offers once every 6 weeks to encourage some repeat sales.

If you are very successful with your bundled, checkout, and e-mail discount offers, you might find that your % profit margin slips slightly, but that your overall sales volume increases significantly.

More importantly, the amount of net profit – i.e. cash that you get to take home in your pocket – goes up dramatically, meaning that you have a lot more cash available to invest in stocks and real-estate.

Then, it won’t be long before that $7 million in 7 years starts to look pretty achievable.

Thinking about starting a solo business?

I think, these days, if you aren’t starting YOUR FIRST BUSINESS as an online business then you aren’t serious about making money.

Let’s face it, we’ve all tried lemonade stands, paper rounds, flea markets and even working at McDonalds as ways to make money. But, compared to these, an online business can knock it out of the ballpark.

Let’s take my son as an example:

At age 12 he came to me and said he was starting an eBay business; he asked if he could use my eBay account (I said ‘yes’) and if I would invest $50 in return for 50% of the business so that he could buy stock.

Not long after, he had completed his first transaction and returned my $50 so that he could get my 50% back (I didn’t have the heart to tell him that it doesn’t quite work that way).

Within two years he was negotiating daily with Chinese suppliers, bringing wholesale quantities of stuff to the USA and shipping daily from our house (bless the US postal system … it works!). He also kept a fully-fledged accounting system that he set up himself.

Now, even though he cannot (yet) write code, he has a online web-business (not eBay), carries no stock, spends half an hour a day on his business and earns the equivalent of a good adult full-time salary.

He just turned 17.

One man’s lean …

I don’t know if you follow the startup scene, but you will see a huge movement to the concept of ‘lean startups’ as championed by Steve Blank and Eric Ries.

However, one man’s lean is just another man’s bootstrap.

That’s not exactly correct: bootstrapping a company generally means starting it without much / any outside finance and launching it on the smell of an oily rag.

For example, Guy Kawasaki famously started Truemors with just $12,107.09

… if you know Guy [AJC: he’s an early Apple employee; founder of one of the original Silicon Valley angel investing firms; and, author of a number of ‘must read’ business best-sellers including ‘Art Of The Start’] he could certainly afford to pay more to start his business … a lot more … he just chose not to 😉

On the other hand, creating a Lean Startup is more about talking to customers before spending money than simply looking for ways to cut costs. But, there’s nothing new in this … it ‘s just – or should be – common sense.

Let me explain with an example from my own business life …

When I first came up with the idea for my business – the one that I eventually ran in the USA, Australia, and New Zealand and subsequently sold for many millions – I had NO experience in the field.

It was just an idea that I got from working in a slightly-related industry (via my other business that I still own today).

However, rather than jump out and launch it, first I did a few things:

1. I found a business in the USA that had the same idea and had been ‘doing it’ for at least 10 years. I tracked them down and flew to the USA and met with the founder. He happily helped me understand the business.

That’s when I undertook my first ‘pivot’.

A pivot is another one of those sexy, new-fangled terms for something that every startup founder who eventually succeeds fully understands (and, those who fail have never worked out for themselves) that says: your first idea sucks.

It’s only once you TALK to clients and competitors that you will KNOW what to build. And, my original idea was not IT.

2. Aside from a new perspective on how to build my business idea, the second thing that I got from the US business’ founder was some industry data. But, it was for the USA.

Being an analytical type of guy, I decided to find out what these numbers would look like for Australia. Basically, they were to support our marketing message by providing backup industry data. Since there wasn’t any in Australia, I set out to adapt the US version by doing my own research.

Once I had this research in hand, I decided to try my hand at writing my own press release (I couldn’t afford a PR agency) and sent the 4 page report that I wrote out to a couple of business magazines.

By some miracle, I ended up with a full page article (including photo of a very young-looking AJC) in Australia’s most prestigious business weekly (think Forbes for Australia). I was quoted as “Australia’s Expert”, yet I hadn’t even handled one single transaction!

3. On the back of that article I was approached to produce a 2-day course on the subject matter of my report. The company was affiliated with a major Australian university (people attending my course received credits towards their professional accreditation) and I was paid $1,000 per course to deliver it! Yet, I still hadn’t handled even one transaction.

Those things not only proved that my idea – and, unique approach (as taught by my new US colleagues) would work in Australia, and that there was definitely market demand … it also brought me my first 5 ‘Fortune 500’ customers!

So, I had found an idea, researched the best way to implement the idea, promoted the idea, sought market feedback (i.e. was somebody prepared to pay money to learn about and/or use the idea), and signed up my first customers …

… only THEN did I set about to build the actual business: hire staff, build software, etc., etc..

Now, that is what Lean Startup really means 🙂

When is a JV not a JV?

Last week I wrote about joint ventures (JV’s) in real-estate; personally, I don’t like ’em but I showed you the right way and wrong way to enter into one. You should also read the comments.

Today, I want to share an interesting e-mail discourse that I had with another reader who wants to set up  what he calls a “JV with a manufacturer”.

Firstly, what he proposed is not a JV; to me, this is one of the most overused terms. He wants a manufacturer to help him design, then manufacture a new product.

What he is setting up is a supply chain relationship, not a joint venture.

To me a JV occurs when both parties take significant risk in the ‘venture’ and in some way share the upside / downside risks.

An example might be where you come up with an idea for a new product (as this reader has) and approach a manufacturer who is willing to take your sketch or prototype and turn it into a manufacturable product at no cost to you. Or, if at cost, then the cost is shared to some significant portion, say 50/50. In return, you pay the manufacturer a (hopefully, reduced) price for the finished product + a % of sales (better yet, % of profits).

I had a number of true business joint ventures: these are when two businesses create a third business party owned by both (it need not be 50/50, in my case one was 51/49 and the other was 40/60). In a true JV both parties bring something significant to the table that makes the JV better than either party going it alone … in our case, my business brought niche industry expertise, unique software and processes and the other party brought infrastructure, client relationships and customer service.

However, if you’re thinking of entering into a JV I can only point you to a conversation that I had just prior to signing my first one:

I was on the plane with a friend heading to see the Rugby World Cup in Sydney. I told him about my plans for a series of JV’s to help me expand to other countries. He cautioned me that he was privvy to a study that showed that JV’s were successful proportionally according to size-parity between the the parties.

The corollary was that where one party was tiny (my company, at that time of 30 employees in Australia) and the other large (my $2 Bill. multinational proposed JV partner) JV’s generally did NOT work … the small guy was almost always swallowed up by the big guy.

In my case, the JV’s actually did work, but they were difficult to manage and even where I held majority ownership (as in the USA JV), that did not translate into effective control.

In the end, it all worked out well for me and for my JV partner, but always remember: it is very difficult for a fly to steer an elephant. 😉


Why most business owners are not wealthy …

There is a very simple reason why most business owners are not wealthy.

Can’t guess?

I’ll give you a hint: the secret is in this statistic:

According to the US Census Bureau, in 2008 there were 27.3 million businesses in the USA. Of these 21.3 million have no employees.

Think about it, 78% of all businesses in the USA have NO employees.

Now, some of them may be bloggers. Some may be eBayers. Some of them may own niche eCommerce sites. But, I bet that the bulk cut hair, mow lawns, see patients, and so on.

They don’t have employees because they offer a relatively simple service: writing, middle-manning, mowing, cutting, diagnosing …

You get the picture.

They are not wealthy because service businesses are very limited in how much revenue they can generate.

Generally, they are a job – albeit a lucrative job for a lucky few – nothing more. And, if these service business owners don’t put in place a very aggressive savings/investment strategy they will never become wealthy.

Ramit at I Will Teach You To Be Rich tells the story of Mark who quit his high-flying day-trading career and gave away his entire $1 mill. net worth just to prove that getting rich (sic) the first time around was no fluke.


You should read his story here.

What struck me is how Mark has now created a nice little kitchen table business for himself:

“I was surprised,” Mark recalled. “[by] this little, easy thing that I can do in an hour. [My clients] want me to hacker test their site and give them a logo to put on the bottom of the site when it passes.” Depending on his schedule, Mark contacts about 15 leads a day. He adds the rest to his growing lead database.

Can you see how Mark is building a nice little service business; contacting 15 leads / day, which I guess allows him to service 7 or 8 in a day (if half convert into paying customers, and if it takes him 1 hr to do each, and if he can do all his other biz admin/marketing after hours)?

What can he charge?

If as much as $99 each (I’m guessing, here), that’s still a nice little earner of $700 / $800 per day or $160k per year!

Again, nothing wrong with that, but hardly likely to make him wealthy, unless Mark does one (preferably both) of two things:

1. Save 50% of his $160k pre-tax income and invest in income-producing assets. Remember, Mark has to generate $1.6 million of assets for every $80k of retirement income that he needs. Oh, and he needs to double that number for every 20 years before he intends to retire to account for inflation,


2. He has to Productize His Service.

This simply means converting his low growth service business – that probably can only be sold for a small amount (typically one to two years’ revenue) – into a high growth ‘real’ business that can be sold for a much higher $$$ figure.

How so?

It means taking Mark out of the picture. By that, I don’t mean replacing Mark with somebody else, I mean making Mark’s – or, his replacement’s – labor secondary to the real purpose of the business.

The benefits of doing this are two-fold:

a) Mark can go on vacation, and

b) the business can scale as big as Mark likes.

Let’s take a closer look at how this might work for Mark:

Mark said that his customers “asked for this little, easy thing that I can do in an hour. They want me to hacker test their site and give them a logo to put on the bottom of the site when it passes.”

If this is really the case (and, I’m not sure what is actually involved, but let’s go with it for the sake of this post) then Mark is really selling a product, not a service: the product is the “logo to put on the bottom of the site”.

Verisign, for example, makes hundreds of millions of dollars a year putting logos on the bottom of sites to indicate that they are secure; it sounds like Mark is doing something very similar.

And, that’s what the customer wants: a  logo.

Why do they want a logo?

Well, they really want what the logo represents: whether it be for their own peace of mind (e.g. “my site can’t be easily hacked”) or – more likely – for their customers’ peace of mind (e.g. “I can buy from this site, my info seems pretty safe from being hacked”) The service that Mark offers (i.e. to test the site) is simply the means to that end: if the site passes the test, they get the logo.

And, if they get the logo … then they (and/or their clients) get peace of mind.

Since it helps his customers to sell their own products from their own web-sites, Mark should be able to sell this ‘seal of approval’ for $19, $29, $49, $99, maybe more … maybe a LOT more.

In fact, it should be relatively easy for Mark to create a web-site in WordPress to act as the ‘front window’ for his new product-as-service, and do a bit of side-by-side testing (called ‘A/B testing’) to find the optimal price point.

Now, what about all of that “easy thing that [Mark] can do in an hour” stuff?

Well, since his customers are really buying the ‘stamp of approval’, and the work is easy to do, Mark should be able to train just about anybody to do it! Assuming that it can be done remotely, Mark should be able to use or to outsource the work offshore. Cost $4/hr.

Mark’s gross margin should be anywhere from 80% – 95%, which is very typical for web-enabled ‘productized service businesses’ (more commonly known in the software world as Software as a Service or SaaS).

Now that Mark has a high gross margin SaaS business on his hands, he should switch his role to marketing and scaling it using the methods that every other successful SaaS business uses.

No more finding/chasing individual leads and personally delivering services in one hour increments … and, Mark may eventually find that he has a multi-million dollar web-business on his hands.

No fluke, after all. ;)


Bragging rights …

Some of my readers want to hear more on the business / startup front, which is where I have spent most of my working life …

…. but, it’s important to realize that the vast BULK of my $7 million that I made in 7 years (starting from $30k in debt) was made from investing – primarily in real-estate and stocks (mainly real-estate).

[AJC: That’s not to say that I didn’t make a lot from business as well – in fact, I exited three of my businesses to a UK listed company. But, that came a couple of years after I made my first $7m7y.]

Anyhow, since business is an important avenue for many of my readers to increase their income (so they can invest more), I like to offer the occasional tip. I love this one from Venture Hacks (via Twitter):

Why do companies brag about how many employees they have? They want to spotlight their inefficiencies and poor leverage?

Why indeed?

Number of employees is another example of what Eric Ries calls a vanity metric: a number that makes you feel good, makes your investors feel good, makes your bank feel good, even makes your wife feel good (and, your friends envy you) …

… but, tells you NOTHING about your business. At least, nothing actionable.

If more employees is good, then add employees to grow your business!? I don’t think so … adding overhead is a great way to go broke.

I have personal experience with this; back in 1998 my business was growing gangbusters:

I started with 4 or 5 employees, then won a couple of contracts in quick succession.

So, we rented a new building – our first ‘professionally fitted out corporate-style offices’ [AJC: actually, the ‘gentleman farmer’ who owned the building rehabbed the office himself … I mean, he and his sons wielded the hammers, nails, drywall, paint, etc. themselves! But, that’s another story …].

It was an 8 year lease, but something in the back of my head told me to negotiate for flexibility, so I pushed hard and got 4 by 2 year leases (our option to extend each renewal) instead.

Surprisingly, we grew from 5 to 16 or so within 2 years and were busting the ‘new’ office at the seams.

So, I scrambled out and hastily bought my own office (cost me nearly $2 million after fit-out), and I determined not to make the same mistake again: we moved into the office with 22 people but I fully / completely fitted it out, including workstations, phones, and so on for 50 people.

I made my self Growth Ready.

And, it worked!

We won more contracts and grew to 30 people. But, there was a catch …

We weren’t making money. The bigger we grew, the more money we lost.

I slowly came to the realization that my business didn’t have a Break-Even Point … our operating cost (i.e. expenses) was directly related to our revenue: the more we earned, the more people we needed to fulfill our service, the more money we lost 🙁

Luckily (!) we lost a major client and had to cut heads from 30 to 20 … it was a sad day for me.

Ultimately, though, it proved to be the first major turning point for our company: we created a new technology platform that allowed us to quadruple our business with fewer people; in fact, we maxed out at 22 after quadrupling our business.

Needless to say, we were suddenly – very – profitable.

So, now I was in an interesting position …

I could no long brag about having 30 staff … but I was rolling in cash, but who likes to brag about money to friends?

What would you rather have?

The vanity metric or the bottom-line results that come from understanding what really drives your business … then, doing it? 😉

Would you cash in your 401k to fund your new business venture?

There was a question on Quora that asked something along the lines of “what is the most overlooked factor in starting a business?”.

This applies equally to an online or offline business … and, I was surprised that none of the responses mentioned it:



In order to launch a business, you need to be able to overlook risk.

Even though risk can be managed, if you sat down to think about all the possible things that could go wrong with your proposed business, well, you would never start it.

So, I think you need to be able to overlook risk – and, move well out of your comfort zone (unless you are already into extreme sports and other forms of death wish!) – if you are to think about starting a business that consumes considerable time and/or money (no ‘hobby businesses’ here).

Hopefully, this now paves the way for a sensible discussion around a rather controversial Wisebread article sharing Darwin’s thoughts on How to Start a Business With Your 401(k).

Darwin’s view is that, rather than taking on expensive debt, it may be better to start your business by withdrawing all or part of your 401k using “a little known, but increasingly popular provision in the tax code referred to as the Rollover as Business Startup (ROBS). It allows someone to start up a new business venture with funds from an old 401(k) account without incurring the dreaded early withdrawal penalties meant to deter people from using their 401(k) accounts like piggy banks.”

A sensible – negative – response is offered by one reader:

To avoid going into debt is a pretty bad reason to raid your 401(k). If your business fails you can always declare bankruptcy – bankruptcy can’t touch most 401(k)’s – you’ll still have your retirement savings…roll it over into the business instead, have it fail…and you’ll have nothing.

And, I agree – to a point: your 401(k), although woefully inadequate for its intended purpose (i.e. ensuring your retirement) is useful as an insurance policy when all else in your financial life goes wrong.

Cashing in your insurance policies because you need money is the last thing that you should do!

But, this viewpoint ignores some basic realities:

1. Going into business, for a true entrepreneur (the type that can build a $7m7y business) is a “must do”.

Starting my own business was all I could think of for 4 years (yes, I was slow to act), and risking everything (career, etc.) was simply par for the course. I’m not saying this is ‘right’, just that it’s how an entrepreneur thinks.

2. Raising significant debt finance is almost impossible for a new business.

Sure, you can (and should) tap out your sources of traditional finance: refinancing your house (if you’re not already upside down on your mortgage); max’ing out your credit cards; trying for a personal loan (fat chance once the bank manager finds out what it’s for).

I do not think cost of the debt is an issue (if it’s available TAKE IT because it’s deductible and you’ll pay it off if your business is successful). I do think access to debt is … I think you’ll find it’s just not available; at least, not in the amounts required if your business requires access to substantial capital (e.g. for shop fit-outs, software builds, stock purchases, etc.)

3. Equity Capital can be equally difficult

The first place you should go for funds for your new venture is the 4 F’s: Founders (see above), Family, Friends … and, Fools. These days, Fools are very hard to find (they’ve already had their pockets emptied in the crash!) and Family and Friends are less likely to dig into their pockets than ever before.

So, that may leave your 401(k).

If that’s the only source of funds for your new venture, what will you do?

Anatomy Of A Startup – Part VIII

It seems that most of my readers are happy for me to – at least occasionally – talk about startups.

So, with your blessing, I thought that I would answer the most common [Internet] startup question that I come across:

How do you develop an idea into a startup? I have an idea that I think would be a very good startup but I am new to this industry and trying to figure out how to better develop this idea into a startup.

Here’s a summary of my process:

1. Spend 1 to 5 days on Google keyword searching EVERYTHING I can about my idea, possible competitors, available research (if anything), market size and so on. Basically, I want to absorb the available knowledge around my idea. Others may consider this step non-productive and do it in 2 hours.

2. I then formulate my idea into my first real attempt at a Unique Selling Proposition; fill in the blanks: “_(Name)_ is _(keywords)_ just for _(who should look for it)_ who want _(best thing)_. There’s no other _(category)_ like it because _(name)_ has _(what makes my eBiz different)_”

3. The next step is to create a 2 page executive summary of your idea, with one paragraph or so under each of the following headings: 1. problem (being solved) 2. solution (being offered 3. business model (i.e. how you intend to make money 4. sales and marketing (how you intend to get your product to market 5.the competition (come on EVERYBODY has competition!) 6. the team (please say you have a cofounder and that one of you is tech!) 7. financial overview (I don’t necessarily do any financial modeling at this stage, but you can add this para if you like).

The reason why I do this document is that it forces you to summarize all that you think that you know with the benefit of a) honing you elevator pitch (you DO have one, right?!) and b) having something to send people if, by some miracle, some investor or strategic partner falls into your lap. That’s also ONE of the reasons for taking the next step:

4. Create your first powerpoint pitch deck; I base mine on Guy Kawasaki’s Art Of The Start…
(but, you can go online and find any number to copy; just keep it short).

The second reason for having one of these pitches is so that you have something to show (with little screen mockups that I create with Paint but you can create with Photoshop or one of the myriad prototyping tools out there like

Now that the background stuff is out of the way, I like to waste even more time by creating ‘wire frames’ (a fancy term for sketches) of what the main screens and workflow will look like.

[AJC: the new ‘lean startup’ movement pioneered by the likes of Steve Blank and Eric Ries will tell you that this step is way premature, and should be done after you have interviewed lots of potential customers to see if they even want what you are thinking of building and – if not – what they would rather you build. I’m slowly coming around to their way of thinking]

5. Then I create a landing page in LaunchRock (there’s NO reason why you shouldn’t make this page as soon as you have your USP / Step 2 … it’s just that I’m a procrastinator. [DISCLAIMER: I am an investor in LaunchRock).

Don’t forget to grab your domain names, and FaceBook and Twitter handles ( is a great resource for getting the necessary ‘likes’ if you are short on friends)

6. Create a short Google Adwords campaign and/or FaceBook advertising campaign and see if you can get anybody to signup to your Landing Page.

7. Talk to and/or survey some real people (potential customers, not your Mom and Dad) about your idea.

8. Go back to 1. until you have Proven Kick Ass Idea With Real And Tested Market Potential.

9. NOW you can stop procrastinating and DO IT.


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