The most important (business) book they’ve ever read …

… and, I agree, this was certainly the most important business book that I’ve ever read, too!

The BEST way to make money …

Recently, I’ve been talking about how to make money in property development, but that’s not the only way to make money … it’s not even the BEST way to make money.

So, what IS the best way to make money?

For that, we need to refer back to Michael Masterson’s table from his book, 7 years to 7 figures [AJC: That's nowhere near $7 million in 7 years, but it'll have to do ]:

Required Compound              Investments

Growth Rate                             Required

4%                                                  CD’s

8%                                           Index Funds

15%                                              Stocks

30%                            Real-Estate together with Stocks

45%              Real-Estate together with Stocks and Small Businesses

50%+                           Start Your Own Business

… from this, it’s clear that starting your business is the way to go IF it’s the Big Bucks that you are after.

But, you don’t have to start off big to end up making it big: I had no idea that I was going to end up with $7 million in 7 years when I started my business (in fact, it was only until a few years AFTER I started the business that I found my Life’s Purpose, hence my Number) … just take it from Pierre Omidyar, the billionaire-founder of eBay:

I started eBay as an experiment, as a side hobby basically, while I had my day job

- It’s what my son is doing with his eBay business (and, now with his New Online Venture … which I’ll share, once he gets it off the ground)

- It’s what my Web 2.0 partners did with our first venture (they’ve since left their full-time jobs to start their own software consulting/development company)

And, it’s what YOU should do, if you want to start a business with the least amount of risk!

Is a fan?

Mike  – the one who actually seems to like my blog – makes a good point in response to the other Mike, who doesn’t:

I’ve never taken out a loan from a bank for my personal finances. Bought every car 100% cash, and bought my first home (condo) 100% cash back in 2005…

On the businesses I’ve run there have been bank loans but I like to get things to where cash flow is coming in and no need to take out a loan.

Unless your business is very capital intensive I’d argue that investment money should come from cash flow and not bank loans. Granted, if you want to expand quickly you need access to capital but who faces this in today’s market?

Now, I’ve been recently told that the true meaning of the word ‘ambivalence’ isn’t a lack of care, but that you care equally strongly about two or more choices; therefore, I can claim that I am ambivalent about bank debt … let me explain by sharing my response to Mike:

1. I have a finance company that uses 90% borrowed money (it has to!),

2. I happily borrow 65%+ for my commercial property purchases,

3. I have zero debt on my houses ($6m+ between them).

So, I can make an argument for anywhere between 0% and 100% leverage (e.g. bank funding)

… and, I forgot to mention to Mike that my residential properties are funded 75%+.

Why don’t I pay down the properties now that I have the cash?

Well, if I was truly in Making Money 301 (wealth preservation) I probably would or should, but I have thrown myself back in to Making Money 201 (wealth creation) by making the property development site purchases that I mentioned in this post, last week. If I didn’t preserve my cash (i.e. by NOT paying down debt), then there’s little chance that I could complete these developments.

How to fund your business expansion …

Take Mike’s point about raising business capital, from this recent post:

Investment money [for your business] should come from cash flow and not bank loans

I happen to agree, mainly because business funding is hard to come by and can be very expensive …

… when, the BEST place to find the capital to run and grow your business is from the gap between:

a. Your Sales, and

b. Your Costs.

This is nominally called PROFIT, but that is dangerous because it implies that you can spend it.

Remember my friend’s friend who had a business making $3 million a year? Well:

1. He gave Uncle Sam one third, and

2. He saved one third, and

3. He spent one third.

Which sounded totally logical until I realized that his ‘cost of living’ was $1 million per year and the Rule of 20 says that he would need at least $20 million in passive investments to justify anywhere near that sort of spending level!

But, a business generating $3 million in earnings a year – as we now know – is usually worth 3 to 5 times it’s annual earnings AFTER TAX, which means his business is ‘only’ worth $6 million to $10 million … a huge amount, but nowhere near enough to justify blowing $1 million a year.

Then there’s still those savings, which (at 10% return) would generate the ‘missing’ $10 million to $14 million (i.e. to reach his $20 mill. Number) in, say, 8 to 10 years (of course, by then he needs $30 million because of inflation, which would delay things by another couple of years or so).

So, what to do with those profits?

1. Pay Uncle Sam one third, and

2. Save one third, and

3. Double the remaining third; multiply it by 3 to 5; then, divide the answer by 20 … and spend that [AJC: enjoy!], and

4. Add the remainder to 2.

Now, what to do with 4. (i.e. the savings generated by 3. plus 2.)?

Well, I would use it to:

a. expand the business, and

b. invest outside of the business

… probably in roughly equal measure – with any excess amounts (i.e. that the business doesn’t need in the foreseeable future) also moved into ‘passive investments’ outside of the business.

If you do this, Mike, you will:

i) Live reasonably safely and well, and

ii) Build your Perpetual Money Machine, and

ii) Probably won’t need the bank to fund your (international?) expansion

… at least, that’s how it all worked out for me

Do what you love …

… love him or hate him, you can’t argue with the success of the Trumpster. This video even gives you some insight into WHY he brought the “Hollywood to real-estate”, but the real messages are in the last couple of minutes of this video … watch and learn from the Master

The Instant IPO

Recently, I pointed all of the difficulties of the Entrepreneur’s Holy Grail – the IPO [cue angels] …

… for all these reasons – and more – I didn’t IPO my businesses … but, I found something almost as good:

7million7years Patented Instant IPO

It works like this:

Step 1

Make sure that your company is profitable and has a reasonable track record of growing profits. This should value your company at 3 to 5 times earnings (i.e. annual net profit after tax)

Step 2

Find a Public Company in a related industry that is trading at least 12+ times its earnings after tax – the more the better, for you!

Step 3

Sell your company to that company and negotiate a mutually agreeable split of the difference between your ‘private value’ and their ‘public value’!

Basically, what you are doing is using the public company’s stock to “IPO” your own company:

You see, when you are on the outside, your company is worth only 3 to 5 times its profit to a buyer, but as soon as the other company buys you and ‘absorbs’ your profit into their profit stream, that profit is suddenly (well, after a relatively short ‘disruption’ period where the market has to get used to the sudden change in profitability of the public company) ‘worth’ 12+ times itself.

[Hint: The smaller you are relative to the size of the acquiring company the smaller the disruption ... on the other hand, the smaller you are, the less attractive your cashflow may be to them, so it helps if you also have some 'secret sauce' - i.e. Intellectual Property - to make you look that much more attractive to the 'big end of town']

The company that has acquired you has just made a huge windfall by using the difference between how private companies are valued and how they – the public company – are valued to their advantage … in fact, there are plenty of public companies that do this as a matter of course. Sometimes, it even need only be only an ideal coincidence that your company actually adds any other business synergy to theirs!

But, when you sell to them, you will find – if you are a smart negotiator – that they have gone to all the expense and trouble of the IPO process for you

Let’s look at an example: say that your company produces $1,000,000 net profit each year, and you have found a likely candidate public company. You have evaluated the market and believe that your business would sell for $4 million in the private sale market.

But, you realize that your widgets complement those of Acme Widgets Inc. very nicely. Acme’s stock is currently trading at a P/E of 12.

You approach the CEO of Acme Widgets Inc. [AJC: actually, if you're VERY smart, you'll engineer it so that he approaches YOU ], but play reasonably ‘hard to get’.

The CEO realizes that:

a) Your widgets do indeed fill a hole in his product range that will cost his capital (and, short term profits) to fill in house, and

b) Your $1 mill. profit adds $12 Mill. to his company’s value (i.e. his stock price will eventually go up by about $12 mill. when the value of all the stock out there is totaled), and

c) He happens to hold a nice bundle of stock and options set to vest in 18 months or so.

So, what is worth $4 million to you, is worth $12 million to him … how much would you sell for?

Ali G hits Donald Trump for some money …

http://www.youtube.com/watch?v=8SaHW6Y7_Yg

I usually do my videos on Sundays, but this one – by the ‘genius’ (?) behind Borat and Bruno – actually has an important message for aspiring entrepreneurs … and, it’s this:

When doing your business plans, it’s tempting to find some stats online that say something like:

… the market for widgets in the USA is $10,000,000,000 per year …

… which leads you [AJC: especially, if you are Ali G] to make ‘conservative’ claims like:

… and, if me capture just 1% of that market, with our New Improved Widgets, we’ll make at least $100,0000,000 per year, so you should invest with us …

Wrong!

You see, you haven’t answered the key question that the Venture Capitalist is sure to ask:

How will you capture 1% of the market?

What will your sales strategy be? How will your marketing/sales team capture 1% of the market? And, why won’t they capture 1.25% or 0.75% of the market (with such a variance being worth a paltry $25 million either way)?

Rather, what I (and, I assure you, the other VC’s out there) want to hear is how you will attack the market? What resources and expertise will you supply? Why will they be more successful than the competition?

And, if you have (say) 5 sales reps, making (say) 10 calls per day, what is reasonable to expect them to be able to close and how much revenue does that mean?

I dare say, if you take this bottom-up approach, you won’t come anywhere near to $100 million in sales in your first few years … but, do you even need to?

Make your business plans ‘real life’ … that’s my advice

What is a good BUSINESS idea?

http://www.youtube.com/watch?v=GS04yv4xgpE

I like this guy’s tips … his delivery is a bit dry and antiquated (overhead transparencies?! What’up w’dat, man?) … but, what do you expect from an attorney?

Pay attention to his Tip # 3: he makes an excellent point about the differences between a Good Idea and a Good Business Idea … listen up!

I don’t agree that you need to throw equity all over the place to get the skills that you need for # 4 … sometimes you can buy in the necessary skills … and, sometimes you can’t. Just be selective as to whom you invite to your party

The Myth of the IPO

By now we all know that the quickest / surest path to stock market success is the IPO:

Take a company worth 3 to 5 times earnings and throw it onto the New York Stock Exchange (or NASDAQ, if you prefer) where it is valued at 15+ times earnings and … wacko! … instant billionaire.

Just ask the boys and gals at eBay, Google, Yahoo, and Microsoft!

Of course, there are a few problems, according to James B. Arkebauer, founder of Venture Associates, and author of “GOING PUBLIC: Everything You Need to Know to take your Company Public, including Internet Direct Public Offerings”:

1. Your company has to be IPO-size:

Many underwriters require that your company is generating sales of $10 to $20 million annually with profits of $1 million. To obtain a NASDAQ listing, you need $4 million in tangible net assets. However, most IPOs today are much, much larger with most offering sizes over $100 million.

2. IPO’s are expensive:

The following figures are considered minimums and many larger offerings will have costs that greatly exceed these numbers.

• Legal – $50,000 to $150,000
• Accounting – $20,000 – $75,000
• Audit $30,000 – $200,000
• Printing – $20,000 -$80,000
• Fees $10,000 -$30,000

3. IPO’s take a lot of time and energy to execute:

[It can take] 3 -12 months (6-9 average – when well prepared) … [including] detailed discussions on information pertaining to:

• Business product/service/markets
• Company Information
• Risk Factors
• Proceeds Use (How are you going to use the money)
• Officers and Directors
• Related party transactions
• Identification of your principal shareholders
• Audited financials

4. The IPO process can fail; IPO’s are all about marketing, but that marketing can fail:

It’s often said that IPOs are sold, not bought. That means a road show and a Q&A with the company’s top officers – in short, marketing.

5. Your company may not survive after the IPO; according to Management Today:

The probability of a new listing surviving in its first ten years falling sharply to 37 per cent by the 90s from 61 per cent in the early 70s

Of course, you only need to worry about the company lasting long enough after an IPO to get your money out … I’m not sure about the USA, but in some countries your money is escrowed for two years to ensure that you retain some ‘skin’ in the company along with all the suckers … I mean shareholders … who bought in to your dream. In other words, an IPO is best seen as a way to raise capital for growth, rather than a ‘quick, easy, and profitable’ exit for the owners.

A hierarchy of one?

One of the ‘growth engines’ that I used to make my $7 million in 7 years was Business [AJC: actually, I used it to fuel a real-estate investment strategy much like that described in my Perpetual Money Machine series], as I suspect it will be for many readers so, from time to time we will cover business topics.

Therefore, I was interested to read this comment on A Closet Entrepreneur from a reader who runs their own interesting site:

I have a section [in my business plan] defining the roles and responsibilities for all jobs within the new company, even though initially all the jobs will be filled by me.

This is interesting because this is what Michael Gerber suggested that I do when I read his classic: The E-Myth Revisited …

Think about it: you are busy doing everything in your business either as a sole operator or because you still have few staff, yet you are going to take precious time out for some seemingly esoteric exercise?!

Let me tell you how important this ‘useless waste of time’ task was for me:

When were only a handful of employees (perhaps 4 or 5; I can’t recall exactly how many there were) I promoted my first ever employee, who was still with me (and still is today!) to supervisor of the other 2 or 3 staff - by default, 2IC to me …

… then, when we won a major new contract and moved – as we had suddenly outgrown our old office - our new location was mostly open-plan but outfitted with four ‘closed-door’ offices, as well.

Naturally, I took one office for myself, and put the new supervisor in another since he was still the only manager and it didn’t make sense to leave the offices empty. Then my accountant moved in, taking another office (a great move for both of us!) and the final office was taken up with office equipment: servers, copier, faxes, etc.

The problem was the company kept growing [AJC: a GREAT 'problem' to have ]; soon, to 14+ staff while still in that location, and I had to hire a more experienced manager, as well … now, who gets the office? I could hardly kick my most loyal employee out, could I?

Then I came across The E-Myth Revisited and realized that I needed an organization chart NOT for now, but for when we were ‘done’ … so, I drew up an organization chart for 60 people.

Much like the reader who commented above, many of the roles were triple- and quadruple-teamed, even though we had 14 employees by then … how many times does 14 employees go into 60?!

Now, here’s the thing:

1. When we moved into our next office, I outfitted it for 50 people immediately (even though we were only 20-strong by then), with room for 10 more.

2. I also outfitted this office mainly as ‘open-plan’ but with 4 ‘closed door’ offices … this time I had no problem leaving them empty. They were reserved for Senior VP-level management of which, at that time, I had none!

3. Over time, we grew to 30+ staff and knew exactly what roles needed to be filled and when, because the Organization Chart that I drawn up NEVER CHANGED.

4. When we opened in the USA, with up to 100 staff, that same Organization Chart, with only minor modifications, became the US Organization Chart, making our HR issues that much easier to resolve.

So, if you have a business of any size … it’s time to draw up your own Org. Chart

Hint: Keep the chart simple and hierarchical: the old-fashioned structure of CEO/President => Sales/Marketing + Operations + Finance/Admin as the three positions underneath the CEO (President) still works just fine.