The Instant IPO

Posted on September 3, 2009 by Adrian

Money Angel 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?

The Myth of Multiple Income Streams …

Posted on September 2, 2009 by Adrian

thread

For a while now the web has been a’twitter with ebooks spouting the idea of Multiple Income Streams …

… literally, here is an example from Twitter:

Multiple Income Streams is the ONLY way to Achieve Extreme Wealth …

I’m not so sure that was true for me – hence it can’t be ONLY 😉

But, is it true even if we substitute ‘usually’ for ‘only’?

Again, I don’t think so … in fact, I feel that most people achieve a very high level of INCOME from just one of their ‘multiple streams of income’ (that is, even if they have more than one) … for me, it was very much an 80/20 thing:

– One of my businesses produced $1 million a year EBITDA (earnings before bullsh*t),

– The other produced $200k a year (still does).

Now, for those who are astute, you will see that I twisted the original statement from ‘wealth’ to ‘income’ … and, as we all know by now:

Income [does not equal] Wealth

So, this is what I think: you don’t necessarily need multiple streams of income, but you DO need a place to store the income earned – and, it’s the wealth that “passively” builds up there that creates the true wealth (at least, it did for me i.e. my businesses fueled my property investments, and THAT’S what took me to my first $7 million) – and that more equates to my Perpetual Money Machine concept than it does to the usually espoused Multiple Income Streams Fallacy … they may seem the same, but they are very different:

Build your Perpetual Money Machine and prosper! 🙂

I think we’re screwed …

Posted on August 31, 2009 by Adrian

If you needed any evidence that the ‘global financial crisis’ – on a global macro level – and problems with the US real-estate market – on a global micro level – are still affecting people in the their day to day lives, you need read no further than Rischa in Seattle’s comment [AJC: I’ve added punctuation for your reading pleasure]:

From what I’ve read I think we’re screwed, but I’m not even sure what we can do. Here is the scenario: my husband and I bought this house about 10 years ago in the boom here; with both of us working we could afford the mortgage and our lifestyle easily. I’ve [since] been laid off and we’ve been living on my savings, which is now gone and I’m on unemployment, which is fast running out.

We’re about $100K upside down, we got a trad. loan 30 yr fixed, but without 2 incomes we’re sinking fast. We don’t necessarily want to stay in this house, in fact we want to move to a part of the country where the cost of living is less.

Any clues? What should we do? How do we get out of this when getting out would cost more than we have, even if we spent our retirement to get out? We would have less than nothing left!

Of course, it’s difficult to give Rischa personal advice – and, I wouldn’t do it – but, I could suggest that she go back to that post and reread the bit where I said:

Ask yourself the following TWO questions:

i) Can I afford the payments? If so,

ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?

If the answer to both questions is YES, then stay. If the answer to either question is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).

In Rischa’s case, the answer to the first question appears to be NO … and, she would prefer to be moving to a cheaper part of the country (and, cheaper house?), anyway …

So, it’s obvious that she can’t afford her existing house, but what would you do? Hang on to a losing proposition? Or, cut your losses?

The Myth of the Million Dollar Retirement Goal …

Posted on August 27, 2009 by Adrian

A couple of weeks ago, I posed the question: Will a million dollars be enough when I retire?

There was much discussion that makes it clear that you must also ask: WHEN do you want to retire?

You see, 4% inflation (say) eats away at your money, such that if you were to retire in 20 years – which is when you hope to get your $1 Million bill – it’s only ‘worth’ $500,000.

And, inflation continues even after you retire, which then means that you probably need to earn at least 9% on your Million Dollar Bill (4% to ‘cover inflation’ and 5% to spend) … this still leaves you only the equivalent of $25k today to live from (assuming that you want your $25k ‘retirement salary’ to at least keep up with inflation for as long as you need an income).

Assuming that this makes sense, let’s see how practical this Million Dollar Retirement Goal really is:

There are two schools of thought:

– There are those who believe that you should aim to approximate your pre-retirement salary in retirement, and

– There are those who don’t.

Now, I am in the second group – as are most people who have tried the same exercises that our 7 Millionaires … In Training! tried.

For example, my salary throughout almost all (bar the last 3 years) of my working life was less than $50k – $100k (incl. fringe benefits) and my wife had to keep working, BUT that was a purposeful strategy designed to get me to a retirement in just 5 years (instead of the notional 20 years) i.e. at 49 y.o. on the equivalent of $250k+ a year income for life (indexed for inflation) post-retirement.

But, this post is aimed at those new readers who are still in the first group … they, too, fall into two (sub)groups:

– Those who believe that they need at least 100% to 125% of their final salary in retirement (because, they say, you spend more in retirement due to travel, leisure activities, and escalating health care costs as you age, etc.) , and

– Those who believe that they need only 75% to 99% of their final salary in retirement (because, as these other ‘experts’ say, you need less in retirement as your children are grown up and educated, weddings are already paid for, house is paid off or downsized, etc.).

… at least, that’s how the personal finance columnists seem to be split.

So, in our example from the last post, we work backwards:

Somebody who aims to retire with $1 Million in 20 years time is really saying that they want to live off an annual income of roughly $50k in retirement (that WE now know is only ‘worth’ $25k a year), which means that their final salary will probably also be $50k (+/- 25% depending on which financial ‘guru’ they happen to follow).

Now, if you follow $50k in 20 years time all the way back to today, that person is probably earning $25k today (i.e. assuming that they earn CPI salary increases for the next 20 years) …

… so, now we can work forwards again:

If you have a starting salary (i.e. today) of $25k and aim to retire with $1 million in the bank in 20 years, you will need to set aside about 45% of your gross salary AND earn 9% on your money (after fees and taxes) AND have a house that you can free up at least $250k from when you do retire (e.g. by downsizing or moving into a very cheap rental).

Of course, if you can save 45% of your salary for 20 years, then you must be in the Salary-LESS-45%-In-Retirement camp, which is another story altogether 😉

So, it seems to me that getting to $1 mill. in 20 years for somebody on a salary of $25k is all bar impossible … and, even if you do scrimp, save, and ‘frugal’ your way there, you have only made it to the ‘lofty heights’ of living off about twice the poverty line, for a two-member household:

2008 HHS 100% Poverty Guidelines

Members of household————- 48 Contiguous States———–Alaska————–Hawaii

1———————————$10,400 ———————–$13,000————– $11,960
2———————————-$14,000 ———————–$17,500—————–$16,100
3———————————$17,600 ———————-$22,000——————$20,240
4——————————-$21,200————————–$26,500——————-$24,380

For each additional person, add—–3,600———————4,500————————-4,140

SOURCE: Federal Register, Vol. 73, No. 15, January 23, 2008, pp. 3971–3972

So, I think the Million Dollar Retirement Goal really is a myth – or, at least a very low bar to aim for – how about you?

Ali G hits Donald Trump for some money …

Posted on August 26, 2009 by Adrian

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?

Posted on August 23, 2009 by Adrian

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 🙂

Instant Real-Estate Valuation Tool!

Posted on August 20, 2009 by Adrian

fear1 Today, I want to share one of my secret weapons for purchasing real-estate: it absolutely kills paralysis by analysis, and it works for all type of real-estate, including residential and commercial.

But, I warn you in advance, you won’t like it!

You’ll think it’s risky, you’ll think it’s stupid … then you’ll find out that I’ve actually used this method three times … well, four times … and, each time it’s made me more money than I could ever have dreamed of.

Let’s think about the biggest problem in real-estate: knowing how much to pay.

So, what are the solutions:

1. You ask a realtor – if you can trust them

2. You ask a friend – but, are they the experts

3. You ask (actually, pay) an appraiser

4. You put in the ‘hard yards’ (missing many potential bargains as you simply stand by taking notes) learning about real-estate until YOU are the expert.

Of all of these, 4. is the one that I would recommend …

… if I did it, but I’m way too lazy 😉

Instead, I use 7million7years Patented Real-Estate Valuation Tool

Here’s how it works:

I find a property that somebody else wants to buy … somebody who is already an expert in that specific property … somebody who has: measured the place, gone to council, hired an appraiser, looked at 1,000 identical houses in the same areas … in short, somebody who has made themselves an expert in this type of property, and has narrowed down his search to this one property that I also happen to be interested in …

… and, I make sure that I offer just a little bit more for the property than he does. Simple!

Does this work? Sure … I’ve done this on my own home, an investment condo, a quadraplex, and an office.

Is this the cheapest way to buy such properties? Of course not; by definition, I’m always paying (at least a little) more.

Can it make money? Absolutely … I’ve probably made at least $2 million profit doing exactly this.

… and, the best part is that I’d probably still be researching my first deal if I didn’t.

Here’s one example of how it worked:

I was driving around and saw a condo for sale … actually, it was up for auction that day. I noticed that the sign was from an ‘out of town’ agent – I love these properties because they usually attract the smallest pool of buyers because the agents don’t really know how to attract the buyers out of their own area.

I went home and grabbed my checkbook and rushed back because I wanted to look at the condo before the onsite auction started: I saw a young guy in coveralls walking around with a tape measure doing a final ‘once over’ … it was obvious that he had been though the place before and was planning to rehab and flip it.

This was perfect: I simply bid against him at the auction until everybody else dropped out and it was just him and me bidding … the difference between us?

He needed to buy at a low enough price to rehab and make a quick buck; since I was buying to hold and rent, I could afford to pay a little more … which is exactly what I did: every time he bid, I bid a little more … eventually, he could bid no more, and my $500 ‘overbid’ was enough to buy the property.

I was surprised that I bought it … but, not as surprised as my wife 😉

But, we still own it … it’s the smallest property in our portfolio, but is still cashflow positive and has appreciated by over $250k.

So, who are these ‘unofficial appraisers’ that you are looking for?

– Home buyers – we bought our first house by attending an auction for a house that we expected to sell for a lot more; we just kept bidding until the only other serious buyer dropped out and we bought it – much to our surprise – far cheaper than we ever expected. We knew it was a good deal, because we knew the other guy had been looking around the area for quite a while

– Developers – I bought my office for $1,000 more than a developer was prepared to pay to buy it for as a ‘tear down’ … so, I figured that I was buying the property at land value and getting a whole building for only $1,000 more. I used the property for my business then sold it (a year or two after I sold the business) for around $1 million profit.

– Owner / builders – as well as the condo, I also applied the same technique to a quadraplex that I eventually bought; this was rehabbed while we were in the USA (my accountant oversaw the project) and I have never even seen the finished product, yet it is cashflow positive and has already appreciated by around $1 million. Again, I only saw this building once: on the day that I paid over $1.25 million for it!

Now, I don’t recommend that you do quite as little ‘due diligence’ as I often do (or, don’t do … as the case may be), but you have to admit that it is the ultimate cure to paralysis by analysis!

Scary, and you won’t find this technique in any book, but it works 😉

My top posts!

Posted on August 19, 2009 by Adrian

These are my ‘best-selling posts’ … what does this say about me? More importantly, what does this say about you???!!!

BTW: I am not unhappy with any of these posts … but, I doubt that many of those who came to my blog via Top Post # 3. have stuck around 😉

The Myth of the IPO

Posted on August 17, 2009 by Adrian

CallidusIPO 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.

Technical issues …

Posted on August 15, 2009 by Adrian

… again.

Apparently GoDaddy (who hosts this site) are experiencing temporary/intermittent problems with this site (in fact, many of their hosted wordpress sites). This means that (hopefully, only occasionally) you might see a “page error” message … obviously, you aren’t seeing it now 😉

Hopefully, it will be a thing of the past, soon. In the meantime, you have my apologies …. and, theirs:

The issue you have been experiencing is being worked on by our technicians. You site is currently active, however you may still experience intermittent issues. Service will return to normal as soon as possible. Unfortunately, we are unable to give a specific time frame for this resolution. We appreciate your patience and understanding in this matter and we apologize for any inconvenience.

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