Tag Archives: Business

Work on your business?

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Picture 1Yesterday, I told you (yet again) about this book … the book that others claim to be “the most important business book” that they’ve ever read.

Well, I claim it to be so, too!

Let me revisit one of the key tenets of this book – indeed, a phrase that has been often (mis)used by all and sundry:

Work on your business, not in your business!

Why misused?

Because I think that most people use it, but don’t really understand what it means to really work on your business, rather than in it …

… to understand what this truly means, let me give you a personal example:

When I started my second business (the first having being ‘handed to me’ in a rather crumpled heap … but, that’s another story), I was not at all qualified to do the ‘work’ of the business, which was essentially technical in nature, yet I taught myself to handle the paralegal files that we were handling at that time because my attorney was too slow.

This became a blessing – because, it meant that I could reduce costs by insourcing a lot of the previously outsourced paralegal work which was the essential component of the business model – and a curse, because I was the person handling all files, initially.

Even when I started to hire staff, all ‘complicated’ files – or, all files over a certain $$$ value – would cross my desk, because I wanted to make sure they were “done right” … you see, I had started the business, so I wanted to believe that I was also the best technician.

But, of course, that wasn’t my job …. but, at the the time, I was blinded to the fact that every hour that I spent handling technical issues was an hour that I was NOT running my business!

Eventually, as happens in so many businesses (thank goodness!) my operations manager simply stopped his people referring those files – any files – to me; he didn’t ask, he just stopped sending them to me.

Guess what?

Our technical metrics didn’t fall in a heap … the uber-technician [AJC: obviously, only in my mind!] was not as essential as he thought he was …  and, I had more time to concentrate on my real job: CEO i.e. running the business.

The business grew!

Lesson One learned: I wasn’t essential to the technical operation of the business.

But, as CEO – now, totally focused on marketing, finance, and other high-falutin’ business matters – surely, I was key to the successful day-to-day operations of the business?

Seems logical, until I signed the contract for the USA branch of the business …

… since this would be about three times the size of the Australian operation, I decided that I needed to relocate to the USA to personally manage my ‘global operations’ (well, three countries: Australia, New Zealand, and now the USA) from there.

That left me a hole to fill: I needed to appoint a replacement CEO of my Australian operations.

After a long search, I found somebody, who I appointed and trained over a period of months …. and who promptly resigned for a “better opportunity” [read: more money] just 6 weeks before I was now contractually-bound to relocate to the USA to commence operations!

Think about it: I now had only 6 weeks to find and train a CEO who could replace me in a job where I – like every owner/CEO – believed that I was totally indispensable!

How would this be possible [AJC: queue to apocalyptic visions of imminent business failure]?!

Yet, somehow, I found the ‘new guy’ and gave him all of two weeks training before I left, leaving him with:

– some last minute instructions (which he subsequently, all but ignored),

– my direct phone line in the USA (which he NEVER used), and

– my silent prayers that he wouldn’t run my life’s work into the ground too quickly.

Here is where I learned my ‘second lesson of indispensabilty’: not only did he NOT run the business into the ground, he saved a client that I had all but lost, maintained excellent relationships with my largest existing clients, signed a major strategic new contract, etc., etc. …. he proceeded to double the business over the next couple of years.

In fact, to this day, he is still successfully running the Australian operations for the new owners!

Lesson Two learned: a good business runs well under the watchful eye of it’s owner/CEO … a GREAT business runs even better without him.

You see, anybody [AJC: clearly!] with suitable training and experience can do the technical and managerial work of pretty much any business …

[AJC: if not, you don’t have a business …. you have a JOB]

… it just needs good systems to be put in place so that the business can run on ‘auto pilot’ while you – as the entrepreneur behind the business – do the ONLY job that you NEED to do:

Develop and and promote the strategic vision of the business.

Any other work that you do decide to take on is just so that you can feel busy … if that’s what makes you happy, keep doing it.

Me?

I prefer to make money 😉

The BEST way to make money …

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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?

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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) :P

… 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.

The Instant IPO

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Money AngelRecently, 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 …

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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?

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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

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CallidusIPOBy 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?

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Org Chart

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.

A sample business plan template …

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Because I have asked our Millionaires … In Training! to take a “dry-run” at the financial section of a business plan – to see if the ‘growth engine’ that they have selected to reach their Number – is “an opportunity worth pursuing”*, now seems like a great time to tell you how I go about business planning …

… also, it’s an excuse to share a business planning model that I built – keeping in mind that finances and numbers are actually NOT my strong point.

NOTE: Since I can’t work out how to attach spreadsheets to my posts here, you will need to go to this forum thread and scroll down in the comments until you find a reply with the same heading as this post, the spreadsheet IS linked as an attachment there: http://shareyournumber.ning.com/group/7millionairesintraining/forum/topics/will-your-craigs-list-ad-take or try this link: http://shareyournumber.ning.com/group/7millionairesintraining/forum/attachment/download?id=2494516%3AUploadedFi38%3A4669

Once you download it (hopefully, it works with most versions of excel?), you use it like this:

[Hint: double-click on various cells to see which ones are data and which ones are formulas]

1. Start with the Pricing Tab, and set up your pricing model – if you are going to use this sheet, which is designed for an online subscription-based business (like SurveyMonkey.com, but with the usual 7m7y Patented ‘Twist’) please try and keep the data in the same places unless you are comfortable fiddling formulas … each sheet is tied to data in the other sheets! But, it shouldn’t be hard to create your own, either …

2. The go to Business Volumes and try and work out what your potential market it, and how many you will get for each product type that you are offering … we are offering survey services to all businesses but feel; that out ‘sweet spot’ will be in businesses with 10 to, say, 100 employees.

3. Then go to the Subscriptions tab, which is simply where I summarize the info that I came up with in 2. … it’s not hard to think ahead, here, and see that my SALES REVENUE will be be based on this info multiplied by what’s in the Pricing tab (1., above), which is why we work in this order.

4. Your major cost will PROBABLY BE PEOPLE -and, the space to occupy them – so let’s move on to the HR tab; since this is an IT-based business you may need to modify the categories to fit your job titles, and the salaries and numbers of such staff. You can see that I am paying commercial rates, even though I will do this and ‘frank’ will do that … we want to see if our business can ‘stand alone’ if it needs to. You can then rerun a ‘bootstrap’ version of this plan where you eliminate as many startup costs as possible by having your relatives do all the work 😉

[HINT: in the startup phase, though, $85k is plenty to pay a CEO who is getting some ‘sweat equity’ as well]

You will see that I have built in models of occupancy costs (which includes an allowance for rent, desks, and chairs) based upon some USA industry chamber of commerce-type estimates that I found online.

5. Now, the P&L should VIRTUALLY produce itself!

[HINT: Again click on cells to see which ones are formulas and which ones are numbers; IN GENERAL: leave the formulas alone, but check the numbers in case you need to put in ones that you prefer]

Voila! … 7Million7Years Instant Business Plan 🙂

* Thanks to Michael Gerber for teaching me that you need to find out UP FRONT if your business is “an opportunity worth pursuing”.