Over a couple of posts, I posed the question: is your partner worth $5 mill.?

Through some suspect mathematics, I ‘proved’ that partners aren’t worth the price you have to pay (in lost equity) UNLESS they are the ones with The Big Idea!

I bring this up, because a reader (who shall remain nameless, as business plans are currently in motion!) told me:

One of my clients-turned-friends is doing the coding [for my new site].  This was an idea we’ve tossed back and forth for a couple years… he was one of my first clients.  [I worked on his previous] site for 2 years or so, then helped him find a buyer who paid a couple MILLION for the site.  I got a $5,000 bonus…  then we worked on [another site] for a year or two.  I helped him sell that, but for something in the hundreds of thousands rather than a couple million but he gave no bonus! I was a little peeved! I mean, sure, the bonus wasn’t a requirement but … you know, it was sorta expected.  I couldn’t very well say – where’s my bonus?  A couple weeks later he asked if I was interested in collaborating on the project we’ve been tossing back and forth the ideas for, we worked out some stuff and he’s outlaid all the costs and most of the time to get it going.  [W]e’ll barely see 15% of profits [each] when all is said and done  …

[AJC: I had to ‘square bracket’ a bit to protect the innocent … but, you should be able to get the picture?]

I told this reader that this guy has a track record, and 15% of something that costs our reader nothing could turn out to be something worth while! I said: “I guess that’s his bonus ‘gift’ to you ….”

This is the real value of a partner – besides providing the ‘Big Idea’ – if they are the true entrepreneur and you are more the ‘worker bee’ type, then a partnership MAY be the only way that you’ll get a business up and going …

… you see, this guy – and, this is true of many successful entrepreneurs – can show a track record of:

(a) spotting winners i.e. good potential business opportunities, and

(b) spotting winners i.e. good potential people who can help him make them happen.

The ability to spot winners is all that it can take … BUT, that’s a rare skill that’s very hard to bottle 😉

I gave you the 4 absolutely vital questions to ask before buying ANY business …, and here are some more, in response to Jeff’s quest to buy a business:

This week I found an air charter business for sale for 825K [AJC: Jeff is a navy pilot].  The sale price includes five airplanes (twin engine pistons) and the FAA certificates required to conduct flight operations for hire.  Depending upon the condition of the airplanes, 825K, might just barely exceed the cost of the aircraft, leaving me the profits, employees, and business model for free.

According to the financials listed on the sales ad, the business brings in 600K in revenue and cash flows 216K.  That looks like a 36% profit margin to me, which is good from what I can tell.  The revenue comes 80% from freight and 20% from passengers.  This tells me that the passenger focus I’m interested in is one that they either don’t have much market for, or maybe haven’t tried to exploit.

Needless to say, I’m intrigued.  For significantly less than I think I need to start things with my original plans, I could buy an air charter that has airplanes, employees (and pilots), procedures and systems in place AND appears to operate profitably.  That would leave me to try and expand the passenger side of the business and as/if it grows, I could slowly begin to acquire the aircraft necessary to take the business to where I want to try and go.  All the while having the cushion of a profitable business model to mitigate much of the risk.

I’ve shot an email at the broker asking for more details about the business and the aircraft, but am wondering if you have any bits of wisdom and questions I should consider as I begin looking into the details?

So, the first four questions that I would ask are:

1. Do I understand the business?

2. Am I comfortable with management?

3. What is the business worth?

4. What do I have to pay?

… after those have been answered satisfactorily (i.e. now you are serious about proceeding), it’s time to get ‘down and dirty’ with these additional questions (some of which are specific to this business, but can/should be modified for any other ‘capital intensive’ business):

5. Do I want to own an air charter business?

6. If I did, would this be the TYPE / LOCATION of air charter business that I would want to own (at least, to start out)?

7. If I still did, would these be the type / qty / age / condition of aircraft that I would want (or, at least, could work with)?

8. What is the current value of the aircraft (what it would cost you to buy similar aircraft … NOT the value that they list on their books)?

The answers to these 8 questions will tell Jeff:

(a) if he wants to be in THIS business and,

(b) what he is paying for capital (i.e. aircraft) v goodwill (i.e. past/future profits, etc.)

… obviously, if Jeff could start a new business – from scratch – similar to this and ‘buy’ aircraft and customers, these answers will tell you him much time he can save by buying rather than building.

THEN, he should start looking at profitability, which will barely approximate the numbers that the seller provides to him 😉

If Jeff can buy the business for not much more than startup cost (better yet, USED aircraft acquisition cost), as he thinks he may be able to do, then he really only needs to assure himself that the business AT LEAST breaks-even.

Remember, if you undertake a similar analysis for a business that you may be looking at acquiring, when looking at profitability BE SURE TO INCLUDE a reasonable salary for yourself. Many owners ‘bump up’ their profit figures by taking their ‘salary’ out of profits rather than accounting for it as a salary. Is it a family business? They are rife with these kinds of practices …

To protect yourself against this kind of ‘profit inflation’, the question to ask is: “what would I pay for each job that needs to be done” and make sure that you build in the appropriate allowance, whether the current owners do or not.

And, just in case you’re also thinking of buying an air-charter business, here’s the additional questions that Jeff says that he’s started asking:

I’d like more details about the operations…typical freight customers and passengers, typical flight destinations etc…

Plans for future growth?

Condition of the aircraft? Hours, TBO, SMOH.

Expenses…typical employee salaries, pilot salaries, cost per flight hour of the aircraft etc.

Where is the business located?

Is there any real estate included in the sale?

Is the current owner willing to stay on during the transition to help ensure a smooth transfer and train the new owners as necessary?

There you go, a great place to start your questioning process, when looking to buy a business. Now, tell me about your experiences? 🙂

I guess by now you know my true feelings about partnerships, but you may have other ideas …

… after all, your intended partner may be the Yin to your Yang … she may be the finance whiz while you run rings around operations … or he may just be your buddy since you shared a dorm together.

All I can say is: I hope that whatever your partner brings to the table, that they are also bringing The Big Idea.

You see, if you are the one with The Big Idea and you choose to share it with a partner because you [insert too scared to go it alone reason of choice: need more capital; need finance/operations/marketing skills; need somebody with a level head; need somebody to burn the midnight oil with; need somebody to hold hands with; etc.; etc.], then you are effectively paying your partner $5 million for the privilege!

By now you’re thinking that I’ve gone entirely off my rocker, so let me explain:

Let’s say that you have worked your way through all of the exercises and you believe your Number to be, say, $10 Million in just 10 years … where are you going to get it from?

Well, The Big Idea of course!

You’ve had this great idea and you will build a business around it and you will sell it for $10,000,000 in 10 years and …

… ooops!

You forgot that you invited a partner to join you … and when you sell, they are going to get half: $5,000,000.

That’s $500k a year for 10 years PLUS whatever salary that they took for those 10 years PLUS whatever perks that they got (e.g. trips, cars, laptops, phones, etc., etc.) PLUS 50% of any profits.

And, now you’re only half-way towards your Number!

Was your partnership worth it? Or, could you have hired people when you needed them for far less cost? I’m venturing that the answer is ‘yes’.

Another way to look at it is: will I be able to sell my business in 10 years for $20 million, so that my half still gets me to my $10 million 10 years Number? Or $30 million, if I decide to have 2 partners 😉

So, the question that you need to ask before considering going into business with somebody else is: am I more likely to get to my Number with or without this person?

And, I’m guessing that unless you’re a total doofus who just happens to have The Big Idea and not much else going for them, the answer will be “NO, I can get to 100% of my goal without this person, MUCH easier than getting to 200% of that same goal with them”.

So, what if you don’t have The Big Idea, but the guy who happens to have it asks you to go into business with him?

That, my friend, also depends on whether you are more likely to get to your Number with or without this person … and, their Big Idea?!

Everybody wants to be an entrepreneur, or so it seems; but, where to start?

If you can’t think of a side business to start, Trent at The Simple Dollar gives you a ‘kick-start’ with this list of 50 Side Businesses You Can Start On Your Own …

… you can click the link and browse through all of his ideas, but here is a sampling:

What follows is a list of 50 of those ideas that I’ve collected over the last year or so. Each of these ideas is very simple to start, and most can be done as a sole proprietorship at first (meaning you don’t have to file any legal documents to get started, though you will want to do that if it starts to take off). Most of these can be done at home in your spare time in your spare space, too.

Ready? See if there are any ideas below that fit you well. If you find an idea, seek out a guide on how to get started in that area.

Blogging If you enjoy writing, find a topic you’re passionate about and start a blog on the topic. All you need is a computer, some time, and some energy to consistently write.

Candle making Candle making is a great little craft to learn. You can often easily sell the candles at local shops and also through websites like Etsy.com.

Event coordinator Events like family reunions and large parties are often full of busywork that many people simply don’t want to tackle. That can be the perfect place for you to step in and take charge of the planning and coordination.

Jewelry making If you have a good eye for detail work and a lot of patience, homemade jewelry can be quite profitable. As with other items on this list, there are many opportunities to sell such items through local gift shops or at sites like etsy.

Pet walking Many busy people leave their pets home all day, but realize that those pets really could use a vigorous walk (and an opportunity to relieve themselves) during the day. Pet walking is a great opportunity for exercise, fresh air, and some pocket money if you have free time during each day.

Scrapbook making Many people dream of having beautiful scrapbooks. They collect all the materials they want in the scrapbooks but never follow through on the actual creation. You can step in here – take their ideas and materials and assemble a scrapbook for them.

Virtual assistant Many ultra-busy professionals appreciate having someone who can check and answer their email, organize task lists for them, update their calendars, and so on, with minimal interaction. The best part is that you can provide this service from home with a good internet connection.

I’m betting the readers have many, many more ideas along these same lines.

I’m also betting that my readers have many, many more ideas along these lines … and, each is a potentially GREAT Making Money 201 idea that can:

– Produce a little extra income

– Boost your savings rate (remember, you WILL save at least 50% of this extra money, right?)

– Help you build up some capital for future businesses investments (putting the 50%+ savings to its highest/best use)

BUT … did you spot the problem?

Almost all of these business ideas (and, I mean Trent’s full list, not just the random few that I have sampled above) seem to have one – I feel – major flaw:

They (almost) all rely on the fruits of your personal labor.

And, it’s easy to understand why: you have a skill – perhaps learned on your job or via a hobby – and you naturally apply that to a business: you start making some cute little cuddly toys for your kids, then friends, then the school fete, and before you know it … you’re in the Cute Cuddly Toy Business!

Even though you are in the business of making PRODUCTS (i.e. Cute Cuddly Toys), you are really in the SERVICE business, because it is all tied to YOUR ability to keep making Cute Cuddly Toys.

The problem is that these businesses are hard to expand past … well … YOU. And, any business based on Y O U is actually just another J O B.

Sure, you can expand by hiring people to do what you do, but then:

– Will you be able to find / train sufficient people to manage growth?

– Will you be happy with their quality?

– Will you be able to manage people (they get sick; ‘forget’ to turn up; have temper-tantrums; etc.; etc.)?

– Will YOU be around (will you get sick; have family conflicts; etc.; etc.)?

There is a simple solution:

Turn these service-based businesses into product-based businesses; here’s how:

1. Start with your service-based business, but keep it small as you will probably shut it down pretty soon

2. Video yourself doing what it is that you do (including how you buy/sell/make) … every step, sequentially … and, explain what you are doing as you go along

=> you are creating a series of short instructional videos 🙂

3. Write down the same steps that you followed in the videos … every step, sequentially … and, explain what you are doing as you go along

=> you are creating a series of short instructional manuals 🙂

4. Write down a list of materials required and places to get them

=> you are creating a Buyer’s Directory 🙂

5. Package the lot up!

=> you are creating a course in [insert part-time business of choice] 🙂

6. Buy a web-site-building package such as Bebiz and/or Site Build It! and sell your course (and/or materials required to make Cute Cuddly Toys) online!

=> you are creating an internet-based business 🙂

Can you see what you have done?

You have turned your ongoing personal labor (i.e. making the Cute Cuddly Toys) into once-off personal labor (i.e. developing a course on how to make/sell Cute Cuddly Toys), and then selling those toys online … once the course is complete and the web-site is set up, you can outsource most of the manual work of the business (fulfilling/shipping orders) to someone else when you get too big (or too sick) to fulfill them yourself.

Not to mention, you can make a lot more money; for example this guy who turned his hobby of wire-sculpture jewellery-making into a $600k per year online business.