Tag Archives: Saving

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.

Is this an opportunity worth pursuing?

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My co-author [of my new book … still in the final stages of development], Debbie, has just written this article for Entrepreneur.com …

… speaking of entrepreneurs, here is a question that you need to ask yourself NOW before it’s too late:

Is this an opportunity worth pursuing?

After all, time is precious … even more precious than money!

Let’s backtrack a little; let’s assume that you have:

1. Chosen Your Number and Your Date, and

2. Calculated your Required Annual Compound Growth Rate, and

3. Selected your Growth Engine.

So, you have – hopefully – selected your Growth Engine (it could be stocks, it could be a business, it could be real-estate investing, etc.) in the hopes – and need – that it will carry you to Your Number by Your Date.

But, what do you think it will mean if you are wrong?!

Let’s say that you are five years down the track and find that you chose the wrong Growth Engine: it can’t produce enough steam …

… now, if you rerun your calculations, you will probably find that your Required Annual Compound Growth Rate has shot into the stratosphere!

In reality, you have probably blown your chances of every reaching your Number … and, certainly delayed getting there by at least 4 or 5 years.

This ALMOST happened to me.

Except, that I was lucky enough to be challenged by Michael Gerber (in his seminal work: The E-Myth Revisited) to ask myself UP-FRONT: is this an opportunity worth pursuing?

So, I created a business model for my small, but slowly growing business … and found:

I had 5 corporate clients at that time … not bad, I thought for 5 years hard work. BUT, my models showed that I would NEED EVERY SINGLE ONE of Australia’s Top 1,000 Corporations as clients WITHIN 5 YEARS in order for my business to generate the $1.5 million after tax annual net profit that I calculated would be required in order to sell my business in just 5 short years for the $5 million that was my then Number.

What was my likely outcome if I hadn’t performed this relatively simple calculation?

Well, if it took me 5 years to get 5 clients, then the next 5 years should lead to … what? … 5 to 20 more such clients? And, I needed 1,000 … in fact, ALL of them!?

Obviously, unachievable on so many levels that my Number was doomed, if I didn’t do one simple thing:

Change my business plan!

In fact, that’s exactly what I did … unfortunately, twice (because the laws in Australia changed, making my first revision unworkable; thankfully, that problem arose … and, was solved .. within 2 years) … which is why it took me 7 years to $7million rather than the 5 years to $5million as I had originally planned … but, it could have been A LOT worse.

Here’s what to do:

Run the numbers now … see if your Growth Engine can get you to Your Number by Your Date … do it on paper now, rather than finding out in ‘real life’ when it’s already too late. If it can get you to Your Number by Your Date … go for it, what are you waiting for?

But, if it can’t …

… change Growth Engines, revise plans, do ANYTHING, until you find a way that can 🙂

Nothing is impossible!

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[pro-player width=’530′ height=’253′ type=’video’]http://www.youtube.com/watch?v=mKOEQVgONh0[/pro-player]

If you ever needed inspiration to take immediate, massive action to get off the ‘rat race’, just check out this video …

… but, before you wave it off as just another thing to laugh at the Japanese about, think about all the things that YOU do in your day to earn a meagre crust: flip the bird to another driver; have one flipped to you; kiss up to the boss; rush to meet a stupid, meaningless deadline; steam/iron/fold another shirt; and the list goes on … and on … and on … and …. [groan]

Of course, there’s another message: I bet you never thought it possible to get all those people ON the train? How about your Number … does it seem possible? 😉

Adrian

Acknowledgment: Thanks to Brandon for the video http://www.brandonlaughridge.com/all-aboard/

Will a million dollars be enough when I retire?

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1MillionDollarBill01

It seems like we have visited this question a lot … on the other hand, we have new readers every day, so it’s important to revisit the basics – and, I hope, it never hurts us to refresh our point of view either.

So, I couldn’t resist jumping in when Peter of Bible Money Matters posed the question: “Will a million dollars be enough when I retire?”

I told Peter that I love this question because it’s such a loaded one …

… we’d love to BELIEVE that it will be enough, but for most, it won’t.

Why?

Simple mathematics:

If you have $1 million (by the time that you retire in, say, 20 years) and inflation is averaging 4%, then the first 4% of your return goes just to keeping up with inflation. So, now just keeping your money in the bank isn’t enough.

So, let’s say that you can earn 9% on your money (in the stock market … crashes – and, ridiculously high mutual fund fees – aside? Hopefully!), then that’s ‘just’ $50,000 a year after inflation.

But, if you’re retiring in 20 years, $50k is (again, ‘just’) like $25k today [AJC: remember, 4% inflation roughly halves your buying power every 20 years] … so the real question becomes:

Will $25k a year be enough when I retire?

Now, that’s up to you to decide …

… all I can say is that, in my own retirement years, I’m ‘struggling’ to live off $250k a year ;)

The Myth of Passive Income …

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money-sign-tapFlexo at Consumerism Commentary says that the Wikipedia entry on “passive income” is WRONG.

Flexo is right!

Wikipedia says:

Passive income is a rent received on a regular basis, with little effort required to maintain it.

OK, that’s pretty obviously incorrect, so let’s adjust this slightly to say: “Passive income is any income received on a regular basis, with little effort required to maintain it”.

Better?

Yep! It does sound a little better – aside from the repetitive tautology 😉 – so, let’s see a little more of the Wikipedia entry:

Some examples of passive income are:

  • Earnings from a business that does not require direct involvement from the owner or merchant;
  • Rental from property;
  • Royalties from publishing a book or from licensing a patent or other form of intellectual property;
  • Earnings from internet advertisements on websites;
  • Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;
  • Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
  • Pensions.[dubious – discuss]

I love the little [dubious – discuss] attached to the last one …

… it should be attached to all of them!

You see, whilst I have also been guilty of (mis)using the term “passive income”, at least I know fantasy from reality; let’s start by reexamining the Wikipedia list:

  1. Earnings from a business that does not require direct involvement from the owner or merchant;

    2. Q: If you put the owner of such a business in one corner of a room with Santa Claus, The Easter Bunny, and the Tooth Fairy sitting in the other three corners, and you put a bucket of gold in the middle, who would be the first to get to the gold?

    A: No one, because there is NO SUCH THING as Santa Claus, The Easter Bunny, the Tooth Fairy … or, a business that does not require direct involvement from the owner!

  2. Rental from property;

    3. This is great, especially if you have (i) a flawless property manager, and (ii) NO taxes, vacancies, repairs, maintenance, mortgage payments, refinancings, etc., etc.

  3. Royalties from publishing a book or from licensing a patent or other form of intellectual property;

    4. Agree; totally ‘passive’ … that is, AFTER the book writing, editing, deadlines, interviews, and book signings … and, BEFORE the next book writing, editing, deadlines, interviews, and book signings.

  4. Earnings from internet advertisements on websites;

    5. Please! Exactly HOW do you ‘passively attract’ readers to your site to get the ‘earnings from internet advertisements on websites’?!

  5. Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;

    6. Asked: “Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service”
    And, Answered: “that must be renewed on a regular basis in order to continue receiving its benefits” … we addressed this exact issue for (another) Scott, not so long ago!

  6. Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;

    7. Now, this is interesting – if it is indeed true that in “the United States, portfolio income is considered a different type of income than passive income” – because (at least, to me), dividend and interest income is one of the MOST PASSIVE of all of the items on this list … interest rate changes, market crashes, poor earnings reports, and other reasons that a Board may reduce or eliminate the dividend, aside.

  7. Pensions.

    8. Strange that whomever reviewed this entry felt this one to be ‘dubious’ … ‘old style’ pensions (like government ‘lifetime pensions’, and the ones that are sending the car companies broke) seem to be the most passive of all of these!

If you disagree, please drop me a comment (below) then try and go on an extended vacation and NOT: (a) answer your cell phone, or (b) check your e-mails, or (c) worry about your [insert “passive income” source of choice] 😉

The power of bonuses …

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Before I wind things up on the subject of partnerships, I just want to summarize my position:

– Having no partners is better than having partners [AJC: I covered my reasoning in this post and in this follow-up post],

but

– Sometimes, having a partner is the only way that you will get a business off the ground [AJC: as I discussed in this post].

Now, my reasoning on this subject is clouded by my own experience with partnerships – in fact, it’s how I got started in business: a family business.

The arguments that my father and I had were legendary, and the business eventually failed.

Yet, it was the business idea that my father passed on to me (which I was able to resurrect, like a phoenix rises from its ashes) that ultimately lead to my success … because that little ‘reinvented’ business eventually funded my next little business (which WAS my idea) which became a multi-national-much-bigger business which I eventually sold => phew! => still leaving me with my original little business 🙂

Now, I have a number of other little businesses in the works – and, I am ‘working’ almost all of these ones with partners; here’s my somewhat revised reasoning:

1. Three of the businesses are my idea, but my partners are the developers (they are all web 2.0 sites): I am taking a Venture Capital view to these, where I direct the strategy of the companies but others do the work; the idea of taking these partners on is to eliminate a major start-up cost – hence risk – and to retain the IP ‘in house’ without having a huge staff cost. I would hate to lose one of the key developers!

2. One of the businesses that I am negotiating to buy into is also a web startup – not currently very ‘web 2.0’ but I intend to take it in that direction – and, the guy that I am hoping to partner with is the developer. If the partnership or site doesn’t work, I am hoping to ‘blow’ only $50k or so. For me, this is really pocket change [AJC: but, who wants to blow $50k every time they want to ‘play’ with a new idea? I sure don’t! So, I AM taking this semi-seriously 😉 ]

3. The other business that I am negotiating to purchase is major: it will cost me $700k up front and another $800k over the next few years to buy out the current owner, who has successfully destroyed his current business: taking it from $2 mill. annual net profit to break/even or a small loss in just 3 or 4 years through divorce, and pure mismanagement. I am hoping that I can reverse this trend … we shall see. Naturally, I don’t want this guy around!

It’s this last one that I mentioned in my post about bonusing the existing key staff to keep them on, rather than taking them on as partners.

But, the key question is: how do you reward and keep good staff?

The common way is to make them equity partners: give them skin in the business … but, I don’t think you really need to do that, if it’s purely a ‘staff retention’ issue …

In my last business, I had a key employee who moved to the USA with me to help me establish my operations over there … I actually transferred 10 of my best Aussie staff for periods of 6 weeks to 6 months, but three stayed on. And, one of them became more and more key to the success of the US operation.

His salary in Australia was $70,000 (Australian dollars, which was about $55,000 US) but I put him on a ‘bonus payment’ while he was in the US of a GUARANTEED $160,000 (US dollars) total PER YEAR while he remained working for me in the USA.

That was a $100k+ pay rise … he was THAT important!

Not to say that he wasn’t operationally replaceable [AJC: I made sure of that 😉 ], but that he just could take care of a lot of stuff for me that others would struggle with … less stress on me at that time was worth $100k.

Then, when I was approached to sell the US operation, I took even more dramatic steps to make sure that he stuck it out:

Even though a $160k pay packet should have been plenty, you can never be sure how people think …. so, I offered him another $100k as a one-off ‘retention bonus’ i.e. if he stayed on until the sale closed and my final payout was delivered.

Was it worth it?

For him, absolutely … and, for me, you betch’a 😉

In fact, my accountant in Australia also got a bonus – $250k (Australian dollars) – just for helping me keep my businesses alive in the early days (remember when the original business went belly-up, leaving me $30k in debt? He was there to help me negotiate with the banks and turn things around) … and, you should NEVER forget those who were there when YOU were the one who needed help!

Adrian.

PS My ‘$160k + $100k Man’ finally did come back to Australia, and he now works for me in my original little business, which can only afford to pay him $55,000 (Australian dollars) per year; he is happy and I am happy … I told you that you can never be sure how people think!

How do you stack up?

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OK, so I’ve found a few online calculators that I don’t like, but it’s time to quit bitchin’ … here’s one that I do like:

Picture 2

This one asks just two questions to determine how your Net Worth ‘stacks up’ against others, by age and by income.

Here’s how I stacked up just before I retired (a.k.a. Life After Work) at age 49 and was still drawing a ‘salary’ of $250k:

[AJC: OK, so I’m ignoring all of my other business and investment income, etc., etc. for the purposes of this particular rant]

Picture 1

Again, the obvious question is: how much SHOULD I have accumulated in my net worth?

Let’s assume that I just want to replace my then-current gross income of $250,000 by the time I reach 60 … a reasonable goal, if you ask me, but still way, way more optimistic than the general population would hope for:

Step 1: $250k is roughly $385,000 by the time I reach 60 … a simple estimate of adding 50% every 10 years to allow (very roughly) for 4% inflation gets close enough to the same result without using an online calculator or spreadsheet.

Step 2: So, if I want to keep the same standard of living – with all the arguable pluses and minuses of grown up kids and greater health and insurance costs … not to mention more green fees 😉 – I’ll need to generate a passive income of at least $385k that, according to our Rule of 20 (which assumes a 5% ‘safe’ withdrawal rate), means we need $7.7 Mill. sitting in the bank (well, in something that will give us a RELIABLE 10%+ annual return).

Step 3: If I plug my starting Net Worth (let’s go for the generous starting average for people on my super-generous assumed current income) into this online annual compound growth rate calculator, I can see that I need just over a 19% average annual compound growth rate between now and then.

OK, so I have my target, now let’s take a look at how likely I am to achieve it (you see, it’s not as bad as it sounds: I can keep adding a % of my salary to my Net Worth, as well as reinvesting any investment gains and/or dividends) …

… to my mind, I’ve had 27 years of ‘practice’ to get where I am today – if I match CNN Money’s ‘profile’ – using:

– How much I had saved when I started working, and

– What % of salary I’ve managed to regularly save over those years, and

– What average investment returns I’ve managed to achieve in that time.

Well, I’ve been working for about 27 years, and I started full-time work with about $6k of car and pretty much nothing in the bank. So, if I plug in my current net worth (again, assuming that it’s what CNN Money says is ‘average’ for my super-high assumed income); what I started with; and 27 years between the two … the calculator shows that I must have averaged 21%, so no problem!

Except that I had to receive massive salary increases to get from my starting salary of $15,000 [AJC: I thought that was huge! And it was … in the early 80’s 😉 ] to my current (assumed) salary of $250,000 … in fact, my pay increases would have needed to average between 11% and 12% every year for 27 years! Now, that’s hardly likely to continue …

So, if I assume an average compounded investment return (e.g. stock market) of 12% for the past 27 years … which seems pretty darn generous, if you ask me … then, I would have needed to be smart enough to save nearly 40% of each pay packet for the entire 27 years (including putting some of it … a lot, I suspect … in my home).

Running that forward (assuming a more sedate, and probably much more likely, 5% salary increase each year until I retire at 60) and I CAN reach my Number!

In fact, I overshoot by about $1 mill., so I can even afford to drop my regular savings rate to ‘just’ 35% of my before-tax pay packet … easy, huh?!

So, it seems doable, except that I see four problems:

1. I need to have a starting salary of $250,000 per year

2. I need to have a Net Worth of at least $1.12 million by age 49

3. I need to be able to save 35% of my GROSS pay packet

4. Even after all of that, I still NEED to work until I’m 60!

[groan]

Adrian.

PS How DID I stack up at age 49? Easy: $7 million in the bank. What did I start with just 7 years before that? Nothing: I was $30k in debt. So, is it ‘doable’? Absolutely: And, this is just the place to find out how 🙂

Are we all broke sheep?

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[pro-player width=’530′ height=’253′ type=’video’ image=’http://api.ning.com/files/GLRPkozxKqsAOEDs*Rd06n1g0GC8wifx-HvjXsxwOlpn2Skpsbb8pRzsH82CNjTMI47lPVU2MHMBsp*V8xitlm6Ts5H*DgTL/BrokeTheMovie.jpg’]http://www.youtube.com/watch?v=N-4Z7xKq4lU&feature=player_embedded[/pro-player]

This should be an interesting movie [thanks to KC for the link!] … interesting because I’d love to know how they plan to fill up theaters with a documentary on the economy.

Expect it to be filled with wonderfully breathy comments like “Warren Buffett has more in common with a great poker player …” Oooooh! 🙂

When will you be a millionaire?

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Last week, I posed the question: how much should you have saved by now?

With the general consensus being that pre-packaged formulas such as “6.1 times your current salary by age 50” mean a hill o’beans because:

a) the best these ‘common wisdom’ formulas will get you to is just over broke by the time you work to 65 (and, not a day before!), and

b) they fail to take into account that YOU need to have saved enough to ensure that you’ve reached Your Number by Your Date.

The corollary question is “when will you be a millionaire?”, one which  CNN Money attempts to answer with this neat online calculator:

Picture 1

The problem with this calculator is obvious … but, in case you missed it, I blew up the bottom-right corner of the above image for you:

Picture 2

Your ‘desired nest egg’ – in this calculator – isn’t variable … it’s One Million … that’s it!

My issue is that plenty of people (fortunately, none of them readers of this blog) – with the support of an ‘authority’ such as CNN Money – still think that $1,000,000 is something to aspire to!

If $1 million isn’t just a hurdle along the way to your Number – and, a fairly early and relatively small hurdle at that – then you are destined for a VERY late retirement or an early trip to the ashram to meditate all day and eat rice at every meal … not that there’s anything wrong with aspiring to Asceticism 🙂

Adrian

PS I’m sure there’s plenty of other online calculators that will do the job, although I couldn’t find one that accepts >20% annual return and we know that we need more than that! If you find a good one, please post a link in the comments.

How much should you have saved by now?

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datesThis is rapidly appearing to become a blog about your Number … of course, that’s not the case: it’s a blog about money, specifically about how to make $7 million in 7 years, but you can pretty quickly see that having a real financial goal in mind is a powerful focusing tool.

It’s also a ‘comparator’ – a tool to use whenever you are presented with two financial alternatives … for example, Scott who is deciding how many clinics to open: 1, 2, or 3+ [Hint: only one of these is the right answer, and it’s not the obvious one!] … it was ONLY by having a clear understanding of his Number / Date that he came to this conclusion.

Without that understanding, Scott could have made a terrible (OK, far better than terrible … more, non-optimum) decision that would have had the opposite effect to that intended: it would have committed him to working for 10 to 20 more years.

So, now that I have provided the hint, let’s look at today’s conundrum, posed by Money Magazine in March 2008: how much money should you have saved by now?

Well, given the current market the chances are that what you have saved has halved, but what you should have saved hasn’t … bummer 🙂

But, here’s what Money Magazine advises; to see how much you should have saved by now:

If you are age 45 multiply your current salary by 4.1
If you are age 50 multiply your current salary by 6.1
If you are age 55 multiply your current salary by 8.5
If you are age 60 multiply your current salary by 11.4

So, if I said my current salary was $250k (well, that’s what I most recently paid myself before I retired), then I should have saved $1.525 million by now …

Can you see the obvious problem?

Well, it assumes that I am going to want to keep working for another 15+ years!

Why? Simple: $1.525m can only support a ‘safe’ 5% annual withdrawal rate of $76,250 (before tax) … so, unless I want to take a HUGE pay-cut, I’m going to have to keep working until I’ve saved at least $5 million … lucky that’s exactly what I did 😉

So, here’s how you should calculate how much you should have saved by now:

1. Calculate your Number,

2. Decide your Date,

3. Subtract your Current Net Worth from 1.

4. Subtract today’s date from the Date

5. Divide 4. into 3.

That’s how much you need to have saved each year between now and your Date, if you want to reach your Number.

Now, you can get fancy and use an online compounding calculator to do the year-upon-year calculations, but this is a good place to start.