The Magic Number for successful sales …

Magic Number For Sales

The Magic Number for small-business sales success is 5 …

… this means, that you shouldn’t give up too easily when trying to contact new prospects.

Don’t give up after just 2 attempts at contacting them, your prospect may just be busy, not quite ready to buy, or may really not want to talk to you.

The trouble is, you won’t really know which of these reasons it is – or, whether you really should give up on them – until you have tried to contact them 5 times!

That’s 5 e-mails; 5 voicemails; 5 calls to their cell-phone; 5 handwritten letters; 5 rocking up on the doorstep with coffee and donuts; or …

… better yet, some combination of the above (probably, in the order that I’ve presented).

What is a business plan?

Business-PlansThe other day, somebody asked me:

What is a business plan?

I think they were asking more than the obvious …

… I think they were really asking: “what makes a good business plan? what are the things I should include/ leave out?”

In any event, my answer was – and remains:

“A business plan is …”

A waste of time.

*Keep reading and I’ll tell you the only three times when you must write a business plan*

A very well-known guru once said of planning:

Four things can happen when you plan:

1. You plan and things turn out in your favor

2. You plan and things do not turn out in your favor

3. You do not plan plan and things turn out in your favor, anyway

4. You do not plan and things do not turn out in your favor

Of these, only 1. and 4. are as you expect …

… the rub is that the guru said that all 4 outcomes are equally likely.

In other words, there is no direct link with planning and outcome.

Mike Michalowicz, author of The Pumpkin Plan: A Simple Strategy to Grow A Remarkable Business In Any Field, agrees:

Financial projections for a new company are ludicrous. If we could project financials accurately for a public company for even one day, we’d be billionaires. How can we think we can project reliable financials for a company that doesn’t even exist?

Having worked (actually funded) close to 30 startup businesses to date, I wholeheartedly agree!

In fact …

I have never written a business plan for any of my businesses.

But, I have used financial projections and written executive summaries for three specific purposes:

1. To impress people

I have used a short, one page ‘executive summary’ (like this one) to impress other people i.e. as a ‘sales tool’ for clients, bankers, and investors.

But, make no mistake, these are largely works of faction (fiction dressed as fact) i.e. to be used purely as marketing documents: proposals, marketing and sales presentations, and the like. Do not mistake them with documents actually intended to convince yourself of your business’ future success. For that purpose, I use the following two types of plans …

[AJC: The executive summary that I have shared with you has a place close to my heart: it was my first attempt at a purely online business as a founder/investor. We built the site, but never launched it. It was wonderful, overly ambitiously wonderful … the web equivalent of Howard Hughes’ Spruce Goose]

2. To check if my business is an opportunity worth pursuing

This type looks like the financial part of a business plan, but it’s not a plan, it’s actually a sanity-check:

I did this kind of financial plan (the kind that Mike says is “ludicrous” … and, I would usually agree) only once and you should do the same:

In 1998, I found my Life’s Purpose, and it sucked …

… for me, it meant lots of traveling and time not earning an income (basically, it meant very early retirement). It sucked because now that I knew what I really wanted to do with my Life, I could no longer just sit around and wait for it – and, my business – to ‘just happen’.

So, to passively fund the true cost of my new-found life (an expensive one!), I knew that I simply had to come up with $5 million dollars in just 5 years!

[AJC: for new readers, this is how I came up with the title of this blog, because I actually ended up making $7 million, but it took 7 years]

Now, there was just one small problem: in 1998, I was over $30,000 in debt!

So, I quickly realized that the only hope that I had of going from negative $30,000 to positive $5 million in 5 years was if I could make my business worth that much, quickly.

Working backwards, I asked around (i.e. my accountant and my friends who had their own businesses) to see what my business would need to ‘look like’ in order to be worth $5m to somebody else? The general consensus was that, as a private company if sold to a private seller, it would be worth around three to five times it’s annual taxable profit.

That means my business would need to generate $1m to $1.5 million in profit each year within 5 years …

… with only one small problem: it was currently losing money!

So, in comes the ‘business plan’:

All I wanted to know was: “was it even possible for my business to generate $1m to $1.5 million in profit each year?”

So I drew out a basic business plan (actually, financial forecast) with outrageously large sales growth (and, commensurate growth in expenses) to see: “at what annual sales volume (less reasonable expenses) will it be possible for my business to generate $1m to $1.5 million in profit each year?”

Once I found that revenue (i.e. sales or turnover) number, it was then relatively easy – again, with the help of a spreadsheet – to work out exactly how many customers that I would need, based on some guesses around the size and frequency of their average purchases and so on …

[AJC: now, I’m not even good with numbers and spreadsheets, but I didn’t even need my accountant to help me do any of this; but, if you need the help of yours, go ahead … it’s what they are there for!]

So, with the help of this ‘business plan’ (actually, the ‘financial forecast’ part of the business plan … but, it’s much the same thing), the question became a fairly simple one: ” can I find enough customers to make my business generate $1m to $1.5 million in profit each year?”

Sadly, the answer was: No.

My business would have needed each and every one of the Top 1,000 Corporations in Australia as my clients; given that I currently had 5, that was going to be a stretch [read: impossible] 🙁

So this form of business planning was for one reason and one reason only: to tell me if my business was an opportunity worth pursuing.

The answer, of course, was no … at least, not in it’s current form.

But, it pointed me to the right answer: which was to find markets that were much larger than Australia and relocate. Which we did … to Chicago … and, the rest is history.

[AJC: as it happens, I also had a financial epiphany, and realized that I should be investing – rather than spending – my businesses increasing profits, so a lot went back into the business, so that I could grow without needing to borrow or raise outside capital, but all of the remainder went into passive investments: stocks and real-estate. And, it’s these investments that took me to my first $7m in 7 years. Eventually selling my businesses was a huge dollop of cream on top!]

3. To check if the business can break-even

I do one other kind of business plan (again, I’m now just focussing on the financial forecast section … I never write the other 30 pages typical of most business plans): it’s the one that looks like a typical business forecast spreadsheet [you can download a copy of this example, here]:

break-even

This one has a yearly projection of expected revenue growth, offset by expenses.

But, there’s only one thing that I’m looking for …

… it’s the column, where the bottom-line turns from red to black (actually, from negative to positive … from a loss to a profit)!

In fact, I’ll then fiddle with the numbers in that column to get the ‘bottom line’ number as close to $0.00 as possible (without being pedantic), because what I’m really trying to get a feel for is …

the point where the business breaks-even.

[AJC: in this example, the 2008 column is closest to zero profit (showing a $107,000 loss), and just a few tweaks to the revenue and expenses quickly go that closer to $0.00, or break-even]

I do not care what Date the column says, that isn’t the point.

I do care what the numbers in that column look like:

– Does the sales number look achievable (i.e. for my business, is it more like 6 or 7 mid-size corporate customers than 1,000)?

– How many staff will I need? How big an office? Am I now going to bump into better funded competitors and have to try and steal all their customers, or is the market big enough for all of us?

– Will I need to expand interstate/internationally, franchise, and/or joint venture?

In other words, is it a business that I can comfortably take to break-even (before I run out of money)?

Why?

Well, once I know the business can break-even I know that I can then ride whatever storms come my way and take as long as I need to take to get my business to where it needs to be.

[HINT: see 2., above. Remember: even though I set my goal at $5m in 5 years, I actually took 7 years to make $5m plus a ‘bonus’ $2m]

So, don’t bother with a business plan, unless it’s for one of the three reasons that I outlined, above.

Now, tell me about your business plan successes and failures, so that mine don’t seem so lonely … 🙂

Help a reader out …

Should this reader buy his building or reinvest in his business?

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What should this reader do?

Read his story, make a selection, and leave a comment:

We are renting the commercial condo that our business is in for $1,800 per month, we can buy it for $160,000 should we?

We like the building, the location is a bit hard to find, and with a 20% down it will really cut down on the monthly expense but I will eat up $32,000 that we could use to expand the business. I don’t have $32k but I have a friend who offered to lend me half of it, I do have half.

We currently average $15k a month in sales, other than rent we have about $1000 in fixed expenses, I pay myself $2500, and we average about 25% for costs of goods sold. We currently have staff that costs about $2000 per month. This gives us about $4,000 of extra money at the end of each month….so far with this extra money we have bought lots of extra inventory to the point that we have enough, we have bought a commercial truck, the business is 100% debt free and has about $5,000 in liquid assets saved up (And we personally have over $10k), along with 30k in inventory and 10k in tools and equipment. Personally we are debt free other than the house, student loans and car….but with the house at 2% interest and the car at 2.9% and the student loans at 3.25% I don’t see any reason to send any of them more then the minimum because we make 4 times on most inventory that we buy.

So is now a good time to get the building? Or should we keep our cash free to keep buying things that are our core business? We are not in the business of real estate so should we own or rent?

Now, I’m not yet sure exactly what advice to give him, yet, so leave a comment and help us BOTH out 🙂

The myth of the millionaire next door …

weep warning

This post will make you cry.

But, it is a post that I have to write.

It’s one that I have been putting off … and, off … and, off.

Why?

Because, I am going to tear apart one last (well, until the next) tenant of finance …

… one that even I have not dared touch until now.

But, I have finally decided to bite the bullet, because there has been a whole generation weaned on an aspiration that, in itself, is a lie.

Yes, I am talking about:

[shock]

The Myth of The Millionaire Next Door.

[horror]

In case you are too young to remember, The Millionaire Next Door is the title of a 1996 best seller by Thomas Stanley and William D. Danko that was touted at the time as revolutionary but, to me, produced a totally mundane and obvious conclusion:

Most of the millionaire households that they profiled did not have the extravagant lifestyles that most people would assume. This finding is backed up by surveys indicating how little these millionaire households have spent on such things as cars, watches, suits, and other luxury products/services. Most importantly, the book gives a list of reasons for why these people managed to accumulate so much wealth (the top one being that “They live below their means”).

[sigh]

The perception after this book was released, becoming an instant – and enduring – best-seller, is that the typical American millionaire is actually your neighbor, the small business owner who has been working for 20+ years on his business, investing (and, reinvesting) its profits rather than spending on lifestyle and luxuries.

In other words, somebody who slips under your radar; somebody you probably ignore; for good reason …

It’s all fine and dandy: like all “spend less than you earn and save, save, save”-driven strategies you, too, will no doubt become a millionaire by the time that you retire, but there are two problems:

1. What about inflation? Start now and, if you take 20 years to become a millionaire, you are really still only half of one in today’s dollars, and

2. Who says that you can wait 20 years?

I certainly couldn’t.

That’s why I call this type of ‘Millionaire Next Door’ business – an ATM business – little more than ‘a job with benefits’ …

… if you really do want to have one of these businesses, then here’s what you need to do:

Do NOT spend the spare business cashflow on personal lifestyle building (homes, cars, vacations, etc.); instead, use that cashflow to fund an aggressive investment portfolio, outside of your business: one that will one day grow to replace your personal income i.e. the amount of money that you DO take from the business to live off.

When the day comes that this passive income surpasses your personal business income, you become free.

However, this freedom does not come simply from saving and investing passively – otherwise, you are simply following the advice given in the Millionaire Next Door and you, too, will slave for the next 20+ years to get there.

Rather, this true financial freedom comes from investing your business profits aggressively and actively, with a mixture of your money and borrowed money, in things such as direct stocks (no funds for you!), and real-estate.

In this fashion, you may still need to work your business for 20 years before you shut it down, but at least you will retire a real millionaire (or better) in today’s dollars.

Far better, instead of starting a lifestyle business that relies on YOU being the front man (e.g. lawn-mowing round; accountancy practice; design studio; etc.), or a business that is tied to a single location (such as a car-wash; a restaurant; a corner shop) …

… start a business that can scale like McDonalds, invest aggressively, and you (too) may be able to do it in 7 😉

How to dig yourself out of a financial hole …

If you’d like to catch my nationally syndicated radio interview on Financial Safari With Coach Pete, click this link:

http://www.financialsafari.com/as-heard-on-show/interview-with-adrian-cartwood-11-24-2012/

_______________

I really feel for the author when I receive an e-mail like this one from Rick:

My wife is leaving her job in December, I’m a paramedic here in Chicago and we’re both college graduates.  Our house is upside down, we don’t have much in the way of savings for retirement or otherwise and we’re trying everything to stay afloat financially.  Any help would be appreciated.

[AJC: I changed Rick’s job and location to protect his anonymity]

The worst part is that I can’t really help Rick, for a couple of reasons:

1. I’m not a qualified financial adviser;

2. I don’t know anything about Rick, other than what he has told me in (exactly) 50 words.

But, I can give Rick one piece of specific advice: see a qualified financial professional to help you decide how to deal with your ‘upside down’ house, and work out why you aren’t saving enough, and what to do about it.

I can also give a fairly general piece of advice that Rick can choose to follow or not; and, it’s the same advice that I would give just about anybody who is in a similar situation (under-employed; under-saved; and under-water on their house):

The best way to dig yourself out of a financial hole is to …

… find a way to increase your income!

Cutting costs, while admirable – necessary even – is simply too limited to produce the sort of financial turnaround that Rick and others like him need.

Maybe, Rick can turn his wife’s loss of income into a blessing by refocussing her on starting a business, even it it’s while she actively looks for new employment … a business that can be run part-time (at first) when she does manage to find a new job.

I would give similar advice to Philip, who is desperate for the opportunity to shake off the shackles of being imprisoned in a job:

In 5 years I’d like to not have an office job anymore, working for myself/having my own business. I’m stuck in a job, so I keep it to pay my bills. Designers don’t earn much, so I can’t exactly bankroll my parents’ retirement. I’ve been too afraid to go out on my own.

The best way for you (and, Philip) to overcome your fear of becoming your own boss is to actually start …

… but, start part-time.

Doing something is better than doing nothing, and can quickly lead to more/better opportunities in ways that you could not have predicted in advance: for example, and in Philip’s case, designers can freelance, work (cheaply) on crowd-sourcing sites such as Freelancer.com, 99designs, fiverr.com, and so on.

Even better, Philip could use his own design skills to help create his own web-site or product, and run that part-time to earn some extra $$$ and learn how to run a business – building up his confidence in the process, even if the business never truly takes off.

On the other hand, the business may suddenly find its own life and give Philip the confidence to quit his job and start working on it full-time.

Now, unlike Philip, you may not be a designer … I assume that Rick’s wife isn’t either … but, there are plenty of businesses that you can start part-time that require very little money.

Here are some thought starters (if a teenager can do ’em, surely you can?!): What are some potential low-cost businesses that can be started and operated by a teenager?

But, you’ll never know if you don’t start …

.

Living to 100 …

First of all, let me tell you that living to 100 is not a blessing.

My grandmother just passed away. She made it to 12 days past 100 years.

In fact, the 100 was like the finishing line to a marathon for her; in Australia, you get a letter from the Queen.

She also got a letter from the Prime Minister, the Governor General, and her local member of parliament …

… and, a little party at the old people’s home where she resided, complete with party hats and balloons. Hurrah!

My Grandmother lead almost the whole family unscathed through the holocaust (she ‘only’ lost one brother, where most others lost their entire families) and emmigrated to Australia almost penniless where she (and, my grandfather … but, mainly she) did what most immigrants do: work hard, invest wisely, and slowly rebuild their fortunes.

She may not have made $7 million in 7 years, but she certainly made that much in 30 or 40 years, starting with nothing. I can’t see why anybody would settle for $1 million after a lifetime of work?

So, what have I learned from my grandmother’s experiences?

1. Living to 100 is not all it’s cracked up to be.

My grandmother’s brain was amazing, right up to the end.

When she got her letters, she immediately recalled our Prime Minister’s name as being Julia Gillard.  And, just a few weeks before her 100th, she was still doing mental arithmetic (“if you were only 85, how much longer to 100? I asked. Within a couple of seconds, my grannie answered “15 years”).

But, her body was not so good: the legs went first, then the teeth, and so on … she often told me that living to 100 is not all that great.

2. If you lose it all, get up and do it all over again.

My grandmother lived like a queen before World War II. He husband (my grandfather) was a banker in the small town in Poland where they lived. They also owned the local movie theater. My granny hadn’t worked a day in her life and had maids and servants. My grandfather never drove a car (he could afford a driver).

The war, and the Nazis, changed all of that. Coming to Australia destitute, my grandmother decided to start a business making neckties. Not only did she not have any money with which to start a business, she had never sewed a necktie in her life.

Instead, she took a job at a tie factory to try and learn how it was done and (after convincing the owner that she could, in fact, sew ties) she convinced a couple of the seamstresses there to make some sample ties for her after hours. Using those samples, my granny went door to door (shop to shop) signing orders for those ties.

3. Don’t ever convince yourself that you can’t ‘cold call’

If my grandmother – who had never worked a day in her life before and was a female at a time when all salesmen were … well … men – managed to do it, then so can me or you!

Once she had enough orders, she paid those same seamstresses a ‘per tie’ rate (it’s called “piece work”) to fill the orders. She then delivered the ties and used the money earned to start the process all over again …

… eventually, she had been through this cycle enough times to open a small factory and hire those “piece workers” away from their other factory job, and they stayed with her until my granny retired (she gave the business to her loyal staff).

4. Invest today so that you can live tomorrow.

Most people would take the money that they are earning from their businesses and start paying themselves a decent salary. My Grandmother wasn’t most people: instead, she would invest the profits from their business into real-estate.

Contrary to popular belief, most business people don’t become rich from their businesses (remember, my granny simply gave hers away); they become rich from the investments that they make using their business’ income.

My grandmother was no exception: she bought real-estate.

Not only did she buy real-estate, she also developed her own down-town property. To give you an idea what that may be worth, when he was 93 – and, living in the old people’s home – my grandmother sold another down-town property on behalf of her 3 other partners who were all as old as her.

The realtor told her that the property was worth $11 million. She said “rubbish” and managed to hold out for a better offer, which eventually came in at $18 million. Not bad for a half-deaf, bed-ridden 93 year old.

The corollary to this is something that I learned from my grandfather (but was relayed to me by my grandmother after he passed away many years ago): at one stage, my grandmother felt that they could finally afford to buy a house. My grandfather said: “You can always buy a house from a business. But, you can never buy a business from a house”.

All in all, the value of the life lessons that I learned from my grandmother were immeasurable … but, the business lessons that I learned from her shaped who I am as an investor, and an entrepreneur.

No doubt, I wouldn’t have made $7 million in 7 years without them, and I can finally share the ultimate source of my inspiration here with you.

The myth of consulting …

My wife is always trying to get me to do some consulting, but I just can’t see the point.

I used to do a bit of consulting, but I saw it as a capital-friendly business development opportunity:

Rather than pay to fly out to talk to people about my regular products or services, I repackaged my bus. dev. [read: sales] activities as a paid consulting gig (at the very least, business-class international travel and accomodation paid for).

It worked quite well and was quite nice while it lasted.

Now, my wife sees consulting as a way to get a paid holiday every now and then …

… but, I see it largely as a waste of time.

I also see it as largely a waste of time for those who aspire to consult as their major source of income:

I feel that the biggest mistake that aspiring consultants make (particularly those setting up as an independent consultant/speaker) is to OVER-ESTIMATE their earning potential.

I once posted about a friend of mine, having sold out of his own business, who decided to become a consultant to his particular industry … his earning expectation is $200k for his second year in the business.

I told him “it won’t happen” …

Why?

You have to apply the ‘smell test’ to these sorts of expectations … wouldn’t EVERYBODY leave their $100k a year jobs if you could suddenly earn twice as much as a consultant?

… and, what about ‘lost time’ for marketing yourself, vacations, illness, accounting and business admin.?

Clearly, you have to build up to this (find a unique niche, build a reputation, etc. etc.) and that takes time … a lot of it.

For example, a top sales consultant in Australia recently said that he still spends at least two to three days a week in sales i.e. drumming up new business. Let’s assume that that time includes all of his admin., as well.

That means that he is spending a maximum of 2.5 days per week billing clients for face-to-face time less any unbooked time, travel time, research time, report-writing time, etc., etc.

You may be able to earn $1k+ per day, but I doubt that you can keep that up for 220 working days per year …

You do the math!

How to buy a business with No-Money Down

You’ve heard of ‘no money down’ deals for buying real-estate, but you probably have never done one yourself. But, did you know that it’s much easier – and, more profitable – to do ‘no money down’ deals in business?

[Originally published on Biznik, the small business online networkhttp://biznik.com/articles/how-to-buy-a-business-with-no-money-down]

You’ve seen the late night infomercials on cable: “buy my course for only $149 (plus S&H) and learn the secrets of how to buy 52 properties this year with NO MONEY DOWN”.

Naturally, you’re sceptical – and, so you should be because ‘no money down’ deals on real-estate are far more rare than the infomercials would lead you to believe [AJC: post-financial crisis, now almost impossible] … and, some of the ways that they are done are ‘on the edge’ of ethical business practices to say the least.

That’s why I have purchased a lot of real-estate over the years, but have NEVER done a ‘no money deal’.

But, did you know that it is possible to do ‘no money down’ deals on businesses? And, not only are these deals ethical, but they can be win/win for everybody involved?

And, they can be so easy to put together that my 13 year old son [AJC: this was a few years ago, now] put  one of them together for himself!

1. Let me start with my son’s example, as it is a good illustration of how simple the process can be:

My son started a small e-Bay business, but he didn’t have the capital to meet the minimum order requirement of $100 from his online wholesale supplier.

So, he asked me to put up half the capital for that first order for him: $50. In return, he offered me 45% share in the business, which I accepted.

He made that order and sold the stock within one month and promptly bought me back out!

[AJC: he handed $50 back to me and said he wanted his 45% back; I didn’t have the heart to say “son, it doesn’t quite work like that …”]

Not quite ‘no money down’ … but, close.

Now his e-Bay business nets him a cool $30 a week (not bad for a kid who only gets $26 a month in Allowance)

[AJC: Now I’m extra sorry I handed back my equity for $50, because his latest online/part-time business – he’s still at high school – makes him $150k a year]

2. I had the opportunity to take over a defunct family business: it was a finance company that needed both working capital and bank funding (a lot of it!) to run.

Unfortunately, at the time, I had neither the capital nor the access to bank funding … in fact, I was $30k in debt. But, I did have a customer list.

So, I used the same ‘no money down’ technique that my son used: I found an investor (who happened to be a competitor, often the best place to go for help) who put up the 25% capital that the business required to get started.

I then found a bank willing to finance the remaining 75% simply secured against the ‘paper assets’ of the business.

If you think about it, this is very similar to a ‘no money down’ deal on a property: find a partner willing to put up the deposit money in return for, say, a 50% share of the future profits, and a bank to lend you the balance as a mortgage over the property.

If the business is growing, my advice is to buy your partner out as soon as you can afford to … that’s what I did: we parted good friends. Make sure you always do the same.

3. Another way to do a ‘no money down’ deal for a business is where you have an asset that a larger company needs for their own business (preferably a non-profitable division of a larger company … believe me, there are plenty out there).

Most people are happy to sell this ‘asset’ to the larger company, or perhaps consult to them, for a fixed fee. Instead, consider ‘trading’ what you have for equity. Here’s how I did it:

I had some software that I used in my business that made our operation quite profitable; I found a Fortune 500 company that had a division operating in the same niche, but in another non-competing location, and discovered that they were still operating on older technology, hence, were unprofitable.

They offered to buy my software and consulting to help turn their own business unit around. However, we instead proposed a joint venture. For the ‘price’ of the software and our expertise, we received a majority share in that business unit. No money down!

It only took us two years to make the business profitable (using our software) and, we on-sold our share soon after for a huge return. We made about 7 times more profit by trading assets for equity than a simple software sale would have provided.

4. These are the types of ‘no money down’ deals that you should be looking for if you want to get into business or if you want to expand your existing business. But, there is an even simpler way:

If you want to buy an existing retail business with an existing lease … no matter what the asking price: ALWAYS start by offering No Money Down. Simply offer to take over their lease.

Many times that will be enough to do the deal … people need to sell their businesses for many reasons (marriage, divorce, moving) and are tied to their leases. By offering to take over their lease, you are removing a major headache for them … no money down!

Now that you have seen how easy it is – and, how lucrative it can be – to buy any type of business with No Money Down, maybe you will give it a try?

If you already have, please let me know your experiences …

How to manage your life with just $19 Billion …

After the recent Facebook float, how did Mark Zuckerberg fare, and – more to the point – how is he going to live?

According to the online business media:

The founder sold 30.2 million shares out of his entire holding, leaving him with a $US1.1 billion payout. It’s a huge amount of money, even after taxes, but it doesn’t come close to his final stake, somewhere in the region of $US19 billion.

So, the answer to the “how is he going to live?” question is: very well, thankyou!

Instead, let’s take a look at a hypothetical Internet business owner whose company IPO’d for mere millions in value, instead of Zuckerberg’s billions:

Let’s say that our hypothetical founder sold 30.2 million shares out of his entire holding, leaving him with a $US1.1 million payout. It’s a lot of money (let’s pretend that it’s after taxes), but it doesn’t come close to his remaining stake in his company, somewhere in the region of $US19 million.

How is our founder to live?

It would be tempting to say that he has $20 million, so a typical ‘safe withdrawal rate’ of 4% [AJC: which could be achieved through a combination of dividends and selling down small amounts of stock each year] would suggest that he has a massive $800k disposable income each year.

But, spending anywhere near $800k – even spending anything more than 25% of this amount p.a. – would be a huge mistake.

You see, the bulk of his money is in stock … and, risky stock at that: 5% of his net worth in cash and 95% in one relatively small, ‘hi tech’ company …

… and, we know what happens in tech: it can be boom/bust [AJC: remember MySpace, anyone?].

This is no different to an athlete trading off his contract, and spending money like it’s forever … except when it isn’t, which is why 78% of NFL players and 60% of NBA players are bankrupt within two years of leaving the game.

The second – less aggressive – temptation, then, would be to live off the dividends from the stock held …

…. let’s say that the company pays 2% dividends [AJC: which would not be unusual for a tech. company seeking to reinvest in itself, or acquire other companies, even though many – such as Apple – would pay zero dividends], which would deliver $400k per year.

But, again, what happens if the company stops paying dividends?

Instead, what our founder needs to do is realize that he is merely potentially very rich, but right now is a very valuable employee (and, controlling shareholder) of a company that is rewarding him with (a lot of) stock that may – or may not – one day convert to cash.

So, what our founder needs to do is count his blessings … I mean, assets:

1. He probably has a very healthy $400k+ annual salary, he should live off no more than 50% of this (indexed for inflation) and invest the rest.

2. He probably receives $400k in annual dividends; he should add 100% of these to his nest egg.

3. He has a starting nest egg of $1.1 million, which he should invest in ‘passive’ income-producing investments [AJC: real-estate is ideal for this]

As he starts to convert more stock to cash (i.e. through sale of small amounts of stock each year, as the law & his board may allow, and/or dividends) eventually, his nest-egg will grow to $4 million …

… which is his lifestyle break-even point i.e. the Rule of 20 says that your nest-egg should be 20 times your required annual living expense, which is currently $200k.

The good news is that anything converted to cash – hence, into passive investments – over $4,000,000 allows our founder to increase his annual living expense.

You’ll find that if you follow this system:

a) Sure, you’ll be living well below your ‘paper means’, but once you realize that your wealth is merely on paper, you’ll get over it, and

b) You’ll slowly-but-surely be transferring your ‘paper wealth’ into real wealth (i.e. passive investments), and

c) If you choose income-producing real-estate as your vehicle for holding your ‘real wealth’, you’ll pretty quickly find that you are able to support an even more quickly-increasing standard of living, no matter what happens to your tech company, and sooner than you may think.

This is how to bullet-proof your future …

… unless you’re Mark Zuckerberg, who can probably already survive on 4% p.a. of $1.1 billion 😉

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What’s a simple business to start?

Often, I’m asked about businesses to start.

Usually, the person asking has low-to-zero capital to invest; wants to start part-time; and, wants “a simple business to start”:

What is a business that I can start, so simple in nature, that virtually I (perhaps with the help of a friend) could start with less than $3000 and some hard work?

Well, there are lots of what I call ‘traditional’ businesses that you can start part-time, depending on your talents:

For example, if you are good at photography, you could do wedding photos at nights or on weekends. Same if you like baking (“cakes delivered to your door”).

But, these aren’t as easy to scale part-time, in my opinion,  as an online business …

… which is why I prefer online businesses, these days.

Even then, some online businesses are better than others:

For example, starting a blog (perhaps like this one), or selling information products (e.g. eBooks), or even starting an eBay business might be relatively easy, but they’re hard to scale into something that might one day take you full-time (so that you can quit your job and become your own boss) or even – eventually -become saleable.

So, let me share with you the little-known secret of the type of online business that I think is:

1. easiest to start, and

2. makes the most money, and

3. is still quite scaleable and saleable (the two magic words if you want to retire rich).

The secret is to create a 2-sided market place.

A two-sided market place is any kind of business that has buyers on one side and sellers on the other:

1. eBay is one example: it’s people and businesses selling to other people and businesses.

2. Amazon is NOT an example (it’s very hard to set up a warehouse and systems to become an online seller like Amazon) but the Amazon Marketplace is a example: it has buyers and sellers using Amazon’s payment platform to sell stuff to each other.

3. Etsy is another example: people make things (arts, crafts, jewellery, etc.) and list it on Etsy.com where people browse and buy things: Etsy doesn’t make anything, sell anything, or hold stock … it just makes a % of every sale for introducing both sides of the marketplace to each other.

4. The most famous recent example is Airbnb, started by 3 guys who simply came up with the idea of letting people share their couches for backpackers to stay (they weren’t even the first: couchsurfing.com got there first); it has since evolved into a real competitor to the Expedias and Pricelines of this world and is on track to become a $1bill.+ company.

That’s why, when people ask me what business to start, this type of business is usually where I then point them.

But, how to start?!

To start Airbnb (I suggest you don’t, this is just an example):

1. One of the startup’s founding team goes around their home city photographing and signing up a whole bunch of ‘bed and breakfast’-style accommodation (I know that Airbnb didn’t start with this; remember, this is just an example)

2. The other founder gets to kick back with a tiny budget to drive traffic to a ‘sign up to be notified when … ‘ landing page (LaunchRock is ideal for this).

[HINT: try $50 worth of Facebook ads and another $50 of Google Adwords and see if that drives any traffic. Spend $10 on each ad platform on 5 different keywords rather than $50 on one. Remember to target your ads specifically to your city (I know FB allows this; I’m not sure if Google does). Submit your landing page to sites like betali.st and startupli.st. Wait for a more significant story before you spam Techcrunch and Mashable]

3. Once you have 20 to 50 BnB’s signed up, and perhaps 200 – 600 names on the landing page, you put the two sides together and see if magic happens!

4. If so, you rinse and repeat in another city, and another (until you raise sufficient investment to allow you to hire ‘city managers’ to do the photographic/doorknocking for you).

5. If not, this marketplace idea sucks. Try another.

Now, stop asking and go do it … 🙂

LATEST NEWS

Catch my latest interview herehttp://www.creditcardassist.com/blog/7-million-7-years-best-of-the-best-blogger-series-22702/ – thanks Bill (founder of Credit Card Assist).

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