Category Archives: Business

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”.

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!

Now, that’s hard to bottle!

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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 😉

When is a partner not a partner?

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taxi policeLast week I called out that I had an over-supply of business ideas, simply because I don’t need them [AJC: I am meant to be retired, you know?!] …

… much like taxis and police who are never there when you need them, but seem to pop up everywhere when you don’t 😛

Brandon proposed a possible solution:

I think I remember you saying you don’t like partnerships but you could buy it with your friend and have him run it day-to-day. If he can still assure you of those numbers when he has skin in the game then it’s a smart in my opinion.

Sure, it’s a potential Making Money 301 solution for somebody who is not quite ready to fully let go of their business – or wants to dabble as a ‘hobby’ (as in my case) – without needing to be fully hands-on i.e. become a ‘silent partner’.

I have a friend who started off as a competitor (I have a whole string of competitors-turned-friends, but that’s a whole other story) and ‘retired’ when I did, but unless his Number was miniscule (in terms of the annual lifestyle income that he can draw off it), he can’t really retire whereas I can (he made $3 mill; put $1.8 mill. into a house; bought a couple of cars and so on, which leaves him about $800k to ‘live’ off … not possible for someody who lives in a $1.8 mill. house!) he needs to work again.

So, he’s looking to buy a business and have me invest 50% ‘silently’ … except that I’m not investing in any businesses as a MM301 ‘passive investment activity’ as I don’t believe that there’s any such thing as a ‘passive business’ – and, very few truly ‘passive investments’.

Now, that brings me back to my ‘retirement businesses’:

They aren’t part of my MM301 portfolio … they are the ‘travelling … mentally’  part of my Life’s Purpose; in other words, I wouldn’t like to LOSE money on them, and I’d really be happy if I actually MADE money on them, but their real purpose is to exercise my mind: an expensive form of Sudoku 🙂

So, my strategy is to do a LOT of them and invest only a LITTLE (financially, emotionally, and physically) in each …

… which brings me back to Brandon’s idea to invest with my friend who is already the CFO of the business that I mentioned in that post:

– One of the reasons why I am considering the business is that it has an excellent management team (once the owner/founder is removed) whom I feel would perform well with minimal supervision, but a lot of strategic direction,

– I don’t want to have partners – even my friend – for a lot of reasons, the most pragmatic being the power afforded to minority shareholders (i.e they may only own a small % of the shares, but that can be enough to make them a real pain in the butt if things go awry),

– Yet, I want to incent them to profitably grow the business.

So, the solution may be Simulated Equity [AJC: a term that I just made up 🙂 ] … here’s how it works:

There are two financial benefits of stock ownership for employees:

1. A distribution of profits, and

2. A growing asset, redeemable upon sale of the enterprise or their stock, whichever comes first.

The first one is easy: having, say, 5% of the stock in the company affords you 5% of the DISTRIBUTED profits; that means the Board of Directors (and, as a minority shareholder, you may or may not get a vote here) decides what % of profits made that year should be distributed to the shareholders and what % should be kept to help grow the business.

The problem with the second is that the employee may receive the stock, but can then sell it whenever they wish (after any exercise and / or vesting periods) … where’s their incentive to stay and grow the business once they’ve sold their stock?!

My solution – ‘simulated equity’ – is simple:

I will offer each key employee (e.g. my friend):

a) A profit share – this means that the employee might get 5% of all of the profits earned EVEN if the Board of Directors decides not to distribute all profits that year (in other words, the employee gets their FULL 5% share), and

b) A bonus on sale – I might offer a, say, bonus equal to their profit-share percentage of any sale price of the business. This way the employee gets an incentive to stay on and help with the eventual EXIT PLAN for the business … good for me, great for him!

In other words, the employee gets the financial benefits of ‘partnership’ … in return, I get a committed employee who benefits in proportion to my benefits … and, I don’t lose any control!

What do you think?

When you need a taxi …

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It’s interesting, one of the major obstacles apparently standing between many people that I talk to and a few million dollars is the want of a ‘killer business idea’ … or, even ANY reasonable business idea.

But, that problem magically disappears when you wake up one day to find a spare few million in your bank account … people-with-ideas seem to just spring out of the woodwork.

You know how you can never seem to find a cab when you need one? 😉

Well, it’s been nearly a year since I’ve found myself with both a lot of spare change and nothing of substance to occupy me during the daylight hours …

… a little less than one year and I have:

– Three blogs,

– Three Web 2.0 internet businesses under various stages of development

– A Fourth one under negotiation to buy into

– And, just yesterday a new business opportunity was presented to me.

This last one is interesting because it is a ‘bricks and mortar’ business (with an internet sales site as an adjunct):

It’s interesting because a friend of mine is the finance director and has spent the last two years of our time together complaining about the excesses of his boss, the entrepreneur/owner/founder …

… without giving away too much, the guy developed a business around an innovative niche product with a strong brand name that was even featured on Oprah (as one of her ‘favorite products’), resulting in a business generating $2 million to $3 million profit per year in the USA and overseas.

Yet, through excess (taking all the profits out of the business), divorce, and mismanagement this company is now barely breaking even in the face of declining sales. From what I can see, even though the product is no longer unique, the reason for the sales drop is the management of the company rather than product or market issues.

So, I have an indication that the owner of the business will sell for:

– $400k up front cash, plus

– $350k to pay off a personal loan, plus

– $150k to $200k per year for the next four year (sort of a ‘deferred payment’).

By my reckoning, this is $1.55 million …

Now, here is where it gets interesting:

– The business has an excess of money owed to it (accounts receivable) LESS amount owed by it (accounts payable) of about $200k, and

– Inventory worth $800k+

Provided that the receivables can be collected (my friend, the CFO assures me that it can) and that the inventory can be sold close to book value (he assures me it can), I am essentially buying the ‘goodwill’ of the brand-name + suppliers in place + distribution network in place + staff in place for a globally recognized niche brand for a little over $500,000.00

So, there’s two ways to look at this:

– A brand in decline, so the owner is selling out while he can still salvage some value, or

– A ‘vulture’ opportunity to buy a no-worse-than-break-even business + established international brand (endorsed by Oprah, no less!) for only $500k.

What to do? What to do? Hmmmmm ….

I’d love to hear your ideas!

What's the big idea?

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picture-13Sometimes the messages in my posts can be a little obtuse; and why not? Whoever said that making $7 million in 7 years was going to be straightforward?!

For instance, my recent post about partnerships seemed to be about deciding whether one partner can double the value of your business … if two can triple the value … three quadruple … and so on … because that is the true ‘cost’ of partners.

But, if you go back and read that post carefully you will see that the equation varies remarkably according to who holds The Big Idea: you or your prospective partner?

So, the real point is this; if you want to make your Number – and, if it is one that requires a compound growth rate of 50+% – listen up to what Money Blog has to say:

I appreciate the insight but most people will never have a workable $10M business in 10 years.

Ouch! 🙂

Seriously, Money Blog is right: you are simply wasting your time trying to reach an [insert Very Large Number] by [insert Very Soon Date] by way of a business …

… at least, if you are without the key ingredient: The Big Idea!

You see, you need to be paid off – big time – but people only pay for value.

So, you have to find a way to deliver that value in a way that others – and, believe me, there are plenty of ‘big guys’ out there just waiting to rain on your parade – can’t themselves deliver; because they [the Big Guys] can throw:

1. Money trying to buy a market

2. Resources to try and bludgeon their chosen market into submission

3. And, they have time to wait the market out

But, the one thing that they can’t offer is creativity, because creativity doesn’t come out of a committee or a corporate training manual.

So, the only way for you to take a business to the levels required to generate that kind of ‘new money’ wealth is by applying big spoonfuls of creativity … hence, The Big Idea.

It can be an idea that:

1. Opens up a totally new market – the highest risk / highest return option: for every YouTube there are thousands of wannabes that come and go. Also, opening up new markets is something that usually does require time/money/resources because your market may be slow to catch on to your revolutionary way of doing whatever it is that you want to do.

One of my businesses created a new market for a service that was previously handled either in house by the large corporates or outsourced to other equally large corporates AJC: none of whom appreciated an ‘upstart’ like me trying to elbow his way into their turf]; being the first on the market with my new way of doing things, I had to spend a long time educating my potential clients before they would ‘hop on board’ … of course, once they did, I had little real competition – at least for a couple of years. But, it’s a looooonnnnggggg road …

2. Improves a product or process in an existing market – to me, the lowest risk / highest return option: You simply take something that works and apply a little ‘magic sauce’ to make it better/faster/cheaper. The Japanese are famous (at least in modern folklore) for taking existing ideas and improving them; and, entrepreneurs have a rich field of existing ideas that they can take and improve upon.

My business really plodded along until I finally realized that I could automate a large part of my call center-based processes; this was late 1999 and I discovered the Internet! For a relatively low cost, I hired a couple of programmers (c’mon $200k a year is cheap compared to how much it would cost a large Corporation to change the way that they do anything!) and created the ‘new process’ that eventually saw my profitability sky-rocket, and my client-base along with it.

3. Provides a way to expand quickly into new markets or territories – not a bad way to go, either, but can require the most capital: simply take an existing idea and find a way to expand geographically (I am not talking about expanding into new product lines … that’s something that the ‘big guys’ specialize in). An example might be the hairdresser who decides to franchise their unique way of doing business. But, it costs a ton of money to make your business ‘franchise ready’ then for marketing to find potential franchisees.

I used my IT-based ‘competitive advantage’ to take my business from Australia, first New Zealand (a smaller market, to test that I could ‘roll out’ the concept elsewhere) and then to the USA; I used a Joint Venture model – I guess it’s like a partnership, [AJC: I broke my own rule here 😉 ] to give me relatively easy access to these new territories … it was a situation where the value of the partner was way more than 50%: their existing infrastructure and client base to ‘incubate’ my new business provided the far lowest cost (and, quickest) way for me to expand into global markets. My plan was to continue growing internationally through the JV model had my business not been bought out …

… and, this is where the Deep Pocketed Big Corporate steps in: to buy your creativity … but, only once your hard work has proved its worth.

So, I applied The Big Idea in many different ways to help grow my businesses shoot me way past My Number.

Oh, and Money Blog, you still may be right; even with The Big Idea very few startups reach the $10 million 10 year sales price mark … but, a GREAT business generates plenty of cash along the way … cash that you should INVEST instead of spend …

… that’s how I made $7 million in 7 years!

Oh, and selling my businesses scooted me way past my Number … whoo hoo! I love it when that happens 🙂

4 more questions to ask when buying a business …

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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? 🙂

What's 17 years between friends?

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17Warning: This image has absolutely NOTHING to do with the post other than:

(a) it came up when I searched for “17” on Google Images (I don’t even know why?!),

(b) it’s very funny/cool, and

(c) I have absolutely NO IDEA how a boat lands on a car

… or, what a seemingly naked guy in a yellow raincoat is even doing there!?

____________________

In a recent post, we gave Chad a ‘starter kit’ to becoming a millionaire; and as Money Monk said:

There’s always a slow way and a fast way.

For me, the fast way has always held more appeal …

… but, that doesn’t mean that you can’t combine the two, as Jeff points out:

By taking into account annual contributions, your compound annual growth rate can significantly drop. For instance, if Chad starts with $10,000, his compound annual growth rate is 65.52%. If Chad could also save and invest $10,000 of his salary a year, his compound annual growth rate drops to 52.52%.

If Chad’s Date is firm, annual contributions might not change his analysis much, but if he extended his term or could increase his annual contributions, (or both)…the difference can substantial. For example, if Chad extended his date out another 17 years (and adjusted his number for inflation), his compound annual growth rate drops to 19.81%. If Chad also decided to increase his initial annual contribution to $15,000 and then continue to increase the annual contributions by 5% a year, his compound annual growth rate drops further to 16.69%.

Getting 16.69% annualized return is no cake walk, but a lot easier to get than 65.52%.

What’s an extra 17 years and a drop in living expenses by $15k a year between friends?! ;)

Seriously, Jeff’s point is absolutely valid and is the real secret:

Rather than gambling on the business or [insert speculation of choice: growth stocks and options; gold; oil; etc.; etc.] to pay off big time (i.e. deliver your Number in one neat check), you build a business for sale … in the meantime, you keep following Making Money 101 and save/invest in solid assets (e.g. income-producing real-estate and/or ‘value’ stocks) …

… it’s the combination of Making Money 101 and making Money 201 that delivers the extraordinary result that Chad is after.