Tag Archives: Starting Out

How to fund your business expansion …

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Profit-And-LossTake Mike’s point about raising business capital, from this recent post:

Investment money [for your business] should come from cash flow and not bank loans

I happen to agree, mainly because business funding is hard to come by and can be very expensive …

… when, the BEST place to find the capital to run and grow your business is from the gap between:

a. Your Sales, and

b. Your Costs.

This is nominally called PROFIT, but that is dangerous because it implies that you can spend it.

Remember my friend’s friend who had a business making $3 million a year? Well:

1. He gave Uncle Sam one third, and

2. He saved one third, and

3. He spent one third.

Which sounded totally logical until I realized that his ‘cost of living’ was $1 million per year and the Rule of 20 says that he would need at least $20 million in passive investments to justify anywhere near that sort of spending level!

But, a business generating $3 million in earnings a year – as we now know – is usually worth 3 to 5 times it’s annual earnings AFTER TAX, which means his business is ‘only’ worth $6 million to $10 million … a huge amount, but nowhere near enough to justify blowing $1 million a year.

Then there’s still those savings, which (at 10% return) would generate the ‘missing’ $10 million to $14 million (i.e. to reach his $20 mill. Number) in, say, 8 to 10 years (of course, by then he needs $30 million because of inflation, which would delay things by another couple of years or so).

So, what to do with those profits?

1. Pay Uncle Sam one third, and

2. Save one third, and

3. Double the remaining third; multiply it by 3 to 5; then, divide the answer by 20 … and spend that [AJC: enjoy!], and

4. Add the remainder to 2.

Now, what to do with 4. (i.e. the savings generated by 3. plus 2.)?

Well, I would use it to:

a. expand the business, and

b. invest outside of the business

… probably in roughly equal measure – with any excess amounts (i.e. that the business doesn’t need in the foreseeable future) also moved into ‘passive investments’ outside of the business.

If you do this, Mike, you will:

i) Live reasonably safely and well, and

ii) Build your Perpetual Money Machine, and

ii) Probably won’t need the bank to fund your (international?) expansion

… at least, that’s how it all worked out for me 🙂

Not all is as it seems …

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This video has nothing to do with money per se other than (maybe) helping you realize that IF you want to be successful, you have to be able to see things that others can’t and learn to differentiate between the real and the unreal.

If you want to find the ‘secret’ in the above video, then you really need to watch this version, then watch the first one again:

Maybe, it’s all the people giving you common wisdom financial advice who have everything backwards?

What’s behind Door Number 2?

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Picture 1There’s nothing wrong with being debt free …

… which seems like I am flipping, when I should be flopping, about debt. Until you realize that I can just as equally claim that there’s nothing wrong with being in debt, either.

You see, it depends.

In fact, what I contend is that the majority of my readers NEED to be in debt … but, that’s not the same as advocating debt for debt’s sake.

Confused?

Let me explain by introducing you to a new reader, Lee, who asks:

I’ve been reading about this 20% rule and it does make sense, but after what happened with real estate over the past 18 months do you still think this is a good approach? Right now, I have about 55% equity in my home. To get my home to only be 20% of my networth I would need to refinance it to 80% LTV. I have a pretty low rate (4.625%) and only have 9 years 8 months left on my mortgage. Would you still recommend someone in my situation refinancing?

After a lot of confusing to’ing and fro’ing [AJC: you can go pack to that post and read all of the comments … in fact. I would encourage it, because this is one of my Top 3 most widely read posts], I asked Lee what I think are the critical questions:

1. Do you have a Date in mind, when you REALLY want (nay, NEED) to stop working so that you finally have time to live your Life’s Purpose?

2. Do you have a Number in mind, that represents how much you need in your nest egg (be that the bank, ‘passive’ investments, your house – although, you may need to think how you plan to access those funds to live from – etc.)?

If not, I suggest that’s your first task: think about your Number and Date. Already (or just) got them?! Good … now;

3. Will your current financial plans and strategies get you to your Number by your Date?

To which Lee responded:

As far as retiring by no later than 55, yes my current path will easily provide for that. If I choose to the pursue the passion I mentioned earlier, then that would impact the amount of money I would need in the short term, but would not affect my long term retirement goals.

If your current financial strategy is working for you – i.e. in that you are happy with your current work and financial arrangement, and believe that you can achieve your Number by your Date – why would you even think about changing anything, Lee?!

So, let me go back and clear up the confusion about debt for my other readers:

– If you can achieve your Number by your Date WITHOUT the use of debt then PLEASE do so,

– Otherwise, what choice do you have but the wise application of debt?

… I just happen to believe that for the vast majority of my readers, Door # 2 (‘wise application of debt’) is the one that holds their prize 🙂

I’ve been out shopping!

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high riseYes, I have been out shopping …

… last week I bought not one, but two, commercial properties:

– One is a warehouse/showroom that needs extensive renovation, and

– The other is a quadraplex (four apartments on one title/deed).

The first one (the warehouse) is one of those properties that you drive past for years and years and think to yourself: “Wouldn’t it be great to own that property … one day?”

Well, I happened to drive past ‘one day’ and a For Sale sign was out front!

Naturally, I immediately called the real estate agent listed and commenced negotiations … this is one of the advantages of having money 😉

He sent me a brochure showing the property listed at $1.2 million … the negotiations dragged on for a while so I asked a friend of mine who specializes in commercial real estate to step in and he promptly closed the deal for me …

… at $1.287 million!

Great negotiator, huh?

As it happens, I was not too upset about the price, because something strange happened between the time of first looking at the property and the time of signing the contract (which I did last week):

The property is basically an under-loved property on one of the main boulevards leading into the downtown area … not a hip area by a long-shot but a good area nonetheless (close to a railway station, shops, cafes, and with fantastic main street exposure) … all-in-all, exactly what I was looking for.

My plan WAS to simply rehab it: render the horrible yellow/orange bricks (i.e. cover then with concrete mixture to make a smooth ‘concrete look’ that can be painted)  and put in large, modern aluminum windows, a new roof, and fit out a new interior (probably $500k all up) then rent it out, to give myself a nice, steady 7% return with even nicer depreciation benefits (over all of the renovations) for the first 5 years.

But, my architect found something interesting: you see this property sits right next to an office tower with 8 floors, which was built over 20 years ago – this building is the ONLY building higher than 2 or 3 floors for miles in either direction …

… until now. My architect found out that the council is suddenly willing to rezone three or four properties around that tall building to allow building to the same height as that relatively tall building next door … my building included!

So now, I am sitting on one the the very few properties that may allow us to build 50 or so condo’s plus some office space, all in an up and coming neighborhood that will have scarcity of such condo’s because that’s all the council will allow!

Needless to say that I am going to get plans drawn up and council permits, then I will decide whether to:

a. sell the property to a developer with plans and permits, which I am sure will net me $1 million+ profit in a mere year or so, or

b. do the development myself.

Next week, I will run you through the numbers …

Not a fan?

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GREEDY-BANKIt’s fairly safe to say that Mike is NOT a fan:

I happened to stumble on this site doing some research on debt free. No wonder I’ve never heard of this site or even the radio show apparently associated with it. Anyone who thinks that living debt free is the wrong thing to do needs to have their head examined. That’s like saying Ohh we shouldnt live debt free we’re on the planet to make banks rich on our hard earned money. Nice mentality you got there. It just doesn’t hold any water. The question you should be asking yourself is would you rather live be constantly paying out your hard earned cash to banks making money off you not paying for your own assets or should you own your assets outright and control a greater portion of your hard earned cash? The choice IS obvious.

But, what of Mike’s aversion to paying the banks interest?

I look at banks a little differently to those like Mike who are averse to paying their interest, fees and charges …

… sure, I don’t like how they can mount up. And, I don’t like how the banks can make ‘super profits’ in good times and seem to get away with it. And, I don’t like those snooty tellers who look over their glasses at you, when you want to make a withdrawal, like they’re doing you some sort of favor by letting you have your money 😉

But, I can put that aside, when I realize that here is a partner who is willing to put up some – or even most (if it’s a real-estate transaction) of the capital to fund my latest entrepreneurial or investment endeavor, yet they want virtually no say in how I manage that business / investment once they have put their money in … and, I even get virtually 100% control over all of the daily management decisions and even, pretty much make the ‘sell’ decision on my own.

And, all they want is a few % per year return on the money that they put in … no share of the speculative upside!

Where else can you find a partner like that?

So, Mike, I ask you: what’s your objective?

– To get rich(er) quick(er)?

– Or is it to avoid putting any of your money into somebody else’s pocket?

I don’t mind which path you choose, as long as it gets you to your financial objective i.e. Your Number by Your Date …

… if not, you will do well in life – not just your financial life – to stop obsessing about what the other guy might be getting out of the deal, and start obsessing about what you might be getting out of that same deal 🙂

I wonder what our readers think? Tell us about your good/bad experiences with bank funding …

The Instant IPO

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Money AngelRecently, I pointed all of the difficulties of the Entrepreneur’s Holy Grail – the IPO [cue angels] …

… for all these reasons – and more – I didn’t IPO my businesses … but, I found something almost as good:

7million7years Patented Instant IPO

It works like this:

Step 1

Make sure that your company is profitable and has a reasonable track record of growing profits. This should value your company at 3 to 5 times earnings (i.e. annual net profit after tax)

Step 2

Find a Public Company in a related industry that is trading at least 12+ times its earnings after tax – the more the better, for you!

Step 3

Sell your company to that company and negotiate a mutually agreeable split of the difference between your ‘private value’ and their ‘public value’!

Basically, what you are doing is using the public company’s stock to “IPO” your own company:

You see, when you are on the outside, your company is worth only 3 to 5 times its profit to a buyer, but as soon as the other company buys you and ‘absorbs’ your profit into their profit stream, that profit is suddenly (well, after a relatively short ‘disruption’ period where the market has to get used to the sudden change in profitability of the public company) ‘worth’ 12+ times itself.

[Hint: The smaller you are relative to the size of the acquiring company the smaller the disruption … on the other hand, the smaller you are, the less attractive your cashflow may be to them, so it helps if you also have some ‘secret sauce’ – i.e. Intellectual Property – to make you look that much more attractive to the ‘big end of town’]

The company that has acquired you has just made a huge windfall by using the difference between how private companies are valued and how they – the public company – are valued to their advantage … in fact, there are plenty of public companies that do this as a matter of course. Sometimes, it even need only be only an ideal coincidence that your company actually adds any other business synergy to theirs!

But, when you sell to them, you will find – if you are a smart negotiator – that they have gone to all the expense and trouble of the IPO process for you 🙂

Let’s look at an example: say that your company produces $1,000,000 net profit each year, and you have found a likely candidate public company. You have evaluated the market and believe that your business would sell for $4 million in the private sale market.

But, you realize that your widgets complement those of Acme Widgets Inc. very nicely. Acme’s stock is currently trading at a P/E of 12.

You approach the CEO of Acme Widgets Inc. [AJC: actually, if you’re VERY smart, you’ll engineer it so that he approaches YOU 😉 ], but play reasonably ‘hard to get’.

The CEO realizes that:

a) Your widgets do indeed fill a hole in his product range that will cost his capital (and, short term profits) to fill in house, and

b) Your $1 mill. profit adds $12 Mill. to his company’s value (i.e. his stock price will eventually go up by about $12 mill. when the value of all the stock out there is totaled), and

c) He happens to hold a nice bundle of stock and options set to vest in 18 months or so.

So, what is worth $4 million to you, is worth $12 million to him … how much would you sell for?

The Myth of Multiple Income Streams …

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thread

For a while now the web has been a’twitter with ebooks spouting the idea of Multiple Income Streams …

… literally, here is an example from Twitter:

Multiple Income Streams is the ONLY way to Achieve Extreme Wealth …

I’m not so sure that was true for me – hence it can’t be ONLY 😉

But, is it true even if we substitute ‘usually’ for ‘only’?

Again, I don’t think so … in fact, I feel that most people achieve a very high level of INCOME from just one of their ‘multiple streams of income’ (that is, even if they have more than one) … for me, it was very much an 80/20 thing:

– One of my businesses produced $1 million a year EBITDA (earnings before bullsh*t),

– The other produced $200k a year (still does).

Now, for those who are astute, you will see that I twisted the original statement from ‘wealth’ to ‘income’ … and, as we all know by now:

Income [does not equal] Wealth

So, this is what I think: you don’t necessarily need multiple streams of income, but you DO need a place to store the income earned – and, it’s the wealth that “passively” builds up there that creates the true wealth (at least, it did for me i.e. my businesses fueled my property investments, and THAT’S what took me to my first $7 million) – and that more equates to my Perpetual Money Machine concept than it does to the usually espoused Multiple Income Streams Fallacy … they may seem the same, but they are very different:

Build your Perpetual Money Machine and prosper! 🙂

I think we’re screwed …

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housing_crashIf you needed any evidence that the ‘global financial crisis’ – on a global macro level – and problems with the US real-estate market – on a global micro level – are still affecting people in the their day to day lives, you need read no further than Rischa in Seattle’s comment [AJC: I’ve added punctuation for your reading pleasure]:

From what I’ve read I think we’re screwed, but I’m not even sure what we can do. Here is the scenario: my husband and I bought this house about 10 years ago in the boom here; with both of us working we could afford the mortgage and our lifestyle easily. I’ve [since] been laid off and we’ve been living on my savings, which is now gone and I’m on unemployment, which is fast running out.

We’re about $100K upside down, we got a trad. loan 30 yr fixed, but without 2 incomes we’re sinking fast. We don’t necessarily want to stay in this house, in fact we want to move to a part of the country where the cost of living is less.

Any clues? What should we do? How do we get out of this when getting out would cost more than we have, even if we spent our retirement to get out? We would have less than nothing left!

Of course, it’s difficult to give Rischa personal advice – and, I wouldn’t do it – but, I could suggest that she go back to that post and reread the bit where I said:

Ask yourself the following TWO questions:

i) Can I afford the payments? If so,

ii) If I were to invest in a house right now, given my current net worth, is this the house that I would invest in ?

If the answer to both questions is YES, then stay. If the answer to either question is NO, then sell/move … be it into a rental or to purchase another (provided that the changeover costs/hassles are worth it).

In Rischa’s case, the answer to the first question appears to be NO … and, she would prefer to be moving to a cheaper part of the country (and, cheaper house?), anyway …

So, it’s obvious that she can’t afford her existing house, but what would you do? Hang on to a losing proposition? Or, cut your losses?

The Myth of the Million Dollar Retirement Goal …

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1MillionDollarBill01A couple of weeks ago, I posed the question: Will a million dollars be enough when I retire?

There was much discussion that makes it clear that you must also ask: WHEN do you want to retire?

You see, 4% inflation (say) eats away at your money, such that if you were to retire in 20 years  – which is when you hope to get your $1 Million bill – it’s only ‘worth’ $500,000.

And, inflation continues even after you retire, which then means that you probably need to earn at least 9% on your Million Dollar Bill (4% to ‘cover inflation’ and 5% to spend) … this still leaves you only the equivalent of $25k today to live from (assuming that you want your $25k ‘retirement salary’ to at least keep up with inflation for as long as you need an income).

Assuming that this makes sense, let’s see how practical this Million Dollar Retirement Goal really is:

There are two schools of thought:

– There are those who believe that you should aim to approximate your pre-retirement salary in retirement, and

– There are those who don’t.

Now, I am in the second group – as are most people who have tried the same exercises that our 7 Millionaires … In Training! tried.

For example, my salary throughout almost all (bar the last 3 years) of my working life was less than $50k – $100k (incl. fringe benefits) and my wife had to keep working, BUT that was a purposeful strategy designed to get me to a retirement in just 5 years (instead of the notional 20 years) i.e. at 49 y.o. on the equivalent of $250k+ a year income for life (indexed for inflation) post-retirement.

But, this post is aimed at those new readers who are still in the first group … they, too, fall into two (sub)groups:

– Those who believe that they need at least 100% to 125% of their final salary in retirement (because, they say, you spend more in retirement due to travel, leisure activities, and escalating health care costs as you age, etc.) , and

– Those who believe that they need only 75% to 99% of their final salary in retirement (because, as these other ‘experts’ say, you need less in retirement as your children are grown up and educated, weddings are already paid for, house is paid off or downsized, etc.).

… at least, that’s how the personal finance columnists seem to be split.

So, in our example from the last post, we work backwards:

Somebody who aims to retire with $1 Million in 20 years time is really saying that they want to live off an annual income of roughly $50k in retirement (that WE now know is only ‘worth’ $25k a year), which means that their final salary will probably also be $50k (+/- 25% depending on which financial ‘guru’ they happen to follow).

Now, if you follow $50k in 20 years time all the way back to today, that person is probably earning $25k today (i.e. assuming that they earn CPI salary increases for the next 20 years) …

… so, now we can work forwards again:

If you have a starting salary (i.e. today) of $25k and aim to retire with $1 million in the bank in 20 years, you will need to set aside about 45% of your gross salary AND earn 9% on your money (after fees and taxes) AND have a house that you can free up at least $250k from when you do retire (e.g. by downsizing or moving into a very cheap rental).

Of course, if you can save 45% of your salary for 20 years, then you must be in the Salary-LESS-45%-In-Retirement camp, which is another story altogether 😉

So, it seems to me that getting to $1 mill. in 20 years for somebody on a salary of $25k is all bar impossible … and, even if you do scrimp, save, and ‘frugal’ your way there, you have only made it to the ‘lofty heights’ of living off about twice the poverty line, for a two-member household:

2008 HHS 100% Poverty Guidelines

Members of household————- 48 Contiguous States———–Alaska————–Hawaii

1———————————$10,400 ———————–$13,000————– $11,960
2———————————-$14,000 ———————–$17,500—————–$16,100
3———————————$17,600 ———————-$22,000——————$20,240
4——————————-$21,200————————–$26,500——————-$24,380

For each additional person, add—–3,600———————4,500————————-4,140

SOURCE: Federal Register, Vol. 73, No. 15, January 23, 2008, pp. 3971–3972

So, I think the Million Dollar Retirement Goal really is a myth – or, at least a very low bar to aim for – how about you?