Be an Ethical Entrepreneur, Marketer, and Business Builder

The quickest way to $1,000,000 – Stock Market? Real Estate? Business?

August 22, 2009 By 3 Comments

Unless you’re a doctor, lawyer, or work on wall street most people will never be able to become millionaires without one or more of the above methods for generating wealth. As a matter of fact, less than 12% of millionaires get that way by virtue of their “jobs” according to The Millionaire Next Door. So what’s the easiest/best path to becoming a millionaire? Keep in mind, that we’re not talking about a get-rich-quick scheme, but instead the old fashioned way to make $1,000,000 as I blogged about before.

The most important concept to understand is leverage. The goal is always to do more with less. Whether that’s make more money with less invested or more money with less time, the more you can leverage your current assets the more quickly you’ll be able to acheive millionaire status. Now which option – stocks, real estate, or small business provide the greatest leverage?

In reverse order:

  1. Stock market – Once you acheive $1,000,000 in your bank account you can put that into a CD at your local bank for 5% and live comfortably off of your $50,000 per year in interest. Also, once you acheive a net worth of over a million with income of over $250,000 your stock broker can get you access to buying public shares at wholesale prices. In other words, the more money you have to invest the cheaper your per share investment will be. The problem with stocks is that you have to have money to leverage the stock market. Unless of course you can convince a bunch of other people to invest with you in which case you can leverage their money. However if you did that you would no longer be an investor you’d be in business. ;-) Typically a stock market investment prior to becoming a millionaire might look something like this. You invest $5,000 after doing your thorough research on EBB LLC and after a year manage a 20% return. That’s a VERY ideal situation but if you did that you’d cash out in a year with $6,000 or $1,000 profit. Not bad but not a whole lot of leverage there. If instead you invested $20,000 and you’re the next Warren Buffet who can sustain a 20% annual return for 21.5 years you’d be a millionaire. That’s before taxes of course.
  2. Real Estate – If you’ve been around real estate at all you’ve heard the often touted “statistic” that “real estate makes more people millionaires than anything else.” I say “statistic” because I’ve never seen hard evidence to back this up and even if someone produced it, I believe they’d be showing that people are paper millionaires. In other words, on paper their real estate is worth $1,000,000 if they sold it for a $1,000,000 but they don’t exactly have a million smackers in the bank. Real estate is beneficial however in that it gives you much greater leveraging power than the stock market. For instance if you buy a $100,000 property with $5,000 down (which would be tough these days) you would then have around a $600/month mortgage. If you then rent the property to someone else for $1000/month you now have a positive monthly cashflow of $400. Now here’s where the leverage comes in, if the property appreciates 5% in one year and then you sell it (by yourself of course since a realtor would take your profits), you would cash out with $14,800. Let’s say after insurance, maintenance, taxes and other expenses you actually walk away with $10,000. You invested $5k to begin with so you made $5,000 or a 100% return on your investment. Obviously this is an ideal situation however I’ve personally done nearly 100% in less than 22 months so it is definitely possible. If you were able to maintain a 50% return on your real estate investments every year by acquiring positive cashflow rental properties (with the first one worth $200,000) that appreciate at 5% annually you’d be a millionaire in a little less than 10 years. As a matter of fact, in Robert G. Allen’s book Nothing Down for the 2000s, he proposes just such a strategy to help you become a millionaire within 10 years. It’s actually a very good book that I personally credit for inspiring me to buy my first rental property at 21 while enrolled in engineering school. Obviously real estate offers quite a bit more leverage…
  3. Small Business – Here’s the bottom line, with around $5,000 out of pocket I’ve structured a business purchase that has yielded me in perks and compensation more than a 14 fold return on my investment within 12 months. That’s right, a 1400% increase on my initial investment in less than 12 months. Keep in mind, that’s on my very first business purchase and that’s without even selling the business yet. Since I’ve nearly doubled the profits in the business in my first 12 months, I would tend to think that my ROI will actually be well in excess of a 20 fold increase on my money. To make the math a little simpler, a 20 fold increase would be like investing $5,000 and getting back $100,000.

Now to make the comparison more accurate we need to take into account 2 more crucial pieces:

  1. Time
  2. Taxes

The only time I ever made money in the stock market required me to invest a lot of time in research before investing. Once I make those investments I should just be able to stick with them for years and so very little “maintenance” is needed. However that’s the get-rich-slowly method since we have little to no leverage of our money. So if your time is very limited this may be what’s best for you. However with capital gains around 35% your actual profits will be much smaller since when you cash in your stocks you’ll be taxed around 35% on the profits. There are creative ways to reduce that number but in the interest of simplicity we’ll leave it as-is.

When I had my rental property while studying engineering I was able to sufficiently manage my house, classes (while averaging over 21 credits per term), and racing so, though the time investment was constant and sometimes unexpected (like the time when the toilet exploded when I was a state away), it shouldn’t take over your life. Once you get 10-15 properties that’s a different story. As for taxes, real estate actually can be a great tax shelter however if you’re making money and your properties are appreciating you’re probably looking at close to 30% in taxes. I say that because capital gains on your profit will still be 35% however you have more deductions and, if you run it like a business, you can give yourself perks like business travel, laptops, mileage reimbursement, etc.

My business nearly consumes all of my time. Ironically, at the same time, I have more freedom now than I’ve ever had before as either a student or under the employ of someone else. In other words, I may have to trade a Saturday this weekend for skipping out next Friday for a long weekend but I don’t have to ask permission to do so. Overall my business is a full-time job that could still afford me the time for stock market investing and real estate speculation, but could not afford me (at this point) time for a normal full-time job. With 1-3 rental homes it’s very possible to have a normal full time job. The tax benefits of a business are so many and varied that I pay less than 20% of total income in income taxes.

If we take all of those into account here’s how our returns actually look:

  1. Stock Market – (after taxes and assuming a normal full-time job) $650 or 13%
  2. Real Estate – (after taxes and assuming a normal full-time job) $3,500 or 70%
  3. Small Business – (after taxes and deducting the salary I’ve been offered as an engineer) – $18,000 or 420%

So even after taking into account both my time investment (which wouldn’t be nearly as flexible working for someone else as an engineer) and tax consequences, investing in a Small Business as your first step to generating wealth is the best one because it offers by far the greatest leverage. Don’t forget that my ROI for Small Business still assumes that I make absolutely no additional profit when I sell the business. Obviously I don’t plan on that happening. ;-)

To your wealth generating success, Bryan

P.S. My original out of pocket expenses for my business purchase were all lawyers fees that were reimbursed by my new business shortly after buying it which meant my inital cash investment was tied up for maybe 90 days versus the entire year for both stocks and real estate.

Filed Under: Business Accounting, Business Buying/Selling Tagged With: , , , , , ,

Shopping yourself – The best way to improve your business' conversion rate?

August 11, 2009 By Leave a Comment

By shopping yourself, I simply mean determine exactly what your customers experience, record it, and review it to determine areas for improvement.

Paco Underhill actually wrote a great book titled, Why We Buy: The Science of Shopping, that talks about much of what he has learned through his Mystery Shopper business. His book and experiences are all geared toward improving retail closing ratios or conversion rates. In other words, he wants to figure out how to get the highest percentage of people to buy the most often. He doesn’t help with marketing or lead-generating in the sense that he helps get people into the stores, his business simply specializes in converting those people who have made a trek to your store into customers (or repeat customers).

Why do you NEED to invest so much time and money into your conversion rate? Because leads are expensive! In my business, leads cost around $78. In other words, to get someone to call me and be interested enough in our products to provide their name and contact information costs me $78 per call ($159 per call for Yellow Page contacts).  To convert those to sales costs me around $268. So right now I’m converting 1 out of every 3.5 prospects who call me into customers. As you’ll learn, these numbers are never perfect and this doesn’t include people who call me for service of existing equipment or to purchase ancillary products. This is simply the people who don’t have anything I offer right now and want it.

Now what do I stand to gain from increasing our conversion rate? Potentially thousands of dollars in revenue and profit. Since some of my new customers are rentals (or equipment leases) and some are sales it’s hard to get an exact “average dollar sale” of my new customers however here’s how it breaks down for new customers in 2009:

  1. Average new sale – $3798
  2. Average new monthly rental/lease – $52.78

Roughly 24% of new customers are rental/leases but let’s ignore that for a minute to keep the math simple. If I can increase my conversion rate for sales by 10% so that 1 customer buys for every 3.15 people who call (instead of every 3.5) that would have added about $32,283 to my business this year. In addition, though my cost per lead would remain the same at $78, my cost per sale would drop to $249 ($241 if I assume a 10% increase for both sales and rental/leases). To say that an even simpler way, increaseing my conversion rate by 10% results in a direct increase in gross profit of 10% on all of my sales. Not bad. And don’t forget we just increased our top line revenue at the same time so my actual Net Profits just increase by much more than 10%.

In the past I’ve reviewed how to increase your conversion rate. Since I’m always looking for new ways to do that, I’ve bumped into Paco Underhill’s book and into a company called teleXpertise. teleXpertise does the same thing that Mr. Underhill’s company does except they do it over the phone. They’re phone mystery shoppers and I must say they’re very good. Their recorded calls with your sales people will tell you a whole lot about the efficiency of your sales process. My business model requires onsite inspections before quoting prices so our process can be quite lengthy from the first call to a closed deal. Keep in mind that every interaction with the customer is a potential step where they can be lost forever however each step does not result in a sale… So each and every step has to be improved. To clarify what I mean by “steps” you’ll want to check out my blog on increasing your conversion rate.

Let’s talk a bit more about how they can help you increase your conversion rate by evaluating what I’ve learned. Keep in mind that I have my sales phone calls scripted and have gone over individual training with all of my team members on how to handle sales inquiries and the following still came up:

  1. Answering questions that we didn’t know the answer to. (though we thought we did)
  2. Not asking for the caller’s name or contact information (including email).
  3. Answering questions that we shouldn’t (because they’re based on what information we gather from an onsite inspection)
  4. Quoting exact prices over the phone
  5. Not using proper NLP techniques
  6. Didn’t always ask about what prompted them to call us

And what we did right:

  1. Cross-sold products (i.e. they called asking about X and we told them about Y)
  2. Tried to set the appointment with the customer (several times)
  3. Returned the customer’s inquiry within minutes (our lead catchers don’t set appointments our sales people call the customer back to set the appointment)
  4. Upsold products (i.e. they called about a service we didn’t offer and we suggested a better alternative)
  5. Differentiated ourselves from our competitors

So you can look at this information in 2 ways.

  1. After all that training we still did more things incorrectly than correctly so we suck (me in particular as the Team Leader).
  2. After all that training we still did more things incorrectly than correctly so just look at how much more money we could make if we always did things correctly!

Obviously I focus on the latter. It’s one thing to do the right thing by training and scripting, but it’s just as important to constantly train and improve. What was most surprising to me was I didn’t tell a single person on our team that we were using mystery shoppers until after they were done.  When I did tell them their conversations were being recorded they weren’t at all mad about it, they were actually excited to hear themselves. This may be partially because I set the bar for myself to constantly improve so I’m not asking them to do anything they haven’t seen me do over and over again and I stressed that before I told them what was going on. I also let them know how much we pay for leads so they can get a grasp of just how valuable each and every call is. The best part, however, was that they were very receptive to improvements and looked forward to doing better next time. That’s right, I assured them their would be a next time… ;-)

To your increased conversion rate success, Bryan

P.S. As an additional note, if you’re buying a business you should definitely Mystery Shop the business ahead of time. If they did more right than wrong you may want to look for a different business. If they have a LOT of room to improve that might be the perfect business for you. Keep in mind that you prefer to buy businesses that just need to tweak the front end.

Filed Under: Business Accounting, Ethical Marketing, Leadership, Team Building Tagged With: , , , , ,

I have a great idea for a business. Now what?

August 6, 2009 By 2 Comments

A friend recently contacted me with the idea of starting a topless hair salon wondering what my thoughts were on the project. Granted that’s not the style of business I would ever own or start, however I realized my thoughts on, and more importantly my process for evaluating his business idea are the same that I would apply to any business. If you came to me asking if your idea is a good one and if you should start a business I’d answer in almost the exact same way. Since you may have to evaluate dozens of businesses before you find a great one, it’s important that you train yourself to think the same way. So here are my thoughts…

  1. I don’t recall ever seeing one in the 40+ states I’ve visited but I could have driven right by one and just not realized it.
  2. Sounds like it has business potential and I’m a big fan of owning businesses vs. working for them.
  3. It’s almost always better to buy vs. start a business since they already have a location, customers, equipment, cashflow etc. etc. In this instance I’m not sure that’s the case since the customer base may change drastically and the current employees may not be interested in your changes. Maybe take over a lease from one that’s going out of business so that all the equipment is there but the employees and customers are not… Have you been able to find one of these businesses yet? It’s always easier to steal ideas from other established businesses than come up with all of them on your own.
  4. If you’re really interested in buying/starting a business there’s a LOT more to it than coming up with an idea so you’ll really need to work on educating yourself. Check out my blog and particularly the Recommended Reading section. It gives a lot of good resources for you to learn what it takes to start/buy a business. Particularly since it chronicles a lot of what was involved with me doing the same.
  5. Las Vegas is in Carson County which currently has the highest unemployment rate by county in the US at about 12.5%. In the last year over 10,000 have left that county (for the first time in like 20 years the population has stopped increasing). Major hotel and building projects have been cancelled and thousands have been laid off. On the plus side, you can probably find cheap space to lease for a business. On the negative side, it may not be as easy to get an extra $20 out of someone for a haircut… This was in essence my target market evaluation. He mentioned starting the business in Sin City for obvious reasons so don’t you think information on the current economy in Las Vegas might be pertinent? Notice how I didn’t discount the idea altogether. A year or 2 ago when things were booming the upfront costs themselves may have made this idea completely cost prohibitive. The down turn in the economy in Vegas may just provide the perfect opportunity for a lease takeover and recruitment of team members at reasonable wages. That’s the beauty of buying and selling businesses. No matter what the economy is doing some businesses will always be available.
  6. Once you educate yourself a bit about the questions you need to ask about buying/starting a business,  call one that’s already established and ask them about marketing, growth, pricing, how the community reacted, how they recruit talent, etc. If they don’t see you as competition a lot of times business owners/managers are willing to lend a hand by answering questions. This is very true. We entrepreneurs are a tough lot who work hard to get where we are. However we tend to appreciate and respect those trying to accomplish the same thing and so don’t mind helping out a little bit when we can. Obviously you can’t abuse the privilege of talking with someone who’s been there and done that. The best thing to do is to build up a long list of business contacts so that when you have questions you can always find an answer without bugging the same person every time.

Can you answer those questions about your business idea in the affirmative? If you can, the next step is determining your break-even point, your potential market, and your marketing plan. Starting with the break-even, if you can risk the money it’s going to take to get you to the break-even point go for it. What do you have to lose? Just be aware that over 90% of businesses fail within the first 5 years so if you don’t want that to be you, over prepare.

To your business starting success, Bryan

Filed Under: Business Psychology, General Business Tagged With: , , ,

Buying a business – Step 2 – The Broker

August 1, 2009 By Leave a Comment

When buying a business for the first or even second or third time there are a few things to keep in mind to help you a long the way…

The first step is obviously finding a business. I’ve blogged before how I’ve found several offers to buy or otherwise acquire businesses in a short amount of time and even blogged about finding a business for little to no money down. In addition to those few examples, I mentioned 2 other great resources are:

Bizbuysell.com

Bizquest.com

Both have some easy to use tools to find the exact business you’re looking for. Keep in mind that the best businesses have a great Cashflow to Asking Price ratio. In other words, if a business has a cashflow of $100,000 you should want to pay as close to $100,000 (or less) as possible. Ideally you’ll pay less than 1 times Cashflow plus assets. So in our example with $100,000 in cashflow if they also have $200,000 in assets a price less than $300,000 would be quite a deal. :-)   Convincing the seller and a business broker of that might be a little more tricky so be prepared to justify your valuation. Keep in mind that business valuations can be quite subjective. In my experience, a broker can either be your best friend or worst enemy. If you are able to convince him you’re the man for the job, he’ll do his best to convince the seller you’re price should be accepted. Even though he represents the seller, he only gets paid if someone actually buys a business. It’s important to keep that in mind and use it to your advantage. Now how do you do that?

The game plan is rather simple. The trick (like usual) lies in how well you’re able to communicate it. ;-)

  1. Make sure he likes you. – This is important because he’s the gate keeper. Heck, he may even be “screening” potential buyers ahead of time. Without his blessing, you don’t see a Non-Disclosure Agreement or ever meet with the sellers. Be comfortable but confident in your discussions and if you find common ground, certainly use that to build rapport. If you get along well with most people and can speak coherently (even under pressure) this becomes second nature and not a step that even requires planning. Check out How to Win Friends and Influence People and Persuasion: The Art of Getting What You Want for more details.
  2. Make sure he thinks you can do the job. -If he doesn’t think you have the ability to run the business being sold you’re not going to make it very far. Be prepared for questions like “Do you have any experience in this type of business?” (he’s making sure you can actually get the job done), “Are you looking at any other types of businesses for purchase” (he’s determining your commitment and passion to this field), and “Do you have management experience?” (he’s assessing whether you can take over and lead a team effectively especially with the nuances of a new owner/leader). I’ve spoken with enough of these guys that I generally have preplanned stories in mind to respond. Always remember that stories that illustrate your capabilities are the best way to get your point across. If this is your first business purchase and you want to sound like an expert, read my blog, the Best 6 books to teach you how to generate wealth, and practice “interviewing” a few business owners to learn how they implement “book lessons” in the real world. Explanations for leadership styles based on books generally do pretty well with business brokers since they’re in effect consultants themselves. They get to look at and evaluate businesses every day without getting involved with what’s needed day-to-day so the perfect answers that you read in books are what they want to hear. For instance, when a broker asked me if I had any management experience I explained my philosophy on being a Team Leader instead of General Manager. He immediately interrupted me and said it sounded like I was a big fan of the Deming philosophy and Six Sigma and I had a great leadership philosophy. Now that he was on my side I shot back “So do you think my style would work well in this business?” – obviously looking for additional details that could help me in my negotiating.  His response was that for liability reasons he couldn’t respond specifically about how my philosophy would work however “it’s a proven philosophy that would do well in any business.” You think he liked me and thought I could do the job after that? ;-)
  3. Make sure he agrees with your valuation. – You always save this step for absolutely last. If the broker and owner trust you, thinks you’re capable, and you’ve done your preliminary due diligence and you still want to proceed you start working on explaining why you think the business is worth less than they do. This is possibly the toughest part, but it doesn’t have to be. In one business I was evaluating the owner didn’t have any cashflow or even profit and loss statements. For that reason it was very hard for me to value the business. Obviously it made it even harder for the broker to value the business which was something that rather annoyed him. So he recommended to myself and the seller that this should be an asset only transaction. The transaction never materialized however it was kinda nice to not have to do much negotiating that time since my goal would have been an asset only purchase as well. :-)   You won’t always get that lucky, so you need to spend a bit of time educating yourself on proper business valuation models so you can “talk-the-talk”. Check out my blog on why banks don’t know what your business is worth and my other one on EBITDA for more information. Simply low-balling with no justification or explanation is a bad idea. If you’re dealing with an individual who is selling on their own, chances are they have no idea how to truly value a business and so will be more apt to agree with you if you know what you’re talking about. Beyond that, one broker told me there are about 12 valuation models that are “commonly accepted”. With 12 valuation models, do you think they all work out to the business being worth the same amount? Of course not. The bottom line is cashflow and assets so make sure you stick to that. Business growth potential aren’t worth anything and should never be something you pay for.

That’s your quick overview of dealing with a broker (or even seller without a broker) on a business purchase.

To your business buying success, Bryan

Filed Under: Business Accounting, General Business Tagged With: , , ,