Be an Ethical Entrepreneur, Marketer, and Business Builder

How to fix your business FAST – Part 1

A friend of mine asked me today about what I would do with a business that isn’t doing very well in this economy. Actually with 5 different businesses in 5 different industries… So I told her. My blog about how I doubled the profits in my business in the first year covers much of what this and the succeeding blogs will, however these will have much more detail and be much more specific.

Firstly, by “fixing” I simply mean increasing profits and cashflow (yes, they’re different). The bottom line is that the number one goal of business, and its reason for existing, is to make a profit (and a healthy one at that).

Secondly, you need to determine the time frame for your fixing. In other words, do you need cash by next week or month to make payroll and pay bills OR are you simply looking to increase the value of your business to sell in a year OR are you looking for a way to have your business provide the income and freedom that you desire for the next 40? Granted, some solutions will overlap but the plan of attack may be different. Since she was looking for IMMEDIATE solutions to improve the business we’ll look at that first.

Before we go any farther, though, as a business owner and/or leader you need to get 2 things situated right away

  1. Work on the Business – If you’re a plumber and you’re out plumbing while your business is going down the tubes, it’s a lost cause. Of course I’m assuming you have a team and aren’t a one-man operation. The point is, if you have a team to take care of the work of the business, your work needs to BE the business. If it’s not, then the business will never improve. Make the commitment to spend time daily on improving your business.
  2. Make a list – Actually, lots of them. I’ve done enough consulting to know that if your goals aren’t in writing, they get forgotten and pushed into oblivion. Don’t fall into that rut. If your business needs to change, you need to change. As we go through these blogs, make a prioritized list of the improvements you’re going to start and don’t stop working on the list until it’s done! Personally, I’m still working on a list of 10 things that I made at a conference in February 2009. Currently, 7 out of 10 are checked off, but the list won’t be thrown away until 10 of 10 are taken care of.

Again, our goal is near immediate improvement so here’s what you can do:

  1. Know your numbers – In my experience this is the biggest mistake business owners make. They know things like their gross and net profit margins, number of customers, and total revenue, but have no idea how or why those things are down. Customers, revenue, and profits are not answers to problems, they’re simply questions. All they can do is tell you what question to ask but you have to dig deeper to find the answer. If you stop digging there, you’ll never locate the problem or come up with a way to devise a fix. Some of these numbers were covered in my blog on weathering the economy.
  2. Cut Costs – If a business exists to make a profit, it’s breath of life is cashflow. Assuming you have sales and customers already, the quickest way to increase profits and put cash in the bank is to cut costs. You cut $1,000 in costs and you add $1,000 to the bottom line. Don’t ever forget that.
  3. Improve Efficiency and Productivity – You already have a team, though if money is tight you may have to start cutting. Before you do that, you need to do some simple analysis to determine the effectiveness and productivity of each person in your organization. Again, you need to know your numbers. If you don’t know your daily break-even per income-generating job position AND for the entire business, you’re shooting in the dark. If you can go back to the “good old days” and compare your profit per person back then to now, you’ll quickly know if you have to cut positions.
  4. Improve Marketing and Sales – There is a reason this is so far down. If you need immediate cash, this is often the slowest response. You have to develop marketing, you have to get your marketing out and wait for a response. You then have to review your process for acquiring, handling, and converting leads to customers. You need to track the effectiveness of each marketing campaign because the first one might not be successful and determine, through testing and measuring, what marketing provides the best Return On Investment. This is obviously important long-term, but generally can not immediately get you cash. That being said, this should be done concurrently with the items above.
  5. Build recurring revenue – This one is often most challenging because it can require a cash investment up-front.  Cash that you obviously don’t have if you’re business is not doing well. Then again, there are ways to generate immediate and recurring cash with no up-front investment and you’d do well to develop some of these in your business.

That’s the 5-step process for fixing a business quickly. Now that I’ve reviewed this list, there are only a few things I would change if you’re looking long-term versus short-term.

  1. If you’re making money and not looking to sell any time soon, the costs are less important. Obviously $1,000 saved is a $1,000 more in profit. However, if you’re happy with your income and perks and those provided for your team, then this doesn’t become an IMMEDIATE necessity even though it’s ALWAYS beneficial.
  2. If you’re looking to sell soon, cutting costs to increase profits is extremely beneficial as it will increase the value of your business. Any “perk” you can’t reasonably classify as an ownership perk, and therefore a seller add-back, should be cut immediately. For instance, if you have a lot of meals and entertainment expenses and tried to do a seller add-back on those and I’m buying your business, I’d argue all day long that if they weren’t necessary for business you wouldn’t have them on your books and I won’t accept them as an add-back.
  3. Knowing your numbers, efficiency, productivity, sales, and marketing are as important today as they will be in 40 years so work on them constantly. For the long-term owner, these systems and numbers are what will allow you to manage your business remotely and with minimal input.
  4. Recurring revenue can either require up-front cash or not. Recurring revenue that costs nothing up-front (or is break-even very quickly) is well worth the investment short-term as it will produce cash and increase your business’ value. Recurring revenue that requires an up-front investment in sales, marketing, equipment, and installation/service is not a good short-term plan but can be an amazing long-term one so don’t neglect it.

So there’s the quick and dirty overview… In the next few parts to fixing your business I’ll dissect each of the 5 pieces and provide real-world examples, suggestions, and solutions for each.

To your business-fixing success, Bryan

The fundamentals of Buying, Building, and Selling a business

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To my knowledge, there is no other blog or book or lesson or presenter who shows someone the basic pieces necessary to generate wealth with real world experience as I will. It’s the nuts and bolts of the whole buy, build, sell process.

There are basically 4 steps:

  1. Preparing – What you need to know prior to getting started.
  2. Buying – How to find, value, negotiate, and purchase a business.
  3. Building – What you can do quickly to increase the value of the business.
  4. Selling – The ins and outs of selling your business.

Preparing

Ironically, as my most recent blog has pointed out (it’s ironic because it took me 18 months to write the blog that I should have written first), the most important part is your mindset and your attitude. Next, you’ll also need to take the first 3 steps to becoming wealthy including, always spending less than you earn, understanding the difference between where you are and where you want to be is education, and framing your goals into  Do x Be = Have context. Possibly most importantly, you need to have a clear motivation for being an entrepreneur (even if it’s different than mine) and you need to appreciate that the ethical route is always the most profitable. And make sure you’re able to get over your fear of failure in trying new things.

It’s important to understand that there’s no better, quicker way to go from very little money (let’s say less than $5,000) to a lot of money. You can even take it to the next level and setup a business to generate $1,000,000 per year if that’s your desire. Recently, as part of another blog, I’ve outlined a basic plan for how someone can go from $5,000 or less to $1,000,000 primarily through business. To stress the point even further that buy, build, sell is the best way to generate wealth for the average individual, review my suggestion to skip getting your MBA and just buy a small business for your business education.

Buying

In the buy, build, sell strategy, the part that will have the greatest influence on your profit is the purchase price so learn as much as you can for this stage.

First, you’ll want to know some basic questions to ask the seller about their business and maybe even what questions to ask about any given business idea. Then you’ll have to understand how banks value a business in case you need to go to them for financing and also how EBIDTA can tie into business values (since sellers and business brokers may reference it). As you start looking for businesses, you need to have some ideas of where to find businesses for sale for little money down and how to deal with the business brokers once you find one you’re interested in.

Before you start making any offers, it’s very important that you get the seller (or broker) to like you since then they’ll be more likely to accept your business valuation. It’s very simple to turn someone down you don’t like anyway. Once you’re ready to make an offer, make sure you only purchase the assets and then put them into an LLC filing as an S-corp. If you do that, you won’t have to spend nearly as much time fighting with lawyers. But since you may need one anyway here are a few tips for getting the best rates from your lawyer.

When you’re just starting out you may be considering a partner but make sure you don’t take on a business partner unless absolutely necessary.

Building

In the building stage you’re going to need to know what to do your first 2 weeks onsite at a business you’ve just purchased. If you don’t already know the difference between profits and cashflow, I’m sure you’ll learn very quickly.

Immediately you need to work on polarizing your company’s culture, improving teamwork, and communicating effectively. Right out of the gate you need to start setting up your business for running without you through the effective use of technology, incentives, and empowering your team. If you don’t do that immediately, you’ll soon be asked to do lots of things “in” the business that will take away from you working “on” the business. This is vitally important because if you’re not working on the business you’re not taking the time necessary to double profits, improve marketing, teach your team the importance of NLP, create systems, processes and scripts, or improve closing ratios. In other words, your primary focus for building value in your business is going to entail 3 parts:

  1. Increasing Sales – through new and improved marketing and better conversion rates. In other words you have to make sure your system for taking a lead and converting it to a customer is top-notch. Don’t forget that your back-end sales (sales to existing customers) will always be your most profitable business. With that in mind, if you can buy an already profitable business that’s horrible at back-end sales you can quickly increase its value.
  2. Cutting Costs – look at all of your expenses and simply cut those that aren’t needed. We reworked our accounting and phone costs alone to save thousands of dollars per year.
  3. Improving Efficiencies – this is primarily about scripts, systems, and processes for every aspect of your business.

Don’t make the mistake I did and wait until cash gets tight to realize that cashflow is king and then start building recurring revenue while looking for quick, easy, cheap ways to generate immediate cashflow.

Chances are you’re going to run into some issues with team members so it’s helpful to know the proper way to fire someone without having to pay unemployment and effective ways to get your team members to do what they do best.

As you’re building your business you need to work on getting it to achieve critical mass by, in particular, hiring or training the 3 leaders every business needs to succeed.

In summary, you need to have a game plan from day one including an exit strategy or else you might end up like one of the 300 businesses in NYC who failed because they failed to plan for success.

Selling

Since this blog is getting long and selling isn’t much different than buying I’ll keep this short. You need to basically understand 3 things:

  1. How to value your business just the same as discussed in buying so you can justify your price.
  2. Where to list your business which is again the same places where you’d go to find a business for sale (such as bizbuysell.com)
  3. How to foster relationships so that when it’s time to sell, you have a few personal contacts in mind.

With regards to the 3rd, you may want to get to know other business owners in your area who have complimentary (or even competing businesses). You may also consider hiring a leader who would like to take over and own their own business some day. If you have a franchise like mine, you will also want to stay in touch with owners in other areas as they might want to expand their operations.

The goal with this post is to organize and direct the many varied posts I’ve written about my adventure buying, building, and now selling my business over the last 18 months. As I add more posts I’ll try to keep this summary updated so you can always reference it for new material.

To your generating-wealth-through-business success, Bryan

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

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.