Be an Ethical Entrepreneur, Marketer, and Business Builder

What are the chances of creating the next Facebook, Google, or Zappos?

September 6, 2010 by 2 Comments

Yesterday I was listening to an interview where Ron Morris, The American Entrepreneur interviewed Matt Mickiewicz the co-founder and CEO of 99Designs.com. Matt’s story is quite incredible. He’s currently 27 years old, lives in Vancouver where he grew up, and owns 3 businesses. The 2nd business, 99Designs.com does about $1 million in revenue per month already and was founded in February 2008. It also has 78,000 designers around the world who “compete” against one another through a process called Crowdsourcing. If you’ve never heard of it, here’s how it works:

  1. A business person logs onto the website and says he has a design project for a website, logo, brochures, graphics or just about anything else. He dictates how much he can afford and a deadline for submission.
  2. 78,000 designers and members of the site (only 60% are from the US) can now accept the project, create a design, and submit it.
  3. The business person will now have generally 99 options to choose from and 99Designs.com automatically facilitates the payment to the designer.

For the designer, he now has a potential customer. For the business person, he now has the best possible design at the best possible price and potentially a long-term relationship with a designer he knows does great work.

So how did a 27 year old from Vancouver come up with this? It started when he was 14 and decided to start learning about websites… He started designing websites for local businesses and eventually created a site that offered marketing services to all of the Dot Com companies popping up all over the place in the late 90’s. As Ron puts it, he was selling shovels to the gold diggers during a gold rush. He was still in High School at this time and was bringing in 6-figures… He did point out, however, that he was taking too much time to grow his business and so was never a real good student. Sounds like Thomas Stanley’s profile of a millionaire held true for Matt…

After the Dot Com bubble burst, Matt and his partner started writing articles about website design, html, php and other areas related to web design. Initially he gave everything away for free but one day decided to try to see if he printed and bound their advice if people would pay $35 for that service. He sold 20,000 copies of that first online book and has since sold hundreds of thousands of copies of their many books. That website is still online and profitable at Sitepoint.com.

99Designs.com was actually an accident. Matt and his co-founder of Sitepoint.com stole the idea from someone who came onto one of their forums and said, I need a logo and I’ll pay $100 to whoever designs the best one. Since Matt already had his tribe of followers, they created the website for 99Designs and it immediately took off. He tells the story in more detail in the interview so you listen to the entire interview if you want more details.

Today I finished reading Delivering Happiness: A Path to Profits, Passion, and Purpose, which is Tony Hsieh’s book about his life and how he grew LinkExchange to sell for $265 million in less than 3 years and then grew Zappos.com from zero to $1 billion in sales in 10 years. Moreover, after telling his story, he talks about his purpose in life now as CEO of Zappos.com to help other companies develop a culture of happiness like he has done with Zappos.com. For a current business owner, that final section of the book is the most interesting and valuable but is beyond the scope of this blog…

What was most interesting to me about Matt and Tony was that they were  entrepreneurs from the beginning… Tony says he was always fascinated with making money and discussed his first button-making business in middle school through his restaurant at Harvard and the businesses discussed above. One way or another, Tony was going to figure out a way to make a lot of money. And considering he’s worth a few hundred million today at the age of 36, I’d say he succeeded…. Along the way he discovered he didn’t really want or need all that money but you’ll have to read the book to fully appreciate his whole story…

Viral Loop talks about Hotmail, Facebook, Myspace, Twitter and a dozen other companies that grew to hundred million or billion dollar entities in a very short time… The stories are amazing and inspirational but can also be quite detrimental… How can such remarkable stories be detrimental? Well that depends on what you learn from them.

There are nearly 13 billion websites in the world and all of the ones I’ve mentioned are in the top 1000 (99Designs.com is still relatively small but is currently ranked 2561). That’s the top .0000077% of websites. That’s a whole lot of zeroes. I point this out because none of these current businesses (aside from maybe Hotmail) had any vision of how huge they would be or how much they could potentially be worth when they got started. Why not? Because no one knows exactly what the customer wants except the customer. No one can predict exactly what is going to make money online.

If you’re an entrepreneur and starting a business and trying to create something to compete with a major online retailer keep in mind that you have a .016% chance of getting struck by lightning at some point in your life. In other words, you’re 2078 times more likely to get struck by lightning than to create a top 1,000 website. Granted, creating a major online presence is more than just luck as is getting struck by lightning, but it’s still a tough business to plan.

So let me ask you, do you have the next multi-billion dollar internet idea? Even if you did, you probably wouldn’t know it. Moreover, sometimes internet billions take $10’s of millions of dollars in funding and 3-4 years of unprofitability as Zappos.com, Yahoo.com, and Amazon.com all required. Without a millionaire such as Tony Hseih to back your idea, now what are your chances at success?

The point is you can learn a TON from these and other stories of internet riches and you should always work on those crazy ideas just in case you do have the ability to become the next Mark Zuckerberg or Tom Anderson or Sergey Brin or Jeff Besos or Tony Hseih.

If going for an internet business, the chances of creating a business the size of Matt’s ($12 million dollars per year) is much better, however 99Designs.com is also a top ranked website at 2561. More importantly, it took him over 10 years to build a following so that when the idea for 99Designs.com came up, he instantly had customers and designers… That’s a long time to build a following without even knowing how you’re going to profit from them. So what can you do in the mean time to create an income and some time?

You know the answer already don’t you?

You start buying, building, and selling businesses. Every time you go through that cycle you’ll hopefully upgrade to a larger business with more cashflow. It doesn’t matter if the businesses are internet or brick-and-mortar based, either. As a matter of fact, even Tony Hseih got involved only after the original founder of Zappos proved that people were interested in buying shoes online. Buying an existing business takes out much of the guessing work that a start-up has such as:

  • Will anyone want this product?
  • How much will they be willing to pay for it?
  • At those prices can we make money?
  • Will our business model and structure prove profitable?
  • What’s the potential size of our market?
  • How easy will it be for competitors to copy me?
  • How much will staff, insurance, and overhead cost and will it all be scalable?

And on and on and on… You can’t answer a single one of those questions definitively about a start-up but with an existing business you can answer those and dozens more because someone else already has been answering those questions to stay in business. This can help you to determine more precisely what you’re getting in to and how much you can grow the business. More importantly, with creative financing, you won’t need to rely on Venture Capitalists.

The other major lesson that Tony’s book taught me was, whether you’re running a business that does $1 million or $1 billion in sales per year, the rules are the same. Tony outlines mistake after mistake that he and his leaders made at both LinkExchange and Zappos.com. As I was reading the book I was literally getting upset thinking, “No, that’s not how you run a business!” I’m not saying that because I’m better or smarter than Tony however, many, if not all, of those mistakes can be learned with a smaller business. How do I know this? Because I’ve made many of the same so when I was getting upset it was partially because I could feel his pain. 🙂

The final major lesson was that when you have a strong business model, if you can scale it and become a leader online to a worldwide market your growth is almost limitless. Figure out how to do that and I’ll be reading a book about you.

My final thoughts are simply:

  • If at first you don’t succeed, try another business
  • Learn how to build a business
  • Learn how to grow your business online
  • Keep working on those one in a billion side ideas just in case you really do have a good one

To your entrepreneurial success, Bryan

P.S. What Tony has done with his team culture, something I blogged about over 2 years ago before ever hearing of Zappos.com, is quite remarkable so you’ll be sure to learn a lot from Delivering Happiness.

Filed Under: Business Books, Team Building Tagged With: , , , , , , , , ,

The fundamentals of Buying, Building, and Selling a business

October 30, 2009 by Leave a Comment

[digg=http://digg.com/business_finance/The_fundamentals_of_Buying_Building_and_Selling_a_business]

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

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

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: , , , , , ,