Business – Five Tips for Business Startups

Today’s article is a guest post from Howie Bick.

Howie Bick is the founder of The Analyst Handbook. The Analyst Handbook is a collection of 16 guides created to help current and aspiring Analysts advance their careers. Prior to founding The Analyst Handbook, Howie was a financial analyst.

Things To Keep In Mind When Starting A Business

Building or creating a business is an endeavor that incorporates a variety of different factors, and touches upon multiple different topics. Within the building of a business, there are lots of ideas to think about, like the amount of capital you may need in order to begin, the type of overhead or expenses you may have on a monthly basis, the type of market or demographic you’ll be catering to, and the type of competition that’s out there. The business landscape is one that requires business owners or managers to manage and handle a variety of tasks and wear multiple different hats at once. Keeping these things in mind, and having a good idea of what’s ahead, will be beneficial for anyone trying to build or create a business.

The Market or Demographic You’re Catering To

Each business or company has a particular demographic or market that they are looking to cater to. The market or demographic a company or business is looking to cater to, is often a group of people who have something in common, like a problem, an issue, or a desire they’re looking to solve. It can be something they need, desire, or want, but the business is looking to provide a solution or deliver the type of results their customers are looking for. Figuring out the market or demographic you’re looking to cater to, is a great place to start. That way, you can get an idea of the types of services they may be looking for, the type of products that may interest them, or the type of solutions they may be looking for. The way a business positions themselves, with their offerings to their customers, plays an important role in the way potential customers view them, and the way they’re viewed within the marketplace.

Competitive Advantages or Competitive Edges

Businesses that are able to carve out a particular niche, or area where they’re successful, often have a competitive edge, or a competitive advantage over the competition. A competitive edge is something that a business does better or more effectively than their competitors, or something that allows them to differentiate themselves within the marketplace. It’s an important element to any company or business, that’s looking to compete in a market where there are lots of options, and many parties looking to fulfill or satisfy their customers desires. Companies can develop competitive advantages through their prior experiences, the type of packages or services they offer to their competitors, or the type of knowledge or information they may have that others don’t. It’s something that’s important to keep in mind, when you’re evaluating whether you may be successful in a certain market, or whether you’re capable of differentiating yourself among the competition.

The Initial or Upfront Costs Associated With Starting

Every business requires a certain amount of investment, or capital in order to begin operating. Whether it’s getting a space and signing a lease, or acquiring the type of machinery you may need to operate, the costs associated with creating or building a business depend on the type of company you’re looking to build, and the types of products or services you plan to offer. It’s important to have a sense of the amount of capital or investment it may cost to create a business. It’s a tough situation when you decide to start a business and invest the capital or resources you do have, to later find out that you don’t have enough, or need to obtain more. By having an idea or a sense of the type of investment a certain business requires you can prepare or plan in advance or prior to creating the business and be better situated to develop or create the business you were looking to build.

The Monthly Costs or Expenditures

Similar to the amount of capital or investment you may need in order to start or build a business, having a sense or an idea of the types of costs or expenses that your business may accrue or cost on a monthly basis is an important metric to keep an eye on. The age-old business equation is revenue minus expenses equals profit. By having an idea of the type of expenses you may accrue, you’re able to get an idea of how much business you need to do, or how much revenue you need to generate in order to make money in a month. You’re also able to have an idea of how much capital or money you need to keep on hand to continue operating and continue running the business. The monthly costs or expenditures associated with a business is an important figure to keep an eye on, and to monitor during the operations of a business, and prior to starting or creating a business.

Personal Expenses Continue to Accrue

Whenever you’re starting something new, a new job, a new company, or a new business, it’s important to keep in mind that your personal expenses continue to accrue. In the beginning stages of building a business, it often takes a bit of time to get going, and to start making the type of money you’re looking to make. That’s why, it’s important to consider that even though you may be starting a new business or a new company, which is great and congratulations, that you’ll still need to find a way to pay bills and provide for yourself. It’s something that’s a bit of a struggle for a new business owner, who’s truly looking to build a business to support themselves, or to generate the type of income they’re looking for. Preparing and planning in advance is something that can be very beneficial to lightening the load and making the transition an easier process or ordeal for you financially.

Conclusion

Building a business is something that comes with lots of different ideas to keep in mind and brings in to play lots of different factors as well. The market or demographic you’re trying to cater to, is an important part of any business, as it’s the group of people or companies you’re looking to interact with and find a way to provide value to. The competitive edge or competitive advantage a company has, is important in a company’s efforts to stand out within a marketplace or find a way to differentiate itself among its competitors. By having a sense of how much capital or investment you might need to start a business, you can have an idea of whether you have enough to begin, or whether you need to wait longer, or figure out another way. Having that sense of how much investment it might require, can save you spending lots of your money on something that may not be feasible just yet, or a bit out of reach. The monthly costs or expenditures that a business requires, is important to know how much revenue you need to generate, and the type of capital or money you need to keep on hand in order to continue operating. A lot of what corporate finance is, is managing the finances behind a business, making sure that the business has what it needs to continue operating, and finding ways to continue to grow and develop the business as well. Even though you may be starting something new, and you need time to bring it into fruition, personal expenses are something that continue to accrue, and are important to keep in mind when building a business. All in all, creating a business is something that comes with lots of different factors, a lot more than the few we were able to highlight. We hoped this helped and shined light on some of the important factors to consider when starting or creating a business.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Business Finance – Lessons Learned from Buying a Business With Partners

Today, we are going to continue where the last article left off. We are going to go over the lessons learned from my experience buying a business with partners. I will list them out with short descriptions. There is no particular order to the list. Any names mentioned other than my own have been changed to protect the innocent…

Lessons Learned

Partners (The Team) – Our team consisted of four partners. Bob and Carl are the majority investors and took out an SBA loan to acquire the business. John and I are minority partners and not party to the SBA loan. Because Carl, John, and I all have full-time jobs and at the time Bob did not, the plan was that Bob would learn and operate the business until we could afford to put someone else running the business, leaving Bob to pursue his personal interests. See my last article for how that all turned out.

Recommendations:

Be transparent about individual drivers. Becoming your own boss and becoming wealthy eventually become competing interests for an entrepreneur.

Professional respect is critical. Tolerance is listening to every idea quietly. Professional respect is availability, transparency, punctuality, and preparedness.

Autonomy must be earned, never assumed in a partnership.

Bad habits are hard to break in others.

Operating Agreement/Bylaws – Depending on whether you have a Limited Liability Company (LLC) or a Corporation (Co), you should have either an operating agreement or bylaws to govern how the business will be run. In our case, since we had a corporation, we had bylaws. We deliberated on what to include in these bylaws to ensure smooth operations, but did not go far enough. They did not spell out the duties of each partner & role, because we thought that all of us being adults, we would do what was needed to be successful. What we realized was that we each viewed the word through a very personalized lens and what seems obvious to one, (or two, or even three), is not obvious to everyone and if the fourth person feels strongly enough about it, they just will not go along unless forced to. And even then, although begrudgingly agreeing in discussion, they will still fight and obstruct the wishes and decisions of the group. If we had, as a group, decided on the duties for each role and assigned responsibilities for each role to each member of the group, then documented it in the bylaws, it would have made things a lot clearer.

Recommendations:

The operating agreement or bylaws should also include a defined exit strategy that everyone has agreed to and is committed to following. It should have defined triggers that initiate the exit strategy. These triggers should be something that the partners can easily monitor and measure against.

It should also be spelled out how to handle decisions and requests. In our case, decisions initially required unanimous board approval. We amended the bylaws later to only require a two-thirds majority due to the one partner asking for a solution to a problem, but not liking the board recommendations, then never implementing the solutions.

Due Diligence – Nowhere near enough due diligence was done on this business or partners. We did not understand enough about how either operated. The revenue the company was making included the previous owner doing work on weekend “off-book” to get jobs out & keep expenses down. It also relied heavily on promotion via owner visits with distributors and their personal relationship. We had no relationships.

Additionally, having a partner who tells the group he agrees with the intention of not taking any profits for three years, but assigns himself a $100,000 per year salary and in the first week of operation directly violates the ground rules we set up for operating the business. We, (the other three partners), realized that the fourth partner had pursued the investment deal to set himself up with a kingdom where he was king. #AvoidDat

Recommendations:

Know how the business operates prior to purchase.

Calculate how much revenue you need to make to break even.

Have a budget that takes into account ALL costs to operate.

Unless you are laundering money for drug cartels, whatever starting capital you have isn’t enough.

That much isn’t enough, either.

Planning to grow? Triple the previous statement.

Financials – While we started out with modest working capital, we had no understanding of our run rate, break-even point, or runway length. In other words, we did not know how much it cost us to operate, how much we needed to make to break even, or how long we could operate with the amount of working capital we had. We eventually figured those things out, but not until it was too late. Also, another point to make, as referenced in a previous article, you have to pay attention to Cash Flow to stay on top of your business finances. We utilized the accrual method of accounting, but did not regularly look at the cash flow reports. Because of this, we would account for interest paid on our loan from the Income Statement (P & L), but did not account for principle repayment in any of our break-even or forecasting exercises until almost two years into the business.

Recommendations:

The person managing the business needs to have a fundamental understanding of basic accounting and business / financial principals. This is a KEY point and will lead to many headaches if not followed.

Know your costs to operate, to the penny! AND, make sure you include labor!

Cash is King! When you run out of working capital, that is pretty much the end of the business.

Gross margins should be higher than thirty percent. If not, this will lead to a death spiral for the company.

Sales – The business we purchased operates, (soon to be preterite or past-tense?), conducted sales via a convoluted structure. The products are sold via distributors to building supply centers for builders. So if an end user wants to use our product, they get their builder to point them to their preferred building supply store, where they can look at brochures or in some instances, floor models to decide on what they would like. They then request a quote. That request comes to our operation, is processed, and returned to the building supply store salesperson. That salesperson has limited information on the product nor incentive to sell it.

From our end, we pay a commission to a sales agent to promote our products to the distributors, who in turn make them available in building supply stores. This is too far removed from the end buyers and in my opinion, not an effective spend.

Recommendations:

Agencies DO NOT replace effective sales people! Agencies represent a large portfolio of products and do not focus on pushing your product(s) 24/7.

It doesn’t matter what your product is if you and your team cannot sell the product(s). No sales = No revenue = No profit = bankrupt company.

It does not matter how much you cut costs or control spending if you and your team cannot sell the product(s). (See equation above)

Operations / Efficiency – Prior to closing the deal on the business, since Bob was going ot be operating it, we requested that Bob create a budget and document processes for what the business would need to run. He never gave us a budget, nor processes, even after being in the business for a couple of years. His initial excuse was that he had to be working IN the business to understand how the business operated (for processes) and that we, as the board, should be giving him a budget that he could spend. These were two more missed #RedFlags in our journey that should have told us to run, not walk, to the nearest exit. As of today, there are still no documented processes. We kind of have an idea what our budget is through reviewing financials, but we don’t trust the numbers because they are constantly being adjusted. So, we only have an idea, and nothing from Bob. Ultimately, there are still a lot of inefficiencies in the way the business is being run.

Recommendations:

Inefficiency is expensive and cripples or kills a company. From the start, focus on efficiency of process, capital, communication, and decision-making.

Be deliberate and realistic about growth rate. In projections and practice. Year over year revenue and product volume increases have to be realistic and managed to avoid unmet expectations and quality issues. It’s nice to have targets, but remember that you need sales to support targets (see Sales section below). And it is much easier to have a customer wait for quality than to apologize for a sparkly piece of crap.

Product Management – This business has about eight main products with practically infinite levels of customization, not counting special-order material types. Every order is a custom order with many options to choose from. There are forty-five different options to choose from when requesting a quote. This leads to decision fatigue and indecision in customers. Ultimately, our quote/win ratio was very low. We suspect that most customers that requested a quote had already decided on something else by the time they received the quote back. Additionally, “Bob” was continuously wanting to add new products to the portfolio because they were the latest hot thing selling.

Recommendations:

Have IP, a unique desirable product, or both. If you have neither, shoot it in the head, kill the deal, pull the plug, or whatever euphemism you want to think in. Unless your goal is to be your own boss, then feel free to limp along for eternity (or until your cash runs out).

Keep or reduce your product line to your top sellers. Based on the Pareto Principle, roughly 80% of your business should come from your top 20% of sales. (Just a note, it will not be exact. This is a rough guideline) So, find out what products make up the majority of your revenue if you already have a large portfolio of products and focus on selling those products. If you only have a few products, keep this idea in mind before adding new products. Which leads to the next one…

Before adding a new product to the portfolio, always write up a business case and do sales/cost impact projections. In fact, this should also be done for any request or change to a product or portfolio.

Product customization is less important that total customer buying experience. If you make it easy for your customer to buy your product, you will have more sales.

22-Nov-2019

As of right now, the business is still operating. I do not know how much longer that will be the case. It continues to limp along, hanging by a thread.

Stay tuned for further updates…

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Business – Revisiting the E-Myth Revisited

Welcome back! I was talking with Kevin@DeliberateConsulting.com about things we should do differently in our business (disclaimer: Kevin & I are partners/investors, along with others, in a high-end door manufacturing business). One of the things he brought up was that all of the partners should have read Michael Gerber’s “The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It” [http://a.co/d/5JhEnwk] before we decided to invest in a business. Kevin also suggested I write a blog post about it and how it can help you in business.

 

The E-Myth Revisited

 

 

The E-Myth Revisited is a wonderful book that provides guidance for individuals having an “Entrepreneurial Seizure” as the book’s author, Michael Gerber, puts it. It provides a mix of case history, told as an on-going narrative of a client, and guidelines for successfully organizing an entrepreneurial idea into a business operation manual. It tells how you should work ON your business before you work IN your business. AND, your goal should NOT be an employee of your business, doing things yourself.

 

I’ve mentioned the E-Myth before:

BUSINESS – WE DON’T NEED NO STINKING PROCESSES!…OR DO WE?

MY RESPONSES TO TIM FERRISS’ “TRIBE OF MENTORS” QUESTIONS

 

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Business Buying, Two Years Post-E. Seizure

 

I did not read the E-Myth until after we had already purchased the business and were off to the races. I shared it with the other investors, indicating how important it was that we follow its recommendations. Kevin read it and as indicated by the prompt for this post, he feels the same.

 

Looking back, I have to agree with Kevin. We should all have read the book before deciding to buy a business together. We did not understand how to operate the business. What little “processes” we received from the previous owner were a jumbled bag WTF? and Huh? And, on top of that, the partner directly involved in the business adopted everything wholesale, becoming too mired in the day-to-day to view anything strategically.

 

This is exactly what the book is designed to avoid. If we had spent more time understanding how the business operated and put in systems & processes to optimize its operation prior to purchase, we would be a lot further ahead.

 

We are slowly getting things on track and working to bring efficiency to the operation. Only time will tell if we will be successful.

 

Lessons Learned

 

Kevin and I are starting to collect lessons learned so we can apply that to future business endeavors, investment advice, and consulting efforts.

 

Below are some, in no particular order:

• Read the E-Myth Revisited
• Put together your operating manual
• Understand you costs
• Create an operating agreement defining who will do what
• Stick to your operating agreement
• Understand Cash Flow

 

Please email me, comment below, contact me on LinkedIn, Twitter, or my Facebook page to share your Lessons Learned in operating a business.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

If you like my posts, please share them with others and subscribe to this blog.

Personal Finance – What Can I invest In?

This week we are talking about different types of investments that you can utilize to better your personal finances. I’ll briefly touch on traditional investments (stocks, bonds, etc.), investing directly into a business, and various forms of real estate investing.

Additionally, I would like to give a shout-out to @DeliberateKevin for the guest post last week. Go check out Deliberate Consulting.

“Traditional” Investments

Traditional investments are what most people usually think of when they think of “Investing”. This can be stocks, bonds, Exchange Traded Funds (ETF), etc.

There are three main approaches you can use:

• Investment Advisor
• Robo Advisor
• DIY

Investment advisors usually handle clients’ money for a fee. In most cases, that fee is a percentage of the total portfolio balance. Additionally, unless the advisor has a fiduciary duty to you, the investor, they may push you towards investments where they get better or additional commissions, as opposed to investments with less fees and/or commissions involved. Also, you need a sizable balance to start your account, say, in excess of $500,000.

 

Robo Advisors are basically algorithms that select the best investments based for you based on many criteria. They usually invest in ETFs and can automatically do things like rebalance portfolios, automate tax loss harvesting, etc.  They tend to operate on a fractional percentage commission, meaning that they are usually cheaper than a full-blown human investment advisor. Robo Advisors will also allow you to start an account with a much lower balance than a traditional financial advisor, with some allowing you to open an account with no money, though you will need to put money in to invest.

 

DIY or Do It Yourself is another approach you can take. It costs you no fees other than trade fees and you don’t need a large balance to start. But, you will have to spend a lot of time researching your investments and deciding where to put your money. You can start with as little as the price of a single share of stock and the trade fee.

 

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Direct Business Investment

 

You can invest into a business outside of stock. This can be in the form of buying a franchise, buying a share of an existing business, or even taking your non-retirement account money and opening a business. A word of caution: Be sure to perform thorough due diligence into any business you invest in like this and if investing with partner(s), ensure you have a sound operating agreement in place and that everyone abides by it.

See more on starting a business with partners: BUSINESS STARTUP: 9 TIPS FOR STARTING A SMALL BUSINESS WITH PARTNERS

 

If you only have retirement account funds available, either from a 401k from an previous job or an IRA (Individual Retirement Account), you have the option to buy or start a business using those funds through a Rollover Business Startup (ROBS) transaction, also known as Business Owner Retirement Savings Account (BORSA). This allows you to utilize the money you have saved to start a business without incurring taxes or penalty. There are specific restrictions that go along with it and it has to be administered by a qualified group. Companies like DRDA and MySolo401k can help you deal with this type of thing.

 

Real Estate

 

The last type of investing option I am going to talk about is real estate. As I have talked about before, I like investing in real estate, in addition to other types of investing. Real Estate has options that range from very hands-on and intensive involvement to very passive hands-off approaches.

 

Direct Investment – Real Estate

If you have money sitting around, or you decide you want to follow the Tim Ferriss approach and dreamline a muse to support real estate investing, you have lots of options.

You can wholesale, which is finding people with a need or desire to sell a property that doesn’t qualify for traditional financing or need the funds in a short time period (need a quick closing).

You can Fix and Flip. This involves buying a distressed property at 30% or more below market value (where market value is considered the after-repair value or ARV) and rehabilitating the property, then selling it at or near market value.

You can also buy and hold, the term for investors that buy property with the intention of renting it out over the long term. Generally, these investors like to acquire their properties in a similar state to the Fix and Flip investors, but do not sell the properties.

A less well-known approach is to invest in Notes. These are mortgages that the banks sell off at a discount to get their capital back & re-deploy it in another loan. There are note funds in addition to you being able to buy notes directly.

Most note funds require that you be a sophisticated investor. No, that does not mean that you have to drink your tea with your pinky out and wear a three-piece suit every day. It is a category defined by the government as having an income of $200,000/year if single, $300,000 if married, OR $1,000,000 in net worth, not including your primary residence.

 

Self-Directed IRA – Real Estate

Like the ROBS/BORSA methodologies mentioned above for direct business investments, there is a self-directed IRA (SDIRA) that can be used to invest in real estate. They can be used to buy investment properties or, in some cases, to actually BE a “bank” of sorts.

Some caveats with using an SDIRA to buy investment property: You cannot take advantage of depreciation on the property, so you lose out on some tax benefits; You cannot receive any immediate benefit from the investment. All returns from the investment belong to the SDIRA.

 

Another option is to become a private lender. Basically, you are becoming the bank, lending money on a short-term basis, to a real estate investor. They benefit from quicker and usually cheaper closings and you as the lender benefit from the interest earned by lending the money, which usually is more than you will make in the bank or other investments.

 

Hopefully giving you this overview of different types of investing will help further your knowledge and be a starting point for your own investigation into how best to invest your money.

 

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Personal Finance – How NOT To Spend Your Money

Welcome back!

This week I am going to go over how NOT to spend your money. There are lots of good things to spend money on, but I continually observe people spending money so they can feel like they are keeping up with the Joneses or because they “deserve” it. And avoid misunderstanding, I am not advocating frugality, just better decision-making when spending money.

 

Everyday Observations

 

Bad spending habits observed recently:

Withdraw money from an old 401k account to go on vacation

Spending money to set up a business, but with no initial business activity

 

Early 401k Withdrawal

If you have money in an old 401k, use it for the intended purpose: Savings for retirement! It is understandable if you have a hardship and need the money to help deal with that, but just pulling the money out to go on vacation is a bit ridiculous. In addition to diminishing the amount of money to be available at retirement, you also have to pay a penalty on the money you withdraw, in addition to taxes at your current rate.

 

Amount needed to withdraw from old 401k to get $8000 for a vacation.

 

As an example, assuming a 24% tax bracket, if you want to use $8000 to go on vacation, you will need to pull out almost $13,000 to cover the $1,290 penalty and approximately $3,097 of taxes to end up with $8000 to go on vacation.

Not only do you lose 34% off of the top of your money, you also loose any additional earnings by not having that total amount of money still invested.

 

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Setting Up a Business Entity with no Business Activity

I understand the desire to get out of the rat race, to start your own business, and not have to work for someone else. I am right there with you! But take a practical approach. Take a practical approach. I see people starting up LLC entities, putting up websites, and paying for business infrastructure before they have any business activity. That is definitely putting the cart before the horse. If you spend that money, but do nothing in the way of generating business, then that is a wasted expense.

You would do better spending money on actual business-generating activities than paying for infrastructure before you need it.

 

Suggestions

 

Vacations

Plan your vacation as inexpensively as possible. Don’t skimp, just don’t pay $1200 a night for a room when you can rent a whole condominium or home for $110 per night in the same area.

Carry snacks and drinks with you so you don’t have to pay $4-$5 a person for snacks and $3-$4 per person for drinks. No need to carry enough for the whole day, but if you can save $28-$36 for one round of snacks & drinks a day, that cuts your total expense.

Save money until you have enough to go on vacation.

 

Businesses

Start your business on minimal infrastructure. Start conducting business now, then add infrastructure as you really need it.

Have a detailed realistic business plan. Plan out costs, expenses, margin, target audience, etc. Know these things before starting your business, much less spending money on infrastructure.

Hopefully these suggestions helped you out. Please comment here with any questions or suggestions regarding tips, tricks, and ideas for judicious spending.

 

And, as always, let me know what you think in the comments. Ask questions, tell your story.

 

 

 

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