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Building Valuable Businesses

Paying to Be the Boss

Paying the Cost to Be the Boss – Like Bruce Springsteen

Paying the Cost to be “The Boss”

“The avoidance of taxes is the only intellectual pursuit that carries any reward.”  – John Maynard Keynes

Fans of Bruce Springsteen know that one of his nicknames is “The Boss”.  Legend has it that Bruce got the nickname because he loved playing Monopoly backstage while waiting to play at his gigs.  Bruce was always the banker and because he knew the rules of the game so well he generally won and earned his nickname – the Boss.

In order to be the Boss of your own Active Investing businesses, you need to take the time to learn the rules of the game.  For your retirement businesses, your largest potential expense is taxes.  In Plan to Not Pay Taxes, I lay out the basic rules for you to live up to half of your adult life on a tax free basis.

Your first step in implementing your Plan to Not Pay Taxes is positioning your money in a tax free circumstance.  Some people have already done this.  Some can do it in a few days.  Others may need several years before being able to implement their Plan to Not Pay Taxes.  Patience will definitely be rewarded in this circumstance.

Once your money is positioned in a tax free circumstance you will need to establish a company that your tax free money can invest in.  Then you need to select which type of businesses make the most sense for you to generate tax free income in retirement:

  1. Cash Flow Businesses
  2. Real Estate Businesses
  3. Licensing Businesses
  4. Angel Investing Businesses
  5. Financial Trading Businesses

I know this will be disappointing to some but to successfully implement these strategies, you will need the skill to run these businesses as an Active Investor throughout your retirement.  That’s why we participate in the Active Investor Group on Linkedin.  At the appropriate time, you can then convert these strategies to passive strategies so you can sit back and sip on pina coladas at a beach of your choice.

Brexit Opportunities

Brexit Opportunities

Brexit Opportunities

Great Britain voting in favor of the Brexit from the European Union took a lot of people by surprise. Much of the discussion in the aftermath of the Brexit vote has been experts saying that Brexit is bad and they have no idea what is going to happen. While this is normal in the case of any market dislocation, as Active Investors, we want to figure out where is the best place for us to look for opportunities.

In 2012 or so, London surpassed New York City as the Global Financial Capital. This is why Great Britain opting to remove themselves from the Global Financial system, will have continued impact on the markets for the near term as well as over the next several years. Being that Global Finance is based on trust, the Brexit vote basically violated the trust of all who had been relying on Great Britain as the Global Financial Capital.

Even as there is talk of alternative outcomes, the Brexit vote will freeze transactions and will definitely remove London as the Global Financial Capital. While normally the fall of number 1 is good for number 2, New York has such strong ties with London linked with the impending US Presidential election I think there will be a reluctance to rush into New York for Global Financial transactions. Hong Kong (#3) and Singapore (#4) look well positioned to take over much of London’s lost Global Financial business. Also look for less established cities like Dubai and others to assert themselves as Global players in financial services supported by technology and growth in the Pacific Rim.

Knowing that Great Britain is the number one foreign investor in US based companies and real estate, anticipate that some of these British investors will be feeling a cash crunch and need to liquidate their US based holdings just to pay the bills back home. As Active Investors, research US based companies with investors from Great Britain and start evaluating potential acquisition targets. Also identify US based real estate that is owned by British investors which may be attractive investments for you.

Great Britain has served as a conduit for US manufacturers to export into the European Union. As the companies that support this will effectively be shut out, you may want to look to establish your own import-export business into the European Union. Estonia provides virtual residency for companies that want access to the European Union so may be a good business opportunity now that established relationships will be broken with British companies.

Another outcome of the Brexit vote is that the dollar is strengthening as investors flee from the British Pound and Euro. As your US Dollars strengthen over the next 3 to 6 months, you will have opportunities to buy distressed companies, real estate and currencies. This provides you with opportunities to convert your dollars into assets denominated in other currencies which provide a hedge in the event the US dollar reasserts its macro-trend and weakens as it has for much of the 21st century.

Due to the Brexit vote, there will be great opportunities for Active Investors to invest in companies, real estate and currencies over the next several months. What opportunities are you most excited about as an Active Investor?

Investable Businesses

Why Do I Deserve this Generosity? ISO Investable Businesses

Investable Businesses

When evaluating investment opportunities you always need to ask yourself “What did I do to deserve this generosity?” Despite the grandiose claims and the beautiful geometric growth projections contained in every startup business plan, the simple fact is that most of the companies out there looking for capital are not Investable Businesses.

By Investable Businesses I mean a business where a third party investor has a colorable opportunity to get a significant return on their investment in 3 to 5 years.  This does not mean they are not good businesses but it does mean there is not a compelling case for an outside investor to invest in the business.  Many startups are creating efficiencies for users but not capturing inefficiency effectively for themselves.  Many startups are aiming to capture too small of a market.  Others are seeking to position themselves in a way to never be profitable.  Some have viable business models that should be able to operate from cash flow rather than needing outside capital.

In evaluating whether a company is an Investable Business I look at:

  1. The Innovation Area
  2. Size of the Opportunity
  3. Inefficiency Capture

The Innovation area needs to be supported by favorable macroeconomic trends.  21st Century Innovation areas include food, water, energy, big data, transportation, healthcare and millennial consumers.  We don’t want to be investing in a company that is in a maturing industry.  We want a company and industry that is just entering the Innovation Cycle.

The Size of the Opportunity should be sufficient for you to get a 10 to 100 times return on your investment valuation.  If everything goes right and you are unlikely to achieve 10X return on your investment, you have tied up your capital in an unproductive asset.

The Inefficiency Capture that the business is capitalizing on is based on the Business Godfather Cost-Benefit Analysis where we look at where the costs are incurred and where the benefits flow.  We do not want a business that creates efficiencies for others and does not capture enough inefficiency for itself to be profitable and growing.  Profitable and growing businesses capitalize on inefficiencies.
Over the next few blog posts I will be applying this analysis to several companies that I saw present at a Tech2000 Connectpreneur event in March.

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Building More Valuable Businesses

The strategy for building more valuable businesses can vary depending on who you plan to value your business. Looking to prepare to obtain financing from banks or other lenders? A private investor? Or are you looking to sell your business or prepare to sell your business? Different variables such as cash flow, assets on hand, or growth potential can alter the value of your business. By joining the Business Godfather family, we’ll look at your business model, your strategy, and future valuation plans in order to prepare for higher valuation and sale price.

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4 Problems with Business Models

Many businesses struggle not because of a lack of hard work. They are run by smart and determined entrepreneurs. But often, their business model is flawed. No matter how hard you work, if your business model isn’t sound, success will perpetually elude you. In this video I’ll break down the different types of problems with business models I encounter when evaluating businesses.

Name Your Number

As a business owner, we care about one number: the value of our business. If someone were to ask you to name your number for your business, what would your number be? Would it be something realistic?

This is an important question business owners need to ask themselves because it forces the owner to find where the value in their company resides. If they are solely responsible for the profit in their business, they need to shift to being an active investor rather than an employee in their own business.

I have created a crude tool to help business owners determine a rough value of their business. Use the Business Value Calculator to determine the value of your business.

Launch the Calculator

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‘The Godfather Treatment’

Chris Koomey, The Business Godfather, is committed to helping business owners make their businesses more valuable. And to do that, sometimes business owners need to give themselves ‘The Godfather Treatment’.

The Godfather Treatment is when you shake yourself by the lapels and give yourself a slap across the face to force yourself to wake up to what you really need to do to create a more valuable businesses. Often times, people confuse effort with results. It may seem like you are working on hard on your business but you could be wasting your effort on tasks with little return.

The Business Godfather helps you cut through the noise of all the things going on and keeps you on track to adding significant value to your business. Find partnerships, decrease costs, find your replacement that allows you more time to generate more value for your business. These are things that can really impact your bottom line and help you become more valuable to potential purchasers that allow you to realize the value you’ve added to your business.

Joint the Business Godfather Family today by subscribing to the weekly newsletter, following on Twitter, and connecting on LinkedIn. Get access to your Business Godfather today to put you on the path towards a more valuable business today.

more_valuable_business

Build a More Valuable Business

The Business Godfather is here to help you build a more valuable business. So I ask you to look at your business and identify if you are an owner-operator in your business or an active-investor. Be honest. The value of your company rides on your answer.

For a quick calculation, use the Business Godfather Business Value Calculator to give you a rough estimate of what your business is worth. If you’d like to increase your number, shoot me an email.

Business is hard. That’s why you need a Business Godfather.

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Proving Your Worth

Proving Your Worth

Everyday you prove your worth – at least that’s what you tell yourself.  What have you done today to prove what your business is worth?

The Sounds of Silence are not what we should be hearing.  Even when you are fully committed to building more valuable businesses, you need to take the time to document the value you are building to prove your value to someone else.

Running your business by the numbers is a good start provided you have accurate and up to date Profit and Loss Statements and meaningful Balance Sheets.  Your bank or your buyer is going to ask for a 3 year look back so you might as well do it right the first time.  On at least a quarterly basis (monthly even better) get into your expenses and see where you can cut and examine your income so you understand what people are actually buying.

While keeping good books is a hurdle that many businesses struggle with, even fewer take the time to document how they do things.  Remember if someone is going to buy your business or lend your business money they will want an assurance that the business can thrive without you.  Documented processes will boost the multiple you get to your cash flow which will boost your valuation by 30% to 100% or more.

If you are preparing for a sale you need to spend more time on your company or corporate book or organizational documents.  The neater and more up to date they are, the more serious your prospective buyer will take you and your asking price.

I know you probably think about documenting your business value the same way you think about going to the dentist but think about it this way.  For every process you document, for every months P&L and balance sheet that are accurate, for every organizational document you produce you are producing $10,000 ($50,000, $100,000 or more) of value for your company.  That’s worth doing.

And that’s a lot of money you are leaving on the table if you are not doing it.  Join the Business Godfather LLC Family and start building your more valuable business today.

 

 

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Tax Strategies for Serial Entrepreneurs

People that have bought and sold companies before rely on old structures that worked the first time and then refer to themselves as Serial Entrepreneurs (or Cereal Entrepreneurs if they ate a lot of corn flakes during the first start up).

If you are truly a Serial Entrepreneur and have some assets or other businesses that can provide you with income until you are 59 ½ you should consider funding your next startup with the Self Directed Roth IRA Strategy

There is a danger that your Tax Free Asset becomes an Asset Free Asset but all startups are calculated risks with the expectation that the upside rewards outweigh the risks substantially.  Repeating the main drawback of the strategy, you would not be able to receive compensation for your effforts in the new company.  This is why you need income from another source.  At the same time, imagine saving the 20-50% tax bite that you could experience on liquidation.  Or being able to leave the rewards of the next great business to future generations.  How cool is that!

If you are not using the Self Directed Roth IRA Strategy in your next startup, another little discussed strategy for Qualified Small Business Stock are Section 1045 Rollovers which allow you to defer the gain on Qualified Small Business Stock you sell to the extent you invest the proceeds in other Qualified Small Business Stock.  This is similar to the better known Section 1031 exchange used in commercial real estate transactions to defer recognition of gains.  Section 1045 Rollovers are basically designed for Serial Entrepreneurs so they can keep investing and building up big ideas.

Not tax free or tax deferred, but a tax reduction strategy is also available for Section 1202 Qualified Small Business Stock which basically cuts your tax bill in half for Qualified Small Business Stock which you have held for at least 5 years.

As a Serial Entrepreneur, I know you love making things but remember its not how much you make, its how much you keep.  Join the Business Godfather LLC Family and we can help your tax strategies so you get more out of your businesses and your life. 

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Building a Tax Free Legacy

Using the Self Directed Roth IRA as a Tax Free Business Mechanism for retirement is super cool (more about that here…) but the same set up is even better when you use it with assets you may not need during your retirement that you intend to leave as a legacy to your family.

With the current US Gift and Estate Tax allowing individuals to leave $5 million and couples $10 million without incurring tax if they set things up correctly, the estate tax is not the scourge to family businesses that it once was.

The Self Directed Roth IRA provides two benefits for Estate Planning.  One is that if you convert tax deferred assets into tax free assets, by paying the income tax on the transfer from taxable funds you reduce the size of your taxable estate.  Second, and why this is so powerful, is that you can then leave the Self Directed Roth IRA to beneficiaries who will then have tax free assets available to them for the rest of their life.

That;s right, you can extend the power of this strategy for decades beyond your passing.  Your beneficiaries will probably build a statue to you and celebrate the date of your birth (or death) with a parade and a celebration that lasts long into the night.

Your beneficiaries will not see the benefit of this until they are 59 ½ as they will have the same limitations on receiving compensation from the business as you would but that makes the compounding even that much more powerful.

Using the Self Directed Roth IRA Legacy strategy can be effective for businesses with a long time horizon like rental real estate.  This strategy can also be used to fund businesses on a tax free basis with cash from the original business.  And if you or your beneficiaries run out of imagination or energy you can always convert the business assets into financial assets and ride the slow sleepy preservation strategies on offer to a pleasant tax free retirement.

Join the Business Godfather LLC Family so we can start building your long lasting (tax free) legacy today.

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Build a Tax Free Business

Back in my lawyer days, clients would come in and ask how they could make sure they would not have to pay taxes.  “That’s easy,” I would tell them, “Just don’t make any money!”  I would go on to tell them that they were thinking about it all wrong, “You should want to pay more taxes than anyone else because that means you’re making more money.”

Now I know there are charlatans out there selling ideas about how corporations, trusts, special purpose entities, insurance companies, etc. allow you great ways to avoid paying taxes.  The simple rule is this – generally if you make money, you owe taxes.  This has been going on for thousands of years and certainly since 1986 in the US.

However your munificent US government does allow for tax free business opportunities.  Yes, you can create a tax free business opportunity and not run afoul of the current tax code.  There are definitely restrictions on this and details that need to be followed to do this correctly but it is certainly worth your time to learn how to do it correctly.

One of the requirements is that you can not be paid a salary or as a contractor from the business.  So in order to make this work, you will need another source of income from another business or from your assets.  As a Business Godfather LLC Family Member you are already working on developing multiple businesses so this should fit into your overall Success Plan.

Keep in mind that you would not be able to derive any benefit from the business until you are 59 ½ at the earliest.  For some of you that may be a long way off but for others this may be a great strategy for you to add to your overall Success Plan.

The mechanics of this are first you would need to establish a self directed Roth IRA.  If you have a Roth IRA with a traditional financial institution you simply need to transfer the assets from the established Roth IRA into the Self Directed Roth IRA.  You can do the same thing with a Roth 401K from a previous employer or from a Roth 401K if you are already 59 ½ in most instances.

If you do not already have assets in a tax free account, you can contribute to a Roth IRA if contribution limits allow or you can convert from existing traditional IRAs, 401Ks (and the like) from a previous employer or 401Ks (and the like) if you are over 59 ½.  These assets will have a 5 year delay on when you can realize benefits from this account even if you are over 59 ½.

After you establish assets in a Self Directed Roth IRA, the assets in the Self Directed Roth IRA would be used to purchase original issue stock or other equity interest in a new corporation or business entity.  The new corporation or business entity would then use the assets to establish or purchase a business.  This needs to be arms length so don’t get any big ideas about selling your existing business to the IRA entity as this is a prohibited transaction.  You can serve as Director of the company as long as you do not receive compensation for doing so.

Now I know you’re thinking “Great, my Roth IRA owns a company that can’t pay me anything – Why would I do that?”

Well the company can pay dividends or profits to the Roth IRA.  This money can be used to invest in other businesses or can be distributed to you as beneficiary of the IRA once you are 59 ½ or, if the 5 year holding period applies, after five years of your initial deposit.

This strategy can work well for a cash flow business that others manage for you.  Imagine a franchised convenience store (or some other business) that generates a decent return on capital and then imagine a tax free income stream from that business throughout your retirement.  Probably a better return than your balanced portfolio that your financial services professional is producing.

For specific guidance on the mechanisms, join the Business Godfather LLC Family or review  Swanson v Commissioner 106 T.C. 76  https://scholar.google.com/scholar_case?case=15277963416926279130&hl=en&as_sdt=6&as_vis=1&oi=scholarr

and

IRS Field Service Advice Number: 200128011 http://www.irafinancialgroup.com/IRAFinancialGroupFSA200128011.pdf

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Figure Out What You are Going to Do the Rest of Your Life

“I am trying to figure out what I am going to do the rest of my life” is something a colleague of mine told me after he had sold off his primary business.  He was looking for ideas because he knows retirement is not something most business owners are good at.

The most successful business owners I have worked with over the years always had multiple businesses and multiple streams of income so when they exited one business they had other business ventures to focus on.  When I talk about the Six Value Drivers in Your Business effectively what I am trying to get you to do is develop multiple streams of income and multiple streams of value within your core business.  At the same time you should always be developing other streams of income outside your core business.

In order to do this well, you need to extract yourself from the day-to-day as an Owner Operator and approach each of your businesses as an Active Investor.  For each business you are an Active Investor in, you need to identify the Strategic Objectives the business must focus on and then track Action Items and Results on a periodic basis.  I work with business owners to help them develop their strategic Action Plan to do these things and more.

Once you systematize your active investments and only focus on what’s important, then you can make sure you are constantly figuring out what you are going to do the rest of your life.

Your gift as a business owner is that you can take a big idea and enjoy the risks while the big idea grows.  Most people don’t have that skill.  What you are going to do the rest of your life is harness that skill.

Business owners sell themselves short when they take on someone else’s vision of what they should be doing.  Run a charity – maybe; Be a philanthropist – if you have nothing else to do with your money; Play golf? – really is that the best you can do????

The world needs creative risk takers.  Don’t curl up in a ball when you have cashed in some of your success.  Use your skills to develop new opportunities for you family, your friends and your community. 

That’s what you are going to do for the rest of your life – with the help of your Business Godfather.

Are you Interested in Building a More Valuable Business?

Are you interested in building a more valuable business? Like most business owners, the answer is obviously yes. However, if you look at the actions of most business owners it would appear they are not trying to make their businesses more valuable.

There is a difference between being an owner-operator in your business and an active investor. An active investor cares about how valuable their business is and an owner-operator cares about how much income they can generate from their business.

Benefits Active Investors

I try and transition Business Godfather family members away from being owner-operators towards being active investors in their business. There are many benefits to doing this.

First, it allows you to plan for your obsolescence. You can build the business in a way that you can still receive value from it while not partaking in daily activities. This allows you to focus on more businesses and build more wealth than had you built the business around you. Businesses that require a single person to succeed aren’t very valuable to outside investors looking to possibly give you money for your business.

Second, it allows you to focus on overarching strategy that will increase your value to possible investors or buyers. If you are constantly dealing with the daily grind common in every business, you might let big opportunities pass by. Active-investors can identify strategies that add value to the business.

Join the Business Godfather Family

The Business Godfather is here to help you build more valuable businesses. So I ask you to look at your business and identify if you are an owner-operator in your business or an active-investor. Be honest. The value of your company rides on your answer.

For a quick calculation, use the Business Godfather Business Value Calculator to give you a rough estimate of what your business is worth. If you’d like to increase your number, shoot me an email.

Business is hard. That’s why you need a Business Godfather.

business worth business value calculator

How Much is Your Business Worth?

Use the Business Value Calculator to Calculate your Business Worth

Don’t worry … dumb looks are STILL FREE!!!

If you are like most business owners you have no idea your business worth.  Even worse you probably have no idea what your business could be worth.

Sometimes business owners have a vague, puffy white cloud idea of what their business might be worth but that is usually based on hopes and dreams rather than on any reality of what someone would actually pay you or finance you for.

This is why I put together the Business Godfather Business Value Calculator to give you a rough estimate of your business worth.  This tool will give you a rough estimate of the value of your business today.  The great thing about the calculator if you love the number it produces you can probably take some of the money to (or from) the bank.  The great thing about the calculator if you don’t like the number, is there is something you can do about it.  In fact, you have more control over the value of your business than just about any other aspect of your business.