Episode Transcript
[00:00:00] Speaker A: In this episode, we talk about whether you should quit your job and buy a business. And if you did, how to go about it. Let's get started.
[00:00:06] Speaker B: Let's get some money from New Money, New Problems. It's the New Money New Problems podcast. A show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
Negotiating compensation. Purchasing your first investment property. Helping your family with money. The highs and lows of, uh, entrepreneurship. New Money brings new problems that require new solutions. Join us as we work through them together.
I'm Brenton Harrison, and this is the New Money New Problems podcast.
[00:00:45] Speaker A: Hello, my name is Brenton Harrison of New Money, New Problems and your host.
[00:00:48] Speaker C: For the New Money New Problems podcast.
[00:00:50] Speaker A: I want to thank you all for joining us this week. I will tell you that this is.
[00:00:54] Speaker C: The start of what will be a unique series when it comes to New Money, New Problems. Uh, this is going to be, and.
[00:00:59] Speaker A: It may not be like all four.
[00:01:01] Speaker C: In a row, a four part series.
[00:01:03] Speaker A: And it's a four part series that I'm doing at a particular time based.
[00:01:08] Speaker C: On trends that I'm seeing with people.
[00:01:10] Speaker A: Who are in my community, in my client base, and I'll kind of explain what I mean. Um, I remember when the pandemic hit, everybody was just in it, and you were trying to figure out the best way to survive.
[00:01:23] Speaker C: If you had kids, you were trying.
[00:01:24] Speaker A: To figure out how to keep them occupied. If you had a job, you're trying to figure out how to navigate whether you were going to continue to have a job where there was going to be work from home, where they're going to make you return to the office.
[00:01:34] Speaker C: And we were just kind of surviving. And then I also remember the year or two after the pandemic where we were starting to cherry pick the things.
[00:01:42] Speaker A: That we liked from the pandemic and try to make them more permanent parts of our existence.
[00:01:47] Speaker C: Right.
[00:01:48] Speaker A: I've talked about the fact that the pandemic was a big deciding factor in.
[00:01:52] Speaker C: Me deciding to even start this firm.
[00:01:54] Speaker A: When I understood, hey, I actually do.
[00:01:56] Speaker C: Like working from m home.
[00:01:57] Speaker A: I actually do like being able to market the way that I want to market, have a different structure and a.
[00:02:02] Speaker C: Different pace of living.
[00:02:04] Speaker A: So we started to take the things that we wanted to take and leave.
[00:02:08] Speaker C: The things that we disliked.
[00:02:09] Speaker A: And there was a lot of flexibility from employees and employers alike for that period.
Now we're in an interesting time where a lot of employers are requiring you to come back to the office.
[00:02:21] Speaker C: And that may be something that you're not interested in doing.
[00:02:23] Speaker A: Or maybe you are in the dei, uh, profession and you're watching your industry be decimated or you're in something that's impacted by dei.
[00:02:31] Speaker C: Uh, you're an educator. Then you have forces that are not allowing you to teach what you want to teach.
[00:02:35] Speaker A: Programs that are being turned down or canceled for your students in a way.
[00:02:40] Speaker C: That you find disheartening. You could have general burnout from your profession. You could have quality of life considerations that have kicked back up again now that we're further removed.
[00:02:49] Speaker A: If you're looking at what's going on in the political environment, you may just be someone who says, as, uh, I'm.
[00:02:53] Speaker C: Hearing very frequently, I need a break.
[00:02:56] Speaker A: From the m things that I'm doing right now and I want to do something else. And I don't know if I'll come back to it. I don't know if I'm going to leave this place. But I'm just coming across a lot of people who just feel like they.
[00:03:07] Speaker C: Need to make a shift.
[00:03:08] Speaker A: And many of those people are trying to make a shift professionally. Hey, Brinson, I'm in the middle of my career and I've decided that I'm really struggling with what I'm doing right now.
[00:03:18] Speaker C: I'm, um, interested in what a pivot might look like.
[00:03:20] Speaker A: And I cannot tell you how many.
[00:03:22] Speaker C: Conversations I have had now that we're four years or so removed from the pandemic with people in this exact same.
[00:03:29] Speaker A: Point in their career where they have.
[00:03:31] Speaker C: Achieved some level of success.
[00:03:33] Speaker A: But for one reason or another, they find themselves trying to make a decision.
[00:03:37] Speaker C: On whether that success is going to.
[00:03:40] Speaker A: Be what the next 10 to 20.
[00:03:42] Speaker C: To 30 years of their life will look like.
[00:03:45] Speaker A: And when these people come to me.
[00:03:46] Speaker C: There are a series of conversations that.
[00:03:48] Speaker A: I want to have or questions that I want to ask to gain some understanding on what we do next. Now, obviously this series is going to.
[00:03:55] Speaker C: Be about leaving your job and deciding to pursue entrepreneurship.
[00:03:59] Speaker A: And we're going to talk about that for the bulk of these four episodes. But even before we get to that point with someone who comes to me with this conversation, I first ask, what type of break are we talking about? Are we talking about a pause on.
[00:04:12] Speaker C: The career of your choice or are.
[00:04:14] Speaker A: We talking about a true pivot? A pause is something like a sabbatical or a mid career break where you're.
[00:04:21] Speaker C: Saying, hey, I'm taking three months off.
[00:04:23] Speaker A: Six months off, nine months off, a.
[00:04:26] Speaker C: Year off, two years off. But at some point I plan to return to this profession.
[00:04:32] Speaker A: And if that's the case, we're really talking about finding a way to finance that sabbatical. If you're going to take six months off, do we have the liquidity to make sure that we can do this.
[00:04:42] Speaker C: Without causing ourselves undue taxation or undue penalties? Which speaks again to the importance of things like non qualified investments in a savings account so that you don't only.
[00:04:52] Speaker A: Have invested assets in places like your 401k. In addition to those financial considerations, I.
[00:04:58] Speaker C: Will ask them, what are you planning to do to keep your skill set sharp and your network strong during your sabbatical? Because what you don't want to do.
[00:05:06] Speaker A: Is you don't want to come back to an industry and your knowledge base has become stale. But the people who are making the pivot.
[00:05:12] Speaker C: It's an entirely different set of questions.
[00:05:15] Speaker A: But the questions are ones that often throw off the person coming to me. Because in my opinion, if you have reached a level of specialty or success in your career, I would consider in.
[00:05:27] Speaker C: Some cases the risks of entrepreneurship for.
[00:05:29] Speaker A: A period of time to be not as big people often think. Now to be clear, if you have.
[00:05:35] Speaker C: Certain responsibilities that you just have to address, if you do not have another.
[00:05:39] Speaker A: Person in the house who's earning an.
[00:05:41] Speaker C: Income, if you have children that you.
[00:05:43] Speaker A: Feel responsible for, family members that you.
[00:05:45] Speaker C: Feel responsible for, then there are times when you just can't pursue entrepreneurship.
[00:05:49] Speaker A: But let's assume that you do have a period of time where you have.
[00:05:53] Speaker C: The liquidity or the income from another partner.
[00:05:56] Speaker A: And it wouldn't be the end of.
[00:05:58] Speaker C: The world for you financially if you.
[00:06:01] Speaker A: Had a period of time where you.
[00:06:02] Speaker C: Were making less money or a shorter.
[00:06:04] Speaker A: Period where you are making no money at all. I will ask that person, tell me about your industry and the reason I want to know about their industry is.
[00:06:12] Speaker C: Because there are certain industries where you.
[00:06:15] Speaker A: Can come back to that industry after.
[00:06:17] Speaker C: An extended period of time.
[00:06:19] Speaker A: And as long as you have kept.
[00:06:20] Speaker C: Your certifications and knowledge sharp, you're not starting from zero.
[00:06:24] Speaker A: And I would argue that that's why.
[00:06:26] Speaker C: The success that you have already had is important.
[00:06:29] Speaker A: An example I'll give you is my friend Reggie Couplet. We've talked about Reggie in the past. He owns Refresh and et cetera, a ah, dry clean and Laundromat in Nashville. But Reggie's background is in healthcare administration. He has an MBA from Belmont University. He had years of experience.
[00:06:44] Speaker C: He had built himself up to the department manager VP level role. And I remember him laboring for a long time about whether he should pursue entrepreneurship because he was burnt out of healthcare.
[00:06:55] Speaker A: And the conversation that we had was.
[00:06:57] Speaker C: Let'S talk about the true risk of.
[00:06:59] Speaker A: You leaving for three to five years. Do you think that you've reached this level of success and you're going to be going back to an entry level job if you decide to go back to health care?
[00:07:10] Speaker C: And the answer of course was no. While he may not have progressed and go back to the promotions that he might have received, while he may even.
[00:07:18] Speaker A: Have to take a job for a little while, that's a little less than.
[00:07:21] Speaker C: He was making to earn his stripes a little bit, he's not re earning all of his stripes. There's a certain base level of success that allows you the luxury of coming back after an extended absence in the way that you wouldn't be able to if you were an entry level employee who decided to pursue entrepreneurship and truly was sacrificing all that you had earned because there wasn't that much that you had earned in terms of equity in that industry. However, I also want to know the trends in that industry in terms of if jobs are being replaced, because there are some industries where you have to be aware of the atmosphere.
[00:07:57] Speaker A: An example that I would give is if you talk to my wife, she's in marketing, and she'll tell you there.
[00:08:02] Speaker C: Is an actual and serious ageism element to the marketing industry.
[00:08:07] Speaker A: Or even if your skill set is.
[00:08:08] Speaker C: Strong, you might might reach an age.
[00:08:10] Speaker A: Where just because of the fact that.
[00:08:11] Speaker C: You'Re older, someone may look at you and say that we need the newer or fresher idea. In that case, the risk may be.
[00:08:17] Speaker A: A little bigger to take three to five years and walk away with the.
[00:08:21] Speaker C: Intention of possibly coming back if your small business doesn't work out.
[00:08:25] Speaker A: Another industry would be, uh, encoding or software development.
[00:08:29] Speaker C: I remember three years ago when they were telling us that if you weren't encoding, then you just wouldn't have a.
[00:08:33] Speaker A: Job in three to five years. And now three to five years later.
[00:08:36] Speaker C: They'Re saying that coders are not needed because artificial intelligence is doing their job for them.
[00:08:41] Speaker A: So you want to understand how the.
[00:08:42] Speaker C: Winds are shifting in your industry. But I would argue that in many cases, if you have achieved some level.
[00:08:48] Speaker A: Of success and you continue to keep.
[00:08:50] Speaker C: Your connection strong and you continue self learning and staying relevant with your ideas.
[00:08:55] Speaker A: Then you may have an opportunity to.
[00:08:57] Speaker C: Step out into entrepreneurship and take a leveraged bet in the same way that you would leverage any other investment where.
[00:09:04] Speaker A: Hopefully you're moving into something permanent that.
[00:09:06] Speaker C: Affords you a great level of success, but even if not, you'll have something to come back to that limit your losses.
[00:09:12] Speaker A: So after the break, we're going to talk about some of the three different ways that I see people who are.
[00:09:16] Speaker C: In this phase enter into entrepreneurship.
[00:09:19] Speaker A: And we'll also talk about the financing.
[00:09:22] Speaker C: The funding, and the next steps for.
[00:09:24] Speaker A: Each of the three.
[00:09:27] Speaker D: This is the New money New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen. We'll be right back.
[00:09:45] Speaker B: Are you wondering what new money problems you might be overlooking in your financial life? If so, we've got great news. We've crafted the New MONEY New Problems Gapfinder to identify potential weaknesses in your finances in areas ranging from budgeting, investments, insurance, and even the threat your extended family's finances could pose to your household. Please head to newmoney new problems.com Gapfinder to complete it today. Again, that's newmoney newproblems.com Gapfinder to take the assessment.
[00:10:24] Speaker D: You're listening to the New Money New Problems podcast. Subscribe now at new money, new problems.com welcome back.
[00:10:35] Speaker A: Welcome back for the break. Regardless of whether you are starting a business from scratch, uh, purchasing a business or becoming a franchisee, you know, there are certain ways that you're going to come up with the money to fund that process.
And I want to start with going.
[00:10:50] Speaker C: Through some of those options in terms.
[00:10:51] Speaker A: Of prioritization, flexibility and preference. You know, when it comes to this.
[00:10:57] Speaker C: Process, liquidity is king.
[00:10:59] Speaker A: And there's all these connective threads to things we've talked about on the podcast in the past.
[00:11:04] Speaker C: And one of the things, you know.
[00:11:05] Speaker A: I'm a fan of is having non qualified investments. In other words, non retirement assets that.
[00:11:11] Speaker C: You can access or use for leverage.
[00:11:14] Speaker A: Like what we talked about with securities.
[00:11:16] Speaker C: Backed line of credit where you're literally using the equity in your investment account.
[00:11:21] Speaker A: To establish a line of credit in.
[00:11:22] Speaker C: The same way that you would have.
[00:11:23] Speaker A: A home equity line of credit. So when it comes to coming up.
[00:11:26] Speaker C: With the money to fund these type of ventures, your non qualified investments are going to be the first line of defense. Now, a less preferable funding source that.
[00:11:35] Speaker A: I do see people use all the.
[00:11:37] Speaker C: Time would be a home equity line.
[00:11:38] Speaker A: Of credit where similar to the securities backed line of credit uses the equity in your investment account, A, uh, HELOC.
[00:11:44] Speaker C: Is tapping into the equity that you have in your home when you look at the value of that home as compared to your mortgage balance.
[00:11:50] Speaker A: The reason I'm not As big a fan when it comes to a home equity line of credit is unlike a securities backed line of credit where there.
[00:11:57] Speaker C: Is no set repayment period as long as you have a certain amount in.
[00:12:01] Speaker A: Your investment account, with the home equity line of credit, you typically do have.
[00:12:05] Speaker C: To pay back those funds in a certain period of time. Five years, 10 years, some HELOCs will.
[00:12:10] Speaker A: Allow you to go out as far as 20 years. But to me you want to make sure, especially if you are getting a.
[00:12:16] Speaker C: Business loan on top of accessing a.
[00:12:18] Speaker A: Home equity line of credit that you understand, If I take 50,000 off of this home equity line of credit, I.
[00:12:24] Speaker C: May only be required to make interest only payments. But at the end of this repayment.
[00:12:28] Speaker A: Period, I either have to hope that.
[00:12:30] Speaker C: They will extend my line of credit, refinance the amount that I owe into my actual mortgage, which could put you in a position where you're getting less favorable terms than you have on your current loan, or you have to make a lump sum payment that you may not be in a position to make.
[00:12:44] Speaker A: At the end of that repayment period.
[00:12:46] Speaker C: And lastly, retirement accounts. And this is an area where to me there's one option that is really.
[00:12:51] Speaker A: Appealing and there's one awful option that I'm not a fan of at all.
[00:12:56] Speaker C: And uh, the option that is not.
[00:12:57] Speaker A: Appealing at all is taking a withdrawal.
[00:13:01] Speaker C: Or a loan against your 401k.
[00:13:03] Speaker A: You have to understand the consequences of each of them. In Most cases, your 401k or your.
[00:13:08] Speaker C: Employer retirement plan is not accessible without.
[00:13:11] Speaker A: Penalty until 59 and a half, in some cases 55. And if you do this before 59 and a half or 55, in some cases, in addition to those income taxes.
[00:13:19] Speaker C: You'Re also going to owe a 10%.
[00:13:21] Speaker A: Penalty right off the top for accessing.
[00:13:23] Speaker C: It before you are eligible to do so. Now, some people will Instead use a 401k loan.
[00:13:28] Speaker A: And I'm not actually one of those.
[00:13:30] Speaker C: Who thinks that you should never take.
[00:13:31] Speaker A: A loan from your 401k. The problem however, with doing a 401k loan and then leaving to start a.
[00:13:37] Speaker C: Business is you can't repay the loan once you separate it from service. You have a certain period of time after you've left where you either have to pay that amount back to your.
[00:13:46] Speaker A: Plan as a lump sum payment or.
[00:13:48] Speaker C: They'Re going to automatically assess the 10%.
[00:13:50] Speaker A: Penalty and taxes because they're going to.
[00:13:53] Speaker C: Assume that you're keeping the money and.
[00:13:55] Speaker A: It'S an early withdrawal. The second option, however, which is a.
[00:13:58] Speaker C: Newer option at Least in terms of.
[00:14:00] Speaker A: My knowledge of it, is what's called a rollover.
[00:14:03] Speaker C: As a business startup, this is a really unique concept where instead of doing a 401k loan or withdrawal, you're instead.
[00:14:11] Speaker A: Using a mechanism set up by the.
[00:14:13] Speaker C: IRS to allow you to fund a small business.
[00:14:16] Speaker A: The concept of a rollover of a.
[00:14:17] Speaker C: Business startup is you take your 401k at your current employer or previous employer.
[00:14:22] Speaker A: If you've already left, you start a.
[00:14:24] Speaker C: C corporation, which is a type of business structure for the business that you are intending to fund.
[00:14:30] Speaker A: And once you've started that C Corporation.
[00:14:32] Speaker C: You establish a 401k for the C corporation.
[00:14:36] Speaker A: You then roll over the 401k from your previous employer into the 401k of.
[00:14:41] Speaker C: Your newly established C Corp. And then.
[00:14:43] Speaker A: You liquidate the proceeds of that 401k.
[00:14:46] Speaker C: Rollover and you use it to buy shares of the C corp and fund your business.
[00:14:52] Speaker A: Now that's a very complex multi step process that has to be done in a particular way to make sure that.
[00:14:57] Speaker C: You'Re avoiding taxation and penalties.
[00:14:59] Speaker A: But it does allow an option for people out there who may have very.
[00:15:03] Speaker C: Well funded 401ks, where if they're saying.
[00:15:06] Speaker A: Hey, I have $300,000 401k, but I need $75,000 to start my business, I can take a portion, I'm not liquidating all of my assets and complete a.
[00:15:16] Speaker C: Uh, rollover as a business startup and.
[00:15:18] Speaker A: Fund this business opportunity that allows me.
[00:15:21] Speaker C: To potentially establish an asset without sacrificing or leveraging all of my retirement funds.
[00:15:28] Speaker A: So that's how you would come up.
[00:15:29] Speaker C: With your funds to either buy a business or put a down payment on a business.
[00:15:33] Speaker A: But now we have to talk about the financing element of it. And financing is important because you may.
[00:15:38] Speaker C: Have the ability to buy a business that's much larger than you were expecting.
[00:15:42] Speaker A: If you can position yourself to get.
[00:15:44] Speaker C: Financing from either outside investors or from a lender. So, for example, maybe you secure a business loan where they're willing to finance 80 to 90% of the cost of.
[00:15:54] Speaker A: That business, which means that if you're buying a business that cost a million dollars, you would need to come up.
[00:15:59] Speaker C: With only, say only in quotes, 100,000 to $200,000 to buy a business that's worth a million dollars. But to do so you have to be where you can qualify for a conventional small business loan or an SBA loan, a Small Business Administration loan like.
[00:16:14] Speaker A: The ones that we'll talk about with.
[00:16:16] Speaker C: Lane Rhodes, who will join us in part two of this series.
[00:16:20] Speaker A: So now let's get into the three types of business ownership that I typically see people pursue. There are different structures, but these are just. To me, If I see 10 people.
[00:16:29] Speaker C: And they say they started a business.
[00:16:31] Speaker A: They typically are going to fall into one of these three categories. The first are people who decide to.
[00:16:35] Speaker C: Start a business from scratch.
[00:16:37] Speaker A: When you start a business from scratch.
[00:16:38] Speaker C: You definitely need to understand, understand that the liquidity in your personal finances is absolutely necessary. Most of the time, you're going to.
[00:16:46] Speaker A: Be in a position where you are.
[00:16:47] Speaker C: Bootstrapping this business in its early days.
[00:16:50] Speaker A: And the reason that's the case is.
[00:16:52] Speaker C: Because if you do not have an extremely strong financial profile and an extremely.
[00:16:57] Speaker A: Strong business plan and contracts that are.
[00:17:00] Speaker C: Already in place, it is highly unlikely.
[00:17:02] Speaker A: That you're going to secure a small.
[00:17:04] Speaker C: Business loan for a business that does not yet exist.
[00:17:08] Speaker A: These also have the highest failure rate.
[00:17:10] Speaker C: There's a book that I'll, uh, reference more thoroughly in a second called Buy than Build that estimates that up to 90% of startup businesses fail. They have the highest failure rates of any type of business.
[00:17:21] Speaker A: They also, in my experience, have the longest period to replacing your income.
[00:17:26] Speaker C: So it's very different when you are buying an existing business or buying into.
[00:17:30] Speaker A: A franchise where there's a mechanism that's.
[00:17:33] Speaker C: Already there, where the person who owned.
[00:17:35] Speaker A: It before you is already earning an income, or there's processes in place to.
[00:17:39] Speaker C: Allow you to replace income more quickly.
[00:17:42] Speaker A: If you're a franchisee, when you're a startup business, you're having to establish that.
[00:17:46] Speaker C: Business and carve out an income for yourself. And that can at times take years.
[00:17:51] Speaker A: If you're talking about being able to.
[00:17:53] Speaker C: Do so with any level of regularity.
[00:17:55] Speaker A: There are people I know who have been in business for three or four.
[00:17:57] Speaker C: Years and do not consistently pay themselves out of the business.
[00:18:01] Speaker A: So you have to understand that before.
[00:18:02] Speaker C: You leave a career and start something from scratch, you need to either have a partner who is earning good income on their side of the household, or you need to have a fully stocked reserves because you don't know how long.
[00:18:14] Speaker A: You will have to live off of those reserves before you take an income. The second method of business, and this is the one that actually intrigues me.
[00:18:22] Speaker C: The most, is acquisition entrepreneurship.
[00:18:24] Speaker A: And acquisition entrepreneurship is the process of.
[00:18:27] Speaker C: Instead of starting a business from scratch, buying an existing business with the intention of increasing that business's profits.
[00:18:35] Speaker A: And acquisition entrepreneurship, of the, uh, elements.
[00:18:38] Speaker C: We'Re discussing is the one that I.
[00:18:39] Speaker A: Feel is becoming most popular in recent years, partly because of books like Buy then Build.
[00:18:45] Speaker C: If you're looking on screen, you're looking.
[00:18:47] Speaker A: At a copy of Buy Then Build. We'll put it in the show notes as well. It's written by a guy named Walker. Hoping I'm not butchering this last name.
[00:18:54] Speaker C: I think it's Diebel or Diebel D.
[00:18:56] Speaker A: E I B E L and he.
[00:18:58] Speaker C: Is a professor of entrepreneurship who also has acquired and sold several businesses in.
[00:19:03] Speaker A: Various industries and the concept of acquisition.
[00:19:06] Speaker C: Entrepreneurship is there is a lower risk in buying an existing business that has an existing client base than there is in starting a business from scratch. And the success success rate is significantly.
[00:19:17] Speaker A: Higher than starting a business from scratch as well. And in deciding to become an acquisition entrepreneur, you're looking at a business opportunity.
[00:19:24] Speaker C: That you're hoping you can increase in.
[00:19:26] Speaker A: Value because you have a presumably a.
[00:19:28] Speaker C: Skill set in the areas of places.
[00:19:30] Speaker A: Like sales, marketing, operations and logistics that.
[00:19:34] Speaker C: Can be that missing piece that can lead to a lever of growth or additional growth for the business that you're purchasing.
[00:19:41] Speaker A: So you're buying something that's worth a million dollars.
[00:19:43] Speaker C: You're hoping that because of that skill.
[00:19:45] Speaker A: Set you can increase its to 2.
[00:19:47] Speaker C: Million or 5 million or $10 million.
[00:19:50] Speaker A: And you can either live off of.
[00:19:51] Speaker C: Those increased earnings or eventually sell it yourself.
[00:19:55] Speaker A: And books like Buy Then Build give.
[00:19:57] Speaker C: You an excellent framework for how to.
[00:19:58] Speaker A: Go about the search and also dispelling a lot of myths in terms of how much money you have to bring.
[00:20:02] Speaker C: To the table to buy a business of a certain size.
[00:20:05] Speaker A: As an example, in the book they.
[00:20:07] Speaker C: Mention that 80% of small businesses are sold for under a million dollars.
[00:20:12] Speaker A: And while that sounds like a lot of money, let's break down what that.
[00:20:15] Speaker C: Means in terms of what you could.
[00:20:16] Speaker A: Potentially be earning as the business owner.
[00:20:19] Speaker C: Who'S buying that business, and also what it would cost in order to buy.
[00:20:23] Speaker A: That business as well. So typically if you have a business.
[00:20:26] Speaker C: The valuation or the sales price is going to be based on some multiple of the earnings that the owner is actually receiving.
[00:20:33] Speaker A: In the book, they refer to it.
[00:20:35] Speaker C: As seller discretionary earnings.
[00:20:37] Speaker A: Some people refer to it as net profits. But the concept is you may have a business that is generating multiple millions.
[00:20:44] Speaker C: In sales, but you want to have an idea of what the owner is actually taking home. So Maybe it's generating 3 million million in sales, but the owner is bringing home $250,000 a year. Those are the seller discretionary earnings.
[00:20:58] Speaker A: So let's say, for example, that you're.
[00:20:59] Speaker C: Buying a business for a million dollars, but the seller Discretionary earnings of that owner are $250,000 a year.
[00:21:07] Speaker A: So you're basically buying four years worth.
[00:21:09] Speaker C: Of pay for the owner. And the business profit could mean that they are generating much more in revenue. So for example, if the seller discretionary earnings are 10% of revenue, then that.
[00:21:19] Speaker A: Means that that person is bringing home 250,000.
[00:21:23] Speaker C: But the business is producing two and.
[00:21:25] Speaker A: A half million dollars in revenue. So we have a million dollar business that we're buying that's generating two and.
[00:21:31] Speaker C: A half million dollars per year in sales.
[00:21:33] Speaker A: And if we're going to assume that this person gets financing for this opportunity.
[00:21:38] Speaker C: Then they only need to bring 10.
[00:21:40] Speaker A: To 20% of that business's sale price.
[00:21:42] Speaker C: To the table at closing. Which means that they're buying a business that's generating two and a half million as Ah, seller discretionary earnings of 250,000.
[00:21:51] Speaker A: But it could take as low as.
[00:21:52] Speaker C: 100,000 to close on the, to buy a business of that size.
[00:21:57] Speaker A: And when you break it down in that way, it starts to open up.
[00:21:59] Speaker C: People'S eyes to say, oh my goodness, I could buy a business. And it doesn't have to be a business that's worth $10,000.
[00:22:05] Speaker A: If I understand how to do this, I can structure it and buy a.
[00:22:07] Speaker C: Business that's worth much more. Because the bigger the business presumably the better odds you have of not only.
[00:22:13] Speaker A: Replacing your income, but taking that business from one that either was generating two.
[00:22:17] Speaker C: And a half million and now you're.
[00:22:19] Speaker A: Earning more because it's generating four, or.
[00:22:21] Speaker C: It could stay generating two and a half million. But because you find a way to cut costs and improve process, you can.
[00:22:28] Speaker A: Increase your seller discretionary earnings along the way. And then lastly, franchising. And franchising is a concept that we'll.
[00:22:34] Speaker C: Discuss in more in detail for the third episode in this series with Leslie Cuban.
[00:22:39] Speaker A: Uh, Fran Net Leslie is a franchise broker.
[00:22:42] Speaker C: So she goes and she finds franchises which are essentially businesses that have multiple locations who are opening up to other investors the opportunity to establish more locations, that is the franchisor.
[00:22:55] Speaker A: And a uh, franchisee is someone who.
[00:22:57] Speaker C: Buys into that franchise model to establish their own location.
[00:23:01] Speaker A: And unlike when you're buying a business where you're buying the business itself, when you're buying into a franchise, you're essentially.
[00:23:07] Speaker C: Buying a license from the franchisor that allows you to establish your own location.
[00:23:13] Speaker A: So if you're of a certain age, when you think of franchise, the first one you probably think of is subway. Well, you can't just open up a.
[00:23:20] Speaker C: Subway you have to go to Subway as a franchisor and say, I want to, uh, apply for a license to operate my own Subway franchise franchise.
[00:23:29] Speaker A: And there are several pros and cons.
[00:23:31] Speaker C: To consider when it comes to this type of business structure.
[00:23:34] Speaker A: One of the cons is that franchises.
[00:23:36] Speaker C: Often have investment and net worth minimums. So you can't just come to Subway.
[00:23:40] Speaker A: And say that I want to open a franchise. You can't just come to Chick Fil.
[00:23:43] Speaker C: A and say that you want to open a Chick Fil A.
[00:23:45] Speaker A: They're going to have a certain set.
[00:23:46] Speaker C: Of requirements in terms of how much.
[00:23:48] Speaker A: Liquid assets you have to have on.
[00:23:50] Speaker C: Hand and also what your liquid net worth may be. Which again speaks to the importance of having non qualified assets.
[00:23:57] Speaker A: Because if they look at your balance sheet and a significant portion of what you consider your net worth is in retirement accounts, some franchisors will either not.
[00:24:05] Speaker C: Count that if you're under the age.
[00:24:06] Speaker A: Where you can access those funds, or.
[00:24:08] Speaker C: They will put a discount as to the valuation.
[00:24:11] Speaker A: Because if you did access those funds, you would potentially have to pay taxes and a penalty. Another con would be that you have.
[00:24:17] Speaker C: Less leeway in terms of your product and service offerings.
[00:24:21] Speaker A: You may be able to get a franchise license from Subway, but just because you have a license doesn't mean that.
[00:24:26] Speaker C: You can just decide that your Subway franchise offers fettuccine Alfredo. You're going to be bound to a.
[00:24:32] Speaker A: Degree by the operating rules and procedures of that franchise. There are going to be some that.
[00:24:37] Speaker C: Are more lenient than others, but there are some.
[00:24:39] Speaker A: If you're looking for a passive business opportunity that won't even allow that.
[00:24:43] Speaker C: Chick Fil A is a good example. You may be able to start and buy a Chick Fil A, but they will not do it for someone who is not going to be an owner operator. So you would have to be managing that Chick Fil A. It's not something that you could do as a passive investment.
[00:24:57] Speaker A: And another con will be these are.
[00:24:59] Speaker C: Not as easy to resell. If you have your own standalone business.
[00:25:03] Speaker A: You can sell it whenever you there's a market out there, you can sell it.
[00:25:06] Speaker C: You can sell the building. If you own the building, there's a.
[00:25:09] Speaker A: Lot of flexibility in terms of your ability to walk away from that business for a value. Whereas if you're a franchisee, it's not your franchise.
[00:25:17] Speaker C: You have your own license. You have to get approval from the franchisor to offer that license to someone else.
[00:25:24] Speaker A: And you may not get the same.
[00:25:25] Speaker C: Multiple as selling a successful standalone business.
[00:25:28] Speaker A: Because why would somebody pay you a multiple when they can just go and.
[00:25:32] Speaker C: Get their own franchise license from the franchise?
[00:25:35] Speaker A: So that was a lot for this first episode. And I would tell you, if you're listening to this series and you're thinking, why is Brenton going through this?
[00:25:42] Speaker C: I like my job. I don't want to do anything else.
[00:25:44] Speaker A: I would still encourage you to check out these episodes because you don't know what the next five, ten years of.
[00:25:49] Speaker C: Your life may hold, and you don't.
[00:25:51] Speaker A: Know what will pique your interest.
[00:25:52] Speaker C: As we go through some of these.
[00:25:53] Speaker A: Episodes, if something comes up in the news that, um, means we should split.
[00:25:57] Speaker C: Up these episodes a little bit, or.
[00:25:58] Speaker A: If I just feel like the audience.
[00:25:59] Speaker C: Doesn'T want to hear four in a.
[00:26:00] Speaker A: Row, we'll do it. But if not, the next episode in.
[00:26:03] Speaker C: This series will be with our friend Lane Rhodes of Live Oak Bank.
[00:26:06] Speaker A: She's going to walk us through SBA loans and conventional business loans and other financing options for your small business from.
[00:26:17] Speaker B: New Money, New Problems. This was the New Money, New Problems podcast, a show for successful professionals searching for the tools they need to navigate financial opportunities and obstacles they've never seen.
