How You’ll Know It’s Time to Cash Out

The balance tips at 30 times income.

What’s the exact sale price for your business that will allow you to live worry-free off the proceeds for the rest of your life? Here’s the answer.

How much do you need to sell your company for? Yes, right, I know: for as much as you can get. But seriously: What’s the price point on your business that will enable you to live off the proceeds the rest of your life as well as you live today?

It may sound like just another unanswerable existential question. But there is a real answer, and it’s this: 30 times your business income.

That means if you want to replace $150,000 worth of income from your business, you’d need to sell your company for about $4,500,000. How do I figure that?

Let’s assume you did sell your business for $4.5 million, which is 30 times the $150,000 of income you want to replace. With the sale, you’ll owe taxes. (Of course.) Let’s assume that, like most entrepreneurs, you have no significant cost basis in your shares, so you’ve suddenly got $4.5 million of capital gains. In general, Federal capital gains taxes will run you 15 percent. Most states will also tax the income, which will take, let’s say, another five percent in state taxes. That adds up to 20 percent gone to taxes. The actual number will vary with your specific circumstances, but the point is, it’s the after-tax proceeds that matter. That’s what you’ll have to live off.

Except that you’ll also have transaction costs for lawyers, accountants and other advisors. Let’s assume (conservatively) that runs another 1 percent. This means your sales price will be reduced by 21 percent, which puts your net at about $3.5 million.

The next step is to translate that $3.5 million investment portfolio into an annual income stream. A good estimate is that you can take distributions of somewhere between 4 percent and 5 percent of your investment portfolio each year and not run a big risk of bottoming out during your lifetime. So at 4 percent, that’s $140,000 of income, and at 5 percent, it’s $175,000 of income. Average them out, and you’re a little over $150,000.

If you run these numbers and figure there’s no way you can get 30 times the business income for your practice, then go on to step two, which is to figure out how to get to $3.5 million of investment capital with both your current retirement savings and the potential sale of your business. You do have retirement savings, right?

Let’s assume that you’ve saved $1.5 million in your SEP and IRA and other retirement accounts. That means you need to net $2 million from the business sale to get to the $3.5 million you need of investment capital. If you sell for $2.5 million, you’ll net about $2 million after taxes and fees. Add back your $1.5 million in retirement accounts, and you’re back up to $3.5 million. That means you’d need to sell your business for about 17 times the income you want to replace.

In my experience, business owners often underestimate how much investment capital they’ll need to replace the income their companies generated. It just goes to show you how valuable your company really is—because it takes a ton of investment capital to replace it.

Take On the Big Guys This Holiday

Can’t do doorbusters or sweeping discounts? Brooklyn Industries’s Lexy Funk explains small-retail’s tricks for profiting big this shopping season.

This year’s Black Friday and Cyber Monday shopping weekend was a significant boost for U.S. retailers, raking in around $53 billion nationwide. That’s a number that far surpassed most projections. But while big box stores head into the rest of the holiday shopping season armed with slashed prices and seemingly endless inventories, small retailers have what can be a daunting task of trying to compete. Continue reading “Take On the Big Guys This Holiday” »

Why Brainstorming Sucks—and How to Fix It

If this is what your brainstorming sessions look like, you

I hate brainstorming sessions.

Brainstorming sessions not only feel forced, they can quickly become competitive as everyone tries to be the smartest guy or gal in the room. Plus, telling me to come up with five new ideas is like telling me to go to sleep—right now.

If you’re like me, there’s hope. I’m definitely not an innovator, but I can be reasonably creative when I need to solve a problem. Continue reading “Why Brainstorming Sucks—and How to Fix It” »

What Killed American Airlines Could Kill You

Too much inventory and not enough demand can cripple a business of any size. Let this be your warning.

When AMR, the parent of American Airlines, declared bankruptcy earlier this week, few should have been surprised. This was a fall long in coming. But it’s one that pretty much every entrepreneur should study. You might be thinking, “Yeah, but the airlines operate in another world—and one that bears little resemblance to mine.” Stay with me. Despite the obvious differences between a giant corporation and a small business, one of the basic factors that spelled financial doom for the airline could apply to you.

Planes, planes everywhere

One of the long-standing problems of the U.S. airline industry was excess capacity. There were simply too many planes with too many empty seats. Here’s the short version:

  • Airlines wanted to push each other out of the way, so they wanted to expand routes and capture market share.
  • Executives bought planes whenever they had spare cash—or financing. They wanted to make it easier to capture more market share.
  • Airplanes are immensely expensive pieces of equipment and the lifespan, and amortization period, is very long. So every day a plane costs money.
  • It was less expensive to keep planes in the air with at least a few passengers than it was to let them stay on the ground.

And so, the entire U.S. industry had massive amounts of capacity. You could fly almost anywhere for relatively little, especially if you wanted for a particularly hot deal. And that was the problem.

Demand 1, supply 0

When there’s too much supply and not enough demand, you can predict the end: Prices sink like a jet that has suddenly run out of fuel. The airlines got into pricing wars, customers got used to cheap fares, and too many planes kept sucking money out of the companies.

Overcapacity isn’t something unique to large corporations, however. Think of it like Thanksgiving dinner. You go all out, cook a big meal, shoehorn the remainders into the fridge, and live off them for a couple of days until you can no longer stand the sight of turkey or stuffing and have to toss the rest. That’s wasted capacity.

For your business, it might be having too many salespeople on the floor or far more inventory on the shelves than you need to meet current demand for finished product. Maybe you’re running an Internet-based company and you’re making unconsciously lavish use of cloud computing and storage resources. Whatever capacity represents to you, it adds capital and/or operational costs whether used or not. Try to rationalize the capacity to serve customers so you have enough for peak demand, but not enough to swim in.

Step dancing

One time to be particularly careful is when you’re adding new capacity in expectation of increasing business. The business speeds up so you add capacity to meet the demand. But whether you’re getting cloud services or adding a new production line, it’s like taking a step up. Suddenly you’ll have excess capacity and cost per unit work done for customers will jump.

Know that this is going to happen and market like mad to increase demand. Maybe it will be a time to run some promotions to get new customers in the door. What is vital is that you boost demand enough so that your cost per unit work comes down again to normal levels.

When everyone else does it

The pain for the airline industry was not that one or two airlines were profligate in their acquisition of capacity. It was that all of them were. Competition is one other area where overcapacity can blindside you.

Not only do you need to pay attention to your own company’s capacity, but to that of your competitors. When the total capacity in your particular markets rises, prices will fall. You can’t necessarily stop it from happening, but you can plan around it. Look for the early signs and develop supporting and less widespread lines of business.

Then you’ll be able to suddenly drop prices, putting your competitors into a panic, while you use the additional higher-margin lines to support the business. Take a cue from the airline industry model of consolidation and buy some of those competitors for their customer lists and to take excess capacity out of the entire system.

Manage capacity, and you can not only avoid the traps it can represent, but turn it into an advantage.

Maybe I Was Wrong About Twitter

I used to abide by a strict no-follow rule. Here’s how one reader changed my mind.

In a recent post I took the position that Twitter is just a tool. I set up a Twitter account at the request of a few readers who wanted an easy way to know when I post new articles. That’s all I use my Twitter account for, and I make sure potential followers know that in my Twitter bio. Then I got this email from Kat Gordon, the founder of Maternal Instinct, a marketing firm that specializes in marketing to mothers. Continue reading “Maybe I Was Wrong About Twitter” »

What’s the future of laptop PCs versus tablets?

I received the following question from a reader and it started me thinking….

With the recent popularity of tablets, do you think in the near future tablets will replace netbooks or stay as a substitute? If you think tablets and netbooks are going to continue competing against one another, do you think the demand for netbooks will decline but not perish? Thanks!

He raises an interesting question, but I’m going to expand it just a bit to ask an even bigger question: Are tablet computers going to eclipse and ultimately replace laptop computers in the marketplace?

I have the most popular devices — two laptops (one Mac, one PC) and two tablets (an iPad 2 and an Android-powered Kindle Fire) — so I can start by discussing my own experience. With both a Mac and PC, I definitely spend more time on the Macintosh side. Less viruses and a more aesthetically pleasing user experience works for me.

kensington keyfolio ipad case keyboardOn the tablet side, it’s a bit more complicated because I’m more of an information producer than consumer, and I believe that in their current instantiation, tablets are optimal for consuming data, not creating it. As a result, I find that I use my iPad for reading ebooks (though I just got the new Umberto Eco novel, so I’ll be switching to paper for a while to enjoy the full kinesthetic experience) and for entertainment, especially on airplane flights.

The Kindle Fire is still so new that I’m trying to figure out what it offers over and above a great form factor with its crystal-clear 7-inch screen and low price tag. Kindles are still optimal for digital books and magazines, and I’m working out how to get my own movies, music, and reference PDFs onto the device.

When I watch people coming out of the Apple Store, there are at least as many MacBook Air buyers as iPad buyers, another data point.

Television and radio are all about consumption. The Internet and our always-on world is just as much about publishing and production, however, and that plays a major part in this discussion.

Facebook reports over 250 million photos are uploaded each day. Tapping in a sentence or two is no problem, but anything longer and you’re moving into the gray area of adding a wireless keyboard to your tablet or mobile device. Isn’t it then essentially a laptop?

I believe that we’re heading towards a hybrid world where the average user will have a tablet computer, either running iOS or Android, that will neatly slip into a case that includes more storage, additional ports and a keyboard. We’ll have a second ‘travel’ case that’s slim and offers additional battery power. Between the two we’ll have a tablet that’s also a laptop, the best of both worlds.

The Secret to a Better Marketing Team

How do you rein in your lackluster marketing team? It’s not rocket science, just good old-fashioned accountability.

Hardly a day goes by when I don’t hear some marketing consultant claim that marketing is strategic and too important to measure.


Every marketing team can be (and should be) measured and compensated based on the following two metrics: Continue reading “The Secret to a Better Marketing Team” »

The NBA’s All-Too-Familiar Problem

Willie Green #33 (left) and Chris Paul #3 of the New Orleans Hornets

Professional basketball is run by smart businesspeople. So why do they think they’re exempt from the law of supply and demand?

The NBA lockout came about because the league won’t admit that it has the same problem as football, hockey and baseball: Too many teams for the customer base to support.

Despite being owned by some very smart businessmen, sports teams seem to think the law of supply and demand doesn’t apply to them. This isn’t so. Sports leagues can have excess capacity just like any other business. Maintaining capacity without demand costs money and drags down value. That is why companies shut down factories. Continue reading “The NBA’s All-Too-Familiar Problem” »

Yelp Goes Live in Australia

Co-founder Jeremy Stoppelman hopes that the review site will go viral Down Under without a marketing campaign.

As online review service Yelp prepares for its initial public offering, the company quietly has gone live in Australia today.

Yelp’s co-founder and chief executive Jeremy Stoppelman today gave an interview to Australia’s SmartCompany, saying that businesses both online and off need to analyze how well and easily users can find them through search engines in the runup to the holiday season. Continue reading “Yelp Goes Live in Australia” »