Using dreams to positively impact solutions in your business

Dreams have been used by people to improve and solve problems in their lives.Business is one such area that needs constant solutions to create products or services for consumers.It may seem impractical,illogical and slightly silly to use your own dreams to solve business problems.The following examples though show that its real and possible to do so.
Madame C.J.Walker
She has been cited in the Guinness Book of Records as the first female African American self made millionaire.This success all started out in a dream to solve a problem in her life.She had been suffering from a scalp infection that led to her loosing a lot of hair.One night she had a dream in which a big black man appeared to her and told her the remedy required to solve her scalp condition.The following morning she got the ingredients together and put them on her scalp and was amazed by the results a few weeks later.She then tried the scalp remedy on her friends and it worked and from then on decided to sell the hair remedy product.The business started small from her house and with time it grew as the demand for scalp remedies and hair growth pomades for the black woman increased.Madame C.J.Walker then hired women and trained them on hair beauty products and business presentation.They went on to be her sales agents and this led to the establishment of a company ;The Madame C.J.Walker Manufacturing Company.The company grew through franchising and became successful.
Elias Howe
The innovator of the sewing machine got his idea from a dream.Elias had been faced with the problem of a needle going through a piece of cloth to sew.He had been trying to use a needle that was pointed at both ends with an eye in the middle and failed to sew at each attempt.One night Elias dreamt that he was taken as prisoner by a group of native Americans.They were dancing around him with spears and then started to aim their spears at him.At this frightening point of the dream he noticed that all the spears had holes near their tips.In the morning he realised that the dream had offered a solution;he then located a hole at the tip of the needle so thread could be caught as it went through the cloth.This made his sewing machine operable and led to mass sewing of clothes at a time when sewing was still done by hand.
Srinivasa Ramanujan
Ramanujan was an Indian mathematician who lived a short but purposeful 32 years, who used dreams to generate mathematical formuales. These have led to ground breaking solutions in statistical and nuclear Physics. Ramanujan revealed that in his dreams a goddess Namakal would appear and present mathematical formula.He would see a red screen formed by flowing blood then a hand would begin to write on this screen.When he awoke he would write the formula as he saw them in the dream and verify later.
Scientist who created artificial arteries
A scientist in America at the New Dimensions in Medicine Center had been working hard to solve the problem of repairing bad arteries in patients' hearts.At the time the transplant method used was to resort to using other arteries in the patient's body to replace the damaged one.This came with the risk of further damage to the patient's life and a shorter life span.The scientist one night dreamt a formula for artificial arteries and the next day went to the laboratory to test it.He was surprised at the results that the human body could accept the transplanted artificial arteries. His work has been adapted and is used to repair damaged heart arteries and comes with the benefits of an improved life span.

These solutions that come from dreams reveal to us that our brains work differently at the awake and sleep state.According to research done,Laura Silva Quesada of the Silva Method found that,slower brainwave functions prepare us to solve problems.The awake state also known as the Beta brainwaves are between 14 to 20 cycles a second is associated with taking action by using physical senses to solve problems. The sleep state also known as Theta brainwaves are 4 to 7 cycles a second is associated with inductive reasoning and uses dreams and visions to solve problems.
Based on this report I seek to challenge myself and you the reader to make note of dreams that offer implicit or explicit solutions to your business problems.

Fact Based Decison Making

I guarantee this post will offend people, who don’t use facts to support their positions.  And, I don’t give a damn about such people.

The most important factor in making business decisions is facts.  The more facts you have about a business problem, and the better able you are to use those facts, the more likely you are to solve your problem.  The fact that most small businesses fail is ample evidence that few small business owners evaluate facts well.  My business has been around for more than twenty-five years.  So I claim street cred.

There are two important steps necessary in using facts to solve problems.  First, you gather facts.  Second, you identify the facts relevant to your decision.

Here’s the New Year’s resolution I wish for most Americans.  Derive your opinions from facts.  If you have no facts, have no opinion.  Note that facts come first, and opinions come later.  The order counts.  Don’t form an opinion and then search for facts supporting the opinion.

A perfect example of getting the order wrong is the recent Rolling Stone article on an alleged gang rape at a University of Virginia (UVA) fraternity.  The writer started with the opinion that fraternity men commit gang rapes and then proceeded to look for facts supporting her already decided conclusion.  She sought out a story from a UVA coed without checking ANY of the story.  Her conclusion about the gang rape preceded any attempt to find facts.  In fact, she never made any attempt to find facts.  She just accepted a story, using as a lazy excuse, that she was being sensitive to the victim’s situation.  Every jackass has an excuse for laziness.

Within a few days, the story fell apart.  None of the dates from the story were accurate, and the alleged rapist had no connection to the alleged victim.  One need hardly mention that the alleged victim was stone cold, passing out drunk during the incident, not exactly a credible witness even if something did happen.  The story was a fraud in every significant way.  The Rolling Stone “regrets” not checking the facts.  They should get back to their main business writing puff pieces about rock stars.  Journalism isn’t a core competency for them.  They also set back the case against sexual abuse a decade or so.

The order matters.  First you obtain facts.  Then you develop your conclusion.

Second, after gathering facts, determine which ones are relevant to your decision.  The riots in Ferguson are  perfect example of using the wrong facts.  This is a fact.  African American men get shot and killed by the police at a higher proportion than white men.  This is an undeniable, but absolutely irrelevant fact to the Ferguson situation.  Here’s why.

Let’s look at what makes up a proportion.  A proportion consists of a numerator and a denominator.  A proportion is the quotient of a division operation using the numerator and dividing by the denominator.  Yes, this is math.  If you don’t understand these terms, you shouldn’t have opinions about proportions as you are unable to evaluate them intelligently.  In fact, you shouldn’t vote, and you definitely shouldn’t reproduce.  Such reproduction is the root cause of poverty, but that’s a subject for another post.

The numerators in our proportions are the number of people shot and killed by police, in one case African American men, in the second case white men.  The denominators are some measure of population.  In the first case, the denominator is the total number of African American men.  In the second, case, it is the number of white men.  So in both cases, we are taking the number of men killed and dividing by some measure of population yielding two proportions, the first of which is higher then the second.  Thus, something must be wrong.  If all men are created equal, the proportions should be the same.  This is the logic of the protesters, even if the vast majority are unable to express their logic in these mathematical terms.

However, why are these proportions the correct ones to use?  Can we find a better set of proportions to evaluate if police treat African American men unfairly compared to white men in the situations where police officers are attacked?  I submit there is a much better set of proportions to measure, which entirely change the analysis.

We are dealing with a situation where an African American man attacked a white police officer and got shot and killed.  This is undisputed from witnesses and a hospital report on the police officer.  We find, in the situation, the best numerator and denominator to use.  The numerator should be men, who have attacked police officers and been killed.  In one case, we use African American men, who have attacked police officers and died.  In the second case, we use white men, who have attacked police officers and died.

The denominator will be the population of men, who have attacked police officers.  In one case, the denominator will be African American men, who have attacked police officers.  In the second case, it will be white men, who have attacked police officers.  These proportions best show if police officers treat African American men differently from white men in the specified situation.  Are the proportions the same?  I have no idea, and you don’t either.  I also don’t plan on attacking a police officer to gather statistical evidence.  I suggest you forgo such an analysis as well.

The statistics aren’t easily available, if available at all.  No facts, no conclusion as noted earlier.  We can’t evaluate if African American men, who attack police officers are killed disproportionately compared to white men, who attack police officers.  Note the difference in conclusions when you seek the appropriate facts.  No, you don’t always get an answer, but you avoid an incorrect answer such as the one reached by the Ferguson protesters.

How does this apply to making business decisions, as this is allegedly a business blog?  Good decision making comes with understanding the process and practice.  The learning process for making fact based decisions can be painful, if you practice only on your business.  Pain means losing money.  None of us can likely affect the Rolling Stone idiocy or the Ferguson and related protests, but we can practice our fact based decision making risk free on national events.  That’s free.  We can also ridicule those, who can’t make fact based decisions.  Why do that?  Because it’s fun.

Let’s debunk one more myth.  All opinions are equally valid as in, “That’s just my opinion, man.  We’re all entitled to our opinions.”  Yes, we are all entitled to opinions, but many opinions are simply incorrect and of no value.

For example, if in your opinion, two plus two equals five, you are simply incorrect.  The fact that two plus two equals four contradicts your opinion and renders your opinion worthless.  An opinion unsupported by facts is simply incorrect.

Do I sound angry in this post?  Of  course I do.  Much of what ails this country comes from poor decision making in the absence of relevant facts.  Find a national problem and apply fact based decision making.  You’ll be angry as well.  Next time, I promise to take my distemper shot before writing.

Thanks for reading!  As always, please visit the main S&K web site at www.skcpas.com for real tax and accounting advice.  Also please like the “How to Screw Up Your Small Business” Facebook page.  I post shorter pieces there.

Until next time, let’s do it to them before they do it to us.

Management Doggie Style

A couple weeks ago, our Jack Russell Terrier, Sidney, suffered a stroke and scared the hell out of us.  If I had the choice between saving Sidney’s life or say, Afghanistan, I’d take Sidney every time.   She’s a far better person than they are.  She’s stone cold deaf now, but up until a year ago, every day after work, she listened to my woes and provided a sympathetic ear.  She’s doing much better now, but her illness made me think about the lessons I have learned from her.  Here are three management lessons, we can learn from dogs.

First, the best managers don’t look like managers at all.  In fact, their staffs believe they are the real managers.  Dogs give us the illusion that we own them.  Nothing could be further from the truth.  Dogs manage us.  We don’t manage them.

Our dog, Sidney used to dine almost exclusively on steak, chicken, fish, or whatever we were having for dinner.  She scoffed at normal dog food.  She trained us to feed her what she wanted.  Every night, the following events happened.

My mother-in-law yelled, “Sidney, why are you always bothering me during dinner?  I never get to sit in peace and eat.  You’ll just have to wait until I’m done!”

Sidney stared at her and yipped happily.  Why happily?  Because she understood that after the yelling came food from our dinner table.  My mother-in-law dutifully stood and put some of whatever was on our dinner menu in Sidney’s dish.  Of course, she always cooked enough food so that Sidney got her share.  Pavlov was a moron – a well trained one.  So are we.

Second, dogs set priorities and enforce them.  When it’s time to rub Sidney’s belly, you had damn well better rub her belly or there’s hell to pay.  She might hold a shoe hostage, and make you play an exciting game of chase the doggie for half an hour.  Great managers set priorities and hold their staffs accountable.  Noncompliance has consequences.

Finally, training is essential.  With Sidney, 7:30PM is treat time.  No, we didn’t get to set the time.  She did by sitting at my feet and barking every night at 7:30.  Training is all about perseverance and repetition.  Sidney would bark for hours at my feet until I got up and fetched a delicious dried chicken treat.  Eventually, I got the message that 7:30 was treat time.  She only had to bark once, and I sprinted to the pantry to get her treat.

Perseverance and repetition work with employees as well.  Don’t expect lessons to take hold the first time.  Sidney spent nearly a week training me.

Thanks for reading!  As always for real tax and accounting advice, visit the main S&K web site at www.skcpas.com.  Also, please like the “How to Screw Up Your Small Business” Facebook page.  I post business tips there several times daily.  Some of the tips are even useful.

Until next time, let’s do it to them before they do it to us.

JHB Philosophy 101

This week, Jeff Becker steps up to the podium.  Jeff and I go back a lot of years.  In this post he shares his experiences running businesses.  Jeff is truly of the business owner mold.  Take it away Jeff...

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Frank had suggested that I write a piece for his blog a few years ago. However, I was still licking my wounds from having lost a 15 year old company that I had grown from 1.5 million per year into a 28 million dollar a year company. I simply hadn’t spent enough time reflecting on what I did wrong and what I did right. I now think it would be helpful to some to put my thoughts down in writing.

I started my construction company at the age of 28. My confidence came from having personal experience in actually doing the work and feeling as though I understood the technical side as well as the physical side of construction means and methods. So doing the work was the easy part. The piece of the puzzle I had to learn on the fly, was the business side.

MY APPROACH TO BUSINESS

My company travelled the entire United States as well as a few overseas jobs. I was always meeting other business owners in new places and those business owners were 60 year old men who were always happy to engage in conversations about business challenges and experiences. I think they found it interesting that I didn’t want to make small talk. I still don’t understand why so many people waste time by thinking their time is better spent talking about sports or the latest reality show when there is so much to glean from other owners when you get a brief moment of their time. Most business owners don’t want to be buddies, so trying to find “personal” common ground, is a waste of time more often than not. If there is common ground, it will happen without any effort. This approach really helped me tremendously as I tried to navigate and learn business. After all, work was the common ground that landed me in front of them in the first place. The rest happens or doesn’t happen. The relationship grows when working through challenges together. You will find this approach throughout this piece.

Another base belief I have, is that money is only made on the actual performance of the work. So if you believe that money is made by the office, this article is not for you. My entire 15 years was a constant struggle to create efficiencies that eliminated or reduce office personnel needed. I did this with as many as 6 and as few as 2 people. Other entities in my trade were using many more than I was. Becoming paperless is the key.

So after the first year, I realized I needed to know more about accounting. I felt powerless and the CPA I had was a specialist in filing IRS extensions. I was cash strapped and had no idea how to really budget my year when all I was getting each year, was what I called an end of the year “Oh Shit”! This is how I found Frank.

PICKING A CPA

I was really becoming a computer nerd. More on that later. I was using Peachtree at the time and so I felt it would be smart to find a CPA that actually knew my accounting package. Frank was on the Peachtree software support list. He was providing bookkeeper training and I didn’t see any other CPA at the time doing this.  Since I had a bookkeeper, I pulled the trigger and our relationship commenced. Frank and I later learned that we had common ground and that we both had visions concerning our two trades. Through that process, we continued to teach each other and pontificate about how we were trying to manage our businesses. Although Frank and I never just “went out to have a beer”, we did however have many personal conversations that I think pointed to the fact that we could. So, lesson 1, always find a competent CPA that you respect. How do you find that? Talk business first and make the conversation as much about your business as theirs. How the other party runs their business will tell you a lot about how they view yours. It also educates them about yours, so they can better help you organize yours. Make sure you know what you want to track, how you want to track it, and eventually how you want to see it on paper. Most CPA’s don’t care, and don’t know how to run your business. Don’t ask them! However they really can help you organize your information, so you can file taxes correctly. Over the years, Frank has only made one mistake and one joint mistake. Both times he did what was right and we both shared in our portions of the issues. The fact that Frank and I still do business, must mean he feels the same. Did I mention that I always felt that we “Could” go out and have a beer together? Make sure you are like minded.

PICKING A LAWYER

I was in a trade where it was more like the “Wild West” back in the 80’s. It was run by a generation that worked out more problems without the need for lawyers. Millions of dollars were worked out on a bar napkin or a simple hand shake. Of course lawyers were a part of forming a contract document, but law suits were really a last resort and marked the end of doing business with the other party. The moment you sued, the relationship was done forever and any friends they had, you lost as well. So it was always in everyone’s best interest to work things out, even if it cost you money in the short term. This was a very good learning exercise. I quickly became focused on developing a clear and concise bid document. Spelling out what items we would perform, really helped weed out the customers that really didn’t understand the job that they wanted built. Avoiding a customer that doesn’t understand what they want, will save you a lot of money, time, and energy by not working for them. I have only used a lawyer for litigation twice in 15 years. Once in Pittsburgh over $15,000….he was a crook and another against an insurance company that wouldn’t pay for a 1.5 million dollar machine that got dumped on a Tennessee interstate. 

What value does a lawyer have in a business? Well, they sort of do and they sort of don’t. The answer is about 50/50…LOL!! Those of you that own a business get that comment. How I used a lawyer, was as an advisor. Lawyers are very good at telling you both sides of the issue and how it plays out in the courts. Many things can be written, however, if there is no case law concerning the other parties issue, you will most likely win when going to court. I used my lawyer as a researcher. I wanted to hear what case law supported my position and what case law supported theirs. I would then use this new found knowledge in conversation with the other party and plant the seed, that their position wouldn’t exactly be a slam dunk for them. It always resulted in a compromise by both parties and a real savings in time and money. The lawyers always win and cost more money than a simple compromise. So how did pick a lawyer? I point you back to my “approach to business”.

BANKING

The most important lesson I learned was that you can’t just have one banking relationship. Although I did always want one, this is never good for the business. I was financing machines that cost about 1.5 million each and they were specialized. Meaning, there was only 5 companies in the USA that even really used these larger machines. This put my business model in a high risk category regardless of the profits. So the best way to say it is this. Eventually every bank is controlled by the Feds. They have to fit into a federally defined risk assessment model. If you get a “No” from your banker, it may not be you. You obviously have to be able to determine whether or not you need to improve some part of you balance sheet, but a lot of times the bank may not be looking to put YOUR RISK TYPE of business into their loan portfolio. I say move on and find one that is. I still have what I consider my go to banker and he played a very important role in helping me when I met my demise due to the depression. When I got a “No” from him when I was wanting to grow, he sent me to another loan officer that was looking for my type of company and could do a higher risk loan. That is the most important attribute you want in a loan officer. When he can’t help, does he care enough about you to recommend someone that will? Another must have attribute is whether or not they will spend a day and take a tour looking at how your business operates. They need to be asking a lot of “why do you do it that way” kind of questions. This shows interest. I can’t recommend anyone better than Pete Fuge with BB&T. The guy was a great teacher as I learned about banking. I still remember him showing up in a nice suit and wore out construction boots. This let me know that he has done this before and he really wanted to learn what I was up to and eventually needed. He also played a role in telling me “No” and advised that growth wasn’t a good idea, based on what he was seeing in the market. In the end, it was Pete that helped the bank officers realize that I was failing due to the economy and not that the business was being run improperly. I was simply written off and we both took our lumps as businesses that took risk together. Your loan officer has to be your best cheerleader. After all, when the doors shut and they consider your loan, you are not allowed in the room to speak your case directly. Educate your loan officer…dress him up and equip him with flashy pom pom’s….and send him in! Taking nothing personal when it comes to banking.

PICKING AN INSURANCE AGENT

I found this to be one of the funniest experiences. Every agent I ever had, drove up in an older model car and within a year, upgraded to some high end luxury or sports car. The insurance game is a racket. Especially when it comes to workers compensation. I had to fight with the insurance company every time I changed agencies. I never got confirmation of this, but it is my opinion that once you get an agent, the insurance company doesn’t want you to change. As a matter of fact, they won’t quote another agency for fear that the broker is pushing your rates up higher and they don’t want to expose that. They are hoping that the “relationship” can allow them to increase your rates every year and chalk it up to problems with your industry risk. I call bullshit! Every time I forced a change, I saved money! So what I am saying is….make a change. Make your agent be competitive and keep your rates the same. Even if you like the guy…..fire him one time….see if he comes back for your business next year.

PICKING EMPLOYEES

I love this topic. Much has been written about this topic since I have been in business. HR has really put a strangle hold on the industry. I still can’t get my head around this entity and why it is needed. I guess I can see it for mega large companies that are just selling a widget, but I think I can argue as much for itas I can against it . I have always liked a small business, so I naturally grew larger with a small business approach. Back in 2001 my father and I did a roll up of small engine businesses in Manassas. It was a retail business that I eventually became too busy to be a part of. My father took over that and eventually sold it.

I was very unconventional, because I really like the “Type A” personalities. I guess big businesses eventually run out of Type A’s but I still believe they are stifled more than they simply run out of them. HR is a big factor in my opinion. Anyways, here are my reasons why.

A type A person wants responsibility. They hate control and if they are capable, they will help you get there with little to no supervision. It really simplifies your business. However there are some pitfalls that you have to manage immediately until you determine you are like minded.

#1 Make sure they are not a prima donna. You want a type A that feels responsible for their mistakes. Once you have that, you got it made. If a Type A makes a mistake, they will move heaven and earth to correct that mistake and see it as a learning experience. A type B will most likely be afraid to approach the same issue twice and need a lot of babysitting when it happens again.

#2 Make sure they are the type that wants to find an easier way to perform the work. I am unfortunately prejudiced with the opinion that most people will bitch about a process within a company, but never take the steps to improve it. Even Type A’s. They simply show up every day and chalk it up to it being a part of the job they don’t like. This is where you HAVE to be there, so you can talk about the bad parts of the job and eventually come up with a way to make the bad part become a good part. That was always the leading topic when putting all the type A’s in the same room to brainstorm. This is how I opened the minds of my fellow cavemen and eventually became a paperless company.

#3 You have to make sure that the job you want done is clearly communicated. Otherwise you give the type A, wiggle room to point the finger back at you…..if something goes wrong. If you don’t clearly communicate…and it will happen…you have to take it on the chin and shift to fixing the problem WITH them. After all it is only costing you money if you don’t and you caused the problem by not doing your part.

#4 You ABSOLUTELY have to interface with them every day for a year to make sure you are comfortable that they perform the tasks required to your satisfaction. This is when you communicate how the company is going to interface with clients, other employees, and most importantly organize their work. I never really cared about how they did the work. I learned new ways to do the work from these type A’s sometimes. Having spent the time to discuss the process of doing the work netted us many efficiencies. There is nothing more productive than a bunch of type A people, driving towards the same goal, discussing how to improve what we do. We became a company of inventors as a result. Both sides felt very good about what they were doing because we all had a hand in solving a challenge. I even have a joint patent as a result. It is meaningless now, but I don’t want to get started down that road. It is another learning curve that has no place here.

#5 If you do all of the above correctly…..and you have a business that is growing…..you can now start focusing on having that type A groom a successor. Nine times out of ten, they will pick and groom their successor, much like you. I don’t recommend doing this until you have at least 5 years under your belt. If customers are wanting you to grow, resist it until repeat business demands it consistently. I have seen the 5 year rule play out in many businesses.

So I like Type A’s in leadership roles and from there, I try and find Type A’s that are in hiding amongst the type B’s. I had many that stayed with me for the entire ride. I hope this helps.

PICKING CLIENTS

Never forget that YOUpick your clients! If you work for a problem client, then you have forgotten how to say NO! Bad clients will always cost you time, money, and possibly employees. Make sure your client knows why they need you, how to use you, and appreciates the relationship and what you offer. If you have to have a bad client to make ends meet, start looking for another quickly. This challenge is what pushed me out of Northern VA. There are only so many “Good Clients” in any geographic area. Go find what you are looking for in other places. However, don’t discount what a so called “Bad Client” is telling you. They may be trying to help. So stay opened minded until you figure the relationship out.

 

FINAL THOUGHTS

So I now find myself looking for a new challenge. I have grown a business to a size few achieve. In Northern VA that isn’t so big, however nationally it is. I have purchased and run a retail business during that time, so I know what it is like to be “at Risk” and also how to manage and sell widgets…this I lovingly refer to as “Retail type” businesses. My latest passion/venture is going to market with processes and custom software that streamline and teach small companies how to grow and manage the office and “get it done” processes. Process challenges is what I really excel in. Predicting a depression was not.

Well, I hope this hasn’t been too long winded. If all of this is posted on Frank’s blog, then and only then, will I drop my insecurity of being too long winded. I am hoping Frank doesn’t edit this down to something simpler….like…..he had a great business….but failed!

Good Luck in business,

jeff@jhbecker.com

 

Guest post from Sami Jadallah - Mistakes I Made Starting a High Tech Business

This week, I turn the blog over to Sami Jadallah, a long time friend and client, who started a high tech automotive service business.  Take it away Sami...

Few years’ back I came up with an idea to keep track of service and maintenance of cars/trucks on a smart card. Having worked in Europe for few years, smartcards where a hot thing and with bright future. Ah well.

I proceeded to file for a patent, which took almost 14 months to prosecute and secure, and over $100,000. I won the patent then it was time to raise money and organize a team.

1.      Raising the fund:

Because of my many years of doing business overseas it was not too difficult to raise money, given my performance and my professional integrity. One of my clients agreed to come in as partner together with others. My share of 1/3 was a developer and manager of the project while the overseas investors put up the entire funds.

As it happens one of them ran into financial difficulties and did not pay his share, so I used my own money to pay for his shares including collateralize my stock holding even taking out second mortgage… Big Big dumb and stupid mistake… Never ever do that.. Let the company go down the drain but never ever put what you have a risk for the business.

2.      Selecting a team:

The business required both technical and business. On the technical side there was an Israeli company with advance technology in the field of smart card technology. A business associate of mine introduced me to the company and I negotiated an agreement with them to provide the technology (software) and the hardware. The company sent one of their top software developer to the Washington area where I made several appointments for him with local dealership to understand the automatable dealership software and who they electronically file all the service and maintenance records. Upon his return they filed a proposal of 9 months to develop and test the software. Well, they worked at but it seems it was not their priority since they were gearing to go public and my project was one way for them to present a large business opportunity to go the market and raise money.

As it happened, they did raise the needed capital using my business idea and contract with potential investors.

However when it came to the software they did a very shitty job of it and they were late, quite late… and when their team arrived in the DC area to test the software, none of what they did work and I had to hire a professor from University of Maryland to help fix what they could not fix. Lacking a technical team I was at their mercy and the delay and false start lost me a big opportunity to go public (more on this).

Finally we fixed the software but we lost precious time and confidence with dealership and industry, but never the less we proceeded any way.

To help develop the business and marketing, I hired a former VP of a Premier top of the line German car manufacturer who also happens to be the former president of a smaller European car manufacturer. To be the be the president of the company… he was also a head of a major though smaller European car manufacturer.

I also hired a VP of an extended warranty company to be the VP in charge of marketing.

Meanwhile I continued to work overseas and trying to earn income and enough money to pay there top of the line and expensive executives.

As it happened both were losers and my advice to any one… never ever hires a have been … these top executive can only go down and never go up. Hire a hungry young MBA willing to make something of himself and succeed and never higher guys who can only go down and who are used to big expense account, dinners, wines etc… and charge the small struggling start up company.

Also never ever hire anyone with a salary that is not tied up to performance… Once they have a contract they simply don’t give a shit about happens as long as they get their fat check every month.

3.      Legal Team:

Ah well, lawyers are no better than these car guys, specially when one of them is using your business to score a point for partnership, and keep dragging the business and legal process so that he can keep billing until he secure his partnership.  I lost a big big opportunity to go public with the idea, since it was a hot idea when .com companies were raising millions on names only without a product. And I had a product and had a patent to support it.

4.      Conclusion:

·         Never put your house or saving at risk for a business… no matter what, and if necessary let the company and business go down the drain rather than risk your personal financial security and lose your business too.

·         Never ever higher a technical or business partner who will use your business relations to go to the market or secure a big contract using your business as bait to catch the big fish and you lose every thing.

·         Always make sure that you put a substantial sum as penalty for poor of failing product… let the SOB pay for their failing and make sure that their failure is not all charge to you.

·         Never ever hire a have been, top executives who are used to big bucks and perks to head a start up company because they will milk you along the way as they buy themselves time to get a better job or secure retirement. A had been can only go down never go up… and the bigger they are the bigger they fail because they do not have the time or the smart to learn something new.

·         Always make sure you hire a young energetic smart young graduate who will work hard to succeed and who will also make you succeed.

·         Always tie up compensation to both salary and performance and never salary alone… it gives no one any incentive to succeed since they are guaranteed the money… They will work hard when they know they have to perform and deliver to the bank account.

·         As for lawyers, even the best lawyers are out for themselves… think 100 times before you hire a lawyer who will help you with your business.

I lost over $2.5 millions on this project and I continue to be angry with myself, have not reached peace with my self having put my family and their financial security at risk and I put my self at great financial risk… I did not mind if I lost the business because of the economy or bad product, but to lose it because off these so-called top of the line executive is a crime…

Sami Jamil Jadallah

Fairfax, VA

Lessons Learned from Leeches

Leeches killed Robin Williams.  I realized this watching a video of Robin Williams making a public service advertisement with a young cancer patient.  He was totally in the moment with her, completely dedicated to making her happy.  Here was Robin’s problem.  There were more cancer patients, personal assistants, managers, staff, and fans than he could ever make happy.  Not being able to meet the expectations of seven billion earth inhabitants killed him.  Ultimately, there just wasn’t enough blood to feed all the leeches.  Leeches kill business owners as well.

A leech is a thing that feels entitled to feed on your talents, efforts, and success.  If you’re successful, you’ll wade through ponds infested with leeches every day.  Leeches can be vendors, customers, staff, friends, and even blood relatives – especially blood relatives.

There are two types of leeches: time leeches and money leeches.  I often encounter time leeches, who want to market their services to my clients.  They don’t describe their requests that way.  They talk about joint marketing efforts.  However, I have two thousand clients to their twenty.  When a leech looks in the mirror, he doesn’t see a leech.

You may find money leeches in your immediate family.  She’s the sister, who only needs a few thousand dollars to make the mortgage payment this week.  She promises to pay you back by payday.  But payday never arrives.   Soon she and her spawn move in with you on a temporary basis.  Temporary means until the sun burns down to a white dwarf in a few million years.

I’m starting a support group called Leeches Anonymous.  As with Alcoholics Anonymous, the first step towards a cure is realizing you have a problem.  However, the second step, unlike AA, is realizing that the problem isn’t you.  It’s OK to kill leeches.  But Frank, won’t the leeches hate you as a result?  Yes.  The third step in our recovery is realizing that not everyone will love you, and that’s not only OK, but it needs to be that way for you to survive.

To kill leeches, you use the “N” word.  “No” kills leeches more effectively than fire, and killing one leech kills others as the word spreads throughout the leech community that you’re an asshole.  The key to being happy is being called an asshole by the right people.

I’ve had a couple of asshole moments lately when the leeches surrounded me and bled my spirit dry.  Leeches aren’t necessarily bad people.  I cut ties with a charity event, when my expected time commitment spiraled out of control.  That commitment, combined with a bunch of others, caused me panic attacks at night.  I chose sleep and mental health over a very worthy event.  Yes, I’m an asshole, but a better rested one now.  I couldn’t meet any commitments in an exhausted state.  Some leeches had to die for others to live.

Carefully choose the leeches you let live.  You don’t have to kill all the leeches, but put the ones you don’t kill on a paying basis.  I don’t kill all the joint marketing leeches, just the ones where there’s no money in it for me.

Sometimes customers can be leeches.  Evaluate which ones feed you back financially and emotionally to compensate for your effort.  Kill the rest.  And yes – the emotional payback matters as much as the financial.  We all have customers, who kill us emotionally despite the money.

Attracting leeches is a sign of success.  More leeches means more success.  So don’t feel bad about having leeches.  Feel bad about not killing them.

As always, thanks for reading!  For real tax and accounting advice, visit the main S&K web site at www.skcpas.com.  Until next time, let’s kill some leeches.

So You're Not Good at Finance...

I haven’t done a really good blog rant for awhile.  Here goes…

What would a world look like where mental health treatment made people worse rather than better?  Mass murderers would kill school children after receiving mental health treatment.  Soldiers returning from combat would shoot up army bases, kill their families, and commit suicide.  We’d sell deadly guns to nuts, because not selling to them would violate their constitutional rights.  The evidence suggests we inhabit that world.

Comedian Ron White  did a bit around the phrase, “You can’t fix stupid.”  Apparently, we can’t fix crazy either.  Why did WWII veterans come home and not shoot up military bases despite no mental health treatment, when veterans from Afghanistan shoot up bases after treatment?  Mental health “professionals” have some explaining to do.  Calling Dr. Phil.  Calling Dr. Phil.  I’m not getting an answer.  He’s too busy with Lindsay Lohan’s parents.  Now on to our regularly scheduled blog.

Business owners frequently tell me, “I’m not good with finances.”  Is not being good with money really an option for business owners?

Jan owned a multi-million dollar printing and marketing business.  She wasn’t good at finance so she paid a six figure salary to hire a chief financial officer.  She paid lots in taxes on her earnings, but never asked why the company bank accounts were always empty.  After all she’d hired a professional to manage that.

One day two banks called her and wouldn’t talk to her CFO.    They told her she was overdrawn in all the company accounts and needed to deposit $100K immediately.  She walked down the hall and confronted her CFO, who confessed to stealing $750K from the company.  He had covered his theft by kiting checks.  Check kiting is depositing checks from one overdrawn account to cover checks written on another overdrawn account.  Obviously, you can’t do this forever.  Back in the 1990’s, you could do this for a month or so, because checks cleared in about five days.  Don’t try this today since checks clear overnight.

Jan was bankrupt, despite having a successful business, because she wasn’t good at finance.  Business owners need two essential skills.  First, you have to be technically proficient at whatever service you offer.  If you own an auto repair shop, you’d better be able to change the oil in your car.

Second, you have to be good at business.  This is much harder than technical proficiency since it involves a lots of areas.  You need not be an expert in any of these areas.  You can hire experts,  but you must be capable of supervising your experts, which requires at least a degree of proficiency in many areas, such as finance, marketing, and management.  Please read Michael Gerber’s “E-Myth” series of books.  He writes that business success is about working on the business not in it.  Technicians work in the business.  You can hire them.  Business owners work on the business, which is much more difficult and requires entirely different skills.

But what about Steve Jobs and Bill Gates?  They were techie guys, not business people, weren’t they?  You are wrong on two counts.  First, pull your driver’s license out of your wallet.  What’s the name on the license?  Probably not Jobs or Gates.  People win the lottery, just not you.  Jobs and Gates are Michael Jordan to your Greg Jones.  Who’s Greg Jones?  I don’t freaking know either.  That’s the point.  You aren’t Jobs or Gates.  You’re Greg Jones, and nobody knows who you are.  I’m Greg Jones as well.  That doesn’t mean we can’t be successful – maybe not Apple successful, but successful nonetheless.

Second, both Jobs and Gates had incredible business skills in both marketing and finance.  Both had lesser known techie buddies, Steve Wozniak in Job’s case and Paul Allen in Gates’ case.  These sidekicks were the tech geniuses behind the initial success of Apple and Microsoft.  Jobs and Gates understood the technology, but more importantly understood the importance of the technology and how to sell it for a profit.  Their business skills were exponentially more important than their technical skills.

Thanks for reading!  As always, please visit the main S&K web site at www.skcpas.com and like the “How to Screw Up Your Small Business” Facebook page.

Until next time, let’s do it to them before they do it to us.

Why Long term Unemployment Persists

With the economy improving, why does long term unemployment still afflict a large portion of the workforce?  The Who (classic rock old guy group, now known as "Who's Left?") sang a song with the lyrics, "I hope I die before I get old."  You may not die before you get old, but your career almost certainly will.

Some personal disclosure is in order.  I am fifty-five years old.  I'm not a young whippersnapper / buck / punk (pick your old guy euphemism) lecturing you on how you just won't change with the times.  I am eligible for the super cheap IHOP breakfast special.  The waiters know me at Bob Evans.  I take enough prescription drugs that I'm considering one of those plastic old people pill caddies while I still have the mental capacity to use it.  I've got street cred as an old guy.

To prove my point about unemployment, let's do a virtual experiment together.  Get our your checkbook - jeesh I am an old guy.  Login into your e-banking software and schedule a payment for $250K.  You are going to place a bet.  You are going to pretend to be a business owner hiring a new employee for a tech job.  You are betting $250K on the person you hire from two potential candidates.  Pick the better candidate and get your $250K back plus more.  Pick the wrong one and lose your $250K.  So you don't have $250K to bet? That makes you just like most business owners.  We don't have it to lose either.  Welcome to the gamble business owners take every day hiring new employees.

You have two candidates, who appear equally qualified.  Neither is a perfect fit for your job, but from their resumes, either seems able to grow into the position.  Now you interview them and learn that one candidate is thirty-five years old and the other is fifty-five.  On whom shall you bet that $250K that you don't have?  Which one seems most adaptable to new skills?  You will hire the younger person one hundred times out of one hundred.  The economy does the same.

This doesn't seem fair?  Fair won't matter to you when $250K of your personal savings is at risk.

I like to think of myself as tech savvy and willing to learn new technologies and methods.  Maybe I even really do possess those traits.  However, I am one data point in an economy of hundreds of millions of data points.  My individual traits matter little in a job search.  I carry the statistical baggage of all fifty-five year olds.  I am a walking compendium of old guy characteristics that would eliminate me from most jobs without even an interview.

Maybe, we need a federal program to eliminate discrimination against old guys to make the job search game fair.  Before chasing the "fair" concept off a cliff, consider the following example from my wife's career.

She works with a man in his fifties, who has tens of years of computer experience.  I believe he was a programmer earlier in his career and then went on to teaching computer science in high school.  Now he is back as a programmer on a government contract.

He regales his younger colleagues with opinions of how EDLIN is far better than the current crop of of text editors.  Remember EDLIN?  If you do, you probably carry an AARP card.  EDLIN was the original (I think) text editor in MS-DOS - back about 1984.  With EDLIN, you edited text files one line at a time.  Yes, I'm that old that I used it.  It sucks compared to anything you might use in the 21st century.  The EDLIN turd was flushed about 1986 in favor of the MS-DOS text editor, imaginatively named EDIT, with which you could edit whole text files at one time.  What a technology miracle!

The qualities of EDLIN versus anything else really don't matter.  What really matters is the message this guy is broadcasting to his younger colleagues, which is, "I'm old and I can't change."  Maybe they mentally insert the word "won't", for "can't."

This guy's contract will surely end as do all government contracts. As the employee of a government contractor, your employment is contract to contract.  When one ends, you look for another one.  If your company doesn't have a position for you, you move on to another company.

Most people find new jobs by networking with colleagues from prior contracts.  What will happen when he goes out job hunting?  All of his current colleagues think of him as old and not adaptable.  Do you think they'll recommend his hire for new positions?  He is one more lead bar, that I get to carry around in my old guy career baggage.  He's a datapoint equal to mine.  Another brick in the wall we old guys can no longer hurdle in the job market.

Do we really need a federal regulation to get this guy his next job?  He's likely not productive in his current job.  Shall we curse another employer with his employment?  The economy is giving us the answer in the form of the economic reality of long term unemployment.   The economy doesn't value and won't pay for experience not relevant to today.  A really great EDLIN professional isn't in much demand.  Thus, we have persistent long term unemployment for people over fifty.

Sure, this is crappy news for us old people, but you can't solve a problem before defining it.  The problem is that our experience from twenty-five years ago has little value and probably is even a negative factor today on a resume.  Employees get paid for what they bring to a business now, not what they brought twenty-five years ago.  Old people like me may find this hard to believe, but the tech knowledge from twenty-five years ago has next to no value today.  Yessiree sonny, we know that a hard drive has platters that spin beneath read / write heads.  That doesn't matter in a world moving to solid state storage.

Here are some old guy job search tips.  First, don't talk about the good ole mainframe days and how cloud computing is really just a return to the mainframe model.  That's largely true, but your resume will go to the shredder anyway.  You think you're exuding understanding and perspective.  Your younger potential boss pictures giving you CPR in the lobby.

Second, get everything that happened pre 21st century off your resume.  No one cares that you were the senior director of DOS application development.  What can you do now?  Do you have today's important certifications?

Third, talk little (very little) about what you've done and a lot about what you can do for an employer today.  The words "extensive experience" should never pass your lips.  Those words scream out "past" not "future."

Last, and this is a great interviewing tip for all ages, use my favorite NFL employment metaphor.  Tell a potential boss that you are a great left tackle.  A left tackle is the protector of the quarterback.   The boss sees himself as the quarterback.  You are telling a potential boss that you have his back.  You aren't looking to sack him.  OK, this might not work with female bosses.  I don't have a good female boss metaphor.  I don't think the term, BFF, works in an employment setting, but maybe my still normal testosterone is getting the best of me here.

Thanks for reading!  I promise to be back more often after this most recent and challenging tax season.  For real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.  Also like the "How to Screw Up Your Small Business" page on Facebook.  I solve all the world's business problems there daily.

Until next time, let's do it to them before they do it to us.  Damn - another old guy cliche.  Time for my Geritol and a nap.

Business Networking to Grow Your Business

What do you get when you cross a masters degree from George Washington University with a former mean girl from high school?  You get the force of nature to whom I'm married.  She uses her supernatural powers sparingly, but effectively.  A few years ago a tenant in our rental property tortured us repeatedly.  After a few interactions with Laura, he called one Saturday morning.  Laura answered, but he asked to speak with me.

He said, "Hey dude, I don't like talking to her.  She talks down to me."

I'm guessing she caused my dude buddy flashbacks from his high school loser past.  She should have her own Avengers movie called "Mean Girl."  She would subdue villains by reminding them of their inadequacies, causing them to surrender to authorities in search of peaceful incarceration.  What does this have to do with business networking?  Not a damn thing, but it's my blog.  Now on to networking.

 Business networking is the least expensive form of marketing to grow your small business - at least in terms of cold hard cash.  In the early stages, when you have more time than money, networking is an effective strategy.  Later, you begin to see the actual costs of networking when you've tasted some financial success, and time becomes scarce.  But, networking will remain an effective strategy then, even if you have to cut back on the time commitment.  Fortunately, networking's benefits are cumulative and will continue even as you cut back on time.

Step one:  Set realistic expectations.  Networking doesn't work overnight.  You won't attend a chamber of commerce breakfast and walk away with immediate business.  Networking takes two years to achieve significant results, especially if you don't have much of a customer base to start.  People will refer business to you when they trust you.  That doesn't happen overnight.

Step two: Determine who your best referral sources are.  If you are a handyman, think real estate agents.  They'll have a steady supply of home sellers, who need fix up work to successfully sell their homes.  If you're a CPA, you want to meet bankers and lawyers.  Most banks hold small business events.  Attend them.

Step three:  Determine what events your potential customers and referral sources attend.  If you own a consulting business targeting small businesses, don't attend public policy meetings.  You won't find many small business owners there.  Look for networking groups sponsored by business groups such as the chamber of commerce.  Also look into the for profit groups, like BNI.  They ask for a large commitment of time, but deliver good training in basic networking.  Once your business grows, you'll find the for profit groups a black hole for time.  Then switch to a group with a lower time commitment.

Step four: Go deep rather than wide.  Participating actively in a couple groups will lead to more referrals than participating occasionally in a bunch.  Networking is about establishing trust through quality interactions.  Take a position of leadership in a group.  But don't do that unless you intend to do a great job.  I've been in groups with leaders, who really didn't do anything other than hold officer titles.  No one sent business their way.  Doing nothing is better than doing nothing right.

Step five: Be of service.  BNI has the slogan that "givers get."  Expect to give referrals before you get them.  Expect to pay for lunch the first couple times.  Generosity from you will breed generously and trust from your referral sources.  Networking is about win-win relationships.  Show your value to referral sources.  They'll then show their value to you.

Thanks for reading!  As always, please visit the main S&K web site www.skcpas.com for real tax and accounting advice.  Also, please like the "How to Screw Up Your Small Business" Facebook page.  I post snarky advice there three or four times daily.

Until next time, let's do it to them before they do it to us!

How Customer Selection Affects Your Work Life Balance

I'm tired of the grade school girlie gossip war between Dan Snyder, owner of the team soon formerly to be known as the Redskins, and Mike Shanahan, soon to be former coach of said team.  Their moron minions battle each other through leaks to the Washington Post and local sports radio stations.  Here's a succinct summary of the battle.

Shanahan's minions, "RGIII is my boyfriend.  If I can't have him, you can't either.  I'll bench him."

Snyder's minions, "RGIII is my boyfriend.  He likes me better than you.  He told me so when we went on a date to the Tom Cruise movie premier in Hollywood."

I began to solve the work life balance equation when I realized that my choice of clients largely determined the hours I must work.  I also realized that the clients, who wanted to meet after hours, aren't my best clients.  My best clients are business owners, who consider accounting and tax matters to be part of their normal business day.  They no more want to schlep across town at eight P.M. to meet with me any more than I wanted to meet with them at that hour.  They value their down time as I do.  Unless we're meeting for beer, then count me in.

The potential clients, who want to meet in the evenings, have a number of bad characteristics, not the least of which is cutting into my time off.  They are typically lower income than my best business owner clients.  So they care more about price and less about value.  They are great clients for H&R Block, Jackson Hewitt, and Liberty Tax.  Their bosses are my great clients.

I began the transition to a saner life by preventing our admin staff from scheduling new client meetings after four P.M. after tax season.  Yes, people go elsewhere.  The ones I want to go elsewhere.

I once had a potential client call me at eleven P.M. on a Saturday night to see if he should lease or buy a car.  No thank you, not this boy.  I told him to buy the car and then park it up his ass.  Alcohol might have been involved at that hour.

There are some businesses, like retail and restaurants, where business hours are basically all day.  God have mercy on your soul if one of these is your business.   You'll likely never have a decent work life balance.  Better you than me.  These businesses are also typically unprofitable.  So if you own one, you'd probably feel less pain from a sharp stick in the eye.

If you own a business that should allow for a sane life, ask which customers cause you to work long hours.  I'll bet they're the price sensitive ones, whom you can never satisfy.  Fire one of these miscreant customers and see how it makes you feel.  I'm betting the feeling isn't quite as good as sex, but it's probably a close second.  Masters and Johnson should have studied this.  Of course, they were too busy studying each other naked.

As I did with my clients, determine the characteristics of your best customers.  Determine which twenty percent create eighty percent of your profits.  Then market just to them and accept only the best.  Satisfy these customers and they'll refer more great customers to you.  Great customers associate with other great customers the way great musicians play with other great musicians.  Soon you'll have a critical mass of profitable customers, who respect your time and great service. 

Then your life will begin to make sense again.  You wife and kids will recognize your face again.  Of course, spending more time with them may make you want to spent less time with them.  But that's your problem.  I'm not a damn social worker.

Thanks for reading!  As always, for real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.  Also, please like my Facebook page, "How to Screw Up Your Small Business."  I post snarky advice there three or four times daily.

Until next time, let's do it to them before they do it to us.

Buying a Business - Making An Offer Part II

I promise to keep this rant to two paragraphs, not counting this one.  Then I'll get on topic.  If I don't, you can bitch slap me up side my ugly, arrogant head.

I'm tired of caring about crazies.  Notice I didn't write "mentally ill", "clinically depressed", or any of the other PC euphemisms for crazies, nuts, and whack jobs.  Instead, we need to aim our concern towards protecting potential victims.  Psychiatrists worry about stigmatizing nuts.  Their victims are already stigmatized.  Many times they're called corpses.

Ron White says you can't cure stupid.  Well, you can't cure crazy either.  Many of the craziest people in society are psychiatrists, like Sigmund Fruit (Archie Bunker's term).   Show me one brand of crazy that has a cure.  The crazy thing about crazies is that they won't take medication, because they're too crazy to believe they need it.  What's my point?  (I'm running out of space.)  We need to put nuts in nuthouses.  Their rights are less important than the rights of their victims.

In part I of making an offer, I covered the basics of deal structure.  Yes, it was a couple months ago.  Give me a break, I've been driven crazy worrying about crazies.  In this installment, I'll cover determining your offering price.

Let's set some ground rules about the size of potential business purchases I am addressing.  In this installment, I will cover buying businesses from roughly zero to five million dollars in annual revenue.  For businesses larger than that, the principles are the same, but the details, calculations, and deal structure tend to be different.

First, let's define what you are buying.  When you buy a business, you are really buying a cash flow stream or a stream of profits.  You aren't buying the seller's cash flow; you are buying the cash flow of the business in your hands.  That's an important point.  The cash flow available to you from the business and the cash flow to the seller are usually different.  Sometimes your cash flow is higher, but sometimes it will be lower.

Determining the cash flow available to you is an art as much as a science.  You start out with profit from either financial statements or income tax returns.  Then, you add back non-cash expenses, such as depreciation, and financial costs like interest expense.  You will also add back any discretionary expenses, such as the rent on the owner's girlfriend's apartment.  You also add back any other owner perks, like family on the payroll and extravagant auto expenses or benefits.

You can expect the owner and his broker to volunteer most of the above additions to cash flow.  They won't volunteer anything that should be subtracted.  If the owner worked actively in the business, but you don't plan to, subtract the cost of a manager to replace the owner.  In some admittedly rare cases, family members are paid below market value.  You'll have to pay more to replace them.  Determining the cash flow of the business in your hands is the objective.  I doubt you'll pay for the girlfriend's apartment unless she is really cute and digs you.  That last part you verify with some due diligence in a seedy motel.

After you determine the cash flow available to you, determine the appropriate multiple of that cash flow to get your offering price.  My business broker friends tell me small businesses are selling from two to three times cash flow.  To get multiples for your type of business, you can find databases of small business sales such as Bizcomps and the database from the Institute of Business Appraisers.  These cost money.  Your CPA, if a valuation professional, probably subscribes to these already.  Don't rely in any way shape or form on multiples from franchisors.  Their job is to get the highest prices for their franchisees.  To do so, they'll lie to their mothers.

You will find that multiples of cash flow sometimes vary wildly even within an industry.  Company size has a big effect.  Larger companies typically sell for larger multiples.  Even accounting for size, you may see some pretty wide variations in multiples.  Don't expect a "correct" answer in your search for a multiple.  If you get outside two to three times as a multiple, you are outside the norm, and you need to perform some detailed research into the reasons for higher or lower multiples.

If you find that businesses of similar type and size sell for three times cash flow, don't immediately offer three times.  Multiples are subject to negotiation.  Don't go to your top acceptable multiple immediately.  The seller will likely counter your offer.  You need some wiggle room.

Expect to accept terms somewhere between your original offer and your top acceptable price.  If you can't get a price in that range, walk away.  The number one frustration expressed by buyers about deals is buyer's remorse about paying too much.  Remember that the friendly business broker represents the seller, not you.  He'll tell you his price is fair all day long.  He gets a percentage of that price.

The final price for a business will probably be a multiple times cash flow plus any inventory.  You will likely not get receivables, and you should probably not accept any liabilities.  For businesses with significant equipment, you will probably have to buy the equipment in addition to the price as calculated above.

Once you have determined your offering price, don't immediately rush to the seller and definitely don't fill out the offer form from the broker.  Run to your attorney.  You will be making an offer with a plethora of caveats.  For instance, your offer will be subject to verifying the financial numbers provided by the seller.  If the numbers are garbage, you won't consummate the sale.  The offer will also explicitly detail what assets you are purchasing and what assets and liabilities you do not want.  There will also be state law niceties to consider.  Since, I'm only a shit house lawyer, get some real advice from a real lawyer.

Thanks for reading!  As always, please visit the main S&K web site for real tax and accounting advice, www.skcpas.com.  Also please like the "How to Screw Up Your Small Business" Facebook page.  I post tidbits of incredible value there daily.  Yes, that's sarcasm.  Sometimes, I just spew forth.  You get what you pay for.

Until next time, let's do it to them before they do it to us!

Torture Your Customers

This past weekend I flew to Dallas to see the Redskins play the Cowboys on Sunday.  The Redskins stunk up Jerry Jone's stadium so badly, Jerry had to open the roof.  Dan Snyder wants a new stadium just like Jerry's AT&T Stadium.  This is a case of Dan wanting to keep up with the Joneses.  Maybe Dan can start by signing some defensive players who can tackle.

Since the game was played Sunday evening, I booked a return flight to Dulles Airport for Monday morning.  I would arrive early Monday afternoon and get to the office about 3 PM.  I flew United, since it was the only airline that would let me use frequent flyer miles on a nonstop flight.  The trip to Dallas was a breeze, but my return trip turned into a nightmare when my flight was cancelled for mechanical trouble.

Because so many fans traveled to Dallas from DC for the game, there were no seats available on any flights until the next day.  Gate agents handed out hotel vouchers to a hundred angry passengers.  When I approached the gate agent to rebook, I expected the same.  However, since I am a United Club member and was traveling alone,she booked me first class into Chicago and then into Dulles for a midnight arrival, supposedly.  My Chicago flight was delayed for two hours and I arrived home for bed at 3 AM.

The only good part of the trip was flying first class. Sitting in the plane on the tarmac in Dallas, I wondered how many of my fellow passengers in first class had actually paid for first class seats.  I was there to make up for my crappy experience.  I thought many of the remainder were either there for similar reasons or had used frequent flyer miles to upgrade.  So I asked the people around me.  No one had paid full price for a first class seat.  Where have all the paying first class customers gone and what does that mean for the airlines?

The where part is easy.  Wealthy travelers charter flights on time share planes and jets.  They can either share flights with other like minded travelers or book a plane for a solo flight on a per hour basis.  You rent the plane and the crew for an hourly fee.  These flights typically leave from regional airports near major cities and land at other regional airports.

No one waits for hours to check in and endure pointless abuse at security checkpoints.  You walk out of a private terminal onto a plane.  At the end of the flight, you step off the plane and board a rental car or limo waiting on the runway.  A three hour flight requires about four hours of travel time.  A major airline three hour flight requires a whole day.

I know all of this, because I have flown with a client, who travels exclusively this way.  He crosses the country, making three customer visits in three different cities, in a normal work day.  He stays overnight in a hotel and then repeats the procedure on the way home.  In two days, he can be in six cities and get home for a late dinner.  Try that on Continental.
So we have answered where paying first class customers have gone and why.  What does this mean for the airlines?  It means their first class cabins produce little revenue. Today's first class customer either gets bumped there, or uses frequent flyer miles to get there.  The funny thing about frequent flyer miles is that you don't have to even fly to get them. Miles come most often from credit card affinity deals.  Spend enough money and you get first class airline tickets.

How did first class become unprofitable?  I have blogged before about the insurance concept called adverse selection.  With adverse selection, you unwittingly drive off your best customers and are thus left with only your undesirable customers.

Airlines routinely torture their customers.  So their wealthy customers left for private aviation, leaving the airlines with cheap ass, frequent flyer mile usin' blokes like me in their first class cabins.  Bankruptcy was inevitable.  Note that the one consistently profitable airline, Southwest, has no first class cabins.

The business lesson from this seems obvious, at least to anyone not running an airline.  You may think you control your market and customers.  Maybe you think your customers don't have a choice but to use you.  Maybe you just like being an asshole to customers.  But you're wrong.  Customers always have alternatives; at least the desirable ones with money do.

Chase away your best customers, and you'll be left with ones, who will make your life hell on earth.

Thanks for reading. Please visit our main S&K web site at www.skcpas.com for real tax and accounting advice.  Also please like the "How to Screw Up Your Small Business" Facebook page.

Until next time, let's do it to them before they do it to us.

The Value of Faith (an Empirical Approach)

This post builds on the ground breaking research of Greg Kyte, the funniest CPA in the business and a noted agnostic.  Greg publishes a blog at cpaagnostic.blogspot.com.  In one post, he evaluates Pascal's wager, which is the assertion that one should believe in God, because if he doesn't exist, you have suffered no harm.  However, if he exists and you don't believe, you get everlasting accommodations in hell.

Having studied Pascal's wager in depth, I find that it has never been subjected to rigorous academic scrutiny.  I propose a model for valuing faith, for which Pascal's wager represents only two extreme cases.  A real mathematical model of faith in God yields substantially richer results than Pascal's believe or else model.

In creating my faith model, I asked the question I always ask when performing a business valuation.  "What would Shannon Pratt do?"  If you're in the business valuation biz, you're laughing your ass off now.  If you're not, Shannon Pratt is Jesus Christ, Mohammed, and Jennifer Aniston all rolled up into one for business valuators.  You can't discount his advice (another marvelous biz valuation pun).

In creating my faith model, I started with the basic rule that anything, including faith, is worth the net present value of its benefits.  That yields the following equation:

F = NPV((P * H) - S - T)  The variables in his equation are as follows:
F is the value of faith in God.
P is the probability that God exists.
H is the value of heaven's benefits.
S is the value of unforgiven sin.
T represents the transactional costs of religion.

Thus, this formula states that faith is worth the present value of its benefits less related costs, in other words what you give up to get to heaven.   Let's examine each variable in detail starting with the easiest, transaction costs.

Transaction costs are the costs of maintaining faith.  Tithes and offerings are an obvious cost.  Less obvious, unless you're Catholic, is the potential cost of having family members molested by religious authorities.  If you're a member of a cult, don't forget the costs of the Kool Aid.  If your religion requires human sacrifices, count the costs of finding your victims, I mean sacred offerings.

Representing the value of unforgiven sin, S consists of the benefits, net of related costs, of indulging in behavior at odds with at least one of the Ten Commandments.  This is where you record the benefits of banging the babysitter.  Please remember to subtract from the value of the orgasms: incarceration time, alimony, legal costs and possibly child support if you don't wear a condom.

Here's some personal advice based on mathematics.  If the costs of the sin exceed the benefits, you might want to avoid the sin.  In other words, if you can't do the time, don't bag the babysitter.  Woo a TGIF waitress instead.

You might reasonably ask why only unforgiven sin is a subtraction in calculating the value of faith and not forgiven sin.  Forgiven sin does not reduce the benefits of heaven, at least not in this model.  Further research on this point may be necessary. For instance, Hitler and Mussolini are rumored to have asked for forgiveness on their deathbeds.  If they received a heavenly reward, hell may well be empty.  Apparently, the materiality of a sin does not reduce its capacity to be forgiven.  In any case, the obvious strategy is to sin like hell until just before you die.  Then repent and avoid the subtraction in this model of faith.  Disclosure - please consult your own competent religious authority for advice pertinent to your particular situation.

Let's tackle P next, the probability that God exists.  P would seem to have only two values, but Pascal erred when he assumed that either you believe in God or you don't.  He implicitly assumed P was either zero or 100%.  This is not necessarily the case.

For instance, what about Sunday Christians?  Their value for P equals 1 divided by 7 or roughly 14%.  For those, who attend church only at Christmas and Easter, P equals 2 divided by 365.  We can safely ignore leap years as an immaterial variance, except in the year of death, when you really don't want to take chances.

Further, what about worshippers of Satan?  Their values for P may actually be negative.  Clearly their P values must not be zero, since a belief on Satan would seem to imply a belief in God also.  I'll leave this last point for those seeking an interesting thesis for their doctoral degrees.

Finally consider H, the value of heaven's everlasting benefits.  You might think the value of heaven is infinite, but that is only a cursory consideration.  Consider that the definition of fair market value is the value at which a property would change hands between a willing buyer and a willing seller.

First, who in the hell would sell heaven willingly?  I searched both the BIZCOMPS and Mid Market Comps databases looking for comparable sales in vain.  Finding no comparable sales of heaven, we must conclude that heaven is a non-marketable minority interest requiring substantial discounts for both minority interest and marketability. Those discounts could total 100% and wipe out the fair market value of heaven entirely.

In conclusion, Pascal was a poor gambler.  He'd lose his ass in Vegas with his wager.  Much more federally funded research into the empirical model of faith is required.  As a small first step, I filed a Freedom of Information Act with the NSA requesting all of their metadata on God.  We need to know just whom God talks to on his / her cell phone.  What televangelists does he / she have in his / her contact list?  What are his / her favorite porn sites?  Maybe he / she hasn't spoken to the Pope in centuries after that Reformation thing.

Once Congress finishes screwing up the federal debt ceiling, I'll ask them for a $5 billion grant to further my research.  Please take your Congressman hostage until he supports my grant.

Thanks for reading!  For real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.

Until next time, let's do it to them before they do it to us.

Buying a Business - Making an Offer, Part I

If you haven't read my previous post on break even analysis, please read it before reading this one.  It teaches determining whether you are going to make an offer to purchase a particular business.  In this post, you'll learn about putting together your offer.

You have a few decisions to make when putting together an offer to purchase a business.  First is whether to buy the assets of your target business or the business entity itself.  This is a critical decision.

If you are buying the business entity, you are buying all of the assets and all of the liabilities, known and unknown, of your target business.  If your target business is a corporation, you are buying the stock of the business.  If the business is an LLC, you are buying the actual LLC.

At first, you might wonder, "Who in his right mind would take on the possibility of unknown liabilities?"  Sometimes, however, if makes perfect sense to buy the entity, and you can mitigate the possibility of getting stuck with unwelcome surprises.

If you seek a federal government contracting company with existing contracts, buying the entity is pretty much the only choice.  Federal contracts are not assignable.  To get the contracts, you have to buy the entity.  You can't purchase the contract as a separate asset.

You do not, however, have to buy a business entity to get a valuable existing business name.  The name is a separate, valuable asset that can be purchased.

When you purchase the assets of a company, you get to pick and choose exactly what you are buying.  You can, for instance, buy the customers, inventory, and hard assets of a company without buying the accounts receivable.  You can leave those with the existing owner to collect.  If the receivables are bad, that is the previous owner's problem.  You don't have to take any of the liabilities at all.  However, if you take the receivables, the existing owner will probably insist that you take the payables that produced the receivables.  But, all of this is subject to negotiation.

Let's look at the tax differences between purchasing the business entity versus purchasing the business assets.  When you buy the entity, you get no immediate tax deduction.  Your purchase is like buying Ford Motor Company stock.  If and when you sell the stock in either Ford or your new business, you'll get capital gains tax treatment on the sale.  If fact, your seller gets this treatment as well if you buy the entity.  Sellers prefer to sell their entities for this reason.  They get lower tax bills on their sales.

When you purchase the assets of a business, each type of asset has a separate tax treatment.  For the hard assets, such as equipment, vehicles, and furniture, you get a depreciation deduction.  For inventory, you get a deduction when you sell it.  Thus, purchasing assets is typically a better tax deal for a buyer even before you consider that you don't have to risk getting unknown liabilities.

If the seller wants an entity sale, but a buyer wants an asset sale, what factors determine which happens?  To capitalize on the tax advantage of an entity sale, most sellers will accept a slightly lower price for an entity sale.

A buyer can mitigate the potential danger of unknown liabilities by setting aside some of the purchase price in an escrow account.  That amount typically runs between 10% and 25% of the purchase price.  The money is released after a period of time sufficient to determine that no unknown liabilities have arisen, typically three years.

So don't completely discount the idea of purchasing the business entity, but be aware that the escrow account ensures you'll still be dealing with the previous owner until the escrow money is disbursed.  The seller and the business aren't yet completely divorced during that time period, and like an ex-wife, he'll be hanging around to make certain you give him his money.

Almost all small business sales are done as asset sales, because they are less risky for the buyer from a liability standpoint and provide for a clean split from the previous owner.

If you decide to make an offer for a business in the form of an asset purchase, you next have to determine what assets you are buying.  For small businesses, the seller typically keeps the cash, accounts receivable, and all liabilities.  The buyer gets the business name, customers, hard assets, inventory, and can choose whether to accept an existing lease.  The seller also normally agrees not to compete with you for a period of time within a specified mileage range of the business.

While you decide which assets you want to buy, you absolutely need an attorney to write the formal offer you will present.  Do not allow the seller's business broker to write YOUR offer.  As with real estate, the broker represents the seller's interests, not yours.  Most broker written boilerplate documents also have lots of legal issues.  It's your offer.  Get your representative to write it.  Paying an attorney now is way cheaper than paying one later to unwind a poorly written document.  I know from painful personal experience.

My next post will cover determining how much to offer for your target business.

As always, thanks for reading!  Your comments are appreciated and helpful to others reading the posts.  For real tax and accounting advice, please visit the main S&K web site at www.skcpas.com.  Also, please like the "How to Screw up Your Small Business" Facebook page.  I post business tips there several times daily.

Until next time, let's do it to them before they do it to us.