budgeting

Oct

2020

Leave when you want, with your dignity, and your wealth!

Will your business be ready to sell when you are?

There is no doubt that 2020 has effected great change on the way we live our lives, what we do for fun, and where we choose to live. The stay-at-home orders of the Spring pushed many businesses to work remote and re-tool to provide more virtual services. While this came with its share of growing pains and Zoom-bombers, there has been some good that has come from this.

The new business landscape

Many businesses have announced that they will never return to full in-person workplaces, reducing their office costs, and creating happier employees. This is beginning to cause a shift in the way we view cities. With remote work spaces and the ability to attend face-to-face meetings from across the globe, many do not see the need to be close to the city center. Once upon a time you could not “make it” if you lived in a rural area. Today, it is becoming a viable reality.

With a growing workforce of remote employees, many armed with mobile hot-spots and their laptops took to the road in Recreational Vehicle’s (RVs) and have been enjoying a new office everywhere they park. In May and June, RV rentals were up over 1000%, compared to 2019 and sales in June were up 10%. My partner and I decided to seize the market of the moment and as RV campers with our own families, we decided to buy an RV park.

Doing what you love does not guarantee a fairy tale ending!

For those not familiar, an RV park is a campground with amenities for RV campers to park, connect to utilities, meet friends, and have a home base while they explore new areas. When you buy an RV park, very little of what you actually buy is tangible. The largest expense is the business itself. The real estate, buildings, and anything else, from utilities to golf carts and trucks, is a small portion of the purchase. Even though the sale of the business takes place in a real estate transaction, the most valuable asset can be transferred by email.

Imagine the freedom to retire inspired, work remote, and sell your business when you want. Your coach will help you achieve this!

As we began our search, we identified an RV park, right here in Colorado, in a popular mountain town, which appeared to suit our needs. We loved the location and saw a lot of potential to modernize this park and to bring it up to speed. Just as you wouldn’t buy a car without knowing what’s under the hood, you wouldn’t buy a business without knowing what you are getting into. In the business, we call this due diligence. We were certainly glad we did ours as this little fixer upper had some devastating yet avoidable defects hidden behind its curtain.

The couple who owned this park were older and like many getting into this business did it to make friends, spend time outside, and own their own business. They had achieved these goals and had finally made the decision, in their 80’s to move from operator to guest. The gentleman reminded me of my grandfather, very smart, resourceful, and reserved. The woman was sweet, cheerful, and personable. She was an outstanding face for their business. Let’s call them Bob and Sue.

The proof is always in the pudding… or the P&L

Running a mostly cash business and doing most of the repairs and maintenance themselves, Bob and Sue were able to report very little income and still maintain a profit. No doubt this system saved them on their taxes, year over year, despite it being a risky play. Bob and Sue had regular friends who would come visit them for the entire summer to take advantage of the deeply discounted site rentals at the monthly rate and with the added cash discount.

While this helped Bob and Sue maintain long term friendships, they would soon find that it did not serve them in selling their business. When a business like an RV park is sold, as mentioned before, the minority of the price goes to the physical assets of the park and the majority goes to the business itself. Therefore, without a doubt any bank which is called upon to lend money for the purchase will want to give the business its own checkup. When my partner and I accessed the books for this business what we saw was not pretty.

Bob’s crafty workaround to avoid the tax-man and Sue’s clever bookkeeping, which had kept them under the radar for years was unavoidably exposed when we investigated the P&L ( Profit and Loss statement). The business did not generate enough income to support the purchase price and the bank can only assume that if the business continued to run as the books indicated it had, it would lose money when a large loan payment was added into the expenses.

Running out of options!

There are creative financing options in cases like this which allow for the seller to act as the bank and carry the note for the buyer, yet Bob and Sue saw it as they were too old and would not be around to see that loan to maturity, nor much of its benefit. They were stuck. Their only options were to sell the business well below the value of other well-run parks in the area or stay in business for another two years, into their 90’s, to run an above-board business and improve the financials.

When you’re ready to exit, will your business be an attractive product poised to fetch top-dollar? Or will it be a bargain barrel dent-and-ding special? Learn from Bob and Sue and leave on your terms, with confidence!

Key Lessons

Budget – Your books cannot lie! You might lie on your books, however, they can always be verified. How much are you really saving in tax to take that risk which is in-fact digging into your wealth? In Bob and Sue’s case, their shortsighted ploy devalued their business by $700,000!
Economics – Ensure that you are running a business and not a charity. Going into a business where you can make friends and your friends come back is about as rewarding as it gets. Just remember, you are still running a business. Bob and Sue had a nightly rate of $50 to stay the night at their RV park, yet their friends who visited and stayed all summer, the ones who capitalized on all of the discounts offered, were paying less than $5 per night. This drastically hurt their business. Where could yours be improved?
Legacy Planning – A little bit of foresight and planning prevents heartache like this story. No one is too young to begin planning their legacy. Whether it is to pave the way for your retirement or to build a multi-generational trust, I can help you plan for your exit, ensure your business will be highly marketable at that time, and even put more money in your pocket, today.

If you’re ready to plan your legacy and prepare yourself to leave on your terms, with passive income, you can’t wait another year!

Build your Legacy Plan!

(Sources: https://www.forbes.com/sites/alexledsom/2020/07/12/all-aboard-the-land-yachts-as-rv-bookings-spike-1000/#222dbaa447d5, https://www.travelandleisure.com/travel-tips/travel-trends/rv-sales-increase-coronavirus)

Sep

2020

This Simple Habit will help you Build Wealth!

I was recently reading Profit First, by Mike Michalowicz. He is an advocate for taking your profit first (as the title suggests) before you pay any of your business expenses. The goal, long term, is to increase your profit savings and to force your business to run on a leaner budget. This should always be our goal in business, but what about at home? Is it really that much different than a business?

For those of you in business, this will be a quick refresher, however, the generally accepted means of cashflow in a business are:

Revenues (Income) – Expenses = Profit

The trouble with this logic is that we are giving away all control of our profit and leaving it as an outcome of your earning and spending habits. I don’t much trust fate and do not want to put my financial health in its hands.

In Profit First, Michalowicz suggests we look at a model like this (which I have simplified, for the sake of this demonstration):

Revenue – Profit = Budget for Business Expenses

The beauty of this model is that you are paying yourself, which last I checked was the reason most of us got into business, and forcing the business to run on the remainder. I have laid out 11 steps to apply the same principles to your personal finances. Off we go!

Apply Profit First principles to your personal finances

In the book, Michalowicz instructs you to open up multiple bank accounts, to remove temptation and keep your budget fixed. The system is a modern-era, web-enabled version of the old envelope budgeting system, where you have an envelope for each major savings and spending category. People who practice envelope budgeting will get their paycheck, cash it, and divide it into envelopes, based upon their priorities of spending (i.e. emergency fund > rent/mortgage > food > bills/utilities > entertainment).
Analyze and categorize your personal P&L (Profit & Loss). Go back over three months of bank and credit card statements to determine averages.
Group those transactions into big buckets. Your core buckets should be: Income, Savings, Critical Expenses, and Luxury Expenses. As you progress in this model, you may add more buckets, say to save for something special which is further away (i.e. down payment on a vacation home).
Once you’ve determined your percentages of your gross income going into each category (CAP Current Allocation Percentage), set a goal to increase your savings and to decrease your expense strategies (TAP or Target Allocation Percentage). It is possible you have not been saving anything and that your Savings will be 0%. Start small. Set a goal for just 1% this month. It’s so insignificant you won’t even feel it.
Go to your bank and open a checking account for each bucket. Rename your current checking account to be your Luxury Expenses account. We don’t want automatically paid bills and charges coming out of your Income or Savings accounts. The labels should include your CAPs and TAPs and look something like this:

Income
Savings (C-5% T-35%)
Critical Expenses (C-65% T-50%)
Luxury Expenses (C-30% T-15%)
On day 1, take the current balance in your Luxury Expenses account (the one which was your general checking account) and move it to your income account. Get your calculator out, multiply the total in Income by the CAP of each category, and make a transfer from your Income account to each of the other accounts. When you are done, your Income account should be zeroed out. If you had $1,000 in your Income account, the balances when you were finished would look like this:

$0 – Income
$50 – Savings (C-5% T-35%)
$650 – Critical Expenses (C-65% T-50%)
$300 – Luxury Expenses (C-30% T-15%)
When your paycheck goes into your Income account, you’ll make disbursements, according to your CAP, listed on the account’s label, as you did on day 1.
Update your payees and creditors to come from the appropriate expense account. This will be a great exercise in finding which expenses you can cut right away. If you have to update the bank or debit card information on that subscription service that sends you boxes of junk each month (you know… the ones piled up in the corner of your office), this may help you identify what to cancel instead.
Do NOT use your Savings to pay for Luxury Expenses! If this were envelope budgeting, that envelope would run dry and your fun would be over until your next pay day.
Make adjustments as you go. Each month, make it a goal to increase your Savings CAP to be 1% closer to your TAP. You can’t have 101% so that 1% will have to come from somewhere. Attack the Critical Expenses first, before you mess with your fun money! I bet you didn’t think I would suggest that. Before you take away from great memories and a fun life, see which unnecessary expenses you can cut or which bill you can renegotiate, to bring your Expense CAP down by 1%.

What you’ll find is that your 1% savings, as small as they may start out, will add up and gain momentum. In the above example, if you have a take home bi-weekly paycheck of $2,300, a 5% CAP would be $115 per paycheck or $2,990 per year… A 35% CAP is over $20,000 in Savings per year. What would that do for your life?

Take action today and commit to doing it by sharing this blog post on Facebook, Instagram, Twitter, LinkedIn, or your social media platform of choice, and declare you are taking action on your finances. If you want extra accountability, be sure to tag me, Adam Lendi, in it. I will add you to my accountability checklist to make sure you are remaining committed to your goals and your financial freedom!