The most fascinating topic ever. Start a squirrel flying school. Banks don’t loan money. Convince your family to work for free. Custodians have it made. Building rocket ships with Elon Musk. How many times can you visit your grandkids? and for how long? Pickleball anyone? American’s are punished for working.
Welcome to our listener-supported podcast, Money Talk, uncompromised absolute financial truths behind financial perceptions with host, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.
Chuck: This is Chuck.
Ed: Hi, I’m Ed.
Chuck: Today we’re still talking about the accumulation process and specifically, starting, buying and selling a business.
Ed: Chuck, I find this to be the most fascinating topic ever encountered by a normal human being. This is kind of what’s made this country great. This is capitalism in its purest form.
Chuck: That’s true.
Ed: How do you start a business or why do you start a business or what should you do? Now, first off, Let me give you the negatives. Those people that start new businesses fail, 30% of them fail within the first two years, 50% fail within the next five years, and 25% in the next 15 years.
Chuck: Those add up to a high number.
Ed: Yes. Not only a high number, but it’s a situation that– Why do these businesses fail? It recurs whether we’re talking about a profit activity or a not for profit activity. I’ve had folks come in. They’re going to start a not for profit and raise all sorts of money to make squirrels fly. They think that’s a good, terrible activity. The first question I ask is, tell me about the market. People are going to make contributions into this organization so that you can make squirrels fly. What’s the market for this product whether let’s assume it’s a widget or a squirrel retention device, or it’s a new car? What’s the market for this? People typically do not investigate that market. Then they have questions about the business plan. I say business plan, and they will say to me, “A business plan, what is a business plan?” That starts with numbers. Chuck, you kind of like numbers.
Chuck: Very much in favor of numbers. Yes.
Ed: Once you have a business plan are we going to be able to make widgets? What’s the market in this locale for widgets, number one? What’s the competition, number two? What is it going to cost to make these, number three? How are you going to sell them, number four? Then most importantly, where are you going to get the money to finance this?
Chuck: It seems like that can depend a lot from one type of business to another. The other thing is, maybe those numbers that– You want to ideally have numbers for every single one of the things that you’ve just listed. Be able to identify them down to a certain degree of accuracy and yet sometimes, particularly if you’re just starting a business, it may be relatively vague. I’m thinking about it was not too many years ago that I started up my law firm. I sketched exactly those kinds of things out, although it was difficult to quantify every single one of them and yet, it was still an important exercise to go through just to understand well, how are you going to do pricing? What kind of expenses can you afford?
Ed: How are you going to get the business?
Chuck: Right, and what kind of expenses can you afford to incur versus those that you can’t? You sort of have an idea of how far over your ski’s you’re going to need to be. Of course, if you’re talking about a type of company that requires a large capital investment, someone else’s money is probably being brought to bear on that either as equity investor or a lender, and they certainly are going to insist on receiving a lot of detailed information, I would hope.
Ed: Yes, the banks, include the small business administration, will not make your loan if you need the money? Assume that’s the case.
Chuck: I can say with certainty, that that’s the way banks generally– It’s sort of a line from what you’d expect a standup comedian to say, but it has the tendency to be relatively true, and I can share a story with you, which is I had a very nice meeting with a banker one time wanting to get a commercial loan just for cash management purposes. This was one of those things, where I could spend money as I would want-
Ed: Now, this is for your-
Chuck: My law firm.
Ed: They’re service business, no capital to speak of.
Chuck: All right, exactly. The idea was, well, I can pay these expenses as I go along, but what was more attractive to me was to say, well, let’s take the revenue and let’s put it away in investments as we go along and have an operating loan that I can run. Then just periodically pay down that operating loan by selling the investments and it would allow, for me, at least, it seemed like that you can be a little more measured in terms of how you went about which expenses you want to pay for when because you would be able to work instance decide how much salary I wanted to pay myself at the end of the year rather than an ongoing salary.
Ed: They wouldn’t make the loan.
Chuck: Well, no, they would make me the loan, but after a very nice long conversation and going through all of the financials for the business and laying out the logic behind it, and everything 30, 45 minutes into the conversation. Okay, great. This sounds good. Now, what were you thinking about in terms of collateral?
Ed: That is security.
Chuck: Security, which, of course, what I was looking for and expecting to be able to get because I was pretty naive, I suppose, was a non-collateralized loan based on everything we’ve been talking about for the prior 30 minutes. If it was going to be collateralized. I could have saved myself that entire conversation and just borrowed against the collateral, right?
Ed: Yes, now, the takeaway, the lesson here is, the banker will not loan you the money unless the banker knows the banker will be paid back.
Chuck: Well, and I would say they go one further step in that you have to already have, so to speak, the asset that you will pay the banker back with. In my case, I simply walked out of that meeting and had a much simpler transaction where I just borrowed against the collateral separately. When you think about someone who is in the same position but didn’t have any kind of an asset base to be able to borrow against, they would be much more precarious position because there’d be no loan available of them.
Ed: Yes, put it another way. Let’s assume that we’re not talking about a service business that doesn’t require a lot of capital, but let’s assume we’re talking about manufacturing businesses to manufacture widgets– which are the greatest thing since sliced bread better than electric cars, it’s going to go to the moon and back with nominal cost. You’ve got to convince someone that someone’s got to be an angel, an angel investor that’s going to put money in, then you’ve got to make sure you can convince some people to work for you getting paid maybe at the end of the year. Then you got to make sure that you’re willing to commit your entire lifetime to the passion of that activity. In other words, forget about eight to five, think about six to six, maybe six to nine, six to 12, seven days to get this thing going. By the way, let’s assume you’ve done all that, but it doesn’t work. Can you accept failure?
Chuck: Someone who’s going to start a business like that, I think has to be willing to accept failure. Possibility of failure.
Ed: Yes, the possibility that is pretty likely that you’re going to, let’s assume that you’ve got the investigation of the market, which is are going to sell, you can make squirrels fly in this area be a great investment. You got your business plan that you authored. You didn’t delegate it to someone else. You put it in writing, you did the numbers, you did the projections. You believe in it, and you’ve got then overly optimistic you’ve tried A, B and C different projections. You’re sure that this is going to work, and then the financing. Maybe you’re talking about family members, grandparents, parents, cousins, nephew, and what are they going to want in return for that financing? Then finally, are you able to change? In business, the only thing that’s constant is change.
Chuck: I’m glad you mentioned that because I was thinking I needed to interrupt you here and mention that this startup process is something that doesn’t just happen at the startup phase, but midway through an enterprise. I can think of conversations I’ve had with them last week with people were, well, here’s a business that’s been around for generation. Something about it isn’t working. The people who are managing it need to sit down and do exactly what we’ve just been talking about. This is a business that’s been around for a long time, but the idea is, “Hey, you still need a business plan.”
Ed: You get updated. Let’s use journalism as an example. You ever opportune to buy a newspaper or you own a newspaper, well, change is constant. This podcast didn’t exist, this activity didn’t exist two decades ago. Change. The shrinking market for that particular should be able to change. What am I going to do? Convert to digital? We’re going to buy all kinds of organizations up and see if we can make this work or are, we going to simply shut it down and go sell ice cream? The issue is constant reassessment of where you are whether it’s a service business, manufacturing business, whether it’s a protected with some trademarks copyrights, those expire. The bottom line here is patience, no fear of failure, and constant updating, and thinking about it, and devotion of your entire life to this day job.
Chuck: That’s the mentality of the entrepreneur is really, really having that kind of level of emotional dedication to the business. You sometimes see that with people who come in later and manage the enterprise after it’s already off the ground.
Ed: That’s a different group. That’s the custodian.
Chuck: It’s much more rare for that second group of people to have that attitude and for the person who gave birth to enterprise, to begin with.
Ed: Yes, the passion and being a custodian is different than being the entrepreneur. The entrepreneur can make decisions and failure is okay, because I got Plan B, and I got Plan C, and I got Plan D. By the way, no matter what happens, no one’s going to die.
Chuck: It seems like my interactions with people who have been responsible for founding of business, their attitude, even decades later after it’s become very successful you still just can’t have this sense talking to them that they’re constantly thinking, “What can I do for this business?
Ed: What can I do to make it better?
Chuck: What can I do for these people? They’re always thinking about what can I do to make this run better than it is. As you start seeing new management teams come in over time and you take that to the logical extreme, you’re talking about, say, a publicly-traded company that now has a management team that’s been recruited from wherever and you almost get the opposite. Well, you do get the opposite in most cases or the attitude is, “What can this business do for me?”
Ed: Yes, but the issue in looking at a business plan whether you’re talking about starting a business or buying a business or selling a business, the issue is value. What sort of value are you creating that will appeal to someone else? Not that you like flying squirrels. Pardon me for getting back to that, but the point is, what sort of value are you creating? Value is a two-sided coin? We’re talking about quantitative value dollars and cents and it’s money, honey. That’s all it is. Then there’s the qualitative value, the creation of jobs. The second question someone asks you is, “Hey, Jack, what do you do?” What you do defines you as a human being. If you’re an entrepreneur, there is the thing about money honey, but there’s also about conferring and adding value and giving someone self-respect. If you have both of those sides of the coin, in your view, then it makes it more meaningful because just making money is not the way it’s going to work forever. You’ve got to have something that that drives you other than money. Is that fair?
Chuck: No, I think that’s fair. I don’t think what you’ve just expressed is necessarily universal attitude. I certainly have spoken with any number of people who call themselves business entrepreneurs. Don’t do things the way you’ve just described. I lot of times those are folks that bounce around from one thing to another. We’re not talking about the ones building that mean– Elon Musk does not, for instance, fall into the category of the person I just described. He’s more like the kind of person you just described. He is building rocket ships.
Ed: There’s something about the entrepreneur. There’s something about investing. That if the takeaway is not only dollars and cents. By the way, in your business, but you may never make any money until you’re a ghost and maybe your successors will make the money based on what you’ve done. If you can create some kind of intellectual value, some respect you feel good about it. When I see folks that have been businesspeople, but they’re the second generation businesspeople or they’ve been with a large organization and they retire. You know what they do?
Chuck: They have no mooring.
Ed: They fall off the ship. You can only visit grandchildren so many times a year assuming you have grandchildren. Then you go to nieces and nephews where you can play golf so many times a year or tennis. If you can’t play tennis do pickleball. The child the bottom line is you have to have an intellectual challenge. You have to have some passion. Starting a business. I’m thinking about it just read an article in the October issue of Chicago Crain’s Business about some group is planning a private club in Chicago. There are two really member-only clubs. There’s the Soho House and the East Bank Club. Really big organizations. These folks are planning a 21,000 square foot activity, a private club in Chicago. That’s great. It may work, but on the other hand they’re leasing real estate. They’re probably leasing equipment. They’re hoping to attract and is that the business that you as an angel investor would be inclined to put a lot of money in?
Chuck: Yes, I would say that strikes me as the business that is very clearly in decline these days. I would be asking them some very skeptical questions about what that business plan is. Why are they going to be able to start a new one in a city where in the recent past private clubs have been shut down and converted to regular hotels and other types of centers. What exactly are they doing that? I’m sure that the existing clubs are not bursting at the seams with membership. Where are these members going to come from?
Ed: Then the question they asked, there is an organization that is now under the New York Stock Exchange. Since we’re talking about gyms and health clubs. It’s called Planet Fitness. I am not advertising for Planet Fitness, but they have a $10-month charge.
Chuck: That in their case is really a $10 an hour or $10 a month donation that you make to the owners of Planet Fitness in exchange for which most of the people that you get no club usage whatsoever.
Ed: You’ve done the numbers the algorithms have been demonstrated. That you have 100 employees 100 participants at 10 bucks a month, only three are going to come there every month. What is your net cost? If you can gross up to 5,000 members at $10,000 a month and have the property leased and had the equipment leased, you’re going to do all right. The point is what are you going to generate Chuck, ordinary income? We talked about that before. That’s ordinary income versus long term capital gain. What I’m suggesting to you when you’re looking at starting a business or buying a business you’ve got to look at first the passion of the people are going to work with you. The source, the money, the business plan, and then what are the tax ramifications of doing this? Ordinary income capital gain. We’ll get into what happens when you’re going to buy a business. Are we together? Be careful in starting a business. Be careful in buying a business. Good luck.
Chuck: I think that people who were this would be a new thing for them may not be accustomed to the application of self-employment tax if it’s a person who’s always been employed by someone else and just sneak up on a new startup person who was starting a business, you think about, “Okay, how much do I need to live off or make a projection or whatever?” Then, “Oh, wait a minute, I’m paying both the employer and the employee’s side of this social security and Medicaid or Medicare withholdings and suddenly find themselves a little short on what they thought was going to be their budget.” That is one of the things in our tax code that is just an amazing drag in terms of percentage pay.
Ed: Yes, you’re punished for working.
Chuck: It is truly, I remember. This is a few decades ago when Newt Gingrich was giving some speech and he referred to in this speech, he said, “The cruelest tax of all is the tax on job creation.” Now, he was referring to the capital gains tax, but it struck me when I heard that phrase that wait a minute, there is actually a direct tax in our tax code on job creation and it’s super high tax and just astonished that everyone just shrugs as if this is something we should never be concerned about or talk about as a matter of public policy, but it’s there.
Ed: It’s there. Going back on starting a business or buying a business, the steps are really the same and so they’re all the same. The question is, what’s going on here? What’s the passion for the buyer? The seller was the source of financing. What’s the investment rate of return? Do I like numbers? I’ve got to make sure that I like numbers. Do I like staying up at night thinking about the business? Well, turning from that is buying or selling a business. What are the steps? Step number one is called due diligence. Lawyers dream. Let’s assume that you’re with a major firm and you’re investigating the purchase of a company that makes widgets. The team of lawyers, accountants, actuaries, descend on the business organization looking through all of these papers, reams and reams of papers typically for several weeks at an hourly charge, which is fine, but they know more about the business and the issues that confront the business then the owners do, so that’s due diligence. The next step is the businessperson has determined what’s the return on invested capital. If all the assumptions I’ve expressed work, how much money am I going to make on this honey because I can go in the stock market and a total index fund and pay 500 or 1000 total return is anywhere from five to 10 to 20% a year? What am I alternatives? If I want to do this, I’ve got to do better than I could do with a passive index fund. You’ve made that decision. What’s the source of capital? What have I looked at in terms of the market and who do I go to to help me? The business broker, the role of a business broker, like a real estate broker.
Chuck: Well, they call themselves investment bankers Ed.
Ed: Okay, well.
Chuck: I’m not sure why although then it sounds fancier.
Ed: Well, yes, and got to be careful and I don’t want to walk around by investment bankers. I think I’ll be run over by a truck or whatever, but that’s okay. The point is the broker is paid on a contingency fee basis, generally speaking, with so many dollars per month to help on the due diligence process. The broker is pushing for what?
Chuck: Well, they’re pushing just to have a transaction close typically. It’s like real estate broker in the sense that if the transaction closes, the broker gets paid and the broker gets paid typically on the gross amount of the sale and these contracts-
Ed: Including debt.
Chuck: -including debt, typically including, for instance, there’ll be formula for any salary that’s paid for the seller if the seller is kept on as a consultant in that kind of thing and so it’s actually kind of astonishing when you think about the dollar amount that is used to calculate the fee for the broker that their percentage applies against it’s a much larger number than the dollar amount that’s going into the sports fund.
Ed: Yes, it’s measured by the economic value being transferred or received. It’s not what you think it is. It could be, for example, in the now we’ll turn to the questions or the tax considerations. Now, I’m not talking about buying stock in a listed company, your exchanging company. I’m not talking about that sort of thing or note, I’m talking about a business organization. You’re going to buy stock, or you are going to buy assets or combination of that. Typically, the astute business entrepreneur will keep the real estate out of the organization. That could be the subject of a like-kind exchange, or leasebacks or whatever. No matter what you do in planning a business startup, keep the real estate out of the lobster pot, which is the business organization. Having said that, then the first step is allocating this purchase price. Chuck, we’ve had more than a few go arounds on that because we always insist on the allocation is agreed upon before much else happens. You’re experienced along those lines.
Chuck: Yes, I think it’s critical because the allocation and just to back up a step, we’re talking about, let’s say you’re buying a business and you make up a number, let’s say your purchase price is going to be $30 million for this business and it’s not a stock sale, it’s an asset sale. How much of that is being used as the purchase price for the building? How much of that is the purchase price for the inventory? How much there is the purchase price for the furniture, the equipment, the customer list, the non-compete agreements? If you go down the whole balance sheet of the businesses been sold and ideally, you would be allocating prices to each of the items on that balance sheet, but the critical thing is to get it into the tax category, so depreciated property versus long term capital assets versus ordinary income generating property. The seller can determine how much tax I’m going to have to pay at the closing of this thing. Talking about this from the seller side first, it is not unusual at all for a proposed transaction to put less money in the pocket of the seller than they will incur in tax that they will have to pay upon closing.
Ed: Let’s talk about that. It’s like a teeter totter to the extent the buyer gets really good tax rate, but the seller loses.
Chuck: There always is that tension– Well, isn’t really the first and biggest example of that, the fact that the seller would prefer to just sell the stock. The buyer is never going to buy the stock.
Ed: The liabilities and the trala la la, although there’s some exceptions on how you can make it a deemed assets, how we won’t get into that. The point is, you’re starting to allocate the purchase price, and the best for the seller is goodwill and that can be personal goodwill, a doctor. If a doctor is selling the practice and has no non-compete with the practice, that doctor has goodwill in the form of patient following, that is it’s an intangible yet it’s a capital gain asset. The doctors counsel want to allocate as much to the goodwill, likewise with a manufacturing organization. You wanted the chief involved male or female, as much as the purchase price to goodwill and as the least amount to depreciable assets, which will generate ordinary income. Putting another way, we’re not going to spend the rest of the year going through these allocations, but the point is, know that it’s not a simple process.
Chuck: I’m surprised at how little attention is given to this topic by the investment bankers and by frankly, even the accountants and the lawyers that typically operate in this space.
Ed: Frankly even, Chuck, had put that up on top.
Chuck: They eventually
Ed: They over said it. They never look at it. Until the end.
Chuck: You are right. Towards the end they do. These numbers, especially if you’re talking about the sale of an S corporation, these numbers can be so significant or a partnership for that matter. These things can be so significant that you can literally negotiate the price off of– You can make concessions on the top line in order to get the allocation you want. It makes sense in knowing those numbers on the front the very beginning of these discussions is absolutely critical. In fact, I think the habit we’ve really developed is even before the company is listed, before anyone’s engaged to-
Ed: Create the balance sheet, the allocation.
Chuck: -to start mapping this out, to get some a sense of, “Hey, if you can sell this business, and let’s say you can get it at the price you’d like, what’s this really going to look like in terms of cash in your pocket after you’ve paid the tax that is inevitably going to need to be paid on sale?”
Ed: You are criticized. The lawyer does that, and I would encourage every representative to do that as the predicate when you do it, and we’ll get through how these work, very steps. When you get to the term sheet or the letter of intent, that pricing model must be expressed and the opportunity to negotiate at the front, not at the closing. Going back to my favorite topic is value. What is the value of this business organization and how do you determine value? A formula? A combination? I’ve seen some business appraisals, or some professionals suggest it’s a joke, value is a joke. Well, the bottom line is, the value is what someone’s willing to pay for the business. That is a function of that cash flow. How much cash does this business generate?
Chuck: Doesn’t that depend on who the buyer is, though? Let’s say, a buyer who is really coming at this strictly as a standpoint of treating it like a generic investment, definitely seems to me almost exclusively going to be focused on the cash flow. Somebody who’s a competitor who’s maybe observing, that’s different.
Ed: Yes, that’s two categories. You mentioned the last, later category, which is a strategic buyer. I’m going to add this on to my platform and my cost of this will be spread over all these other business organizations have a similar, right if I have. The marginal cost is de minimis, hardly much at all, versus the individual who’s buying it for investment only. That person will look at the excess of the cash over what should be appropriate rate of return. Now, you got to identify all those things that we talked about looking at a business and you got to identify the buyer, what’s going on with the buyer, when, et cetera. It’s almost like a marriage or could be a divorce in the case of the sale. You can use a formula, but more importantly, you can go to external sources. Just one that I look at all the time, is a business reference Guide, and that’s compiled by the business brokerage press and that lists as a beginning point, all the particular measures of value for such things as accounting firms, Ace Hardware stores, apartments and the like. You have something to begin with, because the other side is looking at those also. The bottom line is it’s money honey, and that’s what it is. You need it because of the location, you need it because of the add-on. Why do you need this? This is more of a psychological trip than you might think it to be. Any comments about that?
Chuck: Well, no, but I was going to bring you back to a comment you made at the very beginning of the conversation, which was about the propensity of businesses to fail. I’m curious, I know that those statistics cited, are referring to true failures of the business, but it seems to me like certain types of sales are really just a cushion failure, aren’t they? If you’re selling a business under some duress, it’s really a failure.
Ed: The fire sale. The other thing psychologically, oftentimes folks will want to go through this process to determine the real value their business, never having the intention of selling it. I’ll tell you what, what does it mean to you to know what the widget company is really worth? The only way you can determine that, you’re not going to get evaluation expert in. That person is not qualified to tell you what the real value is. Maybe first aid and gift tax purposes.
Chuck: Well, now you’re going to get hit by a few trucks.
Ed: Well, that’s okay. I have my dad’s car; it doesn’t bother me. That’s a 1994 Buick Century, goes like the wind. The only problem is these stop at a stoplight and these older women knock on the window about to come in. The only problem is they’re all over 80 years old. Having said that, the point is, you’ve got to determine what’s really going on here and one way of determining is testing a lot of markets. If you’re making a gazillion dollars a year of $500,000 to test it is worth it because then you really know what it’s worth. You then know what the cost of the sales is going to be, which are after-tax, cash will be and are you better off by holding it or selling it. I must tell you if you’re talking about an entrepreneur, getting the entrepreneur to sell that business is very difficult unless it’s to a private equity group and they’re going to keep about 20% of it. That business is a child, the next child for that entrepreneur.
Chuck: That’s true. I can’t think of an example of witnessing someone give up a business that they started on a purely voluntary basis.
Ed: It doesn’t happen. What am I going to do? Play golf, play tennis, play pickleball. No. I don’t have the challenge, the leverage, the cost of doing business, the change. Once you have it, you can’t give it up easily, but you got to plan for it. You will become a ghost at some time.
Chuck: Speak for yourself.
Ed: You can’t take it with you. Although I must tell you, I’m coming up with ideas. I will take it with me. The point is, that is something that you got to identify who is the seller, who is the buyer or is it personalities, and that is never, I’m overstating it, but never considered. What are your concerns? What are your fears? Is this going to work, and this is what’s going to cost you and if it fails, you’re still paying me.
Chuck: Do you think that there’s– Well, I forgot a couple of questions. First is might be some people listening who are the folks that– I mean, I’ve run across, not frequently, but periodically people who are– They’ll characterize themselves and say, “Well, I’m a businessperson. I’m looking for a business that I want to buy.” It’s like they don’t really even have an industry in mind or whatever, they just want to buy a business.
Ed: No wait a minute, why do you want to buy the business?
Chuck: Well, my question–
Ed: No, I mean, you’re this person, Chuck. Why do you want to buy this business?
Chuck: I have a hard time putting myself in that person.
Ed: No but try it. Why do you want to buy it?
Chuck: To make money.
Ed: You could make money doing other things. Why are you going to buy a business?
Chuck: I don’t want to have a boss. I want to be my own boss.
Ed: You want to be your own boss, right? What have you done up till this date? Where did you work before?
Chuck: You might have run across people who– What I’ve done before, I’ve bought and sold other businesses.
Ed: Now you’re a sophisticated investor, but let’s assume you’re someone who’s inherited some money, so you want to buy a business. Look at well, I like food. I’m going to buy a restaurant. Favorite ploy. Do you know about, I think about the restaurant business?
Chuck: Well, I don’t know if anyone.
Ed: You’re the guy that’s inherited.
Chuck: I don’t know anyone who does.
Ed: The fair rate I understand is about the same as what I’ve expressed, but I have a sense it’s even greater, but that’s okay. You lie two ways you lie or use numbers.
Chuck: Well, while you’re on this topic, I think that this is one of those areas where, speaking of inheritance, where you see this happen, where there might be someone who really has passion. Who’s a, let’s say a chef, who has an idea for a restaurant doesn’t have any capital, but then finds another person to put the capital into the business who really doesn’t know anything about the restaurant and the restaurant business and then is tied to this thing. I don’t want to say its exploitative because it might be that both parties are in good faith, but it can be real money pit.
Ed: Sure, you think about an option is then a franchise. A freestanding McDonald’s or a Chick-fil-A, or you’ve got the benefit of the teachings, but you’re going to pay a royalty fee, a franchise fee, and you’re going to inherit all the regulations promulgated by the franchisor, but that’s the fallback. This guy that’s coming in with X dollars wants to buy– a guy or a gal– buy a business I would say number one, let’s look at the franchises that you think you may have an interest in something you know something about. If you overcome that hurdle, then you can proceed to all these other steps with a lot of intent. I can go on forever in terms of the papers that are required. Let’s just say they are accountant streams and lawyers dreams and the issue is are you ready to expand the friction costs knowing that A, the transaction may fail before it’s closed and B, it may fail after it’s closed and C, are you willing to absorb the intellectual and financial loss and D, do you understand the passion that’s required to sustain this business?
Chuck: It brings to this other question I had for you. I have two models in my head of an entrepreneur starting a business. First model is someone who’s just very passionate about the thing that the business is going to be. The only way I’m going to be part of making widgets the way I want to make widgets or the only person who is really interested in making this particular widget is me. In order to chase this dream, I’ve got to start a business and I’ve got make these widgets, and I’ve got to make them my way. Person number two is someone who is much more just economically driven. Food stamps don’t buy diapers. I need to go– I need to do something in order to provide for myself and my family, and sometimes these people just don’t perceive risk the way–
Ed: Oh, Chuck, let me ask this question. Going further, do you have any problem with firing people?
Chuck: Have problem with what?
Ed: Firing someone.
Chuck: Well, not anymore. I used to.
Ed: Now, but the point is how do you feel about firing people that aren’t performing? A or B that are performing, but they simply cost too much money.
Chuck: Right. Yes. You’d have to be ready to do that, right?
Ed: Wrapping this up, then we’re addressing the psychological issues that you must address. Your concerns, your fears, your skillset. Can you absorb risk? Can you tell people, friends, family that, “Look, Peter, you’re not doing the job, you’re fired.”? To that extent let’s adjoin for next time.
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