Level Three Business

We were floored by the feedback from yesterday’s post on building wealth independent of your business. I guess my three suggestions and the examples I shared really struck a nerve with a lot of you. I decided to come back to that same topic and share 7 more important tips on building wealth independent of your business.

1. Risk comes from not knowing what you’re doing, so pay the price to learn what you’re doing! Sounds obvious I know, but most business owners I know are ego driven and uniformed investors. As you can imagine this is an explosive combination. They tend to let their business success blind them into thinking that they know more than they really do.

2. Make sure you’re investment plan matches the financial stage you’re at. I made this mistake and it cost me millions… When I sold my first two companies I got a LARGE wire transfer from my buyer. What I now know (having paid the price to learn) is that I needed to invest in passive residual producing cash flow investments, not in non-cash producing “capital gain, forced appreciation” deals. But I did what I was used to doing and as a result, I made several investment missteps.

Be very conscious that your investments must match your current financial situation, don’t just follow your old plan that got you to your current position. Even if it worked brilliantly it may no longer apply to your new situation.

3. A portion of your investment portfolio must hedge your risk in your current business. That means that a percentage of your investment portfolio is something that will either do well if your main business has a downturn, or at the very least is insulated from any industry or macro-economic stress that impacts your business.

4. Do your due diligence BEFORE you invest. Due diligence costs in the hundreds or thousands of dollars. The price of NOT doing you due diligence is in the hundreds of thousands or millions of dollars.

5. If the deal cannot afford the lawyers, don’t do the deal. Always have your attorney and CPA (and if possible your mastermind group) give you their objective input before you make the investment. And make sure your attorney reviews all the deal documentation before you sign! Seems obvious, but I see the consequences of business owners who skip this step.

6. Concentrate your investments in fewer, better deals. There is a cost to every deal, make sure your deal is meaningful enough to merit the time, focus, and expense. The wealthiest people believe in concentration of capital. Sure they diversify, but not with hundreds of smaller investments. You can hold 5-10 investments and still have the needed diversification. How can you really do 100 great investment moves? And look after them after you’ve made them? It’s too much. Concentration of capital is the name of the game (with diversification in 5-10 great investments you know and understand.)

7. Buy America while it’s on sale. This is a quote from a friend and guest Maui Advisor David Stech. David’s point is that there has never been a better time to buy great assets cheap than you’ll see over the next 24 months. I guess you could call this the upside of a very challenging economic climate we’ve been dealing with for the past few years.

I hope you put these 7 tips to great use in your financial life.

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I was talking with one of our consulting clients Todd last week and we had such an interesting conversation about how to build wealth independent of your business.

It was sparked when I shared my observation of how so many business owners I know build a great company, sell it for multiple millions, then proceed to make HUGE financial mistakes as they invest the proceeds from their business’s sale.

They spent 10 years building a multi-million dollar asset, only to lose a significant portion of that equity over 36 months after the sale through dumb financial decisions.

In today’s world it isn’t enough to be a smart business owner, you must also learn how to be a savvy investor.

Suggestion One: Invest a portion of your time and energy (at least 10 percent) to creating and executing your wealth plan. Building a successful business is obviously going to be a big part of that plan, but it cannot be the only leg to the plan. Why? Because there will be a day you may no longer have the business. Either you may sell the business, then you’ll need the skills of how to invest the cash from the sale to generate the passive and passive residual income you need. Or the business could fail, in which case it will be even more important to have “run some of your money from the table” and have this money invested wisely in a way that ensures your financial future.

One of my friends Kevin is a successful business owner. Kevin’s financial plan calls for him to build a great service business, but he doesn’t stop there. He also invests a portion of his time and financial resources in building his family’s investment portfolio. He allocates his portfolio into three equal buckets: one third equities, one third fixed income investments (which for him is primarily hard money real estate loans he makes), and one third commercial real estate.

While this allocation is specific to him and his situation, what is important is that you as a business owner have a wealth plan bigger than just running your business.

What are the other legs to your financial freedom stool other than your business?

What are your other investment vehicles?

And most importantly, how are you upgrading your expertise in these vehicles TODAY?

Suggestion Two: Leverage your strengths when looking for investment opportunities. There is a learning curve in mastering any investment vehicle, which is why it is so valuable to leverage the advantages you already have.

For example, one of our clients Cynthia has been a smart investor in real estate for over a decade. She recently asked for my input on an investment opportunity someone shared with her (it was for a non-real estate opportunity).

I asked her how much she knew or understood about the underlying investment. Very little she replied. I then asked her how long would it take and how much effort would it take for her to become savvy in this new arena. Quite a long time and effort she said.

At this point she got it and realized that she could leverage her real estate strengths versus trying to become an expert in a whole new domain.

Do you know a specific industry and have a network of contacts that give you information advantages? (NOTE: If you are investing in publically traded securities you have to be wary of trading on “insider information”, that is information that is not publically available. Which is one of the reasons I like investment vehicles other than publically traded securities since I not only get paid for my “insider information” but in these other areas it is totally ethical and legal to trade on this privileged information!)

Take the example of Stephanie, one of the Maui Advisors. She invests in tech start ups located near her company in northern California. She can leverage her experience, her network, and her symbolic capital to supercharge her returns and access some great investments.

What are your advantages? What contacts, expertise, and experience do you have that you can leverage? Are you currently maximizing the advantages you already possess?

Suggestion Three: You must become your own most trusted investment advisor–no one can do it all for you. Too many people make the monumental mistake of thinking that investment success is a matter of choosing the right investment advisor to handle your wealth for you. It costs them dearly!

No one–I repeat, no one–will be able to manage your wealth like you can. Yes you need good advisors, but you need to have the sophistication to filter and use the best of your advisors.

This means you’ve got to invest the time, energy, and money to master the skill of managing your own net worth. I’ve watched countless business owners spend 10 years building a multi-million business which they then sell and through dumb investment decisions they lose all the money they had made with their businesses and they are forced back to Level One to start building over from scratch.

In fact I have a friend who five years ago sold his company for just over $4.5 million cash, and he lost over $4 million of that money through bad investments that in retrospect he realizes he never should have made.

Investing your money is a totally different skill from making your money originally.

Generally as a business owner you’re imprinted to take on more risk chasing higher returns. This may serve you well in the building of your asset base where investing for forced appreciation and capital gains makes sense, but it will come back to haunt you if you don’t make the transition to investing for PRI (passive residual income) when you reach Level Three.

Have a great rest of your week.

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So many of the business owners I see struggle to IMPLEMENT systems inside their business.

They say, “But David, there is just so much resistance by our staff.” Well today I want to share with you 5 ways to make systems REAL inside of your business.

Here are five specific suggestions to make systems a part of your company culture.

1. Train your team: They may not know HOW to make and use systems. You or some outside vendor are going to have to train them.
2. Involve your team: Not only will letting them help you build out your company’s systems accelerate your progress to Level Three, but it will also make your team much more committed and involved in the process.
3. Systems must make your team’s lives better: This means no “policy and procedures” manuals allowed. NO ONE USES THEM! You have to give as much thought to how you format your systems as you do to the process layer of the step-by-step.Would a checklist work here? Or a sample script there? Or a 10-minute tutorial video there? Your systems must be user friendly and empower your team or they will be ignored.
4. Start right from the point of hire: I suggest you make sure that part of their job of all key hires that they work to systematize the position and responsibilities you hired them to do. Explain that it’s part of their job requirement.
5. You have to live systems as a role model: This means that you need to use systems, talk about systems, ask to see their systems, cheer on and celebrate their systems, and if need be, coach and correct their systems. Your team is watching what you do very closely so lead well.

The Bottom Line: Your team must internalize the discipline and understanding of the value of creating, using, and refining your systems over time. It can’t just be a fad, but must be an ingrained way of doing things inside your business. If you start the process and don’t see it through, your efforts will wither. Your team must see why systems matter to the business, to you, and to them.

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Tip One: Use this as a chance to reduce your business and personal S-Factors™.

Your S-Factor is your cost of living, or in the case of your business, your business’s cost of operating. Now is a perfect time to look closely at your expenses and trim, cut, prune, and diminish where you can.
This might include negotiating with your vendors for better pricing… Or getting on a better calling plan with your cell phone provider (a friend of mine saved close to $1,100 a year by consolidating all his family’s cell phones to a better plan.)

We had one client who got a $55,000 per YEAR reduction off the rent she paid on her business’s office space.

Take a look at your real estate’s tax assessments. If the values have dropped, how about petitioning for them to lower your assessment. I did this on two of my properties and it saved me over $3,500 per year!

Tip Two: Forget about your expenses.

I know this one contradicts tip one, but what I mean is once you’ve made your cuts, don’t obsess about them. If you live your life immersed in stressing over your expenses you’ll never create the financial successes you want.

Instead, spend some concentrated time getting your spending in alignment with your best interests, and then focus all your working attention on growth–growing your business, finding great investments.

You’ll want to regularly review your expenses, but don’t lose sight of the fact that you need to play offense too!

ESPECIALLY in your business… At a certain point, cutting costs loses its impact and you’ve got to generate revenue. Don’t lose site of this.

Tip Three: Reach out to your peer group.

In tough times it’s quite common that people withdraw and go it alone. This is not only painful and lonely, but downright dumb.
It’s in tough times that your peers need you. Together you can keep your focus on the positive, on what you can do to move forward towards your goals, and to hold each other accountable for any “stinking thinking”.

Of course this assumes that you have a positive peer group of doers. If not, I URGE you to do whatever it takes to create one. If you can free yourself up, join us tonight! and be part of several hundred of your peers who are positive and ambitious doers.

Tip Four: Focus on creating value and serving others.

No matter what is going on in the world you will always be rewarded in direct proportion to the value and service you share with the world. So focus on creating value, and on serving others.

Not only will this help you shift your focus to positive places you can make a difference, but it will also stabilize your position and ultimately help you grow your business and investments.

Tip Five: Remember to give thanks.

You are already a HUGE winner in life’s economic lottery. You live in an abundant society. You will never have to go hungry or sleep without shelter.

You have people who you love and who love you.

Take time to DAILY focus on the 10 things you are most grateful for, and where appropriate, tell the other people how you feel to have them sharing your life.

I hope these suggestions help you to maintain your focus and to use these current times to grow from.

Please feel free to forward this eletter to any of your friends or associates who you know could use a positive boost.

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Today I wanted to talk directly with those of you who are in “start up mode” and share with you a simple, 4-step action plan for any Level One business to get to Early Stage Level Two as quickly as possible.

Step 1: Clarify your basic business idea.
Let’s say you’ve been dreaming of your new business for months or even years and playing the “what if” game in your head. It’s time to get serious and turn your dreams into tangible, concrete ideas on paper. To clarify your core business concept, start by answering these questions:

- In two or three sentences, describe your business idea.

- Who is your ideal customer? Describe that person’s characteristics in as much detail as possible.

- What exactly will that ideal customer buy from you? Describe your product or service including the key features and benefits that will prompt your customers to buy it.

- How much will your ideal customers pay? How and when will you collect that money?

- Who will be your main competitors? List the most important ones.

- What will separate you from your competitors? How will you find space in your market or niche to generate sales?

- What is your dream for how you will expand and grow your business? What do you imagine it will look like in three to five years?

Action Step 2: Conduct your market research.
Before launching your business, invest the time and energy to do an intense period of market research. Study your prospective customers, your competitors, your likely key vendors, and your business advisors. Use this as a chance to sharpen your thinking, gather raw data, and record the information you’ll need for your planning process.

Get online and start Googling away (that is a word right?). Phantom shop your competitors. Interview your prospective vendors. Talk with your advisors and mentors. See if you still want to move forward with your business idea. If you do, determine how you can refine it to increase your odds of success.

Action Step 3: Write your business plan “draft.”
A business plan is the written outline for how you will launch your new business. Too many business owners never take time to write one because they find it intimidating. However, you don’t need to create a perfect business plan; you just need to use it as a template. It will help you refine your thinking, organize your thoughts, and identify the questions you need to ask.

You don’t need to have all the answers, but you do need to identify the questions you need to pay attention to-immediately and over time.

Your business plan will help you create a clear action plan with defined next steps, timelines, and deliverables. In addition, if you need to raise outside capital, your business plan will be essential to helping you fund your new company.

Note how I suggest writing a “draft” of your business plan. I do this intentionally to reinforce the concept that your business plan will always be a work in progress and you don’t have to get it perfect. It’s the process of doing the plan and updating it annually that is so useful.

I drafted my first business plan about 13 years ago for a business I later I sold for a multimillion-dollar payday. This business plan was only six pages! Looking back, I used very few of the stated ideas in the business that I ultimately grew. But-an awfully big but-the exercise of writing it and updating it two to three times a year helped keep me focused. It required me to stay clear on where my priorities and attention needed to be as I grew the business.

Action Step 4: Test your product or service to make sure it will sell.
If your new business involves selling a product or service that customers are already buying from someone else, then you just need to know you can attract enough new or existing customers to buy from you so that your business will succeed. But what if your product or service is new? Then you have to find a quick, fast, and cost-effective way to see if people actually will buy it before you go to the expense of investing time and money in large amounts. This might mean creating and selling a prototype. Or you might sell a service you have to establish as you go. Or you can canvass members of your target market and gauge their feedback on whether they would buy if it were available. In any case, use your best efforts to get objective feedback and test the waters on the viability of your business idea.

Proving your idea is viable means determining if the market will buy your product or service from you at a price that can be profitable. What’s the best guarantee of getting accurate information? Actually close a sale! You can sell a prototype and deliver later; you can sell someone else’s product or service that you buy wholesale; you can even sell the product or service and just go back the next day and refund the money, telling them about a delay in your ability to deliver. Yes, you may lose a sale, but at least you’ll know you can actually make that sale! This confirmation is worth the world to you in Level One when you’re wondering if you can sell your product or service at a profitable price for your business.

I hope you found these four steps useful.

If you would like the Maui team to help you plan and launch your new business, I strongly encourage you to check out our Business Consulting Program. I think you’ll find the detailed, step-by-step format with which we work with business owners a huge resource in helping you launch your business the RIGHT way from the start.

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