Tag: starting a business

Improving the odds

~ C.O.R.E. Beliefs ~ Leave a comment

Some days, it is challenging to write on topic.  For instance, today for this blog, I am on topic number 4.  And frankly, number 4 is just wing it.  So many things to discuss and I am not quite certain how to frame the issues or put them in context.

We had several meetings last week, not the least of which was the meeting to discuss a private placement strategic plan.  That did not go quite as well as I would hope.  The concern is valid – I mean, the plan calls for changing how certain software is licensed.  It models out but we all know models only go so far.  To change direction will cost a ton in marketing dollars and face resistance from the current marketplace who do not want a shift in power.

The shift will happen; it is whether this group wants to be the driver.  Actually, that isn’t it, they want to be, but the hard reality is that it takes a lot of resources to upset the current way of doing business.  With no guarantee of success.

Not that there is any guarantee of success by following the same model as the other developers in the marketplace.  But that channel is well known and understood.  The licensors will likely be open to incremental change which means that the cost to land a subscriber will be substantially lower than trying to go directly to the consumer.

Sorry, I know this seems somewhat vague but I am working under an NDA so have to be extremely generic.  But the strategic business problem is not unique – it is one faced by every business that decides to sell.

Who is the customer?  And how do you improve your odds of success within a sales and distribution channel?

If you are a handyman service one way to go about this would be to get door hangers and go to a mature neighborhood and hang them.  If you do up 2,000 you will likely end up with 40 new customers.  It won’t happen immediately but that 2% is pretty much cast in stone.  You will spend a bit on advertising but it will likely pay off rather quickly.

But, what if you wanted 10% new customers?

One way to attract more customers would be to offer free yard debris removal, for example.  People love a free deal and chances are, many more would look at your service offering after having a positive experience with you.  You will spend more money than on just advertising alone but, it might pay off.  Again, no guarantee that you will substantially increase above the 2% but there is lots of evidence to support the conclusion you will get above 2% new customers.  Your costs will most certain go up though.

Freebies, giveaways, basic services with the opportunity to license premium services.  These are ways to build trust with your product and service but they are not free to you and oftentimes are quite expensive.  Are they still worth doing?

Perhaps.  And that is what I am facing this week.  Do we redesign the offering to make it compelling to the existing channel?  It is going to be expensive either way – either by spending a ton of money on marketing and advertising to go around the existing purchasing channel or on giving away revenues while we work to entice users through free use.

Part of me, of course, loves the idea of challenging the status quo.  It would be awesome to completely upset the applecart and win this my way.  But, the reality is, it is probably more risky to take that approach than it is to work within the existing channel – even if the existing channel is ripe for challenge.

More on this another day.  Have a great Monday.  If you are ever in the market for a thinking accountant who loves marketing and sales, feel free to contact me for a free consultation.  I am here to be of service to you.

 

Winning tax planning

~ C.O.R.E. Beliefs ~ Leave a comment

The Committee Advising Superior Hobbies (CASH for short) has had a busy week, what with so many possible changes in the air and nothing tangible to work with from our dear congressional representatives.  So, while we anxiously await the text of what was supposedly agreed to yesterday, I thought I would share some of the very best tax advise the committee can offer.

  1. Documentation Wins

This is far and away the most important thing to remember.  Quick story (hopefully but you know how I can run on and on).  A few years ago we had a client who owned several restaurants in Portland.  The owners were planning on a trip to Europe.  Naturally, the subject of tax deductibility came up.  Can the business pay for the trip?

The answer:  It depends.

If you are serious about this being a business trip then by all means I think it can be defended.  But it won’t be easy because you will have to work.  We had them hold a board meeting to discuss the positioning of the restaurants and how to possibly give them a more authentic European feel.  While they could get some of the information from books, there is nothing better than hands-on real-world experience.  The Company agreed to send 4 key employees to Europe for 2 weeks.  They were to explore at least two different restaurants a day and make notes of ambiance, food, menu, etc.

When they returned, they needed to write a report for the board and present their findings.  The board would then see how they could incorporate those discoveries into their restaurants.  Because they wanted to make sure that the changes would not potentially put them at risk they also invited their corporate counsel to the meeting – and the accountants were invited to cover costs and investment recovery information.

They followed the rules and the company reimbursed the key employees for their trip.  And 2 accountants and 2 attorneys got an excellent meal and a great presentation on how the restaurants could change to become even more authentic.

Yes, having the receipt for the new mixer is important to prove you purchased it but having the right documentation to back up a big decision like a business trip is even more important.

2.   The right business structure Wins

A couple came to me wanting to take a trip around the world.  They inherited over $1.0 Million from a grandparent.  They wanted to be able to write-off the trip if at all possible.  It is possible, but there are gotcha’s for the unwary.

It is important to realize that LLC’s and S Corporations get dragged into the Hobby Loss rules, not just sole proprietorships or rentals.  What isn’t subject to IRC 183 is a plain old boring C Corporation.

We created a plan to incorporate a business structured as a C Corporation with an initial capital contribution of about $200,000.  It hired two employees (yes the couple) who were hired to film a documentary about 20 somethings who inherited a bunch of money and were traveling around the world.  The Company purchased all the camera equipment and even paid them a salary for doing all this work.

When they got back they edited the film and actually were able to sell it to various outlets for stock footage for about $100,000.  After about 3 years, the Company was liquidated.  The shareholders had a $100,000 loss and priceless memories.  That $100,000 loss was a capital loss – which was used to offset a $150,000 capital gain from the sale of stock from an investment from one of their inherited investments.

3.   Pigs get fat

I know, the good tax planning stories are not nearly as much fun as the horrible “no planning at all” stories.  But boring is good.  The goal is to grow fat, lazy and content, not be led to the slaughterhouse because you gorged.  Paying some tax always beats paying no tax and getting caught – and subsequently paying penalties and interest and possibly worse.

So, the committee encourages you to seek out competent and thoughtful tax planners.  Make sure they are asking lots of questions and are advising you on the hard work you have to do to reduce your taxes – because it ain’t easy and it ain’t free.  And if you are looking for a solid, creative and effective tax advisor, contact me and I will be happy to refer you to one in my network.

Have a great day.

The Traveling Salesman

~ C.O.R.E. Beliefs ~ Leave a comment

I love telling stories about the good, and not-so-good, things clients have done over the years.  Actually, to be honest, I like the not-so-good stories as they are educational and hopefully stop others from going down a path they might regret.

Part of my role is technical compliance and final reviewer of tax work.  My responsibility is to make sure that any significant tax position taken was backed up by adequate documentation and research.  I couldn’t stop clients from taking risky positions, but I could stop the firm from agreeing to dumb things that we couldn’t defend.

One tax return comes to mind.  It was a new client and I was having trouble getting my head around his small business.  It was on Schedule C and reported a loss of about $100,000.  He had a W2 for about $150,000 so was getting about 30K back in refunds.

What stood out most were two items.  Negative gross profit of $60,000 and an RV on the books which generated about $25,000 of depreciation.

Negative gross profit, by the way, comes from when you sell your product for less than the total cost of those products.  In this case, he had revenues of $12,000 and Cost of Goods sold of $72,000.

I wouldn’t sign off and the partner wanted to know what my concerns were.  I asked him if he talked to the client about his “business” and the answer was, “Not really.”

So, I was indulged and the client came in for a meeting.  I asked him to explain how his business worked.  He bought product, he told us and traveled up and down I-5 stopping at county fairs to sell his product.

Interesting.  We didn’t notice any fees for space rental at any events, though.

That’s because he parked his RV in the lot and sold on the outside.  Ok.

How many customers did the $12,000 represent?  We inquired.

One, he replied.  One client.  So what was the $4,000 of meals and entertainment?

He took this client out to dinner and to various ball games and other events because of their loyalty.

Who is this client? we asked dreading the answer.

His wife.

Yeah.  He and his wife took the summer off to travel and he bought stuff and he “sold” it to her.  Because she was such a loyal customer, he gave her a substantial discount on buying the stuff she “wanted”.  And he rewarded her loyalty with dinners and events.

Now, I know you are thinking BS, I am making this up.  I swear I am not.  Public accountants get some of the most entertaining and too-good-to-be-true stories out there.

Our main problem was that his prior accountant let him get away with it.  We suggested that he face the fact that on audit, the IRS would probably say this was a hobby (we didn’t bother to let him know it was probably outright tax fraud) and to protect the prior losses, he should shut down his business and maybe consider starting it up in 2 or more years after a cooling-down period.

He said no thank you but appreciated our advice.  He paid us for the work we did, took his “records” and went to find another tax preparer who wouldn’t be so nosey.

The moral of the story?  You may have heard the old saying that “Pigs get fat and hogs get slaughtered”.  Sometimes, it doesn’t pay to push the boundaries of acceptability.  He may never have been audited – hell he might have even been turned down by the next dozen tax preparers and decided he wasn’t going to win and dropped it – but it was still an extremely risky position to take and there was no real defense.

There are ways to make a business work while you travel.  But the odds are, the bigger the loss, the greater the risk, so documentation is vital to winning.  So, as you prepare for the end of the year and are looking to work with someone who wants to help you be successful, consider an accountant with integrity and who is willing to help you get everything right to protect you from major risks.  If you need the name of one, feel free to write me and I will send back the contact information for one or two to help you.

Have a great Tuesday.

 

Thoughts on Starting a Business

~ C.O.R.E. Beliefs ~ Leave a comment

Happy Tuesday.  I had an awesome weekend.  Brendan and David had 3 friends over Friday night for video games and movies.  We watched Monty Python’s “The Holy Grail” and it was so much fun watching 5 tweener’s laughing at comedy written when I was a child.  Naturally, the boys were awake until about 4am when they started passing out from sheer exhaustion.  But mornings around here start early on Saturday and we had them up and “zombie-like” by 9am where we went to Esther Short Park to play some Football.  It is great fun to play some touch football with half-asleep 11 year olds!

One of the most enjoyable moments I have is when I get to meet with someone who wants to start a business.  They have an idea, or are tired of making someone else a profit or just want “freedom”.  I look at it as my solemn duty to help the budding entrepreneur understand the risks and benefits of starting a small business and am proud of my track record.

Part of the process is understanding the truth about starting a business.  First,  “The Idea”.  This might sound cynical but there is some truth to what I am about to say… There really is no such thing as an original idea in business.  Think about this, chances are your business idea already exists in some fashion somewhere.  What you have is a belief that you can do it better, faster, cheaper, with different colors, in a different part of town, etc. than anyone else who has tried this before.  And, if by chance, you can’t find a direct competitor, ask yourself why an established business hasn’t tried it before?  The odds are someone has tried it and it didn’t work out; and there is a lesson there as well.

Next, “Keeping the Profits”.  If you have read my other blogs about revenues and expenses and the balance sheet, you have a good idea that there is a lot to consider to get to a profit.  Remember, first you must have the equity to invest upfront to create your business and then you must reinvest your “profits” back into growing your business.  A healthy business is a growing business.  You will likely never know when you have excess “profit” to distribute out of the business – until it is time to sell.  And selling the business, that is, your exit strategy, is when you really are going to keep your profits.  if you have set your business up right.

Finally, “Freedom”.  No one in the world works harder than an entrepreneur.  80-100 hour weeks are common, divorce is high, heart attacks, strokes, and general burnout are the norm.  Most small business owners have no freedom, they have a job they cannot quit and cannot pay anyone to do.

Now, keeping these things in mind, can you set up your new business to address these issues and actually reach these goals?  Absolutely!  It requires you to think hard about the more important parts of the business that are typically not considered until you are overwhelmed.  I created a Pro and Con worksheet I am happy to share with you if you would like to have a yardstick to measure starting a new business against.  Send me an email and I will forward it to you.

To succeed, realize your idea has likely been thought about before and is likely even in operation somewhere.  It may not be exactly the same, but something is close to it.  Try hard to find it, think about what works and what doesn’t.  What strengths do you bring to the table to deal with those things which may not work right?  Where is your plan for automation and scalability?

To succeed, realize that you need to design your business to ultimately be bought by someone else so you can receive the real compensation you have worked so hard for.  Pay yourself well for the work you do, but don’t try to do everything.  Hire the right people, train the right people and help them succeed.  You can command a good price for a business with a solid and dependable system – you will get next to nothing for a business that relies solely on you and your skills and knowledge.  If you don’t think so, ask a lawyer how much her practice is worth when she goes to retire.  then ask Mark Zuckerberg.

Finally, to really succeed, you must focus on your processes so your business can take “you” out of the system.  Yes, you will have to work hard and be chef, cook and bottle washer for a while, but you need to develop a system and an organization that you start hiring for.  Think about what positions your business needs to succeed, design those positions and start to fill them.  Your small business then does what it needs and you can focus your energies on more important things – like living.

None of this is easy but it can be rewarding if you look at it through the lenses of these three areas.  If you have questions, I strongly encourage you to speak with your current accountant and ask her to help you with thinking about how to succeed in starting a business.  If you do not have an outside accountant or would like a fresh set of eyes, contact us at Currie & McLain to schedule your free no obligation consultation.

Have a great day.