Become a BEAST, employee bonuses and some real estate

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Why Real Estate Investing is an Outdated Strategy [2.5 min]

When investing, most people take the traditional route of real estate. The allure of owning a tangible asset and the potential for monthly rental income and property appreciation make real estate an attractive option. However, another avenue of investment often gets overlooked but can be equally, if not more, lucrative: buying a business.

Recently, I stumbled across a video from Codie Sanchez, a strong advocate for buying businesses, and as you know, I have a penchant for "boring" businesses like HVAC companies. According to Codie, the average profit from a $250,000 home in the U.S. is about $462 a month. In contrast, a small business sold for the same amount can generate between $50k and $250k in net profit yearly or between $4k and $21k monthly. So, why bother with real estate? This stark difference in potential earnings is a compelling reason to consider business buying over real estate.

Moreover, buying a business offers more control over your investment. As the owner, you have the power to make decisions that can directly impact the business's success. This is in stark contrast to real estate, where you're often at the mercy of market conditions and tenant behavior. In a business, you can implement changes, introduce new products or services, and optimize operations to increase profitability.

Now, I can already hear the objections: "You can't get a $250k loan to buy a small business." Wrong! In business acquisition, financing offers a wide range of tools. Unlike real estate, where you typically need a mortgage and a substantial down payment, small businesses can often be purchased with seller financing. This means that the seller agrees to accept payment over time, reducing the financial burden on the buyer and making the acquisition more accessible. In fact, sixty percent of all small businesses in the USA are bought with seller financing.

But, of course, buying a business isn't without its risks. There's always the possibility that the business may not perform as expected, and you could lose your investment. However, these risks can be mitigated with thorough research, due diligence, and a solid business plan.

In conclusion, while real estate is a tried-and-true investment option, buying a business offers a unique opportunity to tap into a venture's growth potential, have more control over your investment, and enjoy greater flexibility in financing. So, if you're looking to diversify your investment portfolio and are willing to take on a bit more risk for the possibility of a higher return, buying a business might be the way to go. Remember, as with any investment, it's crucial to do your homework and make informed decisions to ensure the best possible outcome.

And don’t forget, as I often remind my clients, the worst thing in your business? People. The best thing in your business? People! What will make your acquisition a success? Finding a great operator to run it… But I’ll save that for another article.

Employee bonuses can make or break your Account Receivables [5 min]

TL;DR

• Pay 50% of the sales bonus after the client has made a down payment.

• Ensure the down payment covers manufacturing, logistics, and bonus costs; the last payment should be less than your margin. At worst, you cover your expenses and break even if the client does not make the final payment.

• Pay 50% of the sales bonus after the client has made the last payment in the contract => Sales is responsible for Accounts Receivable.

• Ensure you have an internal procedure correctly defining the “order” and “sale” stages!

Let’s say you manufacture industrial electrical motors in the B2B space. They usually have a delivery time of about three months. Your Sales Engineers get a nice bonus of 1% of each sale. When do you pay out your bonuses to your Sales Engineers? At the order stage? At the sale stage? What is an order, and what is a sale? These questions can significantly impact your cash flow, accounts receivable, networking capital, and overall business stability. We will explore a few scenarios ranging from the worst to what I would call the best. Indeed, you need to consider market practices, whether you are dealing with a SPOT sale or a key account with which you have a long-term relationship, industry practices, etc.

Scenario 1

Your company does not properly define an “order” and a “sale”. To motivate your Sales Engineers, you award bonuses at the order stage. Sometimes, the order is a simple email order with the client confirming that they would like five motors worth $2m. Your sales engineer gets a nice bonus of $20k.

What could go wrong? Well, you didn’t sign a contract or even got a down payment from your client. The client can cancel the “order” at any time, but you are still left with $20k paid in bonus to your sales engineer. It can also happen that the client changes the order from $2M to $1M – that’s 50% less. Will you ask your sales engineer for the bonus back? Probably not.

What’s more, without a down payment, you will need to use your own cash to finance the manufacturing of the motors. This will impact your Net Working Capital (NWC). And if the client goes bankrupt or changes his/her mind, you are left with manufactured products in stock but no clients.

As such, Scenario 1 must be avoided at all costs.

Scenario 2

You have a pretty good definition of an “order” – meaning that the client must sign a contract and, at minimum, make a 30% down payment within 30 days or so. You feel more covered and can safely pay your Sales Engineer the 1% bonus, meaning $20k. Here’s the thing…within 30 days, the client may decide to walk away and not pay the down payment. Yes, you can take the client to court, but the last thing you want is a court hassle over a down payment that was not made, which should have covered your Sales Engineer’s bonus.

As with Scenario 1, you should also avoid Scenario 2.

Scenario 3

After you got burnt by a few bad deals, you tightened up the screws. You clarified that an “order” means that your client will sign a contract and make a down payment of 30%. Once you see the money in your corporate account, you can safely pay your Sales Engineer his or her 1% bonus. You are certainly in a much better position compared to Scenario 1 or Scenario 2, but still not ideal.

What could go wrong? Well….not everyone pays on time. Say you structured the deal as such:

1. 30% down payment on signing the contract

2. 30% payment on delivering equipment on-site

3. 40% payment after the equipment is commissioned

What may happen is that you:

• Get the order → the client makes the 30% down payment, and you pay your Sales Engineer the 1% bonus

• The equipment gets delivered on-site; you get another 30% payment and then commission the equipment.

And then…. You may have to wait for the last 40% payment for quite some time. And that ends up as account receivables that need someone else's attention. Your Sales Engineer got his bonus and is not incentivized to chase the client to get the rest of the payment.

Scenario 3 is much better than Scenario 1 and 2, but still not ideal.

Scenario 4

I would consider this the best scenario where the structure is as follows:

1. Order stage: The client signs the contract and makes a down payment (say 30%)

2. Your Sales Engineer gets 50% of his or her bonus (remember that the down payment should cover the bonus for the Sales Engineer)

3. At the equipment delivery stage, the client makes another payment (say 30%)

4. Once the equipment is installed and commissioned, the client makes the last payment of 40%

5. Once the last payment has been made, the Sales Engineer gets the remainder of his bonus (50%)

Many would argue that the Sales Engineer should get his / her bonus entirely after the client makes the last payment. That may not be the best choice as the time between order and commissioning can be long. Immediate rewards stimulate our behaviors, so I believe a 50% bonus payment at the order stage is adequate.

After completing the project, the 50% bonus payment ensures that the Sales Engineer takes accountability for Accounts Receivable (AR) and will chase the client to make his payments on time. Large Accounts Receivable can significantly destabilize your company by affecting cashflows (more outflow than inflow). Sales manage the client relationship, and they should be accountable for AR.

The Timeless Truth of Being a 'BEAST': Resilience Lessons from 2,000 Years Ago to Instagram

Lately, like in the past few weeks/months, I keep seeing this idea everywhere: to win at life, you gotta be a "BEAST."

Have you ever heard or watched something that sounds like this?

"You know what a beast is? A beast is someone who walks through hell and is just happy their legs work. A beast loses it all and thinks, 'Sweet, a chance to win even bigger this time.' Hits rock bottom and says, 'Awesome, only going up from here.'"

This isn't some shiny new idea, guys. It's a teaching about resilience, being resilient, and trusting yourself. It's old school, two millennia old, coming straight from the Stoics. Those ancient tough guys were all about toughing it out and keeping their frame no matter what. These Stoic concepts were picked up many times: by the military and motivational speaker types like Les Brown, Tony Robbins, and Jocko Willink. Even Bruce Lee was in on it with his famous 'Be water, my friend.'

And now? It’s all over Instagram, served up by the new era of self-help influencers.

So, if it's coming back again and again for nearly 2,000 years, maybe it has some truth in it?

You don't have to turn yourself into someone else. You already have what it takes to face whatever comes at you. Trust yourself.

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The Industrialist