As you’re sitting back and reading through this blog post, you’ll discover the crucial difference between equity versus cash, and why mixing the two can become a lethal cocktail.
Here’s the bottom line…
You must understand the difference between building an equity business or a cash business because if you don’t, you’ll burn your business to the ground in a short-lived blaze of glory.
You may think your business is a cash business when it might, in fact, be an equity business. What is a cash business?
Cash Businesses Can ROCK
I was used to building cash businesses with minimum overhead – it was a pretty sweet deal while it lasted.
I’d make $50,000 a month in gross profits with $5,000 a month in overhead. I had a couple outsourcers, server cost, etc. I had a well-oiled money machine, all I had to do was turn a few levers and polish a few rough ends every week and it would hum along spitting out huge amounts of cash.
Now just to be clear I did NOT actually print money, because that’s illegal. I sold affiliate and information products online! It was so easy that it felt like I was printing money, legally!
I had a truly kickass cash based business. Not a retail business where you slave away for 12 hours a day to make $5,000 a month net. Or a consulting business where you traded hours for dollars. I had a Timothy Ferris 4-hour workweek type business, and I loved it!
Whatever profit I had left at the end of the month was my income. I put away a portion for quarterly taxes, a little bit for savings, a little bit for donations, and the rest would just collect in my bank account. At any given time, I had over $100,000 in my personal checking account.
Yes, all else being equal, money does bring happiness. Having a $100,000+ in your checking account is a damn good feeling. ☺
Sorry to digress, my point is, cash businesses ROCK if you build them correctly. Did my business have any resell value? Very little. However, I didn’t care because I was banking so much cash on a monthly basis that it didn’t matter.
Equity Businesses are a Long Term Play
Now Boost, the company that I was building, was an equity business. We were developing a line of software. Before we were forced to slam the doors shut, we had 20 full-time employees. Our payroll was $150,000 a MONTH between our employees, contractors and outsourcers. Boost was burning more cash on payroll in the month than I spent per year on overhead for my previous businesses.
We had a full staff of around 30 between our contractors, employees, and everyone else. I never quite understood the stress of “making payroll” until now. A lot of people were depending on me, and I couldn’t let them down!
An equity business is a long-term play. The goal is to build up the value of the company and sell it down the road for a lifetime of riches, fame, fortune, and glory!
You are trading a huge pot of gold at the end of the rainbow far away in exchange living frugally, on a modest income, and investing the rest right back into your business.
That’s the price you must pay. If you try to have your cake and eat it, you’re treading on thin ice.
Now you may be asking, “What exactly do you mean by building up the value of the company?”
I delve more into that in my free video series. In short, building value of an equity business is about:
- Building a winning team
- Building systems to maintain, grow, and improve business
- Creating brand and mindspace for your company, products, and services
- Building out your product/service line
- Developing strong, profitable, and sustainable sales channels and partnerships
The list goes on, but you get the idea. All of these items suck up a lot of resources and gobble up huge stacks of cash to develop.
Growth SUCKS UP cash. And if you ain’t got any, you’re in trouble!
The Death Trap of Success
In 2013, Boost sales and profits went through the roof. We had enough money in the bank to swim in. Nearly $1 million in cold hard cash.
Our cash flow was INSANE.
I had worked hard to setup to setup 15-30 day net terms with all our channel partners, on top of having $500,000 credit line on my American Express Black card.
Our cash conversion cycle was NEGATIVE. That is, for every advertising dollar we spend today, we had already made money on it 7-10 days prior.
This is where things got REALLY dangerous. Yeah, that’s right, the greatest danger is when money is pouring in and you’re celebrating how brilliant you are.
Because that’s when you:
- Develop a massive ego (the size of the Hindenburg!) and think you have it all figured out. Hubris – the classic character flaw that lead to the downfall of almost every Greek hero!
- Think the gravy train will last forever, and that things will just get better and better, and better!
- Lose your focus and sense of urgency, the very things that made you successful in the first place.
Confusing Equity Versus Cash
Guess what I did when I saw the huge mountain of cash sitting in the Boost bank account?
I decided to take large distributions out of the company. I bought a house, invested a bunch of it, and put a lot of money into my house.
Now, since I had a business partner that was 50/50, I had to match my distributions with him, which meant taking DOUBLE the money out of the business!
Equal number of bars of gold for each of us! Think of the movie “Italian Job.”
I treated Boost like a cash business. UGHH.
We did almost three million dollars EBITDA that year. Both my business partner and I took out close to a million a piece.
Everything was going great until…
To Be Continued!