Playing in the sandpit …
This is one of our last structured exercises …
… soon, our paths to our Number will begin to diverge and we won’t be able to neatly keep every one of the 7 Millionaires … In Training! – and, our readers – on exactly the same path.
Right now, though, we have one of the most important MM201 exercises of all: Assessing whether the ‘ad’ that you have placed on Craigs List will actually be able to do its intended job!
Will your selected Growth Engine actually have sufficient ‘grunt’ to carry you to your Number on (or before) your required Date?
Will it do the job?
So, you have chosen business, real-estate, stocks or some combination of all (for most of our MITs this is true) as the vehicle to carry you to your Number, and you chose it based upon:
a) a calculation of your required annual compound growth rate, and
But, is having faith in Michael’s guidelines good enough for YOU … do you want to put your entire future in the hands of somebody else, or do you want to come to your own conclusions?
Even if you are a person of immense faith in others (is naïveté a better word?) as am I, are you really guaranteed a, say, 50%+ compound growth rate if you choose to start a business, as Michael Masterson’s table suggests?
Of course not! Let me give you an example:
In 1998, when I undertook as similar analysis, I had already decided that my little finance company was incapable of growing enough to reach my Number / Date … it wasn’t the Craig’s List ad that I needed to run!
So that left my fledgling call-center business to do the job; but, at that time it was growing VERY slowly with just 5 customers in 5 years … and, was losing $5k a month. Yet, something told me that this was the place to start looking for my Growth Engine …
…. here are the steps I took in order to confirm my suspicions:
i) Find my Number / Date: this was then $5 Million in 5 Years
ii) Decide where the bulk of my Number was going to come from: selling my business in (target Date) 2003 for (target Number) $5 million
iii) Decide what income/profit the business would need to generate in order to be ‘worth’ that much to a typical buyer: well if these types of businesses sell for 3 to 4 times annual earnings, then my business would need to generate, say, $1.5 million net profit each year by the time 2003 rolls around.
Note: other businesses may have different multiples; e.g. doctors’ surgeries might be based upon a multiple of sales; RE might be based on a ‘capitalization rate’ of, say, 7% for commercial, etc.
iv) Decide if/how my business could get from -($5,000 x 12) to +$1.5 mill. in just 5 years: in my case, I realized that my business would need to have almost every single large corporation (both private and public) in order to reach my Number!
So, I ran some ‘what if’ scenarios with a spreadsheet and realized that if I could change my business model to include a number of new lines of business, not only could I reach my Number, but I would only need to be exactly 1/11th of the size of the public company whose annual report I modeled my own numbers on.
Unfortunately, soon after, the government changes some rules that would have required millions of dollars in capitals security bonds to secure the necessary licenses for the type of business that I wanted to move into, to it was back to the drawing board for me!
v) Once I realized that the business/investment could NOT go from i) to iv) satisfactorily, then NO PROBLEM (well, after a few sleepless nights and a lot of soul searching): I wrote a NEW Craig’s List ad and went back to Step (i) …
You see, I ran some new ‘what if’ scenarios on my spreadsheet and realized that if I could simply change my existing business model to assume major overseas expansion … and, the numbers worked!
At least on the spreadsheet …
… I quickly realized that finding the capital to fund the expansion (and open operations centers in multiple countries) would also require a lot of capital that I didn’t have, but I ‘solved’ that problem (at least, on paper) with the idea of setting up each overseas operation as a separate joint-venture!
From that point on, the rest was ‘simply’ about the execution …
Now, what about you? Can your Craig’s List ad take you to your Number? If not, what are you going to do about it?
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We’re not ‘playing in the sandpit’ any more 🙂
