Two Years of Income

Hey guys. So I recently sat down with a longtime operator. he's in the service and retail business, has about forty employees. He's been running this business for over three decades. Three decades of work. He's thinking about retiring. So he hasn't taken an offer yet, but he just talked to a business broker. a broker pegged his business, because it's local retail and service, at a three to four x multiple. So I sat down and ran the math, after taxes with him, which is the most important thing, what he'd actually walk away with, and it came out to about two years of his current income. Two years So in addition to that, as I started digging into his financials with him and asking him questions, there's a lot of personal benefits that small business owners get from owning a business. your cell phone's required for the business, your vehicle, your fuel, insurance. They don't see that as income because they're not writing themselves a check for it. He didn't. But every dollar affects the EBITDA, and every dollar becomes, an out-of-pocket expense, cost the day after the sale. You have to start paying for all of those things. And his eyes started getting big. the two years number assumes he keeps living the way he lives today, and he won't a lot of operators that I know, like I was, that he's so concentrated in the business that there really isn't much else. Three decades of work, one revenue source, one customer base, one industry. he chose not to sell. He's still working. He feels locked in. He is locked in. I'm working with him to help build the real estate bridge now. It would've been a lot easier if he had started 10 years earlier. Interesting enough, he did buy, the property that he's operating his business out of, and that is actually worth more than his business. He bought it as a convenience at the time, which I know, a lot of small business owners do that. But it's worth more than his business. It's worth more than what he spent the last 30 years building, just because he invested in his own real estate. the bridge gets built, with what we're working on. It's just a lot slower. He's, I think he's about 67. would've been a lot easier if we started 10 years ago. here's the thing. That's exactly what I did. If you, listened to last week's episode, on the Leisure Quip concentration story, how I got suspended off of Amazon, how I was doing $40,000 a day in sales, and that went to zero, I got slapped in the face with how concentrated I was on one business, and it made me change my direction and change what I was working on. So this other operator, he didn't act in time. We're working to rectify it. I was able to. I was blessed enough to learn that lesson and be able to diversify. And that's what I wanna share with you today So here's what I would do. Here's my philosophy that changed, is that I think everyone should build their business to be able to sell, even if you never sell. It's kinda funny. If you build it to sell, you improve operations, you get things streamlined, it's kinda less motivating to sell. It's when it's not ready to sell, when everything re- revolves around you as an operator, and, you're in the grind, that you wanna sell it. so think about that. Build your business to be able to sell even if you never sell it. The work you do to make it sellable is the same work where you're diversifying your income, where I would suggest investing in real estate like I've done. It improves your operations, gets you out from under the parts of your business that own your time. So you don't have to be two years from exit to do this work. You should be doing it at five years, at ten years. Actually, really at any year that you'd like a better business that depends on you less. It's a great idea to start a business thinking about selling it. So I wrote a book on operational things, AI, leveraging tools that I use every day in my business. I call it the "23 Secrets on How to Improve Operations and Plan for the Exit." you should go check that out. It's at neelypi.com/playbook. Totally free. So what I did after the dust settled with the Amazon suspension week, it took about seven days, and I was finally able to get my, Amazon account, reinstated and sales start happening again. it was, almost three hundred thousand dollars in lost sales that I never got back, but at least the flywheel started spinning again. I immediately shifted to buying more real estate, specifically looking for larger properties that had solid depreciation and solid cash flow. I needed to spread my wealth base out. And that's what this friend of mine, that's the operator needs to do now. But it takes some time and, and we're working on it. But I stopped letting LeisureQuip absorb every dollar of the cash flow. So I pulled my forecast back. I got a little more conservative. I squeezed the, inventory, replenishment, decided if I ran out of inventory for a few days, at times, that was fine, and I was able to put some of those dollars to work, in a different way with more diversification So then I pivoted to apartments specifically. my first commercial properties were some mixed-use buildings, some townhomes, and, several large government-leased office properties, which were great at the time. I still own them. They're great cash flow, and they work. But I've moved to apartments s-specifically for a few different reasons, I love business. If you're an operator, there's something in our blood about improving operations and making a business sing I didn't wanna lose that part, my edge there. So every apartment building that I buy is a small business Doesn't really matter how many doors there are. There is marketing and sales on the front end, talking to tenants. there is the operational side of maintenance, of turnover, of strategy, and planning out improvement projects. So I get to run a small business. I just get to do it on an asset that pays four ways at once and I get to add diversification to my portfolio So the four ways that an apartment, investment pays you: cash flow, depreciation Leverage and then principal pay down against the debt. So cash flow, usually monthly distributions that you can live on. So not a withdrawal rate that you're hoping will last based on how the market's doing, but actually rents coming in, expenses being paid, and there being cash flow, to pay you. So depreciation is huge. paper losses that shelter your other ordinary income. that one point five million dollar tax projection that was sitting on my desk, I ended up being able to reduce that to zero through several tax strategies. But one of the key ones was to be able to, do a cost segregation study, bonus depreciation, and take advantage of these paper losses of investing in real estate. leverage. So a three million dollar equity position controls a ten million dollar asset. So no other asset class lets you do that at this scale with this risk profile. And then these are generally amortizing loans that we're paying down as we go. So we're getting the cash flow monthly, but also part of those rents are paying off debt for us So equities can give you appreciation, bonds give you cash flow, but n- neither gives you depreciation, and nothing gives you leverage like this So there's four levers to, what real estate can do for an operator that are incredible. we can do a refinance, and most of my Neely Property Investments deals, I plan on doing a refinance. A refinance returns most, if not all, of the original investment tax-free. Consult your CPA. but then you can put that capital to work again, and that's how you start building this, diversified platform with your income. you're also getting the quarterly distributions while you hold. This could be income replacement. this could be reinvestment, like if you wanted to take that money, put it into equities or into T-bills or something to have some liquidity. something that a lot of people don't think about, but as you're planning for the sale, planning for retirement, that, you get a stepped-up basis at death on, real estate. So all of the appreciation and the gains can be zeroed out for your heirs, and it is a, incredible estate planning tool as well. So if you look at all the wealthiest, operators and business owners, the path is almost always build a business, make it successful, make the operations smooth, build a lot of value there, and roll those profits into real estate. Real estate's almost always the next step, uh, for those successful operators So again, as I mentioned earlier, that after-tax math is the only math that matters, and almost nobody runs it early enough. After-tax math is a lot different than thinking I'm gonna get four X or more of my, when I sell my business. By the time you pay taxes, you stop getting those owner benefits It's just not what most people are expecting the conversation that we just had and these strategies for planning for the sale, even if you're not going to sell, if you want the rest of it and in more detail, I wrote a book that you can download for free. it has AI workflows, it has strategy and, operational planning, as well as why real estate works so well for operators planning for the exit So go to neelypi.com/playbook. You can download it totally free, no pitch. I also send out a Friday letter that is current operations of what I have going on, tips and tricks on how to make your business better. And, if you ever wanna reply, just shoot me an email. I read every reply and will get back to you I'm Brent, and this is the Wealth Cockpit podcast. I look forward to hearing from you guys soon. See ya