My brother-in-law Eric Grove's book on email marketing was voted on the list of top ten small business books for 2009.
Archive for the ‘Small Business’ Category.
I originally started this blog as an advice column for small business, and though I have diverged pretty far from that most of the time, I still like to share some of the things I have learned.
The last year have been difficult for a growing business that needs capital to survive. A lot of our growth is on leased land in the form of leasehold improvements that revert to the landowner when the long-term lease expires. This has always made getting funding difficult -- as bankers want to slap a lien on something -- but of late it has been impossible.
The one exception has been in equipment financing -- I get almost more calls from lenders looking to do equipment financing than I do from companies selling printer supplies. So I began thinking about how I might be able to redevelop a campground using as much equipment financing as possible.
One large expense in any construction project is rental equipment. But on this job we have bought a bunch of equipment - up to and including large construction equipment. We equipment-financed the machinery, the payments on the loans are less than the rental charges we would have had, and we hopefully can sell the equipment at the end of the job if we have no place to redeploy it.
But we still were facing a large expense for buildings. I asked my equipment finance guy - will you finance a modular building? "Sure," he says. So we started rethinking the whole design using factory-built buildings. We combined three modules to make the store and office:
The entry / gatehouse was entirely factory built:
In another location at Burney Falls, California, we equipment financed 24 cabins by, you guessed it, having them factory built rather than built on-site. They came out pretty well:
I was really amazed at how well they came out. Modular has really come a long way. And since in many locales they are permitted different, some of the paperwork and approvals and inspections were streamlined as well.
As a small business owner, a huge portion of my time is spent feeding governments with all the paperwork they demand. But this year has been twice as bad. Every local authority we operate in has started mining for dollars. What this has meant is a whole slew of property "reassessments" that have no basis in reality (e.g. values put on non-existent assets) that I have to spend a lot of my time fighting. The general modus opperandi is to declare my company owes money for something fictitious, and then make us prove we don't. Have you ever tried to prove you don't own an asset that doesn't exist? Think about it. How would you go about it, short of inviting the assessor out to your property to search for it.
Maricopa County, the county that includes Phoenix where my headquarters resides, has been the worst. We buy assets for properties all over the country, and have the bill sent to our headquarters. Often, if a registration is required, we will put our headquarters address on the government registration to make sure we get the renewal paperwork (long experience is that if anything gets sent out to an address in the field, it is lost). The concept that an asset might be in location X but the paperwork should be sent to location Y is a really, really hard concept for a lot of state registration authorities to get their head around/
This year, Maricopa County has started sending us personal property tax notices for all kinds of assets that have never even existed in this county. They were bought in state A, shipped to state B, with the bill sent to us here in Arizona. But the County is in financial distress. It probably understands that the asset does not exist in the County. I am sure it knows that I don't, for example, have 24 cabins sitting on the fourth floor of this building, where they have them located. But they need money. If they send out enough fraudulent bills, and then tell taxpayers it is the taxpayer's responsibility to prove the bill is wrong, then they will likely get some money. Yet again, the government is engaging in abusive practices that not private company could get away with for long.
I was pretty calm today on the phone with the assessor until this came up:
Me: Look, these are cabins I bought from a factory in Maricopa County but which were shipped immediately from the factory to California.
Assessor: I don't see where you filed for permission to move the cabins
Me: Excuse me?
Assessor: Your xxxyyy form [I forget the numbers]. You never filed for permission to relocate
WTF? I know we have problems with declining tax roles, but do I really have to ask permission to move an asset out of the county or state. What, did I violate directive 10-289?
So beware small businesses. Your government is mining for dollars -- do not assume that tax bill is correct.
A quick note to many small businesses out there that use Quickbooks. I know that most of us are cynical about annual upgrades from people like Microsoft as they seldom add any new functionality one actually needs, so they are seldom worth the price. But there is an additional reason not to upgrade Quickbooks. Every single version, since at least 2004 and up to and including 2009 has been worse than the previous year's version. Somewhere around 2006 we got data file bloat, where the size of the company data file mushroomed 10-fold. Around 2008 we got a goofy and intrusive place-a-phonecall-to-India authorization process. In 2009 most of the online banking features were broken.
It is kind of funny to read Quickbooks reviews on Amazon, with each successive generation getting fewer stars. Every version is dominated by reviews that begin with "worst quickbooks version yet." Quickbooks 2009 right now is at about 2 stars, and is buoyed that high only by an aggressive campaign by Intuit employees to post 5-star reviews. I stopped upgrading my business version around 2006 (and wish we had stopped earlier) but one of the non-profits I do the books for upgraded to 2009 and it is a mess. Unfortunately, if you use the online banking functions or payroll service (we do not) Intuit forces your company to upgrade as there is apparently a 3-year clock built into the software that shuts down and forces an upgrade.
Its time for those market forces to get to work and make someone rich by bringing out an alternative. Intuit is right for the plucking, if someone has the right product.
Because in a public company, I might have to, out of fiduciary responsibility, accede to this:
China plans to require that all personal computers sold in the country as of July 1 be shipped with software that blocks access to certain Web sites, a move that could give government censors unprecedented control over how Chinese users access the Internet.
Running a private company, I can tell them to take a hike. As I did last week, when I was offered a large piece of new business but refused it because it required that I drug test all my employees.
Once upon a time, most entrepreneurs organized their business as what is called a C-Corporation. Most of the publicly traded corporations you can think of, from Avon to Zenith, are essentially C-Corporations. Such corporations had any number of advantages, but they had (and still have) one big, big disadvantage. C-Corporations paid federal income taxes at the corporate tax rates. And then, if after-tax profits were dividended to owners, those dividends would be taxed again. This double taxation of earnings is something Congress talks about all the time, but never does much about. And the implicit government tax subsidy for debt over equity does a lot to explain various waves of merger and LBO activity we have seen since the 1980's.
Now, entrepreneurs were not stupid. No one wants their hard-earned income taxed twice. So, entrepreneurs who owned C-corps would do one of two things. One approach was to have the owner pay himself a large salary, thus reducing corporate income and converting the dividends to more tax-advantaged wages. The other approach was to have the company issue the owner loans rather than dividends. I have seen many closely-held C-corps with huge accumulated corporate loans to their owners, which may only be unwound years or decades later when the company is sold or liquidated and profits can be taken out a lower capital gains rates.
Over the last 20 years or so, a new corporate vehicle called the sub-chapter S or S-corp has become popular. With a few limitations, the S-corp offers all the same liability protections as a C-corp, with a big tax advantage: S-corps are not subject to corporate taxes -- corporate profits of the owners flow straight through the corporation to the owners' 1040 personal returns, eliminating any double taxation (Limited Liability Corps or LLC's operate roughly the same, but with slightly different rules). For this reason they are also sometimes called pass-through entities.
It is interesting to note something I never hear mentioned when discussing aggregate personal income data, which is that the switch over time from entrepreneurs using the C-corp to the S-corp creates something of a discontinuity in the income data. Thirty years ago, much of the annual corporate earnings, and all of the retained earnings, of business owners would not show up in the IRS personal income data -- it shows up as corporate income, but not personal income. Today, nearly all of that corporate income of small business owners shows up as regular income on personal tax returns. Absent any other changes in income trends, business owners as a group will appear to have large increases in taxable income, when in fact economically nothing may have changed save the corporate structures of their businesses.
But the real point I want to make is that all of the retained income and potential investment capital of a small business using S-corps or LLCs (which is nearly everyone nowadays) shows up on the owner's personal income tax returns. Let's hypothesize an entrepreneur whose S-corp earns $250,000 in profits after-tax. Let's say he typically puts $150,000 of that to savings and living expenses, and the other $100,000 is reinvested in the growth and/or productivity of the business. Now let's look at proposed increases in upper income tax brackets. With these higher proposed rates, the business owner will have less than $250,000 in after tax income. Let's say it goes down to $220,000. Odds are that the owner will retain his lifestyle (he will as a minimum still have the same size mortgage and school and other payments). The slack, then, comes out of the retained earnings. Essentially, higher taxes result in less investment capital. In fact, we can see an increased tax rate on wealthier entrepreneurs and business owners could easily result in a dollar for dollar reduction in business investment among small businesses, acknowledged to be the place where most all new jobs are created.
I think readers know that I don't fully accept the Obama administration's analysis of this recession. However, let's take them at face value for a moment. They are concerned that savings of average people won't currently translate into more business investment, as they fear the credit crisis causes banks to hold the savings rather than re-lend it. If this were the case, then it would mean that as a policy, we would want to preferentially route tax savings to entrepreneurs and business owners who invest their own money directly, because their is no intermediary of a bank to interfere with the process. But in fact, this is exactly opposite of what the Obama administration is doing through tax policy, instead taking away the investment capital and retained earnings of entrepreneurs through higher taxes.
This is the European-style corporate state in a nutshell. In Europe, entrepreneurship is made extraordinarily difficult. This is part of the deal that the political elite have with the largest companies in their countries -- we will protect you from potential new competitors, we will bail you out when times get tough, and you in turn will support us politicians. One only has to look at the turnover of the top 30 companies in the US since 1970 vs. the top 30 in Germany or France to see this at work. Political turnover is even slower, as an elite group of ministers run the country, almost no matter the party voted in office. The economy as a whole suffers, but for the top 1000 or so men in power, the system works to protect their position, be it in government or in the largest industries.
And now we bring this system to the US. Small business owners and entrepreneurs are punished with higher taxes in order to bail out politically powerful but failing companies like GM or Citicorp. Welcome to America, the new corporate state.
Postscript: A lot of folks erroneously associate corporate states with right-wing governments, and certainly that was the case in Mussolini's Italy. But the closest brush the US has ever had with such a system (prior to today) was implemented by leftish FDR via the National Industrial Recovery Act, and governments of both left and right have supported the corporate state approach of France and Germany. In Britain, it was the left that built the corporate state and the right, under Thatcher, who tore it down.
Apparently Wells Fargo is catching grief for having an internal conference in Las Vegas. Tigerhawk defends Wells Fargo. I don't know if the meeting if the meeting made business sense to hold in the first place (and I don't want to be in the business of caring which is yet another really good reason for the government not to be investing my money in these companies). But I can tell you that Vegas makes tons of sense for a business conference.
My company has managers located all across the country, which makes it sound like we might be a really big company but in fact we are not. It just turns out that we have a process that allows us to accept relatively small contracts around the country and still turn a profit. Being small, and with profit margins well under 10% of revenues, I can assure you that we do not spend any money on items or events that are frivolous or superfluous boondoggles. Against this backdrop, here are two things I can say with confidence:
- You have to physically gather all you key managers and/or employees in one place from time to time. No amount of teleconferencing and email can substitute for occasional face-to-face meetings. We get all of our managers together for a week once every two years, and I wish I could afford to do it more often.
- Given the fact that we have to meet somewhere, Vegas is just about the cheapest place in the country to hold a national meeting. There are tons of cheap flights there from everywhere. And since the hotels have away of earning money from visitors that most other hotels in the country do not have (ie from gambling) they discount the rooms below equivalent quality rooms in most other large cities. On top of this, every hotel I have used for a meeting in Vegas had great meeting facilities and really knew how to provide meeting and catering services. Finally, many (but not all) of my employees love to go to Vegas, and consider the trip a treat/reward. So, I get a positive reaction from my employees for taking them to one of the cheapest possible places. A win-win for sure.
I got another boiler room broker call today, so I guess the recent downturn has not flushed out all the cockroaches. A while back I discussed the frequent calls I get from boiler room stock promoters. The approach they use with me is this:
So the other day, I accidentally let one of them go further than I usually allow. He said he was from Olympia Asset Management. (There is an Olympia Asset Management web page, but I don't know if it is the same company and the web page has not been updated for several years.) I let him run for a bit because a friend of mine runs a very well-respected financial planning firm with a different name but also with Olympia in the title, and for a moment I thought it might have been one of his folks.
Anyway, he proceeds to try to convince me that we have talked before and discussed a certain security. "Remember me, we talked six months ago about ____". Of course, I had never heard of the guy. At this point I usually hang up, because I have heard this crap before -- it is a common pitch.
Its pretty clear to me now that this is what he is doing:
- Trying to imply that we have some kind of relationship we actually don't have. Or worse...
- Trying to convince me that he touted stock A six months ago, so now he can tell me stock A has gone up in price. Many reputable brokers built their reputation by cold calling people and saying: Watch these 3 stocks and see how they do and I will call you back in 6 months. That way, you can evaluate their stock picking without risk. The modern sleazy approach is to pick a stock that has gone up a lot in the last 6 months, and then call some harried business person and pretend you called them with that pick 6 months ago, hoping that they will give you the benefit of the doubt.
The call just went downhill from there. I hung up after his discussion of throwing Molotov cocktails into the cars of people he doesn't like. That was right after I asked him if Tony Soprano was standing beside him listening in on the call.
Anyway, beware. The guy today called me and asked me if I remembered him calling 6 months ago predicting the downturn in the mortgage market and the crash of the financial stocks. You are not crazy - no matter how certain the guy seems, you really did not talk to him 6 months ago.
By the way, I am not the only one getting this pitch. Ed Moed got the same pitch from the same script from the same company. Many of his commenters share similar experiences.
Update: Wow, they sure do like Mitt Romney over at Olympia Asset Management. I'm sure there was no arm-twisting here, when every single employee of the company seems to have given the max donation to the same candidate, with no breaking of ranks.
Update #2: Mike Murphy, CEO of Olympia Asset Management, was "a member of the [Hoffstra's] elite football team." Wow. Remember that time Hoffstra ripped through all those SEC teams? Yeah, neither do I. Anyway, this achievement does not hold a candle to the fact that I was once captain of Princeton Tower Club's elite intramural coed field hockey team.
I got another one of those scam letters from a company that attempts to trick businesses into thinking their bill is actually a requirement of a state regulatory organization (original post here). This one is from the "Indiana Corporate Compliance Business Division." It looks like one of the millions of small fees a business actually does have to pay to state governments for all kinds of random stuff, but is actually a business solicitation. I will give this one credit - the font size at the bottom where they say this is a business solicitation and not a bill from a government agency is actually a size larger than similar language on the last one I received. (click to enlarge image below)
I did not take them up on their offer, so I do not know what one would get back, if anything, from them. It is indeed important to keep minutes books up to date. But I do know that the information they request in addition to the fee is not nearly enough to create a meaningful set of minutes for one's corporation, so my guess is it is a ripoff.
Reader Tim Allen writes:
I wanted you to consider that in a recent previous post you had
mentioned that people are filling up their gas tanks before they
previously would, and they are filling up all their other cars, and
spare gas tanks because of the fear of not having enough necessary gas.
This is a market reality and is completely rational considering the way
the game's rules are set up (no gouging, as per the govt).I would like you to consider that I, as a small business man,
maxed out all my lines of credit and deposited the money in my bank
accounts. If fear is driving this market, and if it causes banks to dry
up credit, I want to be the first to be tanked up on money,
so-to-speak. The negotiated rate of interest is not high enough for me
to be disinclined to borrow, at least until this credit storm blows
over. I know I am not the first person to have this idea and I won't be
the last, and we (together) will create the situation that you think
can't happen. The tighter credit gets, the more people will borrow, if
just to have the cash on hand, to not need to borrow in the future.
I have done the same thing. I am maxed on my line of credit, because the interest rate is low and I would rather have the money in hand and pay the interest rather than find out later my line is somehow revoked or frozen. The money is not needed for near term expenses, but I want to have resources in hand if the recession creates a business opportunity that requires funding. Does this worsen the near term crunch, the same way panic buying of gas worsens local gas shortages? Probably. And again, price is the key. Like with gas, I would rather rationing by price rather than shortage. In other words, I would rather my line of credit go up to a 15% interest rate, if that what it takes to put things in balance, than to be revoked entirely so a few businesses can still have 6% money.
I have never said that letting banks fail was without cost. I just think the cost is going to be there, one way or another, and the cheapest and quickest solution is to let the whole mess sort itself out.
By the way, the notion that small business lives on short term credit is a hoot. ExxonMobil may have access to the commercial paper market on short notice, but borrowing for our company, even in good times, generally takes a panzer division and a long war of attrition. Even layup deals have taken me 6 months or more to finance. Stephen Fairfax, via Mises, makes this point:
None of the small business owners I know depend upon easy credit to
make their payroll. When things get to the point where you need to
borrow to pay your employees, the end is near. Most small businesses
fail in the first few years, in large part because business is not
easy, it is hard. Not everyone is good at it. But it is an essential
part of free trade and the market economy that businesses fail, so that
new, better ones can arise in their place.
Few small businesses depend upon easy credit. Banks are generally
reluctant to lend to small businesses, with good reason. Most small
businesses are funded by owner's savings. Sometimes start-up money
comes from loans by parents or friends. While I can understand that
small businesses involved in building houses might profit from easy
credit, the market is sending unmistakable signals that there are too
many houses that are too expensive. Flooding the system with still more
easy credit can't be the cure, it is the problem.
People who say that bad things come in threes never ran a small business. Bad things can come in much larger, Costco-sized lots. Such is the case today in my own little corner of the American economy. Expect blogging to be light for a few days. Also, I may be slow to fix the RSS problem that has been reported. Sorry.
PS- The big lots of bad stuff seem to come just after one was thinking "gee, its kind of quiet around here, maybe I will take a day off this week..."
Working for someone else: Days are way too long.
Working for myself: Days are way too short.
Why is it so much fun to hate Ivy Leaguers? In part, because they
(well, we*) can often be so hateable. For years, I toyed with the idea
of offering a prize to the first Harvard grad I met who did not, in the
first ten minutes of conversation, manage to work that fact into the
OK, I have a couple of Ivy League degrees, so now I have fallen into the trap as well. But I say that mainly to tell a story about running a small business.
Running a service business that is dispersed across many locations in 12 states, I cannot personally be on top of everything. Not even close. I depend on my employees taking the initiative to tell me when they think the company should be doing something differently or better. However, many of my employees do not have college degrees at all. This is not a problem for their job performance, as most have a lot of life experience and they do their jobs quite well. Unfortunately, if or when they find out I have a Harvard B-School degree, the very likely outcome is that they stop making suggestions. They make the assumption that because I have a more expensive piece of paper on my wall than they do, that I must know what I am doing. They are embarrassed to try to give me suggestions. Which is a crock.
I constantly have to hammer home two messages to my employees, both of which are hard to get people to believe despite the fact that they are true:
- Most of my employees do their job better than I would do their job. They tend to assume they are somehow an imperfect proxy for me, when in fact, because their skills and interests are different, they usually do what they do better than if I focused on the same job myself
- If the company is doing something stupid, it is probably not because I want it that way. It is probably because I am ignorant, either of the problem or of the better way to do it.
I know a gentleman named Alan Shapiro who has come up with what looks to me to be a nice new boat concept he calls the "Raptor". Pictures of the boat are below (click on any picture for larger image)
He knows how to design and build the boat and has pretty good contacts for selling it, but needs help from a CFO/Strategist/business-type to push the company forward. He has a prototype built and the production model fully costed-out and sourced. However, he is about to look for a new round of financing and need help in that process. He is offering equity in the company but can't pay a salary. The job would not be full-time in the beginning. If anyone has some time on their hands and has experience with startups and likes boating, this may be something to look into. I have helped him a little bit, but I am out of time and need to focus on my own business.
I do not in any way warrant whether this is a good opportunity or not. Don't assume that because Coyote seems like a smart guy, that this must be a viable business, because I just don't know. I have given him a bit of startup money in exchange for some future boats, and a bit of advice, but that is the extent of it. He has a draft business plan I am sure he would share with qualified candidates.
What I like about the product is that in the rental business, there really is a need for a personal watercraft or jetski that is enclosed, such that it will rent in colder waters and does not require renters to get out of their street clothes. If you know what a mouse boat is, these are much higher performance versions of that type product. He takes jetski engines, from 50-110HP, and puts them into this really fast hull shape. This boat is fun to drive (see the video linked above) and my opinion is that it would rent well, but I of course have not been able to prove that with actual boats. Alan believes there is also a strong market for individual sales, but I can't confirm or deny that from my own knowledge.
If you are interested, or know someone who might be, email me at the link on the right with some information about yourself and I will pass it on to Alan.
It always happens this way.
Pick a random message: Let's say I want my folks at Matagorda to know that what they do is important. So I visit from time to time and tell them they are doing a great job. I will email them with the same message, emphasizing how important Matagorda is to the company. Each quarter I will compliment them on their results. I will show Matagorda in all my long-term strategy documents as one of our core operations. Every time I am on the phone with them I thank them for their had work at so important a facility.
And then one of our employee's mailman's wife's gynecologist's dog's veterinarian's receptionist might say at a social gathering that she heard our company was leaving Matagorda and the next day I will have 8 people emailing me to ask me why I was about to fire everyone and, further, how mad they were to hear about it second hand.
Sometimes I want to just give up.
A bit over five years ago, I wrote an op-ed piece in our local paper calling for further privatization of public recreation. The editorial was in response to a proposal for a large bond issue to rebuild recreation infrastructure. I argued that the state should instead be focusing on attracting private investment. Not only was there more money for recreation in private hands than public, but I sensed that private funds would more likely be invested in facilities the public really wanted, rather than goofy politically correct projects. Further, private operators could operate recreation facilities much less expensively, in part because they are not tied to ridiculous public pay scales, pension plans, and job classifications.
Soon after, I had a business broker call me and ask me if I wanted to put my money (such that it was) and time where my mouth was. After a lot of twists and turns, I ended up the owner of a recreation concession company. In a recreation concession, a private operator pays the government rent in exchange for the ability to charge visitor fees and run the recreation facility for profit. In most cases, our company can operate a property and make a profit on fees lower than the government must charge just to break even.
My business, Recreation Resource Management, has prospered since then. And as I have gotten deeper into public recreation, what I have learned has only confirmed what I wrote in that editorial. I have seen that when the government runs recreation facilities, it almost never spends enough money on capital maintenance and refurbishment. The reason seems to be that legislators, given the choice, would much rather spend $X on a shiny new facility they can publicize to their constituents than spend $X maintaining facilities that already exist. I laugh when I here progressives argue that private industry is too short-term focused and only the government invests for the long-term. In practice, I find exactly the opposite is true. Think about hotels, or gas stations, or grocery stores. Private businesses understand that every 15-20 years, they need to practically rebuild existing infrastructure from scratch to keep them fresh for customers. This kind of reinvestment almost never happens in public recreation.
Except this week!
After years of building up our business, we just completed a project with California State Parks that is what I have always wanted to achieve with the company. At McArthur-Burney Falls State Park, California State Parks had an aging concession store and an outdated section of the campground that it really did not have the money to rehabilitate (by the way, this is an absolutely beautiful park -- I highly recommend it). We crafted a two-part lease with the state which eventually led to us investing over a million dollars in the park: In phase one, we built a new concession store (old store on left, our new store on right):
In phase two, just complete, we took an old tent-camping loop with no utilities and added 24 new cabins. These cabins not only refurbish an aging and dated section of the campground, but they also add new amenities to the park to attract visitors who may not own an RV and who don't want to sleep in a tent. In addition, since they are insulated and heated, these cabins will extend the camping season -- in fact, we already have a number of reservations for Thanksgiving, a time when no one would have wanted to tent camp here.
Its a win-win-win, where we make money, the state gets lease revenues
from us that exceed their previous camping revenues, and the public
gets new amenities without any taxes or public spending.
So, in answer to the question I so often get, "why does a libertarian run a company that works with the government?" Now you know why. I will admit that from time to time I find myself on the losing end of libertarian-intellectual-purity debates because I choose this path rather than, say, living in a cabin in the wilderness and manufacturing rifle barrels for a living. *Shrug*
Postscript: One lesson I have also learned is that state governments are not always a monolith. Texas and Florida, for example, while being beloved of libertarians for having no state income tax, can be horribly bureaucratic in certain areas (e.g. sales tax reporting and vehicle registrations). California, on the other hand, which in many ways is one of the worst states to do business in, actually has what is probably the most innovative and business-friendly state parks organization in the country. Go figure.
PS#2: By the way, the cabins shown are actually modular buildings, built here in Phoenix by Cavco, and shipped to the site. The classy interior work was done my by maintenance supervisor.
One of my favorite bloggers, TJIC, also runs a business called SmartFlix
which has an enormous collection of instructional videos, from crafts
to outdoors to home improvement, all for rent. Most of these niche
videos are incredibly helpful, but are almost impossible to find
Anyway, TJIC apparently wrote James Lileks, a really fun-to-read columnist and author, with the following come-on:
We send you a video. You watch it, or watch 10 minutes of it, or don't watch it at all.
Then you write something, which might be a review, or might
barely mention the video at all. For example, a short review on a video
that instructs one on how to play pool might mention the fact that you
watched 10 minutes of the video, and then segue onto a story about you
playing pool 15 years ago with The Giant Swede"¦
In short, I propose a business relationship where you do whatever the heck you want to.
Small business tip of the day: If you find yourself waking up on Monday, thinking that you have finally climbed on top of things and everything is humming pretty well, expect a torpedo to hit you. Maybe several.
The red lights are all flashing here and the bulkheads are leaking. Blogging will be light for a couple of days, while damage control progresses.
There are probably a lot of reasons out there to criticize Las Vegas, but one thing it is great for is that it is perhaps the best and least expensive place in the country for a small business like mine to put on a national managers meeting.
We bring 60 managers in from all over the country. We held our event at a hotel/casino a mile or two off the strip called the Orleans, where two years running we have gotten nice clean rooms and great service. Beyond the good service and more-than-acceptable rooms, we get:
- $60 room rates for mini-suites
- Two days of lunches, breakfasts, snacks, coffee, an open bar with appetizers, and a meeting room all for less than $100 per person
- Bar none, the best airline connections of any destination city except maybe Chicago, and they are all cheap (lots of America West and Southwest flights)
On top of all this, my people love it there. Anyone running a national meeting on a budget should definitely consider it.
Sometimes entrepreneurs are successful enough to buy themselves sexy toys: It may just be a nice pool table for the office, or it might be that new Gulfstream jet bought with the IPO proceeds. But little did I know that entrepreneurial success would allow me to buy this beauty (click to enlarge):
This septic tank truck can really haul a load, carrying over 3800 gallons of, uh, poop.
We have a new facility at Pyramid Lake we run in LA County, where, due to its location, all the bathrooms run into series of underground holding tanks. At some point in the past, someone converted all the bathrooms into flush toilets, which in this area makes for a real waste of water and creates a lot of liquid waste we have to pump out and dispose of, at the cost of over $80,000 a year. This truck is the intermediate solution, letting us cut our pumpong costs in half. The long-term solution we are working with the US Forest Service on is to replace the bathrooms with a great composting technology from Bio-Sun, which will cut the waste and water use both to near zero.
I recently went through the process of obtaining an SBA (Small Business Administration) loan. These are loans that are what I call "cash flow" loans, secured more by the companies earnings rather than collateral (though collateral may be required, see below). SBA loans are written by private banks to standards set by the government. If these standards are met, then bank loans under this program get a partial guarantee from the US government.
Before I go on to describe the process, I feel compelled to note that as a libertarian who does not believe the SBA should even exist and who believes that such loan guarantees are a subsidy program that should be eliminated, I was obviously conflicted by whether to seek out such a loan. What finally made the decision for me is that this government program has crowded out all other private options. Banks get about the same rate for an SBA loan as they would for a commercial loan without the guarantee. Since the guarantee is out there and doesn't cost the bank anything, the bank has no reason not to insist on it? Therefore, as a small company in the SBA size range, there just are not any banks willing to lend without the SBA guarantee. This does not mean that in a free market without the SBA there would be no loans - it just means that when such a free subsidy program exists, banks are going to take it.
Types of Loans
The following is a gross simplification, but for a small company, there are basically two types of loans: secured loans and cash flow loans. Secured loans are by far the most common for small businesses. I, like nearly every entrepreneur I know, have had to pledge my house at various times as collateral for loans. While it is fairly easy in today's market for a small company to get an equipment loan (typically lease-finance of a purchase) secured by hard assets, few lenders will provide loans for general business and working capital needs unless they are secured by something tangible -- homes, vehicles, receivables, etc.
However, most businesses need capital for more things than just to buy hard goods. Seasonal businesses may need loans to pay the rent in off-seasons, retail businesses need money to grow inventory and pre-pay for new leases, while opening new divisions may require paying salaries well in advance of first revenues. Unfortunately, most businesses that claim to be business banks have no desire or talent to understand a business well enough to make a cash flow loan. I am not talking about just Ethyl's Bank, but large banks like Bank of America and Wells Fargo who were stumped when I wanted to discuss some unique financing needs in my business. I know people with a half million dollars a year in free cash flow out of their business who have trouble getting bankers to make unsecured cash flow loans. And, as mentioned above, those who do make cash flow loans typically insist on having the SBA guarantee.
How an SBA Loan Works
I will not pretend to be an expert on all the intricacies and rules. The SBA has a number of programs, offering loans of different lengths of time and for different purposes. The SBA has programs for both revolving lines of credit as well as standard 10-15 year loans. Each of these programs has different under-writing criteria, fees, and limitations, which your banker will have to explain to you. Most SBA loans, including mine, fall under the section 7(a) program. The SBA site tries to explain some of this.
As stated in the intro, an SBA 7(a) loan actually is issued by a bank, but to SBA underwriting criteria and with an SBA guarantee. The SBA only guarantees a portion of the loan, something like 50-75% depending on the exact loan type, with the bank taking the rest of the risk. These loans are issued at a floating rate of prime plus a percentage, and the SBA has rules that caps the rates as well as fees the bank can charge. The SBA charges a substantial fee, in the 2-3% of total loan value, up front to the borrower for the guarantee.
Banks participate in the program in one of two ways. Most any bank can originate an SBA loan, collecting all the (very substantial) paperwork needed by the SBA and forwarding it to the SBA for approval. In addition to the underwriting time at the bank, the SBA can take many weeks to complete this analysis. A smaller subset of banks have been pre-approved by the SBA to act as their underwriting agent - called a preferred lender or PLP. This means that they can do the SBA's analysis for them. This often greatly accelerates the process. My total time form the bank's first data request to the final loan closing was less than a month, which is very fast.
Choosing the Bank is Critical
From the section above, it should be obvious that you should strongly consider working through a bank that has the preferred lender status with the SBA. Note that having or not having this status does not necessarily correlate with bank size. The "expert" I was hooked up with at Bank of America (my main bank) was useless, and told me in so many words that it would be impossible for me to ever get an SBA loan. I ended up working with Silver State Bank, a relatively new business bank out of Nevada. They had the whole process automated, and when combined with a very knowledgeable banker on the front end named Jerry Woods here in Phoenix, the process was as smooth as silk and very, very fast. In fact, I got the whole loan done in less time than it took BofA two years ago to do my line of credit.
Costs and Other Considerations
SBA loans are not cheap, and I would strongly urge you to pursue secured asset-backed loans as far as you can. My total fees, including the cost of the guarantee, ran to about 3% of the total loan value. In addition, I STILL had to put up collateral to back the non-guaranteed portion of the loan. In retrospect, I think I did a bad job of negotiating with my banker on this. No matter how good they are, bankers are still bankers and are going to attach every asset that can sit still for collateral whether they really need it or not. I should have pushed back harder on this issue. Overall, though, I am excited that I now have the capital to continue to grow my business.
PS- If you want to enjoy some of this capital at work, come to Lake Havasu and rent a jet ski for a day! All those other entrepreneurs out there are investing money in dead-end stuff like microchips and improved manufacturing -- Ha! There is nothing like being able to tear around a big lake on 110HP to really make America competitive!
The original purpose of this blog was to pass on my experiences and lessons-learned running a small business. Over time, though, since I have the attention span of an 8-year-old boy mainlining Hershey bars, I have gone many different places with this blog, well beyond day-to-day experience of a small business.
However, today I will return to this original goal, at least for one post, by asking the question "what's on my desk this morning?" I tackle this question for two reasons. First, it is interesting to compare how different the issues I struggle with day-to-day are as compared to my previous life as an executive at several Fortune 50 companies. I am sure I did more, but all I can remember from my daily activities at large companies seems to involve either working on PowerPoint presentations or traveling to give them to somebody. The second reason for visiting the contents of my desk is to reinforce my usual libertarian political points, which I think will be made sufficiently obvious just in the description of my to-do list that I won't need to editorialize further.
So here is what's got to get done today [ed note -- while published on Sunday, this is based on my worklist on Friday morning, May 13.]
- Sales tax returns have to be completed, which I usually do myself. We file monthly returns in six states, but one of those is Florida, where we have to file multiple returns county by county. This month I also must complete a lodging tax return for two counties. If it was the end of the quarter, an additional three state returns and two county returns would be due.
- We are nearly completed with a sales tax audit from Washington state. I have written before how complicated the WA sales tax return is, but the funny part was seeing a trained tax accountant from the state of Washington sit in my office for nearly 6 hours and still not be able to figure out how much tax I owed. She kept encountering crazy exceptions like "such-and-such county requires 2% lodging tax unless the facility has more than 63 rooms or campsites and then it owes 50 cents per room-night except if it is in the Seattle convention district where it owes an additional .25% or if it is on a metro bus line where ... etc." When tax law is too complicated for the paid employees of the tax department to figure out, it is too complicated. Wonder of wonders, though, we may get a refund!
- Also sitting on my desk from Washington is a notice that I did not pay my leasehold excise tax last year. For those who don't know what that is, it is a way that states like WA and CA effectively charge property tax on the US government, evading the federal rules against such (basically, I have to pay the tax for the Feds, and then I take it out of the rent I bid to the Feds). Actually, though, I did pay it. Well in advance of the due date. The state has spent the last 2 weeks trying to decipher their own records, and so I need to call them back today to see if they have figured everything out yet.
- The department of Health in one California county is holding up my building approval because the condensate line from a refrigerator condenser coil runs out and drips fresh water on the ground (about a gallon a day). If you have an air-conditioning system at your home, it is very very likely your air conditioning condenser does the same thing. Unfortunately, the county wants this to run into the sewage system. Why the county wants extra load on the sewer system, I don't know, but fortunately my builder caught this early so the change won't cost us much money.
- Speaking of inspections, the ADA inspector at another California facility ruled yesterday that our sales counter was an inch too high and our ramp a half-degree too steep to the front door, so I spent part of this morning already getting the original contractor out there to tear these improvements out and redo them. Interestingly, we previously had the bathroom that was originally in this modular building ripped out, because it could not be made ADA compliant. This was not a big headache for our employees, because there is a public bathroom building next door. However, the local health inspector is now reluctant to approve the building because... it has no bathroom and hand-wash sink. The only food we sell is packaged (think Twinkies) but some health inspectors still want you to follow the same requirements as if you were a restaurant. I am not sure how we are going to resolve this.
- I just got a call from a customer who was mad that the county Sheriff would not respond to several complaints about drunk and disorderly conduct in the early morning hours at one of our campgrounds. A few of our campgrounds, like this one, are too small to justify a live-on-site staff, and the rowdies seem to get the word out which campgrounds do not have on-site security. I promised the customer a refund, and made a note to myself to talk to our manager about having one of our employees come by a few times in the night on a security sweep.
- I have a meeting at 3:00 to meet with my accountant to finish up our income taxes. Since we have to file a federal, 9 state, and a number of county tax returns, our total company return fills two 3-inch binders. Today we are trying to sort out the depreciation schedule, which in and of itself is hundreds of pages long given that we have so many small assets.
- We are still trying to get a liquor license approved for our store on Lake Havasu. The whole liquor license process is one of those funny holdovers. Coming out of prohibition, most states wrote tough procedures to make sure that the organized crime figures who control liquor during prohibition did not receive licenses. As a result, to get a license, my wife and I and my managers have to be finger-printed and have FBI background checks. The applications tend to be long and tedious and small errors cause the application to be returned for corrections. Worse, though, I have found that many towns use the licensing process as an anti-competitive protection for incumbents. In California, if a County is "over its limit" (set fairly arbitrarily) in terms of licenses, it requires the county board of supervisors to meet and approve the new license. In one California county I was told that this was really for my protection - they are protecting me from getting my business in a situation where I might fail due to too much competition. Anyway, I suspect that the strong powers-that-be in Lake Havasu City may be holding up our license, and I need to try to figure out what is going on,though I am not sure how to go about it.
- While I have been writing this, I got a call from a county DA in Arizona. Most states have bad check programs where, if you have a bounced check and can't collect, you turn it over to the courts and they seek collection. In extreme cases, they will arrest and try the offender. I have never been entirely comfortable with this situation. Sure, bounced checks irritate the heck out of me, but arresting people for a $20 bounced check feels like sending someone to a Victorian debtors prison. This morning, I spent about 30 minutes trying to talk the DA out of prosecuting the heck out of some guy who claims that he paid us and we lost his check. I give his story about a 30% possibility, but whatever is the case I have no desire to prosecute the guy. The DA's blood is up, so it takes me a while to talk him out of it. I am adding to my worklist something I have put off for a while, which is to investigate 3rd party NSF check collection.
- My bank just called and still needs yet more paperwork before they can complete an equipment financial loan. AAARRRRGGGG.
- I just finished my annual rant with Arizona Game and Fish about fishing licenses. We sell fishing licenses at a number of locations. We only sell fishing licenses, we don't sell hunting licenses or duck stamps or all kinds of other special licenses that the state seems to sell. Unfortunately, if you are a Game and Fish registered license seller, you can't get just fishing license inventory from them. You have to take their full range of licenses, which they send you piles of in January. We take all this stuff we don't want to sell and put it in the safe, and hope that we can keep track of it for the next 12 months. If we somehow misplace anything and don't return it the following year, we pay for it (and some of those stamps and licenses cost hundreds of dollars). Many of you will recognize that this practice of the state government would in many situations be illegal for a private company. There are many laws out there that limit a manufacturers ability to force a retailer to carry their full line of inventory, or worse, their ability to send the stores a bunch of inventory they did not order.
- I have been putting off registering our 15+ trucks in Washington, but I am going to have to get to it today or this weekend. Last year Washington passed a law that vehicles had to be registered with an in-state physical address (no PO Box). I am not sure if this is a tax or terrorism thing, but it is obviously awkward for an out of state corporation, so they have finally relented a bit and said that you can still have to have an in-state physical address but they will mail paperwork to an out of state address. I or my assistant will need to spend a couple of hours soon typing in two addresses each on all these vehicles before we can register them.
There are a million other things going on, but that is what is burning me up today. In fact, since I have been spending the last hour writing this post, these tasks will probably also be occupying me this weekend. An alien from another planet in reading this post might question whether I am really working for myself or this "government" entity.
In the span of one hour this morning, I got to "enjoy" both my most and least favorite business activity.
My least favorite activity is always paying taxes, but within that broad category (remember that being in 10 states and 25 counties means that I file over 50 different tax returns or one sort or another every year) my least least favorite are business property tax returns. If you have not run a small business, you may not be aware of what a pain these are (individuals don't have to file them, and large companies have poor schleps in accounting to do it).
First, business property tax statements usually have to be filed by county, so I have to do a zillion of them. Second, governments require that you report every year and in great detail on essentially every asset your business owns in a state or county. A business must report these assets, usually with a description, date purchased, original purchase price and estimate current market value. Imagine as an individual if you had to report this information on everything in your house - furniture, computers, appliances, tools, etc. Now imagine doing it for a business, which owns a lot more miscellaneous stuff than you have in your house.
What really irritates me is that filing some of these statements requires the person filling out the statement to take a chance. Clearly, no one is going to list every asset, down to the last pencil and paper clip -- you are going to establish some reasonable cutoff, and group similar assets into catch-alls like "miscellaneous tools" or "office supplies". Note however, that this is taking a chance: In counties that require detailed asset listings, there is never any statutory language like "you can ignore items under $100 as de minimis" or "you can group similar items". Technically, you are supposed to list them all. Take my word for it, this is very, very tedious.
But wait, as the Ginsu knife guy would say, for our business there is more aggravation. We do business as a concession holder on federal lands. For example, we might run a US Forest Service campground. By US law, states and counties may not charge the US government property taxes on these facilities. BUT, certain of the most acquisitive states, including California and Washington, have devised taxes that get around this requirement. These two states make me pay the federal government's property taxes for them at the facilities I operate. This is kind of like being forced by law to pay your landlord's taxes for him. I always find this terribly irritating, all the more so since now that I know the game, when time comes to bid on concessions in these states, I just subtract the estimated taxes from what I am willing to pay the government in rent, in effect ensuring that the US government ends up paying the tax.
This whole enterprise left me feeling depressed, when a couple who I had called about a manager position at a new store concession of ours at Clear Lake State Park in California called me back. It turned out this couple is incredibly entrepreneurial, has great business experience, and are very well-suited to running my operation with minimal supervision. I was thrilled to find them, and they were in turn thrilled to find an outdoor summer job opportunity in a nice location which could be flexible enough to accommodate a person with a disability (one of the couple has Parkinsons). There is NOTHING I enjoy more than finding great people to work for me, and finding such people is all the sweeter if I can offer them an opportunity that uniquely fits their own needs.
Running a small business can be quite "interesting". Last summer we dealt with 4 hurricanes that shut down our Florida operations for over a month. This winter we have had great success winning new contracts, including one we are very excited about at Pyramid Lake, California. We got all our investments made to support this contract, got all the necessary staff on payroll, and wham, a local pipeline company spills over 100,000 gallons of crude oil into the lake and it is now closed for weeks, with a substantial loss of revenue in prime spring boating season. Sigh.
Then, there are the banks. From my experience, it is very, very
difficult to get a bank to make an collateralized loan - i.e. a loan
that is secured only by the cash flow of a company rather than by
assets. In fact, I have never been successful at that. About the only
way that I have found that banks will make a loan is if it is an SBA
loan, where the SBA basically guarantees the loan for the bank. The SBA
goes through cycles of being very open to lending to being very tight.
I have not dealt with them for over two years, so I don't know what
their stance is today. Remember, though, that the SBA is not going to
approve any loan where the buyer has no experience in the industry or
where the buyer is not putting down his own money as well. The SBA has
a lot of information here.
This statement is still mostly true but I have learned a lot over the last couple of months. The following is an update.
One of the things they tell you all the time in business school, but frankly I always found impossible to really internalize, was how much cash growth takes. I guess I always thought of businesses with cash flow problems as being unsuccessful, slowly sliding down the drain and trying to make ends meet. Wrong. Growth is tremendously expensive. And stressful.
My business is based on concession contracts. Each winter, we are usually presented with the opportunity to bid on many contracts. We narrow the field down to 4-6 we bid on, hoping to win about 2. One of the things I did last year was greatly improve our standard bid materials, hoping that would help us win good projects. Did it ever. We bid on 6 last year and we won 6 (including Burney Falls, Pyramid Lake, and Lake Havasu). Yea! But then I began adding up all the investments in new inventory, new equipment, salary (you always have to hire people before the first revenues come in), licenses, building improvements, etc. Eeek!
After a lot of work with bankers, I stand by most of my statement above. Most bankers will not lend to businesses on cash flow, and always want some type of collateral (like my home equity). Over time, though, I have found a few bankers who are willing to lend on cash flow and really understand business growth and why maybe I don't want to have my business's growth rate limited by how much equity I have in my personal home. There are bankers who will put together packages of long-term loans backed by the SBA plus short term working capital loans that will now let me grow faster. The folks at Copper Star Bank, for example, have been great.
One of the reasons I felt the need to post this update is that I have been told that my difficulty finding a good business banker was due in part to my location here in Phoenix. The Phoenix banking market is very real estate driven, so bankers usually come from that background rather than a business background. I am told that those of you on the east coast or in the Midwest may have an easier time finding good business bankers.
Postscript: By the way, you might ask how I feel as a small government libertarian about accepting the government subsidy implicit in an SBA loan. The answer is "conflicted". Some libertarians are fine accepting government services, on the theory that they certainly have paid for them with all their taxes. Some try to avoid government services, but that is almost impossible in today's world (such as using government roads). I generally try to be pragmatic, operating somewhere in the middle.
As far as SBA loans go - I don't know what the commercial banking world would look like without SBA loans. I think that the banking world would have found an alternative way to mitigate the risk (e.g. via securitization) without the government gaurantee, but we can't know. The fact is that SBA gaurantees exist and banks would be crazy not to use the gaurantees in making business loans. So, the reality is, if I want a cash flow based loan for a company my size, it will likely carry the SBA gaurantee. My appologies to all those whose taxes support my loan gaurantee.