“The best bet you’ll ever make is on yourself.”
–Warren Buffett
You got where you are today because you bet on you.
You had a vision to start a business that would impact the world and give you control over your own destiny. You didn’t wait for someone else to hand this opportunity to you… You bet on yourself and took the leap out of your career and into the new frontier of building a business from scratch.
Today, you’re successful, but victory didn’t happen overnight. Let’s rewind and remember what it took to get here…
The first year of any business can be rough. You’re trying to manage cashflow, build out infrastructure, hire the right employees, and so much more. Yes, you have a business, but because you’re in the building phase, your business doesn’t look good on a financial statement.
Are You Betting On Yourself–Or Someone Else? | 19
When you want to get loans or business credit cards, nobody wants to give you the time of day. The highest quality attorneys, tax accountants, and financial advisors won’t take meetings with you because you don’t fit their ideal client profile–yes, you’re on your way to being the next game-changing entrepreneur in your niche, but according to the numbers, you look like a broke person with a dream.
But eventually, you climb out of the struggle period. Now, you’re generating revenue, and the business is finally profitable. You bet on yourself and won!
You solved countless problems to get here, but soon, another problem begins to creep in…
As you generate revenue, you reinvest it in the business, and the business grows and grows, generating even more revenue, which you reinvest in the business… It’s like a snowball rolling downhill and getting bigger as it gains momentum.
You now have the opposite of the problem you started with: you have too much money.
What do you do with all of the excess capital your business generates?
The dangerous part of this problem is that because you’re successful, every financial planner wants to sit down with you and sell you a product. You may have dozens of voices in your ear, vying for you to be their next client, telling you that
their way is the best way. Who should you believe? Out of the seemingly endless buffet of solutions, which is the right one?
Wealth has to reside and be warehoused somewhere…
Let’s explore some of the most common places it can reside.
The Banks
Can’t you just leave your money in the banks?
Right, the banks, where, under the Dodd-Frank Act1 enacted in 2010, you’re an unsecured creditor to the bank. Meaning once you put money in a bank account, it’s not even yours anymore.
This legislation, which resulted from the financial crisis of 2008, was passed with the intent that there would never be a full-scale bailout again.
How safe are banks right now? Early in 2023, five banks went under2. By the end of 2023, you had ten banks downgraded by rating agencies and eleven banks placed on a watchlist3.
People might say, “Well, sure, that sounds scary, but there’s always FDIC insurance.” But by the FDIC’s own admission, they only have 2% of what they have insured in reserves4. They can’t bail out your bank account.
Do you want to bet on the banks? I didn’t think so…
Bonds
What about bonds? With bonds, you have the threat of counterparty risk. How solvent is the entity or government that’s issuing the bond? None of them are solvent…
Interest rates for bonds are massive.
An interest rate spike can devalue your bond significantly. If you buy a bond of $100,000 at an interest rate of 2.5%, the bond will pay you $2,500. When interest rates go up significantly and move to 5%, the bond that you bought at 2.5% is now only worth $50,000 because a bond of $50,000 purchased with a 5% interest rate will pay out $2,500… The same as a $100,000 bond bought with a 2.5% interest rate…
Fun fact, 5 banks collapsed in 2023 because they bought bonds with reserves at low-interest rates, and then interest rates more than doubled.
Do you want to take the risk that interest rates will spike? In such a volatile economic environment where most bond issuers are bankrupt and interest rates fluctuate, only a gambler would take that bet.
Invest in the Market
As a successful business owner, you have dozens of financial planners telling you, “Your business is crushing it. Why don’t you give me some of your money, and I’ll invest it in stocks, bonds, and mutual funds so we can grow your wealth and diversify your portfolio?”
But what these financial planners don’t say is that when you invest in stocks, bonds, mutual funds, ETFs, and other common investments, you’re investing in other people’s businesses.
When you hand your money over to a financial advisor to help you grow it, what you’re really doing is providing liquidity for other entrepreneurs to grow their businesses. Meanwhile, you’ve deprived yourself of the ability to use that capital to invest in your own business.
For example, when you invest in Apple stock, you’re helping Tim Cook grow his business. With a quarterly revenue of about $89.5 billion in the fourth quarter of 20235, I’m not sure he needs your help… Don’t get me wrong, I love Apple. I use Apple products every day. But Apple doesn’t need more of my money. My business needs more of my money. Why should I invest in Apple stock when I could invest in growing my own business?
When you invest in the financial market, you’re no longer betting on yourself. You’re betting on someone else. You’re relinquishing control of your capital to your financial advisor, who is going to use it to help you bet on another entrepreneur.
You got where you are today by betting on yourself. Are you really going to change your winning formula?
And the reward for handing over your dollars to another entrepreneur isn’t even spectacular. Are you really going to let go of control over your capital just so you can get, on average, a mere 8% return in the marketplace? (which is an illusion and that’s before taxes eat away at it…) Simply put, it’s not worth it.
When your capital is tied up in investments, you begin to have liquidity issues. When you need capital to hire a key employee, invest in new software, or capture a one-in-a-million opportunity such as acquiring a competitor, you may find that you don’t have the liquidity available to do so… Because your capital is busy helping other business owners grow their businesses.
Black Swans & Gray Rhinos
Tying up your liquidity in investments can be dangerous…
What happens if there’s a black swan event, which is an event that no one sees coming, or a gray rhino event, which is an event that everyone can see, hear, and feel coming…
If your liquidity is tied up in the market, what position will you be in as a business owner? Will you have access to emergency funds?
At the time of writing this book, the COVID-19 pandemic, which was a total black swan event, is just four years behind us. We can all remember what it was like when the whole world shut down… Before PPP loans were introduced, many business owners had no idea how they were going to stay afloat. Yet those businesses who had liquidity available were less anxious than those who had all of their liquidity tied up in the markets.
What would your business look like if we experienced another black swan event? Would you be in a better situation than you were in March of 2020 or a worse situation?
When you have no liquidity but need capital, whether you’re dealing with a black swan event or simply capturing an opportunity, you’ve put yourself in a position where you’ll need to go to a bank, get approved for a loan, and take on debt.
“The only people that a bank will loan money to are the very people who don’t need it.”
–Mark Twain
The challenge with banks is that they will lend you money when you don’t need it, and they won’t lend you money when you desperately need it. There’s not a human being on
the planet that can’t relate to that, unless your last name is Buffett or Bezos.
Weathering the Seasons
What about planning for the seasons of a business? No business has consistent revenue across the 12 months of a year. You have a summer, when your revenue is at its height because demand for your product or service is highest, a spring, when you’re planning campaigns and building momentum, a fall, when your revenue begins to taper off, and a winter, when your revenue is at its lowest… And when, if you don’t have liquidity, you could have major cashflow issues.
Not only are you struggling to fund new endeavors such as expanding your team or leveling up your software, but you’re now struggling to make payroll and pay the bills. This happens even with successful business owners… They have more than enough capital to afford all of these things, but because this capital is tied up in investments, it’s as if they don’t have it at all.
A Cashflow Crisis
Most businesses deliver a product or service before they get paid. For example, a doctor performs surgery on a patient and then collects the bill after the fact. Sometimes, there is a months-long delay between the product or service being delivered and the payment.
This means you’ve already had to pay the expenses associated with selling your product or service, whether it’s employees’ salaries, manufacturing expenses, or paying for electricity in the office. You had to pay these expenses upfront to be able to deliver your product or service. Money leaks out of your business…
In a perfect world, your clients would pay you at the same time as you paid these expenses. In case you haven’t noticed, we don’t live in a perfect world.
What happens if you have a slow month and it becomes difficult to collect on accounts receivable? Meanwhile, to stay in business, you still have to pay the upfront expenses necessary to sell your product or service. This could quickly spiral into a cashflow problem… And if you don’t have reserves, you would be reliant on a bank loan to stay afloat. You may have to put up assets of the business, such as equipment or the building, or even personally guarantee a loan.
This is a terrible scenario, but it could get worse. You could go out of business because you don’t have cashflow, which is the lifeline of the business. And if you’re on the hook for a bank loan but have no income from the business coming in, the bank can take all the assets of the business and sell it. Worse, you could go bankrupt and the bank could come after your personal assets.
Is there a way to position or warehouse your excess capital without tying up your liquidity and putting yourself at risk of a cashflow crisis?
“I’ll Just Sell!”
Many business owners would read the above and think, “If I need money, I’ll just sell more products or services.” Okay… But you sell physical products. What are your payment terms with your vendors? Do you even have the money to buy more products from your vendors so you can sell them? It’s the same with services… Do you have the money to cover the overhead expenses of selling more services? Could you even afford to hire another employee to fulfill your services? And how are you going to get more sales? Can you afford to hire another salesperson?
In a real liquidity crunch and a challenging economy, many business owners think that they would just sell the business.
But do you know the value of the business now? Do you know the value when you are going to sell it? How did you determine the value? Do you have a buyer lined up?
Reality check… If you have to sell the business to generate capital, your business is probably not worth millions of dollars. Who would want to buy a business that has cashflow management problems?
If you don’t know how much your business is worth (from an appraisal, not from a guess) and you don’t have a buyer lined up, you can’t rely on selling to be a viable option.
With a strategy around generating more sales or selling your business, these plans are based on hope.
Disclaimer and Waiver
Michiel Laubscher & Laubscher Wealth Management LLC is not an investment advisor and is not licensed to sell securities. None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement, of any company, security, fund, or other offerings. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information contained herein is at your own risk. The content is provided ‘as is’ and without warranties, either expressed or implied. Michiel Laubscher & Laubscher Wealth Management LLC does not promise or guarantee any income or specific result from using the information contained herein and is not liable for any loss or damage caused by your reliance on the information contained herein. Always seek the advice of professionals, as appropriate, regarding the evaluation of any specific information, opinion, or other content.
