ORIGINAL VERSION

EDITED VERSION

CHAPTER 2

Why an entrepreneur?

This chapter will attempt to cover why somebody would want to become an entrepreneur. This book is written primarily for entrepreneurs. As a person who became an entrepreneur in June of 1966, I feel qualified to write this chapter. I terminated a salaried position with a major corporation to go back to graduate school and complete my master’s degree. I’ve always been independently minded and achievement-oriented, with very specific goals both annually and longer-term. For the most part, I believe entrepreneurs are optimistic while being very much focused on the future. In my years of working with entrepreneurs, I’ve found them to be very health-conscious with extremely high energy.

Entrepreneurs are risk takers. They have dreams and can see themselves in a certain place. They generally are driven by a great need to be in control. Being and entrepreneur is not risky when you’re confident that you will succeed. Most entrepreneurs I’ve worked with have a track record of success. They have excelled in school, sports, and in their professional life. Do these descriptions fit you?

Is profit a keyword to you? Do you usually reinvest in your business? Do you look at the profit magnitude to justify the risk of your being in your own business? Are all your eggs in one basket? Are you excited about getting up in the morning? Do you love what you’re doing? Let’s take some space and explore these key questions.

Profit is what keeps you in business. Without profit, you’ll not stay in business very long. Profit is how we keep score. At this writing, we have experienced 17 years of high double-digit returns in the stock market. Therefore is it acceptable to expect at least a 20 percent or greater return on your business? You’re putting in a lot of time and probably have most of your savings at risk. In fact, as an entrepreneur, I believe your business should give you your greatest return. If it isn’t, maybe you should do something else with your money. Do you have a budget for your business? What is each activity worth to you? At the end of this chapter, I have included an outline that we use each Monday morning to estimate the value of each activity. Like any other successful business, the acquisition of new clients is critical to our continued growth and success. If a client is not involved, then our revenues are limited. By tracking our activity, we have some idea of our handicap, that is how many held appointments will generate a certain amount of revenues. We very much care about our clients’ success. In fact, one of the main reasons we encourage people to become clients is that we want a partnership built on relationship, not transactions. How do you see your clients? What do you have to do to develop clients and generate a reasonable profit?

If you are generating a reasonable profit and reinvesting in your business, this action becomes easy. The hard part is knowing when and what to reinvest in, unless you have a clear idea of where you trying to go. Do you have a written goal? Do you know what you want out of life? Once you’ve answered these two questions, it’s easier to decide how to structure your company to accomplish your goals. Without taking time to reflect and without reducing to writing your desires, you’ll always be wandering around and taking stands in the dark, because you’re not sure where you want to go. It has taken me four years to write this book. Since I re-entered the income earning world as an entrepreneur in June 1967, my life’s work has given me many experiences in working with fellow entrepreneurs. I felt it was important to share some of my wisdom. Typing is something boys did not do when I went to school. Information fro computers was obtained by using key punch cards. Now I sit with a headset on dictating onto a screen and making corrections by speaking. This investment enables me to operate at a faster pace and not tie up another person to do the typing, that I would then correct. This project is important to me, so I establish the deadline and must meet certain benchmarks to achieve the final book. I do have a written goal that is shared with my spouse and those in my office. I have clearly defined what I want out of life and keep a copy in my daily log book and under the glass on my desk. While on hold, I have time to glance at the list of what I want out of life. When faced with difficult decisions, I refer to this list, especially when faced with a priority decision, such as making a new investment in the business.

If you’re doing all the above and doing well, what is a fair magnitude of profit? That is a decision you have to make yourself. Did you know the government, in the form of taxes and fees, takes over 22 percent of the gross domestic production? If you’ve never been an entrepreneur and had to risk your own money, nor had to satisfy a payroll, but rather received a regular paycheck and merit raises, while considering a CD about the most risky investment you want to make, then a return of 20 percent or more seems excessive. The January 11, 1999 issue of Forbes magazine recognized Pfizer as company of the year. These are the people who brought us the male potency drug Viagra. The article quoted Pfizer’s 32.5 percent operating margin when they focused on proprietary patent protected drugs. In my industry, financial services such as AG Edwards had operating profits of 23.8 percent for the last 12 months. Franklin Resources had operating profits of 31.8 percent, T Rowe Price has operating margins of 39.9 percent, and Charles Schwab had operating margins of 21.4 percent., according to the Forbes article. It makes interesting reading if you want some benchmarks that are recently current at this writing for a number of industries.

Most entrepreneurs have all their eggs in one basket. If you have dropped a carton of eggs, you know what happens to most of the eggs. We entrepreneurs have been accused of dreaming. Those of us who have stumbled have watched most of those eggs break. We must be realistic and careful not to create situations where most of those eggs can be broken. I use the services of a business coach. He asks me hard questions. His desire is to see me succeed. He tries to pull me out of world of dreams. In addition, I have a board of advisers who are in the same business as I am. We deal with the same issues while residing in different parts of the country and get together on a phone bridge twice a month for one-hour. I have included in the back of this chapter information we’re filing for each other for the first quarter of this new year. If you are not seeking this kind of assistance, you’re probably looking at the world through rose-colored glasses, dreaming. Without taking the time to seek and find outside assistance, you’re actually wasting more time trying to catch those eggs before they hit the ground.

The greatest equalizer or safety foam floor to prevent all those eggs from cracking for every entrepreneur is cash-amassing life insurance. The guarantees provide excellent balance by helping build eggs outside one basket. The death benefit provides insurance that your family will receive some value for the business. In many states, individually owned life insurance is asset protected. This is something left to confirm in your own state with proper legal counsel. Cash amassing life insurance is the only asset doing multiple things simultaneously, protecting your human-life economic value while building secure bond-based return values and providing a preferred source of capital, ultimately enabling you to become your own banker and to control both the debt service amount and time if you want to set up a repayment schedule. This is the only product so uniquely qualified to meet all of these features and benefit simultaneously. As stated in other chapters, with the risk you are taking in your business, variable or equity based product is not acceptable for prudent investors. Entrepreneurs who do not have ample amounts of cash amassing life insurance are taking excessive risks not only for themselves but also for their loved ones.

Another measure of success for an entrepreneur is that you are excited about getting up each morning and you love what you are doing. You can tolerate the annoyance and have learned what you can control when reacting to the situation or circumstance, even if you don’t have control of the event that dictated the circumstance. We entrepreneurs are generally devoted to our work and families and are usually the first born. Every entrepreneur I have met is a high-energy individual who is an early riser and likes leisure activities that fill their high-energy demands. Successful entrepreneurs make things happen to benefit others. This is one of the driving forces behind this book. I want to share the wisdom of meeting with more than 21,000 fellow entrepreneurs and helping many thousands to solve financial challenges.

Children born after 1964 have seen their parents get divorced, often more than once, and major corporations downsizing so often that it is almost a nonevent to them. This generation has seen the highest elected official of the country claim not to inhale, lie to a grand jury, tamper with witnesses and demonstrate by his actions that his oath of office means nothing. Everything is relative. The result is a distrust of politicians, the political process, and big business, and this post-1964 generation makes up the fastest-growing segment of the population that are becoming entrepreneurs. With the great examples of the actions taken by us who are older, why should this growth in entrepreneurs be a surprise? Everything else is out of control; therefore, they seek control of their chosen life work. Women particularly, who want freedom and choice, are the fastest-growing entrepreneurial market as the 1990s fade away.

One of the most popular accumulating vehicles is the 401(k) plan. Reasons cited to participate are the tax deductibility, accumulations that are tax-deferred, systematic savings, retirement planning, and a company match. For an entrepreneur, the company match comes from his or her own pocket. Therefore a match is not a favorable reason to participate in 401(k) if you are the entrepreneur funding it.

The 401(k) for an entrepreneur can be a bad investment!

Rarely are unfavorable features discussed in a 401(k) review. Here are 22 I have observed in my career. This is a joint account with the IRS. They will participate in the form of income taxes as distributions are taken out. Not all of the big number illustrated as an advantage of the 401(k) is yours. Tax increased rates erode any profits. There’s a huge tax explosion at the end when you begin distributions. In fact, the survivor, if you were married, becomes a single taxpayer and pays greater taxes at a faster rate on these distributions. Probably one of the most important attributes missing for an entrepreneur is the inability to collateralize or utilize these funds for business purposes, other than under very restrictive rules. There’s a 10 percent early withdrawal penalty. You must wait until age 59-and-a-half or older, unless you qualify for the 72(t) IRS exception. Your tax adviser can discuss this exception if it is an option you wish to exercise. After the 1994 tax law change the probability of being taxed under Social Security benefits increases substantially, unless you have very small amounts in your 401(k) plan that you will be required to withdraw. There’s no disability completion option. If you are disabled, your income stops, and therefore your contributions stop. One of the most popular aspects of the 401(k) plan is demonstrated by math. Put so much money into the plan at some interest-rate and you have this great pool of wealth. This is based on a false belief theta math equals money. You are restricted as to the assets that you’re allowed to invest in a 401(k) plan because this is a deferred happiness plan and you give up control, use and liquidity of the funds. It is really a reverse tax planning vehicle, sold on the concept you will be in a lower tax bracket at retirement. Most entrepreneurs who enjoy their work never really plan to retire unless their health deteriorates; they often slowdown some, but that’s all. Why be in a plan that forces you to withdraw money after 70 1/2? Capital gains rates have generally been below ordinary income tax rates and benefits from a 401(k) plan will be taxed at the less favorable ordinary income rate. The estate tax is extra. The only way to escape the estate tax is to give away your 401(k) / IRA to charity. The IRS dictates the limits that can go into the plan and has a penalty tax of 50 percent if you don’t withdraw sufficient amounts starting after 70 1/2. The plan is complex and the government keeps changing laws. Benefits to survivors are always less than the cash accumulated. As the owner of the business, you are responsible for the administrative costs of a plan that can run several percentage points of total payroll. There are accounting fees because the tax returns must be filed. Entrepreneur / owner, have fiduciary liability along with key executives as defined by the IRS and the Department of Labor. Finally, there’s a cost of time in policing and meeting compliance requirements – more stuff in things that our friends in the government require.

For an entrepreneur, based on the above comments, there are four favorable reasons and 22 negative reasons to participate in a 401(k) plan if you are the owner. When you look at all the facts, is it beneficial as an owner to participate in a 401(k) plan based on these complete facts?

In closing this chapter, I would like to share one other tool that is most beneficial to me. It is titled "subject: daily team report." At the end of each day I take a few minutes to list my three biggest accomplishments for that day. Second, I list my biggest three concerns for that day. Third, on a scale of 1 to 10, I rank how well I performed that day. This little tool only takes a few minutes and gives me great focus for each new day as it will come. This is another helpful tool from my business coach and has been incredibly valuable. Should you decide to incorporate this into your life, I believe you will find it most beneficial.

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A very successful financial advisor as well as an entrepreneur nearly all of his working life, the author is well-qualified to write about his subject. However, we felt his tone was a bit dry and needed a little "warming up." We also shortened paragraphs, restructured sentences here and there, and reorganized thoughts as necessary to make it all flow better, and to make it more appealing to the general reader.

SAVE ME THE EFFORT OF SCROLLING.
TAKE ME TO THE EDITED VERSION NOW.

CHAPTER 2

Why Be An Entrepreneur?

This chapter will attempt to explain why somebody would want to become an entrepreneur. After all, this book is written primarily for entrepreneurs. Having become self-employed in June of 1966, I feel eminently qualified to write this chapter. I terminated a salaried position with a major corporation to go back to graduate school and complete my master’s degree. I’ve always been independently minded and achievement-oriented, with very specific goals — both annual and longer-term. For the most part, I believe entrepreneurs are optimistic, while remaining very much focused on the future. In my years of working with entrepreneurs, I’ve found most of them to be very health-conscious, with extremely high energy levels.

Entrepreneurs are risk takers. They have dreams, and can clearly see themselves in a certain place. They generally are driven by a great need to be in control. Being an entrepreneur does not seem risky when you’re confident that you will succeed. Most entrepreneurs I’ve worked with have a track record of success. They have excelled in school, sports, and in their professional life. Do these descriptions fit you?

Here are some more questions to consider:

• Is profit a keyword to you?
• Do you usually reinvest in your business?
• Do you look at the profit magnitude to justify the risk of your being in your own business?
• Are all your eggs in this one basket?
• Are you excited about getting up in the morning?
• Do you love what you’re doing?

Let’s take some time and explore these key questions.

Profit is the bottom line!
Profit is what keeps you in business. Without profit, you’ll not stay in business very long. Profit is how we keep score. At this writing, we have experienced 17 years of high double-digit returns in the stock market. Therefore, isn’t it realistic to expect at least a 20 percent or greater return on your business? You’re putting in a lot of time and probably have most of your savings at risk. In fact, as an entrepreneur, I believe your business should give you your greatest return. If it isn’t, maybe you should do something else with your money. And no discussion of profit would be complete without mentioning budgeting. Do you have a budget for your business — and if you don’t, why not?

Another question you need to ask yourself is this: What is each activity worth to you? In this section, you will find a copy of the "Accountability" exercise that my associates and I use each Monday morning to estimate the value of each activity. We find it quite helpful in measuring what might otherwise be difficult to quantify. You can modify it, of course, to fit your own needs.

Another tool that has long proven to be most beneficial to my associates and me is the "Daily Team Report," a copy of which I’m including here as well. Again, you’re welcome to modify and use this exercise in your own business. At the end of each day, I take a few minutes to list my three biggest accomplishments for that day. Secondly, I list my three biggest concerns for that day. And thirdly, I rank, on a scale of 1 to 10, how well I performed that day. This little tool only takes a few minutes, and gives me great focus for each new day as it will come. I learned about this helpful tool from my business coach, and it has been incredibly valuable to me. Should you — and your team — decide to incorporate this into your own life, I believe you will find it most beneficial, as well.

Freedom of choice
Like any other successful business, the acquisition of new clients is critical to our continued growth and success. If a our client base is not active, then our revenues are limited. By tracking our activity, we have some idea of our handicap; — that is, how many held appointments will generate a certain amount of revenues. Furthermore, we care very much about our clients’ success. In fact, one of the main reasons we encourage people to become clients is that we want a partnership built on relationship, not transactions. How do you see your clients? What do you have to do to develop clients and generate a reasonable profit?

If you are generating a reasonable profit and reinvesting in your business, acquiring new clients becomes easy. Understand that I am referring here to quality clients who will contribute to your growth and prosperity. If you’re doing everything else right, you will have the freedom and the power to choose the clients who will be best for you, and you will never feel obliged to "settle."

Sharpen your tools and use them!
Having just mentioned the importance of reinvesting in your business, I am aware that you may find it challenging to determine when and what to reinvest in — unless you have a clear idea of where you are trying to go. This is where the fine art of goal-setting comes in. Do you have a written goal? Do you know what you want out of life? Once you’ve answered these two questions, it’s easier to decide how to structure your company to accomplish your goals. Without taking time to reflect, and without committing your desires to writing, you’ll always be wandering around and taking stands in the dark, because you’re not sure where you want to go.

When I went to school, typing was something boys did not do. Information from computers was obtained by using keypunch cards. Now, I sit with a headset on, dictating directly onto a screen, and making corrections by speaking. This small investment in software enables me to operate at a faster pace, and to not tie up another person to do the typing (which I would then have to correct). This project was important to me, so I established the deadline, and knew that I must meet certain benchmarks to complete the book.

Beyond the completion of the book, I do have a written goal that is shared with my spouse and those in my office. I have clearly defined what I want out of life, and keep a copy in my daily log book and under the glass on my desk. Even while I’m waiting on hold, I have time to glance at the list of what I want out of life. When faced with difficult decisions, I refer to this list, especially when faced with a priority decision such as making a new investment in the business.

Define a fair return and go after it!
If you’re doing all the above and doing well, what is a fair magnitude of profit? That is a decision you have to make yourself. Did you know that the government, in the form of taxes and fees, takes over 22 % of the gross domestic production? A return of 20% or more probably seems excessive if you’ve never been an entrepreneur, risking your own money and struggling to satisfy a payroll, but instead receiving a regular paycheck and merit raises (and considering a CD to be the most risky investment you wanted to make).

On the other hand, consider what kind of returns some of the truly profitable companies are realizing, according to the January 11, 1999, issue of Forbes magazine. It makes interesting reading if you want some current benchmarks for a number of different industries.

• Pfizer (the people who brought us the male potency drug Viagra) was recognized as company of the year. The article quoted Pfizer’s 32.5 percent operating margin when they focused on proprietary patent protected drugs.
• In my industry, financial services such as AG Edwards had operating profits of 23.8 percent for the last 12 months.
• Franklin Resources had operating profits of 31.8 percent.
• T. Rowe Price had an operating margin of 39.9 percent.
• Charles Schwab had an operating margin of 21.4 percent.

Diversify to survive!
Most entrepreneurs have all their eggs in one basket. If you have dropped a carton of eggs, you know what happens to most of the eggs. We entrepreneurs have been accused of being dreamers. Those of us who have stumbled have watched most of those eggs break. We must be realistic and careful not to create situations where most of those eggs can be broken.

I use the services of a business coach who asks me hard questions because his desire is to see me succeed. He tries to pull me out of the world of dreams. In addition, I have a board of advisers who are in the same business as I am. We deal with the same issues while residing in different parts of the country, and get together on a phone bridge twice a month for one hour. I have included in the back of this chapter information we’re filing for each other for the first quarter of this new year. If you are not seeking this kind of assistance, you’re probably looking at the world through rose-colored glasses, dreaming. Without taking the time to seek and find outside assistance, you’re actually wasting more time trying to catch those eggs before they hit the ground.

The greatest equalizer or safety net to prevent all those eggs from cracking is cash-amassing life insurance. The guarantees provide excellent balance by amassing eggs outside one basket. The death benefit provides insurance that your family will receive some value for the business. In many states, individually owned life insurance is asset-protected. This is something you will need to confirm in your own state with professional legal counsel. Cash-amassing life insurance is the only asset that does multiple things simultaneously, protecting your economic value, while building secure bond-based return values and providing a preferred source of capital. Ultimately, this enables you to become your own banker, and to control both the debt service amount and time if you want to set up a repayment schedule. This is the only product available which meets all of these features and benefits simultaneously. As I will explain in other chapters, with the risk you are taking in your business, variable or equity- based product is not acceptable for the prudent investor. Entrepreneurs who do not have ample amounts of cash-amassing life insurance are taking excessive risks, not only for themselves, but also for their loved ones.

Loving what you’re doing
Another landmark of success for an entrepreneur is that you are excited about getting up each morning, and you love what you are doing. You can tolerate the annoyance, and have learned what you can control when reacting to the situation or circumstance, even if you don’t have control of the event that dictated the circumstance. We entrepreneurs are generally devoted to our work and our families. Every entrepreneur I have met is a high-energy individual, an early riser who likes leisure activities that fill his or her high-energy demands. Successful entrepreneurs make things happen to benefit others. This desire to make things happen for others is one of the driving forces behind the writing of this book.

The new entrepreneurs
Children born after 1964 have seen their parents get divorced — often more than once — and have seen so many major corporations downsizing that it is almost a nonevent for them. This generation has seen the highest elected officials of the country caught in unscrupulous activities, resulting in a distrust of politicians, the political process, and big business. Realize that this post-1964 generation makes up the fastest-growing segment of the population that is heeding the call of entrepreneurship. Given the great examples we of the "older" generation have provided, why should this growth in entrepreneurs come as a surprise? Everything else is out of control; therefore, this generation seeks control of their chosen life work. Women particularly, who want freedom and choice, are the fastest-growing entrepreneurial market as the 1990s fade away.

Sometimes, the most popular tool isn’t the best tool
Now that we’ve looked at the motivations behind — and the benefits found in — entrepreneurship, we should probably step sideways a bit, and discuss something that represents most people’s first step into the entrepreneuring world: The 401(k) plan, which is one of the most popular accumulating vehicles. Reasons cited to participate are the tax deductibility, accumulations that are tax-deferred, systematic savings, retirement planning, and company matching programs. For an entrepreneur, however, the company match comes from his or her own pocket. Therefore a match is not a valid reason to participate in a 401(k) plan, since you are the entrepreneur funding it. When all the facts are considered, it becomes clear that a 401(k) plan can be a bad investment for an entrepreneur! Let’s look at some additional important reasons, which are rarely discussed in a 401(k) review:

• A 401(k) is a joint account with the IRS. They will participate in the form of income taxes as distributions are taken out. Not all of the big numbers presented as advantages in the 401(k)’s end up being yours. Increased tax rates erode any profits. There’s a huge tax explosion at the end when you begin distributions. In fact, if you are married, the surviving spouse becomes a single taxpayer, and pays greater taxes at a faster rate on these distributions.
• Probably one of the most important attributes missing for an entrepreneur is the inability to collateralize, or to utilize these funds for business purposes, except under burden of some very restrictive rules.
• There’s a 10 percent early withdrawal penalty. You must wait until age 59-and-a-half or older, unless you qualify for the 72 (t) IRS exception. (Your tax adviser can discuss this exception if it is an option that you wish to exercise.)
• After the 1994 tax law change, the probability of being taxed under Social Security benefits increases substantially, unless you have very small amounts in your 401(k) plan that you will be required to withdraw.
• There’s no disability completion option. If you are disabled, your income stops, and therefore your contributions stop.

One of the most popular aspects of the 401(k) plan is demonstrated by math. According to the plan’s promoters, if you put so much money into the plan at a given interest rate, you will end up with a great pool of wealth. This is based on the false belief that math equals money. In reality, you are restricted as to the assets you’re allowed to invest in a 401(k) plan, because this is a "deferred–happiness" plan and you give up control, use, and liquidity of the funds, in the hope of some greater future reward.

The 401(k) is really a reverse tax planning vehicle, sold on the concept that you will be in a lower tax bracket at the time of your retirement. Most entrepreneurs who enjoy their work never really plan to retire unless their health deteriorates They often slow down some, but that’s all. Why be in a plan that forces you to withdraw money after you reach the age of 70-and-a-half? Capital gains rates have generally been below ordinary income tax rates and benefits from a 401(k) plan will be taxed at the less favorable ordinary income rate.

The estate tax is extra. The only way to escape the estate tax is to give away your 401(k)/IRA to charity. The IRS dictates the limits of how much money can go into the plan, and assesses a penalty tax of 50 percent if you don’t begin to withdraw sufficient amounts after you reach 70-and-a-half. 1/2. The plan is complex, and the government keeps changing laws. Benefits to survivors are always less than the cash accumulated. As the owner of the business, you are responsible for the administrative costs of a plan that can run several percentage points of your company’s total payroll. There are accounting fees because the tax returns must be filed. The entrepreneur/owner has fiduciary liability, along with key executives, as defined by the IRS and the Department of Labor. Finally, there’s a cost of time in policing and meeting compliance requirements — more expense that our friends in the government require the entrepreneur to bear.

Based upon the above observations, there are four reasons for an entrepreneur to participate in a 401(k) plan, and nearly two dozen reasons not to participate. When you look at all the facts, can you see any benefit to you, as an owner, to participate in a 401(k) plan? I doubt it.

* * *

You are to be congratulated for your decision to "strike out on your own" as an entrepreneur. By using the logic and tools provided in this chapter, it is my hope that you will realize all the success you strive for, while avoiding some of the pitfalls that have tripped up so many pioneers who went before you. While some ancient maps cautioned travelers about uncharted territory with admonitions like, "Beyond here, there be dragons," the entrepreneur’s map might well warn that, "On this path, there be losses!" Heed the warnings, and follow the paths that others have followed to success, and you’ll be in for the most rewarding journey of your life.