Why_are_you_should_never_sell_your_profitable_online_business
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this podcast
00:00:03.800 | I want to talk about the regrets of someone selling his online business for millions of dollars
00:00:09.840 | Because I really want to highlight that money really isn't the focal point
00:00:14.840 | for happiness and you hear it all the time money doesn't buy happiness
00:00:19.620 | but I seriously believe after certain amount whether it's about
00:00:23.200 | $75,000 if you're living in the heartland of America or
00:00:27.640 | $40,000 if you're living in an expensive coastal city once you have enough money to provide food shelter
00:00:33.780 | You know general living expenses entertainment some travel
00:00:38.580 | You're not gonna be that much happier if you have a lot more money. I've been tracking my money journey since
00:00:45.080 | 2009 you know publicly but privately I've been writing about my money thoughts since 1999 when I first had a job and
00:00:53.000 | You know, I've gone from what $40,000 base salary living in New York City, which is like
00:00:58.080 | $24,000 a year living in Texas Dallas or Houston. It wasn't that much money and I was working
00:01:05.760 | 70 80 hours a week and then I got to a point where I was making
00:01:10.260 | 15 times that and still working about 60 hours a week, but I wasn't much happier
00:01:15.560 | In fact, I was kind of miserable
00:01:17.480 | Which is why I left my day job in 2012 to make no money because I wanted freedom
00:01:22.180 | I really wanted freedom and freedom is the X factor that
00:01:26.280 | Will allow you to feel like the richest person in the world
00:01:29.920 | if you got that compared to a billionaire who has to answer to thousands of shareholders and the stocks not doing well and
00:01:36.600 | He or she's constantly under stress
00:01:38.840 | so this podcast
00:01:41.720 | encapsulates one person's journey and thoughts and feelings on what transpired after he sold his online business for 2.8 million dollars and
00:01:49.400 | What he would have done differently and why he wished he would have held on
00:01:53.320 | For the past six months now
00:01:55.760 | I've been trying to figure out what to do with financial samurai after achieving the 10-year anniversary mark
00:02:01.120 | It takes a lot of work recording this podcast
00:02:03.480 | Writing posts responding to comments and emails and so forth, but it's been part of my life right for so long
00:02:09.360 | And I really thought about selling the site because I just want to do some new things, you know after 10 years
00:02:16.200 | I kind of have this 10 year cycle in me and then maybe I have I don't know
00:02:21.360 | Hopefully four more 10 years and I'm dead
00:02:23.280 | So we all got a thing about these cycles some cycles are longer than others because some of us have different endurance
00:02:29.380 | qualities than others
00:02:31.480 | So I've been searching searching for reasons why I should sell and searching for reasons why I shouldn't sell
00:02:37.320 | And this is a good practice for all of you guys to do
00:02:40.640 | Because if you decide to do something you're gonna find reasons why it's right to do that something
00:02:46.520 | So you also got to find reasons and be subjective not subjective
00:02:50.960 | Objective and try to find the other side so you can see all sides of the equation
00:02:56.400 | So a friend of mine sold his website for 2.8 million in
00:03:01.520 | 2010 he started it for a thousand dollars back then and when I started financial salmon 2009
00:03:07.960 | It was also about a thousand dollars because I had to hire someone to set it up get the design and so forth
00:03:13.960 | But today you can start a site for something like 50 bucks or 100 bucks and you can do it much more quickly
00:03:19.720 | Which is why everybody should try to start something online at least have their own website and don't let you know
00:03:26.560 | The Facebook's and LinkedIn's and so forth get rich off you get rich off yourself
00:03:31.240 | And at least give yourself a chance
00:03:33.240 | But anyway enough about that. So he started the site with a thousand dollars and he sold it for 2.8 million
00:03:39.000 | So that's a twenty eight hundred X return which is better than practically every single angel investment ever out there
00:03:45.920 | better than investing in uber at the angel round or Airbnb and
00:03:50.600 | Definitely better than investing in like SoftBank and we work as we work goes the other way
00:03:55.920 | So he thought
00:03:58.120 | That by selling the site he would free up valuable time to take care of his young boy and it did he was 30 years old
00:04:05.200 | But after six months, he wasn't satisfied with only being a stay-at-home dad after working so hard on his business for so many years
00:04:12.400 | When his boy turned one, he decided to send him to daycare so he can go back to his old routine of building a business
00:04:19.520 | This is what he is passionate about building online businesses and seeing them grow and at two and a half years old
00:04:26.160 | He decided to send his boy to preschool and his wife worked a full-time job as well
00:04:31.360 | He also thought that by cashing out in 2010, he would feel a lot happier
00:04:37.600 | You know, there's a tremendous amount of uncertainty back in 2010
00:04:41.520 | I was just about a year maybe just six months after the worst of the financial crisis had passed and I remember that time quite clearly
00:04:49.720 | Everybody was still losing their jobs and he thought by selling at least he could just get that win because other
00:04:56.920 | Businesses that he noticed went to zero
00:04:59.040 | Despite the nice payout. He still wishes he would have never sold and here are the reasons why
00:05:04.680 | One he felt like he had lost a child
00:05:07.560 | Years before the birth of his son. He birthed his website
00:05:12.140 | Selling the site made him depressed that he no longer had a baby to nurture
00:05:16.720 | For almost seven years. He looked forward to working on his website before and after work and when he got laid off in 2009
00:05:23.800 | He spent 60 plus hours a week on the website
00:05:26.720 | Sometimes he spent way more time on his business than he did his own biological child
00:05:31.600 | And that's not a surprise because many working parents spend way more time at work than raising their children, too
00:05:37.680 | He loved his business as he would any child and when he sold he felt like the worst father ever
00:05:46.280 | And here's the thing selling something you love for money is a horrible horrible feeling he says
00:05:52.240 | You will only realize how much you love that something until it's gone
00:05:56.760 | We all know this from breakups from being far away from losing whatever it is
00:06:01.640 | We took for granted and the irony is you need to sell to realize whether you made the right choice or not
00:06:08.980 | If you feel nothing after you sell that is how you know, you made the right decision
00:06:15.240 | - he lost his sense of purpose
00:06:17.240 | He underestimated how important it was to look forward to having something to do every single day
00:06:23.680 | If you look the Maslow's hierarchy of needs on the very top is self fulfillment needs
00:06:28.600 | self-actualization achieving one's full potential including creative activities
00:06:34.520 | So three he lost that creative outlet
00:06:37.080 | Do you remember when we were kids we'd make paper mâchés and clay figurines and draw random things?
00:06:43.680 | It was fun. We got our hands dirty. We
00:06:46.220 | Expanded our minds. We just thought of crazy things to create
00:06:50.160 | So once he sold he tried to pick up guitar, but that didn't last very long
00:06:55.040 | He said he should have known because he had his guitar gathering dust next to his bed for the past eight years
00:07:00.920 | Then he tried painting but that wasn't easy. It was a little bit too messy
00:07:06.160 | He didn't have a big house where he could throw all his paper on the ground and just paint like crazy
00:07:12.000 | So after a couple works of art, he gave up
00:07:14.580 | All he wanted to do was go back to his website and create and build upon that foundation
00:07:19.880 | But he didn't have it and he couldn't for the first year because those non compete
00:07:24.960 | For this is a big one. He left so much money on the table
00:07:29.680 | It turns out in retrospect selling in 2010 was not a good idea
00:07:33.920 | Because it was the bottom of the stock market bottom on the real estate market and bottom of the economy
00:07:40.080 | It was a really critical error
00:07:42.240 | The site he said was churning out an operating profit of about six hundred thousand dollars a year
00:07:48.640 | So at the time he thought selling for 2.5 million plus a three hundred thousand dollar earn out was a good price
00:07:54.280 | But some of the sites that were smaller than his
00:07:57.520 | Kept on going to the point where they started making about a million dollars in operating profit by 2019 and some as early as
00:08:04.880 | 2017 so not only that
00:08:08.640 | Valuations for websites went up to along with valuations of the SP 500
00:08:13.200 | So if he had kept his operating profits flat
00:08:16.640 | Let's say at six hundred thousand a year
00:08:19.200 | if he had held on for five more years
00:08:21.280 | He would have made another three million dollars and then he could have sold a site for more like four point two million dollars instead
00:08:27.520 | Of two point five million dollars plus a maybe six hundred thousand dollar earn out due to higher valuations
00:08:34.200 | So all in all he thinks he left about five million at least
00:08:38.800 | Up to about eleven million on the table if he could have just hung on until now
00:08:43.720 | So this is a really critical point for entrepreneurs out there
00:08:47.580 | Especially with cash flow positive businesses you want to hold on for as long as possible if you can just keep profits flat
00:08:55.480 | Well, that's kind of like gravy every single day
00:08:59.600 | Valuations stay the same and you can still sell the business if you are a worker an employee
00:09:05.200 | You're trading your time for money. And if you don't work, you don't get paid and
00:09:10.960 | There's no exit if you exit there's not a big pile of equity you can cash in on well
00:09:16.920 | Some of you will have that if you work at a startup
00:09:18.920 | You know tech company or whatever that gives you a lot of equity. So really think about
00:09:23.800 | How to generate wealth it's your income
00:09:28.040 | Plus equity the equity component is really what makes a lot of these very wealthy people the richest it's not the income folks
00:09:36.040 | Five he wasted his time trying to recreate a successful business
00:09:41.040 | During his year-long non-compete. He tried to start three new businesses in different fields that all failed
00:09:47.920 | After his non-compete was over. He tried starting a couple other websites similar to the one he had
00:09:53.880 | But they didn't gain any traction
00:09:55.520 | so all told he wasted about three years of his life trying to get back what he lost and it
00:10:00.960 | Infuriated him to know that all he could have done was spent that time
00:10:05.160 | compounding and building on top of the already successful business he already had and
00:10:10.760 | He could have saved time and made even more money
00:10:14.880 | Six his baby was finally killed
00:10:19.360 | Four years after his site was purchased the acquire redirected his site to land on some other business they owned
00:10:25.320 | Essentially they killed the site and all the time he had put into it and it felt like a knife in his heart
00:10:32.400 | He said he just couldn't believe that after all those years
00:10:37.200 | He thought it was gonna last forever
00:10:40.120 | But the steward decided to get rid of it and that was really a really big blow as you get older
00:10:47.640 | You start thinking about leaving a legacy for your children
00:10:50.440 | Unfortunately, you can't if your baby got killed you want to tell your children what you did to serve your country
00:10:58.600 | to provide for your family and
00:11:01.480 | one of the biggest and best ways to do that is to build a business because you can see it and you can also use
00:11:07.560 | That business to provide for your children and maybe get them a job in their family business, but all that went away
00:11:14.320 | Seven he started taking shortcuts that made him feel ashamed because he was so desperate to recreate
00:11:21.120 | His success and glory he started cheating
00:11:25.000 | He started doing a lot of scammy link building exercises to try to game the search engines like Google
00:11:30.880 | He started taking ideas from many other established sites and just copying their articles with their own spin
00:11:37.380 | I've seen that happen a lot with financial samurai this one guy
00:11:41.480 | He copies literally all of my successful posts and just recreates it on his own
00:11:47.800 | And he pretends like it's his idea. It's pretty annoying
00:11:51.400 | This guy also copies the way I write my author bio with my affiliate links
00:11:57.960 | It's fascinating how there's so much blatant copying going on right now, and it's disappointing. But what are you gonna do?
00:12:05.620 | So he no longer was trying to create something original that he was proud of
00:12:10.360 | He just hired a bunch of freelancers to put up a bunch of crap online and that crap worked because Google can't really tell the
00:12:18.600 | Difference yet between crap and something really really authentic and he put a lot of advertising dollars behind the content
00:12:25.260 | Even though it was boring as crap because he had figured out a way to game the system
00:12:30.260 | eight
00:12:32.320 | He became irrelevant in his community
00:12:35.000 | This is a really important one and something that I felt when I left my day job in 2012
00:12:39.920 | After I left finance, you know suddenly I didn't hang out with the clients. I didn't hang out with my peers because I was irrelevant
00:12:47.400 | I wasn't providing any value and he felt the same way
00:12:50.000 | When he had his site everybody gave him the time of day
00:12:53.800 | Journalists would ask him for a quote
00:12:56.640 | He would be invited to come on podcasts and TV
00:12:59.900 | other bloggers and website owners would say nice things about him and his site and
00:13:06.040 | His offline friends would refer to him as a successful entrepreneur
00:13:09.960 | And once he sold all that went away
00:13:12.600 | He lost contact with all his peers who he had thought were his friends. They were outwardly
00:13:18.240 | Congratulatory. Hey, good job selling. I'm so proud of you seven years. Good job. Good job
00:13:24.280 | But behind his back they just stopped caring he could no longer help promote their work
00:13:29.960 | so they stopped giving him any love and
00:13:33.720 | The podcast and interview request stopped as well. So once you lose what makes you valuable
00:13:39.440 | You're gonna really truly recognize who your friends are. Oh
00:13:44.200 | And he admitted that he decided to buy himself back into the conversation by sponsoring various activities in the community
00:13:52.480 | Right buying access buying friends and he did get recognized as that's how it is
00:13:59.260 | It's all incestuous. It's pay-to-play in many many
00:14:03.400 | Organizations, but deep down he felt sad that he didn't have more organic friendships in the community
00:14:09.600 | And I think everybody can recognize that is it organic? Are you buying your way to influence power and friendship?
00:14:17.100 | Nine, he didn't fully reinvest his proceeds in 2010 if you think about back at the time
00:14:23.800 | It was a dicey situation
00:14:25.440 | So if you arrive at a chunk of cash, the last thing you want to do is lose it
00:14:30.320 | So he fearing a double-dip recession after selling just hoarded cash for the most part and it was only until
00:14:37.840 | 2016 did he admit he invested 50% of the proceeds so by then he had missed out on a very healthy rally that probably cost him
00:14:45.760 | about
00:14:47.440 | $500,000 in lost gains
00:14:49.440 | So talk about adding salt in the wound after already missing out on five million to eleven million in
00:14:56.320 | Gains from holding on if you had held on and then another five hundred thousand. That's a tough pill to swallow
00:15:03.000 | So when you're presented with a windfall, it's really hard to immediately put that money to work
00:15:09.680 | I felt the same way back in 2017 second half of 2017 when I sold my San Francisco rental property
00:15:16.160 | I sold it for two point seven four five million dollars and I walked away after fees and all that with about 1.8 million
00:15:23.280 | I had to pay obviously a mortgage that was like eight hundred ten thousand or something
00:15:27.280 | but 1.8 million is a lot of money and
00:15:30.840 | Actually, that's a very similar amount of money to what he got after taxes. And so I was very methodical
00:15:37.640 | What I did was I invested about six hundred thousand in
00:15:41.520 | Municipal bonds right as safe as you can get double a triple a they're paying about three to three and a quarter percent
00:15:49.840 | After tax and then I bought about six hundred thousand dollars in large-cap high dividend paying stocks
00:15:56.160 | Which is my risk side and then I I think I invested no
00:16:00.880 | I know I invested five hundred fifty thousand in real estate crowdfunding in a diversified portfolio of 17 different
00:16:06.360 | Commercial real estate properties and I held about fifty thousand dollars in cash
00:16:10.400 | So that's what I did and it took me about I would say four or five months to reinvest that windfall
00:16:17.280 | So it didn't take me five six years like my friend did but you know, it was a really stressful process
00:16:23.600 | and then finally
00:16:26.360 | Taxes taxes taxes taxes taxes took so much away
00:16:30.320 | He sold his business for 2.5 million excluding the 300,000 earn out a year later
00:16:35.680 | But he only ended up with 1.75 million after paying federal and state taxes
00:16:42.520 | 2.75 million. Hey great amount of money, but by selling your business you're essentially
00:16:47.560 | Surrendering yourself to the government and saying take all my money when you're operating your business
00:16:53.000 | You can find many many ways to reduce your taxable income. You can spend more money on
00:16:59.440 | Advertisement you can buy a heavy truck or SUV, you know for to take your clients around
00:17:06.200 | You can go to Greece to do your business off-site
00:17:10.400 | Whatever it is, you can spend money to reduce your taxable income legally
00:17:14.240 | So if you think about what the effective tax rate is
00:17:17.580 | Running your business versus after you sell your business
00:17:21.860 | There's a big difference and he was saying that by running his business his effective tax rate was closer to about 20%
00:17:27.400 | But when he sold the business he paid a 30% effective tax rate
00:17:31.320 | So a 10% effective tax rate difference can really add up over time over a seven-year period
00:17:37.760 | It's like doubling the value right in the world of 72
00:17:40.840 | So think about taxes before you sell a business as well
00:17:45.280 | Because that can really get you going if you're gonna give so much to the government
00:17:50.980 | Especially if you believe that government is inefficient with your money
00:17:54.460 | So I hope you enjoyed that deep insightful feedback that I got that he has shared because we talked for hours
00:18:03.040 | Because I was just in a quandary on what to do and I know a lot of this is me
00:18:07.580 | Projecting myself and believing hey
00:18:10.520 | This is the right thing to do by keeping financial samurai and seeing whether entrepreneurship a little bit more entrepreneurship
00:18:16.480 | Will do wonders. I want to try I want to try to see if I can make more money off financial samurai by tweaking the
00:18:23.860 | formula a bit from 90% fun 10% business to 70% fun 30% business and from a
00:18:31.320 | Increase of 10% to 30% that's a big jump relatively given what I've been used to for the past 10 years
00:18:37.240 | And so if you have a profitable business and you know
00:18:41.560 | What the path is going forward in other words if you work 10 more hours or produce this many more posts or?
00:18:49.600 | Produce a new product once a year and you see that path to profitability continue you want to hold on for dear life
00:18:57.160 | Think about all the massive businesses in the world
00:19:01.200 | Mars Inc that creates pet food and candy or coca-cola. They were founded almost a hundred more than a hundred years ago and
00:19:09.320 | They survived through the bad times because during those bad times they use their cash
00:19:14.840 | Their smarts their experience to iterate and get better and come up with new products and new ideas and take more market share
00:19:22.200 | In a low interest rate environment. It is imperative that you hold on to your cash generating assets
00:19:30.840 | Cash is so valuable when it's you know, the 10-year yield is only at one point five to one point nine percent
00:19:38.000 | It takes a lot a lot of capital to produce a certain amount of income
00:19:43.240 | for example
00:19:45.600 | 55,000 you need at a 5% interest rate 1.1 1 million to generate
00:19:50.320 | 55,000 but when interest rates fall to 2% you now need
00:19:56.760 | 2.75 million and when the interest rate falls to 1% you need 5.5 million in capital to generate that
00:20:03.760 | 55,000 so if you're still on the fence about starting a business, I highly encourage you to start and try
00:20:11.000 | You just never know what might happen. Thanks so much everyone if you enjoyed this podcast
00:20:16.680 | I'd appreciate it positive review and I'll talk to you guys later