Is Your Own Business Your Best Investment?
Maybe. But concentration brings risk. For many entrepreneurs, 90 percent of their wealth is tied to the value of their business. And that can cut both ways.
Good Morning!
Here are today’s highlights:
For those who’ve been putting off planning for succession, Lou Mosca has some suggestions on how to get started.
The labor market weakened more than expected in July, but productivity took a big leap.
The Senate voted against reinstating tax breaks for small businesses.
We’ve all seen what can happen when PE firms roll-up an industry. Could ESOPs offer a healthier roll-up alternative?
MANAGEMENT
In this week’s video, Lou Mosca talks about the many business owners who grapple with developing a succession plan: “Here's what I've learned about navigating this process: First, take stock of what you want from a succession plan. Do you want to exit entirely or step back to a partial role? Next, assess your talent pool. Look at your A-team and identify individuals who could fill your shoes. It is crucial to cultivate, mentor, and train these potential successors well in advance. Planning ahead is vital.” CONNECT WITH LOU
PERSONAL FINANCE
How much do you want to invest in your own business? “I recently spoke with a fellow CEO about an opportunity he was given to buy back equity in his company from a few outside investors. The question my CEO friend kept coming back to again and again was whether it was a wise decision or not to invest in your own business. Generally, my advice is yes -- whenever you get the chance to secure equity in your company, do it. This is likely your best opportunity to create life-changing wealth in the right circumstances. However, you must keep a few risk factors in mind before making that decision.”
“Is the company in a distressed situation? In other words, is the business going through a turnaround? This means that money might be tight and the future of the business is uncertain. Investing in a company going through this phase is extremely risky and might not be a sound decision. However, as CEO, if you have confidence that the financials are trending in the right direction, this could be a tremendous opportunity to buy.”
“The fact is that investments in private companies can generate much higher returns than investments in public companies, with the added benefit that, by doing so, you are betting on yourself. As the CEO, you have control and insight in areas like forecasts, budgets, employees, and customers, giving you a unique picture of the company's potential. Suppose you believe the arrow is pointing up for the company's future potential and you plan to capitalize on the numerous opportunities ahead of you. In that case, you'd likely be hard-pressed to find a better investment opportunity.”
“Beware of concentrating your wealth: You must also consider one other mitigating factor when it comes to investing in your business: Is your wealth too concentrated? For many entrepreneurs, 90 percent of their wealth is tied to the value of their business. This puts them at risk of losing all their wealth should something happen to the business. So, before you make any additional investments in your business, consider the implications for your balance sheet and look for potential ways to mitigate the risk in your portfolio.” READ MORE
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THE ECONOMY
The labor market weakened more than economists expected in July: “The Labor Department reported on Friday that hiring slowed to 114,000 jobs last month, missing expectations. The unemployment rate jumped to 4.3 percent. America is still adding jobs. But the labor market’s strength has been fading, and Friday’s report adds to evidence that it could be on its way to weakness.”
“Better news on inflation and a desire to prevent a significant rise in joblessness are two major reasons why Federal Reserve policymakers on Wednesday cleared the path for a September interest-rate cut. ‘I would not like to see material further cooling in the labor market,’ said Fed Chair Jerome Powell at his press conference following the central bank’s policy meeting.”
“Ernie Tedeschi, director of economics at the Budget Lab at Yale University, reckons the recent data are consistent with an economy that is at full employment—one when there are fewer gains to be had than a year ago, when many employers were still struggling to find workers.” READ MORE
Meanwhile, productivity surged in July: “Productivity grew at a 2.3 percent annual rate in the second quarter, the U.S. Bureau of Labor Statistics reported on Thursday, surpassing economists’ expectations. The pickup was a major improvement upon the sluggish 0.4 percent rate in the first quarter. And on a yearly basis, productivity increased 2.7 percent. That far exceeds pre-pandemic averages.”
“Productivity, at a basic level, is calculated as a simple ratio: the total amount of output an economy produces per hour worked by its labor force. But the output side of the equation is adjusted for inflation on a quarterly basis. That can cause volatility, in both directions.”
“Did the U.S. economy, and its workers, suddenly become deeply unproductive when oil prices jumped, causing energy inflation to surge, after war broke out in Europe? No, but the impact on productivity data in those quarters was deeply negative.”
“For now, most analysts say artificial intelligence is having only a nascent influence on overall productivity. A recent report from the Federal Reserve suggests that low unemployment, traditional automation, falling inflation and growing investment have more to do with the brightening data.” READ MORE
TAXES
As expected, the Senate rejected a bipartisan tax deal that would have restored important tax breaks for small businesses: “The roughly $80 billion bill had seemed to have everything. It soared through the House earlier this year with broad bipartisan support, a rare feat. Business groups loved it and hoped Congress would again allow companies to immediately deduct the full cost of capital investments and research expenses from their tax bills. And anti-poverty activists cheered its expansion of federal support for parents with children. But the effort — spearheaded by Representative Jason Smith, Republican of Missouri and the Ways and Means Committee chairman, and Senator Ron Wyden, Democrat of Oregon and the Finance Committee chairman — still ran aground in the Senate. Republican senators worried that the bill’s expansion of the child tax credit veered into creating a new welfare program, stalling the legislation.”
“Lawmakers had sought to cover the cost of the tax breaks by effectively shutting down a fraud-riddled program from the pandemic, the employee retention tax credit. Intended to be an incentive for companies to keep employees on payroll during the worst of Covid-19, the retention credit has instead become a magnet for bogus claims.”
“The Internal Revenue Service has frozen new claims for the credit for months in an attempt to address abuse of the program. The bill in the Senate on Thursday would have rejected all claims made after Jan. 31, 2024, helping generate $80 billion in estimated savings.” READ MORE
SELLING THE BUSINESS
Bill Fotsch believes ESOP roll-ups can be a compelling alternative to PE roll-ups: “Private equity companies recognize this model enables them to extract significant financial rewards. But company owners are beginning to realize they can beat private equity with a compelling alternative approach. This became apparent to me through conversations with several past clients from decades ago. Few had successfully transitioned their companies to new owners. Several had been acquired by private equity firms. While they were pleased to seal the deal, I sensed a level of regret.”
“One president told me that he had been acquired by a private equity company. He was subsequently asked to stay on as a consultant to help them acquire even more companies and share the same best practices we had applied at his company.”
“The first part went according to plan. They were successful at acquiring more companies. However, he admitted there was little success in sharing best practices. As he put it, PE companies are good at transactions, but not very good at operations.”
“The truth is, while PE companies have the unique capital and experience to acquire companies, they have little expertise in specific industries or running a company. Yet they extract a fortune for their efforts at industry roll-ups. Why can’t company owners create roll-ups like this themselves, without any private equity involvement?”
“Pooling resources under one ESOP structure means the cost of the ESOP per company plummets. Individual companies can operate autonomously. Meanwhile, the employees become company owners, who can directly improve the value of their stock by sharing and implementing best practices. Their chances of succeeding at this are greater than the PE company’s because they understand their industry and people.” READ MORE
HUMAN RESOURCES
The L.A. Times assesses the impact of the huge increase in immigration on California: “The surge of international migrants since 2021 — including refugees, asylum-seekers and others entering legally and illegally — has lifted the U.S. and California economies by filling otherwise vacant jobs, helping to keep job creation strong, growing businesses and pumping millions of tax dollars into state, local and federal coffers. Payroll taxes on immigrant workers have even helped relieve pressure on the nation’s embattled Social Security system.”
“Many employers in California are reluctant to talk about immigration because of the sensitivities surrounding the politically charged issue, especially in this election year. The California Chamber of Commerce, California Business Roundtable and other industry groups declined to comment for this article.”
“Yet their member companies depend heavily on immigrants. Foreign-born Californians account for one-third of all workers at restaurants and warehouses; about 40 percent in home healthcare and child day care; almost 50 percent at trucking and lodging businesses; and 60 percent at services for landscaping and cleaning buildings, according to a Times analysis of 2022 Census Bureau data.”
“Giovanni Peri, an economics professor at UC Davis, said large-scale immigration actually boosts productivity and demand for services, which in turn helps companies to grow and create jobs that are more likely to be taken by native-born workers, such as those in sales and management.”
“It’s also well documented that immigrants have higher rates of self-employment, whether that means working as an Uber driver, pushing a street food cart, or launching an ambitious tech business.” READ MORE
Given the labor shortage, energy companies are turning to robots to install solar panels: “The companies racing to build large solar farms across the United States are facing a growing problem: Not enough workers. Now, they’re turning to robots for help. On Tuesday, AES Corporation, one of the country’s biggest renewable energy companies, introduced a first-of-its-kind robot that can lug around and install the thousands of heavy panels that typically make up a large solar array. AES said its robot, nicknamed Maximo, would ultimately be able to install solar panels twice as fast as humans can and at half the cost.”
“Roughly the size of a pickup truck, Maximo has a large extendable arm that uses suction cups to pick up solar panels one by one and lay them neatly into rows, using artificial intelligence and computer vision to position them properly.”
“After months of testing, AES will put Maximo to work in the California desert later this year to help install panels at the largest solar-plus-battery project under construction, meant to help power Amazon data centers. If all goes well, the company aims to build hundreds of similar A.I.-powered robots.”
“‘We’re seeing labor shortages on construction projects in the United States, and it’s a bottleneck to the build-out of solar farms,’ said Andrés Gluski, chief executive of AES, in an interview. ‘So how do you get around it? Well, robots can work 24 hours, right? Robots can pick up 80-pound solar panels, not a problem.’” READ MORE
THE 21 HATS PODCAST
Beyond Trust Falls: An Event Planner Plans an Offsite: This week, Shawn Busse, Jay Goltz, and Jennifer Kerhin talk about what it takes to plan and execute an employee retreat—especially in our post-Covid, more-remote environment. Do you go offsite? Do you take everybody? Do you delegate the planning? Do you try to measure the ROI? Jennifer tells us about the interesting responses she got when she encouraged her employees at her retreat to ask her anything. Shawn explains why he let his leadership team do the planning—and didn’t set a budget. Jay, meanwhile, offers a slightly different perspective: “My company retreat,” he tells us, “is I cut back on my advertising. That's my retreat.”
Plus: How well does The E-Myth hold up as a playbook for business owners? Is it still relevant? Or was it written for a type of business that is far less prevalent today? And Jay tells us what he thinks of Wayfair opening a massive brick-and-mortar furniture store right down the expressway from his furniture store.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren