‘They Build Nice, Little Companies’

Some people speak demeaningly of entrepreneurs who build “lifestyle” businesses. Those people should shut up.

Good morning!

The Morning Report will be on vacation the next two weeks, returning after Labor Day. The 21 Hats Podcast will publish as usual. 

Here are today’s highlights:

• We now know why celebrity CEO Dan Price resigned.

• No, the IRS isn’t sending 87,000 armed agents to audit your business.

• Actually, the Inflation Reduction Act promises real tax savings for business owners.

ENTREPRENEURSHIP

Ami Kassar is tired of people speaking dismissively of “lifestyle entrepreneurs”: “If I asked her to define how a ‘lifestyle entrepreneur’ is compared to her, her answer would have been something like, ‘they build nice little companies.’ But unfortunately, when venture capitalists think about ‘lifestyle businesses,’ they minimize them. It's time for different terms. I would argue that there are ‘flipper entrepreneurs’ and ‘builder entrepreneurs.’ And their philosophies are very different. Flipper entrepreneurs want to build several companies in their career, try to do it quickly, and sell them. They're more passionate about the process than the actual entity they're building. Their goal in life is multiple exits. The game is to get in and out. They never put up their house for their company—they're never that emotionally tied to it.”

• “‘I am a proud builder entrepreneur! How about you?’” READ MORE

BRANDING

Moscow’s flagship Starbucks has reopened under new owners—a local restaurateur and a popular rapper—and with similar branding: “On Friday, Russians lined up for drinks at Stars Coffee, operating under a new logo similar to Starbucks’s. Instead of Starbucks’s siren with a star-topped crown, the new Russian chain’s logo sports a woman wearing a star-emblazoned kokoshnik, a traditional Russian headdress. On its website, which went live Thursday, Stars Coffee posted, ‘Bucks left. Stars have stayed.’”

• “The approach is a stark departure from that of the new owners of another big Western chain that recently left Russia: McDonald’s Corp. After McDonald’s sold its thousands of Russian restaurants to Alexander Govor, a Siberian businessman, he instituted a wholesale rebranding.”

• “That included a new name, Vkusno i tochka, or ‘Tasty & That’s It,’ and a distinct logo. The burger chain also dropped off some menu items, like the Big Mac and the McFlurry, saying they were too directly related to McDonald’s.”

• “On Friday, the store was packed with patrons buying familiar coffee drinks, croissants and desserts, as well as salads, pita sandwiches and pastas. [Restaurateur Anton] Pinsky told reporters Thursday that two or three of the new Stars Coffee locations would offer alcoholic beverages.” READ MORE

THE ECONOMY

Last week’s jobless claims indicate the labor market remains tight: “New applications for unemployment benefits inched down last week, a sign the labor market is holding up as the broader economy shows signs of slowing. Initial jobless claims, a proxy for layoffs, declined slightly to a seasonally adjusted 250,000 last week from a downwardly revised 252,000 the week before, the Labor Department said Thursday. Claims totals have hovered around this level since hitting a high for the year in mid-July, and are above the 2019 pre-pandemic weekly average of 218,000.” READ MORE

PROFILE

We now know why Dan Price—once called “the one moral CEO in America”—resigned from Gravity Payments: “On Monday, the police in Palm Springs, Calif., said they had referred Ms. Margis’s case to local prosecutors, recommending a charge of rape of a drugged victim. Prosecutors in Seattle earlier this year charged Mr. Price with assault in another incident. After responding to questions earlier in the day from The New York Times, Mr. Price tweeted that he had resigned on Wednesday evening as chief executive of his company, Gravity Payments. He wrote that he had become a ‘distraction’ and needed to ‘focus full time on fighting false allegations made about me.’”

• “There were warning signs about Mr. Price, but Ms. Margis did not see them. When she did a Google search, many of the top results for ‘Dan Price’ were his own social media accounts, along with flattering stories.”

• “Buried was the reason he had, for a time several years ago, nearly vanished from public attention: An article I wrote in 2015 for Bloomberg Businessweek revealed that his story about the pay raise had notable holes and that his former wife had accused him of domestic violence.”

• “Mr. Price’s internet fame has enabled a pattern of abuse in his personal life and hostile behavior at his company, interviews with more than 50 people, documents, and police reports show. He has used his celebrity to pursue women online who say he hurt them, both physically and emotionally.”

• “Ms. Margis is one of more than a dozen women who spoke to The New York Times about predatory encounters with Mr. Price.” READ MORE

TAXES

No, there won’t be 87,000 new IRS agents with guns headed to your door: “Treasury and IRS officials have said the new funds for tax enforcement won’t increase audits on filers making less than $400,000, which some have called into question. On Aug. 10, Treasury Secretary Janet Yellen sent a letter to the IRS with more specifics. It says the new funding ‘shall not be used to increase the share of small business or households below the $400,000 threshold that are audited relative to historical levels.’ The Treasury directive leaves room for audits of taxpayers claiming, say, $300,000 of income that have another $200,000 of unreported income.”

• “Over half the new dollars were earmarked for new tax enforcement, especially audits of high-earning taxpayers, while the rest was to improve operations, technology and taxpayer service.”

• “The bottom line, says Ms. Sarin [a Treasury official overseeing the IRS]: ‘For honest taxpayers earning less than $400,000, the chances of being audited are going down.’”

• “According to the Treasury Department’s plan, part of the new funding will go to hire 87,000 workers over 10 years. This figure includes all hires, including customer service reps and tech workers as well as agents.”

• “It doesn’t take into account that due to the IRS’s aging workforce, more than 50,000 retirements and other departures are expected in coming years.” READ MORE

POLICY

Yesterday, Gene Marks told us the Inflation Reduction Act will hurt small businesses. Today, in a different column, he says it will reduce taxes for small businesses (Gene and I will sort out his reporting in Monday’s Dashboard podcast): “For starters, there’s the extension of the qualified business income deduction from 2025 through 2027. Otherwise known as the pass-through deduction, the popular write-off allows many ‘pass-through’ companies a 20-percent deduction on their business income. This perk, particularly for those earning more than $400,000, was on the chopping block during the IRA’s negotiations. Not only did it survive, but business owners now have two more years to enjoy it.”

• “The IRA gives small business owners the opportunity to enjoy generous tax credits when they buy used or new electric vehicles. There’s a $7,500 ‘clean vehicle credit’ for vans, SUVs and pickups costing $80,000, and $55,000 for all other vehicles.”

• “Businesses providing the types of green energy and environmentally friendly equipment and services that homeowners will be seeking will surely see an uptick in their demand too. For small businesses that buy or sell manufacturing parts used in renewable projects (such as wind turbines and solar panels), there are more tax credits available.” READ MORE

READER COMMENT

Josh Patrick, a 21 Hats Founding Member, took issue with Gene’s original criticisms of the Inflation Reduction Act: “I think Gene is wrong on three of his reasons small business will pay for the new tax bill.”

• “Pharmaceutical negotiations: We are the only major economy that doesn’t negotiate with drug companies on prices. We’ve been subsidizing the world for years. Now, they get a chance to pay their fair share also. It doesn’t automatically mean private insurance will pay more.”

• “IRS agents: Small businesses who don’t take advantage of the tax code will most likely not be affected. Those small businesses who use sketchy deductions will. The IRS has all sorts of algorithms for finding tax returns that don’t look correct. Those are the ones who will be targeted for audit.”

• “Finally, the 1-percent tax on buybacks and billion-dollar companies. The buybacks are out of control. If it causes all of them to stop, good for us. This money could and should be used for a productive purpose, and buybacks don’t do anything good for the company employees or stakeholders besides shareholders. If the companies want to increase dividends, that’s fine—and even better, use the money for R&D or paying their employees more.”

• “It’s time for us to stop whining about every bill that comes along that raises taxes. We’ve been starving government for years and years, and nothing good, or at least little good, has come out of it. If we had the tax structure in 1952 that we have today, we never would have had an interstate highway system built or money behind the internet. We need to stop pretending that any money that government takes out of the private sector is bad. Just my opinion from the cranky guy in Vermont.”

THE 21 HATS PODCAST

This week, Shawn Busse and Paul Downs talk about what they’ve learned from their worst client experiences. Shawn, for example, tells us that he’s come to think about taking on a client much the way he thinks about hiring an employee. And Paul stresses the importance of watching what he says about difficult clients to his employees, because he doesn’t want to encourage a cynical attitude. From bad clients, our conversation shifts to bad partnerships. Even though their own partnerships ended poorly, both Shawn and Paul emphasize that having a partner can be invaluable in getting a business off the ground. In fact, Paul says he might even consider taking on a partner again. Plus, both Shawn and Paul explain why all the talk of recession is not giving them second thoughts about their ambitious marketing plans.

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If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren