Small Business Doesn’t Mean Small Profit | USTaxAid

Diane Kennedy's Blog

Small Business Doesn’t Mean Small Profit

Written by Diane Kennedy, CPA on July 3, 2021

Ted had been a client of mine for years. I became his CPA shortly after he quit his job and started a business based on his unique skills in a B 2 B (business to business) service-related business. It was a narrow niche and he soon became very well known. His team custom-manufactured a very specific type of equipment and then they provided maintenance and repair services.

The work he personally did was considered earned income. He had to show up to get paid. He trained some employees to handle elements of the work, particularly the manufacture of the specialty equipment. That was leveraged income. He was involved, but not in every step of the work. His time and expertise was leveraged.

He was interested in building out his recurring income. We spent a couple of consultation appointments brainstorming, designing and then documenting the action steps. It was a written blueprint for creating a unique recurring income model for his business.

Obviously, he was an expert in his field. That wasn’t my role. I was there as a sounding board and then to help him design and document the systems. And, of course, we also came up with the best tax strategies to handle the various types of income that he would receive from his business with the new business plan.

The recurring income model he would use was basically a service plan. He (and his top repair people) developed a list of things to check that would let them know when something might be showing undue wear and tear. He found that if his people showed up regularly every quarter, the number of repairs went way down. It was regular income for the business and it was a cost-effective solution for his clients. Most importantly for his business model, he was better able to plan his employee’s time. It didn’t require late night emergency visits but rather was scheduled maintenance appointments. That meant happier employees and clients as well.

Besides providing proven stats that the cost and frequency of repairs kept costs down for his clients, he also offered a 20% discount on repairs for any business that signed up for the recurring maintenance program.

And finally, best of all, he didn’t need to be personally involved in the regular maintenance calls. By adding this profit center, he reduced his earned income and increased his leveraged and passive income from the business. And because the recurring income was based on a regular schedule, he didn’t have to worry about constantly selling. Recurring income increases the lifetime value of clients. 

That was when he started talks with the big dog business in his field. They made an offer, that was accepted, subject to due diligence. Next, the lawyers and accountants got involved. In the end, the big dog business backed out. They were happy with the numbers but it wasn’t quite the model they wanted to add to their portfolio.

The Potential Buyer Told Him How to Make More Money
That’s when one of the big dog owners took Ted aside and gave him some advice that changed everything.

“We really only wanted your recurring income model,” he said.

And right now, his recurring income wasn’t big enough in relationship to the rest of the business. The prospective buyer suggested that Ted build up that part of the business. Maybe offer some other levels of service. Make sure it was all well documented with written systems.

He just did exactly what had been suggested. Two years later, his business gross income had actually gone DOWN. But his time in the business was just a fraction of what he’s spent before. He had created a systemized business that worked so he didn’t have to.

He reached out to the big dog business again and this time they consummated the sale. There was one big difference.

He sold it for double what he’d been offered before, even though the income had gone down.

The systemized recurring income was much more valuable than the job he’d had before, where he had to do most of the work himself.

That leads to one of the first tips if you’re planning to sell your business. 

Follow along with the story at Build a Business to Sell

It was clients like Ted that made me decide to start the Wednesday Coaching classes. I’ve started, built and sold millions of dollars in businesses. My success came because I watched what my successful clients did. I learned lessons from others that didn’t have the success they expected. And from those that did.

Win or lose. There is always the need for a good tax strategy and that’s why I’ve had the opportunity to learn from so many business owners and real estate investors. 

That’s what we study during the Wednesday Coaching classes. How to build your business and/or real estate investments. How to create recurring income, passive income, leveraged income and, of course, enough income to keep it all going when you need it most.

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