Rock LaManna09.07.16
When owners think about raising the value of their companies, they usually think about expanding through sales. However, there are other cost-effective options for earning a residual income that adds value to the company.
Real Estate
A common way to create residual income is to own the tangible property from which you run your business. As mortgage holder, you charge the company a fair market rent. It may seem like a pointless exercise to charge yourself rent, but stay with me. Once the mortgage is paid off, there will be a recurring monthly payment on the owner’s books that will show a profit, even though the rent is a company expense.
As the owner, if you have been charging the company fair market rent over a period of years, you will have attractive options when you sell your business.
You can:
• Sell the business with income-generating real estate.
• Sell the business, retain the real estate, and end up with rental income each month.
• Sell the real estate separately, which is more valuable because it generates income with a proven track record.
Today’s buyers, of course, understand how this benefits you, so keep in mind that they are looking at how this will benefit them. No matter how you structure the terms of the sale, you’ll be in a stronger position at the negotiating table if the company has been paying a fair rent all along.
Expanded Assets
Whether you borrow other people’s money to buy more real estate or expand within the confines of your current property, think about putting other businesses under your roof. That way, you can work toward a true net profit, not simply on paper.
Owners often have ample space in their facilities to rent or lease to others. Yet many owners hesitate to do so because it’s complicated, and the return on effort doesn’t seem worthwhile. Yes, there are liability and security issues, utilities and maintenance, taxes and fees, and the worries of being a landlord. But there are definite advantages.
Once you are making a profit, you can reinvest in real estate and expand your holdings. Consider adding a location, buying a warehouse, or finding a building that gives you residual income such as co-work space or storage units. If the usage is perceived to be valuable or the location is popular, you can theoretically charge more rent. You may even consider setting up a separate entity to buy and sell real estate. These are important factors to discuss with your advisors in developing your recurring income strategy.
As you can see, your real estate assets can be more than just a place to house your business. Real estate is key to a powerful growth strategy.
Royalties
The next area where you can achieve a monthly income is through an intangible asset, such as a royalty.
One way to achieve this type of income is to protect your intellectual property and charge others for its use. Examples include: a product; a unique design; an invention; proprietary software or anything where you can legally claim the idea.
Chasing down companies that try to steal your ideas is never fun and rarely successful, so it’s important to create something that is tied to your company, well-protected legally, and worthy of a customer paying to use it.
While patents, trademarks, copyrights and franchise programs have their place, there is a cost to protect and maintain them. Enlist a neutral expert to advise you and protect your interests.
There are companies that take advantage of people with ideas, so it’s important to do your online research and go deeper than a cursory check. I have worked with and for companies that had proprietary technology that generated substantial residual income, so this is not an idea to be overlooked.
Subscriptions
Think of magazine subscriptions, monthly software fees, or membership websites. The fee may be a modest amount, but multiply that by hundreds or thousands of members. Look around your business and see if you have something worth sharing through a member channel. Create value around the idea, tie it to your brand and your specific expertise, and then build a community that craves to learn from you.
Keep in mind that attrition is a natural occurrence in membership situations, so you will need a way to add new members continuously.
Reselling
A recurring income stream does not have to be built entirely from scratch. You may have the foundation already. For example, do you sell the same type of item to many people every month? Let’s say you buy supplies in bulk to get big discounts and then resell the extras online at a slightly discounted price.
If you can establish a minimum order and require your customers to buy it on a program every month, you can pull in a monthly income.
Warehousing and Fulfillment
Many owners charge a break-even fee to archive customers’ work or hold their inventory. They believe this helps to gain customers and keep them close, and I agree. However, if you can add value to warehousing, you may be able to charge more and make your customers even happier. Drop shipping, inventory management, customization, imprinting onto blanks, and kitting can generate revenue from items you are already storing for your customers.
If you can create a program where you can charge the customer more for the items you store for them, that’s perfect.
Contract Services
Do you hire a janitorial firm to clean your building and maintain the exterior? Can you create your own company to do this work? By the time you pay labor costs, materials, insurance, etc., you may have a zero net profit, but what if you sell your business?
Like the real estate example above, you’ll have many options. You can keep the janitorial service, sell it with the company, sell it to someone else, find new customers and expand it, or just shut it down. A small janitorial business could generate a few hundred dollars a month for you during your retirement. Now take that concept and apply it to any other outside services you use regularly.
If your company is family-owned, a small side business can be a good way for family members to take charge and gain experience. In addition, businesses like these are a great way to train department managers on how to run profit centers.
Does it make sense to start a business like this? Talk to your business advisor and run the numbers.
Equipment
Do you have equipment that is still in good working order but doesn’t make sense to operate anymore in your business? Most owners sell their unused equipment to gain floor space and remove the tax burden. However, if there is a market for whatever the equipment can produce, perhaps there is an entrepreneur interested in leasing your equipment and paying you a monthly fee.
Look at copier leases, postage meter contracts, or even cell phone plans. Those equipment programs have a base equipment charge, a fee for usage, and a maintenance or repair option. Is there a way you can apply that model to your business?
Other Considerations
When you go to sell your business, having revenue streams that are independent of your primary offering can be very attractive to buyers. Furthermore, if you have to raise capital to improve your business before selling, your bank will be pleased to see predictable income that is diversified and not tied to the ups and downs of sales and production.
In addition, as I’ve described, some of these income-producing ideas can be separated from the company when the time comes and create a handsome income for you during retirement.
As you look at the opportunities inside your business, do your research so you can benefit from other people’s successes and failures. Talk to experts about the tax, legal, financial and human resources ramifications. Work with your accountant to set up chargebacks and fees. Communicate with department heads and employees so no one is surprised to discover charges that were formerly absorbed by the company. Use industry best practices and external audits, so profit centers operate within the law and you are safeguarded from financial shenanigans.
Start Now
Like all new businesses, it may take a while to break even or become profitable. Work with your advisors to plan strategically so you’re not robbing Peter to pay Paul. Adding value to your company through residual income sources is one of the smartest and most strategic things you can do. It levels out the ups and downs of your industry and niche. It cushions you from swings in your customers’ market and the economy. It softens the impact of rising prices for supplies, equipment and labor. It helps with cash flow, even in break-even scenarios. And, it strengthens your borrowing power.
If you are planning to sell or retire within the next five years, start to develop residual income streams now. That way, when buyers come knocking, you’ll have established, sustainable profit centers that truly increase the value of your business.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at Rock@LaManna.com.
Real Estate
A common way to create residual income is to own the tangible property from which you run your business. As mortgage holder, you charge the company a fair market rent. It may seem like a pointless exercise to charge yourself rent, but stay with me. Once the mortgage is paid off, there will be a recurring monthly payment on the owner’s books that will show a profit, even though the rent is a company expense.
As the owner, if you have been charging the company fair market rent over a period of years, you will have attractive options when you sell your business.
You can:
• Sell the business with income-generating real estate.
• Sell the business, retain the real estate, and end up with rental income each month.
• Sell the real estate separately, which is more valuable because it generates income with a proven track record.
Today’s buyers, of course, understand how this benefits you, so keep in mind that they are looking at how this will benefit them. No matter how you structure the terms of the sale, you’ll be in a stronger position at the negotiating table if the company has been paying a fair rent all along.
Expanded Assets
Whether you borrow other people’s money to buy more real estate or expand within the confines of your current property, think about putting other businesses under your roof. That way, you can work toward a true net profit, not simply on paper.
Owners often have ample space in their facilities to rent or lease to others. Yet many owners hesitate to do so because it’s complicated, and the return on effort doesn’t seem worthwhile. Yes, there are liability and security issues, utilities and maintenance, taxes and fees, and the worries of being a landlord. But there are definite advantages.
Once you are making a profit, you can reinvest in real estate and expand your holdings. Consider adding a location, buying a warehouse, or finding a building that gives you residual income such as co-work space or storage units. If the usage is perceived to be valuable or the location is popular, you can theoretically charge more rent. You may even consider setting up a separate entity to buy and sell real estate. These are important factors to discuss with your advisors in developing your recurring income strategy.
As you can see, your real estate assets can be more than just a place to house your business. Real estate is key to a powerful growth strategy.
Royalties
The next area where you can achieve a monthly income is through an intangible asset, such as a royalty.
One way to achieve this type of income is to protect your intellectual property and charge others for its use. Examples include: a product; a unique design; an invention; proprietary software or anything where you can legally claim the idea.
Chasing down companies that try to steal your ideas is never fun and rarely successful, so it’s important to create something that is tied to your company, well-protected legally, and worthy of a customer paying to use it.
While patents, trademarks, copyrights and franchise programs have their place, there is a cost to protect and maintain them. Enlist a neutral expert to advise you and protect your interests.
There are companies that take advantage of people with ideas, so it’s important to do your online research and go deeper than a cursory check. I have worked with and for companies that had proprietary technology that generated substantial residual income, so this is not an idea to be overlooked.
Subscriptions
Think of magazine subscriptions, monthly software fees, or membership websites. The fee may be a modest amount, but multiply that by hundreds or thousands of members. Look around your business and see if you have something worth sharing through a member channel. Create value around the idea, tie it to your brand and your specific expertise, and then build a community that craves to learn from you.
Keep in mind that attrition is a natural occurrence in membership situations, so you will need a way to add new members continuously.
Reselling
A recurring income stream does not have to be built entirely from scratch. You may have the foundation already. For example, do you sell the same type of item to many people every month? Let’s say you buy supplies in bulk to get big discounts and then resell the extras online at a slightly discounted price.
If you can establish a minimum order and require your customers to buy it on a program every month, you can pull in a monthly income.
Warehousing and Fulfillment
Many owners charge a break-even fee to archive customers’ work or hold their inventory. They believe this helps to gain customers and keep them close, and I agree. However, if you can add value to warehousing, you may be able to charge more and make your customers even happier. Drop shipping, inventory management, customization, imprinting onto blanks, and kitting can generate revenue from items you are already storing for your customers.
If you can create a program where you can charge the customer more for the items you store for them, that’s perfect.
Contract Services
Do you hire a janitorial firm to clean your building and maintain the exterior? Can you create your own company to do this work? By the time you pay labor costs, materials, insurance, etc., you may have a zero net profit, but what if you sell your business?
Like the real estate example above, you’ll have many options. You can keep the janitorial service, sell it with the company, sell it to someone else, find new customers and expand it, or just shut it down. A small janitorial business could generate a few hundred dollars a month for you during your retirement. Now take that concept and apply it to any other outside services you use regularly.
If your company is family-owned, a small side business can be a good way for family members to take charge and gain experience. In addition, businesses like these are a great way to train department managers on how to run profit centers.
Does it make sense to start a business like this? Talk to your business advisor and run the numbers.
Equipment
Do you have equipment that is still in good working order but doesn’t make sense to operate anymore in your business? Most owners sell their unused equipment to gain floor space and remove the tax burden. However, if there is a market for whatever the equipment can produce, perhaps there is an entrepreneur interested in leasing your equipment and paying you a monthly fee.
Look at copier leases, postage meter contracts, or even cell phone plans. Those equipment programs have a base equipment charge, a fee for usage, and a maintenance or repair option. Is there a way you can apply that model to your business?
Other Considerations
When you go to sell your business, having revenue streams that are independent of your primary offering can be very attractive to buyers. Furthermore, if you have to raise capital to improve your business before selling, your bank will be pleased to see predictable income that is diversified and not tied to the ups and downs of sales and production.
In addition, as I’ve described, some of these income-producing ideas can be separated from the company when the time comes and create a handsome income for you during retirement.
As you look at the opportunities inside your business, do your research so you can benefit from other people’s successes and failures. Talk to experts about the tax, legal, financial and human resources ramifications. Work with your accountant to set up chargebacks and fees. Communicate with department heads and employees so no one is surprised to discover charges that were formerly absorbed by the company. Use industry best practices and external audits, so profit centers operate within the law and you are safeguarded from financial shenanigans.
Start Now
Like all new businesses, it may take a while to break even or become profitable. Work with your advisors to plan strategically so you’re not robbing Peter to pay Paul. Adding value to your company through residual income sources is one of the smartest and most strategic things you can do. It levels out the ups and downs of your industry and niche. It cushions you from swings in your customers’ market and the economy. It softens the impact of rising prices for supplies, equipment and labor. It helps with cash flow, even in break-even scenarios. And, it strengthens your borrowing power.
If you are planning to sell or retire within the next five years, start to develop residual income streams now. That way, when buyers come knocking, you’ll have established, sustainable profit centers that truly increase the value of your business.
Rock LaManna, President and CEO of LaManna Alliance, helps printing owners and CEOs use their company financials to prioritize and choose the proper strategic path. Rock can be reached by email at Rock@LaManna.com.