Business Startup: 9 Tips for Starting a Small Business with Partners

Today we are going to talk about a very specific subject: Starting a small business with a partner or partners.

The generally understood definition by the United States government for a small business is a business that employs less than 500 people. There are financial considerations that also go along with that, but I am not going to attempt to touch on those here.

With this in mind, the concept of the US economy being powered by small business makes a lot more sense. A large majority of businesses are small businesses.

I would venture to say that there is a sizable portion of the population that if not already running a business, want to start one. Based on that, I am going to provide some tips to get started and hopefully avoid pitfalls that I have run across in my business dealings.

Partners

Select your partners well. This seems obvious, but you need to ensure that goals are aligned, that you want the same things for the business. Make sure that you can work with your partners. Make sure that your personalities do not clash. Make sure that all partners are able to understand viewpoints that are different from their own ideas and give them thoughtful consideration. Put a plan together for how you will proceed and have everyone sign off on it. Avoid partnerships where one or more partners are self-serving and attempt to obstruct ideas that do not favor them.

Duties

Define the duties of each partner for the business before investing any money, time, or effort. Agree on who does what and how it will be done. Have each partner provide a plan for how they will accomplish their duties. This seems a bit like overkill, but the effort put into this exercise will pay dividends in the form of getting each partner to think about what they will be doing and how they will be doing it. That alone is worth the exercise.

LLC or C-Corp

There are other types of legal entities, but this seems to be the most common structure used for small businesses. Depending on the type of business, you may be forced into using a C-Corp entity structure, such as a manufacturing business with inventory. While I am not an attorney and I do not play one on the internet, I am of the opinion that most small businesses are best served by an LLC structure.

In an LLC structure, the entity is considered a pass-through entity, so the profits of the company are passed through to the partners based on shares of equity in the company, to be reported on their personal income taxes.

With a C-Corp, the company is taxed, then dividends passed on to the shareholders (partners) is taxed again.

Operating Agreement

This is also a big one. The operating agreement can be based on the details pulled together in the Duties step. It just formalizes how the company will operate and documents the what & how for each partner. It also should contain exit strategies for each partner and for the company as a whole. This is probably more geared towards an LLC entity, but also has relevance to shareholders in a small private C-Corp.

Entity Name

If you already have a good idea for an entity name, then obviously, use it. But if you don’t, there is no need to stress out over it. Pick a name and as long as it is not already in use or trademarked, it will be good. If you later want have specific company branding/marketing, you can create a “Doing Business As” or DBA name. In most cases, all you have to do is file a form with the state for it to be recognized.

Employer Identification Number (EIN)

The Internal Revenue Service (IRS) uses the employer identification number or Tax ID as an identifier for businesses so they can track income and revenue. It costs nothing and can easily be applied for online.

Business License

Depending on the nature of your business, you may need to get a parish, county, or city business license. They are usually just a nominal fee, but not a whole lot. (Caveat: larger cities may have more exorbitant fees).

Business Bank Account

Always use a business bank account for your business finances. Keep your personal finances separate from your business finances. This will help to keep track of how well your business is doing.

Accounting

For accounting purposes, you can start out tracking everything in a spreadsheet. Document revenue, document expenses. Depending on the nature of the business, you may need to do a little more than that and use an accounting software program or service. Once you reach a level where revenue and cash flow allow it, accounting tasks can be delegated to a book keeper.

I would also like to recommend using a CPA for filing your taxes. Having a good CPA on board will keep you out of trouble. Especially if a partner decides it is someone else’s job to get all documentation to said CPA at tax time. The CPA will file an extension on your behalf to keep you out of trouble.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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REI – How We Found Our 2nd Property

Our Second Rental Property!

This week we are going to talk about how we found our second real estate investment property. If you have been playing along, you know that our first property was my wife’s inherited childhood home that we turned into a rental.

Because I work a full-time (+) job in addition to being a minority shareholder & director of a manufacturing business, I don’t have a marketing pipeline set up to find properties. That doesn’t mean I won’t ever have one, just that right now I am moving slowly. Mainly, my wife and I watch the MLS (via Zillow, Trulia, Realtor.com, and local real estate companies) for properties that fit our criteria. That criteria is three bedroom, two bathroom houses built on a slab foundation with central heating and cooling in decent neighborhoods. We have more or less decided to focus on the Thibodaux, La area, mainly because I am very familiar with Thibodaux and Nicholls State University is located there.

We noticed a price drop for a property just outside of the city limits of Thibodaux. It is about a 5-minute drive from the university. Initially, the property was listed at $120,000. I thought that was a little high for us to buy as an investment, so I did not pay much attention to it. The price drop was $40,000, so that was enough incentive for us to go check out the property.

In looking at the pictures on Zillow, I recognized the name of the listing agent from the sign in the yard. It was the same agent that acted as property manager when I was renting a house a block or so away from the subject property some twenty plus years ago. So, I emailed her to ask about a showing. We were able to go look at it and liked the structure. While there were some superficial repairs and painting needed, structurally, it was in good shape. We estimated that we could rehab it for approximately $20,000, with a $5,000 contingency budget in case we needed to do anything else.

Below are before pictures. More of the story after that.

We put in an offer of $72,581. It was accepted and had 10 days from their acceptance to perform due diligence on the property. We immediately lined up an inspection by our HVAC contractor and a certified home inspector, in addition to requesting an estimate from an electrical contractor.

The home inspector identified some issues with the electrical panel & feed lines and confirmed that the water damage to the ceiling tile was due to the air conditioning duct work sweating and leaking through.

The HVAC contractor identified that the furnace chamber had rusted out and the whole inside unit needed to be replaced. We had the option to replace the inside portion for $4,200 or the whole system for $5,700. If he would have to come back to replace the outside portion, it would be $2,000. We decided to wait on replacing the outside unit in the hopes that we could get another 2-3 years out of it. #ThereWentTheContingency

The electrical estimate came back at just under $2,000 to install GFCI outlets by the kitchen and bathroom sinks and to repair the panel/feed line issues, with $1,500 of it accounting for the panel/feed line issues.

I mentioned this fact to the real estate agent, who then got back with the seller and they responded with a counter offer of $71,000 for the home, basically negating the cost of repairing the panel/feed lines.

Next, I lined up a title company to close the transaction. Because the property was owned by 9 surviving heirs, it took a while for claims against the title to be researched. In addition to that, closing was delayed because one of the heirs owed child support and we had to get the district attorney to sign off on allowing the sale, as long as that heir’s proceeds were directed to monies owed.

We finally closed and began to work on the rehab. While waiting for closing, we identified a general contractor to change out doors, hang & finish drywall, and lay down new flooring and trim, among other things.

We handled painting, lighting fixtures, trim in the kitchen, and plumbing. The contractor handled everything else. It took us about 3 and a half months to finish everything and another 2 months to find the right tenants.

There were a couple of things that needed to be fixed after the tenants moved in, but it has now been six months since the lease started and everything is running smooth. The tenants are under a two year lease, so we have locked in cash flow through Q3 2019 for the property.

Because we purchased all cash, we have no debt service expenses. We may look at refinancing the property in the future, but I like the idea of cash flow because my goal is to get to the point where I can live just off of cash flow.

Numbers Breakdown

Purchase Price - $71,000
Rehab Costs - $20,637
ARV (After Repair Value) - $130,000
Annual Gross Rents - $11,100
CoC (Cash on Cash Return) – 5.38%
ROI – (Return on Investment) – 5.38%
Expenses - $4949
NOI - $5041
Debt Service - $0
Cash Flow-Annual - $5,041.22
Cash Flow-Monthly - $420.10
Cash Flow/Door-Monthly - $420.10

After pictures below:

And, as always, let me know what you think in the comments. Ask questions, tell your story.



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Oilfield Automation: Where Do We Go From Here?

I was able to attend a Plenary Panel at the 2018 AADE National Fluids Technical Conference and Exhibition on the topic of Automation and Digital Work Transformations for Drilling and Completions - 'How Far and How Much in the Low-for-Longer Market Setting?' this week.

The format was 4 panelists from various segments of the industry, each giving about a 10-minute presentation, then the audience was broken out into groups to discuss the content of the presentations. The panelists moved around the room and listened in to each groups discussion, offering commentary.

Brad Cage, a completions engineer with Devon Energy, reviewed Devon’s path with working towards the digital transformation of their completions process. He shared steps and outcomes for that journey, resulting in a more efficient and lower cost completion.

Alan Rodgerson, a Fluids Advisor with BP, detailed BP’s progress with 2020 plan for automation. The main takeaway was that it wasn’t as clear-cut as it seemed at the outset. There is a difference between Automation and Mechanization.

Amir Bar, with Halliburton, highlighted the need for attention to the “People” side of automation and digital transformation.

Eric Griffith, with PDS Petrotechnical, discussed the need for data format standards adoption among operators and service companies.

Once the presentations were complete, the audience attendees were allowed to break into groups to discuss their thoughts on the panel’s presentations.

Those varied from a group of students recognizing the need for automation, but also concerned about job displacement to the need for accurate sensors to capture accurate data, to concerns on how the implementation of automation will impact certain jobs where there is already a gap between experienced practitioners (read: older hands) who resist technology and novice practitioners who innately understand technology but don’t yet have the experience to equal the other group.

Overall, the whole session was thought-provoking and a great session to attend.

I had many thoughts on the various subjects and concerns brought up. I will probably cover them at some point in other articles, but I wanted to cover this because it is one that I have not seen covered in-depth.

How do we transition to full automation for the jobs involved in drilling?

I have heard it said that we already are starting to transition some of the jobs with things like iron roughnecks and pipe handlers, but fully automated versions of these are not the norm. In most cases, on rigs where they are present, their actions are initiated and controlled by people. I am not sure if the cost of running a fully automated (Level 6, according to Dr.William L. Koederitz, SPE, PE) version has not dropped below the cost of utilizing people to operate them or other factors are at play. Either way, we aren’t there yet.

There are a lot of people that will say that you can never automate this job or that job, but ultimately, it may not be a matter of automating the job. It may be a case of finding a way to get the same results without having to do the job at all. Automating a manual process can be done, but does it make sense for it to be done? You can read about an attempt to do just that in this previous post. 

I think, eventually, we will have at least three separate stages for moving to general use full automation in the drilling industry:

Piecemeal Task Automation

Specific systems will be automated to reduce risk, improve repeatability, remove the “human error” factor. We are at the beginning stages of this phase. We have auto-drillers, companies working on autonomous drilling advisory systems for geosteering, prototype systems for controlling pipe movement when tripping, based on formation limitations (There may be implementations beyond the prototype stage at this point), and there are probably more than a couple fully-automated pipe-handling equipment providers out there.

More General Automation

Most rig systems will be fully automated with oversight by a smaller skilled crew. The domain experts that used to reside on the rig, (relative to this phase), are monitoring operations remotely and tweaking recommendations to optimize performance, assisted by an AI advisor. Service companies will provide technicians who will do rig-up, rig down, and maintenance on equipment.

Full Automation

Rig is fully automated and houses no personnel. Potentially operates sub-sea, thousands of feet underwater, or even on another planet/moon/asteroid. Systems are fully autonomous and self-correcting. May not even be in the business of exploring for hydrocarbons. (We might all have backyard nuclear reactors powering everything we need.)

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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Personal Finance: What is an Asset?

Welcome back to the Things I Think About Blog. This week I am going to talk about what assets are, with regards to personal finance.

“as·set /ˈaset/ noun

General Definition

a useful or valuable thing, person, or quality.

property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

military equipment, such as planes, ships, communications and radar installations, employed or targeted in military operations.

Accounting definition.

Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles."

The definition we are going to focus on is “Property owned by a person or company…”.

Depending on how you look at things, you can call almost any property an asset. But the real question is will it make you profit? Does it earn you more money than it costs to keep it or can you sell it for  more than you paid or are paying for it?

A phrase you will hear people say is that “your home is your biggest asset”. It can be, but only in specific situations. You can have a large percentage of equity in your home, meaning the difference between what you home is worth versus what you owe on it, but you will only realize that equity if you either sell the property for a gain (if it has appreciated since you bought it), or if you refinance it and harvest the equity, then use that money to invest in something that will make you profit.

While I don’t have the numbers to back it up, I would bet that a lot of people are not in that situation.

Robert Kiyosaki even goes as far as to say that your home is never an asset because it is never bringing in cash flow. He makes the case that overall, you are better off renting and letting someone else worry about repairs, taxes, homeowner’s insurance, etc.

Personally, I tend to agree with him on that front, but I feel that if your goal is to own a home, then you figure out how to make that happen. Make investments that pay for the home you want.

Stay away from buying property that does not bring you profit…like boats, RVs, ATVs, etc. You do not need to spend all kinds of money on shiny objects, especially if they will not make you a profit.

While we are talking about assets or not assets, let’s look at buying a car. 

Here in the USA unless you live in a larger metropolitan area, you need a vehicle to get around. 

If you are in that situation, remember this interesting statistic, that new cars lose approximately 11% of its value. or what you paid for it, as soon as you drive it off of the lot.

Let’s look at this scenario, you buy a $25,000 car and you are able to get 1.9% financing through the dealership. Taking into account the “drive-off depreciation”, your first 8 car payments will be used to pay off that depreciation. Additionally, it will take another 6 months of payments to cover the rest of the first year of depreciation for that new vehicle.

You would be much better served buying a slightly used vehicle and saving the extra costs associated with buying a new one.

Invest in things that will make you money. Invest in things that provide cash flow. Don’t speculate on appreciation.

And, as always, let me know what you think in the comments. Ask questions, tell your story.

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