Today we are going to be talking about my second quarter update for my financial experiment. If you haven’t checked it out yet make sure to look at Season Three, Episode 12: What I Learned From My Mistakes; so then I’ll give you some background to what I’m going to be talking about today.
In this podcast you will:
- Discover why we took a risk on this online business (Hint: It’s not why most people think)
- Gather knowledge on how to structure a business deal without touching your money
- Obtain the reason that PayPal cost the company sales
- Learn the pros and cons in using Unity Assets Store and Facebook Ads
Resources mentioned in this podcast:
Hello my friends this is Dave Denniston and welcome back to another episode of The Freedom Formula for Physician’s podcast. A podcast dedicated to helping doctors like you slash your debt, slash your taxes and live a liberated lifestyle.
Well my friends today we are going to be talking about my second quarter update for my financial experiment. If you haven’t checked it out yet make sure to look at Season Three, Episode 12: Learning From My Mistakes; so then I’ll give you some background to what I’m going to be talking about today. This is a segment that I’m going to be running every quarter or if you wanted me to do more monthly, I would love to know if you like this, would you like me to do it more frequently or is quarterly right. Or do you think that this is just crap and you don’t like it at all? So let me know. I’m going to go ahead and do this as a little experiment within my financial experiment because I love talking about this stuff, It’s really good stuff.
My friends I want to open us up with a quote from Bob Allen Robert Allen. Here’s what he says:
Don’t let the opinions of the average man sway you,
Dream and he thinks you’re crazy,
Succeed and he thinks you’re lucky,
Acquire wealth. And he thinks you’re greedy,
Pay no attention. He simply doesn’t understand.
So my friends in this spirit, I am trying to acquire wealth through the slow and steady route of saving on a monthly basis from my salary and savings. And I am topping that off with having multiple income streams. Obviously I’m an author and I have my books; which are multiple income streams, but I wanted to do something different because I wanted to speed up the process. So I acquired a business and this business is a mobile gaming kit business. Essentially what that means is we help developers, save them thousands of hours by having this mobile gaming kit that they can go in they can design their game. So this is a business that I didn’t create. Another gentleman did and we bought it from him. So let me lay you behind the curtain here. Let me just be authentic and real with you. Can I have your permission to do that? Well I would assume you said yes, because here we go.
So as we looked at this acquisition let me tell you about it a little bit. So you know that we are selling mobile gaming kits and they sell for a few hundred bucks. So someone can go and acquire this product from us. Then there’s two different places that they do it. One is directly through our web site which is great. Secondly they do it through another place called the Unity Asset Store which is kind of like Amazon for developers. So what we’ve been finding in the past is we looked at this business, of course we had to look at how have things done in the past and how could that affect the future. So let me walk you through a few numbers here of what the past looked like for this business. Alright.
So, December of 2015 this business had revenue of $5,000. January of 2016 revenue of $9,000. February of 2016 almost $16,000 or revenue in one month. March of 2016 $8,000 in revenue. April of 2016 $5,000 revenue. May 6 $6,000, June 5 $5,000, July 5 $5,000, August 4 $4,000 September 6 $6,000, October 7 $7,000 in November $8,000. Over course of a year they had $87,000 of revenue in a whole year. So obviously this is a significant enough business that they could generate a good amount of cash flow. And if we divide that by 12 of course that gives us a little bit over $7,000 a month.
Now as I looked at the numbers when we acquired this business February of 2016 was a really huge month, $16,000. So that was an outlier. On the other hand there was an outlier of August of 2016 which had revenue of $4,000 a month. And of course on average, guess what, it’s kind of between the two with more tilting towards the 4,000 than the 16,000. So as we look at this business I said you know what if we get another $16,000 month that would be great. But what I’m really looking for is that five, six, seven thousand dollar a month. We structured this deal to put money down. So we bought the business; it was for about a $130,000 that we bought this business. Alright, hope you follow me so far. We put 60 % down, so that was $78,000. I put in $30,000+ my relative put in $40,000+. So I’m actually less of an owner than he is in this business. And so you notice of course that’s just the down payment right. So we bought it for $130,000, but we had a put down about $78,000. So there’s a gap there right 40% we had not paid for. And so in my last deal that I did which was buying another kind of business we ended up putting down a huge gigantic amount of money. The problem that I had with that business is what if things don’t work out. So we did part no payment without business, we did part earn out and we put money down. The problem was twofold: The no payment, in my opinion, did not have an emergency valve to hit. In case things didn’t work out because the goal is you want the business to pay for itself right. You don’t want to have to put up extra cash, so I insured with this deal that we would not. So we ended up having 40% be earn out. They initially wanted us to do owner finance note and I said no way. I learned from my last mistake I’m not going to do that again. So we went and put 40% down on the business and the rest is earn out. So let me walk you through the numbers of this my friends. So how you do earn out is there’s a whole bunch of different variables you can make it over one year two, three, four or five years.
So since we bought this business and the total earn out portion right was $52,000, down payment of $78,000 are earn out of $52,000 total of $130,000. And so the earn out, I wanted to make it so that it could pay off soon but not too soon. So two years I thought was a fair time frame. So that’s $26,000 a year. Divide $26,000 by $130,000 I’m sorry you divide $26,000 by $87,000 right those total revenues that we had in this year, this snap shot that we were looking at is 36%. And actually what we did, we didn’t do it off of the revenues let me correct myself here we did it off of the gross profit. Gross profit is something where you take out some of the basic charges like credit card processing fees, the unity assets store I’m talking about it’s kind of like an Amazon. They take a 30% cut. And so I didn’t want it to be based off of revenues which is what he was going for. I want it to be based off of gross profit which is the revenues minus the credit card processing fees minus the unity assets store and any referral fees and those kinds of things. So that $26,000 is actually divided by the $72,000, which was the gross profit. So basically what happens is now here we are I’m recording this towards the end of May 2017 and we’ve been paying off of that gross profit.
Well what has actually happened since we bought this business. Well month one was a bit of a rocky thing. What happened in my financial experiment here was that we had a switch PayPal accounts. So when we switched the PayPal accounts he had it set up a certain way. I was doing my book stuff through PayPal I was doing some of my book stuff through PayPal. And so it kind of screwed it up. And so we believe we probably lost some sales there. So in March from the direct stuff there was only $1,500 of revenue and unity assets store was pretty much nothing. So I was a little bit worried to say the least was like what did I get myself into? Now the good news was one of the things that did happen was there’s a $2,000 payment from someone that wanted a custom game. So our revenue actually altogether was three point six thousand bucks which is you can tell if you rewind back and listen to the other numbers that is lower than any month in the one year we have looked at. And then on top of that we actually had to pay money to some developers for this contract work. So really our gross profit was only$2,500. All right so that was March. So of the earn out the earn out was 36% of the $2,500. And so we had about $1,100 dollars left and then we had a couple of small costs, which is the good news with this business there’s not a whole lot of costs unless we choose to. So that was only about $300 of cost so we ended up grossing about if you look at about $1,200. All right so that was March. So I was I was not too happy with that, but it was a start and I was willing to see how things go now.
Now April actually really, as we got some of that stuff turned around, April was a really good month relative to March. So in April we had total revenue of $5,200. Pretty good number right. So $5,200. And then of that those fees but the unity assets store and some of the things were $700. Now let me break this down a little bit further. The total sales about $3,000 was direct from our website. Which actually if you look at the past, if we broke this down by revenue that is about higher than quite a few months last year. So direct Web site sales were actually pretty darn good in the grand scheme of things. And the unity assets store it was about $2,000 which if you look at the past that’s kind of middle to low end depending on the month that you look better than some months a few months but certainly lower than quite a few. So it was it was really an okay month. So overall the profit, gross profit was $4,500. And then after an earn out of $1,600 we were left with $2,900, I was like oh okay this is good. I could really dig that because to me we had a few costs. The costs were about another $300. So really the net profit to us before labor and some other stuff was about $2,600, so to me you know I was over a $1,000 that month. Which that was more what I was hoping for.
So now is talk about May. So far in May the month actually hasn’t closed yet but as of May so far we have about $3,000 in sales for this month. So again better than March but nowhere near what it had been unity assets store sales this month are only about $300. And so that’s what’s killing us more than anything because actually if we look at the direct sales stuff; that’s about $2,800 from the Web site. Which again is really on the high end of the direct website sales. So that’s pretty good. So overall I think things are okay. I’m really hoping we can get a big pop from the unity asset store. There’s a few different things that I’m doing with this business so here are some business lessons. My friends you know as you look at what I am doing.
One of the things that I do, which if you go to any of my properties or web sites, one of the things that we do is we end up retargeting you quite often with ads. So that’s something we’ve been building up here with this particular thing. If you visit the web site we will come back to you and say; hey check out this new article, hey check out this other thing, hey go and download this thing. These things are meant to be helpful and to help you. So we’re not doing it just to sell your product.
It’s meant to deepen our relationships that when we do offer something you’ll say you know what these guys do some good stuff. If they showed me this other stuff that was pretty good I bet this is pretty good too. So it’s all about building a relationship with people whether it’s a product or a business of any sort. So my friends that is what we are doing here too. So I have been building up to doing some Facebook ads and in this particular case we spent about $20 and we got one sale. So $390 to get a spending $20 worth of ads pretty good return. But it’s not a large number. So next month we’re gonna spend a $100 and let’s see if we can sell two of them because then we will be really doing quite well. So that’s one way I’m looking to grow the business.
The other way is through this unity assets store you can submit a sale which I’ve done twice. I’m trying to get better connected with people there and making ourselves useful in serving and trying to partner up. Those are two ways that I’m looking at trying to do it. And then lastly is we’re trying to rehash, redevelop, come up with some new products new ideas and be able to serve our customers and get new customers. And so my friends this is how you go about starting to build a business and I certainly don’t pretend to know it all. But these are just basic principles.
Now let’s talk about something else here for a moment let’s talk about the financials. Alright so if you listen back to that Season Three Episode 12 What I Learned From My Mistakes; I’ll talk about how we used the zero interest rate credit card debt to finance this purchase. As a matter of fact I had used a credit line, a business credit line, on top of that. So actually we did it at the time didn’t have to touch any of our cash. As you can tell from the way we structured the deal there hasn’t had to be anything additional out of my pocket. We are bringing money home. So with the financing I was looking at the bills I was looking at: ok how much is this causing us in cash flow a month? With the zero percent interest rate financing there was a 3% balance transfer fee. But the good news was we could spread out over 20 months. So the effective interest rate somewhere I think actually was 3%. Balance transfer fee, but the effective interest rate was like 1.7% or 1.8% or something like that. And there’s no interest cost to delaying on that payment. And so they were requiring about $200 a month for that credit card. So initially first month they just did a minimum payment and then as I got to see as things were progressing here what I what I did is I looked at ok I have x y z time period it was 20 months to begin with. This is the time period I have left which now is about 17 months and I have the $12,500 left to pay on it. So ended up being math wise about $700 a month to have that bad boy paid off.
So we ended up starting to pay in the month of May here, $700 a month that we were going to every single month regardless of how the business does because this is just the initial equity of having to put the money in. So my goal is I want to see this business return to me at least $700 a month. You can see last month that would have been about a $1,000, so we would have been ahead of the game with banking money. Now the other part of it was I had a credit line through Wells Fargo and that was requiring a minimum payment of about $400 a month. So again I did the minimum payment to start out. And as my wife and I were looking at our bank accounts we had a lot of money at the bank and we could obviously invest the money elsewhere, we could pay off line of credit, we could save towards a new car. We were talking about all of our different priorities giving the church and so on. And so what we decided was we had about $19,000 that credit line it was an interest rate of about 7%. Altogether you know if the business kept up what it was doing that would be providing us on that original investment a rate of return about 25%. So certainly we could keep our cash in the bank and do another deal. But we chose to go ahead and pay off that credit line that way there was less monthly payments that way when be a cash flow stretched down the line.
We just keep to that 0% interest rate credit card making sure to have that paid off on time without stressing cash flow in the meantime. So we made that decision and I certainly am happy for it. I’m pretty stoked that still even on my $30,000. Nearly half of that I mean to finance that in incredibly small interest rate. And as my wife and I are talking you know she really said this is something that she wants to do. So we’re starting to study, I’ve started to have her give her some homework, some stuff to look into and I’m really excited to see what kind of business she will do. When we do this again, which we will for her and then probably again for myself next year. As I’m forming a team around me to help take care of that because I have other duties and other stuff that I want to focus my time on rather than these businesses. I want them to run passively. We will finance these things again and again. Then obviously after the earn out is done which now we have about another 22 months’ worth of payments, then that cash flow just increases after the credit card is paid off. It’s all cash flow. So time will help us more than anything else. And so I’m just really excited for these new ideas. Make sure to check out next week and the week after. I am going to be bringing on Justin Cook from Empire Flipper’s; where he’s going to walk us through what all of these different kinds of businesses and what kind of business should my wife think about buying. So we’re going to walk through, we’re going to rehash some of the stuff we’re talking about today, but even more importantly you can understand how maybe you could buy an online business.
I want to encourage you my friends as we look at this journey we’re trying to build wealth. I want to encourage you to really think about doing something outside the box like I am today. If you feel like you want to jump start your future.
As I’ve been pondering this podcast I’ve been pondering my mission. My mission, as you hear each and every episode, is to help you slash you debt, slash taxes and live a liberal lifestyle. And my friends when you make a purchase like this one you are creating a tax write off. And if you follow this path like I am following, this path I really had been pondering that not only is this podcast about helping you slashing your debt, slashing your taxes and live a liberal lifestyle. I also really have on my mission in my heart as something that is really growing inside me. I want to really help to create a 100 new physician multi-millionaires; without losing your family, without losing your time in the process.
I would love to know is that a mission that you are on board with. On top of slashing your debt, slashing your taxes, and living a liberated lifestyle. Does this mission, helping to create 100 new physician multimillionaires, ring true with you for this podcast. Let me know.
I would love to continue down this path of telling you things that are working for me in this business and encourage you to do the same and take you under my wing. To help teach you how this works and how you can be doing it too. So let me know if that’s something of interest to you, if that mission is something that you think is really awesome or if it or if it’s really just sucks and isn’t good. Let me know your thoughts my friends. I am here for you. I just want to thank you so much for taking time out of your busy, out of your super compressed schedule, for taking time to listen to this podcast and hear some inspiring words of encouragement. For the Freedom Formula for Physicians podcast, this is Dave Denniston. Thank you so much my friends. We’ll listen in. Check in next time have a good one.