Ep. 50 | Why Businesses Fail
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Speaker 2:Welcome everybody back to Teaching Tax Flow, the podcast, episode 50 today. We're gonna take some time and really jump into why businesses fail. So our guest today actually has a great approach to this as he calls the three p's of why businesses fail. But before we meet him and we get into this discussion, let's take a moment to thank our sponsor as always. This podcast is sponsored by Rep's Tracker.
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Speaker 2:Hey, everybody, and welcome back to the Teaching Tax Flow podcast. I am John Topolsky here from the TTF team joined as always by my counterpart with much less hair, Chris Pacquero. How are you, Chris?
Speaker 3:I am great. As always, John,
Speaker 1:great to be with you.
Speaker 2:So let's get
Speaker 3:those snarky comments. Continue. That is alright, my friend.
Speaker 2:Hey. No one Alright. Knowing you for over two decades. I have plenty in the hopper. So before you actually introduce our guest a little bit for us, I wanna point out one thing that he has that you do not, which this is a this is very interesting to me.
Speaker 2:I didn't know there was actually a degree, which I believe is a is a master's in taxation science, or or something along those lines. So, Chris, I know you don't have that, at least that I know of. So let's jump into it. Tell tell them who tell them who's joining us today.
Speaker 3:Right. Well, I we are very excited to have John Neil join us. He's a CPA, an author, has a lot of credentials, has a private practice in Wisconsin, and he is with the Neil Group LLC. He's also, a member of the National Association of Tax Professionals and the American Institute of CPAs. So him and I are both a part of those organizations and part of the personal financial planning section.
Speaker 3:He's an amazing resource that we're very excited to have on. And, you know, yes. Do we have a very, profitable private CPA practice and, true, and in some other things that we've done well here. But I will tell you, I've had businesses that have failed. And just because, you know, we we talk about failing forward all the time, we talk to our families and kids about you learn more from from losing than winning.
Speaker 3:So that's why this subject, why businesses fail, is really pertinent to anyone in the teaching tax law community. Because I would bet that either I know many of our listeners, many of the people in the teaching tax law community are business owners, are real estate property owners, but almost but if you are not, many of them have an entrepreneurial spirit and have thought about starting a business. So, John Neal, welcome to the the podcast. Can you give us a little bit of a personal introduction?
Speaker 1:Sure, Chris. Thanks for having me, first of all. Nice. Neil Group started back in 1984. I got tired of the big CPA firms that I was partner in, so I I went out on my own.
Speaker 1:Small firm, but, we handle a lot of of, different kinds of things. You go to these seminars and somebody talks about, well, I don't know what this is, and there I am raising my hand saying, oh, I've dealt with that. So we're not we're not afraid to take out anything. Have some concentrations in restaurants, construction, health care, and real estate. And, it will work with anybody from the startup to third generation companies.
Speaker 1:So we, we've seen it all.
Speaker 3:Excellent. Well, that is it Spurs a question for me right off the bat because we we talk a lot about how businesses fail, and we're gonna dive into some some ideas from John from John Neil. But I also wanna touch on the as you mentioned, they're third generation businesses. There's a whole myriad of challenges for multigenerational businesses that are passing on or transitioning. And those typically, the biggest challenges are actually not financial.
Speaker 3:There's relationships. There's roles. We're working on a couple cases in our private CPA practice that work with just absolutely amazing families and and working through that, especially for the matriarch or the person that started the business, kinda like one of their babies. So, Jack, can you kinda touch on some of the maybe the keys for multigenerational business planning and transition,
Speaker 1:and then we'll we'll dive into startups? Sure. I I think first of all, the business has to be well run. Otherwise, it's not gonna last that long. But, you have to have children or the younger generations that are interested in it, and you have to be able to get them, I guess I'll use the word trained, and get get them experience so that they can assume the the role of leader, in instead of follower when the time comes.
Speaker 1:I know my own son, graduated, college in accounting, was trying to decide whether he wanted to be a CPA or a lawyer. So he worked for me for a year, and, he'd had his challenges with, you know, trying trying to train him and whatnot. And he finally decided to become a lawyer. And so, you know, they're about my succession plan. Good.
Speaker 1:But, but, you need to do it. I've I have I have clients. They started with me back in 1979 and, you know, I guess I'll call them the grandpa. You know, grandpa and grandma ran the company, then they passed it off to their sons who are now passing it off to their sons. And, you know, they, as I said, they they needed to be they worked in the business while they're going to school and whatnot and liked it and and, and are going to continue on.
Speaker 1:And maybe their sons, you know, so the fourth generation, will will be running the business soon.
Speaker 3:Wow. And you you mentioned something very important. The the next generation has to take an interest in the business. And I feel like sometimes when that when they don't take an interest or when they're kind of shoehorned or forced into that succession plan, things go things go poorly. I'm not gonna mention any details because this is a pretty high profile business, but, at some point in my career, we were working on, some financial analysis and some audit work for a big family business.
Speaker 3:And the owner of the business, had, I'm not kidding you, between eight and ten people from that person's family on the payroll, all making over a hundred thousand dollars, and that was over fifteen years ago. Wow. And the bankers and and the unfortunately, the business went under. And the bank and and the conclusion was the business owner would have been better paying every family member $80,000 a year salary to never step foot in this business. They absolutely destroyed it and ran it into the ground.
Speaker 3:So, you know, that's, that's something to that's something to consider. What are some of the the the the tax, considerations for transitioning a a business? Because, obviously, there can be a you could have gifting involved or a sale or, you you know, you could have potentially, seller financing, bank financing. But, yeah, could you gotta touch on that just for a couple minutes? Sure.
Speaker 1:As he as he mentioned, different ways to do it. The ones that I've been involved in typically involve just the the older generation giving their interest and making a gift of their interest in the business to the younger generation. And with all the discounts and and whatnot that are available, It's a it's a good tax planning tool, you know, to avoid, having to pay either an estate tax or a gift tax on on the value of of the business.
Speaker 3:Absolutely. So for people out there listening, if when when we, you know, we start talking about estate tax, estate tax exemption is is very lot high right now, and, you might have a value you might there might be a valuable business of of x million dollars, but there are some IRS compliant ways to legally and ethically reduce that value using valuation discounts. Meaning, if John, you know, looks like a John Neil is runs, the Neil Group, and they had then the business has a certain value within running it. With them not running it, it might be discounted, if that might make sense. So, 30,000 foot view.
Speaker 3:So let's start let's start talking about start ups or let's say we're gonna call the businesses in their infancy phase three years or less. Obviously, getting even from year one to year two is a, is a challenge. But what are you seeing as the top reasons businesses don't survive that they go under? Well,
Speaker 1:when I was doing a little homework and outlining for this session, I came up with what I call the the three P's of why businesses fail. One is planning or lack thereof. Two would be what I what I call principle or cash to run the business, and then three is process. They they don't know anything about running a business, so they don't do things that you should do. You know, so getting back to planning, I I meet with people quite frequently that, hey, you know, I got this great
Speaker 3:recipe for barbecue sauce. Oh gosh. I'm hungry anyway as we're talking time. We're we're quite in the middle of the day. Alright.
Speaker 3:So so all my friends are telling me
Speaker 1:I should open up a restaurant, and it's like, well, what do you know about a restaurant? I don't know anything about a restaurant. You know? But I wanna be the owner, and I wanna, you know, meet and greet people. And it's like, well, you don't realize that you get there at, whatever, eight in the morning, and you don't leave until midnight.
Speaker 2:And it's very factual. I live right by a barbecue joint here. I see the delivery trucks come in to town at about three, 04:00 in the morning, drop it off all the goods, and then I see employees start getting there about four or 05:00 in the
Speaker 3:morning and then start start prepping food. Right? Yeah. John Neal makes a great point, and John Topolsky, we talk about this, a lot with tax professionals, and he really crosses industries. Just because you're the inventor, the visionary, or the creator of a product or a service, or you have a technical skill, like creating great barbecue sauce, preparing tax returns, welding, That doesn't mean you could you you have the skills to run a welding shop.
Speaker 3:Being a business owner is a completely different skill set than the technical skill that you have, if that makes sense. And I would put that under that planning bucket that that John mentioned. So, what about the cash and principal portion? I know, you know, you've authored several books, which we'll touch touch on. One of them, the five ways to improve your cash flow, But what would you recommend other than having a money tree in your backyard?
Speaker 3:Yes. The cash or principal portion of it, not only start up, but also having some type of cash flow.
Speaker 1:Yeah. Well, I I think you have to be realistic when you're starting your business. Again, when I'm talking to people and and we start going through their forecast projections and whatnot, they're like, well, okay. You know, I I think now I'll use a smaller business. Yeah.
Speaker 1:I I think I need about a hundred thousand dollars to get this business started. I was like, great. How much are you gonna put in? Well, I'm not gonna put in anything. You know?
Speaker 1:I should be able to get it from a bank.
Speaker 3:Right. Yeah. You you don't have the money to put it in and you don't have to take the rest, but some bank's going to. But gotta love that.
Speaker 1:You know, and then that also they they, underestimate how much they're gonna need. You know, the person who says they need a hundred thousand, they actually maybe need $250,000 So they, you know, they get the hundred thousand, and then three months in, four months in, or whatever, they go, oops. Mhmm. I need more.
Speaker 2:At some point, say, like, you know, was it, consumer packaged goods? Like, you mentioned the barbecue sauce. Right? It's one of those and I in in the past life of having a marketing agency, we had a couple clients in that space, and it was the little things that they don't really account for. Right?
Speaker 2:Like, it's like you mentioned too, Chris, I think you had said it. It's, you know, an individual is driven by passion. So if they're if they are so passionate, they think the whole world will buy into it, they don't account for, oh, wow. I need to actually get the message out. So they're like, I don't need any marketing.
Speaker 2:This is so good. Everybody's gonna come to me. Where, ironically enough, we used to have a lot of really good connections with banks, in South Carolina, North Carolina, Georgia. And some of these banks would actually send us clients because they'd say, hey. Look.
Speaker 2:We we we basically looked at a business plan. Their marketing is not really up to where it needs to be or their plan for it. Maybe you could work with them and develop a marketing plan, a true marketing plan. And that's you know, you get into you get into trouble because then it might get so good, and then they run out of capital again. Now they can't supply the product, and then they start outsourcing it, and then there's a whole win.
Speaker 2:But that's a huge plan. I love how you've developed those the three p's because they're I know we're at number two, but they are right in line with what I think we've all experienced.
Speaker 1:Yeah. And and I've been in some seminars recently for, you know, practice development and whatnot, and one of the things that they hammer home is marketing is everything, and everything is marketing. Mhmm. I always used to say word-of-mouth to get your product out. Yeah.
Speaker 1:How are you gonna make money? Exactly.
Speaker 2:Your friends and family only go so far.
Speaker 3:No. Pleasure capitalization is yeah. It's a huge issue because you're if you're a hundred thousand dollars into this and you have nothing to show for it, but you still need another hundred thousand, you're between a rock and a hard place. You don't, you know so John, do this. Do you have a rule of thumb?
Speaker 3:Obviously, you know, depending on the industry, it could things things could be drastically different. But from a capitalization standpoint, do you have a rule of thumb of, for instance, how much someone should have in reserves based on their monthly burn or
Speaker 1:how you know? Or Yeah. I I'm I'm from the South Side Of Milwaukee, so I'm pretty conservative. I say at least six months of operating expenses in the in the bank in reserve. Mhmm.
Speaker 1:As as I tell people, you know, you open the doors today, you aren't gonna make your million dollars tomorrow.
Speaker 3:That would be nice, but I of course. The third one I wanna talk about is process because I I I have personally struggled. The first ten years of my practice, I struggled and I didn't know I was struggling until I was enlightened, but, but, I ran the practice based on me running it, not processes run it. Processes run it. People run the processes.
Speaker 3:So can you tell us a little bit about, you know, when you what you're thinking of process and and the third p? Sure.
Speaker 1:Process is is basically, you know, the the systems and procedures that you need to put in place in order to to run the business successfully. And, again, from I I forget who said it, but, you know, it it should be that your ultimate goal in in creating a business is to be able to sell. And if it's just you running everything, how are you gonna sell it? You know, I'm I'm fortunate that I have a good team, that I've I've, you know, trained and and they trained me as well, you know, to to get these processes and procedures in place. So, I guess I'll I'll it just it hit it entered it hit me right now.
Speaker 2:You
Speaker 1:know, think of McDonald's. Everything is there. I used I used to work at McDonald's when I was in high school, and they had binders and binders of how to make a French fry and how to clean the shake machine. And and everything just was was there in writing so that, you know, if, if I wasn't working today and and Susie had to work the fries, she would know how to do it.
Speaker 3:Rick was yeah. The not only the processes, but what you're recommending is cross training of your team. Yeah. Because if we know one thing, is that the humans are not reliable. It is not on purpose.
Speaker 3:We just are not. Like, what if one of our children has something happens? What if our car breaks down? What if we don't have internet? We're unreliable.
Speaker 3:So we have to have that process. You have to be able
Speaker 1:to cover for people. That I mean, one of the things in our office that we do when somebody writes a procedure down is somebody else will take that piece of paper, if you will, in their hand and walk around. And it's, you know, well, you didn't say that you gotta put the key in the lock to unlock the door to open the door to get in the office. You need to add that to your op to your procedures.
Speaker 3:Yeah. I like having procedures. The worst thing is if my wife sends me a says, can you grab, detergent from the grocery store? Well, how about this? Take a picture of the one you actually want, and I will grab that for you, because I don't wanna get the wrong detergent.
Speaker 3:But I love that planning, principle, process. I mean, those are the those are the three things. And, for some, I wanna I wanna ask you a question then then definitely get all of your, contact information so that if someone's out there looking for some assistance, they can we have that available. But for someone starting your a business, what are what are the one or two things it could be? Because I I see people jumping into these these extravagant entity formations and flowcharts and all that stuff, before they have any sales?
Speaker 3:What, what are what are maybe one or two relationships that someone starting a business needs to have in place that they might not be thinking of right now? And then one or two things just to get started that they should think about as far as, getting their their books in a in tax and accounting in order. Yeah. Well, I think one of the things that you need,
Speaker 1:for sure is a good accountant, CPA, whatever you wanna call them. You know, some somebody that deals with numbers so that they can check your numbers and see if they're within reason. That that's probably the most important. Second, I guess I would I would say kind of a a fan maybe or or or a emotional support person just to get you through the the hard times. You know, when I when I started my accounting firm, you know, I had one client.
Speaker 1:And it was like, well, where am I gonna get the other ones? And and so my wife would, you know, don't worry. They'll they'll come. You know? We we'd bounce things off each other, and maybe that's a better thing, somebody to bounce ideas off of.
Speaker 1:You know, hey. You know, you may your family may like your barbecue sauce, but the general public wants it spicier or they want it sweeter or they want it less red or more red or whatever. So somebody to bounce ideas off of, and and get you back in reality.
Speaker 2:Right. And that's a great way to to really start to close us up a little bit on this. I'd I'd do as we start to wrap too, I I wanna go back to those three piece, not hitting on any specific order, but really the importance of those three, which really stand out to me. So you have the planning, principle, process. Really without any one of those, you would fall on your face in a sense.
Speaker 2:Right? And and and I wouldn't necessarily say fall on your face as far as for a complete close the doors fail. But even if you didn't have a process, you may be successful for a short period of time and then cap out and can't grow anymore. So that's, you know, basically, Chris, as you had mentioned the the example of and I remember these days that you were in, of almost hitting a burnout a little bit and saying, wow. You know, it's I can't even go on vacation or the business falls apart.
Speaker 2:So it's I've seen a lot of people kind of fall trapped to their own success and and really follow their own passion a little too far. But then I've also seen people that are have the money tree in a sense, have the passion, and have no process and absolutely fail because everything just starts to unravel and then really you run out of capital eventually. Money is only as good as the the paper is printed out as long as you got it. But Yeah. And really really in closing, John, too, let's let's not forget.
Speaker 2:If anybody has any of these questions, I know you've authored a handful of publications. If you could recommend and I'm gonna put you on the spot. If you could recommend one of your books for somebody to pick up and thumb through, And this is almost like saying which one is your favorite child. Right? Or or in your case, I know you have a handful of grandchildren.
Speaker 2:Which one is your favorite grandchildren? We won't ask that question. But the books what when what would you recommend to anybody? Not even somebody just getting into business, but just to pick up and really just kind of casually go through the content and take some notes. Oh, boy.
Speaker 2:I knew it was a tough one when I
Speaker 1:Started starting a business, I'd I'd say the the the ways to improve cash flow actually, there's what there's two. There's that one, and then there's another one, fifty seven ways to grow your business. Excellent. Excellent.
Speaker 2:Well, I appreciate I'll let you slide with with scaping out of it and going back. You're going from one to two, but it's all good. Well, when
Speaker 3:you have that menu to choose from, that's a good good problem. Well, John, I'm gonna dust something off, from that we I I for some reason, I didn't I haven't done in a while. But I'm gonna start doing it again. We always ask our guests. We're gonna have our wrap it up with a quick fire questions.
Speaker 3:These are non tax related. They're just fun questions that, we're gonna hit you up with. And, so John, Neil, you're gonna be on the hot seat, but I promise you these are fun easy questions. Alright. Alright.
Speaker 3:So here we go. Maybe Johnny Johnny t will put a drum roll in before, when this gets edited.
Speaker 2:I won't I won't do the audible one of me doing the drum roll. It's it's pretty bad. We'll do something.
Speaker 3:I know. I know. Alright. Here we go for Johnny Hill. Favorite vacation destination?
Speaker 1:Saint Louis.
Speaker 3:Favorite sports team? The Packers. Hey. They're yep. Yep.
Speaker 3:I I, they've had I figured that being in Milwaukee, but, you know, maybe it was the Brewers, maybe it was Marquette. I don't know. You never know. So, are are you a dog or cat person? Dog.
Speaker 3:And Tucker's on my website. Oh, awesome. Mhmm. Awesome. Income shifting to pets.
Speaker 3:That'd be cool. But, Well, in fact, my as you say that, my first book was, titled Best Doggone Financial Advice. Oh, that's cool. How can how can I claim my dog as a deduction? I like it.
Speaker 3:I like it. We'll have to check that out.
Speaker 1:And favorite cereal. Favorite cereal. Captain Crunch. Oh, that's one of
Speaker 3:my favorites. Final hot hot stove question. What is your ideal weekend? My ideal weekend.
Speaker 1:Oh, there's a there's a few scenarios. But I guess, favorite favorite weekend would be going down to St. Louis to, visit visit my two grandchildren who are down there and my son and, taking in the the sites down there, breweries, the zoo, Grant's Farm. It's always a fun time.
Speaker 3:Yeah. Saint Louis is one of those sneaky places, especially for kids with the, museum and and there's just a lot of cool things there. So thank you so much, John, you know, for coming on. I learned a lot. I know our business, our listeners and our community will learn a lot.
Speaker 3:How what is the best way we'll leave it at this for we'll put it in the show notes. What's the best way for someone to get a hold of you?
Speaker 1:Two ways. They can call me at (414) 325-2040, or they can email me at j0n@nealgroup.net. Awesome. Awesome. Well, John, thank you again for joining us.
Speaker 1:Plan to not fail if you're planning on going into business and listen to this podcast a couple times.
Speaker 2:And if you have questions, let us know. And as I always like to wrap it up with, we will see everybody next week. Thank you everybody and John for joining us on this episode of why businesses fail. Hopefully, we all got some good notes from this. Realistically, we probably all know somebody who has opened a business, potentially closed their doors, taken a break from it.
Speaker 2:But either way, we probably know anybody who's an entrepreneur or or possibly not and know somebody who may have had a business that has not succeeded, to its full capabilities. Maybe you've identified a few things in here that you may know about that person. So we covered a lot. Another great show as always. Thank you again to John for taking the time to join us.
Speaker 2:We know this time of year is kind of crunch time for any tax professionals out there. So the time is greatly appreciated. If anybody has any questions or either their business, when they're thinking of starting, please feel free to reach out to to John. We'll put his contact below in the show notes, but also to teaching tax flow. Be sure to send us a message.
Speaker 2:Any of those questions, shoot us an email, drop us a line on social media. We would love to hear from you. So just two more weeks to go, everyone, until we turn one year old and cross that one year mark of doing this podcast every single week for the past year. So we're looking at doing something special for that episode. So, again, be sure to follow us on social media for any of the updates and a little bit of news some people may know of what we might be up to on the one year anniversary episode of teaching tax flow, the podcast.
Speaker 2:Until next time, we'll see everybody very soon.
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