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How Much Do I Need?
Old 06-28-2007, 05:06 PM   #1
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How Much Do I Need?

A few years ago I started an internet business and it has grown considerably. Matter of fact almost to the point where its to much for me to handle anymore. With that being said, I was offered a good sum for the business but am looking to find out if its enough to actually retire from. I am only 42 and currently live off of about $100,000 a year. I dont currently have any investments and invested all my profits back into the busines to keep it growing, which I suppose was a good thing because the offer was pretty darn good.

Anyways, I'm hoping someone can give me some advice.

By the way, I'm new here and if things work out, could make this my new internet home

Thanks
Pearson
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Old 06-28-2007, 05:14 PM   #2
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Welcome. There are some software people on board, usually work/ed for Megacorp but probably speak those strange html and other languages you understand.
As a simple rule of thumb you need 25X what your annual expenses are projected to be. So if you NEED $100K to live that would be $2.5M. It gets more complicated with other issues like social security, health insurance and the like but a well diversified portfolio is thought to support a 4% withdrawal rate, adjusted for inflation each year.
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Old 06-28-2007, 05:17 PM   #3
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The rule of thumb is that your investments will generate (safely) around a 4 percent yield (give or take). So if you need $100k in income then you'll need a nestegg on the order of $2.5MM. Those numbers are before any taxes are paid. If you need $100k after tax then you'll have to plus up the numbers per your tax bracket.

Check out the Firecalc calculator to give you a very good idea of what kind of nestegg you'll need:

FIRECalc: A different kind of retirement calculator
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Old 06-28-2007, 05:54 PM   #4
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Very interesting, thank you!
The numbers are close, which leaves me somewhat wondering, however I may have the option to keep some stocks in the business to help out a little. The business has a huge growth potential but then again I know they could spend profits and just call them expenses, leaving me dry. All sorts of tricky ways to keep from showing a profit if they wanted I suppose. I'll have to crunch some more numbers to see if I can close the gap a little better.
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Old 06-28-2007, 06:36 PM   #5
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Also, evaluate whether your yearly expenses of $100K will drop because you're retired. Less nice clothing, less driving, less taxes, etc.

You might also decide that retiring now would be worth some cutting back in expenses. Many here live on less than $40K per year and don't feel deprived.
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Old 06-28-2007, 07:13 PM   #6
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Quote:
Originally Posted by Pearson View Post
A few years ago I started an internet business and it has grown considerably. Matter of fact almost to the point where its to much for me to handle anymore. With that being said, I was offered a good sum for the business but am looking to find out if its enough to actually retire from. I am only 42 and currently live off of about $100,000 a year. I dont currently have any investments and invested all my profits back into the busines to keep it growing, which I suppose was a good thing because the offer was pretty darn good.

Anyways, I'm hoping someone can give me some advice.

By the way, I'm new here and if things work out, could make this my new internet home

Thanks
Pearson
as someone who's sold off a software company (albeit really small one)
unless you see some really huge upside to doing otherwise. i would
cash out completely given that you seem to be close to
FIRE level by doing so.

It will get you diversified and that alone is a very
good thing. If you were an employee in even the most sterling of
software companies, would you want all your savings in
company stock?

you could partially cash out as you suggested
but i would not recommend that either
i've worked with people (multiple times)
who did that and it never worked out well.
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Old 06-28-2007, 07:25 PM   #7
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Welcome pearson.

My guess is that if you no longer need to foot payroll taxes (FICA, Medicare, etc.) and you were already paying for health insurance you will generate very close to what you need to live on comfortably. Of course, I don't know the specifics but you indicated it was close.

Congratulations on escaping early
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Old 06-28-2007, 08:35 PM   #8
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When you say you live off of 100K per year,is that gross or net?
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Old 06-28-2007, 10:02 PM   #9
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Quote:
Originally Posted by Pearson View Post
Very interesting, thank you!
The numbers are close, which leaves me somewhat wondering, however I may have the option to keep some stocks in the business to help out a little. The business has a huge growth potential but then again I know they could spend profits and just call them expenses, leaving me dry. All sorts of tricky ways to keep from showing a profit if they wanted I suppose. I'll have to crunch some more numbers to see if I can close the gap a little better.

You are correct in fearing potential financial shenanigans by the new owners.

If you are really interested in keeping some interest, you can always do it as a percent of revenue - which is far safer than depending on a share of net profits.

Also, just out of curiosity - roughly what multiple of annual net income are they proposing to buy out your company at? It's always tricky to value privately-held businesses: some average firms go for just 2x-3x annual net income; others, much higher.
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Old 06-29-2007, 06:51 AM   #10
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Also, just out of curiosity - roughly what multiple of annual net income are they proposing to buy out your company at? It's always tricky to value privately-held businesses: some average firms go for just 2x-3x annual net income; others, much higher.
Due to the growth potential it was much higher, nearly 2x the gross. The business currently only covers about 20% of the USA and even then not adequatly. It also has international capabilities but I never pursued that. Basically what I did is started my own brand of products and now supply major retail stores in my region. So as you can see there is still a huge growth potential but its to the point where if I get any bigger I need help and I dont want that headache. I currently work out of my home and have a 40x80 pole building that I use as my office/warehouse.

I think I'm over estimating when I say I need 100k to live on, I just paid everything off so the only bills would be stanard taxes, insurances ,etc, etc, etc... However I would like to eventually buy me some big ticket items such as a mobile home, a bigger boat, etc.. I currently have 200k collecting 5% but that interest is taxable. Keep in mind guys, this is all new to me and I have never really looked into investments besides a 401k which is basically set-up for my sons college fund (probably has more than he needs but better safe than sorry). The offer on the buyout was 1.75m

I could probably get more if I was willing to hold on for another 2 years but man I am really getting burned out.

Thanks again for the advice!
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Old 06-29-2007, 07:15 AM   #11
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Quote:
Originally Posted by Pearson View Post
Due to the growth potential it was much higher, nearly 2x the gross. The business currently only covers about 20% of the USA and even then not adequatly. It also has international capabilities but I never pursued that. Basically what I did is started my own brand of products and now supply major retail stores in my region. So as you can see there is still a huge growth potential but its to the point where if I get any bigger I need help and I dont want that headache. I currently work out of my home and have a 40x80 pole building that I use as my office/warehouse.

I think I'm over estimating when I say I need 100k to live on, I just paid everything off so the only bills would be stanard taxes, insurances ,etc, etc, etc... However I would like to eventually buy me some big ticket items such as a mobile home, a bigger boat, etc.. I currently have 200k collecting 5% but that interest is taxable. Keep in mind guys, this is all new to me and I have never really looked into investments besides a 401k which is basically set-up for my sons college fund (probably has more than he needs but better safe than sorry). The offer on the buyout was 1.75m

I could probably get more if I was willing to hold on for another 2 years but man I am really getting burned out.

Thanks again for the advice!
Take the 1.75m and run. Take a few months off and chill. Then decide what you want to do with your future. You might decide you would like to do some consulting work. The income from that would supplement your investments.

Good luck with whatever you decide!
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Old 06-29-2007, 07:31 AM   #12
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Yeah, I would much rather be talking about the fish I caught during the week because everyone else was working and knowone else was on the lake
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Old 06-30-2007, 05:39 PM   #13
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Sounds like you and I are walking on similar paths right now. I'm 38 and apart from my business being closely tied to the Canadian oilfield, the rest of the story sounds very similar. I have just counter offered on a bid to purchase my company. I'm 38, and even the $ amount is similar. Also just like you, it was a small mom and pop show that suddenly caught fire and the next thing that I knew, a lot of the fun was disappearing and I was spending a lot more on call after hours, and at my desk dealing with the part of the biz that is the most boring to me, but which is hard to trust to anyone else. Just like your story, the company which I am dealing with is larger than mine, and they are offering shares as part of the bargain. They are privately held for now.

Something that I think that you could consider is the size of the company that is looking at you? If they are much much bigger and well established, and you are considering taking shares, obviously have your acct. look at their books. Firstly, it's interesting to see if the shares that they are offering are valued similarly to how they've valued your companies shares, and secondly, take some time and put yourself in the purchasers shoes. Are the accounting shenanigans really likely to happen if you only own a tiny portion of the shares? Seems like a lot of effort just to screw over some guy with only 2% ownership. Remember, it could seem like big bucks to you, maybe even FI/RE, but lunch money to the purchaser.

Best of luck
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Old 07-19-2007, 01:13 PM   #14
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Vision

I think this decision does not come down to whether you have enough to cash out now (you have enough depending on your standard of living) but rather where your vision is. You have already indicated that the business has huge growth potential so do have the vision to carry it forward --- I know you said that it was getting to be more than you can handle but you can hire people with expertise to handle things that are causing overload... I am sure Bill Gates could have "cashed out" when he had his first 1-2 mil offer but he obviously had the vision to continue pursuing what he also saw to be growth potential. If you do not have that passion for the business any longer then find what you do have the passion for --- Maybe that includes cashing out and thinking about it for a year --- That is a great benefit of Early Retirement --- (wish I could experience it) You can go back if you want to! God Bless with your decision -- Trade with you ....
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Old 07-19-2007, 03:45 PM   #15
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Pearson
Remember you'll have to pay taxes on the 1.75 mil...you'll have to figure out how much. You are also young, so I would be a little more conservative than the 4% SWR being indicated (I'm really conservative looking at 2.5%, but to each his own). I have bought and sold companies for my mega-corp, and we often keep the former owner on as the general manager of the business for a period of 2-3 years, with of course a nice salary, nice bonus (if targets are met). Usually we will make a base payment up front for all of the shares and a contingent payment based on future growth over the next two to three years. If you think your company has huge growth potential, why not give that a try? ...That assumes you are not already too burned out and have what it takes left in you to continue building the business AND do it for someone else. Again the contigent payments are NOT for some shares that you keep, they are for the shares already transferred, but based on how the business fares over the next couple years. Most of the time, former owners of businesses we have acquired have REALLY made out like a charm. The only times that has not worked has been when a company is acquired right before economic recession...no growth equals no contingent payment...

Hope this helps in some small way. Post here again if you have any questions. Good luck!
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Old 07-19-2007, 07:01 PM   #16
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That 25 x annual income you quoted. Wouldn't that figure be effected by your age? If you 40 you have 20 more years to live off you investment than say if you were 60. I would say there needs to some adjustment for age as the longer you have to go, the more you need.

Just ran it through FireCalc and taking out $100,000 out a year for 45 year with a 2.5 mil portfolio leaves only of 69% chance of success. (that is assuming someone retires at 40 and lives to 85)
So, I would venture to say that you need to cut that back to about 65,000 a yr. and maybe you would be ok.
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Old 07-19-2007, 07:08 PM   #17
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In The Entrepreneurial Venture (Practice of Management Series, Stevenson, Roberts, Bhide, Sahlman) Harvard Press, various editions, 1994-99, Michael J. Roberts has two excellent chapters that apply to you: Ch 20, The Challenge of Growth, and Ch 21, Managing Transitions in the Growing Enterprise.

His point is that people who start new ventures often get "stuck" at the stage of rapid growth because they need to start building the infrastructure that will enable them to delegate the everyday details of running the business, while still keeping the spark alive. Is this a problem for you? Are you still the Board Chair, CEO, CFO, CIO, VP Marketing and VP Operations all rolled into one? Is there another solution besides selling out?
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