“Listen, business is easy. If you’ve got a low downside and a big upside, you go do it. If you’ve got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside.”
It really is that simple.
The problem is we either don’t take time to think about the downside, or we don’t have enough experience to “see” the downside.
Back in 2000, I started my own real estate brokerage. I only saw the “upside” to this opportunity. I didn’t have enough experience to “see” the downside.
And truth be told, real estate brokerages aren’t the best businesses. They’re businesses with a big upsides AND big downsides. Because they have both a big upside and a big downside, they’re opportunities requiring a great deal of work. I didn’t have the experience to “see” this when I hung the brokerage sign on my new office.
I can still remember the pressure I felt to sell homes personally in the early days of my brokerage. This pressure came from the overhead of the business. If I didn’t personally sell homes, the business would crumble. The business had rent, payroll, insurance, copiers, software, marketing, postage, utilities, taxes, and other expenses.
The profit on sales generated by the agents working for the brokerage didn’t cover the costs of the businesses. This is because these commissions were split with the agents and because they didn’t sell very many homes. The only way I could keep the business going was to sell homes myself using my commission income to cover the business’s expenses.
This was a bad deal. Prior to starting my brokerage, my personal commission income wasn’t consumed by the business. I had a lot more money. I had a lot less stress. Starting my brokerage made my life more challenging because I actually had to sell more homes to provide for my family and to keep the business afloat.
The only way to fix this problem was to figure out a way to get my agents to sell more homes. So I began studying marketing like a mad man. I wrote marketing campaigns and sales letters. I tested different direct response advertisements. I worked hard to try and convert leads for my agents. All with the focus of helping my agents sell more homes.
To increase the income of the business, I actually ended up creating a paid membership for investors. Investors paid a monthly fee to receive a lengthy newsletter, a CD recording (podcast), and have access to special classes on investing. Slowly but surely, we began attracting more clients. The membership of investors expanded and so did the income of the business. Several years later I was finally able to remove myself from actual real estate sales as I finally had transformed a bad business into a good business.
All of this hard work was required because I didn’t “see” the downside to the business when I started it. The crazy part is the downside is very easy to see. The business loses 50 to 80% of every dollar earned through commissions payable to its agents. The business has to pay its overhead out of the remaining income. The only way to be profitable is for the business to sell a lot of homes. Selling a lot of homes is extremely challenging. It really is.
Sam Zell is 100% correct….opportunities that have big upsides AND big downsides do require a great deal of work.
I ended up selling this business in 2007 and financed a large portion of the sale. In 2009, the buyer defaulted on the sale and I had the opportunity to take the business back.
I passed on this opportunity.
The reason why is because I saw the downside. I had the experience to know the business required a great deal of work to be profitable. I knew it wasn’t a great opportunity.
Great opportunities don’t require a great deal of work to be profitable. Great opportunities have little downside.
To create a lifestyle business, we have to pass on bad opportunities. We cannot get involved in businesses that require a lot of work. Working a lot isn’t the problem. Owning businesses requiring a lot of work IS the problem. These bad opportunity businesses end up owning us.
This means we have to have the discipline to pass on businesses with big downsides.
We have to focus our time only on businesses with little downsides.
These are the best businesses.