How To Start A Business: Bootstrapping To 7-Figures

Building a business for financial freedom and early retirement - How To Start A Business

Are you wondering how to start a business, especially as the pandemic created so much job uncertainty? You've come to the right place.

My friend Michael from Financially Alert, shares his tips on how to start a business after starting and selling one before. Michael took an early retirement in his mid-thirties to be fully present with his young children. He accomplished this with aggressive savings, building an I.T. Services company, and investing in real estate.

If I were a gambling man, I would bet a crisp $100 bill that most of Financial Samurai’s readers have already thought about starting their own business – at least twice!

Yet, the vast majority probably haven’t tried. I’m here to say that it’s definitely worth the extra effort. Starting a business can be incredibly rewarding. It directly led to my own early retirement at age 36.

It wasn’t easy, but it also wasn’t that hard. It’s quite possible for anyone to replicate my results and even exceed them. It simply depends on your level of persistence and resourcefulness. By sharing my story, I will point out some critical steps that are required to successfully grow any business.

How To Start A Business

1) Build Tangible Skills

I always knew I wanted to start a business. Like many, I just had no clue what I would do! I exited university after 4 years with a shiny new economics degree. It looked nice in a frame, but I didn’t have any real skills related to economics. Since I was a gamer and had worked a tech-related internship, I decided to go work in I.T. (information technology).

I was hired on as a systems administrator, which is just a fancy way of saying I was an in-house I.T. support technician. The job paid decent for a new-grad and more importantly taught me about the different layers of a business (accounting, operations, HR, solutions, customer service, etc.).

I quickly learned tangible tech skills by working directly on desktop PCs, servers, networks, and related technology equipment. I also had the chance to work with a lot of end users which forced me to improve my communication skills.

2) Find A Business Opportunity

My first W2 job didn’t last long. I had only been working a little over a year when the dot-com crash hit and began to crush tech companies left and right. My company was caught up in the whirlwind and began to implode.

After witnessing the 6th round of layoffs, I knew it was only a matter of time before me and my friends would be eliminated too. So, I decided to act and left the company with three friends to start our own I.T. support company.

When I look back on this situation, there were many others in exactly the same position as I was. Yet most failed to see the writing on the wall and waited passively for the proverbial ax to fall on their heads. If you suspect that you could be in the next round of layoffs or want to change careers, take the reins. Read Sam's book How To Engineer Your Layoff and profitably take control of your destiny.

Entrepreneurs think differently. They analyze a situation, look for opportunity, and take action to capitalize. Sometimes it works out, and other times it doesn’t.

3) Bootstrap Your Business In The Beginning

With the exception of our I.T. skills, my founders and I had absolutely NO CLUE how to run a business! But, we were resourceful. Since I was interested in numbers, I was in charge of the money. I collected $1500 from each of the four partners for a total of $6000. This was our startup capital.

We could have taken out a business loan, but we didn’t want to have any debt from the beginning. Having said that, a business loan used wisely can certainly accelerate a business launch. It certainly would have been tempting if interest rates were as low as they are today.

With just a small amount of cash, we bootstrapped wherever we could. Frugality was our friend. No office space, no frills, no fluff! We decided to go in lean and mean until our cash flow could support those operational luxuries at a later point. Remember to leverage the skills of existing family and friends also. We were able to get some incredible references for professionals by simply asking around.

Many times these personal references will give you a sweetheart deal if they know you are a just starting out. Just don’t take their help for granted and provide something in return for their value – it could be money or some other form of exchange.

4) Solve A Problem & Keep It Simple

Within a few days of us leaving our prior company, we were contacted by a couple of our previous clients who wanted to work with us directly. The had lost confidence in our prior company. Although we were small, we were able to provide the peace of mind that their I.T. systems and infrastructure would be taken care of. This gave us revenues from day one.

As an I.T. support services provider, we needed a way to track our hours, and then ultimately bill our clients. We would note our time when we went on site to a client and enter detailed time entries onto our palm pilots (remember those!?).

After syncing, I would then copy & paste those time entries into Excel and generate invoices manually based on a flat $125/hour rate. It was incredibly simple, but it worked.

5) Wear Many Hats

In the first couple of years, my partners and I all worked with clients directly. That meant even though I was in charge of the numbers, I was also down on the ground crawling behind desks to plug in network cables.

We all pitched in with marketing and sales, and client relations was everyone’s responsibility. It was a fun time. These were some of the longest hours worked as we chiseled away at creating some semblance of structure.

Running a start-up service business is a bit like plate spinning. There’s always some area of the company that needs attention. As soon as that area is resolved, another area requires focus. This is why flexibility is so important.

The trick is to take a step back occasionally and ensure the actions taken are leading directly to a desired outcome. Prioritize before executing so you don’t waste time on non-essential tasks.

6) Learn To Let Go & Expand

A common problem that most entrepreneurs face is getting out of their own way. I was no different. I always wanted to control every last detail of our services and products. However, this obsession with control actually stifled progress. Many small business owners never break through this challenge.

Fortunately, I was persistent. Once I learned to let go, I actively began to operate the business differently. I managed our teams around specific results rather than trying to control how they got to that result. I also began to notice patterns emerge in the business where we could become much more efficient.

For example, we became more proactive in our approach to supporting our clients. Instead of waiting for them to call us when something would break, we went out and invested in software that could monitor and maintain thousands of systems from a central dashboard.

Leveraging technology is a great way to keep a competitive edge. This was also an inflection point when we finally broke through and hit 7-figures in annual revenues.

Company Revenue Chart - How To Start A Business

Related: Bankers, Techies, Doctors, And Lawyers: You'll Never Get Rich Working For Someone Else

The Rewards & Benefits Of Owning A Business

Now that you know how to start a business, let's look at the rewards and benefits of owning a business. Despite the ongoing challenges of growing a business, it also comes with some incredible benefits!

Personal Growth

Running a business provides unlimited areas for personal growth. I learned how to become a better communicator, servicer, manager, and leader.

These are tangible skills that are portable to other positions later on in life, or even in another business in a different industry. This is an advantage over others that work a traditional W2 position with limited career movement.

Compensation

Being an entrepreneur can sometimes mean forgoing a traditional salary for a while, but it can also lead to much higher earnings once the business has stabilized.

For example, I was earning $42,500/year prior to starting my own company. By the second year of running my new business, I was earning $61,500 or 47% more. As an owner I had to pay my own employment taxes. So it was actually closer to 37%.

Our compensation continued to increase with revenues over the years, but at a certain point we chose to keep our salaries down to minimize taxes on earned income. For us, the better route was to keep the cash in the business, or pay out as a distribution which was taxed a lower rate.

Finally, owners also have the flexibility to structure the business in other tax advantaged ways, such as directing cash towards a self-employed 401k, healthcare, cell phones, internet, food & entertainment, technology allowances, etc. A traditional W2 employee simply does not have the same flexibility.

There are many different ways to structure your business as well. For example as an LLC, S-Corp, LP, C-Corp, or sole proprietorship. It's worth consulting with a tax attorney, business attorney, or accountant to determine which structure can provide you with the most benefits. If you go with a pass-through entity structure, be sure to read about the PTE tax election which can save you a lot on taxes.

Create Owners Equity

As a traditional employee, it’s more difficult to find meaningful ownership opportunities. Entrepreneurs build equity based upon their own efforts and their ability to bring a solution to the market. I have also seen many businesses build up equity through commercial real estate and intellectual property. The point is to build additional assets while operating a business.

One important pivot point for us was transitioning from an hourly-based services company to one that could provide full-service solutions. By evolving to a solutions-based business model, we could then sell multi-year support contracts and service larger businesses. These contracts ended up being valuable when it came time to sell the business.

Remember that $1500 investment that I made in the beginning to fund the business? Here's a quick chart that illustrates my equity growth over 9 years in business. The value of an online business will grow post-pandemic because online business weren't shut down by the government! If you can keep your business up through a pandemic, war, or whatever, the value grows.

Equity Growth

Related: Why Online Business Valuations Will Skyrocket In Value

Sell Your Business With Multiple Exit Options

Running a business for 9 years is a long time. Although we were coming off our best revenue year ever, our industry was shifting again with the onset of cloud computing. This would directly impact the service model we had built. The question was, did we want to pivot again, or merge with a company that already had that infrastructure in place?

There were a few other variables contributing to my decision, but I decided that it was time to exit. We had been approached by a couple of different companies who were interested in acquiring our business. So I went out and solicited a few more for good measure. Eventually, we were entertaining three companies seriously.

We finally decided to merge with a company based out of New York with a national presence and large cloud infrastructure. They agreed to purchase our company for a low 7-figures. We received an initial down payment upon the close and then received the remainder over a 3-year earn-out period. I ended up working for the company for a little over a year to help transition before parting ways.

Because of this sale, I was able to retire early at 36 and spend the last 3 years at home with my young children. It’s tough to put a price tag on this opportunity, but to me, it feels like I’ve won the lottery. I couldn’t have done this without taking that initial risk to venture out on our own.

Building a company that is saleable creates options for the owners. If there is enough equity then it can help fund an early retirement, create capital for a new venture, or transfer to another investment like real estate. The possibilities are endless.

Related: Early Retirement Is Exactly Like Being An Entrepreneur: It's Awesome!

More Tips On How To Start A Business

Build A Team Of Expert Advisors

We’ve all heard the term, “work harder, not smarter”. Listen to it. Leverage expertise any time you are able to. Be an expert in what you do best, and let the other professionals do what they do best.

Hire an Attorney And Protect Yourself

Hiring a business attorney, in the beginning, was a critical move. He helped us to figure out what structure was most advantageous to us. We settled upon an LLC and he helped us to draft our operating agreement at a discounted rate of $350/hour. It was worth every penny.

When starting a business, it’s important to use some type of entity to protect yourself from individual liability. That means that if someone were to sue you for damages related to your company, they can’t go after your personal assets (eg. your home, cash, etc.). Instead, the damages they could seek would be limited to the assets of the company.

Different Type Of Business Structures

Entities that typically offer the best protection are C-corporations, S-corporations, or LLCs. Each has their own legal and tax implications. So remember to consult with your attorney and tax advisor simultaneously to select an entity which best suits your situation.

In my case, we were looking for maximum protection and minimal tax liability. Later when we grew larger, we converted over to an S-corporation.

A sole proprietorship is popular for individuals offering some type of service. It’s also popular for newer entrepreneurs trying to validate an idea quickly in the marketplace. The downside is that a sole proprietorship will NOT offer individual liability protection.

This isn’t a big deal for individuals who haven’t built up any substantial personal assets yet. But, for those who need to protect their wealth, protection from day one is ideal.

It’s possible to create your own entity by visiting a site like nolo.com. They have all the forms and processes to get you started, but remember everyone’s situation is different. That’s why I’d still recommend talking to an attorney the first time at least. Once you get good at starting businesses, you can always bootstrap the process the next time around.

Hire A Tax Advisor

The same exact concept above holds true for hiring a professional tax advisor. The advisor should be able to help plan a foundation to work from. The last thing an entrepreneur wants is to earn a lot of money the first year and then get taxed unnecessarily at the end of the year. Alternatively, if losses are inevitable the first year, it’s important to write-off everything you can.

In addition to tax planning, the advisor should have the capacity to validate cash flow projections and a startup budget. Remember how I mentioned leveraging professionals around you? We were lucky.

My Dad was an independent CPA who serviced a lot of small businesses. This was super helpful when planning for taxes and structuring our initial compensation models. A tax advisor will also help along the journey as the strategies change with growth.

Network With Competitors

This may seem a bit counterintuitive. But, one of the best things I did was to network with other business owners in my industry. Other business owners that you may consider competitors are actually many times very forthcoming and willing to help. There is usually enough business to go around and collaborative efforts can create win-win situations.

If you’re unsure about networking within your own industry, consider joining a peer mentoring group or mastermind made up of other business owners in difference sectors. This can really help to move your business forward when encountering difficult situations because chances are someone in the group has already experienced and moved past that issue.

Final Thoughts On How To Start A Business

One final consideration before starting a business is to determine your “Why.” Asking yourself why you want to start a business will create different answers for everyone.

For me, I wanted the flexibility of being my own boss. I wanted to be able to build equity with my direct efforts. And, I wanted to have the opportunity for a big win at the exit point.

For those that have been on the fence, I say “just go for it!” Life is pretty short. Don’t have regrets later on. Besides, what’s the worst that could happen?

For most, it’s going back to a traditional career. There’s nothing wrong with that. But, if you are an entrepreneur at heart and don’t even try, well that’s a tragedy! Remember, businesses are born out of necessity.

There are millions of problems in the world. Go out and solve one. I hope this article has given you good insights on how to start a business in this crazy world today.

Business Recommendation

Start a website today. The easiest business to start is an online one. And the easiest way to start a business is by launching your own website like this one. Here is my step-by-step guide for how to start your own website.

Once you've got your website launched, you can experiment with different business ideas with minimal downside since the cost of keeping a website up for a year is less than $100. Compare this to starting a retail story or even running a food truck, operating a website is dirt cheap in comparison.

I had no idea what my business would be when I started Financial Samurai in 2009. But after three years, it started making about $80,000 a year. That is when I knew I had something so I negotiated a severance in 2012 and focused on Financial Samurai instead.

Below an a real life example of the various income streams you can make from a website. The key is to just start. Once you start, you'll be able to build momentum. Host your website on Bluehost for less than $3/month.

How much can you make blogging for a living
Here's a sample income statement of how much you can making with your own website

Invest In Private Growth Businesses As Well

Taking a leap of faith to become an entrepreneur is hard. Instead, you may want to keep your day job and invest in private growth businesses. This way, you get to have brilliant entrepreneurs work for you. Or you can do both! I certainly am.

Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment. 

Check out the Innovation Fund, which invests in the following five sectors:

  • Artificial Intelligence & Machine Learning
  • Modern Data Infrastructure
  • Development Operations (DevOps)
  • Financial Technology (FinTech)
  • Real Estate & Property Technology (PropTech)

Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!

The investment minimum is also only $10 while most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. 

For further suggestions on saving money and growing wealth, check out my Top Financial Products page.

In addition, if you enjoyed this article and want to get more personal finance insights and tips, please sign up for the free Financial Samurai newsletter. You’ll get access to exclusive content only available to subscribers.

About The Author

59 thoughts on “How To Start A Business: Bootstrapping To 7-Figures”

  1. Tangible skills. I like this. So many want to run a business without the tangible skills at the businesses core. Spend the time first to learn how to do something tangible.

  2. Networking with competitors is vital! My business is just me, but knowing and respecting my competitors has done me wonders. Some were even kind enough to let me know what they charge; this helped me understand what the market bears. Any client who is too complicated for my business today is referred to my competitors who are professional and knowledgeable. They are friends and colleagues. It works well for everyone.

  3. Thanks, MM! You bring up a good point. You don’t need to be a tech genius with a well-funded unicorn to get ahead. You only need a service/product that people will pay for and that you can supply well.

    I don’t think that I’d ever go back to I.T., but I can definitely see myself starting/buying/running another business in the future. It’s a lot of fun and a great challenge to grow something that can be sold later on. For now though, my focus in on my kids. Once they’re in school full time I will have a lot more free time to “play”. In the meantime, my blog and other side hustles keep me busy. :)

  4. Hi Michael – awesome post, it isn’t often that we get to see into the life of an entrepreneur and the financial details of the adventure and it’s great.
    What I find really great with your story is that there’s no need to have a unique idea like the iPhone or Facebook to be a successful entrepreneur, being good at what you’re doing and being more trustworthy than your competition can go a long way already.
    It’s also great that you had an exit in mind, I can imagine that this isn’t always the easiest part to figure out.
    Now that you FIRE’d, do you see yourself doing this again in the future, or taking over an existing business instead of starting a new one?

  5. May I suggest the book THE EXIT STRATEGY.
    It was very helpful to me to build a business that I tailored to sell and planned on 2-3 years to get it done, on my terms.

    In the end, you want no regrets when you let your baby go…..The book covers the mental blocks many owners can’t overcome that lead to failed or less than ideal business sales.

    Also, plenty on the mechanics of letters of intent, valuation techniques etc.

    Great book, I read several times so as to be the one eyed man in the valley of the blind.

    I trained myself to beat every industry standard and sell for a valuation not heard of for my widget industry.

    I walked out, never looked back and enjoy early retirement because I looked far ahead when starting and building the business to build something I knew others would want, ……you can too!

    1. Good to know!

      The funny thing about my business is that it is a lifestyle business and some thing I totally want to do in retirement. But I have had opportunities to sell for a good amount so it is interesting to hear people stories about how they sold their business.

    2. Nice, I read a similar book but it wasn’t all that good. This one you mention looks much better. I wish they had published that book before I sold. I did take some time to read numerous purchase agreements on onecle.com.

      Congrats on your own exit, John!

  6. Thanks for the inspiration Michael! It’s always great to read these stories. There are so many critics in the world (fortunately not many on this site), it can be difficult to share a success story. I feel like every time I read a personal finance success story, it brings up a bunch of people complaining or making excuses on why it can’t be them. With a defeatist mindset like that, they are bound to be right. Keep sharing your story and doing your thing!

    1. Thanks for the encouragement! Yeah, there was a time in my life when I would have just stayed completely to myself and not share anything in fear of critique. But, as you get older, you tend to care less and less of what people think of you. It’s more important to share openly with others to help inspire them to meet their full potential. Life is too short to live with the regret of “what if…”.

  7. FIRECracker

    Awesome article and congrats on building a 7-figure business! I completely agree with you that as a employee your reward is limited but the rewards for running your own business is unlimited!

    And even though you may not see the returns in the beginning, as you learn from your mistakes, the business grows and eventually takes off. Gotta put in the hard work in the beginning, realize that it’s all about delayed gratification so you can get the big rewards in the end. Well done!

    1. Thanks! Like you said, sometimes you may not see returns in the beginning. So, you’ve gotta be in it for the long-haul. When I first started my blog it was like watching grass grow. But, slowly and surely more people are coming. Congrats on your early retirement!

  8. Hey Michael,
    Congratulations on all the success and thanks for sharing your inspiring story! It was both motivational and informative.
    I had one failed attempt at starting a business after College because of some of the things you mention in this post. I thought I could do everything and definitely learned that it pays to hire experts.
    That said, I think I learned a lot the first time around and would be in a much better place to attempt again. However, I don’t have an idea or opportunity I feel strongly enough about. On the other hand, blogging over the past year has helped me realize that I am probably more on the creative side than on the CEO side. I prefer to avoid being too pushy and focussed on sales. I don’t always prioritize effectively because I focus on the projects I feel passionate about. I think blogging has helped me realize that I would need a team of experts to compliment my skill set.

    At least now, once the business idea and skill set are developed, I have this framework to look to. Thanks again for the read!

    1. Thanks, Graham! Isn’t it great what you learned from that “failure”? It’s awesome that you were able to reflect so much about entrepreneurship.

      Not everyone naturally ascends to a “CEO” type position and that’s okay. In fact, it’s much better to find what you enjoy best and bring in the other skills via other people. There are lots of creative entrepreneurs out there that never deal with sales or employees. :)

  9. Michael, Thanks for sharing. That’s an awesome story. Starting a business is a ton of work, but it’s worth it. I think it’s best to do it while you’re young when you have a lot of energy. :) I can’t put that much time and energy into a business these days.

  10. Thanks for sharing your entrepreneurship story! A case study like this is motivating for small, budding entrepreneurs like myself as I too sense that things in my own day job environment might not be all smooth sails any much longer. This site also motivated me to start my own brand and I am looking forward to making an impact in the WWW however big or small it may be.

    1. Good luck! Despite most people’s feeling that everything has already been “tapped” on the Internet, it’s just not true. There are so many opportunities left and more to come. Good for you for starting your own brand. Best wishes!

  11. While I’m nowhere near the same boat as you, Michael, I can identify with everything you wrote here. A friend and I started a business in the spring and bootstrapped EVERYTHING. The website and it’s content are entirely our work, we’ve transported bags of inventory by hand truck across entire neighborhoods, and we’ve taken some creative approaches to online and offline marketing as we don’t yet have money for advertising. Even the corporate documents, filing, and accounting are being done by us.

    I wish I was making seven figure sales (we’ve made three figure sales so far this year), but this year is sort of the sacrificial lamb for next year. Our site reaches about a thousand or so people each month. Not bad for no paid advertising (so far).

    I dream of one day growing my business to the point where it can be sold for seven figures, but in the meantime I am having a blast running it (as much of a pain in the you-know-what it is). It’s nice to be the one calling the shots and creating the policies rather than getting permission from managers and having to explain away arbitrary regulations to customers.

    The best businesses are the ones that started with some bootstrapping. Apple started in someone’s garage, right? While Trump started with a “small” loan from his father. Which business would you invest in?

    Sincerely,
    ARB–Angry Retail Banker

    1. Congrats on the business, ARB! That’s fantastic. There’s nothing wrong doing everything yourself if you’re able to figure it out. Running a business no matter how big really teaches you to be resourceful, manage time/priorities, and leverage resources.

      Michael Dell started in his college dorm room!

      Good luck as you continue the journey.

  12. PatientWealthBuilder

    Thank you for sharing your story and demonstrating your work ethic. Going from IT support to selling the company you created almost a decade later is absolutely outstanding. Most people intuitively shun additional responsibilities and hard work. But one thing your story illustrates is that taking on greater responsibility and working long hard hours, can really pay off.

    The other thing your story illustrates is taking control and calling it quits on your own terms. This can only be done once you have a track record of providing value and trust with those whom you are partnering.

    Great story and thanks.

    1. Glad you liked it!

      I’ll let you in on a little secret. While I did put in some long hours the first year, I made it a point never to work weekends (unless it was an emergency) or holidays. Growing up I saw my Dad work non-stop and I didn’t want to get sucked in like that. I value balance much more which is again probably why I decided to exit when I did and spend time with my kids. :)

      1. PatientWealthBuilder

        I totally agree and do the same. The only time I work on weekends is in an emergency and am thankful for a job where that can be done. Its not so much about hours as it is about energy and focusing the right amount of energy on the right things. This usually involves talking to the right people and having the right team!

  13. What an awesome story. Way to go taking advantage of a potentially bleak situation with the W2 company that you were working for and turning it into a tremendous ROI. I wish I could have invested in you all back then :) Thanks for sharing the inspiring post!!!

  14. Matt @ Distilled Dollar

    Inspiring post Michael! Persistence and understanding your “why” are two of my key takeaways.

    You mentioned the 37% increase (post tax) after only two years, but I know many people would have likely quit before that early success point. Great job sticking with it and succeeding on your path!

  15. Great job growing your business! Lots of helpful insights. I like your image of spinning plates. That’s definitely how I’ve felt at times. There are way more logistics and things to do running a business than I ever would have imagined before I started working for myself. At least it gets easier with practice.

    1. Michael @ Financially Alert

      Agreed! The best part is when you realize that you can have other people spin the plates for you. :)

  16. Thanks for allowing me to participate on FS, Sam! This is my first guest post ever. :)

    In answer to your questions:

    1) On the initial exit we picked up a down payment worth 1/3 of the sales price. The remaining 2/3’s would be paid out over the course of 3 years. When I left early it was mutual. I had another 1.5 years on my employment contract, so I was able to negotiate a healthy severance from that. The earn out was unaffected because it was independent of my employment. In the end, they did stop paying the last several payments, but it wasn’t enough to go after legally at that point.

    2) The $311k was roughly my portion of equity in the company when we sold it. I held 30% at that point.

    3) There were several factors for not sticking out the 3-years. First, the earn out was independent of my employment with them. Secondly, I was literally happy with my initial downpayment. Everything else was gravy for me. Finally, and most importantly, the cultures of our two companies didn’t match. I can’t get into details, but let’s just say I didn’t feel like our values we in line.

    4) Sure, we could have gotten the same exit price regardless of how many partners there were. It does get a bit complicated after nearly a decade as we bought out one partner earlier on, then had two minority partners later on. There were differences in the our salaries based on our functionality and roles by the 5th year and on. At the end though, I was certainly glad to exit with my portion because I wanted to get 100% of my efforts beyond that point. All in all though, it worked out with my partners.

    1. Thanks for the answers! That’s cool the earn out wasn’t dependent on you staying. What was the earn out dependent on then?

      Also on your equity, can you share how that equity was paid out e.g. lump sum down payment of $311K and then some extra over the next 18 months?

      How was it taxed? I’d love to learn the best way to minimize taxes on a company sale since that will be the biggest expense. Always good to know these things!

      Thanks!

      1. The earn out was actually pretty static, unless the contracts that we brought in didn’t perform within a specified range. Luckily they all performed, so there weren’t any adjustments to that end. We were incentivized however with stock warrants in the parent company so we were all aligned with common growth goals.

        I believe I picked up a $100k in cash as my part of the downpayment. The remainder was split amongst the 3 years following and we also earned interest during this period.

        As far as taxes, it was treated as capital gains against our original stock basis. Since the earn out occurred over a couple years, we paid taxes as an “installment sale”. This is pretty common in this type of scenario.

        What did suck a little bit was that we had to pay taxes on the value of the stock warrants which we didn’t get any cash for. That kinda sucked since they never panned out, but I eventually got my tax money back.

        1. Was the strike price for the stock warrants at Fair Market Value? If they were, the only value you received would have been Black-Scholes value (the time value of having the option to execute the warrants), so seems like taxes would be minimal. Or did they issue you penny warrants that were in the money from day one?

          1. I don’t recall the valuation methodology to determine the warrant prices, but I do know we had a little flexibility to offset the face value. I also remember our CPA and attorney spending a good chunk of time on this matter only to realize we’d have to pay something regardless. They were both excellent resources for us over the years, but in that particular instance, I was hoping for a better outcome, or at least less time spent to figuring out a whole lot of nothing. :)

  17. Michael, congrats on taking control of your own destiny. Having recently had our first child, I can definitely relate to wanting to retire early and spend more time with my family.

    I’m curious what your circumstances were when you went out on your own in 2001. Were you single, married, kids? I founded a startup about five years ago when I was still single. I didn’t draw a salary for the first three years but now make 3x what I was making working a “real job”.

    My wife and I reflect on that, especially when my friends with great jobs ask my opinion of going out on their own. I could not imagine doing it today while having to support a family. It’s just too much risk. And that’s what I generally tell people.

    That doesn’t mean it can’t be done. I think there’s a lot you can accomplish before and after working hours to de-risk that situation. But most people tend to think it needs to be all or nothing. So just curious what your situation was then.

    Congrats again!

    1. Excellent question. I wasn’t married at the time and had very few personal responsibilities other than my own well being. This was definitely an advantage mentally to be able to take additional risk at this age.

      Like you, I don’t know that I’d do it again with an entire family dependent on me. However, I’d still try to ramp up a side hustle and eventually transition that into a full fledged business.

      1. Thanks for the response, Michael. Totally agree on getting the side hustle going. It’s very doable if you’re committed and can make the transition so much less risky.

        Glad I don’t have to deal with that though.

    2. Work a side hustle while having a stable job. No brainer!

      “Job you love? GOOD. Supplement w/ a side business.
      Job you hate? GOOD. Pays bills while you start a business.
      No job? GOOD. More time to start a business!” – Michael Medici from Twitter

  18. Thanks for sharing your success.

    Most first time businesses fail. It would also be nice to have a post from someone who has failed a few times, but eventually succeeded. I always love to hear those lessons learned type of pieces.

    1. Michael @ Financially Alert

      Thanks, Dennis! One resource you may check out is the Eventual Millionaire podcast. Jaime interviews tons of entrepreneurs there who share incredible stories of persistence past failures.

      BTW, don’t let this highlighted success story fool you… I’ve had many many many failed side hustle attempts (and continue to do so). I’m just too stubborn and bored to not keep going. ;)

  19. Michael, thanks for sharing your journey. A several questions for you as I was reading and editing the post for publication:

    1) You mentioned after the acquisition there was a 3-year earnout to get all your equity. Given you left a little after one year, does that mean you got roughly 1/3rd of your equity?

    2) Does 1/3rd your equity equal $311,000 in 2011 per your chart?

    3) What were your reasons for not sticking it out for 3 years to earn 100% of your equity? If it was me, I would find it difficult to leave before earning 100% of the total acquisition price b/c it would be hard for me to sell my business in the first place.

    4) Do you think you could have got to the same size and exit with one less partner? I always wonder what the optimal number of founders is for maximum profitability. For example, take a music band. If they have to split between 5 guys it maybe be tough! But they may never have gotten there. Or, it can be one founder who hires co-founders for minimal equity. Related: Sleep With One Eye Open As A Startup Employee

    Thanks!

    1. Great questions, looking forward to seeing Michael’s follow up. I’ll just chip in to say that earnouts don’t necessarily require the sellers to stay involved in the business. We do deals all the time where the purchase price is tied to the future performance of the business and where the sellers are walking away from active management of the company. The idea is that if the sellers are promising that revenue will be a certain amount over the next three years, they should be willing to accept a higher purchase price in exchange for risking that the earnout won’t hit (i.e. revenues will not be as rosy as they promised). Of course, the downside for the sellers when they leave management is that the buyer will mismanage the Company and future revenues will not hit the earnout targets thanks to their incompetence. But nobody really wants this, since the buyer wants the business to succeed too.

      1. What’s the best type of sales contract you recommend for the seller? Tying to performance after sale can be risky. But tying to the seller working at the company is much less risky b/c it is almost 100% in the seller’s control.

        Thx

        1. If I’m representing the seller, you always want as much cash upfront as possible with as little strings as you can get away with. Many sellers do prefer to stay working at the company post-closing if an earnout is involved. It’s not quite 100% in the seller’s control, but you have more opportunity to influence the outcome and make sure the new buyer doesn’t crater your business. But many sellers are also ready to leave. If they get 80% of their compensation up front, it may not be as important for them to stick around to make sure the additional 20% comes due. Most of this comes down to whichever party is the better negotiator.

          1. Makes sense.

            Given so many entrepreneurs put their heart and soul into their company, staying on for a year or three to ensure a sooth transition is normal. I’d certainly want to stay on for at least one year if I ever sold FS.

            I do like the idea of getting X amount up front I’m totally happy with if that was it, and then having a performance upside incentive.

  20. How important do you think it was to your success to have business partners from the beginning? Thanks.

    1. It really depends on your situation. For me it was a fantastic synergy in the beginning. Many of my partners brought skills that I didn’t have (like sales initially). As we grew, I stepped up and really pushed the growth which they benefited from. So, it can certainly work out well if you keep communication open. It can also become rocky if there is a misalignment of values or vision. It doesn’t make any one party wrong, but it can completely kill a company’s growth if you don’t address it.

  21. Michael – Great article on starting a business. Been following your blog for awhile and glad to get the backstory on how you started your business. I think many people will reject your story as “that was easy for him, but for me it would be much harder” when I’m sure you just gave everyone the exact knowledge they needed to go out and start their own business. And what’s the worse that could have happened to you? You might have lost $1,500 and spent some time on a project that didn’t work out. If the business had failed, I’m sure you would have found another IT job quickly once the market rebounded (the kind of people that are brave enough to start their own companies are the kind of people that get hired when it fails). Keep up the great writing.

    1. Thanks, Josh! I enjoy reading you blog as well. :) Yeah, it was nice being young and taking the “risk”. $1500 lost would have sucked, but wouldn’t have been earth shattering. I was also young and naive, so I never realized the odds were stacked that much against me until well after the fact. I personally believe most people fail in business, not because they can’t do it. Rather, they aren’t prepared to run a marathon of persistence.

      1. Biglaw Investor

        Young, naive and persistent are great qualities that can often lead to success as long as you’re learning along the way.

  22. Apathy Ends

    Thanks for sharing your story

    The last 3 years we have been cutting over everything to the cloud and closing contracts with outsourced IT firms. You made a wise choice to merge

    I think your right in the bulk of FS readers thinking about starting a business – I definitely have. It’s something that will happen in the next few years as I fizzle out in the corporate world.

  23. Very informative article. I’m currently struggling with the type of business question a bit. In my state to do anything non w2 side hustle you must have a business license. The question is how committed are your to freelancing and is it enough to go full llc,score,etc with the associated cost for a side hustle you want to bring in sofa money. It is ultimately a question of level of risk and your assets, not the returns of the business obviously. However it’s always a question.

    1. Yes, that’s a common dilemma when starting up a smaller side business. It’s tough to pony up for the fees and excess work when you’re just picking up sofa money. So, it really depends on your personal situation. For some, a sole proprietorship would work just fine. Eventually though, you’ll want to have additional protection.

  24. Great case study, thanks! I liked the fact that you were able to assess that the shift to cloud computing would impact your core business and you were willing to exit when the time was right. Congrats and all the best!

    1. Thank you, Ilias! Sometimes it’s easy to get caught up in the day-to-day operations of a company. One thing that is constant with most businesses is CHANGE. So you have to make it a point to look forward a few years to ensure your trajectory is where you want it.

  25. Great article and it hits home a lot of the same reasons why I’m choosing to transition from a 9-5 (well in my case a 5:30-5:30). Flexibility is key. With flexibility I can take advantage of multiple opportunities, while creating the life style that I want. Running the rat race just doesn’t offer the same upside.

    1. Michael @ Financially Alert

      Yes! Flexibility is huge. There are so many successful businesses today that started out doing completely different things. Yet, they were able to pivot and grow into market demand they exposed along the way.

  26. Wow, what a great story Michael! Very inspiring and it just goes to show how you can build some true wealth with good old fashioned hustle and drive. There’s nothing like having your own business to really increase your wealth.

    I can’t the risk of starting a business from scratch right now, except for my blog, but I’m always on the lookout for a good business to buy. If a good one comes along, I’ll be on it!

    Congratulations!

    1. Thanks, John! Starting a blog is an excellent way to explore your business aspirations. As I’m sure you know there are many that do quite well with it (like FS!). It does take a lot of upfront sweat equity and persistence to find profits these days, but I believe it’s still well worth the efforts.

      Good luck searching a good business to buy. You can do quite well going that route too… just remember 2 words – due diligence! ;)

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