MJ DeMarco
I followed the science; all I found was money.
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Read Rat-Race Escape!
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New video on YouTube on a topic that was recently mentioned here. The 3Ts of making financial decisions is NOT addressed in either of my prior two books (TMF or Unscripted ) and is only mentioned in The Great Rat Race Escape .
View: https://www.youtube.com/watch?v=HOL3gYh3Gwg
If you haven't, please SUBSCRIBE - I'm only 35 subscribers away from the illustrious 50K mark! Thank you!
This video addresses a great problem all of us entrepreneurs would LOVE to have:
Do I sell my company at a big valuation if I get an offer?
Or do I keep it and continue earning the big profits?
TRANSCRIPT:
3TFinancial
[00:00:00] Hey, what's up. It's MJ DeMarco here. And as you may have heard, I recently just got over COVID and I'm happy to report that my experience was pretty benign. Um, had a fever for a couple of days, but no loss of taste, no loss of smell, no coughing, no congestion, got over it pretty, um, pretty easily. So considering I'm one of these people that refuse to get vaxinated, at least under the way things are
[00:00:30] right now, I'm especially excited that my immune system was up to the task, especially considering I'm not a young whipper snapper anymore. So today I wanted to talk about something that came up on the forum, and it's a concept that I explained in my latest book, The Great Rat Race Escape it is not discussed in either of my other two books.
[00:00:53] It is called The 3T Strategy. So, if you want to make the best [00:01:00] financial decisions in your life, the kind of decisions that you're not going to regret five or 10 years from now, you need to pay attention to the next few minutes. Literally could save you millions of dollars. And yes, I am not exaggerating.
[00:01:15] That's not hyperbole. This could save you millions of dollars. When I made the decision to sell my company the second time in 10 years, I recognized that my existing business model was probably not sustainable as technology changed and consumer expectations changed as well. The ADJUST in my three, a analysis revealed that a new business model was likely going to be required, which itself was going to require more capital or employees more time and of course
[00:01:52] more headache. While this need for a huge pivot was a secondary reason that I was considering selling, there [00:02:00] was a more obvious pressing reason, and that was this: I knew that money earned and taxed at a lower rate today is worth far more than money owned later and taxed at a higher rate later. Remember the time value of time isn't taught anywhere.
[00:02:20] And if you don't know what I'm referring to, there's a video here on my channel, uh, from last month, that talks about that. So whenever you're making financial decisions, you have to look at your money options beyond just the nominal numbers, the simple numbers, namely, you have to look at it through The 3T Strategy, which I call TIME, TROUBLE, and TAXES. For example, let's say your business enjoys a $2 million a year in net profit.
[00:02:50] That's awesome. Life is great. The bills are paid and you're stockpiling cash for your financial army. And then suddenly you're offered [00:03:00] $20 million for your business. Now, at first you dismiss the offer because hey, you know, I'm making $2 million a year and I can earn $20 million in a short 10 years.
[00:03:13] Assuming things stay the same. Now this is true, but these numbers aren't telling the whole story. And you could be making a huge financial mistake. So by not properly analyzing this decision, guess what? It could cost you close to $10 million in realized purchasing power, simply because you want to stay pat.
[00:03:36] The first problem is time. Remember time favors now over later, just like money. Money and free time that you can enjoy in your youth as far better than money and free time you can enjoy in old age. $20 million today is worth just that, $20 million in real purchasing power. However, $20 million [00:04:00] earned over 10 years when you discount it for time,
[00:04:04] Is only going to be worth a little over $12 million. $20 million or $12 million. So this waiting 10 years to accumulate your extra $20 million is going to cost you $8 million in real purchasing power. And that doesn't account for trouble. Our second variable. So who knows if your profits are going to be sustainable at $2 million a year, you know, I'm sure at the beginning of 2020
[00:04:37] millions of business owners had a rude awakening when COVID 19 showed up and paralyzed their businesses and their profits. Waiting 10 years to accumulate your $20 million is subject to TROUBLE, whether it's from the industry, the economy or stupid government decisions, or just the plain [00:05:00] old grind, trying to earn it.
[00:05:02] The final consideration is taxes. In the United States as of early 2022, the sale of business assets is taxed at a long-term capital gains rate, now that rate is usually 15 or 20%, depending on how you're organized, depending on your personal income tax. The point is the tax rate is far lower than earned income tax.
[00:05:28] So if you're profiting $2 million a year, guess what your marginal tax rate is not going to be 15 or 20%. It's going to be around 40, 45 or 50% depending on your state, depending on how you are organized. The point is it's a lot more taxes on earned income as opposed to corporate long-term capital gains.
[00:05:53] In short, you're going to need a lot more time to actually clear $20 million in after [00:06:00] tax real money, real purchasing power. So with that in mind, let's go back to our example: if you accepted the $20 million offer for your company, not only do you get the cash right now, you only get taxed on 20% of it.
[00:06:16] So that all happens and put into the now, you're going to clear $16 million. Think about that $16 million. So wait 10 years that $20 million that, hey, I'm just going to earn that through my business, and guess what, you're going to pay 40 to 50% in earned income tax rates... in 10 years, 20 million after tax is only going to be worth about $8.9 million dollars.
[00:06:47] So not accepting this offer is going to cost you $11 million and 10 years of life. That's just assuming if all things are held equal. In other words, you're [00:07:00] going to need close to 20 years, 20 years to get the same after tax benefit of $16 million. You see everything has to be looked at in this after tax framework.
[00:07:14] Take the offer right now you get $20 million taxed at 20% equals $16 million, meh don't take the offer, I'm going to take my profits over 10 years, that's $2 million taxed at 45% is about $1.1 million a year. So annual net of 1.1 million earned every year for the next 10 years, discounted at a 5% interest rate for accounting for inflation,
[00:07:42] you're going to end up with $8.9 million again, realized after tax money. So as you can see, it's almost foolish not to take the money if freedom and financial freedom is your primary concern. Of course, this [00:08:00] answer is going to be different for everyone. You could also grow your business in the next two or three years, and instead of your company being worth $20 million, it can be worth 40 million.
[00:08:10] So this decision obviously is going to be different for everyone. The sell or keep question is highly personal, and it's going to be dependent on so many factors, including your 1,5,10 Planasy assuming that you did that structure. All this boils down to is you never make a decision based on just nominal pre-tax and pre trouble numbers.
[00:08:36] You have to consider time, potential trouble, and taxes. Do so and you might find yourself saving yourself millions of dollars and an opportunity to live unscripted for the rest of your life. So I'm MJ DeMarco thanks for watching. Please subscribe and hey, I hope you have the opportunity to make a decision like this, to decide
[00:08:59] hey, do I want to [00:09:00] make $2 million a year for the next ten years, or where do I want a $20 million offer? My hope for you is that you actually put yourself into a position where you can struggle with that decision, because it's a great problem to have. Take care, we'll see you next time.
If you haven't, please SUBSCRIBE - I'm only 35 subscribers away from the illustrious 50K mark! Thank you!
This video addresses a great problem all of us entrepreneurs would LOVE to have:
Do I sell my company at a big valuation if I get an offer?
Or do I keep it and continue earning the big profits?
TRANSCRIPT:
3TFinancial
[00:00:00] Hey, what's up. It's MJ DeMarco here. And as you may have heard, I recently just got over COVID and I'm happy to report that my experience was pretty benign. Um, had a fever for a couple of days, but no loss of taste, no loss of smell, no coughing, no congestion, got over it pretty, um, pretty easily. So considering I'm one of these people that refuse to get vaxinated, at least under the way things are
[00:00:30] right now, I'm especially excited that my immune system was up to the task, especially considering I'm not a young whipper snapper anymore. So today I wanted to talk about something that came up on the forum, and it's a concept that I explained in my latest book, The Great Rat Race Escape it is not discussed in either of my other two books.
[00:00:53] It is called The 3T Strategy. So, if you want to make the best [00:01:00] financial decisions in your life, the kind of decisions that you're not going to regret five or 10 years from now, you need to pay attention to the next few minutes. Literally could save you millions of dollars. And yes, I am not exaggerating.
[00:01:15] That's not hyperbole. This could save you millions of dollars. When I made the decision to sell my company the second time in 10 years, I recognized that my existing business model was probably not sustainable as technology changed and consumer expectations changed as well. The ADJUST in my three, a analysis revealed that a new business model was likely going to be required, which itself was going to require more capital or employees more time and of course
[00:01:52] more headache. While this need for a huge pivot was a secondary reason that I was considering selling, there [00:02:00] was a more obvious pressing reason, and that was this: I knew that money earned and taxed at a lower rate today is worth far more than money owned later and taxed at a higher rate later. Remember the time value of time isn't taught anywhere.
[00:02:20] And if you don't know what I'm referring to, there's a video here on my channel, uh, from last month, that talks about that. So whenever you're making financial decisions, you have to look at your money options beyond just the nominal numbers, the simple numbers, namely, you have to look at it through The 3T Strategy, which I call TIME, TROUBLE, and TAXES. For example, let's say your business enjoys a $2 million a year in net profit.
[00:02:50] That's awesome. Life is great. The bills are paid and you're stockpiling cash for your financial army. And then suddenly you're offered [00:03:00] $20 million for your business. Now, at first you dismiss the offer because hey, you know, I'm making $2 million a year and I can earn $20 million in a short 10 years.
[00:03:13] Assuming things stay the same. Now this is true, but these numbers aren't telling the whole story. And you could be making a huge financial mistake. So by not properly analyzing this decision, guess what? It could cost you close to $10 million in realized purchasing power, simply because you want to stay pat.
[00:03:36] The first problem is time. Remember time favors now over later, just like money. Money and free time that you can enjoy in your youth as far better than money and free time you can enjoy in old age. $20 million today is worth just that, $20 million in real purchasing power. However, $20 million [00:04:00] earned over 10 years when you discount it for time,
[00:04:04] Is only going to be worth a little over $12 million. $20 million or $12 million. So this waiting 10 years to accumulate your extra $20 million is going to cost you $8 million in real purchasing power. And that doesn't account for trouble. Our second variable. So who knows if your profits are going to be sustainable at $2 million a year, you know, I'm sure at the beginning of 2020
[00:04:37] millions of business owners had a rude awakening when COVID 19 showed up and paralyzed their businesses and their profits. Waiting 10 years to accumulate your $20 million is subject to TROUBLE, whether it's from the industry, the economy or stupid government decisions, or just the plain [00:05:00] old grind, trying to earn it.
[00:05:02] The final consideration is taxes. In the United States as of early 2022, the sale of business assets is taxed at a long-term capital gains rate, now that rate is usually 15 or 20%, depending on how you're organized, depending on your personal income tax. The point is the tax rate is far lower than earned income tax.
[00:05:28] So if you're profiting $2 million a year, guess what your marginal tax rate is not going to be 15 or 20%. It's going to be around 40, 45 or 50% depending on your state, depending on how you are organized. The point is it's a lot more taxes on earned income as opposed to corporate long-term capital gains.
[00:05:53] In short, you're going to need a lot more time to actually clear $20 million in after [00:06:00] tax real money, real purchasing power. So with that in mind, let's go back to our example: if you accepted the $20 million offer for your company, not only do you get the cash right now, you only get taxed on 20% of it.
[00:06:16] So that all happens and put into the now, you're going to clear $16 million. Think about that $16 million. So wait 10 years that $20 million that, hey, I'm just going to earn that through my business, and guess what, you're going to pay 40 to 50% in earned income tax rates... in 10 years, 20 million after tax is only going to be worth about $8.9 million dollars.
[00:06:47] So not accepting this offer is going to cost you $11 million and 10 years of life. That's just assuming if all things are held equal. In other words, you're [00:07:00] going to need close to 20 years, 20 years to get the same after tax benefit of $16 million. You see everything has to be looked at in this after tax framework.
[00:07:14] Take the offer right now you get $20 million taxed at 20% equals $16 million, meh don't take the offer, I'm going to take my profits over 10 years, that's $2 million taxed at 45% is about $1.1 million a year. So annual net of 1.1 million earned every year for the next 10 years, discounted at a 5% interest rate for accounting for inflation,
[00:07:42] you're going to end up with $8.9 million again, realized after tax money. So as you can see, it's almost foolish not to take the money if freedom and financial freedom is your primary concern. Of course, this [00:08:00] answer is going to be different for everyone. You could also grow your business in the next two or three years, and instead of your company being worth $20 million, it can be worth 40 million.
[00:08:10] So this decision obviously is going to be different for everyone. The sell or keep question is highly personal, and it's going to be dependent on so many factors, including your 1,5,10 Planasy assuming that you did that structure. All this boils down to is you never make a decision based on just nominal pre-tax and pre trouble numbers.
[00:08:36] You have to consider time, potential trouble, and taxes. Do so and you might find yourself saving yourself millions of dollars and an opportunity to live unscripted for the rest of your life. So I'm MJ DeMarco thanks for watching. Please subscribe and hey, I hope you have the opportunity to make a decision like this, to decide
[00:08:59] hey, do I want to [00:09:00] make $2 million a year for the next ten years, or where do I want a $20 million offer? My hope for you is that you actually put yourself into a position where you can struggle with that decision, because it's a great problem to have. Take care, we'll see you next time.
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