Do you dream about starting a side business? Maybe it is time to explore your entrepreneurial self.
Passive income is an idea built upon entrepreneurship and diversification. More money without more work - that's passive income. But what are the realities? Let's tease this out, strategize to help you design your empire!
Actionable: At Providence Law, we counsel entrepreneurs at different experience levels. This article is based upon observations and is designed to deliver actionable steps to immediately implement.
Who: This article is for those aspiring to create passive income and for those already earning.
Why: Passive Income can be ideal for those with other obligations, seeking financial growth with potentially limited involvement.
Vet opportunity: Think. Then do.
There is a lot of opportunity. Once the idea machine gets started, you will generate a lot of business ideas.
Vetting opportunity includes the allocation of your resources. Time. Thoroughly analyze your expected involvement before you launch. Eliminate opportunities that will consume too much of you and your time. This is a passive business, so you must design it to be hands off.
Passion? Money making? Neither, singularly, should be the sole barometer. Rather, both must be contemplated.
If a business is purely driven by passion -with little or no thought to viability and success- then you will probably fail. Do what you love and never work a day in your life? That maxim doesn't pay the bills.
Conversely, business devoid of passion leads to fatigue, burnout and becoming disgruntled.
Crux: A business plan must address your interests AND a pathway to financial success.
Plot your course: How; to Where? Avoid Myopia and Delusions of Grandeur.
I'd say it's about 50/50, based upon my observations: (A) nearsighted v. (B) over ambition. Neither is the happy place.
A business plan should contain a -realistic- plan for growth (eg. How will capital be raised for additional locations). Over ambition is akin to hubris; the first business unit is the most important because if it fails then everything could end.
Being too myopic is also harmful. If you open a business without planning for growth, you could be handicapped from exploring other, later opportunity. For example, initially investing too much of your money and time may preclude you from other, later opportunities.
Crux: Plan. Plan realistically for both near term and long term.
Is it really Passive? (hint: Probably Not)
Nothing is really hands off. That's the truth. People make a lot of money selling courses on “passive income.” But you reap what you sow. An investment without oversight is like planting a garden in the shade and then never watering it; it won't yield diddly.
Instead, plan for the type of business and the ownership and management structure.
These two elements will define your involvement and return. Vetting opportunity includes this step. A 24-hour restaurant will lead to work during the middle of the night (trust me, I owned one) even if it is “passive” and you have a manager. You'll still be the owner; your attention will still be needed! If a 24-hour business doesn't sound appealing then do not explore a 24 hour business opportunity; plan against that.
Crux: Analyze the business. How "passive" is it... really.
Ownership Structure: Build your team; Togetherness: Legal and Partners.
Build your team. Hire a business lawyer, a business accountant and surround yourself with knowledge. This will save you time and money navigating complex issues, so you'll be more hands off.
Partnering - with someone who will oversee and/ or manage the business - could increase the passiveness of the business. Ultimately passive income is about distancing yourself from the work associated with the business. By involving a partner, you could build your team so as to dilute managerial demands while increasing available inputs, such as additional capital or attention. Think of it like this; two partners can mean twice as much attention to the business without 100% of it coming from you!
Crux: Partnering can decrease demands and increase outputs.
Your return: $$$. How much do you want to make? The conundrum...
The classic example of residual income: a rental home. If managed by a property manager, it can be very hands off.
But your return might stink. Why? Because rental profit margins, which are notoriously slim, are further eroded by property manager fees. If you manage it yourself, you'll make more money but you'll be more involved (thus less passive).
Crux: Your pro forma must account for returns, including managerial expenses.
The real key here is planning. Simple as that? No. But, it is a summation. Plan beforehand and then keep on planning. And, if you're already involved with your "passive business that turned out to be not-so-passive" then (a) you're not alone and (b) there is still hope. The good news is that there are always processes that can be manipulated and reorganizing can still occur.
Contact Providence Law for more information about Business Law.
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