EntreLeadership: Dave Ramsey Wants to Ruin Your Business

by JT McGee

Bonus post today, just because I felt like it.

Dave Ramsey is launching a new vertical in his company: EntreLeadership.

From what I can tell, it’s a book and “consulting” program for running a successful company much like Financial Peace University is a book and consulting program for running a successful personal budget.

This will be a blogging goldmine.

Dave Ramsey may totally miss the mark on mortgages, tax deductions, investment choices, and a billion other items for our personal budgets. But now he’s going to show us how we can slaughter critical thinking in business budgets, balance sheets, and income statements. I can’t wait.

Oh man…

It’s one thing to write a book about how to get out of debt and stay out of debt on your personal balance sheet. But businesses are not people. Businesses do not run on cash, and the most profitable businesses are not debt free. This is going to be corporate finance gold. Gold, I tell you.

Debt is the engine of a successful business operation. If cost of debt service is less than the return on assets, then leverage makes sense.  But not for Ramsey.  Of course, this book includes “everything they should have taught you in business school.”

Dave tells you that he went broke by buying real estate on leverage.  What he doesn’t tell you is that he ignored the most basic concept in corporate finance: capital structure.  It’s true; he bought long-term real estate investments with short-term leverage, the equivalent of borrowing money at 2 years to buy a 30 year treasury bond.  It’s stupid.  Dave’s stupid.

And of course, his stupidity lives on.  What did Dave learn from the experience?  Well, for starters, he didn’t learn his lesson: cash flow and debt service have to be structured intelligently.  He didn’t learn that there is such a thing as systematic risk.

However, he did learn that all debt was bad because it was debt, not stupid use of debt, that made him broke.  Parallel logic would recommend that business owners close up shop on all Wednesdays if a certain Wednesday just happens to be unprofitable.  No logical business owner would ever do that.

Just in case you’re interested, Dave’s new deal is on Amazon for pre-order: EntreLeadership: 20 Years of Practical Business Wisdom from the Trenches.  And, just like before, he’s setting up an “ELP” vertical so that he can monetize your bad decisions that he encouraged.

Readers,

If Dave Ramsey were made CFO of a publicly-traded Fortune 100 company tomorrow, would you buy into it?

If you answered yes to the question above, are you currently under the influence of any drugs or alcohol?

Bonus points:  Do you think Dave considers a return on assets of less than 12% per year to be a negative economic return on capital since “growth stock mutual funds” provide similar returns?

{ 45 comments… read them below or add one }

Harri @ TotallyMoney July 28, 2011 at 06:32

THANK YOU! Wow it feels good to hear from someone who doesn’t idolise Dave Ramsey. The fact that he’s turning a dab hand to corporate finance makes me want to weep. Surely business owners/managers will be able to see through his baloney.

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JT McGee July 28, 2011 at 11:13

I give Dave a really hard time for personal finance laughs; however, this new book is in completely different territory.

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101 Centavos July 28, 2011 at 06:42

Dave Ramsey has his place, and it’s good to know your place, but Dave Ramsey doesn’t know his place, because his ego is all over the place. He’s steadily moving towards “wanker” status in my book. Take this any further, and he may even rival Jim “What-a-tool” Cramer.
To comment on Harri’s comment, financially astute small business owners may see through Dave’s BS, but I’m wagering that there are enough thick-headed large-company CFOs with inside political aspirations (“See, I got Dave Ramsey to consult, aren’t I smart”) that Dave Ramsey is going to do just fine with this new venture.

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JT McGee July 28, 2011 at 11:14

Dave is going to do really, really well with this new venture. I have no doubt about it. He makes a killing through his ELP program by referring people to “financial planners” who sell garbage. I bet the ELPs for EntreLeadership sell garbage, too.

I just really hope that people don’t take the chapters/pages/whatever on business finance that seriously.

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Sandy - yesiamcheap August 19, 2011 at 09:48

Oh God, the first two lines of this comment had me rolling on the floor. I can’t laugh anymore. Good one. (wipes tears).

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Hunter July 28, 2011 at 08:46

Jeez JT, tell us what you really think. Yeah, preaching to the converted here; not a DR fan. He always reminds me a of recent investing class I took. One class member advocated DR and the professor took pleasure in tearing him apart, and slamming all faith based finance & investing initiatives. It was brutal.

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JT McGee July 28, 2011 at 11:16

Hey, if there’s one thing that you always get at this blog it’s the brutal, honest truth. I’m sure most finance professors would have a field day with Dave Ramsey, as they should.

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No Debt MBA July 28, 2011 at 09:07

Dave Ramsey will do just fine as you point out, but no way would I put money on his business skills. He’s a smooth marketer and speaker, great traits for building a personal brand, maybe even a marketing role or CEO, but if he took over as CFO of, say, Johnson and Johnson or something I would so not buy. What the hell are his qualifications or experience aside from being some sort of anti-debt guru? Most businesses need and regularly leverage debt to succeed. I would not let that guy from the 700 club, George Foreman, Suze Orman or other “personalities” run a company (heck even they bring in outside talent for their own companies), why should Ramsey be any different?

Shooting fish in a barrel.

The one good thing I have to say about Ramsey is that he’s motivated some people to avoid needless debt and encouraged some people up to their eyeballs in it to get out. It may not be the greatest advice and I hate the cult feel his brand has, but it’s not selling drugs on the street corner or anything.

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JT McGee July 28, 2011 at 11:18

I agree with you, NDM. Dave’s great at motivating people, I’m sure, which makes for a great CEO visionary type. But he’s out of his league as CFO, and I feel really bad for business owners who listen to him.

I’m willing to forgive his advice on personal finance now that I have this new book to have fun with.

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Jeff Reed July 28, 2011 at 11:57

Motivation can be effective. However I prefer education. If you take someone that is ignorant on a subject and educate them that represents true progress. If the DR approach of “motivating” the masses continues unchecked we will have scores of motivated idiots. We already have enough motivated idiots (see debt ceiling lemmings).

Keep the blog pressure going JT.

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JT McGee July 28, 2011 at 17:18

You and me both. There really are logical answers to all these problems. A problem that results from a nonexistent logical process probably doesn’t need an illogical solution.

Oh well, he reigns as finance king!

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Jeff Reed July 28, 2011 at 18:47

A former manager of mine went to work for DR FPU (after he left the BD we were with before he was fired) and recast himself as an empathetic champion of the middle class. He was pathetic (no em) and could care less for the regular guy & gal. Good riddance (Bill L. I hope you read this blog).

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JT McGee August 19, 2011 at 11:32

Wow. There’s a Bill who does show up in the comments, so maybe it’s Bill L! 😛

That’s a sad story, but one that doesn’t surprise me in the least.

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Matt Wegner @ Financial Excellence July 28, 2011 at 12:52

Wow, feel the love here. I think you have to keep in mind that Dave is running a very successful business of ~300 team members and they are very profitable without debt. As NDM said, most businesses need debt, but that certainly doesn’t mean all businesses need debt. Dave’s company is one that doesn’t. There are quite a few other businesses that are doing just fine without debt too.

To 101’s point, small business owners are precisely the ones who need to be most careful with debt. I work with them every day and so many of them get into trouble because they’ve bought into the myth that they need debt and credit to be successful. So they go out and borrow lots of money without a solid business plan and, voila! They end up with lots of debt and no cash flow. I think Dave’s advice on business is much more pertinent to them than it is to large corporations.

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JT McGee July 28, 2011 at 13:10

Businesses don’t need anything besides customers and the bandwidth to produce and sell a product. Obviously, businesses don’t need debt, just like I don’t need anything more than food, water, and shelter to survive. Still, that doesn’t mean that I should stick to the very minimum.

Seeing as you work with small business owners, you’re likely well versed in the pros and cons of financing. I’m sure you know that debt comes with an interest expense, but you also realize that it comes with benefits, including the tax benefits of debt and the asset substitution benefits. For small business owners, asset substitution benefits are HUGE, right?

A business owner can finance their business and transfer the risk of the entity to a bank with debt. They can take their equity out of the business, replace it with low-cost debt, and retain the equity on their personal balance sheets, which cannot be touched should their business go down the drain.

Do you recommend this to the small business owners who use your company’s services?

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Matt Wegner @ Financial Excellence July 28, 2011 at 13:28

Actually, no I don’t recommend that in most cases. I recommend they avoid debt if at all possible. The reason is this: Yes, there’s a tax break from borrowing money. It’s a tax break on the interest, which reduces your taxable income. Say the company pays the corporate tax rate of 40%. They’re still paying 60% more than if they hadn’t borrowed the money at all.

Yes, debt is the cheapest source of financing but despite what everyone thinks, leveraging still increases risk. That’s straight from the business finance text books: increased debt means increased risk. Many small business owners have no equity in their businesses to transfer because they borrowed too much to begin with.

Many of them pierced the corporate veil by personally guaranteeing their business loans, too. That loses what protection they had by transferring assets. Many also took home all the equity/profits and didn’t keep retained earnings to cover cyclical shortages in cash flow. Then when cash flow suffered in, let’s say a recession for example, they weren’t prepared and they were crippled because all their cash flow is tied up in debt payments.

I guess my point is, a lot of biz owners got themselves into trouble by over-leveraging to buy things the business didn’t necessarily need. The justification for the leveraging was in many cases the tax write-off. All the theories about debt being a useful tool are good theories but in practice it doesn’t work as well. Just like everyone knows it’s bad to carry a balance on a credit card but so many people do it anyway.

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JT McGee July 28, 2011 at 14:08

Leverage increases risk in a vacuum. Your clients do not live in a vacuum. Leverage would allow them to remove assets from their business, which allows for more safety to their personal finances, but less to their business finances.

I tackled the same issue in regards to paying off a mortgage. In general, I don’t like parallels in corporate and personal finance, but this is appropriate here: http://moneymamba.com/pay-off-mortgage-or-invest/ Paying off a mortgage is not a risk-free return, and debt actually provides a much better, much more secure, outcome. In terms of risk management, we could basically say that paying the minimum on a mortgage while investing the remainder in BK-protected accounts is the equivalent of creating a synthetic CDS against ourselves for .2% per year, less than the current cost of insuring US Treasury debt, a product considered risk-free. You can say that’s all theoretical nonsense, but gravity is theoretical, and it still works, too.

I long for a solution to personal and corporate finance woes that uses logic. Unfortunately, we’ve accepted the position that illogical decisions put people in the hole they’re in, so an illogical decision is the necessary tool to getting out. Maybe if illogical decision put us in a hole, logic can get us back out.

P.S. The tax benefits of debt are not entirely limited to the loss from interest expense. The interest expense does play some role in making debt more attractive, though.

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Matt Wegner @ Financial Excellence July 28, 2011 at 14:25

Good discussion JT.

I think we’re looking at risk from two different angles. I own my house outright. Even though the house is worth less than I bought it for, if I still had a mortgage it would be worth less than I owe. So when I lost my job a few years ago, I’d have been stuck with a house payment that I couldn’t afford, and a house I couldn’t sell because I owed too much on it. That’s pretty risky to me.

Instead, when I lost my job, I had no debt so my cost of living was pretty low and I could rely on my emergency fund to last way longer than if I was still paying $750 a month on the mortgage.

Of course, to your point, I paid the opportunity cost of not investing that money and gaining the return. But I’m 36, have no debt and have a nice nest egg started. I don’t think it really cost me much since I’ll still meet my retirement goals at an early age.

I agree, logic would be great if people actually managed their finances based on logic. The problem is, most people manage their money based on emotion. That’s why we have our blogs to educate otherwise. Fortunately for both of us, we’re not going to run out of people needing help.

Btw, I’m not saying the theory is nonsense. I’m saying it’s hard to apply the theory correctly because nobody lives in, or works in a vacuum.

JT McGee August 19, 2011 at 11:35

Borrowed money doesn’t disappear. Had you not paid down your mortgage, you would still have the money, no?

Logic will eventually prevail. Eventually.

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Hunter July 28, 2011 at 13:33

I never actually read any of Dave’s books. I knew he was all about debt and since I have no debt that’s probably why I didn’t pay much attention to him. Anyways, thanks for the forewarning.

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JT McGee July 28, 2011 at 17:13

His books are great if you want a really bad way to do something really good. 😉

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krantcents July 28, 2011 at 16:55

I never listened to Dave Ramsey! I may be the only one. Does anybody call him on his advice based on the mistakes that led him to it? Don’t you need some creditability before people will listen to your advice?

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JT McGee July 28, 2011 at 17:17

His marketing has earned him plenty of credibility. As I understand it, he’s very much an institution in many Christian churches, which tends to lower the barriers to using his plan. “If it’s good enough for the church, then it’s good enough for me” seems like it would be a pretty convincing thought process. Not sure; I’m not his target audience.

Even still, I don’t think many are willing to call him out on it. The first time I had heard about why his real estate holdings went down was yesterday when I wiki’d him. That’s after reading plenty of articles about him and his methods.

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MRB August 4, 2011 at 10:55

Hey JT, great blog! Glad I found you.

One thing you seem to overlook is that Dave Ramsey offers, above all else, Financial Peace, emphasis on PEACE. The average person who does not live and breathe finance and investing will have a much less stressful life if they follow his ‘dump debt and save money’ plan. That is his appeal. His plan may not make you as rich as you could possibly be, it may not be sophisticated, but it makes many people HAPPIER than they were before. This is why Dave and his fans pay little attention to his many critics. It’s hard to argue with happy. It’s hard to argue with, ‘I was broke and now I’m not.’

As for his new book, no one disputes that Dave is an effective marketer and successful entrepreneur, so I remain curious to see what he has to say.

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JT McGee August 4, 2011 at 11:00

Yeah, I know he offers “financial peace.” I get that. What I also get is that “financial peace” is an abstract concept, one which may be obtained in more ways than one. For example: business debt is not personal debt, and therefore may provide more financial peace and security than an all-cash business. Rigid plans don’t work so well for abstract concepts, ideas, feelings, etc. But he sells rigid plans.

The problem, as I see it, is shaping a reality for people that does not exist. After reading this book, so many business owners are going to think poorly of commercial loan officers who don’t want to rip them off, but rather protect them. Debt is a powerful tool for business owners, but when you tell people that it’s evil, dangerous, and certain to lead to demise, people make poor decisions. It’s like telling people not to keep a knife in their kitchen because it could kill people. A knife can kill people, but it also makes preparing dinner a hell of a lot easier.

He’s definitely an effective marketer and successful entrepreneur, so it’s good his book focuses on this. I just wish, for the sake of education, that he’d leave out the topics related to business finance.

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Jared August 9, 2011 at 05:48

Wow……….just, wow…….this way of thinking of thinking is exactly what got us into this recession. Good luck to you all.

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JT McGee August 9, 2011 at 12:45

You’re right; this way of thinking did put us in a recession. Recessions happen because an economy is less productive, and underleveraging business assets is a great way to have an unproductive business climate. It’s all Dave’s fault.

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Kevin August 11, 2011 at 10:27

I would not want to work for any company whose leadership has attended EntreLeadership and who subscribes to Dave’s philosophies on running a business. In his podcasts, Dave has shared several of his tidbits of wisdom about running a company, and they include such absurd things as a “no gossip” policy (he will fire you if he catches you gossiping at work), and even requiring to meet your spouse before hiring you (“Don’t hire people with crazy spouses.”)

It’s absolutely ludicrous. I would never want to work in such an unforgiving (how ironic, for a Christian), draconian, iron-firsted work environment.

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JT McGee August 19, 2011 at 11:25

Meeting a spouse before hiring people isn’t necessarily out of the norm. It’s typical for companies where the person being hired is critical to business development and may spend countless hours at work past the 40 full time hours. Knowing that the spouse is in the game, too, meas that there won’t be any family problems.

I wouldn’t work for Dave Ramsey, either, but not because of these reasons. More importantly, I wouldn’t work there because he sells snake oil.

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Dale Suslick August 19, 2011 at 08:20

I Lost $1,000,000. Then used Dave’s ideas ADAPTED for our personal and business situation.

That worked for us to survive, stabilize and succeed.

My issue with FPU and EntreLeadership has been in the follow-up. Dave’s taught that your situation is your situation.

The trouble I see FPU -er’s and EntreLeadership Alum get into is a lack of follow-up, accountability and not enough systematic 2×4’s built into Dave’s training.

Use Dave’s system, use the “good debt” system or some other system that works for your situation.

That’s the critical piece. When you use a system that isn’t working for you is what gets you to make $1,000,000 mistakes.

And make sure the system has follow-up, accountability and enough systematic 2×4’s built in.

What’s 1 or 2 thoughts you think about that? 3 for you over achievers.

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JT McGee August 19, 2011 at 09:41

You’re the captain of your own ship. If you find that the best way to steer your ship is to drive with the anchor down, then by all means, do it. FPU and Entreleadership show you how to drive your personal and business finances with the anchor down.

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Sandy - yesiamcheap August 19, 2011 at 09:54

Can I speak as someone that had a very successful business that ultimately failed? As a small business, debt is not your friend. You might like it, but it doesn’t work when you are just starting out. Servicing that debt is more of a headache than anything else and takes you away from the most important part of your business – getting customers and selling your product. It doesn’t matter what business you’re in, those two will always be critical.

Where debt is a GOOD thing for businesses is when you expand, but you also have to be diligent and mindful to not take on more debt than you can service or than your business can sustain. If you go into business not knowing how to run your business and listen to someone who’s chief objective is to SELL YOU SOMETHING with cookie cutter ideas, I don’t know that anything will help you.

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JT McGee August 19, 2011 at 11:23

Great comment, Sandy.

I agree that customer financing is the best kind of financing, and ultimately any entrepreneur has to dedicate time to finding customers. I’m not sure managing your business finances does consume that much time, but it does take some, so we’ll accept it. Debt is a very important tool I use in my business because it’s a necessary step to funding projects before I see cash flow. For me, it’s a prerequisite to customers, and it provides me with a very concrete competitive advantage.

As for your second paragraph, I agree 100%. Dave Ramsey sells cookie-cutter ideas in FPU and Entreleadership, and if you’re foolish to buy it, run with it, and use it by the book, then you’re out of luck from the get-go.

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Richard Eddy October 27, 2011 at 15:39

I bookmarked this article a few months ago so that I would remember to read it. Just came across it as I was cleaning out my bookmarks and gave it a read. I mostly agree with the author’s point of view. Some of what Ramsey espouses isn’t exactly what I’d consider “best practices” for many businesses. Most of my successful business owner clients use (or have used) debt to finance their business operations. Those that did it right (structure!) are/were able to grow their businesses strategically.

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Cpizzel October 27, 2011 at 21:32

Well how does the Koch brothers do so well? Being debt free and all! I think they own a lot of company’s of products that range from fertilizer to paper towels? Wow you guys are ignorant. It’s faith based scripture duh! You the man that is named Jesus who manifest himself through his people! The way, the truth and life!!!

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JT McGee February 3, 2012 at 22:35

The Koch brothers likely aren’t debt-free through their subsidiaries. Also, finance and Jesus never really co-existed. Frankly, I don’t see where what Jesus said at X year AD to be important for a study that didn’t really come about until the early 1900s.

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101 Centavos February 12, 2012 at 09:27

If Koch companies have to take on some debt, likely that it doens’t stick around for very long. Case in point is the Georgia Pacific acquisition a few years back. 21 or 22 billion in cash and some assumed debt, which was paid off fairly quickly.

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Eric December 2, 2011 at 18:29

I don’t know much about the book nor do I know much about companies financial picture so I’m sure people will have much to write back to correct me. I do realize companies use debt (MANY), but you said: “Businesses do not run on cash, and the most profitable businesses are not debt free”

Isn’t Apple debt free? And aren’t they one of the most profitable? They are lately #1 or #2 with Exxon on market capitalization?

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JT McGee February 3, 2012 at 22:33

Apple is debt free and the most valuable company on the US exchanges. Regardless, that debt free position and $100 billion they have in cash is making the business less valuable. Remove the cash, let debt displace the working capital and you have a much more valuable business, and you have cash outside the business, a much better position.

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JC August 12, 2012 at 16:31

My hubby and I have used Dave Ramsey for personal debt reduction… when we started we were naive and didn’t understand… His program helped us get out of debt in 3 years… It gave us a focus. We have attended his business seminars and will continue to do so. His information is incredibly valuable and it is God given (not sure yours is… when all you can do is tear someone else down to get people to come to you)… His business information and the way it is delivered is non threatening and funny. Our real estate business has succeeded very well due in part to him. I understand you are just needing to bash someone… but maybe start looking at yourself to see what is wrong with yourself that you must attack others for security

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Rich August 29, 2012 at 22:22

I completely disagree with you. I think you’re missing the point and the good that Dave Ramsey has done.
You have to understand that what Dave does is a cookie cutter solution. It works but each person must plan out their own financial future apart from his plan. That’s why he encourages meeting with a financial planner. His plan WILL NOT give you the best ROI but it WILL give you financial peace and there is nothing wrong with that.

I’ll draw a parallel here.

I am a web developer. As a web developer on your site. I’d say that you can do a lot better than to run the Thesis theme powered on WordPress. In fact, I bet that you could make twice as much revenue on your site by improving your SEO, implementing a different design and using better call-to-actions on your affiliate links. I know, because I help people improve site revenue daily. However, if I were to give an answer to the masses on the best solution for a blogging site, I would recommend WordPress with a premium theme because it works and because my hope would be that as someone gains momentum, they will start looking for a web developer to personally take a look at their site and come up with a custom solution. I know it’s bulky, it doesn’t provide the best SEO, and there are security issues caused by theme developers but the fact is that everyone needs a place to start.

I don’t sit around knocking WordPress or premium theme developers. I know that they play a role in helping people get to the point where they can invest in people like me.

I would also ask; what companies have you started? How many millions have you made? How many people do you employ? Where are your credentials to knock a successful man who has helped many others become successful?

I am 26, debt-free and own a successful debt-free web services firm serving Fortune 10 companies. I would recommend Entreleadership to anyone.

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Bmac December 21, 2012 at 15:19

You are really dumb is all I have to say. I would invest heavily in a company that had Dave ramsey as the CFO. Did you know that Microsoft, Walgreens, Cisco Systems, Family Dollar Stores, Ross Stores, and Bed Bath & Beyond (just to name a few) are all debt-free publicly held companies? Please consider the following quote in a USA Today article about debt-free companies:
“What kills companies is debt,” says Peter Andrew, analyst at A.G. Edwards. “Without debt, companies have the financial wherewithal to survive.”

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JT McGee December 21, 2012 at 15:53

Actually, all of those companies with the exception of Bed Bath & Beyond have increased their long-term debt since 2008. I just looked that up for you.

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Michael September 26, 2013 at 13:50

I just heard that Chik Fil A just passed McDonald’s in highest sales per location for a restaurant. This puts Chik Fil A at #1 in sales per location…..they are debt free private company.

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Christy October 12, 2014 at 08:46

I have recently bought the Entreleadership book and am currently reading it. Now maybe his ideas are not for every business, I see some as ideal and the real world does not run on ideals, but things like everyone having the best interest of the company in mind seems to me a good idea. Treat your “employees” with value and they will do more for your company which in turn does more for everyones wallet. I am open to using his methods to make my business succeed, because no matter how full of BS you think he is, he has taken the financial ride and won!

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