The Invest Local Book Blog.: July 2015

Thursday, July 30, 2015

[VIDEO STORY] Mini Storage Mess! I tell the story about a mini-storage deal gone bad (but the risk was controlled)

Have you ever wanted to own a mini-storage warehouse business? I have. All the pleasures of collecting rent with none of the hassles of toilets and other inconveniences.

Check out this story of the time I tried to build one with some partners. It ended in a loss!

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Monday, July 27, 2015

[VIEWER QUESTION] Brian's question: Should I buy a fixer upper for my Realtor to flip?

The worst case scenario that I can see is that Brian could end up owning a half-renovated house with mechanics liens on it.

Because I'm not a house flipping expert, I got Darlene Smith on the line from www.masterycoachingwithdarlene.com to see what she had to say. Watch the video.

The Invest Local Book blog is all about small business, franchises, local investing, home economics, small business systems and borrowing money for your business. It's full of great content and I look forward to seeing your feedback. Sign up for my mailing list and don't miss a thing! [CLICK NOW]

Wednesday, July 22, 2015

[AUDIO] Listen to a great interview I did about local investing and my new course.

I appeared recently on the Financial Survival Network with Kerry Lutz and did an interview about local investing and my new course, 'How to do Small Local Investing Deals from A-Z'

Check out the interview [CLICK]

Or buy the book' Invest Local. Only $10

Monday, July 20, 2015

[VIEWER QUESTION] Are Business Brokers Valuations Reliable?

I made a short video to answer Phil's question; Are Business Brokers Valuations Reliable?

Phil asks, ‘Can we trust the valuation that a business broker puts on a business?’

When I was a business broker, people would come to me with their businesses and I would evaluate them. I would do what was called a Most Probable Selling Price evaluation. I'm pretty good at it and I still do them today for people who want to have a value put on a business. Generally my MPSP prices would come out within five or 10% of what the actual end result selling price would be, so they were pretty accurate.

Back to Phil’s question; If the business broker is qualified and competent, knows what he is doing, has experienced proper training and you hire the broker to evaluate a business, then probably you're going to get a pretty good accurate idea of what the business is worth.

If you go to a business broker and say, ‘Show me businesses for sale and what are the asking prices?’ That’s not the same question at all.

In my own experience, I would do an MPSP and then the seller would set their own asking price.

Now if I told someone that their business was worth $220,000 and they said they wanted to ask $500,000, I wouldn't take them on as a client. I would tell them to try somebody else because if it's just so far out of whack to what is reasonable, it is just going to be a waste of the broker’s time.

Nobody is going to seriously consider that business because it is priced so far outside the realm of reason, but if I said ‘the business is worth $220,000’ and the sellers said ‘let’s asked $249,000’ and I’ll have room to negotiate, then that was perfectly reasonable.

You have to know that when you're looking at businesses that priced for sale with a broker, those are asking prices, they are not the result of some kind of business valuation.

Beware though, there are people out there that call themselves business brokers who will basically take any listing that is offered to them at whatever price the seller wants to ask for.

They’ll put it out there in the world and hope to sell it. What’s unfortunate is that people end up wasting a lot of time with these types of people because ultimately an overpriced business can’t create a positive cash flow and nobody would be able to buy it.

If you’re going to buy a business or you’re going to sell a business and you want to find an experienced, qualified business broker who has proper training and who uses proper methodologies, one of the things to look for is membership in the IBBA (International Business Broker Association) or one of the larger business brokerage franchise names.

They have their own training programs internally that are also very good. You want to look for someone who's a part of those organizations, who has had access to training and you want to talk with them a little bit about how they do the evaluation. You want to hear that they compare businesses by industry and size to other similar businesses that have already been sold.

This is called the direct market data method.

Don’t try to hire a business broker to do an evaluation on a business he has for sale, it creates a conflict and he’ll probably just ask you to make your best offer and work things out in a negotiation.

Thursday, July 16, 2015

[BIO VIDEO] My Yellow Pages Years. I tell the story of my first real 'career'

My first 'real job' out of university was with the Yellow Pages. I still use some of what I learned today.

Monday, July 13, 2015

[GUEST POST] The 7 reasons small businesses fail

I asked Rick Nicholson of TheRestaurantNinjas.com to create a guest post for my site. The results? Another fantastic article.. Thanks Rick

We know from statistics that 80% of businesses fail in the first five years of operations. After 10 years of running my own businesses and working directly with other entrepreneurs, I have discovered a pattern to failure.

Here are my seven reasons why businesses fail and what the entrepreneur can do to avoid them.

1. Failing to plan equals planning to fail

Extraordinary events like fire, flood or any other insurable claim can devastate a business which does carry ample insurance. Planning for disaster is not a fun exercise but it's necessary to plan for it just in case it happens. Insurance should include lost of profits, key employee wages and possibly management salary. Anything that could hurt the business as it rebuilds needs to be accounted for.

Some businesses are heavily reliant on staff. It is imperative to plan for problems with staff, customers, landlords. Is there a backup plan if an employee calls in sick? What happens if a customer has a bad experience and complains online? Is there a legal lease agreement with the landlord that was reviewed by a lawyer? Lawyers are expensive by an unscrupulous landlord can take advantage of a poorly written lease contract to seize the leased premises for a more profitable tenant.

2. Lack of adequate capital

Getting into business the first time, is an exciting and scary time. Most new entrepreneurs leverage their homes, their savings, and their future earnings to invest in their new adventure, not leaving enough cash to help through the first two years of operations. As the business is building, too often there is little to no cash on hand to support day-to-day operations. If there isn't enough extra cash, the landlord could seize the space, the suppliers could cease deliveries, the customers could stop buying due to lack of inventory. All because there wasn't enough upfront capital.

3. Lack of mentor

Many new business owners get into business in an industry they are familiar with. Michael Gerber calls this the "Fatal Assumption" in his book, E-Myth Revisited. "Knowing the technical work of a business is the same thing as owning a business that does technical work". Unfortunately, in most cases, the new entrepreneur may be fantastic as a technician but doesn't know what she is doing as a business owner, and fails. Having a mentor to help guide the new entrepreneur through tough decisions is critical for anyone wanting to get into business.

4. Lack of business systems

McDonald's is the greatest business in the world run by 16 year olds. Systems make the business simple so kids can work there and still deliver the same level of consistency expected by its clientele. Backyard barbecuers make a better burger than McDonald's, but not nearly as consistent. Every business needs systems to do the same for its clientele. Receiving a remarkable burger followed by an average one on a second visit is worse than receiving an average burger all the time. The real objective in systemization is to offer something remarkable every time.

5. Personal issues cross the lines and affect business.

Some entrepreneurs take their business personally. It makes sense as they pour blood, sweat and tears into their dream company. The lines between a personal life and business life get blurred. Whatever happens away from work is brought to the office. These actions have an effect on the employees, the customers and ultimately the business. Some personal issues can include death or sickness of loved one, personal struggles with spouse and or children. The entrepreneur must learn to separate work from home. It's difficult to leave work at work when things aren't going well there, just like it's not easy to leave home at home when things go badly there. Mainly because many entrepreneurs live their lives through their work. The people they interact with most are employees. It's in the best interest of all involved to separate "Church from State" when dealing with these issues. The business depends on it.

6. Complacency

Too many entrepreneurs focus on the competition. Competition does not kill another business. It puts it out of its misery. Engaged entrepreneurs are motivated by increased competition. It helps attract more clients to the area and it ultimately grows the overall demand for the product. It's not competition that kills a business. It's complacency. Complacency attracts competitors who want to do a better job than the incumbent. Complacency drives customers to the competitor. Complacency creates employee turnover, pisses off customers, attracts competition and drives down profitability.

7. Lack of focus

An entrepreneur has to have laser focus. She needs to have clear, concise, SMART goals for the week, month, and year. SMART is an acronym for Specific, Measurable, Achievable, Realistic and Timeliness. With focus, the entrepreneur navigates the business through rough waters like a ship's captain, keeping the destination in mind. Without focus, the entrepreneur stumbles, riding the entrepreneurial wave like a surfer not knowing where they'll end up, just hoping they have enough skill to ride the wave long enough not to end up crashing into the rocks.

With a background in finance and marketing, Rick Nicholson owned two highly successful restaurants before selling them to start a consulting business. His current company The Restaurant Ninjas provides tools to the foodservice industry to become more profitable. His book, "The Art of Restaurant Theft" can be downloaded for free at www.therestaurantninjas.com

You can subscribe to Rick's weekly email and his thoughts on business, life and everything in between at:

http://forms.aweber.com/form/05/1667819805.htm

Friday, July 10, 2015

[VIEWER QUESTION] Peter's question: How can I trust the information given by a business seller?

This week I answer Peter's question. How can I trust the information given by a business seller? Take a look.

If you're considering buying a business, you should sign up for my new online course; Business Buyer Advantage. Save $100 during the pre-sale period. Only $79.

Pre-order Business Buyer Advantage for $79. Save $100!

I’m back today with another viewer question. Peter asks, ‘When buying a business, how do I trust the information that’s provided from the seller?’ It’s a great question. I love the quote from Ronald Regan—Trust, then verify.

The first and best way to verify information is via third party sources. For example if you know that in the restaurant trade that about 50% of sales are in the form of cash and 50% are in the form of credit and debit cards, then you can check the credit and debit card terminal statements and if it equals about half the sales being represented in the financials then you know that the cash sales are probably being represented fairly.

Another example would be if you were going to buy a bar in a province or state where all liquor has to be purchased from a state owned agency. You can get records directly from them that will show what the purchases to the business have been over the course of the year. If you know the average margin on the alcohol then you can work out what the sale should be and compared that to what’s being represented in the financial statements.

When I was a business broker, I was always very clear with buyers that financial statements are nothing more than ink on paper. Just a few days ago, in fact, I was actually working on a business evaluation and the property taxes went down every year over three years. I thought that was kind of interesting, so I asked the business owner about it. He explained that they paid the taxes monthly and that the bill hadn’t gone down, they’d just been falling further and further behind.

In this case what was being report in the financial statements was not the actual property tax, but the amount that they had paid towards a property tax. That's not the correct way to do it at all.

The full amount of each year’s bill should have appeared on the income statement and any unpaid amounts should have been on the balance sheet as an outstanding liability.

One of the things you can look at when you're doing an investigation into a business is look at what kind of financial statements that you're being provided with. Accountants prepare three different kinds of financial statements.

1. Notice to Reader: This means that the accountant has taken the information provided by the business owner and formatted it so that it looks like a set of financial statements. That’s it literally.

2. Review Engagement: Tthe accountant does some minor review of the information to make sure that it makes sense and if something is obviously weird or out of place, the accountant might

3. Audited: The accountant would actually come in and do an investigation, look at numbers, etc.

Notice to reader statements might cost somebody $1,200 or $1,500 to do. A review engagement might be $5,000, and the audited could be $20,000. It’s very rare to find a small business with audited financial statements.

Audited statements are typically reserved for bigger entities or for some not-for-profit & public entities who probably has some pretty simple financial. You’re not going to get an accountant to put an auditor’s opinion on a small business like a restaurant or convenience store without some very thorough investigation of what’s going on in the business. It’s simply too risky to their professional reputation to be careless.

If we can’t have full confidence in what the sellers giving to us for information, what we have to do is work within the bounds of knowing that the information may not be correct. The way that we protect ourselves in this situation is through the structure of the deal.

What that means is a vendor take back note or vendor financing of some portion of the purchase. Let’s take for example a business that the buyer and seller have agreed is worth $100,000.

Let’s say it’s a small restaurant or corner store and the value of the assets within the business is $60,000. This represents the inventory, the equipment, etc. The things that we can actually put our hand on or what we call ‘tangible assets.’ This means the other $40,000 would be considered ‘goodwill.’

On the other side of the equation we have our source of funds and it also has to add up to $100,000. You go to the bank and the bank is willing to lend you 75% of the tangible asset value of $60,000, that means a loan of $45,000.

Next, you’re going to put in some money of your own. Let's say that you’re going to put in another $30,000, which brings us up to $75,000.

The offer that you make to the seller is on closing day I will provide you with $75,000, but I want you to finance $25,000. We call this the vendor note. It is also called the vendor take back or the seller financing.

At the closing table when you buy this business, there are going to be several contracts all made up. There is going to be, perhaps, a non-compete agreement, a bill of sale for the tangible assets and the good will, assignments of leases for equipment or an assignment for a lease of the premises.

One of those documents is actually going to be the note. That debt instrument representing the vendor financing, also called a promissory note. It’s going to say, ‘I, Mr. buyer owe you, Mr. seller $25,000 and I’ll make payments of $XX each month inclusive of XX% interest over XX years, etc.’

You need to be sure that this note contains a clause saying ‘subject to offset in the case of material misrepresentation or undiscovered leans.’ What that means is that if it turns out after you bought the business that the seller had been lying to you about information then you can say to him, ‘you misrepresented yourself.’

‘There is a material misrepresentation of the facts. I'm not going to pay you.’

You’re already in the possession of the business. If you stop the payments he has to:

1. Go find a lawyer, if he wants to fight you

2. Pay the lawyer a retainer

3. Take you to court and prove that he gave you the proper information so you owe him the money.

If you didn't have the vendor financing and you bought the business and you paid the full $100,000 in cash. What would happen when you discovered the misrepresentation is:

1. You would have to hire a lawyer

2. Pay the lawyer a retainer

3. Find the seller

4. Take him to court

5. Hope that he hadn’t spent all the money

6. Get a judgment en

7. Have the problem of trying to collect

So what we are doing with the vendor financing strategy is we move the responsibility and the risks associated with lying from the buyer and move it to the seller.

Now the seller e has an incentive to make sure that he gives you the proper information and that he doesn't lie to you. He needs you to be successful in the business in order to collect that outstanding vendor financing.

If you make a proposal like this to someone and they flat-out refuse to do any vendor financing it can mean one of a couple of different things.

1. It can mean that he knows he's lying or misrepresenting something, so he's not willing to take the risk of not being paid that portion of the money –or-

2. He doesn't think you have the ability to run the business. If he doesn’t think you can run the business, he knows he is going to have trouble collecting that money because you won't have the profits to be able to pay him.

Both of those reasons are an excellent, excellent reason not to proceed with the purchase.

If you want to learn more about how to buy and sell businesses you should be visiting my blog site, www.InvestLocalBook.com , but you should also be signing up for my online course Business Buyer Advantage. http://gumroad.com/l/czUIi

To be sure and not miss out on any of my informative articles and videos about local investing, small business and buying and selling businesses, sign up for my e-mail list at http://eepurl.com/brqqjb

Friday, July 3, 2015

[VIEWER QUESTION] How do I find investors to give me $$Millions to buy and manage a Florida apartment building?

I answer a question from Bill about how to find private investors to help him buy a Florida apartment building...

As you know, I recently asked people, ‘If you were sitting down for a cup of coffee with me and could ask just one question, what would be?’ I'm going to tell you, I was totally blown away that the kinds of questions that I’ve gotten. I would never in a million years have dreamed them up myself. Thank you for everyone who has submitted one and don't be afraid if you didn't to send one in.

I'm going to answer one of the wackier ones and answer it for us here today. Bill asks, ‘How do I find and convince investors to invest between 1.5 and $2 million on a large rental complex such as 150 units in Florida with up to $1 million in renovations and have me manage it?’

I spent the last couple of days thinking about this. I'm going to take a stab at it and just so that we’re absolutely clear, I have never done this before. I have, however, pooled investors together before for a mini-storage project. So I am going to draw a lot on those experiences that I had in that project and try to figure out a way that we can do this deal.

Let’s assume that this project, including renovations, is going to be a $5 million dollar deal. The very first thing we have to do is figure out what kind of leverage are we going to be able to apply here. Leverage is borrowing, borrowed money is cheaper money usually than equity, because investors want a big return on their money.

People don't want to take a risk to get 3% back, but a bank with a security interest against the building they might be very happy with 3%. If you’re going to put a whole lot of investors together there probably are not going to be any particular investors that are going to be willing to stick their neck out and be liable on the mortgage. You probably don't want that either.

So our question about leverage is going to have to be something like this; You’re going to have to call banks that service that area of Florida and you’re going to have to say ‘Hello, this is Bill. I represent a group of investors from Canada and we want to buy a $5 million building down there. We’re wondering what sort of loan-to-value you are willing to consider with no personal guarantees strictly the lien on the property.’

Now, I asked that question of a banker that I know here in Canada before, and without batting an eye he said 50%. So as long as they know the building is worth $ million, let's assume that a bank that operates in Florida is going to be willing to lend $2.5 million on that.

We’re halfway there, okay. Now where is the other $2.5 million going to come from? This is going to have to come from investors. This is going to have to be equity. So how are we going to structure this?

Different people are going to be in different situations, your investors may have different tax rates, tax brackets, etc. different earnings from other sources.

Because the investors have such different interests with respect to taxation and income, the limited partnership is a great tool to use.

The features of a limited partnership is that one partner has unlimited liability and then the limited partners, they’re protected just like being shareholders in a corporation. They’re limited, they’re liabilities is limited to the money that they put in.

So let's call this building limited partnership Bill LP. Let's assume that you're here where I am in New Brunswick. So it is going to be New Brunswick limited partnership.

Within Bill’s limited partnership we have to have a general partner. Bill may probably say it should be him, but it shouldn’t. The general partner, the one who faces liability, don't forget it can be any legal person. So what we want to use is a corporation.

Bill will want to create a management company or a investment management company and we are going to call that Bill Co Inc. Bill Co Inc is going to be our general partner and that then leaves room for the limited partners.

The limited partners are going to be the one’s supplying the money and having them be limited partners is great because of the features it provides to them. Number one, if they put in 10 grand and Bill messes things up and the bank wants to sue you down in Florida and tax people are after you or whatever, they can’t be pursued.

They were limited to the money they put in. Number two, in a partnership, earnings flow through. Partnerships don't actually pay any tax. Every individual partner in the partnership has to declare their own tax form for their percentage of the partnership.

So if somebody owned 10% of this whole partnership arrangement and there was $100,000 in cash flow for one year, they would actually declare $10,000 of that cash flow on their own tax return. What's nice about this is that if there are people like retired folks who have very low incomes, they might personally want to be limited partners because they have a lower income tax bracket themselves.

On the other hand, big wheel multimillionaire investor types, they’re going to have family trusts or corporations or something set up to do their investing for tax reasons. They're going to make those entities be the limited partners for their interests.

Basically what you're saying is, ‘give me your money, here's what I think I'm going to do for a cash flow for you and you get to manage your tax consequences to your best advantage with your own advisors in the best way that you can.’

Next what you typically have is a partnership agreement, which outlines the details of how the limited partners are going to interact with the general partner, Bill Co Inc.

So your agreement is going to say that Bill Co Inc. is going to manage the property and the limited partners are going to supply the capital. Bill might want to determine an equity split here. Bill is taking the time to put this whole thing together, dealing with the bank, etc.

Bill will be running all over the countryside talking to investors. So Bill should get something out of this, right? Maybe he decides that he’s going to own 20% of the building and that's going to be his fee for putting all this stuff together. We can now say that the general partner owns 20% of the equity, and the limited partners own 80%.

Bill can sell the limited partnership portions as ‘units’ of $1,000 or $10,000, whatever he thinks will work best for him.

Next the property will have to be identified and put under contract. There needs to be enough time for Bill to gather his investors together and show them his figures for this property.

There are a lot of moving parts to a deal like this… the building, the investors, the paperwork. Bill will have to put together a document outlining all this information and the projected cash flows and appreciation in order to convince his investors.

Limited partnership interest is considered personal property which means that a person who owns one of these units can give it to their heirs, they can sell it, they can treat it just like you would a couch. Some people are going to ask, ‘How do I get my money back?’ If you tell them, ‘You’re never going to get your money back. It's going to cash flow forever, and you’re going to give it to your kids’, some people may not like that.

So what most of the limited partnerships in the world of equipment leasing or in the private mortgage community do is that they actually have a time horizon for the investment.

What they say is ‘we’re going to amortize the bank loan over 20 years. Let's say you put up your 10,000 or $1000 today and in 20 years when that loan is finally paid off the building will go up for sale and we will sell it and divide out the money according to the equity.’

20% goes Bill Co. (as the general partner) and the rest is divided up amongst the limited partners based on their ownership percentage just like the profit every year from this thing is divided up amongst the partners.

That way if you go to someone who's 30 years old for example, they’re going to know that when they’re 50, if everything works well that this whole thing will come back. They’ll get a whole pile of money back out of this deal.

Anyway, great question Bill and I’ve got to tell you in this list there is a bunch more just like it. So stay tuned everyone there’s more to come.

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