***New Video Alert!
I’ve met hundreds of successful business owners over the years, and we sometimes talk about their investments.
This week, I show you where they invest their money and why.
Also- why the personal finance advice you get online likely would be very bad advice for you if you own a business or intend to buy one.
You’ll see in today’s video: https://youtu.be/GlqCelWVNb0
Cheers
See you over on YouTube
David C Barnett
Financial Planning for Biz Owners
New Livestream guest-> Jennifer R. Lee Author, Founder of Modern-Wealth
I’m happy to have Jennifer R. Lee join me on a live broadcast.
Jennifer R. Lee is a Florida Financial Planner.
She works mainly with women going through divorce who are or are leaving entrepreneurs.
We’ll be discussing all things financial planning, how she addresses this very specific client group and the particular concerns you might have if you’re doing well in business and may be planning or afraid of a divorce!!
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here: https://youtube.com/live/guYBRNP0Gf4
We’ll be going live Monday October 28, 2024 at 12 Noon Eastern Time and 1PM Atlantic Time.
See you there!
David C Barnett
I share a story about my attempt to develop a mini-storage facility that reveals critical insights into the complexities of real estate development, particularly regarding zoning regulations and municipal oversight. https://www.youtube.com/watch?v=9wrVubshfiY
Background and Opportunity About six years ago, I was approached with an intriguing opportunity: a piece of industrial-zoned land in Riverview, New Brunswick, that was in short supply in a growing community. The zoning bylaws permitted mini-storage as a viable use for the property. Wanting to mitigate financial risk, I assembled a group of nine investors, forming a corporation and collectively investing in the land. They raised a total of $40,000, enough to purchase the land outright, which eliminated the burden of debt and mortgage payments.
Planning and Building After securing the land, my team worked with a builder experienced in commercial construction. The builder proposed a plan for a steel storage building that would yield an attractive 18% return on investment, financing the project with a 60% loan-to-value mortgage from a credit union, contingent on each shareholder signing a $5,000 personal guarantee. However, this arrangement allowed for individual liability without joint responsibility for the total loan amount.
The Twist: After the builder secured the steel structure at a favorable price, they went to city hall to obtain the necessary building permit. To their surprise, the local planning department stated that, despite the zoning allowance, any construction on industrial land required approval from the Planning Commission. This regulation was part of a broader industrial development plan that had not been disclosed during their initial inquiries.
Municipal Requirements At the Planning Commission meeting, my team and I faced a slew of additional requirements, including:
Installing a privacy fence
Paving the surrounding area
Adding curbs to the driveway
Planting trees and shrubs in the front yard
These unexpected mandates would increase the project's costs by approximately $60,000, reducing the projected return on investment from 18% to a mere 4%, which was lower than the interest rate for the loan. The partners decided against moving forward, feeling that the bank would profit more than they would from the project.
Lessons Learned The team listed the land for sale and decided to compensate the builder for his efforts, though they had no obligation to do so since they lacked a building permit. Fortunately, because they had purchased the land outright, they could hold onto it without financial strain while waiting for a buyer.
Eventually, after a year and a half, the land was sold, and they were able to distribute a return of 83 cents on the dollar to their investors. Barnett emphasized the importance of being aware of municipal regulations and the unpredictable nature of local government, which can dramatically impact real estate development.
Research Zoning and Regulations Thoroughly: Always verify local regulations and potential requirements beyond what is initially presented.
Partnership with Municipal Officials: Real estate developers are essentially in partnership with local government officials, whose decisions can significantly influence project feasibility.
Equity over Debt: In this case, an all-equity deal proved advantageous, allowing the investors to wait out market fluctuations without the pressure of mortgage payments.
Contingency Planning: Always prepare for the unexpected and understand that plans can change due to factors beyond your control, including bureaucratic processes.
Respect for Industry Professionals: Barnett expressed admiration for successful real estate developers, acknowledging the complexities and risks inherent in the business.
This story serves as a cautionary tale for aspiring real estate investors and developers, highlighting the importance of thorough research, adaptability, and respect for the regulatory environment in which they operate.
Make sure to subscribe to our email list so you never miss a new video, and explore our other resources like courses and books to help you grow and transition your business seamlessly. https://www.DavidCBarnettList.com
***New Video Alert!
Yes, you can buy a business quickly.
In this week’s episode, I dive into a case study of someone who did just that and add my commentary about the lessons learned.
Buckle up for this ride: https://youtu.be/uN8pZ5cCcic
Cheers
See you over on YouTube
David C Barnett
Build an Operations Manager
New Livestream guest-> Mani Ellefson, the Hands-off CEO Leader, podcast host and author.
I’m happy to have Mandi join me on a live broadcast.
She’s built a business out of helping entrepreneurs get out of the day to day of operations and truly be free to work ‘on’ their businesses.
She hosts a podcast on the topic and is the author of The Hands-Off CEO which is a great book.
Tune in and as we’ll be discussing how to develop or hire an operations manager in your business.
This is a ‘must see event’ for anyone who doesn’t want to be doing this job themselves 50 hours a day forever while they’re in business.
Be sure to join live so that you can ask questions, replay will be available.
Set yourself a reminder on YouTube here: https://youtube.com/live/LxAp_KsUW68
We’ll be going live Monday October 21, 2024 at 12 Noon Eastern Time and 1 PM Atlantic Time.
See you there!
David C Barnett
My experience as a real estate investor offers valuable lessons for anyone looking to get into property investing. My story began in 2004, influenced by books like Rich Dad's Cashflow Quadrants, which sparked my interest in leveraging assets. At that time, I was making over $100,000 a year working for Yellow Pages, and I decided to use his success to invest in real estate, preparing to eventually leave his job.
By 2004, I paid off the mortgage on my home and leveraged a home equity line of credit to buy two triplexes. Over the years, I expanded his portfolio, purchasing more properties, learning the ins and outs of being a landlord, and dealing with tenant management, maintenance, and unexpected costs. One of my earliest mistakes, which I call “buyer fever,” involved underestimating the true operating expenses of one building because he hadn’t considered the higher electricity rates for common areas and hot water, which drastically reduced the cash flow.
As a landlord, I initially made the mistake of subsidizing my real estate business with my own labor, performing maintenance and property management tasks myself, which consumed valuable time. Eventually, after the birth of my children, I outsourced this work to property managers. This gave me a clearer understanding of the true profitability of my properties, revealing that the actual cash flow was not as lucrative as it seemed once all expenses were properly accounted for.
By 2009, I began selling my buildings, driven by rising property values and lower interest rates. However, I learned a harsh lesson about liquidity risk when selling one property and I believed I had $50,000 in equity, only to walk away with around $31,000 after accounting for realtor fees, legal costs, and mortgage penalties.
I eventually exited real estate completely by 2011, realizing that the modest cash flow wasn’t worth the financial and personal risk involved. The highly leveraged investments, combined with low cash returns, made real estate less appealing. This experience pushed me toward smaller business investments and loans, which I found to be more profitable and manageable, with fewer hassles and better returns.
Looking forward, I believe that real estate could become attractive again when interest rates rise, property values drop, and better equity positions can be established. My advice is that in any future real estate ventures, I would aim for a much stronger equity position—putting down 50% or more—and ensuring proper management systems are in place from the start.
My journey highlights key points:
Understand all expenses thoroughly before investing, including utility costs and property management fees.
Avoid subsidizing cash flow with personal labor—outsource and get a clear picture of the true profitability of a property.
Be mindful of liquidity risk when selling properties, as equity can quickly diminish through various fees.
Leverage is powerful, but it’s important to calculate risk versus reward, especially when returns are minimal.
This six-year experience taught me that while real estate can be profitable, it’s critical to enter with a strong equity position and a clear understanding of cash flow, liquidity, and time investment.
Make sure to subscribe to our email list so you never miss a new video, and explore our other resources like courses and books to help you grow and transition your business seamlessly. https://www.DavidCBarnettList.com
***New Video Alert!
What if a rich person just offered to buy you a business?
What would you ask about to make sure the deal was likely to complete?
I’ll walk you through it in this week’s video: https://youtu.be/WX3MXtOF8RY
Cheers
See you over on YouTube
David C Barnett
This is a common question I receive, especially from people in the U.S. where there are options to use 401(k) savings for financing a business acquisition. While it may seem like a great way to avoid borrowing from a bank or paying high-interest rates, the risks are significant, and it’s essential to understand the implications. https://youtu.be/37t2lK1lZ_w
In the U.S., there's a legal structure known as Rollovers as Business Startups (ROBS), where you can use your 401(k) savings to invest in a new business. Here's how it works:
You set up a new entity to buy the business.
Your new entity starts its own 401(k) plan.
You transfer your existing 401(k) funds into the new company's plan.
As the new company’s controller, you can direct the 401(k) to invest in the business.
While it sounds simple, it's legally complex, and there are companies that specialize in managing this process to ensure you comply with tax laws. However, failure to meet all legal and tax obligations could result in penalties, such as having the transferred retirement funds treated as taxable income.
When clients ask if they should use their 401(k) to buy a business, I ask them a critical question: If the business fails, do you still plan to retire? This money is meant for your retirement, and the failure rate of small businesses is high. Using these funds could jeopardize your financial future, not just your present situation.
Many people are drawn to this idea because they think that by avoiding interest payments to a bank, they’ll save money. However, you should hold yourself to the same standards a bank would when lending money.
If you use retirement funds, you must ensure that the business is producing a rate of return similar to what the bank would expect for such a loan. This means you should be disciplined enough to repay your retirement account with interest, as you would with any other loan. The issue is, most people aren't as strict with themselves as a bank would be.
One scenario where I can see using retirement funds making more sense is if you lend the money from your retirement account as if you were the bank. For example:
Let’s say you’re buying a small business and need a loan for a vehicle. Instead of borrowing from the bank at an 8% interest rate, your retirement account could lend the money to the small business, secured by that vehicle.
If the small business fails, your retirement account, holding a secured lien, can repossess the vehicle and recoup its investment. This way, you treat your retirement fund the same way a bank would, ensuring it’s protected.
I have no idea how to set this up, you’d have to get tax and legal advice.
Your decision ultimately depends on your Best Alternative to a Negotiated Agreement (BATNA). If you have other opportunities—like employment or alternative investments—you should weigh those before risking your retirement savings. In cases where you have no other options, using retirement funds might feel necessary, but I caution against it unless you're sure you can protect that investment as a bank would.
At the end of the day, your retirement funds are meant to ensure a comfortable future. Using them for a small business acquisition puts that future at risk. Unless you're confident in securing those funds properly, it’s often wiser to leave them untouched and explore other financing options for the small business.
If you’re interested in exploring small business buying, selling, sign up to my email list https://www.DavidCBarnettList.com to keep you updated whenever we post new videos and content.
***New Video Alert!
Where are you spending your time watching for hazards to your business?
Maybe pencil some time in your calendar for these areas people sometimes miss.
Especially important for those not active day to day in their businesses!!!
I’ll walk you through it in this week’s video: https://youtu.be/tLGr5rCWfkY
Cheers
See you over on YouTube
David C Barnett
Today, I’m addressing a great question from Jesse, who’s concerned about buying a business right before a possible recession. Here’s how you can approach this situation with caution:
Recession Sensitivity: Different industries react differently to economic downturns. For example, luxury goods and travel-related businesses often suffer more during recessions than essential services like healthcare or basic consumer goods. Evaluate the industry of the business you're considering. Are its customers likely to cut back on spending during a recession?
Local Economy: Consider the economic health of the area where the business operates. If major employers in the area are vulnerable to a recession, the local economy might decline, affecting local businesses.
Variable vs. Fixed Costs: Businesses with high fixed costs (e.g., rent, salaries) are more vulnerable to revenue declines. Look for businesses with more variable expenses that can scale down with reduced revenues. This flexibility can help the business weather economic downturns better.
Cost Management: Review how the business manages its costs. Can it adjust its expense structure if revenues drop?
Financial Monitoring: Ensure the business has strong reporting systems to track financial performance in real time. Good reporting helps identify problems early, so you can act before issues become severe.
Data Accuracy: Verify that the financial data you’re reviewing is accurate and up-to-date. Strong reporting systems should reflect real-time performance and trends.
Financing Structure: If possible, negotiate favorable terms with the seller, especially regarding financing. Seller financing can be flexible and might include terms that help you manage downturns, such as interest-only payments during slower periods.
Flexibility in Terms: Discuss terms that allow for adjustments based on business performance. For instance, you might negotiate terms that adjust based on future sales or performance metrics.
Motivation Check: Find out why the seller is selling. If they’re motivated by personal issues rather than economic conditions, they might be more open to negotiation and seller financing.
Seller Insight: A seller who’s transparent about their reasons for selling and willing to assist with the transition can be a good sign. Conversely, if they’re insistent on a high price with no flexibility, they might be trying to offload a problematic business.
Trust and Communication: Developing a good rapport with the seller can provide valuable insights into the business’s true condition and the seller’s motivations. A cooperative seller can also offer support and advice post-sale.
Negotiation Stance: Approach negotiations with a mindset of collaboration rather than confrontation. This can lead to better terms and a smoother transition.
A potential recession doesn’t necessarily mean you should avoid buying a business, but it does require more careful consideration and due diligence. By evaluating the industry’s sensitivity to economic changes, understanding the business’s expense structure, and negotiating favorable terms, you can better position yourself to make a sound investment.
There is an entire module in Business Buyer Advantage: Online Training all about structuring purchase deals in a recessionary environment. Learn more at https://www.BusinessBuyerAdvantage.com
If you haven’t already, sign up for my email list at https://www.DavidCBarnettList.com
