When the City Rezones Your Business Out from Under You

 …And why the real problem wasn’t the zoning.

Today, I want to share a horrifying story that starts with a sneaky zoning change… but ends with a hard truth about business ownership that way too many entrepreneurs ignore. https://youtu.be/lwORvoJ_xeY 

The Zoning Nightmare

I got a call from a guy who owns a small manufacturing business. He’s been at the same location for over 30 years. Back then? His shop was in the country.
Today? Residential neighborhoods have grown all around him.

One day, he finds out the city quietly changed the zoning on his property—from industrial to residential—without ever notifying him.

Now that he needs a mortgage to unlock capital from his building, the bank refuses. Why? Because if anything happens—like he sells or the bank forecloses—the property can’t legally be used for industrial purposes anymore.

He’s furious. He calls me to vent.

But Then the Questions Start…

As always, I ask:

“Why do you need the loan?”
To buy inventory in bulk and improve margins.

“What were your sales last year?”
“I don’t know.”

“How much do you take out of the business?”
“Well, I will reinvest everything.”

🚩Red flags everywhere.

Let me be blunt: Business owners who don’t know their numbers are usually avoiding them. And in my experience, that avoidance is almost always masking a bigger issue.

The Sad Truth Unfolds

I dig deeper. His business sells only to governments.
Every job is awarded by tender. It’s always about being the lowest bidder.

He’s trapped in a race to the bottom.
And he thinks he’s “building his business” by leaving all the money in… except the business now can’t afford to pay him, and it’s not worth anything to anyone else either.

When I asked what made the business valuable, his answer?

“I own the building.”

Guess what? That building just lost its core utility. And no, it's not valuable if it can’t legally support the use it was built for.

The Real Problem Wasn’t the City…

It’s not about zoning.
It’s about running a business that can’t pay its owner.

And here’s the brutal truth I gave him:

“They actually did you a favor. If your business made real money, you’d move it or sell the land. But you can’t—because the business doesn’t work.”

He thought he was building wealth.
In reality, he’d created a job that didn’t pay, while the city and taxpayers got cheap products on his dime.

Lesson: Know What You’re Building

A business is not a piggy bank.
It's not a retirement plan.
It's not a hobby disguised as hard work.

It’s a system to combine people + place + capital into one thing:
👉 Cash flow for you.

If it’s not producing cash for you today?
It’s time to fix it—or kill it.

💥 Key Takeaways

✅ Just because you own a building doesn’t mean you own value.
✅ Your business must pay you today—or it’s a hobby.
✅ Avoiding your numbers is a warning sign.
✅ Leverage cheap money, don’t worship being debt-free.
✅ "I'm reinvesting everything" is often code for "I'm afraid to look at the truth."

Don’t Be That Guy

Don’t forget—join my email list for early access to my latest videos and insights at DavidCBarnettList.com. You’ll even receive 7 FREE gifts when you sign up.

– David C. Barnett

LIVE Spencer Hilligoss- Raising private Capital

 

Spencer Raises MiLLION$$$

New Livestream guest-> Spencer Hilligoss

I’m happy to have Spencer join me on a live broadcast.

He’s been busy doing private real estate deals and he’s raised millions of dollars via syndication deals. 

Tune in and as we’ll be discussing how his business operates and what it’s like to attract and accept investor money.

If you think you’re just gonna ‘get investors’ this episode is for you as we’ll be discussing all the realities of being responsible for other people’s money.

This is a ‘must see event’ for people who need to raise cash to get deals done.

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/gLtMdvCgJEM 

We’ll be going live  Monday October 30, 2024 at 4 PM Atlantic Time and 3 PM Eastern Time

See you there!

David C Barnett

Live 2024 Financial Planning for Biz Owners with guest Jennifer R. Lee

 

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

Should You Use Your Retirement Funds to Buy a Business?

 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

Using Retirement Funds in the U.S.

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:

1. You set up a new entity to buy the business.

2. Your new entity starts its own 401(k) plan.

3. You transfer your existing 401(k) funds into the new company's plan.

4. 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.

The Risk to Your Retirement

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.

The Accountability Problem

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.

A Possible Exception: Secured Lending

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.

Consider Your BATNA

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.

Final Thought: Retirement Money Should Be for Retirement

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. 

The Reality of Managing a Business from Afar

 The Reality of Managing a Business from Afar

Today, I want to address a common scenario where business owners, after many years of running their operations, transition to a more passive role. They may spend most of their time in Florida while a manager handles the day-to-day activities. It sounds like a dream opportunity for many buyers, but there's more to it than meets the eye. https://youtu.be/GszdyDQulEI

The Ideal Scenario

Imagine this: after decades of running a business, the owner puts a trusted manager in place and enjoys a semi-retirement in a sunny locale. The business appears to run smoothly with minimal involvement from the owner, and they only need to stay in touch occasionally. For a potential buyer, this setup might seem perfect—less hands-on involvement and a well-oiled operation.

The Reality Check

However, this scenario isn't always as ideal as it seems. Here’s why:

1. The Owner’s Expertise

• Deep Industry Knowledge: The owner has accumulated decades of industry-specific knowledge and experience. They understand the nuances of the business, interpret financial reports effectively, and know exactly what to ask the manager. This depth of understanding is hard for someone new to the industry to replicate quickly.

• Skill Development: The skills developed over many years by the owner are not just in managing daily operations but also in setting up systems to monitor and guide the manager. This includes interpreting performance metrics and understanding what they mean for the business.

2. Management vs. System Oversight

• Systems and Oversight: In large organizations, managers operate within a framework of systems and oversight. For example, chain restaurants like Olive Garden have regional managers and standardized systems to ensure consistency across locations. Similarly, a well-managed business has systems in place to monitor the manager’s performance. When buying a business with a manager in place, it’s crucial to assess these systems and ensure they are robust and functional.

• Building a Framework: If you’re buying a business in which the owner has mostly stepped away, you may need to build or understand a similar framework to effectively monitor and guide the manager. This requires experience and a solid grasp of the industry.

3. Manager Turnover

• Potential Issues: Managers, like any employees, can leave. When this happens, it’s essential to have a plan for how to handle the transition and whether the systems in place can maintain business continuity. A manager’s departure can disrupt operations and may require the new owner to step in more actively during the transition period.

What to Consider When Buying

1. Learn the Business

• Get Involved: If possible, spend time learning how the business operates before purchasing. Understand the key metrics and the systems in place for monitoring performance. This will prepare you for a smoother transition and allow you to manage or guide the manager more effectively.

2. Evaluate the Systems

• Assessment: Ensure that there are effective systems for tracking performance and managing the business. Assess the quality of reports and how well they reflect the actual state of the business.

3. Prepare for Transition

• Contingency Plans: Have a plan for managing the business if the current manager leaves or if issues arise. This includes understanding how to step in and manage the business temporarily if necessary.

4. Consider Industry Expertise

• Seek Advice: If you’re new to the industry, consider working with an advisor or consultant who can help you understand the nuances and assist with the transition.

Final Thoughts

Buying a business with a manager in place might seem like a great opportunity, but it’s essential to thoroughly evaluate the situation. Ensure you have the systems and knowledge needed to manage effectively, and be prepared for potential challenges. By doing so, you’ll be better positioned to take advantage of the opportunity and make a successful transition.

If you enjoyed this and never want to miss any of my content, be sure to sign up for my email list at https://www.DavidCBarnettList.com

2023 HC#009 Ernie builds a business brokerage Video

 

Ernie just sold his first business for a customer and now wants insights into growing his business brokerage. The goal? Build up enough cash to exit and buy another business. We talk marketing, positioning, value propositions and more. If you’ve ever dreamed of collecting a 10% fee on the value created by SMB entrepreneurs on exit, you’ll find this conversation very insightful.

Live Growing a new franchise Brand. The challenges and opportunities in something new.

Growing a new franchise Brand. The challenges and opportunities in something new.

New Livestream guest- Megan Rosen- Beef-a-Roo.

I’m happy to have Megan join me on a live broadcast.

She has years of experience in the realm of franchise development.

Tune in and as we’ll be discussing the growing challenges and pains of starting a new franchise brand. In this case, a mid-western, mid-market sit down dining experience called Beef-a-Roo.

They have a milkshake subscription!

This is a ‘must see event’ for people thinking about franchise opportunities or making their business into a franchise.

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/kYp3DqRNqyM 

We’ll be going live Monday July 29, 2024 at 1 PM Atlantic Time & 12 Noon Eastern Time

See you there!

David C Barnett

Unlocking the Secrets of Price Allocation in Business Acquisitions

Today, we’re diving into a crucial aspect of buying a business: price allocation. A viewer asked an excellent question about how to break down a negotiated purchase price among the different assets of a business. If you’re new to this concept, stay tuned—I’ll explain everything you need to know. https://youtu.be/Zzt7xznT7fU

 

Why Price Allocation Matters

When you purchase a business through an asset sale, you’re buying various components—both tangible and intangible. Tangible assets include inventory, equipment, and vehicles, while intangible assets might encompass goodwill and non-compete agreements. Allocating the purchase price among these assets is essential for tax purposes for both the buyer and the seller.

The Seller’s Perspective

Tax Implications: Different assets receive different tax treatments. For instance, equipment is typically depreciated, which saves on taxes over time. However, if equipment is sold for more than its book value, the seller might face capital gains tax or have to pay for recaptured depreciation savings on previous year’s tax returns.

The Buyer’s Perspective

Depreciation Benefits: Buyers aim to allocate more value to assets that can be depreciated quickly, like equipment and vehicles, to maximize future tax savings.

An Example of Price Allocation

Imagine you’ve agreed to buy a business for $1 million. On the balance sheet, equipment is listed with a book value of $200,000, but its fair market value is $300,000. Here’s how this scenario plays out:

For the Seller:

• Selling equipment for $300,000 (above the book value) means recognizing a capital gain and reversing some tax benefits from previous depreciation.

• Sellers prefer to allocate the equipment at its book value ($200,000) to minimize tax liability.

For the Buyer:

• Buyers want to allocate $300,000 to equipment to maximize depreciation benefits, which reduces taxable income in the future.

Tips for Successful Price Allocation Negotiation

1. Discuss Early: Address price allocation at the start to avoid disputes later.

2. Understand Both Sides: Recognize how different allocations impact both parties’ tax situations.

3. Consult Professionals: Hiring an appraiser to determine fair market values can be worthwhile, especially if required by lenders.

Regional Considerations

Different regions have unique tax treatments for various asset classes. For instance, in the United States, allocations to non-compete agreements are common, while this is less prevalent in Canada. Goodwill and capital gains are also treated differently depending on the jurisdiction. It’s crucial to be aware of these differences and plan accordingly.

Avoiding Common Pitfalls

Negotiations can falter if both parties are unaware of the importance of price allocation. Including an allocation component in your offer to purchase can streamline this process. By addressing it upfront, you prevent potential roadblocks during due diligence or closing.

Conclusion

I hope this answers your question about asset price allocation. For anyone buying a business, understanding and negotiating price allocation is vital. If you want to delve deeper into this topic and many others related to business buying, check out my online course at https://www.BusinessBuyerAdvantage.com 

Also, are you on my email list? Sign up while you’re here on my blog.

Download my free Guide here:

A Guide to Asset Allocation When Buying a Business