HOW TO BUY AN ASSET
Most people live out their lives and never buy any assets. I think this may be attributed to people getting their basic costs of living needs met with a job and saving some money, such as in pension fund. A house in which you live is not an asset, but a house that you own and rent out to a tenant can be an asset. If managed properly, it will pay you a regular income, that is an asset. Your car is not an asset, but a collection of antique cars that people pay admission to come and see may be an asset, or a fleet of taxis that you lease out to taxi drivers may be an asset. Just because you can sell something does not make it an asset. An asset provides regular income for the asset holder, hopefully it is positive income (profit). By implication, everything else is a liability.
Yes, that work of art you bought at the auction for $7,500 and had appraised for $10,000 is still a liability because it’s not generating regular cash flow, good job on buying low however. Owning assets or the rights to cash flow from assets is how you acquire and build a net worth. While most people know how to acquire long term debts for college, homes and cars, they have no clue about buying assets. If you create a scale on buying assets, the best assets are those for which you have no liabilities for ownership, but derive the benefits from the cash flow, and make infinite returns. That means none of your own “cash in”, but you get “cash out”, profit. These are the kinds of deals I like the best and it’s becoming easier and easier as we have developments such as the Internet and blockchain and cryptographic currency. That’s at one end of the scale.
At the other end would be something like, you get an option on a commercial real estate site, and draw in capital from investors, develop some retail space and begin making 7% on your money in about 5 years. It’s still an asset, and might be worth more cash than the infinite returns deal, or maybe not. Every deal is different. But how would the average person who has never bought an asset or never really considered this subject until now, go about “acquiring” assets?
First, you need a way to own the asset, or manage the cash flow, or hold title to whatever it is you want to buy. I’ll start with something that most of us can relate to, let’s buy that coin operated car wash in our town. That is very close to a commercial real estate deal, but without the commercial lease agreement, presumably, and without employees, these are my specifications for this example, especially if you are just getting started. The car wash is actually a real estate deal and those have publicly recorded titles, so you would use a corporation to receive the conveyance of the title as part of the sale.
Second, if you don’t already know what you want, you have to go shopping. Either you can do this yourself, or through a broker or some other agent that can help you find the deal or deals you want, where you want them.
Third, you need to be able to make an offer, it should be in writing, but this is not required.
Fourth, you should always look for financing, even if you pay cash, you will still want financing at some point so you can make the best returns on your money. Here is where many people run into a brick wall. They either believe they don’t have enough money or cannot get the financing because of their personal credit score. What most people don’t know is that most of these types of deals for example (the car wash) are not usually done with personal credit or lots of cash.
Imagine buying an asset, such as retail zoned real estate in your town, on credit and with little or no cash of your own. Yes, it can be done, and once you see how this works, you will want to do this all the time even if you have enough cash to just buy the property without any financing. Always risk the least amount of your own cash on a new deal.
Let’s take a closer look at financing the purchase of an asset. First of all, you are buying an asset on credit, much easier than buying a liability based upon the fact that you have a job (such as your home). The first consideration for lending should always be with the seller. Ask yourself, if the seller is selling his asset, something that is paying him on a regular basis, why is he doing that? This information comes from a discussion with the actual seller, not his agent. Let’s say he has a good reason for selling, and that the asset is really a good deal, the seller should be willing to “bet on himself” or the “profitability of what he’s wanting to sell you” by financing it to you. But maybe there are so many buyers that he won’t consider it, this is an important consideration.
The second consideration in getting financing is to understand that the collateral for the financing is the asset you are buying, it should be paying for itself. It’s not like you are buying a house and your ability to make payments depends upon you keeping your job. It’s a much better financing situation to buy a business than to buy a home. Remember that I explained previously, an asset can be owning the thing that pays you, or it can be the actual cash flow coming from the asset, whether or not you hold the title. In fact, it makes more sense to buy a business or two and use that money to offset the purchase of a home or finance a liability.
Let’s say our car wash generates $50,000 of gross income annually, and let’s say that a fair asking price is $50,000, the asset’s annual income, and this assumes that the real estate comes with the business, same owner (doesn’t have to be though). You may never find a deal like this, but I’m only using this as an example. Estimate your financing based upon a short term debt, such as 3 to 7 years. And let’s just be optimistic that the seller is so excited about financing this deal that he’ll be jumping for joy upon receiving your offer.
It’s already generating a monthly income of $50,000 / 12. You will want your monthly payments to be a fraction of this amount, after all, you want positive cash flow and you still have to factor in operating costs (taxes, insurance, materials, supplies, maintenance, etc.) If your monthly gross is $4,166, structure your financing for one-third of this, or $1,388 and get a three year note. You’ll have some wiggle room for the interest rate by doing it this way.
There are several ways of managing the title during this transaction, the easiest one is likely to be with an exclusive options contract where the seller gives you (or sells you) an option to buy (take the title) at some point during the life of the note, or upon full payment of the note. Let’s say the seller of your local car wash agrees to sell you his car wash, under the provisions of an options contract in which you take the title after the note is paid in full, three years from now. Within 30 days of the closing, you will be keeping about 2/3 of the $4,166 or $2,777. This will be your new income, and you didn’t have to go begging to the bank or use your personal credit. Instead, you would have probably had to show the seller that you had solvency in a company, which only takes a few months to establish.
I’ve just described a very simple and boring transaction that created nearly $3,000 a month in new income for you. Let’s step back for a moment and talk to all of you who believe you would never get “owner financing” for a moment. If the seller won’t carry a note, maybe there are others whose business it is to only carry notes? Yes, of course there are. You would then need to find a third party lender, and in some cases you might prefer this. If the seller insists on doing it this way, then he will need to transfer the title at the closing. Or, maybe the seller will finance it (second position) if your lender contributes 25% to 50% of the purchase price, there are many options.
In this case, the title holder will be your company, that will have shown its solvency to the eventual note holder or lender. You don’t want to be the personal guarantor on this, where your personal credit is being used. These deals can always be done using the company’s credit, even if this is the first asset being acquired by the company.
Who would hold a note on commercial real estate with a history of positive annual cash flow of $50,000? You will find many lenders for this. I would suggest that your best options do not include any traditional banking organizations. You want to look for cash or hard money lenders, let those organizations source the lender for the loan they are giving you, that’s how it works. Where would you find these? I would start with a business broker, maybe it’s the same broker who helped you find the deal. He or she can probably connect you with real loan money, hard money, again, not bank “funny money”. I use the term “funny money” because you don’t want to get tied up in loan contracts with the evil banking system since you are not in that business, let someone else do that, you get a hard money loan and let that lender deal with financing of his loan portfolio.
You might also find equity financing, that is, someone with cash who doesn’t want to be a lender, but wants a share in the business, in the equity of the deal. These are also very good ways to get financing, just write your contract so that your equity partner has a clear exit strategy or includes a buy-out clause so the deal has the most flexibility for everyone. I would not suggest selling actual shares or even advertising for the sale of shares; rather, I would look for a partner who brings cash to the table and his rights and interests are expressed in an operating agreement and or a joint venture contract. You don’t want to be under the purview of selling securities; however, once you become a little more sophisticated, you may want to look into “Reg D financing”, I’ll save that for another article.
Notice that so far, I haven’t mentioned anything about writing a business plan or a marketing plan, or even a financing plan. These are important and you should have them, but don’t let not having them prevent you from moving forward. Like I’ve explained, you want to show solvency in the business. You can do this with a balance sheet and income statement. Once you form the company, have a bookkeeper create your balance sheet and income statement, even if you show only the $100 you used to open its bank account, that is where you begin. The next step may simply be you depositing an additional $100 a week or month into the business bank account as a contribution for your interest in the company. This creates a record of regular cash flow, it doesn’t have to be millions of dollars, just regular.
Consider additional ways to create funding, such as grant money. I would start with finding a grant writer to prepare a grant application and then shop it around for a grant. It doesn’t have to be substantial, just get one grant and it will do wonders for your future ability to attract more capital. Along with finding a grant writer, contact the Small Business Administration to review what is required for a grant application, just so that you know, even though your grant writer will be working you through that process. The SBA is not the only place to get grants, that’s why I suggest starting with the grant writer, and a grant broker, but only use the SBA as just one possible source and a way to learn about the process.
Grants.gov is also good place to start when looking for grants. There are professional grant services such as eCivis, Inc. This one provides a suite of Web-based software applications, along with grant-writing and grant-management services. Grants.gov is the federal government’s e-portal for 26 grant-making agencies. The website is a central storehouse for information on more than 1,000 grant programs and provides access to approximately $500 billion in annual awards. You may also want to get a copy of Grant Writing for Dummies, 4th Edition (John Wiley & Sons, 2011).
You may also find that getting a short term loan from the SBA would be beneficial in getting your venture going faster. Remember that you want the business to get the financing, not you personally, never disclose your personal credit information for a business loan, but before you look at getting a business loan from the SBA or bank, you will need to create, not only a balance sheet and income statement, but a real business credit file with Dunn & Bradstreet. There are many services that can help you do this, even some that guarantee a certain amount of unsecured credit within a short period, such as six months. That should be one of the things you do in the first year, and before you submit any traditional loan applications. I’ll discuss this along with business brokers in more detail.
The SBA is a good source, but don’t overlook state and local sources for grants. It will be useful to consider the economic development office of the state, county and city in which your business operates. These grants are often less restrictive than federal government grants and it is likely there is less competition.
Another good source for small business loans would be a company called Start Up Nation, at https://startupnation.com/. Let’s review the process of setting up business credit before we go any further. I didn’t want you to think that your only financing source depends upon a high credit score, I’d rather you think of it as just another tool. I’ve done many lucrative projects with no credit whatsoever, so don’t let this prevent you from getting the assets you want.
Once you have a corporation registered, you want to be sure it has a business location as its address, maybe it’s a virtual office space or maybe it’s your barber shop because your friend works there and his boss doesn’t care if you use his address as yours for a short time, or you really do have a business location for the company address, not just a mail box. You can also use a mail box, but your main address should be a business location. The next step is to get that business information listed in the 411 directory, this can be done online and there are specific instructions to help you.
You’ll want to review http://www.ehow.com/how_5828088_business-listed-411-directory.html. Keep in mind there are services that will charge you a fee or monthly to list your business, and some of them may be really useful, but I’ve found that it’s enough to list your business yourself, for free.
If you can be patient, you should receive a letter from Dunn & Bradstreet within about 60 days of registering on the 411 directory, welcoming you to the service and giving you an account number. The objective here is to sell you business services, and these are not required in order to get a business credit file, even though you might find some useful. I don’t recommend turning down D&B offers for services, instead, just explain that you have to discuss them with your partner and ask for additional information and explain you will call back. In the meantime, you will have a D&B account with no credit score. D&B is actively looking for new businesses and once you get on its radar, it will create an account for you. The next move is yours, as you will eventually need a credit score. That takes a little more planning and you have to understand some basic concepts.
You will need four “net 30” accounts, there are were you buy supplies for example, on store credit and pay the bill when it arrives. You don’t need 5 or 6 and 2 or 3 would not be enough. The trick is to buy things you already need, such as office supplies, and be sure that the retailer reports to your business credit file and never use your personal credit information to obtain the store credit with the retailer. Sometimes you have to call a different office or search online to get the actual business application that does not require any personal guarantee, never settle for being the guarantor, ever. Next, pay the bill immediately, don’t wait for the full term, in fact, you may want to call in advance of receiving the bill and pay within 5 days of using the credit. This will result in a D&B creating an actual credit score for your business’s use of credit. The scores range from 0 to 100, and your first score may be above 90. A higher score is not better. You want a score that shows you are able to use debt and manage the business properly, so that score would be around 75 – 80. The more debt you have and the better your balance is, the more creditworthy your company becomes. It’s because your company is using debt to increase it’s net worth. People can’t do this because typically consumer loans are based upon limited income, wages, and those don’t go up with more debt.
The next step is to take unsecured loans for about $20,000 to $50,000 within the first six months of starting your business credit profile. It’s important that the lender reports these accounts to your D&B file, you must confirm each time, do not assume. Once you do that, it’s then just a matter of managing your company, but again, you should be able to obtain financing just by thinking through a deal and not be totally dependent upon asking an institution or bank per se.
I mentioned a business broker earlier. What can a business broker do for you? If you are new to this “business” of buying assets, it’s best to start with a business broker. Tell him what you want, what you are looking for and ask what will be needed in terms of your company’s financial records, in order for the seller to even consider your offer. This will be such a great education, better than taking on huge student loans to get your MBA.
I talked with an MBA student one time. She said she was studying how Star Bucks runs its business, so I asked her how it does. She could not answer me. What’s more, I asked her the general question, how would she create a corporation, the main tool of business. She couldn’t tell me. So I suggested that if she really wanted to know how a business operated, including Star Bucks for example, that she get together with her classmates and form a corporation and then get into a licensing deal with Star Bucks (which is how that works by the way, no franchises). I think she was mortified at the thought, but this is my point, it’s not difficult and if you’re going to study it, you should do it, that’s the best way. I remember presenting a thesis to my college professor about how it would be a good business to teach elementary school children how to do high school algebra. I thought I was so smart, so I was surprised when she wasn’t that impressed after reading it and suggested that I actually go out and do it. So I did, and I made lots of money, and then she was impressed.
Business brokers will help you with pricing the business with a professional valuation and then drafting an offering summary, sometimes called a confidential business review. This piece becomes one of the most important marketing tools for the offering, and is provided to prospects only after they have signed a confidentiality agreement and been qualified by the broker.
Marketing the business to the widest possible audience while maintaining strict confidentiality. This is one of the important distinguishing differences between business brokers and real estate agents. Real estate agents put a sign in front of their properties and typically without the need for confidentiality, advertise widely the specific location. Business brokers are trained to maintain strict confidentiality. When you contact the broker, he will research his database for the deal that works for what you want.
Your broker will also facilitate meetings between you and the seller. When it’s time, he can also writing an offer to purchase the business and be involved in negotiating between both parties. Your broker can work for and represent only you, or work for both parties, it depends on the contract. Either way, he can also facilitated the due diligence investigation, as most offers to purchase are made contingent upon a due diligence finding. And as I’ve mentioned earlier in this article, your broker can assist you in obtaining financing. He may not be as creative as what I’ve described in this article, but that is your job after all. Your broker can help you through the entire deal, even scheduling and facilitating the closing of the transaction. This article would not be complete with at least a brief review of crowd funding.
This is a way to get funding from a large number of people who like your idea, but may not necessarily know much about business or being a lender for profit. Crowd funding allows the average person to benefit from your ideas with low risk and avoids the need to sell securities or do any public offering.
While you may have planned a marketing and advertising campaign for selling your actual product, you will need a marketing and advertising campaigning to raise money through crowd funding. The idea of “its not what you do, but why you do it,” really hits home here. By focusing on a bigger purpose, the driving force behind a brand, project creators will be able to create a unique community of like-minded individuals. Each campaign is set for a goal amount of money and a fixed number of days. Once the project is launched, each day will be counted down and the money raised will be tallied up for visitors to follow its success.
Instead of traditional investors, crowdfunding campaigns are funded by the general public. Typically, most successful startup fundraising efforts receive about 25-40% of their revenue from their first, second and third degree of connections. This could include friends, family, work acquaintances, or anyone that the owner is connected to, including their second and third degree connections. Once a project has seen some traction, unrelated consumers start coming out of the woodwork to support campaigns they believe in, but you must have a story that appeals to people, such as for the car wash, your business is involved in developing the community (sounds lame, but you get the idea). You may want to launch the campaign with pre-arranged contributions that are made immediately with the launch.
Here is a list of the top 25 crowd funding services, http://fitsmallbusiness.com/best-crowdfunding-sites/
This is a very cursory review of how to buy assets, but the references should really help you get a better view of how it’s done and hopefully, why you should buy assets, at least one new asset a year.