Deal or No Deal

[Bigtone]

For background

My original investment plan was to build my property portfolio quickly and then live on equity. Part one has worked beyond expectations and the portfolio is now a relatively nice size but is still as expected at this stage of the plan very negatively geared.

Initially I was borrowing all the shortfall between the cost of holding the properties and the income received.

During the GFC I became skeptical of the ability to continually increase my borrowings and concerned about the risk that put on the plan and my property portfolio. The recent changes to credit legislation and the further proposed changes have reinforced these doubts and caused a change of plan.

I now only capitalize a very small percentage of the debt and no longer plan to live on equity. The plan was changed to use the equity in the properties to take advantage of cashflow opportunities when they arise so I can use this cashflow to stop any capitalizing completely and then built the cashflow to a position where i can live of that without having to sell anything.

First opportunity was a no brainer and involved buying out my business partners who panicked during the GFC and allowed a big boost in monthly cashflow, have done a couple of others deals in the last two years.

Anyway point of the thread is a new opportunity which is:

Buy 50% of a retail business (clothing)
Purchase Price $120k
Return $1000pw
50% of sale price when sold
Shareholder not director
No responsibility for lease, debts etc.
Paid $1000pw and then current owner keeps the rest of profit which is currently $3.5kpw
Owner has to run business and work 45-55 hours per week and is responsible for day to day operations
I could have some input if desired on direction of business to maximize a future sale price.

Current owner had a previous partner who needs to cash out.

Deal or no deal?

 

[handyandy]

Buy 50% of a retail business (clothing)
Purchase Price $120k
Return $1000pw
50% of sale price when sold
Shareholder not director
No responsibility for lease, debts etc.
Paid $1000pw and then current owner keeps the rest of profit which is currently $3.5kpw
Owner has to run business and work 45-55 hours per week and is responsible for day to day operations
I could have some input if desired on direction of business to maximize a future sale price.

Current owner had a previous partner who needs to cash out.

Deal or no deal?

I have never done a deal like this but my main concern is how that $1000 to you is determined. It is a business with ups and downs how can there be a fixed amount to be paid to each shareholder?

How is the $1000 - $3500 determined? Is it that the profits are split 22% - 78%? At least on that basis you get an increase if business improves and it also ties the $3500 to the well being of the business.

Cheers

 

[Propertunity]

Anyway point of the thread is a new opportunity which is:
Buy 50% of a retail business (clothing)

Businesses are great vehicles for cash flow. The only Q in my mind, Bigtone, is the viability of a "retail clothing business" in the longer term. i.e. pressure that many retail businesses in bricks & mortar stores are coming under from internet sales etc.

 

[oracle]

Businesses are great vehicles for cash flow. The only Q in my mind, Bigtone, is the viability of a "retail clothing business" in the longer term. i.e. pressure that many retail businesses in bricks & mortar stores are coming under from internet sales etc.

I have to agree with Propertyunity's assessment of the long term viability of retail clothing business.

Recently, I read that few retailers (mostly ski equipment) are charging clients $50 bucks to try stuff in their stores. They get it refunded back if they end up buying something. What is actually happening is people come in the store try stuff and then end up buying the same stuff online for big discount. I wouldn't be surprised if such a thing becomes normal with most retailers in future. Online shopping is a real threat to bricks and mortar retailing.

Cheers,
Oracle.

 

[Monopoly]

I have to agree with Propertyunity's assessment of the long term viability of retail clothing business.

Recently, I read that few retailers (mostly ski equipment) are charging clients $50 bucks to try stuff in their stores. They get it refunded back if they end up buying something. What is actually happening is people come in the store try stuff and then end up buying the same stuff online for big discount. I wouldn't be surprised if such a thing becomes normal with most retailers in future. Online shopping is a real threat to bricks and mortar retailing.

Cheers,
Oracle.

I don't believe retailers will adopt this trend; it'd be a slow road to death of the business IMO. I'm guessing there will be customers who refuse to pay the deposit so buy the item without trying it on, take it home, try it on there, and then come back an hour later demanding a full refund (because it didn't sit well, look right, etc....any wardrobe malfunction that can't be corrected by a simple exchange to a size up or down)! Hence, what was the point of the exercise??!!!

 

[oracle]

Anyway point of the thread is a new opportunity which is:

Buy 50% of a retail business (clothing)
Purchase Price $120k
Return $1000pw
50% of sale price when sold
Shareholder not director
No responsibility for lease, debts etc.
Paid $1000pw and then current owner keeps the rest of profit which is currently $3.5kpw
Owner has to run business and work 45-55 hours per week and is responsible for day to day operations
I could have some input if desired on direction of business to maximize a future sale price.

Current owner had a previous partner who needs to cash out.

Deal or no deal?

Bigtone,

Sometimes, you got to ask few obvious questions.

If as you say you get $1000 pw profit and the other owner gets $3500 per week. That is $4500 per week profit. Per year it would amount to $234000

For nearly 50% of the profits per year ($120K) you get to buy 50% stake in the business without any responsibilities of day to day running of the business.

You got to ask why would someone sell 50% stake in a business for $120K when the business is actually making $234K per year in profits?

One of the investment golden rule is if it's too good to be true it usually is.

Cheers,
Oracle.

 

[Bigtone]

ok further clarification:

Handyandy

Offer is first $1000 pw mine anything over that is hers, takes risk out and if business booms she does well and then i would be rewarded when it sells, maybe though there should be something like first $1k and then 10% of remaining profit so if it does boom there is more immediate reward, i will try and add that in

Prop-

I agree but it is cheap stuff for teenage girls so internet not such a worry i would think

Oracle

Good questions and i have these responses.

Partners fell out and the business was sold for $400k. One wanted out and one wanted to stay. Buyer paid deposit of $40k and then did not settle and did a runner. Departing owner committed to a property settlement and has to settle asap or loses out big time on that property transaction. Remaining owner very keen to keep business going and is offering these terms for partnership moving forward.

Should have been clearly profit is $3.5k pw so $1000 to me and $2.5k to owner/manager so in effect getting $1.5k pw to run it.

Cheers BT

 

[oracle]

Oracle

Good questions and i have these responses.

Partners fell out and the business was sold for $400k. One wanted out and one wanted to stay. Buyer paid deposit of $40k and then did not settle and did a runner. Departing owner committed to a property settlement and has to settle asap or loses out big time on that property transaction. Remaining owner very keen to keep business going and is offering these terms for partnership moving forward.

Should have been clearly profit is $3.5k pw so $1000 to me and $2.5k to owner/manager so in effect getting $1.5k pw to run it.

Cheers BT

Ok, makes things bit more clearer.

It's still not a bad deal if what you say about profits per week is true. If you can verify atleast past 3 years history of profits you should be OK. Although, the longer the period you can verify the better it is. Look out for whether business (revenue/profits) is growning, stagnant or shrinking year on year.

Secondly, and is very important is how confident you are about the integrity and honesty of the partner owner?

I believe it is vital that you are comfortable dealing with partner so in the long term you don't end up regretting entering such a deal.

Cheers,
Oracle.

 

[sash]

Hi Bigtone,

I say no deal....I don't like the idea of retail. Too much risk involved....the 3.5pw profit seems really high and profits can be fleeting. What due diligence have you done?

Out curiosity...why have you changed tack? Don't know if you are comfortable telling me...but what level neg gearing are you talking about?

PM me....if you are willing to discuss.

The reason I am curious is that I have almost hit a new level in terms of asset base and netwealth...and surprisingly I am still positively geared.

Perhaps we can swap some ideas?

For background

My original investment plan was to build my property portfolio quickly and then live on equity. Part one has worked beyond expectations and the portfolio is now a relatively nice size but is still as expected at this stage of the plan very negatively geared.

Initially I was borrowing all the shortfall between the cost of holding the properties and the income received.

During the GFC I became skeptical of the ability to continually increase my borrowings and concerned about the risk that put on the plan and my property portfolio. The recent changes to credit legislation and the further proposed changes have reinforced these doubts and caused a change of plan.

I now only capitalize a very small percentage of the debt and no longer plan to live on equity. The plan was changed to use the equity in the properties to take advantage of cashflow opportunities when they arise so I can use this cashflow to stop any capitalizing completely and then built the cashflow to a position where i can live of that without having to sell anything.

First opportunity was a no brainer and involved buying out my business partners who panicked during the GFC and allowed a big boost in monthly cashflow, have done a couple of others deals in the last two years.

Anyway point of the thread is a new opportunity which is:

Buy 50% of a retail business (clothing)
Purchase Price $120k
Return $1000pw
50% of sale price when sold
Shareholder not director
No responsibility for lease, debts etc.
Paid $1000pw and then current owner keeps the rest of profit which is currently $3.5kpw
Owner has to run business and work 45-55 hours per week and is responsible for day to day operations
I could have some input if desired on direction of business to maximize a future sale price.

Current owner had a previous partner who needs to cash out.

Deal or no deal?

 

[BuildingBlocks]

If all you are putting into the business is money, then why would someone pay you $50k a year when they could repay a loan for a lot less, unless they were not confident in the business earning enough to pay your money or could not secure finance?

Also what happens in the event that one party wants to sell? (both scenarios)

 

[Bigtone]

update

If all you are putting into the business is money, then why would someone pay you $50k a year when they could repay a loan for a lot less, unless they were not confident in the business earning enough to pay your money or could not secure finance?

Also what happens in the event that one party wants to sell? (both scenarios)

Just to update this i did go through with the deal.

BB it would have been impossible for her to get an unsecured loan to pay out old partner in time or in fact at all so it made sense from that point.

I am confident i will get my money back as business only has to last a bit over 2 years for that to happen so downside not huge and return on investment % wise is very high if it does work as planned. I paid over the cash on Tuesday and got my first weekly profit share of $1k on friday (that is how they do ponzi schemes isn't it?)

Main reason i guess is that I am just soft and felt sorry for them and find it extremely difficult to say no to women. I self managed one of my properties once, no rent for three years basically so confrontation not my strong point!!

My "business" venture today was buying a share in a race horse, normally recipe for just burning ur cash (6c in the dollar is the ave return). Bought a third share in an older horse by paying the outstanding training fees of the former owner who is in the big-house for trading some things he perhaps should not have. I might be crazy but I think i will also get more than my money back on this one for a few reasons !!

Time as always for tell on both.

 

[handyandy]

I paid over the cash on Tuesday and got my first weekly profit share of $1k on friday (that is how they do ponzi schemes isn't it?)

Yes it is

Main reason i guess is that I am just soft and felt sorry for them and find it extremely difficult to say no to women. I self managed one of my properties once, no rent for three years basically so confrontation not my strong point!!

Mate, you going to have to toughen up. What if she stops paying you the $1k - business tough, had to buy a new car or any other excuse and you are not getting a return.

Forget you reasoning about a 2 year payback etc. It doesn't fly if your not getting any money so toughen up and make sure you keep getting the money.

Cheers

PS If you had mentioned this

"so confrontation not my strong point!!"

I would have definitely given it the thumbs down.

 

[zed_kid]

Great thread. I was recently offered a business venture by a friend and it’s structured like yours BT, basically a passive investment with some pull as I’ll ‘control’ 33% of the business. Anyway I remembered the old saying, if you want to lose a friend loan him some money. So I’m still cautious on it, the return is not that great (but better than IP yield) the risk is pretty big.

So to contribute to the thread, I think you should work in some kind of upside into the deal, ie if the business truly booms you will also see the benefit of that in CF not just CG, so to speak.

 

[Ms Jade]

Main reason i guess is that I am just soft and felt sorry for them and find it extremely difficult to say no to women.

Heya Bigtone, I got a business deal for ya.


I have a feeling (dunno why) that this will end up working out OK. One thing for sure - if you never punt you never win. Best of luck!

 

[FormerLurker]

Keep us posted on how it goes mate - weekly "got paid" comments will do

best of luck with it - sounds good it all is as discussed.

 

[soyabean]

Beware

I hope it will work out well for Bigtone. Your deal could be an exception.
BUT
It is likely to be a scamp. BE VERY CAREFUL.
The "1/2 owner" who wants out is properly one of "them".
They will have records to show that the business is MAKING A LOT OF MONEY.
You should spend weeks at/in the businessand verify the claimed income/expenses. Do not believe the sales amt they actually banked everyday because these amounts could be pumped up using other source of money (money laundering may be).
Not long after you buy you could see that the business is not that profitable and you won't get that $1000 per week. The business probably would only be worth 40K, they have made a profit selling you at 120K already ! THey could disappear from you all together.You could end up be given that whole business to run yourself. These people are going around hurting inexperienced investors wanting "passive income". I was not the first one . I now know they are mainly in Sydney and NZ but also have tried Mel and Bris.

I have entered not quite the same but sort of similar deal and have lost half a Mil last year no joke. All was because I wanted to "use the lazy equity" and thought exactly the same " only needed 2 years of good business to get back the money"., pleinty of lazy equity , have to make them "work" . ...

It is still a fresh wound. A year ago I was severely depressed I could bearly talk. I just want to voice this so that no one else will have to go through what i have been going through.

So from the bottom of my heart, please beware.
If it is too good to be true it IS.
Regards,

 

[Property Meister]

So from the bottom of my heart, please beware.
If it is too good to be true it IS.
Regards,

Hiya Soyaban,

Congrats on speaking out, to be honest, Ive been in financial trouble like you beofre (not business related) and I know how it feels,

Ive done a few businesses now, and my last 2 have been quite good

that being said ,

my last venture, no joke in some pockets of shops/businesses, 30% were selling, 30% couldnt sell because their $250k business was worth nothing, they literally couldnt even give it away

and I saw some of the stress on the faces of people. Even those that tried to put on a brave face you could tell were hurting inside, and was even more sad to see is when they started to bring in their wives to help them out to save on wages, followed by the 12 yr old son to help out with simple tasks. to the point where they came in begging me for a job even for $10 per hour.

Soyabean, I dont know your situation, and it seems from your post that you bought a managed business with your equity, I personally find it too hard to do a managed business, and need to work in it at least 3-4 days per week to work out the intimate details of the business. But hey, thats me.

When I made my huge mistake I suffered the consqueences, and I had to change my lifestyle from a normal one to a stingy tight a$$ one, I had to sacrifice everything, and a quick glance of the bank statements all those years ago is enough to make me shiver and cry.....

businesses can be scary stuff

 

[Bigtone]

So to contribute to the thread, I think you should work in some kind of upside into the deal, ie if the business truly booms you will also see the benefit of that in CF not just CG, so to speak.

Makes sense but deal was done without that.

 

[Bigtone]

Heya Bigtone, I got a business deal for ya.
i'm in!

I have a feeling (dunno why) that this will end up working out OK. One thing for sure - if you never punt you never win. Best of luck!

thanks appreciate that

 

[Bigtone]

Keep us posted on how it goes mate - weekly "got paid" comments will do

best of luck with it - sounds good it all is as discussed.

payment 2 has cleared in my account tonight so good start!!

looong way to go, i will update in a few months or if payments stop

hopefully the next update will be the horse has won!! should be running late may.