okay now i'm worried.

[grossreal]

hi all
just to give you an idea
what you are talking about with regards to using equity to fund a business is the model used by most equity funds to buy into a large business
and if they use it then yes it does work.
the main issue is understanding the business.
now here is a way of using the same stratigy but to the max
go to a liquidators and tell him/her what type of business you are looking for.
then they will come to you with that business that has a few problems
now use your equity to trade that business out of trouble and you can pick it up for a fraction of its true value.
I used to buy and sell these businesses and they can be very profitable if you pick the right ones.
usually they are very profitable its just that they have no idea of how to control funding in and out and thats why they go west
I picked up a national company that was 25 yeras old and had a balance of about 600k and 7 service cars here in sydney
and picked that up for 1k inc the phone number from sullimans there liquidator.
I don't have the time or the energy to do it any longer as you are restarting a company and that takes time.
most of the time the clients will keep ringing and all the old debts are cancelled so its an instant business
you employ the guy that went west as an employee and the bank lends on the back on a equity position off an investment( if you need a loan).
and there are hundreds if not thousands of these deals
I would not go into food preparation but would into service
and yes they are very profitable.
you are the accounts or funder they are the workers and you put up the money to get them out of trouble
same a short term money just long term
if that make sense.

not for everyone and have not done one for about 5 years but now that money is getting short with lenders taht when the wheels drop off a few and may well have another look.
they are easy to find ring up and get a list of liquidators and send out a request form they will come running to you.
and strike a deal.
they can be fun

 

[ArJay]

Thanks GR....extremely thought provoking post.

Can I ask; what was your evaluation process for feasible businesses?

Cheers again
R

 

[grossreal]

hi ArJay
I only buy what I understand and I can control.
most companies are not bad businesses they are just bad managers
you can be very good at your work but not good at business
some people are good at business but not good at work
and some are good at both.
if you asked have the higher managers in say energy aust can they change a light bulb and the answer will be no.
so you have to look at a business not as a business but can it make money.
and if the answer is yes then go with it.
heres a few stats
95% of small business fold with in the first year
then another 1 in the next and the another 1 in the next
so you have only got 3% that will make it to 3 or 5 years old
that not good batting averages
so why
simple
they can't manage there business
they can make money
but the lose it just as quick.
they grow to big to quick
the spend out more then comes in
or they don't pay the bills they need to ay to stay above water and pay the bills that are not going to close them down.
most work on a shoe string and don't put any money into anyform of r@d
they try to keep the current customer happy and lose half a dozen in the mean time.
they are so busy that they don't see that there largest client is in financial trouble and he/she is about to liquidate and take them with them.
these are all the things that a external management team look for.
so what do I look for.
I ask the old owners what went wrong and before it went wrong what were you making.
its that simple
and then see if they had a business that was worth taking the punt and this is punting.
and by the way that punt out of 5 only 3 work so its not great success rates but if they come off the losses and no where near the gains
I have wiped out 5 years losses in about 3 months in one so they can grow very quickly
once they are back on their feet you do a management buy out and this time the management pays you to run the business and you are out of it with a nice little profit.
but this is not investing
this is business management and I do the same now just I run the deal.
I bring in the management team and we run the deal its the same
just before I bought the business
now I buy the site from a liquidator and run the deal
the number on a balance sheet are different but its still just business management.
thats why I take a position with every and all my deals as i use my team to manage the deal.
its alot easier
I would never invest in say a vets clinic or as a couple have asked a solicitors practice because I don't understand the business
so I only will look at business that I can
A understand
and
B control.
and no not one for having a boss over the top of me.
this also give you alot of confidence when dealing with higher end deals
as the person on the other side of the table understands that you are not there for fun but to do business
you become a numbers person and you are talking as a business person and thats a very big difference.
investing or finance has really nothing to do with money it to do with how the deal is
A presented
and
B the perception of the deal
and they are very different things.
and if a company is taken over
and is shown to be alot more business like
and has the systems in place to make it work
they do what they say
then you will make money its that simple.

 

[Aaron Sice]

y'know what i like about this forum?

the fact that i gauge for everyone else's perception of the current woes in the economy, and i get detailed responses on how to make more money.

i love it.

 

[josko]

No argument about being a newbie Sunfish, but my 4 steps to financial freedom has been proven. My old man used this strategy over 20 years without forums, without books, without seminars, without tax experts and being of European descent and him finding it difficult to sometimes communicate in the early days, I can tell you he has done very, very well for himself.

Bought good properties in good locations, held onto all of them and now he is worth millions. No doubt there are ways to make property work for you in a shorter period of time, but this strategy works well I believe as I have seen it first hand.

Times have changed no doubt, but the fundamentals are the same.

PS. Only sharing my experiences, not saying this is the best way to do things.

Bludging Man,

Any chance we can get your Dad to tell us his story? We'd love to hear from him.

I am glad to hear your 4 steps work, as personally, they are pretty much what I have based my strategy on. I haven't been around long enough to prove they work, but so far it's looking good!

Aaron, isn't your baby due soon?


Regards Jo

 

[Aaron Sice]

wow you've got a good memory for names AND dates there josko.

yes, had our last ob appt this morning - bub is due early/mid Aug.

 

[ArJay]

hi all
just to give you an idea
what you are talking about with regards to using equity to fund a business is the model used by most equity funds to buy into a large business
and if they use it then yes it does work.
the main issue is understanding the business.
now here is a way of using the same stratigy but to the max
go to a liquidators and tell him/her what type of business you are looking for.
then they will come to you with that business that has a few problems
now use your equity to trade that business out of trouble and you can pick it up for a fraction of its true value.
I used to buy and sell these businesses and they can be very profitable if you pick the right ones.
usually they are very profitable its just that they have no idea of how to control funding in and out and thats why they go west
I picked up a national company that was 25 yeras old and had a balance of about 600k and 7 service cars here in sydney
and picked that up for 1k inc the phone number from sullimans there liquidator.
I don't have the time or the energy to do it any longer as you are restarting a company and that takes time.
most of the time the clients will keep ringing and all the old debts are cancelled so its an instant business
you employ the guy that went west as an employee and the bank lends on the back on a equity position off an investment( if you need a loan).
and there are hundreds if not thousands of these deals
I would not go into food preparation but would into service
and yes they are very profitable.
you are the accounts or funder they are the workers and you put up the money to get them out of trouble
same a short term money just long term
if that make sense.

not for everyone and have not done one for about 5 years but now that money is getting short with lenders taht when the wheels drop off a few and may well have another look.
they are easy to find ring up and get a list of liquidators and send out a request form they will come running to you.
and strike a deal.
they can be fun

Sorry to sort of hijack your thread BC...

Thanks again GR for the brilliant repy...everytime I read your posts I learn something new. You're an asset to this forum...

R

 

[josko]

wow you've got a good memory for names AND dates there josko.

yes, had our last ob appt this morning - bub is due early/mid Aug.

Aaron,

That's very exciting. Don't forget to post the news!

My 12 week old is asleep in the stationary cupboard as we speak.

Regards Jo

 

[Attitude]

Caution required

Hi Blue

An excellent book I am reading at the moment is called Good to Great by Jim Collins. It's about business startegy but the same principles apply to investment. One of the key findings is that you have to confront the brutal facts. The brutal fact is the credit crisis isn't going to end any time soon. At least another 12-18 months depending on who you read.

Implications for borrwers are potentially higher rates and a tighetning of credit guidelines as funding constraints remain. The old demand and supply effect. Also keep in mind that even if the RBA lowers rates the banks will not reduce theirs.

In the light of the above and your comments fixing would seem a reasonable option if you want to be able to sleep at night. But I think the other part of the equation is your level of debt. I think I would be rethinking further borrowing for personal purposes. If you can put your building plans on hold I would give it serious consideration.

Debt on the investment side I am comfortable with as long as you are not over-stretching and you are keeping your LVRS within 80%.

Cheers

 

[Aaron Sice]

i appreciate the advice there Attitude - but my slab went down this week.

will be ordering that book off amazon tonite - i'm fresh out of reading material after TC's recommendation. cheers.

my LVR is 70% as well - on lo doc - but this year's tax return gives me 2 year's financials, which means i can start shopping for a better deal.

cheers.

 

[Aaron Sice]

Aaron,

That's very exciting. Don't forget to post the news!

My 12 week old is asleep in the stationary cupboard as we speak.

Regards Jo

yeah i will, cheers!

i already have a 3½ and a 1½ yo running around at the moment driving us insane. very hard to work from home, but it happens.

and NP witht he thread hijack Arjay - 6 pages in, i don;t expect things to be on topic anymore. conversations evolve!

 

[alba]

Alright - i am reasonably bullish for the good part of the last 18 months.

strong fundamentals, low vacany rates, record immigration, diversified trading partners and wider spread of market risk. pretty much sums up Australia at present, which led me to believe (for the short of it) that Australia can hold it's own against the world.

companies who lend to people who shouldn't have loans have closed a few ... uh, "specialist" lenders and major banks have tightened lending criteria themselves which says we may have curtailed the issue of default a fair bit sooner than the "sweep it under the rug" scenario of the "sub prime" issues facing the US.

my biggest concern was interest rates, my income depends on a solid RE market and i have a house to build over the next year.

my "Aaron's Amazing Crystal Ball ©" led me to believe that interest rates would be pretty steady about now, and my crystal ball was as clear as it gets with the RBA holding off rate rises recently.

great - imported inflation is a worry, but it's clear that there needs to be another approach. what other approach do the RBA have other than to raise or lower interest rates?

now it's tipped there's 2 more rates rises coming this year, and a possible 2 more early 09.

we're all paying through the nose to "hold off" a recession in the US - our money is essentially headed there in the form of "free trade" (*cough*bullsh1t*cough*) and the IMF.

i am worried now - my predictions of rates holding and the economy steadying are now looking like a lighthearted hope'n'prayer. i'm not worried about the equity i have in my home, or the value it has increased by since buying it. that will always fluctuate.

i am worried about the short-medium term though, whereas before i was only worried about the short term.

i will be fixing my homeloan in the new year. i can't afford any more rate rises even though CBA have already built another one in.

are there any other similar or not-so-similar views out there? what are your reasons behind them?

Bluecard, we are all in the business of trying to predict what course the market is going to take from here and there are some very conflicting views from analysts out there. I believe that the fundamentals are all aligned for the property cycle to continue without too much disruption.

When I process the information that is available to me, I think that while this spring might melt the prices when a number of fixed loans taken out at lower levels will mature. This, in turn will bring about higher yields at which point buyers will open their cheque books again. So if you're in the business of developing, you might find good deals for your next projects in the coming year.

Inflation will run its course until energy prices will cause both individuals and governments to implement changes in energy use which will curb demand and stabilise prices for a while. Just my 2 cents worth.

 

[Aaron Sice]

your 2c is welcome.

 

[BayView]

Cheers for the excellent posts so far L.AA. Really interesting reading....

Can I ask, have you had prior experience the business/es you've been investing in?

Are there significant risks involved using equity from your IP portfolio to gear into business?

R

Hi ArJay,

sorry I haven't replied earlier - I didn't see your question. I was just reading GR's post a few below yours and found his comments great.

The business we are buying is a restaurant/snack bar/bistro/take away/wedding reception venue. Only open for lunches and dinners, and receptions. Does around 80 weddings per year.

It has been there since 1930, and has had 3 owners. It is still very profitable, hence we are buying it, but it's not one of the liquidated businesses that GR was talking about.

It is in an iconic landmark building in our area, with a unique position and many passing customers and tourists, and our region is growing every year with tourism trade.

The current owner has been there for more than 15 years and has decided to retire. I am a little nervous about this due to the size of the purchase, but no more nervous than when we bought our first IP. It's an unknown territory as far as the type of business, but I've been running them for a long time now, so I am confidant we can do it well.

I have no experience in food service as such, other than working in a road-house as a young person, but I have had many years in running businesses and understand the cashflows, profit and loss, managing staff (herding cats) etc.

There is always some risk when buying any business - are the figures they provide you real and accurate, is there competition you are unaware of taking your profits, are the staff stealing money/stock, etc. The hardest figure to put any weight in is the directors/owners' drawings. Many cash businesses are raped by the owners (good luck to them) and so the real profitability is hidden - you only have their word for it that they make heaps.

Using my equity to do so makes me more keenly aware of how healthy the business is, but the Bank is providing some of the funds as well, and if it all went south, the loss would be mostly in the IP's - I would still retain my home.

But, if you can ready between the lines of the business' financial statements
(provided by the accountant usually) you can ascertain how profitable it is, and how much risk there is.

 

[BayView]

Using equity to access business

Businesses have much higher yields (term used for simplicity) compared to property. A retail electrical goods business will sell for around 1 years net profit plus stock, a service business might sell at 3-5 times net profit. Other business can sell at much higher ratios to this but we will use these for an example.

A managed service business sells at 3 times net profit purchase price $600k net profit $200k

Use your equity to take out $600k loan against property at 10% interest is $60k a year. You get $140k a year income from this business. If a growing business even better. Interests go up you still have a bit of leeway there before it starts affecting cashflow.

Simple example but I think this is the sort of thing that LA is looking at.

Nailed it in one RPI.

 

[grossreal]

hi L.AAussie
sorry to say but food service is the biggest black hole for money I have ever met.
and I am in the food industry.
If you ask one of my architects and he draws for alot of the food outlets they are dogs as a form of profit margins and amount of work done to get the profit you get.
I like them because the buy lots of equipment and that all needs repairing.
but as for working on the other side on the counter for me go very carefully into it.
they work for some time and then they die in the ar-- and you go backwards very quickly.
have a read of boston markets and there movement into the aust market and see what macers lost.
have a look at a few of the attempt by tricon and pizza hut.
have a look at even a few of our so called great chefs of sydney and you give me a chef and I'll send you his dog of a restaurant.
have a look at a heap of burger joints with all the new stainless and polished chairs when they buy them they should be given the auction stickers in advance so it saves someone a job.
the classic person is a retiree or one comming to retirement and its freddys cafe.
trouble is freddy hasn't managed an outlet before and because his kids love his chips
he will be restaurant owner and he will use his cash to keep it alive.
well it does for a long time but then fred runs out of a money and b a livelyhood.
so its not something I would be jumping at, I'd rather jump at an on comming train at least someone might stop me.
in the case of food sevice the opposite happens everyone want you to buy and it always the new range.
which becomes the top of the line at auction.
I have one group that bought a reception and have 5 mil invested and are going backwards quicker then that freight train and they would love to have jumped infront of it then take the problems they have now and already are talking liqudator and auction.
and they are up the tube for 5 mil and have about another 3 mil in equity on top and they are going to take a bath.
so i would be very carefull to check a your numbers but b have a very big outclause or exit stratgy if the thing goes west.
just a bit of advice.
oh and most of the equipment I get I get for free as it sometimes more expensive to get us to remove them then they are worth
thats why you see lots of shops where the owner has walked out leave the land owner with the equipment.
and usually if its leased the company won't pay to remove it.
that the great aussie dream of owning freddy cafe.
for me 9 out of 10 its not a dream its a nightmare

 

[boomtown]

Food service.


Loooooooong hours.

 

[grossreal]

hi boomtown
and very early start and very late finish and some times not alot in between.
except the bank manger stoppping by every other day to make sure you are making money.
and every family member that you have not seen for 14 years comming by for a free feed with there 14 friends one for each year.
and then theres the friendly council officer that wants to close you down.
and the local drunk that can only remember you shop.
and after all that you sit down with the local plumber and he tells you he made 10k this week and you have done twice as much and are lucky to get 5k so you get him to buy the beer.
fun

 

[contrary]

reversion to the mean

It is a funny thing that there is a mean and things revert to this (by definition as the mean itself changes depending on the last values in the sequence). I think this applies to property also. Just how this happens is an interesting thing. Predicting it is like following chickens entrails. Which is why dollar cost averaging probably works out best and as the old timers will tell you buy property when you can afford it. I do this and invest the other 50% in super. Super is boring but hell I have done a lot better than 90% of the people I've spoke to over the last 15 years.

The following is about market timing which is not recommended with a significant proportion of your investment if you are conservative as I am. It a like a punt but good for a punt. It is just my view and not investment advice :

I reckon we are witnessing reversion to the mean in Sydney and possibly the rest of australia. The can be quite slow. It is a process of repeated dissapointment until people reach a stage of revulsion. There is a pavlovian effect on the way up (salivating dog expecting another biscuit, positive reinforcement for gains) and this is gradually extinguished until all the positive anchoring points have diminished and are forgotten. A collective forgetting. Until people stop having a pavlovian salivation response to "Seaside property" or "water views" I would say things have not been extinguished. I think the expectation of a fast bust is part of the fallacy of the boom. OK there are short corrections but it is the buyers fantasy that they catch this and things shoot up again. This is not actually a bust, it is called catching a correction which is not actually possible in real estate markets easily as the market is so opaque and slow to get into and exit.

No a bust takes a long time. Things go down a bit, there is a suckers rally, people buy in, are dissapointed and then things go down again and there are new buyers who then are again dissapointed until the base forms. It may take a decade. If you are expecting to get a bargain, maybe you will get that. Maybe you will be dissapointed or maybe it is the real bottom and things will go up. Basically there are always structural arguments about why a market is above the long term mean (migration, tax, technology, resources, limited supply, vacancy rates, whatever). These apply most if not all the time. Funny they are only touted when things are bullish. I think it is actually an indication the bottom is not yet reached when these are still cited.

My prediction is that rates have or are likely to peak soon. I think however as rates go down, real estate will also go down in value as unemployment will go up. This did not occur in the last cycle so no one thinks it is possible. I think oil will peak in the next year and go back to $50 a barrell. I think the world economy will go into recession. This may not be a good thing for the Australian economy. I think the emerging market economies may not do so well either. We are awash with debt everywhere, it will unwind.

Maybe we are in acommodity supercycle.

I still hold by a few maxims : Debt must be repaid. This time is not different. Things revert to the mean. No one can predict with precision turning points. If it smells like a bubble, looks like a bubble and tastes like a bubble, what is it likely to be ? it may look cheap, but it can always go lower...

The capitals including Melbourne have caught up. Sydney is actually looking OK value on a relative basis. 1.3X other cities. Maybe it will go down more. The Eastern suburbs and northern sydney area seem to be giving way to gravity.

I will be looking in the outer rim of Sydney over the next few years. It is at the end of the day a fantastic city with great weather.

Happy investing !

 

[Aaron Sice]

I reckon we are witnessing reversion to the mean in Sydney and possibly the rest of australia. The can be quite slow. It is a process of repeated dissapointment until people reach a stage of revulsion. There is a pavlovian effect on the way up (salivating dog expecting another biscuit, positive reinforcement for gains) and this is gradually extinguished until all the positive anchoring points have diminished and are forgotten.

No a bust takes a long time. Things go down a bit, there is a suckers rally, people buy in, are dissapointed and then things go down again and there are new buyers who then are again dissapointed until the base forms. It may take a decade. If you are expecting to get a bargain, maybe you will get that.
!

reversion? more like stagnation.

pavlov's dogs? been talking to Daniel Kertcher by any chance...?