Real Estate Myths Destroyed

Thats a good result; I presume personal guarantees by directors too? Was it 75% of the purchase price of the new business or was the entire loan 75% of value of purchasing company assets? Because if it's the former actual LVR would be lower since there would be a charge on the old and new company.

 

Be interesting to see if a lot of small business failures are due to financing, or lack of.

 

75% of purchase price of business. Directors guarantees. Asset and goodwill purchase (not entity) so only single charge against my company's assets

I must have a 1 in 50 broker

 

It's a good result @DaveM but what's the actual LVR (roughly) when you add the assets theyve taken a charge over to the purchase price? I'm looking to do something similar as well so appreciate the heads up

 

Despite all the claims about real estate "sucking up" all the loan money and leaving none for businesses, I haven't seen any evidence to support this claim. From an article on the subject:

In my view, the greatest single driver for small business failure is the absence of basic commercial management skills.
Most small businesses are started by people with:

• a great idea; or
• a skill in a specific area, e.g. a cook or a software developer or a boat builder; or
• raw passion, boundless energy and a desire to create something of value.

More often than not they jump headlong into their venture with little or no planning, work tirelessly and relentlessly and wake up several years later with nothing to show for their immense efforts and ultimately blink in the harsh light of day and wonder why they failed.
Almost all small business owners have no idea how to:

• assess the financial viability of their idea or write a simple business plan;
• create a simple financial model or manage cash-flow;
• develop or manage a budget;
• write a sales and marketing plan ;
• put in place simple legal agreements to protect their assets;
• protect their Intellectual Property (IP); or
• attract and manage staff

​

Why do small business startups fail? | EmpireOne Group

I have worked for a number of small businesses and I agree with much of the above. The main issues I have seen is a complete lack of basic business planning and also cashflow management. A mate of mine was involved in a fantastic startup that failed because the business could not manage it's cashflow. It was a real shame because they had a great business model.

 

DaveM has given me permission to provide clarification to help those out in the thread.

The finance in particular was actually approved at 75% LVR secured only with a general charge on the purchase entity assets and personal guarantee from directors. As the client would prefer to take over the business within their existing entity it was instead placed over the existing business, but this is incidental and not required by the lender financing the deal. So this is a *true* 75% LVR, with no nasty debenture/early payment penalties.

You have to have a quality business to be able to access products like this and be squeaky clean, but it's a space that a number of lenders are opening up to. To get these over the line it involves substantial reflection on cost projections, mitigation of management, transaction, clearance, equity and security risks.

As always, for those who can show sufficient value and risk protection - there's funding available. The question is usually at what cost.

 

Thanks for clarification, excellent result @Corey Batt and congrats @DaveM ! What sort of interest rate range do loans like these get charged out at? Don't need a specific figure.

Also, is funding available for the purchase of part of a business? Eg there's one business id like to buy into with outstanding credentials:
- very strong long term valuable contracts to rock solid clients
- very strong history of growth, financial discipline etc
- full management structures, procedures etc in place as well as both majority shareholders being involved in day to day running
- very low debt, well under 10% of company value
- high cashflow and profitability
- good net asset position
- basically every box ticked and everything done right from structures, employee agreements, best Lawyers in the country in that field on retainer, full insurances, comprehensive shareholders agreement etc
- monthly dividends paid every single month like clockwork for at least 3 years with larger dividends at ends of financial and calendar years.

I would be looking to purchase a minority stake of up to 5-20%, would be a 7 figure sum.

Do banks entertain things like this as an individual buying a non controlling part of a business? I would ideally have the shares as security and of course personal guarantee.

 

Interesting scenario @sanj

Dependent on a few points:

• Do you have any experience in the industry you're buying into
• personal asset position
• whether any security or 'whole of wallet' buffers can be used to strengthen the application (transactional banking, homeloans, other debt facilities within the same lender)
• Even if not providing a direct dollar for dollar security from property, some lenders will consider property even at 80% LVR as providing a risk mitigant if with the same lender
• ROI of purchase
• Contribution funds

I think you'd genuinely struggle to get a significant lend solely on the shares and personal guarantee - but if you can show parked assets to assist, experience into the industry in which you're buying in etc it could be a go'er.

Rate wise is deal dependent, unsecured can float from 9-16%, and with debentures to nil lock in penalties. A partial to full secured lend will float 5-9% dependent on the overall picture - which in these deals is more to do about the story you tell, than the numbers on the balance sheet. (many business deals are easy to write if you can reference a track record, even if they're half as profitable).

 

Hmm sounds like a maybe, I can tick off most boxes with appropriate justificaiton/proof and can show extensive business experience but not in this industry. My purchase would be as an investor though and not have any involvement in the running of the company so I don't see how experience in that specific niche industry would be relevant. Then again it's up to the lender to decide what is and isn't relevant and not me.

 

I'd be looking to put a sizeable sum in as cash too, even if I got 50% loan id be happy. ROI around between 28-40% depending on the deal struck

 

These doom Sayers frustrate me to no end! Reason being they try and position themselves in a no lose situation.
Year on year they just drop the same dribble and whilst nothing eventuates they sit back and say "wait it's coming, you watch". We'll eventually something will happen, that is a given but it may be in 20 years time. They then rear there heads with the biggest "I told you so!" All the while forgetting the fact if anyone actually bought into there nonsense they would have foregone 20 years of good times in which they could have entered and exited with their entire fortune funding retirement.

 

@albanga shhhhhhh! stop it you. We need the 'forever renters'. Let them have their doom and gloom, as long as they pay rent on time.

 

Haha, hang on Leo, did you write this article!

 

Those who don't understand or can't play the ball, play the man.

 

If used correctly, finance is the tool to expand the business not just the lazy capital to purchase and pay interest (investment logic)

QUOTE="Corey Batt, post: 121832, member: 10"]A large amount of rent seeking in Australia is derived by the inequalities in the system thanks to regulation - in particular planning laws. The current system has mispriced a core asset class which has created a distortion to prices and risk rating, which is heavily draining other productive areas of the economy..[/QUOTE]

So deregulation of planning will lead to lower costs for business? Standalone shops in residential areas? Coal mine next to offices?

 

Extensive experience in the industry is to show that you can understand what you're buying makes sense. Quite a logical policy when the 'asset' being purchased is generally not easily liquidated, have no general commentary or analysis (buy any share on the ASX, there will no doubt be various reports, analysis from third parties which can assist in your decisions). Fundamentally the lender cannot have a strong knowledge about every business in the market, so they'd rather the purchaser have enough knowledge of the industry that they could identify any issues which may be present with the purchase.

So deregulation of planning will lead to lower costs for business? Standalone shops in residential areas? Coal mine next to offices?[/QUOTE]

And nuclear waste dumps next to childcare centres.

But in reality a competitive market with a functioning court system avoids these issues. Cities such as Houston have government planning laws at all - this has resulted in competitive sqm rates for leasing, larger average home and allotment sizes, shorter commutes and cheaper asset prices. Funds can then be redirected into other areas of the system.

Even Australia pre-1970's had a very relaxed planning system - until Environmental Planning and Assessment Act came into being. Conveniently not long after that we saw a persistent uptrend in prices.

 

@Shadow

Uploaded this a while ago.

I think this might have relevance...

 

And that's just from CG, not even talking about all the folks who CREATED additional equity. Will we have the same growth as last 15 years? who knows. But 1 thing I personally believe is that the opportunity to create equity from deals will likely be everywhere. The serious folks look at it from a business perspective, not just waiting for CG. Nice chart Big Will my 2 cents.