Generate cash flow by acquiring distressed businesses
Published 9:45 am 1 Feb 2021
Hi, everyone, welcome to our Ask Dominique session for the month. I thought this would be a quiet time, a calm before the storm because we’ve got the federal election coming up in a few weeks. And then I was thinking, it’ll be business as usual, everything will be fairly settled. But we’ve actually had quite a few changes, which is unusual prior to a federal election. There’s longer-term changes that I’ve been watching for a while in the economy, demographically, as well as technological changes. And additionally, we’ve got some micro short term changes.
So one of the things that they’re talking about, the Reserve Bank is potentially dropping interest rates. And they’ve been talking about that because even though it’s highly unusual to do it, well, not unusual to drop interest rates. But it just hasn’t happened since 2016. And recently, they were talking about raising rates only in more recent time, like the last couple of months, they’ve been saying that the Reserve Bank is in a more easing cycle. It’s not much further to go, we’re already at one and a half percent. So why would they be talking about dropping interest rates even further?
And economists are predicting two more drops this year, which would take the baseline rate down to 1%, which is like uncharted waters for us. The reason that they’re talking about this is that inflation or price growth just hasn’t been where the Reserve Bank wanted to be. So they always try and keep the economy on an even keel to avoid the big booms and then the busts, that whole roller coaster ride. And the Reserve Bank does that by controlling interest rates, the price of money. When they control interest rates, they control our spending. That’s the idea behind monetary policy, the cost of borrowing, the cost of money. If they control the price of money, then it will control the way we spend. We’ll either spend more or less depending on the price of money.
Now, inflation measures how much we spend. If everyone’s spending and everything’s good, then inflation goes up. So you get inflation when there’s a boom. We’ve had flat-lining inflation for a long time. And the Reserve Bank likes to see a level of growth, not booms and busts, but they like to see growth steadily pumping along. And Australia has not had a recession since the early 1990s. We’re a dream economy in that respect. Other economies in the world called us the one to down under because of the way that we constantly have consistent steady growth, but nothing hitting it out of the park and nothing too damning.
We did well following the global financial crisis because we had mining to help us trade through. But we haven’t really kick-started since then. So, the way that the Reserve Bank targets inflation is they like to keep it between 2% and 3%. Nice steady growth. So we don’t have a recession. A recession is defined as two consecutive quarters of negative growth. So we’ve always just had enough, but we needed to be more than just enough.
So our inflation numbers came in last week, and they were at 1.6%. So it wasn’t where they wanted it to be between the 2% to 3%. In fact, they haven’t really steadily hit their targets at all accurately in the last five years. So, there’s talk around the Reserve Bank adjusting the price of money in that respect. And the other thing that’s happened is due to falling property prices and rents, people are feeling poorer. So, as property prices slump, people who had wealth in property, which is a lot of the population, great Australian dream is owning our own home or owning investment properties. We tend to feel poor.
Even if we’re not buying or selling, when we say that our house has gone from $700,000 in value to $800,000 in value, we feel richer. When we feel richer, we spend more. So because house prices have fallen and rents have fallen, it means that we’re not spending more, we’re spending less. Now, that’s taking out, they don’t look in that equation at fuel prices and food prices because they tend to fluctuate anyway so they don’t really give a good indication of what we spend.
And the main reason why we’re not spending is A, the wealth effect, we feel poorer with property prices falling but B, we’re spending less because we’re in debt. In Australia, household debt, Mom and Dad debt, the amount of private debt we all carry is up over 190%. That means that every dollar we earn, we spend over $1.90. And if we’re spending a lot more than we earn, we have nothing more to spend on other things to enforce consumer spending, and thus, boost inflation or growth.
Remember, the more we spend, the more jobs are created, the more people out there are earning, the more money that’s in our economy, the better for the economy. That’s why they want us to spend. It’s good for inflation, good for tax, is good for everything. But we’re not doing it because we’re carrying so much debt. And that was partly because banks lend really well prior to the Royal Commission plus, we were all getting loans very easily. Interest rates were so cheap for so long post-global financial crisis. So we all borrowed and got more and more into debt. Rather than spending, we’re now taking all our earnings and just servicing debt paying interest.
What does that mean for us as an economy? It means that our economy is on a knife’s edge right now. Bear with me, though, because there’s opportunity in this. I don’t want to be doom and gloom about it. But the cold hard facts and figures are, we don’t have growth, we don’t have price growth, we don’t have economic growth. The powers that they, the Reserve Bank, are trying to adjust that, and they’re looking at interest rates, governments are looking at tax cuts and that sort of thing, to try and give us more money to just kick start the economy.
But, we definitely are spending less. A, because we don’t have it and B, because psychologically, we’re a pack animal human beings, we do what other people are doing. We listen to the media and the voices that are out there. And everyone’s talking doom and gloom about property, no one’s spending. So we, in turn, don’t spend and it has a knock-on effect. It becomes a self-fulfilling prophecy.
Unfortunately, when it comes to inflation, if we’re expecting prices to fall, if we’re thinking the economy is bad, that in itself stops people spending. If you wanted to go out and buy a property, you’re probably sitting on the fence now going, “You know what? I might wait because it seems things are bad, it seems things are falling.” And if everybody’s got that collective mentality, then no one’s spending, and we’re all waiting to see and waiting for the worst to happen. And that then becomes inevitable.
President Roosevelt in the Great Depression, he said, “We have nothing to fear. But fear itself.” It’s the fear that holds everyone back. And when millions of us have the same mindset, and we all hold back, it means for bad times. And that’s where we’ve been trending at the moment. And that is a change that we’re seeing. I didn’t think that we’d see change now. I thought it would be business as usual. Because people coming into election just fear uncertainty. When we’re uncertain, we just freeze and do nothing. And yet, a demographic change and a change that’s been in play for over 12 months now is really playing out and hitting its straps now.
Few of these factors have come to critical mass now. First of all, globalization. So, we’re not going to do things the way we always have. The world is far more interconnected now with the internet. And the fact that companies are going global now is really eroding small business. The other thing that’s happening is we have technology, which is replacing people’s jobs, and which is streamlining and making things a whole lot easier. The third thing is, economically, we’re seeing the knock-on effect of this. That’s why people aren’t spending, why the whole world has become stagnant in recent years post-global financial crisis. And no country is getting the inflation or the growth that it wants, that it needs, and that it’s seen in the past.
But these are things we can’t change. It’s the way the world is, it’s the way technology, the internet is and we are far more interconnected. And globalization is a phenomenon now that we have to live with. So, we don’t want to swim upstream, do we? We can’t fight the current, we’ll just tire ourselves out. As Charles Darwin once said, “In times of change, it’s not the smartest or the strongest, who survive and thrive. It’s those who are most responsive to change.” So we’re not going to see anything undone. We’re not going to see the internet suddenly come to a halt. In fact, things are just going to go a whole lot faster, a whole lot further. We got to climb on board with that change. And there’s a rising tide in that respect now.
Now, don’t get me wrong. People are still working. We’re transitioning through change. So unemployment is historically low. That’s a good thing. People have jobs. They’re all earning money. They’re just not spending it. And therefore, we have no inflation, no growth, and that’s going to affect our economy and our sentiment, our consumer sentiment and our business sentiment. And it’s going to affect and is affecting the over 3.8 million small to medium enterprises out there.
So whilst we’ve got all these global giants that the markets play to, and that governments and laws and everything is designed around facilitating the forgotten ones in all of this are the small to medium businesses that are really the backbone of the economy. They’re the ones that provide the 4.9% unemployment. They’re the ones that employ people, they’re the ones that drive the economy. And they’re the ones that are really being hurt and affected when we have such low inflation because they cost a pretty fix, they’ve still got to pay their staff. And they’re not getting the money in from us because as an economy and as a country, we’re not spending.
The other thing that we’re seeing with this 3.8 million small to medium enterprises is that they have reached their heyday, they’re looking for the next generation to take over because many of them are run by owners, small family businesses and owners who were baby boomers. So, for those of us who don’t know, the baby boomers were the biggest generation ever. All of those children born post World War II, and we just had a massive population boom. And all of those baby movers move through peak spending cycles, and they’re quite entrepreneurial. Their parents were post Great Depression children. So they were quite conservative. And you know when the next generation backs the trend, they lived through good times. The world was a good place, the war was over. We had booms, we had manufacturing, and the world grew and all of those children went into the workforce quite Boyd, and they started businesses, they rolled up their sleeves, they worked really hard.
But when it comes to the small to medium enterprise level, they worked in the business, not on the business. They couldn’t ever elevate themselves and streamline. The ones that did and the few turned into massive enterprises. But for most of those baby boomers who run their own businesses, they’re still working in the business. And they’re looking to retire now. But it is a down economy. And the next generation just isn’t as savvy as them and are prepared to get into businesses. So there are a lot of baby boomers, and a lot of small to medium enterprises that have been underpinning our economy that are now just closing their doors or on the market trying to sell but they can’t get out. So they end up just retiring and a perfectly good asset goes nowhere.
Let’s have a look at what we’re seeing in the economy. Because as you know, especially with real estate rescue and distressed property, I’m constantly watching and monitoring court lists. And that means I’m seeing what’s being filed in court and data backs this up. There has been a 20% spike in winding ups of companies and businesses. So, winding up means if a business becomes insolvent, if it can’t meet its debts as and when it falls through due either because the owner is wanting to retire, they’re not working in the business anymore, they’re closing the doors, they’ll either voluntarily wind it up, just close it down, or their creditors, if they’re not paying debts, if they’re not getting the cash flow to make commitments because of low inflation, consumer spending, and sentiment down, people not coming in the door and spending their money, then that goes on to affect everybody.
So we’re seeing a 40% spike in private winding up. So, 20% overall from last year increase to this year. So 20% of businesses, more than 2017 to 2018 have been wound up in the same period 2018 to 2019. In fact, 20% more. And of those ones, if we look at what got wound up, how much of it was done by bad debt and creditors, third parties taking them down and how much did they do personally? 40% more were done personally. Where they fell on their own sword and said, “You know what, not worth it. I’m out of here.” So more businesses just walking away closing down.
And 9 times out of 10, statistically, if you look at the legal framework, these are perfectly viable businesses. It’s just that the owner was too close to it. They were in the business. Maybe they were health issues, maybe they wanted to retire but for whatever reason, there are perfectly viable enterprises who add such massive value to the economy just going nowhere. And for those who would get wound up by creditors, that’s a headache for them. So sometimes viable businesses are out there, they never get wound up, nothing happens. And they just cease to trade.
So, it takes 12 months and over $10,000 to wind up a business. Sometimes they don’t have that, or they can’t be bothered. So they just walk away. There’s opportunity in all of this. When we look at that data, and it’s something that I have been watching and working on for the last two years. There is a lot more happening out there. And recently, new laws came into play. So, July of 2018, six months ago or so, we had some new laws. I’ve been watching the bill come through Parliament. And I thought if this happens, and I thought personally, I got to be honest, it was highly unlikely because we have a certain culture in Australia, when it comes to companies and small businesses, they’ve been a little bit disrespected, no one really cares yet they underpin our whole economy, but they get caught in the middle.
And what we’ve seen recently like in budgets in recent years, is more incentives for small to medium enterprises where they can write things off, get tax concessions, get cashback, and allowed to deduct more things and get those sorts of incentives. It’s been working at a fiscal level. So government budget level where they’ve been helping small to medium enterprises and more recently now at a legislative level. That is, Parliament changing laws to help small businesses, and it’s a massive paradigm shift for Australian law. As a lawyer, I can say that because I never thought we’d see this day where the whole business mind of Australian corporate face was turned around.
So, we have a rise of what we call a turnaround culture. Turn around means to help businesses that hit roadblocks. In Australia, we have had a culture historically of just sacrificing businesses and companies that hit cash flow roadblocks. So the definition of the insolvency at law is when you’re unable to pay your bills as and when they followed you. That is a definition of insolvency. If a bill comes in and I don’t have the money to pay it, then I’m insolvent. And trading insolvent is like a cardinal sin when it comes to the corporation’s law. At least it was until July last year.
So, prior to that, governments have been looking at the data, the things I’ve shown you. They’ve said, “Look, winding ups are going up. Companies are just closing down. Private windings ups, people falling on their own sword, companies just closing their doors, and being deregistered is on the rise. Why is this happening? So they got a special report from the Productivity Commission. And what the Productivity Commission found was here, we don’t encourage businesses to trade through it. They do in America. America has a turnaround culture. America gets that, okay, sometimes when the world’s changing, when technology is changing, when landscapes are changing, businesses have to adjust. And sometimes there’ll be a lag period. There’ll be a temporary cash-flow problem. Happens to all businesses.
But what happens in Australia, we say, “Oh, you can’t do that, you’re trading insolvent. It’s the director’s fault. They’re personally liable. They have to shut down.” And then we have businesses dropping like flies. And that’s no good for the economy. When it comes to inflation, when it comes to the government collecting tax revenue from profitable businesses, everyone, it’s a win-win. If business is doing well, if consumers are doing well, if the government is earning tax money, everybody wins. So the Productivity Commission looked at all of this and said, “We need to encourage businesses to have a bit of gumption and trade through leaner periods.” Instead, we’ve got this culture of punishing them and punishing the director personally for having a go. We need to get to behind small to medium enterprises and businesses and help them trade through difficulties.
So, after a long and heated debate and getting past both houses of parliament, finally, we got introduced into our laws last July, safe harbor legislation. So safe harbor mirrors what they have in America. You may have heard they talk about Chapter 11. So Chapter 11 in America is like waving a white flag, getting a moratorium, like a peace treaty saying, “Okay, got a few problems here, just back off. We’re making adjustments. We’re building up a war chest, we’ll be able to pay you out. But if you take us down, everybody loses.”
So we have legislation now in Australia, that allows businesses some breathing space so that creditors have to back up, they’re not going to be in trouble. That culture of blame where they’re trading insolvent and the director is personally responsible has now been changed in our legislation as well as what they’re calling or ipso facto stay. So, ipso facto, it’s Latin. Ipso facto means where a contract has, and often in business, there’ll be contracts with suppliers and other tradespeople. Most contracts in business will have a clause in them that they call an ipso facto clause. So an ipso facto clause says that if one company goes bankrupt, or is insolvent, or seems like they’re going to be insolvent, or is deemed insolvent, very wide, but if they’re trading insolvent, they seem to be broke, then the other party can just terminate the contract.
And what that meant in Australia is no opportunity to wave your white flag and say, “Hang on, let me trade through it.” Because if you had money in the pipeline, but you just needed to build your war chest and organize things, as soon as you said, “Well, hang on a minute, give me a chance.” All your contracts would be pulled and terminated, they rely on the ipso facto clause, and they’d say, “You’re trading insolvent, all bets are off.” And then all of that money in the pipeline would be lost as well. So they were doomed to fail with the inevitable road bumps that come in business.
So I’m not going to go through that, this chapter in verse. But this is how damaging and how difficult the director’s duties clauses were under the Corporations Act. So section 588G had all of these compliance steps. So it said that if a director of a company knows that the company is insolvent, or has reason to believe it’s insolvent, or should have suspected it was insolvent, or had any [inaudible] in a crystal ball of insolvency, that now or at some time in the future, the company could be insolvent. I mean, how wide is that? How long is a piece of string? How long in the future? That is scary stuff. No wonder people are going, “I’ll go into administration.”
Now, we did have administration that was getting someone to come in, an external administrator and just hold the company sorted out. And then if it was okay, then it could try it again. But guess what the Productivity Commission found? It was often the case, an administrator would come in, it was inevitable, you go from administration into winding up or liquidation and that was because, I reckon, there was a conflict of interest, the administrator was there saying, “Let me sort it out. Oh, there’s money here.” Guess who gets paid first in an administration? The administrator. Oh, there’s money here? Yep, I’m going sell this, that, and the other, I paid myself, Oh, now it’s insolvent, we better wind it up.
So it was like a death knell once you got your administrator in. And when you called an administrator in, all of your contracts in the pipeline, administration was defined as an ipso facto of it. So, administrator appointed, the administrator says, “Hang on everybody, here I am. And all your contract is going bye-bye, contract’s off, I terminate under the ipso facto clause.”
So, what the new legislation does is it presents us with a huge opportunity and a heads up in the business space. Unfortunately, these new laws just haven’t been out there. They haven’t been published. There’s just been no fanfare about it. And many business owners just don’t know what’s possible. So it is the age of the business turnaround. Just like we have real estate rescue with businesses, we’ve got this now, this wave, and sorry, real estate rescue with property where we can come in and rescue a property. Similarly, with businesses now, the laws have aligned. That created real estate rescue when the planets aligned and the laws were right and the climate was right for distress and helping people in distress.
Similarly now, we’ve got the same rising tide and the window of opportunity in the business space. I’ve been watching it for a few years now, watching this legislation come through Parliament. Now that it is law, there is a massive opportunity, especially for us who are in the property and investment space because one of the biggest thing I hear from us in the property game and from all of you guys is yeah, it’s great renovating properties, it’s great developing, but it’s a long time between drinks.
So, you get your payday once or twice, three, four times a year when you do a deal. But in between that, you’ve got to live off that money. Cash flow becomes an issue. And remember Robert Kiyosaki’s cashflow quadrant, where either employees or we’re self-employed, we’re trading time for money, or where we want to be is as investors and many of us have been doing that, haven’t we with property? Or business owners because with business, you can streamline. Problem with business though is that it’s expensive and most startups fail. A lot of money goes into setting something up. How good if you can piggyback off a going concern because of market factors or demographics or baby boomers or whatever it is, it no longer wishes trade, they don’t have the know-how and the ability to use safe harbor legislation, ipso facto stays, those sorts of things to trade through their difficulties. Massive opportunity for a turnaround. And the government… The powers that they want this, they want businesses to be turned around.
So, the Safe Harbor legislation involves laws protecting directors, when they are working on a plan to get out of trouble. And what’s required is that indirectly or directly, they’re taking a course of action, which is reasonably likely to lead to a better outcome for the company. They’re not on the hook personally, if they’re putting a turnaround plan in place to save the company. Even if it ultimately goes into liquidation. There’s no problem as long as they genuinely believed that they were doing something better.
Now, the legislation requires certain things of the owner. First of all, that they keep proper books and records. Secondly, that employees get paid and the ATO gets paid as a priority. And thirdly, that there is an actual plan. They can’t just keep what they’ve been doing in the past, nothing changes. Definition of insanity is doing the same thing over and over again and hoping for a different outcome. So, what the Safe Harbor requires is that there’s a plan in place that the books and records and accounts and other things are kept on track. And that other than that, everything else, the plan is actioned. And when it becomes apparent that the plan is not going to work, then the normal laws take over.
The competitive advantage for you in this opportunity, if you’re plugged into this and have you been looking for cash flow, this is the rising tide. So, first of all, you are not the business owner. Just like real estate rescue, when you come in to rescue someone and help them with a property, the situation is that they just can’t see the trees for the forest. They’ve got the back against the wall, they’re rabbit in headlights.
Similarly, although on a different level in a company or a business situation, what happens is that often, when you become into the business, the business owner has been trying to empty the ocean with a teaspoon. If they’re struggling, they’ve just been promising everyone, they’ll get paid. You’re actually the friend of all the creditors. If you can come in and say, “Hey, I’m just taking this over. I’m attempting to turn it around.” This is what liquidators do all the time and administrators that turnaround experts. There’s a lot of these in America, because legally, it’s a thing in America to turn it around. Now, it’s legal in Australia too.
So turn around experts come in and they say, “How much is already here? How much have we got in the pipeline? And then what are we going to do? We’re going to hold these guys off, we’re going to build up a war chest, we’ll rely on safe harbor and ipso factos, we’ll keep trading through it.” So, your first advantage is the creditors don’t believe the business owner. They’ve already been promising us they’ve been struggling, “I’ll pay you. The check is in the mail.” Suddenly, someone new who’s backed by legislation is coming in to fix things. You can then build a watch. It’s perfectly legal in safe harbor to rearrange things, work out a plan for a turnaround, keep the money coming in, on the other hand, and then you’ve got a war chest to trade through things.
Changes may have to be made. Maybe it’s not distressed. Maybe the owner just wants out. And they’d otherwise just walk away. Maybe the business has been listed on the market. I see so many clients of a certain age where this happens. We tried to sell it, we couldn’t sell it, we shut it down. There are ways to structure these deals where you can come in and take over the business and have an arrangement with the owners. Perhaps they get paid out later. Perhaps it’s speculative. There are a lot of strategies and a lot of ways to structure this sort of thing.
You can negotiate with all the creditors. Many of you are master negotiators, if you’ve done our DDI course or any of our programs and property, and there is cash flow. And that’s the one thing, that’s the opportunity here for our community, especially property people to get from the investment quadrant into the business quadrant and to be able to scale and get money coming in and get leverage. A lot easier and a lot cheaper and less risky than a start-up.
I’ve got some questions coming through now, but just wanted to flag with you that that’s where we’re at, that’s what’s happening, they’re the laws, that’s the economic situation at the moment, so change laws to facilitate turnarounds, a demographic of an aging business owner population, as well as right now, economically, a poor business sentiment environment, even while the government has so many incentives and tax breaks for businesses, they just can’t underpin SME. So perfect storm.
And for the last 12 months, watching the legislation, watching those factors, I’ve developed a business turnaround program step by step to cover these situations so that those who want to play in the business space, even if you’re working a nine to five job, and you’ve been thinking of segueing into business, so that you don’t have to sink everything, burn your bridges, try out with a startup, most startups fail, you’re able to take a going concern, leverage it often with no money to hand, just taking over something that they’re trading your way through it and the laws behind you on that. So it’s a new program.
For those of you who might be interested in that, if this resonates with you and is an area you want to explore or keep informed about, we’re going to be launching this and we’ve got a great special coming up. And if you want to be kept in the loop onto that incoming week, just type yes now in the message section below on your page there, and we will facilitate that and keep you in the loop for our business turnaround program.
Now, I’ve got a question from Chris there. Great. Good to see. Chris has said, “Does this apply to all companies or only to businesses?” No, all companies. It’s under the Corporations Act. So it’s any company registered with ASIC with an ACN, this applies to. So all companies can trade through and invoke this safe harbor legislation. In fact, it’s not ABNs at all. So an ABN is a business name or with an ABN is a business number for tax purposes. So there’s two ways you can trade. One is a sole trader with a business name. So, Dominique [inaudible] trading as JB plumbing or whatever, that’s a business name, but it’s really me, an individual. Anything else is a company. So it’s X, Y, Z proprietary limited, and it may be trading as JB plumbing.
So this relies on company. So if your business is proprietary limited at the end, then it’s a company. And this applies. Steve’s asked, “Will this law be perpetual or just to overcome the present situation?” Now, it is law from the date it was made forward. It’s not just an interim measure. This is our culture going forward. Australia has finally many decades in the making, instead of a punitive or punishing culture. What’s happening in Australia is we’re embracing the turnaround culture. Connie’s asked, “How would we know there are no undisclosed or unknown liabilities?”
Absolutely. Connie, great point. And yes, it is a risk because you don’t want to buy a pea in a pod. That’s why I’ve spent the last over 12 months developing a program to teach you what to look for, exactly how to find and do your due diligence, how to source these deals. So, just like we’ve got pdata for property, similarly, there are tools and search engines and due diligence tools for businesses, so Equifax. So it’ll all be supported with that. And I’ll teach you how to make sure you know where the time bombs are, plus how to deleverage it. So there’s ways to structure it. You may not necessarily step in and take over, we may create a special purpose vehicle. So your own business, your own company that separates the good from the bad legally, and then you keep running it that way.
So, often with these things, it is a case by case basis. And the way that lawyers do due diligence, is you look at what you want. For example, if I was looking at taking over a similar business to me, what do I want in it? Do I care that they’ve got online courses and programs? Maybe I don’t want that. Maybe I’ve got my own online courses and program. Maybe I just want the database. So, the only thing I’ll be looking at then what’s in it for me with that business is the database. So I’ll concentrate all my attention there.
So Mark said, “How can you earn a personal cash flow?” This could be the way, mark. There’s few ways to to get cash flow, but I believe in control. So, some people buy shares and wait for the dividends, but you’re not really controlling the company. You’ve got no say in its direction or outcome, you are depending on the CEO or other decisions that are made. And whether they give a dividend or not, may not happen. Properly gives you a bit more control, especially if you’re an investor because you can get rents in and you can get yield that way. But prices have gone so high and rents really haven’t kept up, yield is very low, that most property in Australia is negative cash flow unless you bought in mining areas where rents were really high, those people are suffering and you’re feeling that now.
So in so far as property is concerned, whilst you’ve got more control, you don’t get the cash flow. That’s why Robert Kiyosaki says cash flow can come from self-employed, it can come from being an employee, because you’re getting a wage every month, but you’re trading your time for money, you can’t really leverage that or increase it. You can skill up maybe and get a pay rise or get a better job. But far better place to be is investments, which if you’ve got a property portfolio, and you’re paying it down over time, and rents will go up, which they should, by the way. If we have a change of government and negative gearing comes in, markets always change. Over time, you’re going to get yield from property and investments and dividends on shares. But you need something far more responsive to you and businesses that adds, so that final quadrant there. Because business allows you then to be in control, to make decisions, to collect the cash flow. All businesses is, at the end of the day, I always say to property developers, property development is the same as business.
So, Harvard Business School defines business as you producing or giving to the market something that it wants, whereby the cost of you to deliver that is less than what the market is willing to pay for it. So, if the market agrees that cups of coffee costs $3.50, if I can get my balance right and employ people in a cafe and buy my coffee beans and my milk and everything and produce a cup of coffee for $1.50, then that’s $2 profit to me. So it’s just doing that. And business allows you to adjust.
When you’re coming into someone else’s business, you are able to see what’s not working, what is working. I always say a body in motion stays in motion. If there’s some momentum, it’s much easier to take a going concern and turn it around which the laws allow us to do now, than it is to say, “I’m going to get a business loan. I’m going to sell the farm. I’m going to get a startup. I’ve got this great idea. I’m going to produce this.” And syncing it all to find that there’s nothing there. If there’s no risk to us, if it’s already a business, if we’re not buying in, if we’re going in for nothing and turning it around, then it’s all upside.
So lots of yes replies coming in. I will keep you guys in the loop as to a launch for this. We’ve got it really special for those of you who are already part of our community and who are on this webinar. So, I will be launching that, my step by step system for the turnarounds. It’s a perfect adjunct. Being a business person myself, I just didn’t ever teach business before because it was risky. It was very niche. And startups are hard. But these new laws allow us to just step in with very little risk and take over. And that’s what I’ll be showing you and it will really augment what you’re doing because you’ll be able to get cash flow on the side, apart from your property trades.
Question here from Steve, who says, “In REA, we have a buyer beware. Will the owner have to declare everything?” So that’s a good question. So, our real estate rescue program, so that’s a buying distress real estate, and in any business, in law, the whole premise of law coming from the Latin is caveat emptor. Caveat emptor in Latin translation means buyer beware. If you’re coming into something, then you need as a buyer to inform yourself.
In fact, that’s where the term due diligence comes from. If you hear due diligence, it comes from an old American case in law, where what happened was due diligence was almost like a defense. So, due diligence, it reverses buyer beware. Buyer beware says, “I understand as a buyer, the onus is on me to inform myself.” Due Diligence was a defense mechanism to say, “Hey, I did everything, and these didn’t come up. So that’s not my fault. They hid stuff from me.” So that’s how due diligence came into being.
So, to answer Steve’s questions, absolutely, the onus will be on us, when it comes to buyer beware. We will have to going into a business make ourselves informed. But the issue will be here is that if there is a risk, and I personally in my business base, in my career, I have taken over businesses and they have been risks and in debt, they’ve been in a lot of trouble. I’ve structured it so that there’s no risk to me. I’m not actually paying them for the business bit like real estate rescue, we’re going in, we’re saying, “We’ll see what we can do. If I can help. I’ll help.” We’re taking profit here. If we could turn it around, if there’s profit or whatever, then we get that. If we can’t, it’s derisked and we walk away from the deal without any loss to us.
The days of buying a business or a franchise or going in and saying, “I’ll give you $200,000 or $300,000,” people regularly pay hundreds and hundreds of thousands of dollars for business based on cash flow that’s not there. I’ve seen clients buy a café and they were told it seats these many people and it makes this much money. And it did. When you read the books of it, it made everything they said. When the owners got in, it turned out it was only licensed to have 50 tables and they’ve been running with 85 tables. So yeah, they were making the money but technically, illegally. When we took away 35 tables, the profits weren’t there. That ends up in court, that’s a hitter. You don’t want to be there.
The best way to know about a business and a do you due diligence is from the inside. Taking over, turning around, you’ll find out first hand without any of the risk or the money down.
Okay, fantastic, guys. Thanks for all the yeses, we’ll keep you in the loop, really interesting changing times we’re living through now and massive opportunity. I’m so looking forward to be sharing all of that with you. We’ll talk soon, have a great month, and we’ll catch up next month. And for those of you who’ve typed yes, we’ll be keeping you in the loop on the business opportunity with business turnaround as we go. See you.