Selling A Share of Your Business to an Employee

Selling a share of your business (or the entire business) to an employee is often overlooked as a strategy, yet it can be very beneficial for both the owner and employee. There are many different ways this can be achieved and different situations where it might be beneficial. It is also possible that the owner can negotiate a better price as the employee may not have the capacity to purchase the business without the owner’s added assistance.

How does it Work?

One of the reasons why this strategy is attractive is that you can tailor it to meet the requirements of the business, the owner and the employee. There are no fixed rules, work out what both parties need for the deal to be beneficial and it’s a negotiation process from there.

The essential part of the transaction is that the owner will be entitled to receive a payment in return for giving the employee ownership or part ownership of the business.

The following variations can exist

  • If the employee does not have the funds or the capacity to borrow the purchase price, then
  • the purchase price can be paid over a number of instalments
  • the owner can personally guarantee the loan (in the employee’s name) and a separate agreement which entitles the owner to retain ownership of the business sold if the guarantee is activated
  • If the employee does not have the capacity to establish their own business premises then the employee can pay a rent and administration fee to the owner
  • The employee may purchase only one income stream of the business (and the owner continues to operate and own the remainder of the business)
  • The employee may purchase a share of the entire business (which could be Stage one of a number of stages to acquire the whole business)

What situations would it be beneficial?

Some examples which would suit this strategy:

1. The owner requires cash for personal reasons and financing is not an option

Example

Peter owns 3 toy stores which are trading very well. However Peter borrowed heavily to invest in an Aged Care Venture recommended by a friend. The Aged Care Venture has filed for bankruptcy and Peter is struggling to meet his debt obligations personally. The business operated an overdraft and the bank is not willing to lend any additional funds.

Paul has been a store manager for 5 years, and has previously spoken with Peter about purchasing the business or part of the business, but Peter had declined as he felt he would sell the entire business when he plans to retire in 5 years.

Peter and Paul negotiate for Paul to purchase 20% of the business for $50,000.

2. The business is largely dependent on the owner and therefore difficult to sell to an “outside party”. However, through a staged process, the business and its value can be transferred from the owner to the employee

Example

Neville provides engineering consulting services to large mining companies. Almost all of the income is from 4 mining companies that he has consulted to for over 10 years. Daniel is a qualified engineer who has been an employee for 5 years assisting Neville on these contracts (the business also employs 1 engineering undergraduate and 1 administration staff member). Neville wishes to retire.

It is unlikely that this business is saleable to anyone except Daniel. It is also likely that Daniel would not be awarded the contracts himself without Neville’s assistance.

Daniel agrees to purchase the business effective immediately – the deal is

  • 50% of the purchase price is paid now
  • 50% of the purchase price is payable in 12 months if the mining companies agree to maintain the contracts after Neville’s departure
  • Neville agrees to continue in the business for 12 months and is paid a salary

3. The owner wishes to offload part of the business to allow another part of the business to grow OR an excellent employee will leave without being rewarded with ownership.

Example

Annette owns a business that distributes cleaning products. The business has 3 distinct income streams

  • Wholesale of cleaning products to 3 large corporate clients. Annette has known these clients and has been distributing to them for 15 years. Profit on these products is high.
  • Retail of cleaning products to restaurants within a 200km radius. Carol is the manager who looks after this division, and whilst sales growth has been good, profit margins are lower as there are a number of competitors in this market.
  • Annette has developed an innovative cleaning product which is suitable for hospitals. This product has significant potential but Annette will have to invest a lot of time to commercialize, trial and distribute the product.

Carol works long hours and has done a great job with the retail division. Carol is enthusiastic about new products that could be sold through the retail network and has some other ideas to increase profits. Annette however does not have the time, nor the interest to invest money into this division, especially when the same time and money spent on the hospital product could produce much higher profit. Carol is frustrated at this lack of interest and is deciding whether she should approach a competitor to employ her. Carol has been repaying her university debt and does not have much money.

Annette and Carol agree as follows

  • Carol will purchase the retail division for $200,000, payable immediately
  • Carol is unable to obtain finance for $200,000 by herself, so Annette agrees to personally guarantee the loan. They sign an additional agreement which states that if the personal guarantee is called upon then Annette will be entitled to retain the Retail business. The loan term is for 4 years.
  • Carol will pay a Rent and Administration charge to Annette of $2,000 per month for the use of the office, staff and equipment.

6 Tips to Take Your Real Estate Investing to the Next Level

Taking your real estate investment business to the next level means going into territory you haven’t gone before to reap rewards you haven’t yet obtained. I know a lot of people who do the same types of deals they did when they first started in real estate investing. Now there’s nothing wrong with doing that if you’re content with what you’ve got. But if you’re looking for something more, you’ve got to take on greater investment opportunities. Here’s how to do just that.

Tip #1: Go After Bigger Fish

I got into real estate investing because I wanted to make some serious cash. I was sick and tired of struggling financially and I hated coming home tired every night. Well, I found real estate. I started doing some single family deals but after awhile, I found that I was still as broke as I was when I first started. I needed cash flow and I needed it fast. Go after bigger fish. Commercial property investment deals offer some of the greatest cash flow and returns for an investment dollar. The number of units and the size of the properties brought the largest returns for the amount of time and money I had invested in any deal.

Tip #2: Continually Educate Yourself

To get to the next level in your real estate career, you must continually educate yourself. Education enables you to find solutions to any challenges that may come up when you’re doing deals. Education also helps to eliminate unnecessary risk. Unfortunately, many investors believe that their lack of knowledge prevents them from doing the tougher types of deals like commercial properties. That couldn’t be farther from the truth. You must continually educate yourself. Read books. Attend seminars and don’t hesitate to ask questions.

Tip #3: Get a Mentor

A good mentor helps you gain practical experience much quicker and more easily compared to books and courses. Mentors help you navigate deals and overcome any show stopping challenges that may arise. Mentors are your safety net in areas where you don’t know where you’re headed. If you’re serious about taking your real estate investments to the next level, a mentor will help you get there quicker and with much less risk than if you were to do it alone.

Tip #4: Utilize a Team of Experts

There are many people who shun the idea of new investors taking on the risk of large, complicated projects like commercial real estate investments. They’re right. Commercial property investing is not for inexperienced investors or for do-it-yourselfers, but here’s the idea – let the experts be experts. Your team of experts works to eliminate the risk of your inexperience and lack of knowledge. You can get to the next level in your real estate investment career when you have the expertise of people who already know how to navigate their way through a deal.

Tip #5: Develop Marketing Skills

Any business will fail unless it’s marketed. Taking your real estate business to the next level means you must develop your marketing skills by putting them into action. For example, I started marketing my business using direct mail. At the time, I believed that it was the only thing I could do. As I started to get responses, I started networking myself at places like local real estate investment clubs and with bankers. Basically, I took one marketing strategy, learned it, and honed it until it produced a reward for me. Then I started working other forms of marketing. Your business is going to go to the next level when you start learning about and working more marketing strategies.

Tip #6: Have a Can-Do Attitude

Attitude makes all the difference. A person who thinks that they can’t do a deal that will take their business to the next level has already shot himself in the foot. Without even trying, he’s already doomed to failure. Conversely, a person who is hungry enough for success will attain it simply because he hasn’t given up.

No matter where you are in your real estate career, these tips will help you get to the next level. Commercial real estate is the right vehicle that provides some of the greatest cash flows in the industry. When you combine education, expertise, marketing, and the right attitude, you’ve got the makings for attaining greater investments and receiving better cash flow deals. The next step is to take action.

Easy Action Steps to a Successful Start in Real Estate Investing

If you happen to watch cable or satellite television on the weekends, you can find between 20 and 30 channels early in the day with get rich quick infomercials hawking everything from books, tapes, seminars and even personal coaching services. Most are centered around real estate and I am not sure they are worth the time it would take you to order them by phone. I have spent thousands of dollars on real estate home study courses through the years and will continue into the future. I am always looking to further my education and understanding of what is really working in the investment real estate world.

Because of the time, energy and dollars that I have spent in the past, I have a pretty good idea of what a real estate investor wants to avoid as well as the best steps to take for a successful start. Education definitely plays a role in the success of a real estate investor as well as business savvy, attitude and at times, luck!

Here are a few detailed steps that an investor can take to improve the chances for success.

– Learn the basics of real estate in general.

As with any investment strategy or business, real estate comes with its’ very own lingo. There are terms and phrases that many of us have heard in the past, yet may not know the exact meaning. It is very important from the get go to do the research and learn the basics such as the meaning of the terms and phrases that are used in the real estate industry every day. You can start by using a search engine and searching the phrase “real estate definitions”.

– Begin home study education.

There are great benefits to home study and I do not mean the courses we eluded to on weekend cable T.V. At your local library, in the real estate investing section, there will be multiple titles recently written by authors with experience in their topic. Check out as many titles as you can read in a week and o to work reading. Write down sentences and topics that come up in the books that interest you and that fit into your reasoning for starting to invest in real estate. This will be the start of your plan for getting started.

– Develop a game plan.

By this point, you have an idea of the general terms and phrases for the property investing world and have begun to grow your interest and understanding of the specific strategies for real estate investing. It is time to formally develop your plan and start taking action. Each of the real estate investing books that you will be reading give specific advice about team building. It is a crucial step for your success and the best books offer advice about who to put on your team, where to find them and how important they are to your over-all success. Before you can start investing, you must have a plan for where you are going and how you are going to get there.

– Join local organizations for investors.

In every city, county and state there are multiple organizations whose missions are to assist real estate investors. Each of these organizations holds monthly meetings and some of the best even hold weekly meetings, where investors can network and learn. These meetings are crucial to a beginner investor because they offer the opportunity to build your team with experienced members. They also are fantastic groups to attend for tips, tricks and education. Join a group close to you and make your attendance mandatory. Attend as many meetings as possible each month. Often times, the simple step of surrounding yourself with like-minded individuals who are positive and re-enforce your determination to succeed, can have the biggest benefit on your future success.

– Find partners & Do not fall for get rich quick!

One mistake that is easy to make in the beginning is to set off on the path of “go it alone”. Another is to believe that just around the corner is a pot of gold if I can just find a deal like those guys on T.V.! One thing that is seldom talked about is the fact that most real estate investors have used partnerships in the past if they are not using them now. Partnerships are a great way to spread the risk of investing while learning the ropes. Those risks include using less of your available capital, credit and time. Partnerships can also be structured to be a simple 50/50 partnership splitting all costs and profits or a slightly more complicated partnership with one partner providing money and the other providing the deals, follow through and managing the investments. Either way, going it alone can be a lonely, long and expensive way to get started investing.

– Do not quit your day job!

This is a biggie and is a MAJOR mistake made by some first time real estate investors. Investing in real estate requires a total commitment – a “burning of the boats” mentality. There is no turning back when you decide to go all in. And in that statement lies the problem with leaving your day job first. Take time to develop your team, to build cash reserves, to learn the ropes. Take time to make small mistakes before you leave your full time employment and make a big mistake! Investing in real estate is a big picture endeavor and as an investor you have to be able to clearly see your future and plan accordingly.

These last two tips really go to the heart of why some investors not only fail, but fail miserably. Many times you can overcome the mistakes with the first few tips here by perseverance and a little luck. If you make one of the following two mistakes, they can quickly break a new investor and sour the experience for a good long time. Then again, if you follow all the previous tips, chances are you will have the team around you to guide you right past these last two tips and onto smooth investing.

– Once started, DO NOT under estimate repairs.

When you are estimating the repairs to a property for investment, unless you have an experienced contractor and trusted advisor on your team, you can miss the mark wildly. Even the best home study courses are not able to provide you with an accurate ability to estimate costs. It takes experience and time before you can accurately guesstimate repair costs. Missing the mark on estimated repairs can quickly break a bank account and take a property from profitable to money pit quickly!

– Do not purchase investment property for equity or appreciation

There is no bigger mistake an real estate investor can make today than to purchase property for its equity holding or future appreciation. Long-term investing today is centered around the ability of a property to perform with a positive monthly cash flow. In my home city for investing, Memphis, real estate investors purchase properties at extreme discounts, but over look those discounts if the property does not provide a high enough monthly cash flow. Equity and expectations of future home values are not good reasons to purchase investment property.

Many individuals will purchase their first investment property in 2010. Some will view their purchase as strictly an investment and others will look for real estate to provide a new profession. Either way, it is extremely important that first-time investors seek all of the help, advice and experience they can get from other investors.

Investment Real Estate Marketing Plan – Putting Details Into Action

Marketing is one of the most important things a real estate investor can do to grow his business. It is also one of the areas that is easiest to make multiple mistakes. From failing to properly plan, failure to track your results and even worse, failure to control spending; marketing is fraught perils that beginning investors and long time investors alike must be aware and prepared to avoid.

There are 3 main areas of marketing to concentrate on when seeking to grow sales and revenues. The first is education, the second is planning and the third is tracking for adjustments and success. All three are important for investors to watch as they seek to grow sales and revenues and more importantly, build a business model that is sustainable through any real estate cycle.

EDUCATION

Educating yourself as a real estate investor and marketer is absolutely paramount if you are going to have success and grow your business. There is simply no excuse for not understanding the basics of each as they both are extremely important for the longevity and ability to stay relevant and profitable. Here a few examples of places to become educated on good marketing techniques for real estate investors.

1. Local Library – There may not be a better place to become educated on real estate marketing than the local library. Break the topic down into two subjects and you can have the basics down inside of a week. Under the real estate section there are multiple titles that explain the basics of real estate investing from beginner levels to expert levels. In addition, many of these books will give a basic outline of some simple marketing techniques and tools to get you started. When you combine that knowledge with a good Marketing 101 book from the library, you can quickly pick up the basic outline of why marketing must be done and how properly set up a marketing plan. The best part about an education from the library is the cost – practically free!

2. Real Estate Investment Clubs – Often times, these clubs are referred to in the industry as REIA’s. Associations of local real estate investors who come together several times a month to discuss topics relevant to real estate investing. These are great sources for so many things related to real estate investing, including marketing ideas and plans. By attending and immersing yourself into these groups, it is easy to develop friendships, partnerships and even mentors who can answer questions and provide guidance. By paying attention to what the top performers are doing in the field and how they are marketing their businesses, you can pick up ideas and integrate those ideas into your marketing plan. It is called modeling and it is one of the best ways to educate yourself on what is working in a particular real estate market. The biggest upside to becoming educated at a REIA is that you are surrounding yourself with the type of people that are going to be vital to your future success. The costs are usually very affordable and you can often avoid mistakes made by other investors before you.

3. Go it Alone – There probably does not need to be a tremendous amount of discussion under this heading. It speaks for itself and generally goes against all advice I could ever give any business person, especially a real estate investor. As far as education is concerned, it is an approach that many investors choose to take and often at a tremendous cost. Going it alone means deciding to jump into the deep end of the pool with both feet and learning as you go. Trial and error can be good and can sometimes lead to good results, but often after many hours and many ups and downs. Strictly looking at costs, many investors have experienced huge losses in the areas of marketing to learn what works in their particular market and often are a little behind the actual trends due to not properly learning to track and adjust.

My suggestion when it comes to education to use all the resources available including those that come with little to no costs. When you are becoming educated on how to set up a proper marketing plan complete with tracking and adjusting, then I would make sure I was a part of a local real estate investors association so that I am always up to date with the latest marketing techniques.

PLANNING

When I talk about planning and marketing, I mean to process of laying out the actual strategies you are going to use to market your business, the time frame you are going to use those strategies, the way you are going to track those results and the possible adjustments you are going to make as your results come in on your plan. One of the biggest mistakes that we see today in the real estate marketing world is not a complete failure to plan, but a failure to lay the full plan out from beginning to end. That being said, here are a few tips to properly develop a plan.

1. Know what you are currently doing and what results you are currently achieving. Even if the answer is that you are doing nothing, you can not work on where you are going if you do not know where you currently are starting from. You should be able to pinpoint today any marketing you are doing and the cost of that marketing as well as any results you are seeing.

2. Know what results you are looking for before you begin. So once you know where you are starting from, the next question is were are you going? Lay out concrete results you want to achieve and be specific. One of the glaring mistakes in this area is not being specific enough. You cannot track abstract goals. Your goals must be specific and detailed so that you can verify if you are achieving them. An example would be a specific number of new leads you want to bring in from each marketing source.

3. Give yourself set time frames to test your marketing. This is definitely the second biggest problem for real estate marketers and most marketers in general. Marketing plans must be given time to take shape and develop. Most real estate marketers are developing marketing plans which are call to action in nature. They are asking their target audience to take a particular action so that they can capture that action and develop a new lead. An example would be to “Call Today to Sell Your House Quick!”. This is a call to action marketing phrase. Often times, there will need to be multiple impressions of that message before the action is followed. Failing to plan a specific amount of time such as 60 days or 90 days, leads to a marketer stopping his action before his target audience responds. If you allow your plan to last longer and stick with all of your marketing pieces and techniques longer, you give yourself a greater chance for success in the long run. It allows for you to see over a longer period of time the results you are getting and that provides a clearer picture of what works and what does not work. DO NOT quit marketing after a couple of weeks simply because your phone is not ringing off the hook. Set your time period on the front end and then let your marketing plan work.

4. Failing to get input from other experts can be costly. If you have access to other real estate investors, I would definitely get their input on your marketing plan before implementation. If they are able to give you advice and direction it can often times help you to figure out the best route to take or at least if you are on track for success. If you have taken your time and all the steps necessary so far to put together a quality plan, then take advice from other experts, but do not be persuaded to change everything. Simply let others take a quick look for feedback, but be prepared to move forward with your plan and any adjustments they think would make a difference.

TRACKING

Tracking means having a way to actually follow and measure all of the marketing activities you are doing and the number of results each gets you. Here are some examples of the things that real estate marketers need to track for every marketing action they take.

1. What are the total number of leads generated per marketing technique tracked daily, weekly and monthly.
2. How many of those leads turned into qualified prospects daily, weekly and monthly. (qualified prospect means you were willing to invest more time to develop the lead)
3. The number of offers made to purchase property daily, weekly and monthly.
4. The ratios of offers made to where the original lead came from.

I am going to insert a quick note here to make sure everyone understands exactly how to track. It is not enough to simply know how many calls you are getting or how many leads are generated or how many offers or deals are being done. When you actually purchase an investment property, you MUST know where that lead came from at the very beginning. Tracking ratios is extremely important to this. It is important to be able to track and measure not only the leads but the quality of those leads. You can have one lead generator that gives you a majority of your leads and another that gives you a majority of your transactions. It should be obvious that you would want to spend more time and resources with the marketing technique giving your more transactions unless you are in the business to simply feel busy and not necessarily to earn a living!

5. What is the cost per lead generated, per marketing technique daily, weekly and monthly.

6. What is the average income generated from each transaction generated by each marketing technique daily, weekly and monthly.

When you are able to track your business in this way, it makes it much easier to make adjustments as you go and it definitely gives a clearer picture of how well you are spending marketing dollars. Often times, as legendary basketball coach John Wooden would say “we mistake activity for productivity” The entire reason for developing and implementing a proper marketing plan is so that we can determine what works, what does not work and what changes we need to make so that we are spending the fewest dollars possible for the greatest impact and result. If we fail to implement any part of this type of marketing plan, then whatever success we achieve cannot be measured against any activities and therefore cannot be duplicated.

Real Estate Investing in Probate Properties Can Yield Savings and Profits

Real estate investing in probate properties can be a profitable niche for investors. While there is no special training involved, investors need to learn the process of researching public records and become educated about probate laws.

Real estate investing in probate provides investors with the opportunity to buy discounted properties in good condition while alleviating financial burdens of decedent estates. Probate is required for all estates that are not protected by a trust. The average duration of probate is 7 to 8 months.

When probated properties are secured by a mortgage note, the decedent’s estate is responsible for paying costs associated with the property. This includes mortgage payments, property taxes and insurance, homeowner’s association dues, and required maintenance. If the estate is financially incapable of paying expenses, the property could fall into foreclosure.

If the house is owned outright, the estate is responsible for remitting property taxes and insurance premiums throughout the probate process. The home must be maintained and properly secured. This can be challenging for estate administrators who live out of town and can add additional costs to the estate. Common expenses include lawn and pool care, or hiring subcontractors to perform maintenance.

Estate administrators can elect to sell the property if it is causing financial harm to the estate. If the estate does not have sufficient funds to cover outstanding debts, the probate judge can order the property sold.

The process for selling probate homes depends on the type of probate used. The most common is known as ‘court confirmation’ and all aspects of estate management must be approved by a judge. The second is governed under the Independent Administration of Estate’s Act (IAEA) which allows estate executors to engage in estate management duties without court supervision.

In order to buy probated properties investors must determine which probate process is being used. Properties can be purchased directly through the estate executor when IAEA is effective. Bids must be presented through the court when court confirmation is required.

To locate probate real estate investors must research public records. When a person dies their last will and testament is recorded through probate court. The Will contains information about estate assets, beneficiaries, and contact information for the estate administrator.

Once investors locate estates with real estate holdings they make note of the property address, than search property records to determine if the house is secured by a mortgage note or owned outright.

Property records reveal the appraised property value, along with year built, lot size, and square footage. The lien holder’s name is included if a mortgage is attached. Investors can also determine if creditor or tax liens are attached to the property.

Real estate investing in probate homes can be a lengthy process, but can yield substantial savings. As when buying any investment property, investors must engage in due diligence to ensure the property is worth the purchase price. It is recommended to work with a probate lawyer to ensure real estate documents are properly recorded and to ensure the buying process adheres to state probate laws.

Buying Probate Properties As Investment Real Estate

Probate properties involve real estate titled to a person who is deceased. Probate is the process used to settle decedent estates and distribute inheritance assets to rightful heirs. In order to transfer real property to heirs, transfer documents must be recorded through the court.

Probate properties are often suspended in court for several months and can cause financial hardship. Decedent estates are responsible for all expenses associated with the property throughout the probate process. Common expenses include: home loan installments, property insurance and taxes, homeowner’s association fees, and general maintenance such as landscaping or pool maintenance.

Estate administrators are appointed within the last will and testament. They are responsible for all aspects of estate settlement. When real estate does not automatically transfer to a surviving spouse, Administrators must secure the house and obtain a property appraisal. It is best to work with a probate lawyer to ensure proper protocol surrounding real estate is followed.

If decedent estates are financially incapable of paying outstanding debts and property related expenses, probate homes can be sold to reduce financial burdens. When multiple heirs are entitled to real estate, each must agree to the sale unless court ordered.

The process for selling probate properties depends on the type of probate. Some states require estate sales to be supervised through the court and allow multiple bidders to submit offers. Others allow estate executors to manage the sale without court interference.

Selling probate homes can eliminate time-consuming tasks for estate administrators and can be especially helpful when houses are located in another state. Since probate executors are required to care for property throughout probate, they are often forced to hire subcontractors. These expenses can reduce the amount of inheritance money available to heirs.

When probate property is listed through a realtor, the estate covers required closing costs and commissions. If property can be sold without court supervision, estate executors should consider selling houses to real estate investors who specialize in buying probated homes.

Probate properties can be a smart investment for both investors and individual buyers. When property sales are conducted through public courts anyone can submit a purchase offer. When property sales are handled by the estate administrator, buyers will enter into negotiation with the estate or representing realtor. In some cases, real estate sales are handled by the estate’s lawyer.

In order to locate potential properties for sale, buyers visit local court houses to review public records. When a person dies their Will is submitted through the court. The Will becomes a matter of public record and can be viewed by anyone. Buyers research probate cases to locate real estate holdings and obtain the estate executor’s contact information. They then research property records to gather information about the home.

Property records show if a mortgage is attached. If so, information regarding the loan is provided. Property records also reveal if creditor judgments or tax liens are attached or if the property is in foreclosure. Buyers can also view the appraised value, lot size, square footage, number of rooms, and age of the home.

It is best to work with a probate attorney throughout the process of real estate sales to ensure property records are properly recorded and that the sale adheres to state probate laws. As with any real estate transaction, buyers must engage in due diligence to ensure the property is worth the purchase price.