Dead Capital in a Business (and Buying a Job). What Most Small Business Owners Don't Understand
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- เผยแพร่เมื่อ 28 ก.ย. 2014
- I discuss the idea of 'killing' capital by putting to non-productive uses. I also discuss the idea of 'buying' a job and how that compares with 'investing' in education.
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About ME: My name is David C. Barnett. I am a consultant and I work with entrepreneurs around the world to buy, sell, and organize their small to medium sized businesses. As a former business broker, I have seen many people do bad deals and lose their life savings as a result. So, I made it my mission to start this channel to help educate people on ways to invest smarter and to ask questions, so they don’t get trapped into doing bad deals.
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Thank you for putting into words what I figured out this year when I sold my house. At first I thought about using the profits to get a master's degree, but I'm just 6 years short of early retirement and the time, money, and energy outlay for a minimal increase didn't make sense. So I bought a business instead and will have that immediate cash flow. I really like the way you stated this
Glad you enjoyed it. My kids are getting to be college age and we're having conversations about the ROI of college frequently here. The time horizon you have to earn the extra income is a major factor in deciding if it's worthwhile... as you figured out.
Still the best advice on the web...
Thanks Byron!
Yep! Improvements and equipment also depreciate. We made gigantic mistakes in the past. Great that new entrepreneurs have this resource!
Thanks for joining us.
Great info. I think I'm going to have my broker show this to all of the sellers I deal with... Going through this process with some people is so difficult. The value of a business or anything really is what someone is willing to pay for it. End of story.
Thanks for the information.
Any time! Please come back for more each week.
great info! I'm looking at buying a landscape business and this is very helpful, thank you
Hi Jeff, a great insurance policy against making a mistake in buying a business is to take my www.BusinessBuyerAdvantage.com course or get me to do a top level Business Buyer Insight Analysis on the subject business. Call me at 506 381 8416 if you would like to learn more.
HI there,
your channel is givving most valuable information regarding buying small businesses on youtbe. Thanks, keep posting
Thanks so much for the kind words. Please share videos when you enjoy them, it's the only way we can get the information out to more people.
Man that MBA comment hit hard 😮😅
All my most 'creative language' fanmail is from MBAs. ;)
Thanks for the info
Bishop No problem Bishop. My mission is to help people avoid making mistakes in business. If you're interested in this type of stuff, please subscribe to the channel or sign up for my e-mail list here: eepurl.com/XKdW1
Great information, atleast better than a lot of the other videos out there.
+Warsame Ali Thanks for the kind words. I get frustrated by having the same conversations over and over and its so sad really for some of these owners.
Brilliant information. Thanks David.
Thanks Tevan. There are lots of traps like this out there. The same thing is discussed in this video: th-cam.com/video/uCSTCS2z3tk/w-d-xo.html
Fantastic video thanks.
Glad you enjoyed it
How does the assets and liabilities come into play when buying a business
Clean Shave Dave!
Babyface David too.
🔥
Thanks Matt
very interesting !
Glad you think so! This is pretty common.
Enjoy the video!!
Awesome advice 😎👍🏿
Thanks for watching Eno!
Invaluable.
Thanks Maria. Join my list and get all the latest stuff all the time www.DavidCBarnettList.com
And the education for a job thing is even worse when considering you are getting "earned" income that is taxed at a higher rate than "business" or "investment" income. The joke is always on those that work for other people.
You can learn a lot from a job but the idea of selling your labour forever doesn't make sense to me either. I like Gene Simmons take on it in his book Me Inc. You look at jobs as places to build capital and skills within the framework of a greater plan for yourself and your assets.
In other words work to learn not to earn as someone with two dads would say
Awesome info. I’m in a similar situation, should have got out years ago. This business has never been profitable. It is a small gluten free bakery. It has great potential but I don’t have the cash to take advantage of the potential. Now I’m 75 and don’t know how to get out. My baker makes more than I do.
If you can advise, I would appreciate it. Thanks
You need to talk to your landlord about when you can close without incurring any liabilities on your lease. Then you'll know when your deadline is. Try and sell the business to someone for the value of the equipment and if you're not successful, close when it won't make a problem with the landlord and sell off your equipment. Let the landlord know your situation and tell them that if they can find a new tenant for the spot that might make use of your equipment, you'll make that new tenant a good deal.
@@DavidCBarnett thank you so much
great advice thank you , i would use your services if you were in australia. cheers
I work with people down under all the time.
How do you buy a business with credit card.
Oh, you have to go waaaaay back in time on the channel to find this... th-cam.com/video/LE_Lyx9eOI0/w-d-xo.html Only 355 views right now?!?
Hello Mr. Barnett,
I have just one question. What experience you have as an entrepreneur, in the real world?
Thank you
All kinds. I've had 5 different businesses since becoming an adult. I've closed 2, sold 2 and one is still going. See my biography here: www.investlocalbook.com/p/all-about-david.html
I want to buy a restaurant with my sister we already look an existing restaurant but right now the business it doesn’t seem doing great , we want to change the concept to make more sales but I don’t have experience managing restaurants but I have experience serving Custumer service but my sissy have experience cooking but we are afraid the restaurant it won’t do good and we loose our money ,
You’re talking about buying a restaurant based on ‘redevelopment value.’ This is how a lot of failed restaurants are sold. Try to get a manager job to learn how to run one before you take the risk. This is a high risk industry.
David Barnett ok thank you David for the advice
I have a few questions about the term “dead capital” as it relates to the example in the video. I think I am probably just being a bit too literal in my interpretation of terms, so I wanted to run my questions by you.
Why do you call it dead capital?
When the owner invested a large sum of CASH, he would have had to reflect that cash infusion as an EQUITY/CAPITAL contribution from the owner on the company’s balance sheet. In other words, that transaction can simply be described as the company’s acquisition of a new asset (CASH) and the owner's resultant claim on the assets of the business (EQUITY/CAPITAL). Once the CASH has been deposited in the company's BANK, the owner/operator is then free to withdraw the CASH from the BANK and purchase other business assets.
At this point, and every point hereafter, the newly invested capital is “alive” and well. CAPITAL, as it appears in the EQUITY section of the balance sheet, is just the accountant’s representation of the owner’s claim on the assets of the company (as calculated by the owners' contributions plus his pro-rata share of the accumulated generated equity). The physical manifestation of that CAPITAL investment is whatever form of value the owner invested into the company; in this case, the owner gave CASH, so at the time of the investment, the value of the CASH and the CAPITAL accounts on the balance sheet increased by the same amount.
The central job of any OWNER/OPERATOR is to acquire, organize, and deploy ASSETS to improve the short and/or long-term prospects for the business to earn additional ASSETS for less than the cost to produce those additional ASSETS.
In this scenario, the OWNER/OPERATOR made investments in long term ASSETS to contribute to the generation of profit, either by helping to increase revenue and/or reduce costs. It is possible that the CASH from the EQUITY/CAPITAL infusion was not spent on the optimal mix of ASSETS, such that the resultant profit generation wasn't as large or quick as the owner would have wanted. Though the performance of the ASSETS might be disappointing, the ASSETS still exist and they are potentially generating some return, so those ASSETS cannot be considered “dead,” nor can the increase in CAPITAL that originally led to the purchase of those assets be considered “dead capital.”
I simply do not think it is accurate to say that the owner has put “money into the business which is not generating any kind of return at all” (5:51), because it is often difficult to accurately attribute the true return on every single asset that a business acquires, unless the business has an unusually simple asset structure.
After rewatching the example in the video several times, it occurred to me that you might be defining "dead capital" as the amount of the original build-out costs that the seller would not be able to recoup in a sale. But that is not "dead capital" either. The amount of the original EQUITY/CAPITAL investment is simply a sunk cost, which should rationally have no bearing on the evaluation of the ultimate sale price.
See the definition below from Investopia (www.investopedia.com/terms/s/sunkcost.asp):
A sunk cost is a cost that has already been incurred and cannot be recovered. A sunk cost differs from future costs that a business may face, such as decisions about inventory purchase costs or product pricing. Sunk costs (past costs) are excluded from future business decisions because the cost will be the same regardless of the outcome of a decision.
That the seller misunderstood that the market value of his business is not closely tied to the costof the investments he had to make to run that business is unfortunate. Those investments should be considered sunk costs.
Again, I accept that I may be overthinking this and/or being too literal with my understanding of the terms. I am eager to hear your feedback on my comment.
Awesome content again! Always thought-provoking!
Great questions and thoughts.
Dead Capital simply means money that's been invested which earns no return. This was never the intention of the investor, it is the result. What has happened is that a poor decision or inability to leverage the assets in a profitable way has led to the capital being 'lost in useable form.'
Where this creates a problem is when these business owners insist that a buyer act as an agent to recoup these losses for them. It just doesn't make sense and is related to human's desire to avert a loss.
Many of these business owners don't understand that they've lost the money.
Contrast this to a chequing account with money in it. It may also not earn any return but because it's cash, it can still be used or re-deployed in some other way so it's not 'dead.'
Once a restaurant buys new equipment, if it's not helping to increase the profits of the business then it's value can't be regained though selling off.
@@DavidCBarnett Thanks for the detailed reply. I see what you are saying, but I'd like to suggest that characterizing capital as "dead capital" could further complicate a thinking error that students of accounting often commit.
The challenge that many have with understanding CAPITAL and/or EQUITY is that they think of capital as a place where their invested cash lives and that that account itself has value to the business. In reality, the CAPITAL account has absolutely no intrinsic value to the business, because nothing of value to the business resides anywhere but in the asset section.
The capital account only tracks the owner(s)'s claims on the assets of the business, as measured by each owner's contributed equity, prorata share of generated equity, less any dividends. The capital account only exists in a theoretical sense -- it is the basis for the owner's legal claim to the assets. There are no assets here. Nothing is here but agreements.
So when you talk about reactivating or having dead capital, that could be really confusing. Unless I am missing something, you are really talking about the productivity of the assets, not the capital. The asset of cash, received in the initial cash infusion, is what can be discussed as productive versus non-productive OR performing vs. non-performing, when you assess how that investment has led to greater profits.
In my non-accountant's opinion, I think that rephrasing the discussion of dead capital as a discussion of sunk cost would be preferable... or at least a little less confusing.
Just a thought.
You're trying to look at the capital from an accounting standpoint. Accountants are historians who record the history of what happened in a business and try to portray this accurately in the financial statements.
When we're talking about buying a business, we need to use the lens of the finance professional. We're looking at the value of cash flows that can be acquired via the investment of capital.
@@DavidCBarnett I agree with your first paragraph 1000%.
I don't really disagree with the substance of your second paragraph either. However, I was giving you a bit of unsolicited feedback to make your message even clearer. I was simply saying that since financial accounting is the language of business, when you use terms that have strict meanings in the realm of financial accounting, it is useful to let people know that you are switching to a "finance professional's lens" or a managerial accounting lens. If you don't redefine terms or explicitly signal that you've left financial accounting-speak, people could miss your valuable insights.
Just one person's opinion. Feel free to ignore me. I could be the only one who had these thoughts.
thomas samson - good question. David Barnett doesn’t say that he is not using standard accounting terms, which is what I’m objecting to. .
When you say buy an education is this meaning buying a business for the experience?
Clearly didint have my ears open. Replayed the end 🤣
OK, hope you enjoyed the video.
I like your videos but the Education/business buying comparison is a bad one.
Going to school is buying an education, so there’s the value of the education in And of itself (ie you will be better equipped to do a job/run a business since you have spent years training to do so).
Additionally, your education gives you access to an entire class of jobs. You are not paying to go to school to get one job And your ROI is dependent on the outcome of that job. With your education you now have access to many jobs all over the country.
When you buy a business, that is essentially buying a job, you only get that one job.
If that turns out to be a bad job, you can’t easily transfer that investment into a better job the way you can with a degree.
Great points. Although, I would dissagree with the last one. Once someone has experience running a business, that does open up their world to a whole new class of opportunities. Either via employment or other businesses.
Hey David great video how can we get in contact?
Hi, just go to www.DavidCBarnett.com and click the 'I'd like to work with David' tab and you can find my contact info and links to my sites specifically for different types of client needs.. buying, selling, evaluation, workshops, etc.