The #1 issue for both myself and for most entrepreneurs, is a lack of capital.
Many people will argue that the key ingredient for a successful startup or business service is training, technical expertise or a solid network. However, all of these shortfalls can be overcome with money.
I plan to post a series stories and insights describing how entrepreneurs can overcome this chasm and turn an idea into a product with virtually zero capital. As stated in the title of this blog, the process is all about using leverage. However, when I refer to leverage, I do not mean using debt to finance your idea. There are many leveragable assets that have nothing to do with money, but that when properly utilized, can lead to cash or even bypass the need for cash.
Here is an interesting story I located about a real-estate entrepreneur who purchased major rental properties using leveraged buyout techniques to purchase property with no up-front capital.
Story One: Michael Pierce
In 2004, Michael Pierce purchased two apartment buildings in Indianapolis - one worth $3.5 million and the other, $2 million. Michael did this with a personal net worth of zero and no up-front capital. For deals like this, an investor normally puts up $50,000 to $100,000 plus a 20% down payment.
So how did Michael do it without putting up $800,000+?
Leverage: Michael made use of his sales skills, charisma and knowledge of finance by convincing others to back him with promised future incentives.
Connections: who your business associates are matters! First, Michael called national accounting firms to get the names of retired partners who might be willing to serve as ’mentors.’ Surprisingly, he was able to get four, each of whom was given promised future equity stakes of 2-5%. Michael then secured legal and accounting firms by offering “performance-based’ compensation, i.e. no up-front cash.
Armed with the right associates who legitimized him, and the proper operation infrastructure, Michael then went about creatively acquiring the funds to purchase the buildings. He decided to purchase properties already housing renters, using the rental cash flow to offset the mortgage costs. Nevertheless, Michael still needed a plan to come up with the money for the down payments.
The LBO Model: The solution was to purchase an 80% stake in the company who owned the buildings Michael was interested in (most buildings are owned by management firms). Since banks allow property owners to borrow up to 80% of the value of the property, Michael could in effect buy into the deal with no money down.
Building owners were willing to hold onto 20% as Michael explained that he thought it best to continue to have the current owners work as ’consultants’ while he handled the majority of operations. He also promised to buyout the remaining 20% stakes over 3-5 years using the cash flows from the rentals.
Now that’s creative thinking. Source.
Note: I came across this story while searching for information on a certain person to be disclosed on a future date.
