David Barnett is a three-time best-selling author, consultant and business coach who has been working with small-business owners for more than 20 years. For the past 10 years, he has been helping people buy and sell businesses. David works directly with clients and produces online education products to teach aspects of small business purchase and sale transactions and local investing.

“(As one progresses in doing business) The deals keep getting bigger and we need these little ones to teach us not to make mistakes when we get into the big ones.”

David Barnett

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Worst investment ever

Background on value-added taxes in Canada

David was approached by an entrepreneur he knew quite well who had run several businesses. The latter was building a new business. In Canada, they have a value-added tax called the HST. When a business buys goods it pays HST, when its sells goods or services, it collects the HST, and then business then sends the difference to the government. So when building a business, the founders have to lay out all kinds of money. All of the contractors and suppliers are charging new tax, but the founder has yet to make a sale. So a business pays paying out money in taxes, and it is not returning. Usually when a new businesses is founded it gets a check from the government because when it files a tax return, it has overpaid sales taxes versus what it has collected, and David had been through this many times.

Deal done to pay partner’s advance and win off the government rebate

In the first filing for a business, the business should get a check back from the government. After that, if it is doing well, it sends money to the government. David’s partner started to run short of cash in building the business because there were unexpected events and he had extra expenses. He offered to sell David and his investor group his HST return at a discount. So the idea was that the group would give the partner an advance and then, within three months, this money would come back to the group because the return would come in and the group would be paid. So the group proceeded.

Once business was operating there was more to learn about tax liability

David then started to learn more about how the government processes HST. It turned out that when the figure is high enough, the government do not blindly issue checks, it looks at the company more closely. So a few months went by and the government wanted the partner to submit some of those bigger invoices. So he did and when it found out the nature of his business, that there was a lot of cash involved, it required him to do anti-money laundering training, so the partner would become aware of current rules and laws. By this time, it was month five, and because there was so much cash in the business, he had to go through the training. So the group has gone from the business being built and all the money was going out to active operations. But the government withheld the money due to the business because it wanted him to send in more information. It wouldn’t release the funds because he had to do the money laundering training.

Business had failed to send in payroll tax, which killed the investment’s chances

Sadly, the business’ sales failed to come in as fast as was forecast, and another problem was that the partner had failed to send in source deductions – There were no income tax deducted from employee paychecks. By the time month six had come along, and the tax office was ready to return the HST, it didn’t, because it did some final checks and found that the business actually owed the tax office money.

David loses faces with his investor group over loss of $25,000

David had not been entirely comfortable about doing the deal. So he had invited two friends to join him in the investor group. Now he had to face them and give them the news about all these problems that had been dragging on, and of course about the loss of the $25,000 they have put in. He admits he felt quite stupid in front of his friends and for the fact he got involved in the first place. He had failed to make himself fully cognizant of all the potential hazards that could have come about by doing this kind of thing. He was embarrassed and felt bad about inviting friends along with the deal. After two years though, they were all able to write off the loss as it had become an allowable business investment loss. So they were able to offset some other gains with it. But he feels embarrassed also that he had been a person who had written a book on how to successfully invest in small local businesses. It was a hard story to tell and one had not been ready to tell until on this occasion.

“There always has to be a clear path to a Plan B … some kind of security or collateral against something (your investment or deal) … even if it’s a guarantee from some person or entity or other business that you think would eventually have the ability to pay.”

David Barnett

Some lessons

Plan A: Make the most attractive thing possible, which is the repayment of your money

If it doesn’t work for whatever reason (and because we’re dealing with humans, anything can happen, illness, marriage breakdowns, all those kinds of things)… have a Plan B.

Plan B: Some other way to be made whole if something goes wrong with Plan A

And follow your own counsel. In one of David’s books he tells how people can do local investing deals by learning how banks do them, which is, banks have a Plan B, they get collateral, they get security, they ensure that if something doesn’t work out, there’s a Plan B to follow. And that was one of the key critical things that David admits failing to have set up.

Avoid hubris (excessive pride or self-confidence) and arrogance

Andrew’s takeaways

Be very careful doing any business related to cash flows linked to government

Government has extreme power and can literally do whatever it wants. It can cancel a deal, it can refuse to pay, it can demand more payments or fees. Dealing with anything linked to governments is messy, both in the West and in Asia.

Make sure that you actually have rights to the value you are trying to claim or receive

If you don’t have rights over the benefit you’re seeking, then you know, it’s very hard to win.

Actionable advice

There always has to be a clear path to a Plan B

That can be some kind of security or collateral against the deal you are doing, even if it’s a guarantee from some person or entity or other business that you think would eventually have the ability to pay.

No. 1 goal for next the 12 months

David is focusing most on his everyday work with people who want to buy and sell small businesses. He has an online group-coaching program where there are people from all around the world (Asia, Australia, New Zealand, Canada and in the US). He works with them to help them prospect, find, locate, make offers, make deals, do the due diligence, on buying small- and medium-sized businesses. The group’s been going for about a year and a half and it continues to grow. It’s very exciting for David because you can spend a lot of time looking online for information about buying a business but every one of the deals is privately, so it’s very rare that you’re ever going to get somebody to tell you the exact details of what happened when they bought or sold a business because it’s all confidential.

“If you want to avoid all risks … you know, just stay home and don’t do anything and don’t go anywhere.”

David Barnett

Parting words

David says, If you want to avoid all risks just stay home and don’t do anything and don’t go anywhere.

But he doesn’t think that’s what life is all about. He admits losing money in the deal, but he now sees it as a piece of the $25,000 that’s going to help save him from losing the piece of the $100,000 because as one progresses in doing business, the deals keep getting bigger and we need these little ones to teach us not to make mistakes when we get into the big ones.

You can also check out Andrew’s books

How to Start Building Your Wealth Investing in the Stock Market
My Worst Investment Ever
9 Valuation Mistakes and How to Avoid Them
Transform Your Business with Dr. Deming’s 14 Points

Learn with Andrew

Valuation Master Class - Take this course to advance your career and become a better investor

Connect with David Barnett

Connect with Andrew Stotz

Further reading mentioned

David Barnett (2016) How to Sell my Own Business: A guide to selling your own business privately and not pay a broker’s commission
David Barnett (2014) Invest Local: A Guide to Superior Investment Returns in Your Own Community

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