Investment strategies for small capital

From: alexhormozi

The Value of Skills Over Capital

Even if one is “dead broke,” possessing skills is paramount for financial recovery and wealth creation [00:00:08]. Skills are an inalienable asset that cannot be taken away by governments, individuals, or economic crises [00:00:34]. Entrepreneurs can bounce back from “hitting zero” because their skills remain intact [00:09:13].

Business Acquisition vs. Home Ownership

When considering investment opportunities with small capital, such as $50,000, acquiring an existing business can be a more impactful strategy than buying a house [00:01:20].

Scenario: House Purchase

With $50,000savedfromanannualincomeof$60,000, one might consider a 10% down payment on a $500,000 house, incurring a significant mortgage liability [00:01:26]. This approach can be slow to build wealth [00:02:00].

Scenario: Business Acquisition

Alternatively, the same $50,000 can be used to acquire a profitable business, leading to a much faster increase in income [00:02:23].

Finding Businesses for Sale

• Brokers: Contact brokers to understand market prices and available businesses in your area, though buying through a broker typically means paying retail price [00:02:35].
• Direct Approach: Identify local businesses that align with your interests or expertise [00:02:56]. Unlisted opportunities often exist with motivated sellers who are tired of their businesses [00:12:34].

The Negotiation Strategy: “Agree on Price, Then Agree on Terms”

This powerful negotiation tactic is crucial for acquiring assets with minimal or no upfront capital [00:03:40].

1. Agree on Price: Determine the purchase price for the business. For example, a business profiting $250,000annuallymightbevaluedat$625,000 (2.5 times earnings) [00:03:04].
2. Agree on Terms: Once the price is set, negotiate payment terms that reduce your out-of-pocket expense [00:04:04].
   • Seller Financing: Request the seller to finance a significant portion of the deal, such as three-quarters of the price, to be paid over an extended period (e.g., three to five years) [00:04:10]. This means the seller accepts payments over time instead of a large lump sum.
   • Bank/SBA Loan: Secure a loan (e.g., SBA loan) for the remaining portion of the price. Use your available capital as the down payment for this loan [00:04:47].

Example Application

Using the $625,000 business example:

• Seller Finance: $437,000 (three-quarters) [00:05:08].
• Bank Loan: $200,000 [00:05:13].
• Your Capital: $50,000 (as 25% down payment on the bank loan) [00:05:16].

This strategy allows you to acquire a business making $250,000annually,significantlyupgradingyourincomefrom$60,000, with just $50,000 out-of-pocket [00:05:34]. Compared to starting a business from scratch, buying an existing one saves on investment, client acquisition, permits, and other initial costs [00:06:06].

Real-World Example: Gym Acquisition

The speaker applied this “agree on price, then agree on terms” strategy to acquire a gym for $40,000or$50,000, paying the seller over 12 months with no upfront money out of pocket [00:07:36].

• The gym made $51,000 in sales in the first 30 days, essentially paying for itself [00:08:13].
• This acquisition generated profit monthly [00:08:24].
• Later, the gym was sold for 1.5 times the purchase price, demonstrating how a cash-flowing asset was acquired for “nothing” and then profitably exited [00:08:36].
• This contrasts with earlier ventures where significant capital was invested ($40,000forthefirstgym,$250,000 for the second), yielding similar returns to the no-money-down acquisition [00:06:32].

Mindset of the Wealthy: Risk Aversion

Wealthy individuals tend to be more risk-averse, understanding that years of good decisions can be undone by a single bad investment [00:09:36]. They prioritize guaranteed small returns with no risk over potential huge returns with guaranteed risk [00:10:58]. This contrasts with people who have less money, who might invest in high-risk ventures like lottery tickets with a high chance of losing everything [00:10:10].

The goal is to acquire assets that “could never go to zero” and, ideally, to acquire them for “zero” cost out-of-pocket [00:10:31].

Conclusion

To succeed with small capital, focus on developing skills, and when making investment decisions, prioritize acquiring existing businesses with motivated sellers using the “agree on price, then agree on terms” negotiation strategy [00:11:44]. This approach, while requiring patience and work ethic, allows for significant financial advancement with very little personal risk [00:12:02].