Peter Lynch's "One Up On Wall Street" talk comprehensively about what kind of stocks one should pick. In general, Peter believes that bigger companies tend to make smaller move and vice versa. Therefore, in spotting what he called a 'ten bagger', or stock that has risen ten times in value, it will occur more likely in smaller company with market capitalization of say less than $ 10 Billion.
Peter Lynch also divided companies based on six general categories, which has their own unique characteristics. Based on these six categories, investors will be able to know the reason why they invest in such companies and consequently the return expected on each kind of companies. The six general categories are: slow growers, stalwarts, fast growers, cyclicals, asset plays and turnarounds.
Slow growers - As the name implies, this is the type of companies that grow slowly, barely above the nation's Gross Domestic Product. Slow grower exists for two reasons. First, they expand rapidly during their early years and had saturated the market or second, they did not make the most of their chances. The book names utilities as slow growers. During the 1950-1970 period however, they are fast growers. As electricity consumption increased (folks installed air conditions, electric heater, refrigerators etc.), power consumption rose and hence their growth rates. That does not happen anymore. Thus, a company inevitably will become a slow grower. A fast grower of the past will be tomorrow's slow growers. Example of industries in this category include: railroad, aluminum, steel, chemicals, soft drink.
Stalwarts - These are not fast grower and yet they grow faster than the slow grower. Most stalwarts are huge companies with huge production of cash flow. Due to their enormous size, stalwarts won't move much and Peter always try to take a profit whenever it has run up 30-50% in value in a short period of time. Some stalwarts include: Procter & Gamble, General Electric, Bristol Myers and Kellogg.
Fast Growers - The name says it all. These categories are for companies which has high growth rates. This is where the potential of the ten baggers lie. Other five categories will not give you as much chance of finding your next ten baggers. Fast Growers does not necessarily be in the fast growing industry. It can be growing fast in a slow growth industry. For example: WalMart in the stodgy retail industry, Marriott in the 2% growth hotel business, Anheuser-Busch in a slow growing beer market or Taco Bell in a not-so-fast fast food industry. There is however, plenty of risk in investing in fast growers. The trick is figuring out how much to pay for them and when they will stop growing because eventually, the party comes to an end.
Cyclicals - Not all companies can profit consistently all the time at every occasions. Generally, cyclicals profit rise and fall in regularly predictable fashion, most often moving in tandem with the economy. Businesses that can be considered cyclicals are : airlines, autos, defense companies or even chip industries. For defense companies, it is cyclical not with respect with the economy but rather with the policy of the white house. For chip industries, it is cyclical with the computer upgrade cycle. Timing is everything in cyclicals. Contrary to other categories, Peter avoids cyclicals trading at a low P/E which generally means that the cycle is currently at its peak. While this rule of thumb does not work 100%, it works pretty well to avoid picking cyclical companies that fall even lower.
Turnarounds - These are high risk high reward preposition. Generally, there are specific problems plaguing the company. Further, if the company fails to fix this particular mess, it will probably end up in bankruptcy court. Despite this, there are several appealing reasons for investing in a turnaround. One, of course, is the reward. Once the problem is fixed and solved, the stock price will rise sharply to trade in line with what its peers valuation are. The other beneficial factor of investing in a turnaround is that it is least likely affected by the general market condition. Market goes up, turnaround may stay down and vice versa. A recent example of a turnaround might be involving Altria (MO) in early 2000s. Facing hundreds of billions of lawsuit from smokers, the stock price sank so low that you can buy it at 5 times earnings and 10% dividend yield. Altria also owned a stable Kraft and Miller subsidiary (which was later sold). Turnaround investors will see if the lawsuit problem can be solved, then investing in Altria will be rewarded handsomely. Sure enough, lawsuit problems diminish and its stock price has increased four fold since then. Of course, turnarounds do not always turn around successfully. K-Mart bankruptcy is another past example.
Asset Plays - This is the type of companies that normally own a hidden asset that is not obviously listed on its balance sheet. All assets should be listed on the balance sheet, of course. But Asset play company often times do not list its asset at market value. For example, the value of real estate holding which is depreciated under the current accounting rule. Meanwhile, the land itself most likely will be worth more than its purchase price. Also, company that has huge tax-loss carryforward qualifies as asset plays.
That's it. All the six categories of stocks according to Peter Lynch. Hope that didn't put you into deep sleep. As boring as it sounds, this will be a valuable lesson that will make your investing journey a lot more exciting and worthwhile.
Wednesday, September 15, 2010
Monday, September 13, 2010
Six Options For Financing Acquisitions
When it is time to arrange the financing for an acquisition, it is important to be creative. When seeking money to buy a company, you will notice that a number of community banks, typically big funders of certain acquisitions, are encountering difficulty due to their degraded residential (builders) loan portfolio. Creativity can make the difference between accessing capital or canceling the acquisition, especially now when credit markets are tighter.
Here are some options for financing acquisitions:
1. Owner financing / seller financing - Go to the seller first. Who is better prepared to finance the business than the person or company who owned it? They know the business better than anyone and are most familiar with its risks. In the current environment, you should be able to get 40-70% of the business financing via owner financing. You must convince the seller you are a good risk, just as you would have to convince a bank.
2. Supplier or vendor financing - The target company's suppliers and vendors are a good source of financing. Their business is likely to increase under your new ownership. (i.e., If you do not intend to grow the business, why would you buy it?) Leverage that growth in their business to negotiate for financing from them. If the target company has been a good customer, the supplier is knowledgeable about the business and will understand the inherent risks better than a typical bank. Note that if you are an existing business acquiring another business, you can pursue financing from your suppliers and vendors. The same reasons apply.
3. Mezzanine financing or private equity funding - Mezzanine and private equity funds that serve the small and medium markets raised large sums of money before the market meltdown. They therefore have money to spend and are looking for great opportunities. With fewer people and companies making acquisitions right now even though multiples are very low, now is a great time to obtain mezzanine financing. The target company typically will need revenue of $10 - $20 million and higher and EBITDA of $2 - 3 million and more to be interesting to a mezzanine or private equity fund. Why? These funds have to spend large amounts in a relatively short period of time (5-7 years) so they need larger deals.
4. Bank debt - If the target company has a lot of medium to long-term assets in addition to good cash flow and a strong profit margin, you should have relatively few problems finding bank financing. However, if you want to buy a service company which has a lot of receivables and other short term assets, you may encounter difficulty. Find a bank that has a history of financing the type of company you are buying. Also, talk to the seller's banker. If the seller has a strong banking relationship, the banker will know the business well, increasing the likelihood that that bank will provide financing in order to retain the relationship and the itinerant deposit accounts.
5. Receivables financing - If you find it difficult to obtain bank financing, pursue account receivables financing firms. They can provide term loans and lines of credits against the receivables. Although the interest rate will be higher, these firms are more familiar with receivables financing and thus often more comfortable with lending against receivables.
6. Pre-paid sales - Approach the target's customers and ask them to make a bulk purchase or pre-pay for several months' or a year's worth of products or services in exchange for a strong discount.
These are some acquisition funding options to stimulate your own creative thinking and approach. There are other alternatives, some of which may be unique to your particular business.
Here are some options for financing acquisitions:
1. Owner financing / seller financing - Go to the seller first. Who is better prepared to finance the business than the person or company who owned it? They know the business better than anyone and are most familiar with its risks. In the current environment, you should be able to get 40-70% of the business financing via owner financing. You must convince the seller you are a good risk, just as you would have to convince a bank.
2. Supplier or vendor financing - The target company's suppliers and vendors are a good source of financing. Their business is likely to increase under your new ownership. (i.e., If you do not intend to grow the business, why would you buy it?) Leverage that growth in their business to negotiate for financing from them. If the target company has been a good customer, the supplier is knowledgeable about the business and will understand the inherent risks better than a typical bank. Note that if you are an existing business acquiring another business, you can pursue financing from your suppliers and vendors. The same reasons apply.
3. Mezzanine financing or private equity funding - Mezzanine and private equity funds that serve the small and medium markets raised large sums of money before the market meltdown. They therefore have money to spend and are looking for great opportunities. With fewer people and companies making acquisitions right now even though multiples are very low, now is a great time to obtain mezzanine financing. The target company typically will need revenue of $10 - $20 million and higher and EBITDA of $2 - 3 million and more to be interesting to a mezzanine or private equity fund. Why? These funds have to spend large amounts in a relatively short period of time (5-7 years) so they need larger deals.
4. Bank debt - If the target company has a lot of medium to long-term assets in addition to good cash flow and a strong profit margin, you should have relatively few problems finding bank financing. However, if you want to buy a service company which has a lot of receivables and other short term assets, you may encounter difficulty. Find a bank that has a history of financing the type of company you are buying. Also, talk to the seller's banker. If the seller has a strong banking relationship, the banker will know the business well, increasing the likelihood that that bank will provide financing in order to retain the relationship and the itinerant deposit accounts.
5. Receivables financing - If you find it difficult to obtain bank financing, pursue account receivables financing firms. They can provide term loans and lines of credits against the receivables. Although the interest rate will be higher, these firms are more familiar with receivables financing and thus often more comfortable with lending against receivables.
6. Pre-paid sales - Approach the target's customers and ask them to make a bulk purchase or pre-pay for several months' or a year's worth of products or services in exchange for a strong discount.
These are some acquisition funding options to stimulate your own creative thinking and approach. There are other alternatives, some of which may be unique to your particular business.
Wednesday, September 8, 2010
Continuation and Succession Planning Considerations in a Family Enterprise
What makes a family business unique, and quite often is the key to its Competitive Edge is its close family connections, experience and expertise. In order to sustain this unique edge, a family business needs to plan early, carefully and thoroughly so successors can be developed and groomed from the family ranks.
Common Succession Issues
- Treating all family children fairly
- Reactions from non-family employees
- Family communications and conflict
- Estate Taxes
- Executive and Management level organization and structure
- Determine how best to select successors:
-- Groom one child from an early age to take over?
-- Allow family members to compete and choose replacements and successors with the aid of the Board of Directors and/ or the Family Council?
-- Choose successors without the aid of a third party?
-- Form an Executive Committee of family members (3-5members)?
-- Allow the children and/ or family as a whole to choose incoming leaders?
How to go about choosing future leaders and successors really is a factor of a particular family business's history, current structure, planning, success, future growth forecasts, available resources (human, technical, strategic and financial), aspirations, goals, wishes and a host of contingent variables. The complexity of succession issues really dictates the use of an experienced Business Consultant, Attorney and Accountant to help develop and implement a successful Continuation Plan. The Business Consultant should be the quarterback of the planning process: he or she should coordinate the inputs of the current leadership, Board of Directors, Family Council, key non-family employee, legal, human resources and accounting; along with the Consultant's experienced advice, to come up with an acceptable, flexible, successful Business Succession Plan.
A Business Consultant can be a great investment when replacement choices are limited. If faced with this challenge, a family business needs to utilize professional help to:
- Analyze present key position assignments, responsibilities and performance to determine current capabilities and weaknesses, as well as, future succession management and leadership gaps.
- Take a Close look at the current company structure and determine if the structure needs to be modified to meet future human resource challenges.
- Do present family members need cross-training, leadership education and mentoring? Or are there key non-family employees who can fill future leadership gaps?
In order to find a solution to a leadership and management future gap threat, it is important to have sound, objective, experienced third-party professional advice and expertise at hand. Moreover, all present managers and key people, family and non-family, should be included in the decision making and planning process when replacement choices present an inherent challenge.
Business Continuation and Succession Planning
In a family enterprise, succession occurs when the family business owner/ leader/ founder passes away, becomes incapacitated, exits the company or retires. You can never start too early in planning replacements; along with succession and continuation contingency planning. Having explained the various areas and issues to consider when planning for future Company leadership and management, we will now examine the importance of Operating Authority Planning; how this authority will pass from one generation to the next when planned for, as well as, putting in place emergency, contingency authority planning when the family business's leader and/ or top management suddenly departs.
- Sudden Departure Planning: Sudden death or incapacity in a business's upper leadership echelon can be paralyzing if not properly planned for. It is very important to consult an experienced Certified Financial Planner, Estate Planning Attorney and Business Accountant to ensure a Business Continuation Financial Plan is in place, which sets up the necessary wills, trusts, insurances, investments and other vehicles to ensure the business can have a successful financial transition. This is often accomplished with Key Person Life Insurance and Disability Insurance. It is very important these advisors work in concert with the Company's Business Consultant, Financial Consultant and Business Attorney so that the Business Succession and Continuation Plan link both Management & Leadership Planning with the Operational Authority Planning.
- Planned Departure Planning: As previously discussed, there should be a Leadership and Management Continuation Plan in place. This ensures a smooth transition and can be overseen by the Company's Board of Directors. This Departure Plan will kick in automatically with the Operational Authority Plan if a sudden, unplanned Leadership Departure occurs. The Continuation and Succession Strategy should be implemented in stages so the existing Company leader can ensure a smooth transition. Having finances in place to take care of any dips in sales and profits during this transition is key and should be part of the plan.
It is important that the outgoing Company leader can retire comfortably and has a retirement life plan in place. When it is time to go, according to the plan, the family Company leader must cleanly go and not hold on. It is time for the next generation to move the Company forward. A Certified Financial Planner and Compensation Structure Expert should be consulted to determine the best way to set up a successful Retirement Plan for outgoing family members- their retirement comfort is key toward continuing a clean break from the business.
- Selling Stock to Family Members: A successful transition is only complete when the outgoing business leader/ owner sells his stake in the business to the remaining family members as per the Operating Authority Plan. The advantages of this type of transition are numerous:
-- Business remains in the family.
-- Business continues to provide a source of steady employment to family members.
-- The family's status and stature are preserved.
-- The former owner/ leader is freed up to actually retire and travel.
-- A successful successor(s) instills confidence and happiness throughout the family.
-- Strengthens family bonds rather than causing additional friction and conflict.
-- Future success rewards the family very well financially.
- Selling the Business Option: After several generations, sometimes family contracts or its members choose alternative careers and businesses. It is better to sell a successful venture than one withering and dying on the vine. This option should be included in the Operational Plan and be well thought out, utilizing the expertise of a Business Consultant, Registered Investment Advisor, Valuation Expert, Business Broker, Attorney and Accountant. If planned for properly, a business sale can be a great thing for a multi-generational family. The proceeds and resulting investments can secure future education funds, new business ventures, philanthropic organizations and other generational family interests and passions.
-- Some things to consider when selling the family business:
- The business owner/ leader ought to plan a transition period into the business sale process. An immediate retirement can reduce a Company's attractiveness to a buyer as having the founder/ leader/ owner around during the transition is often preferable.
- Utilized Valuation Experts and Accountants to evaluate assets, project profitability and determine good will mark up, among other value determinants. A prestigious accounting firm conducting a full audit and investigator go a long way in deriving a premium sales value which is acceptable to the buyer.
- Building up profits, retaining earnings and instituting cash flow management strategies can go a long way to attracting good buyers.
- Structuring the deal with the family retaining a small, passive stake in the business can be very attractive to a buyer as it instills confidence in the new leader and management, while giving the family the opportunity to profit from the Company. This can also make a premium price structure more palatable to a buyer.
- Shift assets to heirs to lower your basis in the business, thereby, decreasing and spreading out the tax load.
- Ensure financial records are up to date and audited with projections tending to air on the conservative side, while having realistic marketing outlooks and inherent assumptions.
- Need to understand what you and your family members will lose from the sale and plan accordingly with your financial advisors. Things to consider:
Pension/ Retirement Investment Plan
Stock Plan
Health, Life, Disability & Long-Term Care
Company cars
Club dues
Perks & Benefits
-- Tax implications can be substantial in a business sale so utilize a good tax planning firm, along with garnering advice from your Certified Financial Planner.
Tax and Estate Planning Implications
One of the biggest threats to the successful continuation and succession of family businesses are the constantly changing tax laws. Utilizing an experienced Estate Planning Attorney, Tax Attorney and Business Attorney, along with a solid Business Accounting Firm, to ensure you not only maximize present profits while minimizing your tax liability, but also successfully plan to pass your estate and business onto heirs in the most tax preference way. Some Estate Planning considerations to keep in mind while planning for business continuation and succession:
- Major concerns typically are the perpetuation of the business and maintaining liquidity. Without sufficient cash to pay estate taxes, heirs have little choice but to drain cash from the business when it most needs it or worse, be forced to sell it or sell many of its prized assets.
- Good Estate Planning can:
-- Reduce the need for beneficiaries to remove funds from the business.
-- Maintain beneficiaries' interest stakes by keeping funds in the Company.
-- Provide a smooth transition when developed in conjunction with the Management/ Leadership Strategic & Succession Plan and the Company's Operating Authority Plan (see previous sections for more details).
-- Selling the patriarch's / matriarch's stake in the business, in advance of any Succession Plan implementation (whether a planned or sudden departure) to family members can be the best estate planning a family business can employ, while giving the business leader control of the Company until the agreed upon relinquishment.
-- There are a host of structural tools which can be used to minimize estate tax liability, that should be fully explored with your Financial Advisory Team, such as:
Gifting
Stock Sales
Trusts
Limited Liability Corporations
Family Limited Partnerships
Share holder Buy/ Sell Agreements
- Critically Important: Establishing a valuation of the business which is in compliance with IRS regulations is critically important. Overvaluing, as well as, undervaluing a business for tax purposes can both be highly expensive mistakes. This is why having an excellent Tax & Financial Team of Advisors in place is absolutely essential.
Conclusion
Not everything can be planned for, but if you adopt the strategies prescribed in this article, which are commonly unique to a family enterprise, running and managing the successful family business is significantly improved, while ensuring successful next generation business continuation and succession. Family Businesses have a unique set of Competitive Advantages, which if planned for, can be used to exploit new markets and ensure future profitability and success. In the end, if you, the family business owner / founder / leader successfully plan, build and manage the family enterprise, you will need to give up control and ultimately ownership in your cherished accomplishment. If built well, the family business will continue to reflect the leader's / founder's ambition, innovation, initiative, entrepreneurship, character, values, integrity, ethics; all those things in testament to hard work and perseverance. This is the legacy of the business, clearing the way for future generations.
Common Succession Issues
- Treating all family children fairly
- Reactions from non-family employees
- Family communications and conflict
- Estate Taxes
- Executive and Management level organization and structure
- Determine how best to select successors:
-- Groom one child from an early age to take over?
-- Allow family members to compete and choose replacements and successors with the aid of the Board of Directors and/ or the Family Council?
-- Choose successors without the aid of a third party?
-- Form an Executive Committee of family members (3-5members)?
-- Allow the children and/ or family as a whole to choose incoming leaders?
How to go about choosing future leaders and successors really is a factor of a particular family business's history, current structure, planning, success, future growth forecasts, available resources (human, technical, strategic and financial), aspirations, goals, wishes and a host of contingent variables. The complexity of succession issues really dictates the use of an experienced Business Consultant, Attorney and Accountant to help develop and implement a successful Continuation Plan. The Business Consultant should be the quarterback of the planning process: he or she should coordinate the inputs of the current leadership, Board of Directors, Family Council, key non-family employee, legal, human resources and accounting; along with the Consultant's experienced advice, to come up with an acceptable, flexible, successful Business Succession Plan.
A Business Consultant can be a great investment when replacement choices are limited. If faced with this challenge, a family business needs to utilize professional help to:
- Analyze present key position assignments, responsibilities and performance to determine current capabilities and weaknesses, as well as, future succession management and leadership gaps.
- Take a Close look at the current company structure and determine if the structure needs to be modified to meet future human resource challenges.
- Do present family members need cross-training, leadership education and mentoring? Or are there key non-family employees who can fill future leadership gaps?
In order to find a solution to a leadership and management future gap threat, it is important to have sound, objective, experienced third-party professional advice and expertise at hand. Moreover, all present managers and key people, family and non-family, should be included in the decision making and planning process when replacement choices present an inherent challenge.
Business Continuation and Succession Planning
In a family enterprise, succession occurs when the family business owner/ leader/ founder passes away, becomes incapacitated, exits the company or retires. You can never start too early in planning replacements; along with succession and continuation contingency planning. Having explained the various areas and issues to consider when planning for future Company leadership and management, we will now examine the importance of Operating Authority Planning; how this authority will pass from one generation to the next when planned for, as well as, putting in place emergency, contingency authority planning when the family business's leader and/ or top management suddenly departs.
- Sudden Departure Planning: Sudden death or incapacity in a business's upper leadership echelon can be paralyzing if not properly planned for. It is very important to consult an experienced Certified Financial Planner, Estate Planning Attorney and Business Accountant to ensure a Business Continuation Financial Plan is in place, which sets up the necessary wills, trusts, insurances, investments and other vehicles to ensure the business can have a successful financial transition. This is often accomplished with Key Person Life Insurance and Disability Insurance. It is very important these advisors work in concert with the Company's Business Consultant, Financial Consultant and Business Attorney so that the Business Succession and Continuation Plan link both Management & Leadership Planning with the Operational Authority Planning.
- Planned Departure Planning: As previously discussed, there should be a Leadership and Management Continuation Plan in place. This ensures a smooth transition and can be overseen by the Company's Board of Directors. This Departure Plan will kick in automatically with the Operational Authority Plan if a sudden, unplanned Leadership Departure occurs. The Continuation and Succession Strategy should be implemented in stages so the existing Company leader can ensure a smooth transition. Having finances in place to take care of any dips in sales and profits during this transition is key and should be part of the plan.
It is important that the outgoing Company leader can retire comfortably and has a retirement life plan in place. When it is time to go, according to the plan, the family Company leader must cleanly go and not hold on. It is time for the next generation to move the Company forward. A Certified Financial Planner and Compensation Structure Expert should be consulted to determine the best way to set up a successful Retirement Plan for outgoing family members- their retirement comfort is key toward continuing a clean break from the business.
- Selling Stock to Family Members: A successful transition is only complete when the outgoing business leader/ owner sells his stake in the business to the remaining family members as per the Operating Authority Plan. The advantages of this type of transition are numerous:
-- Business remains in the family.
-- Business continues to provide a source of steady employment to family members.
-- The family's status and stature are preserved.
-- The former owner/ leader is freed up to actually retire and travel.
-- A successful successor(s) instills confidence and happiness throughout the family.
-- Strengthens family bonds rather than causing additional friction and conflict.
-- Future success rewards the family very well financially.
- Selling the Business Option: After several generations, sometimes family contracts or its members choose alternative careers and businesses. It is better to sell a successful venture than one withering and dying on the vine. This option should be included in the Operational Plan and be well thought out, utilizing the expertise of a Business Consultant, Registered Investment Advisor, Valuation Expert, Business Broker, Attorney and Accountant. If planned for properly, a business sale can be a great thing for a multi-generational family. The proceeds and resulting investments can secure future education funds, new business ventures, philanthropic organizations and other generational family interests and passions.
-- Some things to consider when selling the family business:
- The business owner/ leader ought to plan a transition period into the business sale process. An immediate retirement can reduce a Company's attractiveness to a buyer as having the founder/ leader/ owner around during the transition is often preferable.
- Utilized Valuation Experts and Accountants to evaluate assets, project profitability and determine good will mark up, among other value determinants. A prestigious accounting firm conducting a full audit and investigator go a long way in deriving a premium sales value which is acceptable to the buyer.
- Building up profits, retaining earnings and instituting cash flow management strategies can go a long way to attracting good buyers.
- Structuring the deal with the family retaining a small, passive stake in the business can be very attractive to a buyer as it instills confidence in the new leader and management, while giving the family the opportunity to profit from the Company. This can also make a premium price structure more palatable to a buyer.
- Shift assets to heirs to lower your basis in the business, thereby, decreasing and spreading out the tax load.
- Ensure financial records are up to date and audited with projections tending to air on the conservative side, while having realistic marketing outlooks and inherent assumptions.
- Need to understand what you and your family members will lose from the sale and plan accordingly with your financial advisors. Things to consider:
Pension/ Retirement Investment Plan
Stock Plan
Health, Life, Disability & Long-Term Care
Company cars
Club dues
Perks & Benefits
-- Tax implications can be substantial in a business sale so utilize a good tax planning firm, along with garnering advice from your Certified Financial Planner.
Tax and Estate Planning Implications
One of the biggest threats to the successful continuation and succession of family businesses are the constantly changing tax laws. Utilizing an experienced Estate Planning Attorney, Tax Attorney and Business Attorney, along with a solid Business Accounting Firm, to ensure you not only maximize present profits while minimizing your tax liability, but also successfully plan to pass your estate and business onto heirs in the most tax preference way. Some Estate Planning considerations to keep in mind while planning for business continuation and succession:
- Major concerns typically are the perpetuation of the business and maintaining liquidity. Without sufficient cash to pay estate taxes, heirs have little choice but to drain cash from the business when it most needs it or worse, be forced to sell it or sell many of its prized assets.
- Good Estate Planning can:
-- Reduce the need for beneficiaries to remove funds from the business.
-- Maintain beneficiaries' interest stakes by keeping funds in the Company.
-- Provide a smooth transition when developed in conjunction with the Management/ Leadership Strategic & Succession Plan and the Company's Operating Authority Plan (see previous sections for more details).
-- Selling the patriarch's / matriarch's stake in the business, in advance of any Succession Plan implementation (whether a planned or sudden departure) to family members can be the best estate planning a family business can employ, while giving the business leader control of the Company until the agreed upon relinquishment.
-- There are a host of structural tools which can be used to minimize estate tax liability, that should be fully explored with your Financial Advisory Team, such as:
Gifting
Stock Sales
Trusts
Limited Liability Corporations
Family Limited Partnerships
Share holder Buy/ Sell Agreements
- Critically Important: Establishing a valuation of the business which is in compliance with IRS regulations is critically important. Overvaluing, as well as, undervaluing a business for tax purposes can both be highly expensive mistakes. This is why having an excellent Tax & Financial Team of Advisors in place is absolutely essential.
Conclusion
Not everything can be planned for, but if you adopt the strategies prescribed in this article, which are commonly unique to a family enterprise, running and managing the successful family business is significantly improved, while ensuring successful next generation business continuation and succession. Family Businesses have a unique set of Competitive Advantages, which if planned for, can be used to exploit new markets and ensure future profitability and success. In the end, if you, the family business owner / founder / leader successfully plan, build and manage the family enterprise, you will need to give up control and ultimately ownership in your cherished accomplishment. If built well, the family business will continue to reflect the leader's / founder's ambition, innovation, initiative, entrepreneurship, character, values, integrity, ethics; all those things in testament to hard work and perseverance. This is the legacy of the business, clearing the way for future generations.
Monday, September 6, 2010
How to Pick a Custodian For Your Registered Investment Adviser
Perhaps the most important element of forming a registered investment adviser is choosing the right custodian for the assets. A good custodian can be a new firm's best friend and biggest asset or it can turn a new business into a friction filled daily grind. Prior to entering a custodial relationship a thorough screening of multiple custodians must be completed. Numerous factors should be considered during the process, but there are three fundamental traits your custodian should possess.
1. Customer Service Is King!
The backbone of any good company is excellent customer service. With a custodian, that customer service should come on two fronts, service to your clients and service to you, their client. When it comes to your clients, the custodian should be easily accessible and be able to handle your customer's inquires. Obviously, in an ideal world your client will call you, but clients can get confused and call the custodian. Unfortunately, there are custodians that do not want to talk to your clients. They will not try to help a confused client and simply direct the client to you. This is poor customer service and it can cost you a client. The custodian you choose should be ready, willing and able to help your client.
When it comes to serving you remember that YOU are their customer. Ideally, a custodian will have a well trained dedicated team or department just for your firm. This team will take the time to get to know your firm, its workers and its processes. In a sense, the custodian's team will become an extension of your firm by working with your staff to ensure rapid turnaround on things such as new business paperwork, withdrawals, minimum distribution requests, etc. A custodian that works as your business partner assisting solving problems can make all the difference in the world to your daily business.
2. The Custodian's Trading Platform Can Handle All Aspects of Your Investment Portfolios.
As a new investment adviser, you have put countless hours into creating your money management philosophy. Nothing could be worse than finding out that your new custodian does not have access to the investments that you want to use in your portfolio. You should make a list of specific investments that you will want to own and ask every custodian if you will have access those investments. While it may seem like a fundamental part of a custodian's existence, there are several custodians that do not carry certain mutual fund families or exchange traded funds. If the custodian does not have access to your specific investments, you will want to keep interviewing additional candidates.
3. The Custodian's Technology Needs to Increase Your Business's Productivity.
Over the past few years many custodians have put millions of dollars into their technology platforms in an attempt to attract new investment advisers. These new platforms offer various services and technologies that an investment adviser had pay for just a few years ago. The new platforms often include billing, data backup, performance reporting, compliance monitoring, bulk trading, account rebalancing, accounting, CRM, and much more. Whichever technology you choose to use, it should be easy to use and implement, thus, increasing your firm's productivity. More importantly, the custodian should train your staff on how to use the technology. After all, the world best technology is worthless if no one knows how to use it.
These three aspects of a custodial relationship, customer service, available investments and technology, are critical elements to your success as an investment adviser. They should be considered part of the foundation of your relationship with your custodian. If a prospective custodian cannot help you in all three areas you must move on to a new custodian.
1. Customer Service Is King!
The backbone of any good company is excellent customer service. With a custodian, that customer service should come on two fronts, service to your clients and service to you, their client. When it comes to your clients, the custodian should be easily accessible and be able to handle your customer's inquires. Obviously, in an ideal world your client will call you, but clients can get confused and call the custodian. Unfortunately, there are custodians that do not want to talk to your clients. They will not try to help a confused client and simply direct the client to you. This is poor customer service and it can cost you a client. The custodian you choose should be ready, willing and able to help your client.
When it comes to serving you remember that YOU are their customer. Ideally, a custodian will have a well trained dedicated team or department just for your firm. This team will take the time to get to know your firm, its workers and its processes. In a sense, the custodian's team will become an extension of your firm by working with your staff to ensure rapid turnaround on things such as new business paperwork, withdrawals, minimum distribution requests, etc. A custodian that works as your business partner assisting solving problems can make all the difference in the world to your daily business.
2. The Custodian's Trading Platform Can Handle All Aspects of Your Investment Portfolios.
As a new investment adviser, you have put countless hours into creating your money management philosophy. Nothing could be worse than finding out that your new custodian does not have access to the investments that you want to use in your portfolio. You should make a list of specific investments that you will want to own and ask every custodian if you will have access those investments. While it may seem like a fundamental part of a custodian's existence, there are several custodians that do not carry certain mutual fund families or exchange traded funds. If the custodian does not have access to your specific investments, you will want to keep interviewing additional candidates.
3. The Custodian's Technology Needs to Increase Your Business's Productivity.
Over the past few years many custodians have put millions of dollars into their technology platforms in an attempt to attract new investment advisers. These new platforms offer various services and technologies that an investment adviser had pay for just a few years ago. The new platforms often include billing, data backup, performance reporting, compliance monitoring, bulk trading, account rebalancing, accounting, CRM, and much more. Whichever technology you choose to use, it should be easy to use and implement, thus, increasing your firm's productivity. More importantly, the custodian should train your staff on how to use the technology. After all, the world best technology is worthless if no one knows how to use it.
These three aspects of a custodial relationship, customer service, available investments and technology, are critical elements to your success as an investment adviser. They should be considered part of the foundation of your relationship with your custodian. If a prospective custodian cannot help you in all three areas you must move on to a new custodian.
Friday, September 3, 2010
Things You Should Know About Hiring Financial Help
Financially, all of us are capable of surviving. It is only a matter of budgeting, self-discipline and earnings, so that you'll be able to manage your finances properly. However, there will come a point in time that you will give in to your humanly tendencies and succumb to temptations, or just mishandle your finances. The result is you'll find yourself in financial trouble that even you yourself cannot handle. Although, it is a given that the only person that can help you during tough times is yourself, financial problems and troubles are no easy picking and the best way for you to solve this problem is to hire financial advisor. But this is no easy task that is why this article will eventually you choose the right financial advisor.
* First things first, you need to look at the credentials of a financial advisor. What school did he go to? Does he have the degree? Is he licensed? Was he a top student or a standout during his school days? List down all the trainings and seminars he has had, and all the awards and acclaims that he has received. Also, one thing to consider is the experience he has under his belt. Usually, the longer he has been a financial advisor, the better he will be.
* Look for planners that have experience in all kinds and fields of finance, investments included. Yes, they may come with a heavier price tag, but it will surely be worth it once you get to ask and get advice on all things you may want to know about finances and investments.
* Make a list of any finance advisors that pique your interest. Yes, make a list. Do not just narrow down your list to just one. Make a list of at least three advisors that meet your tastes and have the proper credentials. This will give you more than one option in hiring an advisor.
* Once you've made a list of finance advisors, ask the people around you or anyone you may know that has had experience with that particular financial advisor. Testimonials and references are one way to know if that financial advisor is effective and clearly knows what he's doing. After all, good advisors will surely be backed up by a wide database of customers that have learned much from them.
* Lastly, consider yourself, your taste and your budget. The better financial advisors will clearly take his cues from you. He will not make a plan by himself, but rather, he will make it with you. He will ask you what your goals are, your tolerance, and any factors that may affect your investments and finance handling capabilities. Lastly, choose the one that is appropriate to your budget, or if working on a loose budget, choose the one that's worth the buck. Advisors do not come cheap and it would be best to choose wisely so as not to waste your money.
* First things first, you need to look at the credentials of a financial advisor. What school did he go to? Does he have the degree? Is he licensed? Was he a top student or a standout during his school days? List down all the trainings and seminars he has had, and all the awards and acclaims that he has received. Also, one thing to consider is the experience he has under his belt. Usually, the longer he has been a financial advisor, the better he will be.
* Look for planners that have experience in all kinds and fields of finance, investments included. Yes, they may come with a heavier price tag, but it will surely be worth it once you get to ask and get advice on all things you may want to know about finances and investments.
* Make a list of any finance advisors that pique your interest. Yes, make a list. Do not just narrow down your list to just one. Make a list of at least three advisors that meet your tastes and have the proper credentials. This will give you more than one option in hiring an advisor.
* Once you've made a list of finance advisors, ask the people around you or anyone you may know that has had experience with that particular financial advisor. Testimonials and references are one way to know if that financial advisor is effective and clearly knows what he's doing. After all, good advisors will surely be backed up by a wide database of customers that have learned much from them.
* Lastly, consider yourself, your taste and your budget. The better financial advisors will clearly take his cues from you. He will not make a plan by himself, but rather, he will make it with you. He will ask you what your goals are, your tolerance, and any factors that may affect your investments and finance handling capabilities. Lastly, choose the one that is appropriate to your budget, or if working on a loose budget, choose the one that's worth the buck. Advisors do not come cheap and it would be best to choose wisely so as not to waste your money.
Wednesday, September 1, 2010
Desperate Owner Directors Unable to Get Paid
The oft uttered phrase of 'fat cat' about anyone who is a company director from mid-ranking private sector employees and public sector workers, whose maximum risk is that they might one day be made redundant, now sounds more hollow than ever. The fact is that the vast majority of company directors are small or medium size business owners who, for the most part have not been paying themselves properly for months, if ever. So, if the owner directors are poor as church mice, who are the fat cats now?
Limited liability protects shareholders, but not directors. When orders reduce and other costs cannot be cut the only place left to go is to cut directors drawings from a business. There is no minimum wage for an owner director. Perhaps surprisingly, most owner directors have become the lowest paid, or not paid at all, employees in their company. In an often vein attempt to sustain their business through the 'credit crunch' they are working all hours and often borrowing on their personal account. Business is still being done but, with more businesses and sole traders chasing fewer orders, margins have been squeezed to the point where sales revenues no longer cover the full cost of the service provided.
Directors unable to make their pension contributions and then to pay themselves (properly), are two early indicators that a business will soon fail and become insolvent. Sadly, because the symptoms are a shortage of money the usual response of the director is to seek more money sometimes in the form of more sales. Breakfast networking groups are currently bursting at the seams with new members all desperate for scraps of leads for new business.
Unusually, when faced with a shortage of funds the response is to find help. However, the usual trusted advisors, the bank, the accountant, possibly even an insolvency practitioner, all have vested interests that are not in alignment with those of the business. An independent and better source of advice are business coaches or specialist turnaround management firms. This 'better response' is rare indeed. The logic for that is, the business is short of cash, so how can paying an expensive advisor help? How would they get paid?
The fact of the matter is that a key difference between a small company and a large one is normally the completeness of their management team. The smallest usually have only a full-time striker and part-time goal keeper. Whilst the largest have a full team and often a well stocked subs bench. They have the capacity to respond better to all of the non-core issues and can organise to find time to think about strategy and restructure. Bigger companies do reorganise quite frequently.
Running out of cash and working all hours for little or no pay is miserable. It soon becomes demoralising and the associated behaviour towards trading partners and employees can lead to the further loss of profitable business or the ability to satisfy it. A good turnaround manager will rapidly assess the state of a business through an examination of the finances, performance and behaviour. Frequently, some structural change and direct speaking with trading partners will allow the business to adapt to a form that can return to success and become capable of attracting investment and financial support. In critical situations, the tools of the turnaround manager using the legal framework and insolvency devices might be used to protect and reshape the business in order to allow it to go profitably forward.
Naturally, if a business no longer has a reason for being and has no prospect of recovery it should be liquidated. It is a sad truth that the vast majority of liquidated businesses lost their value in the liquidation process and with restructuring would have enjoyed a prolonged and profitable life. Owner directors should be aware that there is an alternative to liquidation and that good turnaround managers are capable of both realising a proportion of that value for shareholders and being paid themselves.
Limited liability protects shareholders, but not directors. When orders reduce and other costs cannot be cut the only place left to go is to cut directors drawings from a business. There is no minimum wage for an owner director. Perhaps surprisingly, most owner directors have become the lowest paid, or not paid at all, employees in their company. In an often vein attempt to sustain their business through the 'credit crunch' they are working all hours and often borrowing on their personal account. Business is still being done but, with more businesses and sole traders chasing fewer orders, margins have been squeezed to the point where sales revenues no longer cover the full cost of the service provided.
Directors unable to make their pension contributions and then to pay themselves (properly), are two early indicators that a business will soon fail and become insolvent. Sadly, because the symptoms are a shortage of money the usual response of the director is to seek more money sometimes in the form of more sales. Breakfast networking groups are currently bursting at the seams with new members all desperate for scraps of leads for new business.
Unusually, when faced with a shortage of funds the response is to find help. However, the usual trusted advisors, the bank, the accountant, possibly even an insolvency practitioner, all have vested interests that are not in alignment with those of the business. An independent and better source of advice are business coaches or specialist turnaround management firms. This 'better response' is rare indeed. The logic for that is, the business is short of cash, so how can paying an expensive advisor help? How would they get paid?
The fact of the matter is that a key difference between a small company and a large one is normally the completeness of their management team. The smallest usually have only a full-time striker and part-time goal keeper. Whilst the largest have a full team and often a well stocked subs bench. They have the capacity to respond better to all of the non-core issues and can organise to find time to think about strategy and restructure. Bigger companies do reorganise quite frequently.
Running out of cash and working all hours for little or no pay is miserable. It soon becomes demoralising and the associated behaviour towards trading partners and employees can lead to the further loss of profitable business or the ability to satisfy it. A good turnaround manager will rapidly assess the state of a business through an examination of the finances, performance and behaviour. Frequently, some structural change and direct speaking with trading partners will allow the business to adapt to a form that can return to success and become capable of attracting investment and financial support. In critical situations, the tools of the turnaround manager using the legal framework and insolvency devices might be used to protect and reshape the business in order to allow it to go profitably forward.
Naturally, if a business no longer has a reason for being and has no prospect of recovery it should be liquidated. It is a sad truth that the vast majority of liquidated businesses lost their value in the liquidation process and with restructuring would have enjoyed a prolonged and profitable life. Owner directors should be aware that there is an alternative to liquidation and that good turnaround managers are capable of both realising a proportion of that value for shareholders and being paid themselves.
Monday, August 30, 2010
6 Top Tips on How to Handle HMRC Winding UP Orders
Shareholders and directors who think the game is up and the only option is insolvency and liquidation, please, think again. With experience and skill it is perfectly possible to legally trade through a winding up petition to emerge ready for profitable growth.
I would like to share with you my recent visits to the High Court to represent clients who are subject to a winding up petition from HMRC. While at Court I see the production line, often of between 100 and 200 per session. A majority of the Petitions are presented by HMRC, at the hearing HMRC officers claim that in spite of repeated attempts, they have not heard from the company and the Petition results in a Winding Up Order granted without being defended.
Each week the High Court is full of companies represented by their directors who turn up having not spoken to anyone, neither HMRC as petitioning creditor nor to their own advisers. In most instances when the director turns up, if they want their company to survive, they will be granted an adjournment giving them time to pay or find a solution.
Two or three weeks later, when they turn up for the adjourned hearing, they often tell a story about why they haven't paid, it is possible they may get a further adjournment but mostly the level of preparation and information is inadequate. To retain control and prevent winding up of the company by the official receiver the company needs to mount a defence that shows they have a plan and a likelihood of satisfying the creditor.
The level of unpreparedness and ignorance is breathtaking. A director arriving in Court having paid the Petitioning creditor can sometimes get a shock when they learn that another creditor has adopted the petition. An ill prepared director, and many are, should expect their company to be wound up. The human life stories can be tragic. When a director has paid HMRC using personal funds only to lose his company due to another creditor adopting the petition he has simply wasted his money.
Let's face it, most Company Directors are effective in good times but totally ill equipped to handle matters when a company gets into financial or legal difficulty. In smaller businesses the flow of financial information prepared by the director stops, because the director is overwhelmed with work dealing with other issues arising from difficulty the accounts get left. The shortage of cash leads directors to think they cannot afford advice. That is almost certainly wrong. It is precisely because he is in trouble that he MUST get help.
Knowing what the responsibilities are or where to find help is not easy. Many directors assume they are protected by limited liability, they fail to realise that a limited liability company protects shareholders, not directors. It is often not in the company's or the directors best interests to take advice from the usual sources. A banker will always seek to protect their capital, and accountant may see more value in the balance sheet at winding up than from fees and the lawyers will want to collect fees not join a list of creditors. So who then should a director turn to for advice? The answer is a company doctor specialising in turnaround management. A good turnaround manager will quickly assess the difficulty, understand the interests of the company and arrange a restructuring plan that protects the interests of the company and uses a range of specialist legal tools to handle any challenges whilst the restructuring stabilises the position of the business.
Whilst best not left until there is a winding up petition, a turnaround practitioner will often be able to save the business and almost certainly improve the outcome for shareholders and directors. If wound up, the assets of the company are normally all consumed by the winding up administration process and creditors usually leaving nothing for shareholders and the lenders calling in personal guarantees. In a business turnaround the value is normally retained in the company better protecting shareholders and directors whilst debt is restructured.
The six top tips for handling a winding up petition are; Have a current business plan; Keep your accounts up to date and know your plan actual performance, particularly for cash flow; The law about directors obligations when short of cash is clear and it is vital to know what they are; Seek advice early; Keep talking openly with creditors and inform them of progress. If any of these are not possible, find and take advice from a professional turnaround practitioner, they are good at what they do and on your side.
I would like to share with you my recent visits to the High Court to represent clients who are subject to a winding up petition from HMRC. While at Court I see the production line, often of between 100 and 200 per session. A majority of the Petitions are presented by HMRC, at the hearing HMRC officers claim that in spite of repeated attempts, they have not heard from the company and the Petition results in a Winding Up Order granted without being defended.
Each week the High Court is full of companies represented by their directors who turn up having not spoken to anyone, neither HMRC as petitioning creditor nor to their own advisers. In most instances when the director turns up, if they want their company to survive, they will be granted an adjournment giving them time to pay or find a solution.
Two or three weeks later, when they turn up for the adjourned hearing, they often tell a story about why they haven't paid, it is possible they may get a further adjournment but mostly the level of preparation and information is inadequate. To retain control and prevent winding up of the company by the official receiver the company needs to mount a defence that shows they have a plan and a likelihood of satisfying the creditor.
The level of unpreparedness and ignorance is breathtaking. A director arriving in Court having paid the Petitioning creditor can sometimes get a shock when they learn that another creditor has adopted the petition. An ill prepared director, and many are, should expect their company to be wound up. The human life stories can be tragic. When a director has paid HMRC using personal funds only to lose his company due to another creditor adopting the petition he has simply wasted his money.
Let's face it, most Company Directors are effective in good times but totally ill equipped to handle matters when a company gets into financial or legal difficulty. In smaller businesses the flow of financial information prepared by the director stops, because the director is overwhelmed with work dealing with other issues arising from difficulty the accounts get left. The shortage of cash leads directors to think they cannot afford advice. That is almost certainly wrong. It is precisely because he is in trouble that he MUST get help.
Knowing what the responsibilities are or where to find help is not easy. Many directors assume they are protected by limited liability, they fail to realise that a limited liability company protects shareholders, not directors. It is often not in the company's or the directors best interests to take advice from the usual sources. A banker will always seek to protect their capital, and accountant may see more value in the balance sheet at winding up than from fees and the lawyers will want to collect fees not join a list of creditors. So who then should a director turn to for advice? The answer is a company doctor specialising in turnaround management. A good turnaround manager will quickly assess the difficulty, understand the interests of the company and arrange a restructuring plan that protects the interests of the company and uses a range of specialist legal tools to handle any challenges whilst the restructuring stabilises the position of the business.
Whilst best not left until there is a winding up petition, a turnaround practitioner will often be able to save the business and almost certainly improve the outcome for shareholders and directors. If wound up, the assets of the company are normally all consumed by the winding up administration process and creditors usually leaving nothing for shareholders and the lenders calling in personal guarantees. In a business turnaround the value is normally retained in the company better protecting shareholders and directors whilst debt is restructured.
The six top tips for handling a winding up petition are; Have a current business plan; Keep your accounts up to date and know your plan actual performance, particularly for cash flow; The law about directors obligations when short of cash is clear and it is vital to know what they are; Seek advice early; Keep talking openly with creditors and inform them of progress. If any of these are not possible, find and take advice from a professional turnaround practitioner, they are good at what they do and on your side.
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