Tag Archives: ironshield financial

Six Power Ratios to Start Tracking Now

Republished with permission from Built to Sell Inc.

Doctors in the developing world measure their progress not by the aggregate number of children who die in childbirth, but by the infant mortality rate – a ratio of the number of births to deaths.

Similarly, baseball’s leadoff batters measure their “on-base percentage” – the number of times they get on base – as a percentage of the number of times they get the chance to try.

Acquirers also like tracking ratios, and the more ratios you can provide a potential buyer, the more comfortable they will become with the idea of buying your business.

Better than the blunt measuring stick of an aggregate number, a ratio expresses the relationship between two numbers, which gives them their power.

If you’re planning to sell your company one day, here’s a list of six ratios to start tracking in your business now:

Employees per square foot

By calculating the number of square feet of office space you rent and dividing it by the number of employees you have, you can judge how efficiently you have designed your space. Commercial real estate agents use a general rule of 175–250 square feet of usable office space per employee.

Ratio of promoters and detractors

Fred Reichheld and his colleagues at Bain & Company and Satmetrix developed the Net Promoter Score® methodology.[1] It is based on asking customers a single question that is predictive of both repurchase and referral. Here’s how it works: survey your customers and ask them the question, “On a scale of 0 to 10, how likely are you to recommend <insert your company name> to a friend or colleague?” Figure out what percentage of the people surveyed give you a 9 or 10, and label that your ratio of “promoters.” Calculate your ratio of detractors by figuring out the percentage of people surveyed who gave you a score of 0 to 6. Then calculate your Net Promoter Score (NPS) by subtracting your percentage of detractors from your percentage of promoters.

The average company in the United States has a NPS of between 10 and 15 percent.  Reichheld found companies with an above-average NPS grow faster than average-scoring businesses.

Sales per square foot

By measuring your annual sales per square foot, you can get a sense of how efficiently you are translating your real estate into sales. Most industry associations have a benchmark. For example, annual sales per square foot for a respectable retailer might be $300. With real estate usually ranking just behind payroll as a business’s largest expenses, the more sales you can generate per square foot of real estate, the more profitable you are likely to be.

Revenue per employee

Payroll is the number one expense for most businesses, which explains why maximizing your revenue per employee can translate quickly to the bottom line. Google, for example, enjoyed a revenue per employee of more than one million dollars in 2015, whereas a more traditional people-dependent company may struggle to surpass $100,000 per employee.

Customers per account manager

How many customers do you ask your account managers to manage? Finding a balance can be tricky. Some bankers are forced to juggle more than 400 accounts, and therefore do not know each of their customers, whereas some high-end wealth managers may have just 50 clients to stay in contact with. It’s hard to say what the right ratio is because it is so highly dependent on your industry. Slowly increase your ratio of customers per account manager until you see the first signs of deterioration (slowing sales, drop in customer satisfaction). That’s when you know you have probably pushed it a little too far.

Prospects per visitor

What proportion of your website’s visitors “opt-in” by giving you permission to e-mail them in the future? Dr. Karl Blanks and Ben Jesson are the cofounders of Conversion Rate Experts, which advises companies like Google, Apple and Sony on how to convert more of their website traffic into customers. Dr. Blanks and Mr. Jesson state that there is no such thing as a typical opt-in rate, because so much depends on the source of traffic. They recommend that rather than benchmarking yourself against a competitor, you benchmark against yourself by carrying out tests to beat your site’s current opt-in rate.

Acquirers have a healthy appetite for data. The more data you can give them – in the ratio format they’re used to examining – the more attractive your business will be in their eyes.

[1] Net Promoter, Net Promoter Score, and NPS are trademarks of Satmetrix Systems, Inc., Bain & Company, Inc., and Fred Reichheld.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

How Your Age Shapes Your Exit Plan

Republished with permission from Built to Sell Inc.

Your age has a big impact on your attitude toward your business, and your feelings about one day getting out of it.

For example, one person who runs a boutique mergers and acquisitions business refuses to take assignments from business owners over the age of 70.

He has found that septuagenarians are so personally invested that they can rarely bring themselves to sell their business – frequently calling off the sale halfway through, claiming they just wouldn’t know what to do with themselves if it closed.

While it’s always dangerous to generalize – especially based on something as touchy as age – a few patterns emerged in the research for Built to Sell: Creating a Business That Can Thrive Without You.

Owners aged 25 to 46

Twenty- and thirty-something business owners grew up in an age when job security did not exist. They watched as their parents got downsized or packaged off into early retirement, and that resulted in a somewhat jaded attitude towards the role of a business in society.

Business owners in their twenties and thirties generally see their companies as a means to an end, and most expect to sell in the next 5 to 10 years.

Similar to their employed classmates, who move to a new job every 3 to 5 years, business owners in this age group often expect to start a few companies in their lifetime.

Aged 47 to 65

Baby boomers came of age in a time when the social contract between a company and an employee was sacrosanct. An employee agreed to be loyal to the company, and, in return, the company agreed to provide a decent living and a pension for a few golden years.

Many of the business owners in this generation think of their company as more than a profit center. They see their business as part of a community and, by extension, themselves as community leaders.

To many boomers, the idea of selling their company feels like selling out their employees and their community. That’s why so many chief executive officers in their fifties and sixties are torn: they know they need to sell to fund their retirement, but they agonize over where that will leave their loyal employees.

Sixty-five plus

Older business owners grew up in a time when hobbies were impractical and discouraged. You went to work while your wife tended to the kids (today, more than half of businesses are started by women, but those were different times), you ate dinner, you watched the news and you went to bed.

With few hobbies and little other than work to define them, business owners in their late sixties, seventies and eighties feel lost without their business – that’s why so many refuse to sell or experience depression after they do.

Of course, there will always be exceptions to general rules of thumb, but frequently – more than your industry, nationality, marital status or educational background – your birth certificate defines your exit plan.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Mike Flux – Market Update and Investment Alternatives Q4-2015

MichaelFlux_1000x1230

In this video, I speak with Mike Flux, Senior Vice President and Portfolio Manager of Connor Clark & Lunn Private Capital to chat about their investment outlook from Q4 of 2015. We also discuss how to interpret the current events, and how to properly position portfolios to take advantage of these market events.

In this second video, Mike gives an update on the alternative strategies that they are using in their portfolios to help reduce the effects of the current volatility without sacrificing returns.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

Why “One” Is the Worst Number When It Comes to Financial Planning

“One” is usually the best number to be…except when it comes to financial planning.  Imagine if you only had one income stream, one investment, one insurance plan, etc.  As the saying goes, putting all your eggs in one basket is taking a big risk, and in the financial world, it doesn’t allow for what we call “diversification.” In today’s blog post, I’m going to talk about why I highly encourage you to avoid the number “one” and why it is the worst number when it comes to financial planning and wealth creation.

WHAT IF YOU HAD…
ONE Income Stream?
If you were reliant on only one source of income, you are adding a lot of risk to your retirement plan. The rules can change at any time, so it isn’t smart to rely on a single income stream. What you want to do is to look at the different types of income. Most people have one primary job, but consider looking for diversity in places other than your salary. Include your bonuses, pensions, RIFs, good dividend paying investments, rental income, etc. when you’re listing the variety of sources.

ONE Investment?
What if you had only one single security?  Sir John Templeton famously said, “The only investors who shouldn’t diversify are those who are right 100% of the time.” I cannot stress how important nor how true these words are. Don’t have a narrowly focused portfolio. Instead, build a globally diversified portfolio. Here’s a simplified four-step process for taking action against having a single investment:
1. Determine your mix of equities and fixed income, i.e. stocks and bonds
2. Determine your geographic mix of economic opportunities around the world
3. Identify, analyze and invest in the best opportunities of each component in your portfolio’s markets
4. Consider asset classes that have low correlation to one another. This refers to stocks, bonds, and alternative investments such as commercial real estate and private equity.

The most important tip to remember is that you must find the appropriate solutions for YOU. If your paperboy qualifies for the same type of investments that you are in, then you’re probably in the wrong place. Consider migrating your portfolio to a more appropriate investment solution that is better suited and priced for the threshold you are in. See here for more information on the four tiers of investment solutions.

ONE Education Plan?
In Canada, there are a number of options available that can help fund a child’s education: a) RESP, b) an in-trust account, and c) EPSP.

a) RESP—A Registered Education Savings Plan allows you to make contributions that are set aside for your child’s education.  A 20% Canada Education Savings Grant gives you 20% of the first $2,500 you put into your RESP each year. That’s an extra $500 that you can take advantage of, so it’s a fantastic return. Do remember, though, to hold off on putting in too much at once because you want to be able to receive that free $500 each year.
b) In-Trust Account—An informal in-trust account allows you to transfer any capital income to your child. The deferral nature of growth-oriented investments means that tax is deferred to the future and any tax on the capital gain income will be taxable in your child’s hand. There are no restrictions as to how or when your child takes out the money.
c) EPSP—An Employee Profit Sharing Plan is a great solution for business owners. This is a plan registered in advance with the Canada Revenue Agency (CRA) and allows you to share your income among your family members.  One big advantage lies in the ability for you to transfer the tax burden over to your child and take advantage of the lower marginal tax bracket. A second advantage of this solution is that you can avoid the kiddie tax (tax on a child’s income that is taxed at the highest federal tax rate of 29%) that you face when paying your kids a salary. With an EPSP, you can distribute the profits of the company to them and the money will flow from the business straight to your children to help pay for their education.

ONE Insurance Policy?
Our clients often say that they have group benefits, but group benefits don’t necessarily cover everything that you could be protecting.  What you need is a diversified insurance portfolio. The first rule of insurance planning is to solve temporary problems with temporary solutions, and permanent problems with permanent solutions.

a) Dependency Coverage—This is the period of time during which you have dependents, i.e. the time when your children are reliant on you. Typically, this will be the first 20-25 years of their lives. Since this dependency has an allocated time frame, it is therefore a temporary problem. The temporary solution = term life insurance, where one makes regular premium payments in exchange for protection.
b) Estate Erosion on Death of Second Spouse—After the death of the first spouse, assets get rolled over to the other spouse in what’s called a spousal rollover.  When the second spouse passes away, the CRA assumes you had liquidated all your assets and performs a calculation to tax you accordingly.  In insurance planning, this calculation is performed in advance by your advisor and is based on what you hope to have happened over the course of your life and your spouse’s.  Estate erosion is a permanent problem and requires a permanent solution: permanent life insurance.
*Consider adding a tax-sheltered investment account to your permanent life insurance policy.  The desire to tax shelter is a lifelong goal. Taking advantage of the only option in Canada that allows you to have tax-sheltered wealth accumulation on nonregistered investments in the insurance industry has one of the biggest benefits for your wealth and estate planning needs.
c) Accident or Sickness Affecting Income
This is another temporary problem since the risk of not being able to earn income occurs during your working years. Essentially, the only solution to this issue is long-term disability insurance.  Find out exactly what your long term disability insurance covers and whether or not you are adequately covered during your working years.
d) Risk of Cash Flow
We just mentioned the risk of losing income during your working years, but long term disability insurance isn’t enough sometimes, since it only covers you up to the age of 65. When a serious injury affects your ability to perform activities of daily living, e.g. showering and driving, you will need to find alternate ways to accomplish your tasks. Expenses such as hiring a helper will be paid from your cash flow and other investments, so secure a long-term care plan in place to take care of these costs.  Check out these dos and don’ts of long-term care insurance.

While “one” is usually the best number to be, it’s not the case in financial planning. As you transition into retirement and beyond, enjoy the advantages of diversification. Avoid the number “one” in your financial plan—you’ll be better off without it.

Jennifer Jacobs – The Steady Increase in Cost for Long-Term Care Insurance

In this video, I speak to Jennifer Jacobs, President of LTCI Consulting Inc. to chat about the expectation of changes of living benefits / life insurance, in terms of what we see in the market place and what we can do to take advantage on what is available today.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

The Downside of Just Milking It

Republished with permission from Built to Sell Inc.

If you have considered selling your business of late, you may have been disappointed to see the offers a business like yours would garner from would-be acquirers.

According to the latest analysis of some 20,000 business owners who have used The Value Builder System, the average offer being made by acquirers is just 3.7 times your pre-tax profit.  Companies with less than a million dollars in sales garner significantly lower multiples, and larger businesses may get closer to five times the pre-tax profit, but regardless of size private company multiples are still significantly less than those reserved for public company stocks.

Given the paltry offer multiples, you may be tempted to hold on to your business and “milk it” for decades to come. After all, you might reason that if you hang onto your business for four or five more years, you could withdraw the same amount in dividends as you would garner from a sale and still own 100% of the business.

This logic – let’s call it the “Just Milk It Strategy” – seems sound on the surface, but there are some significant risks to consider.

You Shoulder the Risk

The biggest downside of holding on to your business, rather than selling it, is that you retain all of the risk. Most entrepreneurs have an optimism bias, but you need only remember how life felt in 2009 to be reminded that economic cycles go in both directions. While business may feel good today, the next five years could well be bumpy for a lot of founders.

Disk Drive Space

If you think of your brain like a computer’s disk drive, owning a business is like constantly running anti-virus software. Yes, in theory you can do other things like play golf or enjoy a bicycle trip through Tuscany and still own your business, but as long as you are the owner, your business will always occupy a large chunk of your brain’s capacity. This means family fun, vacations and weekends are always tainted with the background hum of your brain’s operating system churning through data.

Capital Calls

Let’s say your business generates $500,000 in Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA), and you could sell your company for four times EBITDA or keep it. You may argue it’s better to keep it, pull your profit out in the form of dividends, and capture the same cash in four years as you would by selling it. This theory breaks down in capital-intensive businesses where there is usually a big difference between EBITDA and cash in the bank. If you have to buy machines, finance your customers, or stock inventory, a lot of your cash will be locked up in feeding your business and the amount of cash you can pull out of your business each year is a fraction of your EBITDA.

Tax Treatment

Depending on your tax jurisdiction, the sale proceeds of your business may be more favourably treated than income you would garner by paying yourself handsomely with the Just Milk It Strategy. You may actually need to pay yourself $2 or $3 for every $1 you can net from the advantageous tax treatment of a business sale.

You Can Do Better

Finally, you may be able to attract an offer higher than three or four times your pretax profit. The businesses we work with who have a Value Builder Score of 80 + get offers that are, on average, 6.1 times their pretax profit. Some of the owners we work with do even better, stretching multiples into double digits.

If you’d like to get your Value Builder Score, please let us know by replying to this email and we will make arrangements for you to complete the 13-minute questionnaire.

For more free information on Creating A Business Owner’s Dream Financial Plan, you can listen to a free, eight part series we did exclusively for business owners. The show is also available to subscribe to for free via iTunes.

Why did Charles Wilton sell KB Home and buy Eaton?

Charles Wilton

In today’s episode, I chat with Charles Wilton, Portfolio Manager with the Private Investment Management Group at Raymond James. We talk about the recent deposition and acquisition in his portfolio.

IRONSHIELD Financial Planning’s “Fly On The Wall” update call.
These calls are recorded by Scott Plaskett and allow you to get a behind-the-scenes look at one of his professional update calls. Watch and listen as a “fly on the wall” and get some of the most valuable information you will find on the Internet.

Having Little Financial Knowledge is a Dangerous Thing

When it comes to financial planning, knowing too little is a dangerous thing. As a financial planner, the main part of my job is to educate my clients on things that they may not know—or things that they may not know they don’t know. In today’s blog post, I’m going to tell you why it is important to work with a professional—someone who has a lot of financial knowledge.

The first thing that you should know about financial planning is that it is comprised of many moving parts. It is often based on variables, which means that personal hopes, goals and opinions, as well as factors such as inflation, rate of return, tax rate and contribution levels must be taken into account. If any of these variables change, chances are that the financial plan you have is going to end up being wrong and your long-term outcome would be inaccurate. This is the reason why being flexible and being able to make small adjustments now, can make a big difference in the future.

Many people feel that having a financial plan in place is all it takes for them to feel secure with their finances. The truth is, while having a financial plan is excellent, it doesn’t mean that you’re all set. It may give you more confidence, but it also only gives you an idea of the direction in which you are heading. To get a more up-to-date version of your financial plan, progress reports every six months are crucial and help you remain focused on where you want to go in terms of your financial goals.

Being confident about your finances and having some idea of what you need to do is great, but it’s not enough for you to tackle your financial plan on your own. For example, most people don’t realize that they are actually unaware of how their planner’s financial planning software handles taxes. Canada is a marginal tax rate environment, which means that all of our income sources are taxed differently and at different rates. What happens then is that a lot of software out there calculates using an average tax rate. As a result, this provides skewed results and causes you to think that you need to save a lot more money in the early years in order to have enough for retirement. The biggest challenge here is putting too much aside for the future while sacrificing the present, so make sure that you are being taxed properly.

Another obstacle that may come up if you don’t have enough financial knowledge is that certain thresholds offer different investment solutions, and you must know which one you qualify for. When handling your own financial plan, the number one rule of financial planning is that if you have accumulated a certain level of wealth, but are investing in the same investment solutions as someone who makes much less than you, then you’re in the wrong place. The four thresholds are:

Tier 1: up to $100,000

Tier 2: $100,000-$500,000

Tier 3: $500,000-$1,000,000

Tier 4: $1,000,000 plus

People want to increase their return without increasing the risk. Being in the right investment solution is the best way to get higher returns with lower fees, without increasing risk in your portfolio.

Many people want to handle their own investments because they resent paying fees for financial advisors, especially if they don’t see positive or any returns at all; they don’t want to pay simply to have someone else lose their money. However, deciding where, when and what to invest in is a daunting task and it is essential that you work with an expert. People who choose to manage their portfolio by themselves could face a huge problem, and there are two reasons why this might happen.

First of all, there is nobody managing the investment, which means that you alone are responsible for the instability and the consequences of your investments. This is a passive approach and while this may yield a decent return over time, it will also make you susceptible to making the wrong decisions when emotions get in the way. This is where the second issue comes in. When things get tough, do-it-yourself investors start to make small adjustments to their portfolios, but studies from the past 15 years have shown that the more you fiddle with your investments without professional help, the worse you do.

An interesting tidbit to point out is that oftentimes, the best days in the market start just after a market crash, a market correction or a really bad day in the market. However, people do not tend to invest during these unstable days and end up missing out on opportunities. Their emotions make it extremely difficult for them to act logically and continue to stay invested. This is why working with a professional can often produce significantly better results.

So you see, having little financial knowledge can be a dangerous thing. The most valuable solution I can suggest is to put someone between you and your investments. Hire a financial planner—an independent, third party—who can guide you through your choices and help you avoid making bad decisions. To help you get started, you can download your free copy of my special report—“Twelve Key Questions that You Must Ask a Financial Planner Before You Hire One”—to help you with the interviewing process. Keep in mind that there is a lot that a certified financial planner knows, so it really helps to talk to them about your financial future.

Related Links

How to Choose and Work with a Financial Planner You Can Trust
https://www.ironshield.ca/landing/how-to-choose-and-work-with-a-financial-planner-you-can-trust/

The Financial Advisor Evaluation: Yes or No?
https://www.ironshield.ca/articles/the-financial-advisor-evaluation-fae-10-questions-yes-or-no/

How to Respond to Market Crashes
https://www.ironshield.ca/articles/how-to-respond-to-market-crashes/