Each year, thousands of small businesses change hands. Some owners decide to retire, others need new capital to exploit market opportunities, and some businesses fail and are liquidated.
According to the BizBuySell.com Fourth Quarter 2014 Insight Report, 7,494 small businesses traded hands during 2014, the largest number of transactions since BizBuySell starting tracking sales data in 2007. While higher than previous years, there are approximately 45,000 small businesses—ranging from restaurants and retail stores, to service and manufacturing companies—available for purchase at any given time.
The motive to sell can arise for both negative and positive reasons. Sometimes, plans do not work out, and business results fall short of expectations. While in the best of circumstances, buyers – drawn by the success of a business – make unsolicited offers to purchase the business. Either circumstance can dictate the potential sale.
Unfortunately, not all owners have a choice whether to sell their companies. The failure rate of small businesses is extraordinarily high, with almost half going out of business before their fifth year, according to Statistic Brain.
Despite their initial optimism, many owners regret starting their business, no longer hoping to get the cheese but to get out of the trap. In such cases, the owners’ objectives are to achieve the highest valuation possible to reduce their losses and restore their business reputation. If a liquidation appears likely, competent legal and accounting advice is essential. Owners may also consider retaining the service of an experienced business broker to help present the company in the best possible light and negotiate favorable terms of sale.
If your business is a successful operation, you may find that potential buyers or their representatives regularly solicit the purchase of your business, perhaps accompanied by preliminary (though very attractive) estimates of market value. But before putting your company on the market or engaging in negotiations to sell the business, there are a number of questions you should resolve.
Lifetime Savings Plan – Principles for Every Age
Many Americans are now discovering that a comfortable retirement and adequate healthcare are beyond their means. As a consequence, we are working later in life, lowering our expectations, and going without not only luxuries, but essentials as well.
The decisions we make through our lives come with financial consequences. These choices include the careers we develop, the colleges we attend, the people we marry, the size of our family, and the lifestyles we adopt. While many of these choices may seem out of our control, it is possible to make adjustments along the way to minimize their worst financial consequences. The advantage available to everyone is time: The sooner we understand the long-term impact of our decisions and make the necessary changes, the more likely we are to reach our financial goals.
Major Lifetime Expenses
People incur common expense categories as they pass through different stages of life. However, the magnitude and timing of each vary from individual to individual. For example, one person may have $25,000 in student loan debt, while another has none. One person might get married at age 22 and have two children while another gets married at age 35 and has three children – another may not marry at all.
As a consequence, the following categories are necessarily broad, and a specific expense category may not apply to everyone. Nevertheless, a rough timeline projecting the cost of future expenses can enable you to save a portion of your income through each phase of life, helping you comfortably pay expenses when they occur, and ultimately leading to a substantial retirement fund.
1. Student Debt
According to a recent report by the Institute for College Access & Success, seven out of ten graduating college seniors in 2013 had student loans averaging $28,400. The median debt for those who earn post-graduate degrees is an additional $57,600, according to New America – one in ten graduate students owe $150,000 or more.
The cost of obtaining an undergraduate or graduate degree continues to escalate. While there are differences in everyone’s loan limits, interest rates, and repayment requirements, every borrower has to decide whether to focus on repayment as quickly as possible or make minimal payments and begin a savings program.
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Regulation vs. Responsibility: A Wall Street Story
The tensions between Wall Street and the Federal Government and the cries to rein in bankers and level the playing field for the average worker existed long before ‘Flash Boys.’
In response, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 with the hope that it might bring about much-needed reform of the financial services industry. Predictably, the industry resisted any attempt to curb its immense power, flooding the halls of Congress with lobbyists and the campaign coffers of legislators willing to roll back parts of the 2010 bill. As a result, many regulations are still not in place, and the Securities and Exchange Commission and CFTC budgets have been slashed, limiting their ability to investigate wrongdoing.
What Is Responsible Regulation?
Critics of Dodd-Frank assert that it does not address institutions deemed too big to fail since it explicitly permits bailouts via a “resolution authority” provision to be initiated at the discretion of government authorities. Many people – including Sandy Weill, John Reed, and Richard Parsons (all former Citigroup chairmen) – argue that banks are, in fact, too big. Federal Reserve Governors Tarullo, Fisher, Stein, Plosser, and Bullard argue that the only solution is to break up the mega-banks.
However, others would simply require that banks raise their capital ratio to 10% or more of their assets, and require more cash reserves. They note that during the Great Depression, large New York banks maintained more than 15% of their assets in equity and cash reserves in excess of 25% – and none of these banks failed.
Cam Fine, CEO of the 7,000-member-strong Independent Community Bankers of America, bluntly claims, “Too-big-to-fail firms should be downsized and split up.” Rather than reducing the risk that mega-banks pose, the Dodd-Frank Act has aggrandized the advantage of large banks over smaller competitors, imposing such a burden on the latter that “they will simply have to sell out to larger institutions that have the staff to deal with the massive volume of new reports and rules,” according to American Bankers Association President Ed Yingling.
The provisions of Dodd-Frank extend well beyond bankers to other segments of the financial industry. While unpopular, many players have reluctantly prepared for its new rules and discovered that the situation is not quite as dire as initially projected. According to Wulf Kaal, a University of St. Thomas professor who surveyed 94 private equity, venture capital, real estate, and hedge fund advisers, 7 of 10 say that the new laws haven’t affected their investors’ rates of return, nor do they plan to alter their investment style. In other words, the regulations have been diluted and defanged to the extent that no real change is required.
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Four Investment Principles for Retirement Savings
While there are a variety of investment options available to everyone, an astute investor must practice good fundamentals to control risks and optimize potential returns, including taking the time to be informed. As stated by Peter Lynch, renowned manager of the Fidelity Magellan Fund from 1977 to 1990 who beat the S&P 500 index 11 of 13 years, “Investing without research is like playing stud poker without looking at the cards.”
As you build your portfolio for retirement, it is crucial to keep several principles in mind:
1. Manage Your Risks
Warren Buffett, the “Sage of Omaha” often credited as the “Greatest Investor of All Time,” supposedly had two rules: “Rule number one: Never lose money. Rule number two: Never forget rule number one.”
It has been generally accepted that investments with higher returns generally involve the assumption of greater risk. Logically, you want to balance risk and reward. Unless you are a diehard gambler, you probably do not want a portfolio that is all or nothing (all assets in the high-risk, high-reward category) or, even worse, assets that have high risk, but low potential reward.
Fortunately, stock market analysts and theorists have conducted numerous studies to better understand the correlation between risk and reward in attempts to minimize risks and maximize returns within portfolios. As you select your investments, be aware of the beta and R-squared values, two measures that compare the investment to a commonly accepted market index (T-bills for bonds; S&P 500 for equities) and can help you better balance risk.
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