The Rules Have Changed . . .

The Rules Have Changed . . .

“‘Would you tell me, please, which way I ought to go from here”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where...” said Alice.”

“Then it doesn’t matter which way you go”’ said the Cat.

—Lewis Carroll, Alice in Wonderland

The rules have changed. Our work lives for several generations were based on the premise, or promise, that we would work hard for forty years and build a nest egg that would carry us through the rest of our lives without working. Reading the local "newspaper" and the letters from retirees illustrates that premise dramatically. They have worked their forty years and there is not enough in the nest egg because of the recent investment losses.

Business owners have likewise had the dream of building a business and then selling it for big bucks that would likewise serve as the nest egg. Build up equity in the business to sell. Build up a business that can be sold to the public through an initial public offering. We have seen examples of that happening here locally. Clear Channel Communications is a prime example.

Lately, though, the conversation has been different. Preceding our recent financial collapse was a long period of decline in interest rates to levels not seen in our lifetimes. A money market account that returns less than 1%! Home mortgages for 30 years at less than 5%.

Certainly retirees who had a nest egg (even if it was untouched through the Wall Street debacle) no longer have the cash flow that the nest egg was designed to provide. $1,000,000 invested at 10% will return $100,000 per year. The same $1,000,000 invested at 3% only returns $30,000. That drop represents quite a change in lifestyle!

Now think about the effect of also losing about half of the $1,000,000. . .

Along those same lines goes the conversation with the seller of a business. After years of building equity, the owner is ready to sell. In this market, it takes a while to educate them that the business can be sold and for just about the same price, even in this down market. There are a lot of people with severance packages, retirement money, etc. who are looking for good businesses to buy.

And then comes the realization that okay, I can sell the business and invest the money and ride into the sunset like Roy Rogers and Dale Evans. After using a calculator for a few minutes, some business owners look up and go, wait a minute, I can't live on that much income. My lump sum after taxes invested at 3% will not support my lifestyle.

Business owners who have used their corporate structure properly are able to expense many items that cannot be expensed as an individual. They make more operating their business than they will get by investing the proceeds.

Now that we have shot down the assumptions that have based our earning lives, the question is: How do I retire?

Drum roll, please. The answer is . . .

Cash flow.

We work to generate cash flow. We use cash flow to pay our bills and buy things. Then we go back to work to generate more cash flow.

So how do you get cash flow that does not require your time?

Fire yourself.

If you have not done so, go buy "The 4-Hour Workweek" by Timothy Ferriss. It does not answer the question totally, but it is excellent food for thought.

I will be reviewing some of his points in future issues.

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Every day we run into someone who because of job loss, the economy or otherwise is not making ends meet and have built up credit card debt they cannot manage, send them a copy of "Three Ways To Stop Creditors In Their Tracks" at http://3ways.get-free-reports.com

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Have a great week!

Jim

Jim Montgomery

210-690-3700

http://yourexitstrategy.blogspot.com

http://www.jamesmontgomerylaw.com

"I have learned, that if one advances confidently in the direction of his dreams, and endeavors to live the life he has imagined, he will meet with a success unexpected in common hours."

Henry David Thoreau

Have The Rules Changed?

Have The Rules Changed?

Investment loss through the financial meltdown has literally reduced 401K and IRA accounts by almost 40%. This investment loss has caused tremendous suffering and stress for baby boomers who are retiring or getting ready to retire. If you missed my last article, check the archive on my blog, http://yourexitstrategy.blogspot.com.

For most of their lives (and as they have taught their children), they were following a business plan for retirement. That business plan was simple: build up a large cash reserve that could be invested to earn interest. The interest would be withdrawn monthly at retirement to replace the income that a job would have paid monthly. At some point, the principal of that fund would have to be invaded to maintain the same level of lifestyle.

To build up that cash reserve, most people saved money from their current earnings over the years to invest and grow. The government gave tax incentives to encourage those savings to be put in vehicles that could grow tax free over the years. However, the money would be taxed when withdrawn from the investment vehicle. The incentive was the small tax deduction when the money was put into the investment. The kicker, that was not discussed, was that the income would be fully taxed when withdrawn.

Due to government regulation, most of the investment funds were invested in mutual funds. Mutual funds took a tremendous beating in the financial meltdown. Of course, individual stocks likewise lost huge value and most investors were totally unprotected with some of the measures that protect against losing principal.

Now the question is, how does one recover? The business plan to build up a large cash reserve requires a lot of time or huge chunks of income. Most baby boomers have little time left until retirement and little likelihood of huge windfalls.

As a result, most baby boomers must continue to work and get the paycheck for the foreseeable future. The monthly paycheck provides a monthly cashflow to pay expenses for everyday living.

The prospect of that monthly cashflow to be replaced by the cash investment business plan is no longer viable. The business plan that has been employed in the past, will not work for this future. The goal is the same: a monthly income that comes in month after month in order to have the money to pay the bills. Getting out of debt certainly reduces the amount required but everyone wants the ability to have money to have the lifestyle they want.

Another business plan may be in order . . .

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Every day we run into someone who because of job loss, the economy or otherwise is not making ends meet and have built up credit card debt they cannot manage, send them a copy of "Three Ways To Stop Creditors In Their Tracks" at http://3ways.get-free-reports.com

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Have a great week!

Jim

Jim Montgomery

210-690-3700

http://yourexitstrategy.blogspot.com

http://www.jamesmontgomerylaw.com

"If a little dreaming is dangerous, the cure for it is not to dream less but to dream more, to dream all the time."

MARCEL PROUST

High Credit Card Debt? Eliminate It Entirely?

These days there are many people who have used credit cards to finance businesses or their living expenses and are now paying the minimum payments every month. As we discussed last week, it is not possible to get out of that debt just paying the minimums.

In their attempt to prevent people from being able to discharge credit card debt in bankruptcy, the credit card pushed for bankruptcy reforms. In 2000, the regulators adopted policies that require banks to take certain actions with regards to credit card receivables (open end credit loans). 65 FR 36903 Uniform Retail Credit Classification and Account Management Policy. June 12, 2000.

The Uniform Retail Credit Classification and Account Management Policy establishes standards for the classification and treatment of retail credit in financial institutions. Retail credit consists of open- and closed-end credit extended to individuals for household, family, and other personal expenditures, and includes consumer loans and credit cards.

Closed-end retail loans that become past due 120 cumulative days and open-end
retail loans that become past due 180 cumulative days from the contractual due
date should be classified Loss and charged off.

The effect is that a credit card not paid must be charged off in full 180 days after the last payment was due or the last charge was made, whichever is later. No interest may be charged after that date.

The consequence for the bank is that the loan must be fully charged off. The expense of collection is rarely justified and the likelihood of recovery is slim because the assets of the individual are either exempt or subject to a payment plan under Chapter 13 of the Bankruptcy Code.

Banks normally sell the credit card loans for literally pennies on the dollar (less than a dime). The collection companies then make a lot of noise, threaten to sue, etc. but the result is similar in that the individual may eventually file a Chapter 13 or the statute of limitations will run. Suing on the debt is usually a last resort and results in a bankruptcy filing and a waste of the creditor's money.

Banks are therefore open to another resolution, a negotiated settlement. Rather than accepting pennies from a debt collector, the bank is open to an offer from the borrower to settle the debt at a higher percentage. The carrot from the bank is the negotiated settlement with a lump sum or monthly payment at no interest in exchange for a report to the credit agency that the debt was settled instead of the standard "charged off".

Thus, the bank gets more money and the borrower does not have the "charge off" report on a credit file. "Settled" is not as good as "paid as agreed" but still does not have the same effect on the credit score.

We are actively negotiating settlements for borrowers on credit cards. If you hear someone complain about credit cards, please do them a favor and give them our phone number, 210-690-3700.

What Is A Power Of Attorney For?

Following up on my thoughts on "The Circle", I had twelve replies to my piece below that was in last week's Newsletter. You may have been thinking about it. Great. Think about it all you need to. But would you do me a favor? The next time you look at your investment account or your bank statement and look at what you are earning on your money (or losing), think about whether your money is really working hard enough for you.

We have a potential deal working to finance an established retail establishment in the Huebner/Bitters area. We don't have the financials put together but the initial thought is that the shares will be $10,000 each with a potential 7% return monthly plus the prorata share of the profits at the end of the year. There is room for more owners.

If you would be interested in getting information, call me.

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What is a Financial Power of Attorney For?

Most of us are familiar with giving the spouse a financial power of attorney.

Jack on the way home has a serious accident with a head injury that prevents him from being able to handle his financial affairs. Rather than having to open a guardianship to manage his affairs, with constant oversight from the court, the financial power of attorney allows his wife to do just about anything he would do if perfectly healthy.

Annabelle is travelling in Europe with a couple of girlfriends. She needs to access money in a separate property investment account for a special purchase she has dreamed about. She calls the bank only to find out that they require a witnessed signature on a bank form to withdraw the funds. In order to get it done in time, she would have to fly home and then fly back to make the purchase. Her husband, with her power of attorney, is able to go to the bank that day and make the fund transfer on her behalf.

Here is one you may not have thought of. You are the owner of your business. You sign all the checks in order to keep controls on the money. On the way back from lunch, that bad accident occurs, maybe you are not permanently incapacitated but will not be able to sign checks for several weeks. Who is going to pay the bills at the office? Will the wife be the only one who can sign checks? Should your business partner have a power of attorney?

Have a great week!
Jim

Jim Montgomery
210-690-3700
http://yourexitstrategy.blogspot.com
http://www.jamesmontgomerylaw.com

"Happy are those who dream dreams and are ready to pay the price to make them come true"

- Leon Joseph Cardinal Suenens
(Archbiship of Malines-Brussels 1904-1996)

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Check out the archived articles on my blog, http://yourexitstrategy.blogspot.com

www.jamesmontgomerylaw.com

210-690-3700

Businesses For Sale

Contrary to common belief at the moment, it is an excellent time to sell a business. Unlike real estate where one for the most part puts out a sign and advertises, businesses are valued based upon their cash flow. Dips in income, even big ones, if not due to actual weakness in the business, are not a huge factor since most evaluations are done on a three year running average.

Even more importantly, money is looking for somewhere to invest right now.

The stock market is horrible. Many people need higher returns than certificates of deposit or T-Bills. Good businesses are the answer.


businesses for sale

I'm Back!

Sunday, February 22, 2009

I'm Back!

Linda and I have completed the last of our scheduled visits in my year serving as District Governor for Rotary in 44 counties in South Texas. This very rewarding assignment has taken me away from the office for quite a bit of time.

Despite the perception that only retired people are the Rotary District Governor, I am not retired and will be ready and able to help you with legal issues.

I have established relationships with three young lawyers, Paul Huckabay, Caroline Luna, and Margot Gallegos, as well as being of counsel to the Elms
Harmon
Macchia Law Firm. Our firm handles buying and selling businesses, business disputes, confidentiality agreements and violations, general corporate advice, partner disputes, buy sell agreements, ownership transfers, real estate issues, development problems, etc. In short, anything your business needs as well as making sure your family is protected by making sure that the family (and your wealth) is protected with wills, powers of attorney, child protection instructions, etc.

Over 95% of our business comes from referrals so please keep us in mind when someone says "Do you know someone who . . ."

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Following up on my thoughts on "The Circle", I have had a number of meetings with potential investors over the last two weeks.

We have a potential deal working to finance an established retail establishment in the Huebner/Bitters area. We don't have the financials put together but the initial thought is that the shares will be $10,000 each with a potential 7% return monthly plus the prorata share of the profits at the end of the year.

If you would be interested in getting information, click here.

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A number of business owners have commented to me lately that they were surprised that I was talking to them about potentially selling their business. Their assumption was that with everything that was going on in the marketplace today that it was a horrible time to sell their business and that they could not get a good price for the business.

Right now there is money looking for good investment deals. People are looking for some place to put their money rather than money market accounts at less than 2% or the stock market that is uncertain.

Prices are not measured like houses. We deal in cash flow and purchasers look not only at the short term but use three year averages in calculating price. If you have systems in place to "fire yourself", your business is worth even more.

If you know a business owner that would like to sell (even if the business is in trouble), please introduce them to me. We can help them sell and help them get out of trouble.

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While getting on an airplane the other day, I was struck by the instructions given by the flight attendants. We fly so much these days that many times one does not really listen to the instructions.

You know the drill, the attendants show you how to buckle yourself in -- something everyone born since 1960 who rides in a car should have down pretty well by now.

Then they proceed to show you how the oxygen masks work. I love the comment when they tell you to put the mask over your nose and breathe normally. I strongly suspect that breathing normally might not be in the cards if those masks suddenly pop down in front of my face!

Then there is the one that you should really pay attention to. They point out every exit on the plane plus tell you that there are lighted lines on the floor to guide you to an exit if there is smoke in the plane. They even caution you that the nearest exit may be in back of you, not in front of you. I found myself counting the rows to the nearest exit out of old habits.

The point here is that if something bad should happen, you need to know where the exits are. You need to have a plan to escape.

In business, we call that your "exit strategy". Do you have one in place? If you don't, pick up the phone right now and call me so we can get one in place. Like on the airplane, when you need to have a strategy, it is too late to dream one up. You have to have a plan in place. Powers of attorney, success planning, buy sell agreements, contingency plans for disaster, financial controls, and a number of very important business tools.

Have a great week!


Jim Montgomery
210-690-3700
http://yourexitstrategy.blogspot.com
http://www.jamesmontgomerylaw.com

"There is hope in dreams, imagination, and in the courage of those who wish to make those dreams a reality."

- Jonas Salk

____________________________________________________________________

Check out the archived articles on my blog, http://yourexitstrategy.blogspot.com

www.jamesmontgomerylaw.com

210-690-3700
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Last Week's Blog Was Biggest Comment Ever!

Last week's newsletter attracted the most response of my weekly newsletters in months.

Rather than writing on a new topic, read the blog entry in the archive below and I will give an example and some additional thoughts.

First, the additional thoughts:

I have discussed with a number of you, the thought of a private financing system. If you lived in San Francisco, were Chinese, and wanted to start a new business, you would not walk into Wells Fargo Bank for financing. Instead, you would present your business proposition to what I will call "The Circle". The Circle is a group of local business people who have come together to stimulate the local economy and free the economy from the regulations that plague the banking process.

If the Circle approved your proposition, it would be funded without a loan. The Circle members would contribute an equal amount apiece and completely fund (pay for) the business so that there was no debt to service. The repayment of the investment comes from the new business owner becoming a member of the Circle. Members of the Circle also do business with each other.

Why would anyone do this? First, if the new business does with you, your minimal investment is probably repaid many times over in the business that it and other businesses do with you.

Second, by starting the new business, the local economy is automatically stimulated. Your proposition is evaluated on the number of jobs you create, the amount of money you will spend in the local community, the amount of money it will eventually make available for addition Circle investments, etc.

Many years ago, a group of business people in Houston decided that Houston should be a major city in Texas and the United States. They decided, among a number of projects, to build a canal from the Gulf to Houston to open up shipping where no natural harbor existed. Beaumont had the natural harbor but did not have the foresight to build the truck and rail connections to fully develop the harbor and Houston surpassed it.

San Antonio has the opportunity to do something like that. We do not have to rely on the banking system and be strangled by that banking system when times are not good.

If you have read this far and are intrigued by the idea, please send this email to five of your best business associates. Let's get the discussions started.

Now the example:

Investor has a house that is purchased for $100,000. The investor puts $20,000 into the transaction and needs $80,000 to finance the house. In today's market, this type of loan is difficult. Banks are regulated and the regulators are telling them that commercial real estate loans are bad. Therefore, banks stop making the loans. Therefore, no liquidity. Therefore, homes do not sell either as home sales or rental property. (Home loans are an entirely different discussion).

Our "Circle" comes to the table. 4 individuals lend $20,000 each, either as separate loans or they "participate" in one loan. The terms are interest only at 7% and the whole loan is due in two years.

With interest only payments as opposed to a bank financed interest plus short term principal reduction, this transaction can make good economic sense.

The investor is then able to sell the property to a prospective home owner on a rent to own basis, lease with a separate option to purchase, applying the option fee and a portion of the lease payments to build equity. With two years payment history, and immediate referral to a credit counselor, the tenant should be able to qualify for a loan in two years with everyone cashing out through the new financing.

If the tenant is not able, the transaction is extended or a new buyer is found. The Circle members can either extend or be replaced by other members for the next transaction. Thus, the Circle members have liquidity and security against default through the value of the real estate.

Give me a call at 210-690-3700 if you are interested in participating in transactions like these (we have five waiting). You also could participate in the equity in the transaction should you choose. We will send you an application for membership.

The above example is a variation on the Chinese "Circle".

Think for just a few minutes of the jobs that could be created if we were able to start a true "Circle" to benefit San Antonio. A large "Circle" could mean tremendous growth for the region with very little individual risk.