Tag Archives: ironshield financial planning

How to Respond to Market Crashes

Oftentimes, we hear on the news that the markets have crashed, but bear in mind that the media frequently dramatize events and make it seem as if things are really crazy. While things may become a little hectic, the real question is how you respond to such events. In today’s blog post, I will talk about the things you could do in the event of a market crash and the 4 Don’ts and 5 Do’s in terms of your financial affairs during these times.

Generally speaking, when a market crash occurs, there are four classic things that you could do with your money:


  1. Invest an additional sum of money—the best time to buy is when things are the cheapest, and things are cheapest when the market is down.
  2. Keep everything where it is—in addition, you could choose to start a monthly contribution plan.
  3. Don’t do anything—you wouldn’t add or take away anything. You could simply choose to ride it out.
  4. Take a defensive stance—this means you could sell your position, get out of the market, put it into cash, and re-enter the market when it is back to normal. Emotions tend to drive this option, but I highly suggest that you don’t let your emotions dictate your investment decisions.

It’s important to remember that for every crisis, there’s an opportunity. When the market crashes, we weigh our options and decide which of them we should take. History has shown that the more violent the correction, the more rapid the recovery. So what should and shouldn’t we do in these times of opportunity?

4 Things You Should NOT do

1. Don’t Panic

People panic when they are afraid of the unknown. Panicking affects your emotions and your rationality, and you will end up making poor financial decisions as a result. Recognize that a negative market event is a requirement for above average returns. So embrace the fact that when the markets turn south, this is setting your portfolio up for a positive future.

2. Don’t Talk to Your Friends

People only talk about their successes. Your friends are not going to tell you about the failures that they’ve had. The truth is, most of your friends are simply bragging about small, short-term successes. The reality, however, is that those big, short-term successes don’t often translate into sustainable long-term returns.

Talk to a CFP instead because they are trained to understand what a market crash means on a global level. They will really help you figure out your next step.

3. Don’t Sell to Stop the Bleeding

This option is essentially choosing option number four: selling for a perceived “defensive” stance. People want to wait until the market is stabilized before they re-invest in the market because this makes them feel better. However, the reality is that more often than not, these “defensive” investors miss out on some of the greatest gains because they let their emotions dictate their investment decisions. Just think about it logically—the formula for profits is to “buy low and sell high”, not “buy high, hoping to sell at a higher point.” The latter is known as “the greater fool theory.” A fool buys a security without paying any attention to the actual value of that security in the hopes that they can find a greater fool to sell it to in the future at a higher price. Take a moment to think about that. Simply put, investing is all about paying the right price for something and the right price is more often than not present right after a market setback. This is called in simple terms “a sale.”

4. Don’t Be Uneducated

Make sure you talk to a financial planner. It is important to understand the situation at hand and discuss the plan and strategy with your financial planner. One of your options is to listen to our Fly on the Wall webinar series and listen in while I talk to various investment professionals and portfolio managers that we work with and get firsthand information on the status of the market. Remember to stay informed and understand the fundamentals of what you are dealing with.

5 Things You SHOULD Do

1. Educate Yourself

This tip essentially reiterates the last point in the previous list. Educate yourself so that you and your financial planner both understand the plan and the strategy.

2. Align Yourself with a Discretionary Investment Firm

Ensure that you are making the right decisions with an investment firm that can implement your portfolio strategy and work on your behalf to take advantage of any opportunities that present themselves. Discretionary management allows advisors to make decisions for their clients based on the discussions they have had and the investment policy statement that has been put in place. Make sure that this is properly set up because you are protected if your portfolio manager ventures outside of these boundaries. They can become liable for doing so.

3. Consider Tax Loss Selling

When the markets are down by a significant percentage, you can trigger that loss by choosing to sell an investment, and then re-invest it in another version of your current portfolio. This allows you to avoid the superficial loss rule in Canada, which states that you are not allowed to claim a loss that you triggered by selling and then repurchasing the same security. Selling an investment and re-investing it in a different version essentially allows you to sidestep this rule.

Now, you can take the loss that you triggered and offset any taxes that were paid on any gains you had prior to the current year. So if you had paid taxes on a capital gain within the past three years, you can reclaim that loss and get some money back. Similarly, you can also take that loss that you triggered and carry it forward indefinitely. This will allow you to offset any future gains with some capital losses.

4. Make Sure You Don’t Get Caught in the Paperboy Syndrome

If your paperboy qualifies for the same type of investments that you are in, consider migrating your portfolio to a more appropriate investment solution that is better suited and priced for your level of investment account. Watch out for the three thresholds. If your portfolio is:

Less than $100,000—mutual funds are ideally suited for you (good diversification; something anybody can purchase)

$100,000 and above—start hiring your own portfolio manager and investment counselling firm to work with (really direct and customized management tailored to each individual)

5. Recalibrate Your Financial Plan

Whenever the markets drop by a certain level, it is understandable that you would have a lot of unanswered questions. Recalibrating your financial plan could be called the first thing you should do. It means taking your plan and keying in the current values so that you would know what you are working with. Work with your financial planner to answer all your questions and find out how the market crash would affect your financial decisions and goals. You can check out the report at our website called 12 Key Questions You Must Ask a Financial Advisor Before You Hire One. It will help you get involved with a financial planner and begin the process of managing your finances.

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

Fly on the Wall Update Calls
https://www.ironshield.ca/blog/fly-on-the-wall-update-calls/

What’s so special about the million-dollar mark?

Republished with permission from Built to Sell Inc.

If you’re wondering when is the right time to sell your business, you may want to wait until your company is generating $1 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).

What’s so special about the million-dollar mark?

The million-dollar mark is a tipping point at which the number of buyers interested in acquiring your business goes up dramatically. The more interested buyers you have, the better multiple of earnings you will command.

Since businesses are often valued on a multiple of earnings, getting to a million in profits means you’re not only getting a higher multiple but also applying your multiple to a higher number.

For example, according to our research at www.SellabilityScore.com, a company with $200,000 in EBITDA might be lucky to fetch three times EBITDA, or $600,000. A company with a million dollars in EBITDA would likely command at least five times that figure, or $5 million. So the company with $1 million in EBITDA is five times bigger than the $200,000 company, but almost 10 times more valuable.

There are a number of reasons that offer multiples go up with company size, including:

1. Frictional Costs

It costs about the same in legal and banking fees to buy a company for $600,000 as it does to buy a company for $5 million. In large deals, these “frictional costs” become a rounding error, but they amount to a punitive tax on smaller deals.

2. The 5-20 Rule

I first learned about the 5-20 rule from a friend of mine named Todd Taskey who runs an M&A firm in the Washington, D.C. area. He discovered that, in many of the deals he does, the acquiring company is between 5 and 20 times the size of the target company. I’ve since noticed the 5-20 rule in many situations and I believe that more often than not, your natural acquirer will indeed be between 5 and 20 times the size of your business.

If an acquiring business is less than 5 times your size, it is a bet-the-company decision for the acquirer: If the acquisition fails, it will likely kill the acquiring company.

Likewise, if the acquirer is more than 20 times the size of your business, the acquirer will not enjoy a meaningful lift to its revenue by buying you. Most big, mature companies aspire for 10 to 20 percent top-line revenue growth at a minimum. If they can get 5 percent of organic growth, they will try to acquire another 5 percent through acquisition, which means they need to look for a company with enough girth to move the needle.

3. Private Equity

Private Equity Groups (PEGs) make up a large chunk of the acquirers in the mid market. The value of your company will move up considerably if you’re able to get a few PEGs interested in buying your business. But most PEGs are looking for companies with at least $1 million in EBITDA. The million-dollar cut-off is somewhat arbitrary, but very common. As with homebuyers who narrow their house search to houses that fit within a price range, or colleges that look for a minimum SAT score, if you don’t fit the minimum criteria, you may not be considered.

If you’re close to a million dollars in EBITDA and getting antsy to sell, you may want to hold off until your profits eclipse the million-dollar threshold, because the universe of buyers—and the multiple those buyers are willing to offer—jumps nicely once you reach seven figures.

Sellability Score

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 – General and Investment Alternatives Update Q3 2014

MichaelFlux_1000x1230

In this video, I speak with Mike Flux, Senior VP of Connor Clark & Lunn Private Capital to chat about their investment outlook from Q3 of 2014. 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.

How To Get a Big Company Multiple For Your Business

Republished with permission from Built to Sell Inc.

Big public companies trade at a significant premium over small businesses in the same industry because investors perceive big, sophisticated companies as a safer bet than small, owner-dependent companies.

Let’s take a look at the professional services industry. Although most consultancies are a small collection of experts, there are also a handful of big publicly traded professional services firms. Omnicom (NYSE:OMC) is a massive marketing services company with a market capitalization of around $18 billion. For all of 2013, Omnicom reported pre-tax income of $1.66 billion, meaning they are trading at around 11 times pre-tax income.

Smaller service businesses trade at much lower multiples. We know this because at our firm we offer The Sellability Score questionnaire which asks smaller business owners (our typical user has between $1 million and $20 million in sales) if they have received an offer to buy their business, and if so, the multiple of their pre-tax profit the offer represents. When we look at the professional services segment, we find the average multiple over the last two years was 3.81—almost three times lower than Omnicom.

When we isolate professional services companies with at least $3 million in revenue, the multiple being offered goes up to 4.97 times pre-tax profit, but it is still less than half of Omnicom’s 11 times.

And in case you thought this phenomenon was unique to the marketing services vertical, take a look at the IT services giant Accenture (NYSE:ACN). Accenture reported pre-tax income of $4.3 billion in 2013 and currently has a market capitalization of more than $52 billion, meaning they are trading around 12 times pre-tax profit, which is more than double the price we see being offered to smaller professional services firms.

How To Get a Big Company Multiple For Your Business

So how do you get a public company-like multiple for your business? One approach is to look for a strategic buyer. Unlike a financial buyer that is looking for a relatively safe return on their capital invested (which is the reason investors place a premium on big, stable companies trading on the stock market), a strategic buyer will value your company on how buying you will impact them.

Let’s imagine you have a grommet business predictably churning out $500,000 in pre-tax profit. These days, a financial buyer may pay you around 4 or 5 times earnings – in this case, roughly $2.5 million – if you can make the case your profits are likely to continue well into the future.

Now let’s imagine that a company that sells a billion dollars worth of widgets starts sniffing around your grommet business. They think that if they integrate your grommets into their widgets, they can sell 10 percent more widgets next year.

Therefore, your little grommet business could add 100 million dollars of revenue for the widget maker next year – and that’s just year one after the acquisition. Imagine what your business could be worth in their hands if they continued to sell more widgets each year because of the addition of your company.

The widget maker is not going to pay you $100 million for your business, but there is somewhere between the $2.5 million a financial buyer will pay and the $100 million in sales that the widget maker stands to gain next year that is both a good deal for you and for the widget maker.

Premium multiples get paid to big companies, and also to the little ones that can figure out how to make a big company even bigger. If you’d like to know how your company performs on The Sellability Score, simply complete the 13-minute questionnaire here at www.businesssellabilityaudit.com

Sellability Score

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.

Long-Term Care Insurance 101–Part 2: The Dos and Don’ts

In my last blog post, I introduced you to Jennifer Jacobs, the top living benefits specialist in Canada, and sat down with her to discuss the essentials of long-term care insurance. To quickly recap, a long-term care insurance policy is essentially a security tool used in the event that you encounter a serious injury or that hinders your ability to perform day-to-day activities. The policy provides you with an added tax-free cash flow that allows you to maintain your ability to continue to financially run your household.

Today, I want to introduce the pros and cons of the various plans available, as well as to point out their most exciting features. In addition, I will also reveal a bit more detail on being “physically dependent.”

pros and cons

Jennifer tells us that a key aspect of a long-term care insurance policy is to apply early and get an offer back from the insurance company first. They will look at your medical records to check that everything is in order. In some cases, further medical testing could delay the process for up to a few months. In other scenarios, a couple may learn that only one party can be approved, thereby causing them to consider other financial plans. So it is important to put in an application early because you never know what the insurance company is going to say or how they view things. Applying early for a long-term care insurance policy is beneficial as it allows clients to stay informed on their situations in case there are delays. This way, there will be no surprises.

A long-term care insurance policy has a number of exciting features that appeal greatly to the mass public. The first feature of this policy is the payment period. In the majority of cases, we are looking at situations where the client is aged 35 and above. One of the options available is for you to deposit into the plan for 20 years and then be covered for life with no further deposits required. This is a very beneficial advantage because it not only protects the younger self in the event of an injury, but it also creates a fully back-loaded retirement plan with a cash flow protection plan in place once you have reached an older age. If you do make a claim in the first 20 years while you are depositing to the plan, your required deposits are waived during your claim, and the amount of time you have collected on this policy will not be added on to the deposit period. It will only simply lessen the amount you paid into the policy.

The second feature is interesting in that it is unique to a long-term care insurance policy. Extended term insurance provision is a feature that incorporates the acceleration of your payments by a bit so that you are pre-paying in advance. This action prevents you from missing a payment and protects you from the risk of losing your policy. Typically, this action does not come into effect until after the five-year mark of the policy being put into place, but the upside of this feature is that you can choose to stop your payments, yet the coverage will remain enforced for anywhere between five and fifteen years from the time you stopped the payments.

Long-term care insurance policies have a lot of flexibility, making it possible for them to be tailored to each specific client’s needs. This is the reason why it is smart to be informed on the optional benefits available and extra features that can be added on to these policies. I do not actually recommend them in most cases as they easily become drawbacks in the cost versus benefits examination. However, it is still important to take note of these options in order to stay knowledgeable about financial planning for the future.

One such optional benefit is inflation protection, which is highly discouraged in many cases due to the high cost and poor rate of return in the feature. For example, if you decide to purchase $2000 in monthly benefit, and add the inflation adjuster to keep things in line as time went on, the premium would go from $100 to $180 for the inflated product. At a 2% inflation rate, it would take 30 years before it is worth $4000 a month. Alternatively, you could have bought $4000 a month right now for the same price as adding the inflation adjuster and waiting for the benefit to catch up.

This feature then seems, in most cases, unnecessary. However, there are two scenarios in which an inflation adjuster may be beneficial. The first situation occurs when the insured is given a limit on the collected amount; inflation protection is the only way to have more insurance when an unlimited benefit is taken away.

The second time in which this feature is used is with executives, high earners and very young, wealthy clients. Because these types of individuals recognize the need for insurance coverage in spite of their wealth, inflation protection becomes a less expensive way of protecting their future cash flow. Unless you find yourself in either of these situations, I strongly discourage adding the inflation protection feature to your policies.

Another feature of optional benefits arises when people express concerns about wasting money or buying something that they may not need—they wonder whether premiums can be returned if the insured passes away without making a claim. I will make a note here and say that you are more likely than not to use a long-term care insurance policy based on actual medical experience.

This feature essentially gets the insured to spend more money in unnecessary places by declaring that the insurer would return the premiums paid, less any claims, in the case that the policy is never used. However, you usually only need to collect for six months to a year in your whole lifetime for that amount to equal the 20 years of payment paid for the policy. Risk is a factor that we need to consider, but I assure you that the chances of you using long-term care insurance are very, very high.

Lastly, I want to talk a little about comprehensive and facility insurance coverages. As the names suggest, one covers care facilities such as retirement homes or hospitals, while the other encompasses cases regarding the mental ability, such as brain injuries, regardless of where care is needed. Remember what I said in my previous post about being “physically dependent.” For this policy, a claim can be made as long as you are in need of either physical or mental assistance; you do not require both.

In addition, the policy does not differentiate between temporary or cognitive impairment, either. However, it is extremely important to note that you CANNOT make a claim with long-term care if factors such as work stresses, anxiety or depression occur because they do not render you dependent on others—these are situational issues. Being “physically (or mentally) dependent” in daily activities is not an insurance company’s definition; it is a standard medical assessment that is critical to an income policy that is essentially based on you and your body.

I hope that you will take advantage of a long-term care insurance policy, a very beneficial security tool that will help you and your family in the long run. Talk to a financial planner today to speak to a specialist in this field. It is never too early when preparing for the future.

Related Links

Long-Term Care Insurance 101—Part 1: The Basics
https://www.ironshield.ca/articles/long-term-care-insurance-101-part-1-the-basics/

Find Out if You Have the Right Type of Insurance Plan
https://www.ironshield.ca/services/insurance-plan/

Health and Dental Insurance
https://www.ironshield.ca/online-healthdental-insurance/

Four Mistakes to Avoid When Creating a Retirement Income Plan
https://www.ironshield.ca/articles/four-mistakes-to-avoid-when-creating-a-retirement-income-plan/

One Hidden Thing That Drives Your Company’s Value

Republished with permission from Built to Sell Inc.

You already know that your company’s revenue and profits play a big role in how much your business is worth.

Do you also know the role cash flow plays in your valuation?

Cash vs. Profits

Cash flow is different than profits in that it measures the cash coming in and out of your business rather than an accounting interpretation of your profit and loss. For example, if you charge $10,000 upfront for a service that takes you three months to deliver, you recognize $3,333 of revenue per month on your profit and loss statement for each of the three months it takes you to deliver the work.

But since you charged upfront, you get all $10,000 of cash on the day your customer decides to buy. This positive cash flow cycle improves your company’s valuation because when it comes time to sell your business, the buyer will have to write two checks: one to you, the owner, and a second to your company to fund its working capital – the cash your company needs to fund its immediate obligations like payroll, rent, etc.

The trick is that both checks are drawn from the same bank account. Therefore, the less the acquirer has to inject into your business to fund its working capital, the more money it has to pay you for your company.

The inverse is also true.

If your company is a cash suck, an acquirer is going to calculate that she needs to inject a lot of working capital into your business on closing day, which will deplete her resources and lessen the check she writes to you.

How To Improve Your Cash Flow

There are many ways to improve your cash flow – and therefore, the value of your business. One often overlooked tactic is to spend less on the machines your company needs to operate.

In the restaurant business, for example, there is an often repeated truism that it takes three bankruptcies at a single location before any restaurant can make money. The first owner of the restaurant walks in and – with all of the typical optimism of a new entrepreneur – pays cash for a brand new commercial kitchen complete with fancy stove, commercial grade walk-in coolers, etc., as well as all new dishware, pots and pans, thus depleting his cash reserves before opening night. Within a year, the restaurant owner runs out of cash and declares bankruptcy.

Then along comes a second entrepreneur who decides to set up her restaurant at the same location and buys all of the shiny new equipment from owner number one’s creditors for 70 cents on the dollar, figuring she has made a wonderful deal. But the outlay of cash is still too great and she too is out of business within a year.

It’s not until the third owner comes along that the location actually survives. He saves his cash by buying all of the equipment off the second owner for 10 cents on the dollar.

The moral of the story is: find a way to reduce the cash you spend on equipment, however you can. Can you buy your gear used on sites like eBay? Can you share a very expensive piece of machinery with another non-competitive business? Can you rent instead of buying?

Profits are an important factor in your company’s value but so too is the cash your company generates. We call this phenomenon The Valuation Teeter Totter and it is one of the eight key drivers of the value of your company. Curious to see how you’re performing on all eight drivers?

Sellability Score

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.

Long-Term Care Insurance 101—Part 1: The Basics

As a company, IRONSHIELD has embraced the need to include long-term care insurance as part of an overall comprehensive benefit plan. This has brought us in touch with Canada’s most talented experts in the field. I had the pleasure of speaking with Jennifer Jacobs, a top long-term care insurance specialist, who had provided us with an excellent overview of what long-term care insurance encompasses.

Today, I want to share with you Jennifer’s expertise. In Part 1, I will give a brief description of what long-term care insurance is and dispel some of the most common myths surrounding this type of insurance coverage. In Part 2, I will share some insight into the various plans available in the market today and talk about some of their pros and cons.

Long-term care insurance is something that people don’t tend to think about when they are young because they feel that there is no need to. This is precisely the first myth that I wish to dispel in today’s post. Until a while ago, I had never been injured and never thought that I would have to think about long-term care. But then, I was involved in a serious water skiing accident and suddenly, I found myself changing the way I thought about long-term care and how it would benefit my family.

The misconception on long-term care comes from our association of the term with long-term facilities, when in fact, the two are not related at all. A long-term care insurance policy is essentially a security tool that allows you to go through life with confidence in the event that you encounter a serious injury or a situation in which it hinders the daily activities of everyday life. This type of insurance coverage protects your entire financial plan and provides you with an added income that would help maintain the life choices of your household.

When we are young and involved in various activities, we never quite imagine the chances that we may be taking. We are logical and presume that the possibility of injuries is something that we don’t have to consider until we are much older. It is only when we do experience a potentially life-threatening situation that we realize the affects of our injury could be financially devastating. For example, you may require assistance with routine tasks while you are injured, and whether it is by hiring a service or reallocating the task to another family member, the action will affect your overall income in some way.

A long-term care insurance policy is simply an income benefit. By acting proactively and securing an insurance policy in place, you are giving yourself the protection you will need in the future. However, it is important to understand that long-term care insurance is not a replacement for disability insurance. The second myth that I want to dismiss is that a long-term care insurance policy would affect the other various plans you already have in place. This is not the case with this particular type of coverage. The difference with this policy is that it isn’t asking whether or not you can do your job; it is asking if you can live independently. There are very strong overlaps between long-term care and disability plans, but rest assured that you are able to collect on both.

The third myth that I want to discuss is what it means to be able to live independently. While long-term care is strictly about whether or not you need help with your daily living, there are a few criteria that must be met before a claim can be made. First of all, there is a short waiting period to prevent small claims, such as sprains or strains. This ensures that the policy is effective for more severe circumstances, such as fractures, recovery from surgery, and incidents that actually affect you for typically more than 30 days. Secondly, the long-term care insurance plan will provide you with the income no matter what injury you have or how it happened. The only restriction here is criminal acts, such as drug use and the like, for obvious reasons.

In short, the whole purpose of a long-term care insurance policy is to promote your life into the stable state in which you want to maintain it. This type of policy is so unique because it has an unlimited status on it, which means there is no limit on the number of times you can collect in your life time. An unlimited status makes the long-term care insurance plan absolutely one of a kind in the Canadian market today.

To ensure that you are protected financially in the event of a serious injury, don’t forget to check back for Part 2, in which I will discuss the various plans available, as well as a little bit more detail on what counts as being “physically dependent.” I will also talk about the pros and cons of these plans, and point out their most tempting features. I strongly advise you to take the initiative and learn more about securing this very beneficial insurance plan. Its long term effects will certainly prove to be most rewarding in the future.

Related Links

Find Out if You Have the Right Type of Insurance Plan

https://www.ironshield.ca/services/insurance-plan/

Health and Dental Insurance

https://www.ironshield.ca/online-healthdental-insurance/