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Posted on
Saturday 12 December 2009
Folks who follow my writings on Business Modeling will know
that I think they are fundamental to success in pretty much every
enterprise today—whether it is a new, for-profit business or a NGO,
Charity or Not-For-Profit. For a profit-making business, the Biz Model
simply ensures that the harder you work the more money you make. It
also speaks to the sustainability of your enterprise—making sure you
start an enterprise that: a) can outlive its founder (i.e., you) and b)
develops some type of differentiated value that creates a concession or
franchise for you.
Another factor I stress is designing the Biz Model to become part of a
wider business eco-system. If your business can survive long enough to
achieve that, it becomes a very hard entity to destroy. Take, for
example, the major Hollywood Studios. It has always amazed me that
organizations with such brainy people in them can make so many bad
films. If you and I did that even once, we would NEVER get a second
chance. Executives and Studios that fail and fail again and again are
either given further opportunities or recycled elsewhere in the
industry.
Part of the reason these studios or poorly performing executives are
so hard to kill off is that they are part of a much wider, deeper and
more intricate business ecosystem; one that has developed deep roots
laid down like ancient limestone over eons (as measured in, say, dog
years, hockey years or Internet years). Once you are part of that
ecosystem of actors, directors, producers, deal makers, studios, agents,
publicists, screen writers, special effects houses, reviewers, gofers,
hangers on, high profile media types, celebrity hosts, musicians,
composers, animators, production designers, directors of photography,
makeup artists, casting directors, art directors, storyboard artists,
costume designers, camera operators, CEOs, COOS, executive producers,
accountants, location supervisors, union bosses, etc., you practically
can’t be dislodged.
The NHL family is the same—that’s why you see coaches and GMs recycled so often. It’s a pretty close-knit community.
If you graduate from being a simple supplier to a South Korean
Chaebol to being a full-fledge member of same, you have it made in that
country. You’ve become a part of a business eco-system and it is likely
that your five, ten, even 25-year survivorship chances have just
increased a lot.
You can plan for this if you think carefully about your business
model. On one side, you have your clients and on the other side you have
your suppliers. Most people think about what do my clients want or what
do I expect from my suppliers? But that isn’t good enough—you need to
look at least two dimensions deep on either side—what do the clients of
my clients want and what do the suppliers of my suppliers have to offer.
If you can manage it, try 3-D or more.
I was speaking to one of my students recently, a terrific young
person who has started her own promotions business: Jennifer Lee
Productions. We are working toward a biz model for her that cements
Jennifer Lee Productions (JLP) in a business eco system and, hopefully,
places her at or near the centre of that eco system. I think she can do
it.
Now this is not easy for a promotional products biz. There is a lot
of competition and differentiated value and ‘pixie dust’ are hard to
come by. Building some pixie dust into her biz model would be a big help
to JLP.
Most sales people from that industry call you up and rather timidly
ask you: “Do you need any promotional products for next year?” Or if
they are clever, they call you up and say: “How many branded pens or
calendars do you want for next year?”
They get the phone slammed down on them a lot.
It’s a pathetic approach really.
We are working on a different approach for JLP some of which is
proprietary and can’t be discussed here. But one simple idea can be—JLP
is working on a t-shirt order for a Not-For-Profit group that is focused
on building a colossal scale monument to the Stanley Cup. It’s a small
order but it could lead to big things if JLP analyses the situation in
(at least) 2-dimensions.
OK, this is how it’s done—first, ask the question: who are the
clients of my client? Answer, the Stanley Cup Monument Group needs a
number of key sponsors to fund this statue and its ancillary works. One
of those founding sponsors is likely to be a Canadian Chartered Bank.
Now ask the second question: what do the clients of my client want?
Well, the Bank wants more customers to go to their branches and to use
their online services too. How can JLP help with that? Why not suggest
to the Stanley Cup Monument Group and the Bank that people should be
able to go to every Bank branch as well as their online properties and
make a donation and, for donations of more than $x they get a fabulous
t-shirt (or some other branded promotional item like, maybe, a Sidney
Crosby (youngest man to Captain a Stanley Cup winner) bobble head doll)
produced by JLP under license.
The t-shirts (or other product) are also open to the idea of
cross-branding so the Bank can co-promote other founding sponsors (and
vice versa) who are likely to be an oil company, a major athletic shoe
company, a clothing company, a postal company and so forth.
So this answers a third question: what do clients of my client want from each other. (For more about co-branding, see: https://www.eqjournalblog.com/?p=571.)
If you have the patience, you should explore these functions at least
into the 2nd dimension and maybe even to the third or fourth level. It
will make your business model smarter and give you MUCH better odds of
becoming a long term part of that eco system.
Prof Bruce
Postscript: Another example I use is a Spa. Who are the clients of a
Spa? Mostly women. Who are the clients of the Spa’s clients? Mostly men.
What do the clients of the Spa’s clients want? Gifts for Xmas,
anniversaries and special occasions. How to satisfy that demand? With
gift certificates that men buy in droves, of which up to 30% are never
redeemed. You can really improve your profitability and, hence, your
sustainability, if you think in these terms.
Postscript 2: How do you think about the supply side of the equation
in this way? Suppose we return to the spa business. Who are their
suppliers? Well, if you are sharp, you might say: their hair stylists,
manicurists, massage therapists, pedicurists, physiotherapists, hair
colouring specialists and so forth. These are the true suppliers of
services.
And what do the Spa’s suppliers want? Great hair care products, skin
products, tools of the trade, vitamins, makeup and nail polish They may
also want to sell grooming aids, jewelry, clothes, towels, bathrobes,
travel kits, etc.
And what do the supplier’s of the Spa’s suppliers want? They want to
increase their market share and, hence, they might be induced to pay the
Spa—volume bonuses (which can be a huge source of profitability.
Remember, nothing is sustainable unless it is economically sustainable
and that goes for environmental initiatives too.) So here is a case
where someone on the supply side of your business might pay you instead
of the other way round. The only way to discover this is through 2-D or
3-D biz modeling or by years of (profitless) trial and error. Remember
too, that your new enterprise is highly vulnerable to error—you need to
be right almost all the time to successfully start and run a business
that will survive longer than a few years. So at least begin with a
sound business model.
Your suppliers’ suppliers might also be encouraged to provide free
round trips to London for the spa’s suppliers (e.g. their hair stylists
or colour specialists) to do top-level courses with world-renowned
experts in their field. That in turn might help the spa keep their top
stylists from being poached by other shops and attract others, both good
for customer satisfaction and the bottom line.
Prof Bruce @ 4:11 pm
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Why What Would Google Do is Wrong
Posted on
Saturday 12 December 2009
Jeff Jarvis in What Would Google Do argues that: “Owning …
intellectual property is no longer the key to success. Openness is.” I
think Jarvis is wrong about this.
Google is not open about its search algorithm. In fact, its
search algorithm is Google’s ‘secret sauce’—its version of the Colonel’s
‘11 Secret Herbs and Spices’.
I think what Jarvis may be getting at is that Google has a new
business model based, in part, on pricing one of its products—search—at
zero, at least for consumers of information. Google is all about open
source code, opening the world’s storehouse of information to anyone for
free, that type of openness. But the core of its biz model is a trade
secret.
It’s true Google didn’t take out a patent on its search algorithm.
But then neither did Coke on its secret formula. Patent applications
require that the applicants disclose how the discovery or invention
works and Google and Coke certainly don’t want to do that. A trade
secret is a much better form of protection.
So they are using their IP to form important concessions (or
franchises) that are very valuable indeed. This is what I am getting at
when I talk about: a) the importance of getting the business model right
(GTBMR) and b) having some ‘pixie dust’ or differentiated value in your
model.
I think that entrepreneurs still need to think about these things to create new successful, sustainable enterprises and not pay too much attention to the trend du jour in the management consulting world and publishing biz.
Prof Bruce
Postscript: I wrote Ten Things that Startups Forget to Do and GTBMR and ‘pixie dust’ are two of them: https://www.eqjournalblog.com/?p=335.
Prof Bruce @ 1:59 pm
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Value Differentiation and ‘Pixie Dust’
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Posted on
Friday 11 December 2009
There is a problem in many industries—clients with time and
no money and clients with money but no time. How can a client with money
be a problem? Well, they can be if they have no time to spend it.
Take the sports industry—there are many potential season ticket
holders who could afford to buy tickets but don’t. The main issue is…
they don’t have the time to go to games. This is a huge untapped market
for pro sports.
How can people with no money help? The key is to match up people with
money and no time with people with time but no money. How would that
work?
In the sports biz, that would allow well-heeled clients to buy season
tickets and lay off the games they can’t attend. If teams would make
this easier to do, then they could probably induce more people to buy
season tickets.
Pro teams live by season tickets—it is the sine qua non of the
industry. Sponsors want to be associated with winners—on the field or
ice and off it. High attendance is the fundamental building block for
this.
So if four club seats at Scotiabank Place for the Sens, say, cost
around $21,000 for the season and the primary ticket holder can only go
to 10 games per season (out of 41 home games) then they need to lay off
31 x 4 or 124 tickets. Now that is a lot of tickets to redirect.
Since practically no one goes to a game by themselves (my brother
excepted—he goes to Seattle Mariners games alone), you might have to
redirect 62 pairs of tickets at a cost of about $256 per pair.
Now in a place like Ottawa there aren’t that many people who can
afford $21,000 for season tickets but there are a lot who can fork out
$256. So matching up those with dough with those with less makes sense
to me.
There are a lot of industries that share this experience. If you
charter an aircraft, import wines from France, start a business, buy a
building lot (big enough for, say, lots of condos or townhomes but you
only need one for yourself), purchase a golf course membership and so
forth, you might want to lay off some of your costs on others. By
banding together, people with limited means can gain access where they
could not otherwise go.
If we assume that you are prepared to work 12 hours per day, 5 days
per week for 50 weeks per year (don’t laugh—that is the minimum work
week for most entrepreneurs), you end up with a maximum potential of
3,000 working hours per annum. With wage rates and incomes as shown
below, people making $15,000 per year are working 1,500 hours to achieve
that assuming they are making $10 per hour. At the other end of the
scale, people making, say, $155,000 per year are working 2,123 hours
(with an assumed wage rate of $73 per hour).
Dec. 11, 2009 Time Versus Money
Income Wage Hours Idle Income
($/hr) Required Hours
$ 15,000.00 $ 10.00 1,500 1,500 $ 15,000.00
$ 25,000.00 $ 14.50 1,724 1,276 $ 25,000.00
$ 35,000.00 $ 19.00 1,842 1,158 $ 35,000.00
$ 45,000.00 $ 23.50 1,915 1,085 $ 45,000.00
$ 55,000.00 $ 28.00 1,964 1,036 $ 55,000.00
$ 65,000.00 $ 32.50 2,000 1,000 $ 65,000.00
$ 75,000.00 $ 37.00 2,027 973 $ 75,000.00
$ 85,000.00 $ 41.50 2,048 952 $ 85,000.00
$ 95,000.00 $ 46.00 2,065 935 $ 95,000.00
$ 105,000.00 $ 50.50 2,079 921 $105,000.00
$ 115,000.00 $ 55.00 2,091 909 $115,000.00
$ 125,000.00 $ 59.50 2,101 899 $125,000.00
$ 135,000.00 $ 64.00 2,109 891 $135,000.00
$ 145,000.00 $ 68.50 2,117 883 $145,000.00
$ 155,000.00 $ 73.00 2,123 877 $155,000.00
$ 165,000.00 $ 77.50 2,129 871 $165,000.00
$ 175,000.00 $ 82.00 2,134 866 $175,000.00
$ 185,000.00 $ 86.50 2,139 861 $185,000.00
$ 195,000.00 $ 91.00 2,143 857 $195,000.00
$ 205,000.00 $ 95.50 2,147 853 $205,000.00
$ 215,000.00 $ 100.00 2,150 850 $215,000.00
$ 225,000.00 $ 104.50 2,153 847 $225,000.00
$ 235,000.00 $ 109.00 2,156 844 $235,000.00
$ 245,000.00 $ 113.50 2,159 841 $245,000.00
Maximum Hours 12 250 3000 per annum
The person earning $15,000 thus has 1,500 ‘idle’ hours a year while
the person earning $155,000 has just 877 idle hours under these
assumptions.
All this does is demonstrate what many people already intuitively
know—there is the potential to match up people with money with people
with less for the benefit of all.
Prof Bruce
Postscript: Urban agglomerations result from this type of
co-operation—indeed, humans are uniquely co-dependent. We build cities
that provide access to many services that would otherwise be
inaccessible to the bulk of the population due, in part, to limited
financial means. Cities are survival machines.
Access to schools, health services, police services, mass transit,
fire protection, waste disposal, utilities, food distribution,
entertainment, mass production of goods and services is made possible
because of skills specialization, sharing and trading within and between
urban centres which, in turn, provide the greatest good for the
greatest number of persons.
Returning to the example of Scotiabank Place, the fact that there are
three rings of suites in the building (about 142 of them) where persons
of significant means tend to sit also makes attendance elsewhere
possible for persons of lesser means. In fact, the original construction
of the arena was only possible because of the insight by arena
designer, Gino Rossetti, that these structures could be sustained by
multiple rows of suites. Individual suites leased on 5 and 10-year terms
by corporations could provide sufficient, predictable income for the
owner of the building to obtain private construction financing and so it
turned out to be.
There is opportunity for entrepreneurs to match persons (and also
other entities—for-profit corporations, NGOs, Not-For-Profits,
Charities) of different socio-economic strata for the benefit of each
other. There will be new ways for them to co-operate and it up to
entrepreneurs to find these niches. For example, it has always perplexed
me why advertisers don’t co-brand when they use (expensive) media. Why
not have a woman wearing Christian Dior Clothing step out of a Lexus
carrying a Hermes Handbag or a man step out of a Porsche wearing a
Brooks Brothers suit and sporting a Breitling Watch.
Or perhaps more politically correctly, you could see a Marks Work
Warehouse-wearing guy exiting a Prius Hybrid entering a Habitat for
Humanity build site. I think this co-branding (a ‘banding together’
strategy) would work just as well in the Internet world as in mainstream
media and well beyond both. Teaming up isn’t limited to
advertising—joint ventures between seemingly unrelated organizations has
the potential to create many new ventures—that is where entrepreneurs
find opportunity—in the cracks between industries.
You can read an example of cross-selling on https://www.eqjournalblog.com/?p=554. Use Ctrl ‘F’ and look for ‘Solution Selling and Measuring the ROI’.
Prof Bruce @ 5:58 pm
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Why a Local Foundation Should Own its Own Real Estate
Posted on
Sunday 6 December 2009
I recently wrote to the Executive Director of a Foundation
on why they should consider purchasing their own HQ. Here is what I
said:
“I think the Foundation should buy its own HQ for a number of reason
including—forced savings, security of tenure, diversification of risk,
relief from rent increases, inflation protection as the Foundation’s
real estate asset increases in value over time, develop brand equity in
“Foundation House” over time, long term stability of the asset value as
well as your operations, credibility of the Foundation, ability to
control your own destiny and customize the premises to your needs,
emergency funds will be available once the building is paid for by
putting a mortgage in place or establishing a line of credit if it was
ever required, building will probably be big enough to have a Tenant who
can help pay some of the costs, this also provides expansion space
should the Foundation ever require it, it can be less expensive to own
rather than rent, it should be possible to raise additional funds
targeted for the building itself.
Re. the latter, there may be GOC (Government of Canada) funds
available for infrastructure that are not available for operations. In
addition, you could create a funding campaign around the building that
would in some way recognize donors perhaps by way of a gift from the
Foundation (say, a collectible, signed print from one of your artists)
or a wall of recognition where donors to the building fund would be
remembered and thanked…
Our brokerage (subject to the approval of our Broker-of-Record) would
be happy to assist in the selection and acquisition of a new building
for you. We would be prepared to donate back the commission we would be
paid by the Seller to the Foundation. We might also be able to convince
the Seller to top this up with a donation of their own.
In our view, you would look for a building in the $625,000 to
$675,000 price range and you would want to create a reserve of $100,000
for a total investment of about $750,000. You would need equity of
around $190,000 and you would get back up to $32,500 as a donation from
the Brokerage. I have shown a GOC contribution as well. This would leave
you with a mortgage of around $375,000. You might also ask Ontario to
relieve you of LTT (Land Transfer Tax) as well as ask your lawyer to
donate back the closing fees which would further reduce the mortgage you
require. Thus, you can find some of your capital in the deal flow
itself.
I have estimated that the Foundation would use 1,000 s.f. and your
Tenant would take the balance of the space, about 950 s.f. The
Foundation’s rent would be around $1,500 per month triple net. Your
Tenant would pay about $1,425. To this you need to add operating costs,
property taxes and utilities.
Over a 5-year period you would see a ROI (as measured by the Internal
Rate of Return) of about 29.2% p.a. made up of principal paydown on
your mortgage (more than $53,000 would be paid off in 5 years in the
normal course of affairs), real estate inflation (about 4.5% p.a. in a
typical downtown Ottawa market) and a cash on cash return.
Obviously, additional fundraising to reduce your mortgage would
further increase your ROI and your goal should be to pay off the entire
mortgage within that time period.
I attach a spreadsheet that will help you with the analysis. You can
download our spreadsheet in .xls format from our server at: https://www.ottawarealestatenews.ca/FoundationBuildingProject.xls. You can change many of the variables and the spreadsheet will automatically recalculate the results for you.
By the way, we are also helping another not-for-profit with a building project and you can read a bit more about that at: https://www.eqjournalblog.com/?p=561.
Lastly, I wrote something more on ‘Why Invest in Real Estate’; it is posted at: https://www.eqjournalblog.com/?p=434.
I would be pleased to make a presentation to your Executive and to your Board of Directors if you felt that would be helpful.
Best regards,
Bruce”
Please note: some facts and figures have been changed to protect the confidentiality of the parties.
Prof Bruce @ 11:50 am
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How a Not-For-Profit Learned How to Raise $2m in Less Than 10 Minutes
Posted on
Saturday 5 December 2009
Recently, I was on a con call with a client of ours—a
Not-For-Profit looking to raise $2 million for a new building.
Fortunately, they had identified a GOC (Government of Canada) source for
a grant of the same amount (from one of the GOC’s infrastructure
programs). The only issue—they were required to raise 20% independently.
We had less than 10 minutes to solve the problem.
Our solution was simple and direct:
a. We asked the REALTOR we had hired to donate back his commission on
the acquisition of the building. This amounted to 5% of the acquisition
cost, paid for by the Seller, i.e., $100,000. He agreed.
b. We decided to sell the naming rights of the building for $40,000 per
annum for 10 years which would raise a total of $400,000 over that time.
Our fundraiser committed to the job. He would charge the organization
15% over and above the naming rights fee, paid for by the naming rights
patron. Of that 15 points, he would gift back to the organization 2.5%.
That raised another $10,000.
In all, we were able to include agreements with the application which
would raise $510,000, well above the minimum required. You will note
that of that amount, $110,000 was found in the deal flow itself. This is
often an overlooked area when it comes to fundraising or raising
capital. In essence, money raised this way is a form of Bootstrap
Capital.
Stay tuned to see if we are successful.
Prof Bruce
Postscript: The organization is able to provide tax donation receipts
so the Naming Rights partner could be an individual donor. Individuals
who have their names on such buildings do so for a number of reasons—a
way to give back to the community, a way to be remembered, a way to give
back to an organization that may have assisted them or a member of
their family, … These folks can generally use a tax receipt.
A corporation that sponsors such an initiative is usually doing it as
part of their marketing program—a tax receipt is not useful to
them—they can already deduct the cost from income as a marketing and
promotion expense. Their motivation is usually to drive more business to
their firm, improve their public standing and increase the level of
trust in their brand.
Postscript 2: When Scotiabank Place was built, quite a bit of capital
could be found in the deal flow. For example, by finishing early (in
just 22 months instead of the expected 30 months), the Ottawa Senators
saved about $12 million in construction interest and earned about $10
million more on the revenue side by being able to move to a bigger
building with more revenues streams and higher revenue streams sooner.
Prof Bruce @ 4:12 pm
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Don’t Be Afraid to Make the First Move
Posted on
Saturday 5 December 2009
Here is a conversation that took place a couple of years ago
between two executives trying to put a complex deal together on a con
call that lasted about a minute:
“Do you have anything to say?”
“No.”
“Do you?”
“No.”
“I was told to call you.”
“I was told to call you.”
“Do you have anything to add?”
“No.”
“You?”
“No.”
“Well then, Goodbye.”
“Goodbye.”
Not very productive, I am sure you would agree. These are
experienced, successful people who may have: a) become successful
despite themselves, b) forgotten what made them successful or c) have
let their egos get in the way now that they are successful.
There are different opinions about who makes the first move. One
school of thought is that you always make the other person go first (as
both were trying to do above.) If you are discussing price, say, the
idea then is that if the other person names a price first, you have an
advantage.
If you are negotiating with a supplier, for example, and they name a
price for supply of their product or service that is lower than you
expected, then you ‘win’. If you are negotiating with a customer and
they name a price that is higher than you expected then you win again.
In both cases, there is a windfall profit and there is one winner and
one loser. Now ask yourself the question: What is the purpose of deal
making? Is it to win or to arrive at a negotiated arrangement that
benefits all stakeholders?
Lawyers can’t help it but they are trained to enter pretty much every
situation with a view to winning, thereby creating a loser—their
opponent. My brother is a criminal-law lawyer in Victoria-Vancouver who
represents persons accused of major crime including murder. Clearly, if
he loses a case, the implications for his client are dramatic. So legal
training to vigorously defend your position makes sense in these types
of situations.
I argued several years ago during the NHL lockout that neither Gary
Bettman nor Bob Goodenow were the right people to ‘settle’ the matter
between the NHL and the PA. Both are highly skilled lawyers. Both have
been trained to fight to the ‘death’ to determine a winner, which they
did.
The PA is widely acknowledged to have lost. Bob resigned before the
ink was even dry on the new player agreement. There have been three PA
leaders since then (all fired) and a fourth is on the way… some day if
the NHLPA can find someone willing to take on what looks to be a
difficult job with too many constituents and too many agendas both
public and hidden.
So the NHL ‘won’ but it probably took longer than it should have to
conclude the matter because, in part, you had two lawyers trying to
‘settle’ it. Plus, I think the Commissioner should be somewhat above the
fray as in Major League Baseball where he or she is charged with
‘looking out for the best interests of the game’.
If instead you accept that your objective is to arrive at a win-win
outcome then you should not be afraid to name a price first. You need to
have confidence in yourself to do this—and to be confident, you need to
understand your industry and your business in depth so you know, more
or less, what a fair price is. You also need to settle (before you enter
any negotiation) what your BATNA is. This stands for: Best Alternative
To a Negotiated Agreement. This protects you in the event that your
dance partner is not a fair person and is only looking to win while you
lose, i.e., they are looking to take advantage of you. Your BATNA gives
you confidence that you can walk away from the table without a deal and
that the sun will still come up tomorrow. It is a powerful psychological
support in deal making.
Another result that will happily flow from taking the initiative is
that you will, over your career, do a lot more deals. I maintain that
you are far better off to do ten good deals than one or two ‘perfect’
ones and, in my experience, the ratio of 5:1 or even 10:1 might be about
right when you put skilled, balanced negotiators in charge versus
people who are just looking to take advantage of the other party and
trying to ‘win’ every deal.
I have used that tactic on occasion. We built a sub-division in Bells
Corners (Ottawa) years ago called Robertson Mews. We built four Barry
Hobin-designed townhomes that were all brick and way above the market;
in fact, there was no market for them at all. But their selling prices
(about double what our 2-bedroom condos were selling for) allowed people
who bought those to feel like they got a deal. We called it out
‘calling card’ for the whole development, a strategy we have used in
many developments including Dunrobin Village (where we built a 10,000
sq. ft. mall even before we built the surrounding homes so people would
feel like ‘shopping nearby’ was more than just a marketing slogan. We
also did the same thing with Scotiabank Place which has become a huge
draw for the entire Kanata West Concept Plan Area.)
Our objective though was not to get unreasonably high prices for
these developments; just rapid sell through which is probably more
important to a developer than anything else.
By the way, the only way to unload those four towns was to trade them
off: one went at a very low price to an employee for great work done,
one went to a former landowner in (partial) exchange for his land, one
went to a supplier as part payment for the roadwork they did and the
last was sold in the marketplace for a close-to-cost-recovery price.]
Prices are usually set through some combination of:
• What a willing buyer and seller agree to without coercion or undue asymmetric information.
• Based on what the competition is charging.
• Based on your costs.
• Based on what the market will bear.
When I worked with Cyril Leeder, now President of the Ottawa
Senators, I was concerned in one deal (fairly early on in my career and
his) that we had quite dramatically underpriced the sale of a piece of
property. I felt bad about the situation because, as a small company at
that time, each deal was incredibly important not only to the
profitability of the company (which would turn out to be the parent
company of the Sens) but its survival as well. Cyril told me not to
worry—by leaving a chunk of change on the table for the buyer, we would
actually get all of that back and more because we had created a loyal
customer for our firm. It turns out he was right. Twenty-five years
later, that company is our no. 1 customer in our real estate practice.
Prof Bruce
Postscript: Many business people insist they make rational decisions.
That they are using their cerebral cortex rather than the more
primitive structures deep within the human brain (basal ganglia). In my
experience, this is often not accurate (see, for example, the work by
Earl K. Miller of MIT, Primitive Brain is ‘Smarter’ than We Think,
Science Daily, March 2005).
Emotional, angry, jealous, envious, spiteful, petty, greedy,
self-damaging, egoistical decisions are, in fact, all too common. If you
make decisions based on these emotions, you will often act against your
best interests.
Instead, I would argue for a combination of gut-based decision-making
and rational analysis. Humans are uniquely able to conjure up nuance
from the vapour of gesture and other non verbal cues. Listening to your
gut feelings is not the same as acting out of spite or greed or
jealousy or any of the other negative factors I site above.
Postscript 2: The above just scratches the surface of negotiating and
pricing. To be more successful at negotiating, it would help you if you
learned something about NLP, Neuro Linguistic Programming. Top poker
players use NLP all the time: they calibrate their opponents (James Bond
played by Daniel Craig in the 2006 film release of Casino Royale does
this to Le Chiffre); they do not play their cards, per se, they play
their opponents. If you are interested, please read more at: https://www.dramatispersonae.org/NegotiatingSellingNLPNeuroLinguisticProgramming.htm.
Prof Bruce @ 8:06 am
Filed under:
and
and
and
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Pre-selling, Finding New Clients, Keeping Existing Ones
and
Firestone’s Three Laws of Power Selling
Posted on
Friday 4 December 2009
Before I get to the Three Laws of Power Selling, I thought I
should restate for you the three most important things that every new
startup and freshly minted entrepreneur has to worry about first. The
three most important things you need to focus on above all others are:
Sales, Sales and Sales.
It turns out that most entrepreneurs are blessed with cleverness,
ambition, flexibility, initiative, the ability to work in teams,
curiosity, creativity, fear of failure, willing to take responsibility,
leadership, energy and willingness to work hard; they have lots of
ideas, some good and some bad.
But if you can’t sell, you’re toast. I have often heard CEOs of
large, successful corporations and Presidents of fast growing SMEEs
(Small and Medium Sized Enterprises) say: ‘Ah, now that things are going
so well (i.e., sales are rolling in rather nicely), I can stand back
and work on the business instead of in the business.’ This is completely
wrong; as soon as a CEO delegates wholly the responsibility to his or
her Vice President of Sales, the business starts to go down hill.
When Lou Gerstner stepped in to the CEO role at IBM in the early
1990s (a time of great crisis for IBM), he took a very active role in
sales. Within a few days of taking the reins, he wanted to see a list of
IBM’s top 300 customers. Why? Because he wanted to visit each and every
one of them.
Sure you want to spend some time working on the business but you have
to working in the business too and you have to be involved in sales you
have to be in the sales loop otherwise you have abrogated your basic
responsibilities to your company’s stakeholders including your
customers. I mean there are times when your customers don’t want to talk
to another sales engineer; they need to talk directly to you, Ms. CEO
or Mr. CEO. And this way you disintermediate all the layers of
bureaucracy; you get the real story and you then are in a position to
create new sales channels and new sales opportunities that only the CEO
or President can champion at the end of the day.
I thought it was weird circa 1995 to 2001 that all of a sudden
entrepreneurs and their financiers started thinking that they needed
financing first and sales second (or third or sometimes not at all). I
have always taught that if you have revenues, you will get financing and
not the other way around. Have you ever heard of a business folding
where their sales are booming? Don’t think so.
They might change CEOs for one reason or another but if you have
great sales, your company is going to be around for a long time.
So, quick, what is the entrepreneur’s first and foremost challenge? Sales, Sales and Sales.
Getting sales is not easy. There is always competition and it’s hard to find customers.
Some of my students tell me that their ‘pixie dust’ in their business
model is that there is’t any competition for their (great!) new idea.
This is actually quite funny there are two reasons why there might not
be any competition. One is that it is a bad idea. Two is that it is a
good idea that no one else has thought about before (unlikely but
possible). However, in the second case, if it is a good idea, you
absolutely will have competition. Check out how long it took for
competitors for Viagra to appear. (I am not saying Viagra is a good
idea, never having tried it myself, but it sure is a money maker.)
If your idea is a good one, you will create your own competition. So
it’s a tough old world out theren your competitors don’t want you to
succeed but, guess what, your customers and your future customers do.
They want you to be successful because they need your product or
service. They don’t want you to go out of business. They are your
greatest allies.
So making a connection with them (this is called marketing) is really
crucial and you have to be able to make these connections cheaply and
effectively (this is called Guerrilla Marketing substituting advertising
and promotion brains for money).
But Guerrilla Marketing is something I deal with elsewhere; here
let’s assume that you have made the connection with a potential client.
How do you make your selling proposition irresistible? Well, you do it
by first applying Firestone’s Three Laws of Power Selling.
The Three Laws of Power Selling
Here below are Firestone’s Three Laws of Power Selling. First, I’ll
iterate them and, second, I’ll give some examples that will seek to
illustrate how the Three Laws of Power Selling actually work. Most
people read these types of things and they nod wisely but really have no
idea how to apply these how-to-guides to their situation. I have found
that people learn best from RL (Real Life) examples.
Firestone’s Three Laws of Power Selling are
• Law No. 1: SITTING ON THE SAME SIDE OF THE TABLE
Thou shalt get on the same side of the table as thine customer or client.
• Law No. 2: SOLUTION SELLING
Thou art selling a solution to a client problem or opportunity.
• Law No. 3: NEGATIVE COST SELLING/NEGATIVE COST MAREKTING
shalt demonstrate that thy solution is a negative cost for thine
customer that thy customer’s or client’s costs decreaseth or thy
customer’s or client’s revenues increaseth or both.
Thou shalt find persons who be willing to pay thou to market thine wares or services
Law 1 Some Examples of SITTING ON THE SAME SIDE OF THE TABLE
When I was doing some consulting work with GradeAStudent.com (started
by four, really smart, former students of mine), I told them that if
they adopted Law No. 1, they could greatly increase the amount of
hardware and software they sell.
Their main business is at-home computer service fixing your PC
on-site: installing software, getting rid of viruses, making your
network to run, etc., etc. But clients naturally trust them to help them
buy hardware and software too.
I told them that instead of trying to sell their customers stuff;
they should put their suppliers on the other side of the table. So
basically a GradeAStudent.com techie would say to a customer: I can get
you XYZ virus scan software from Acme Corp. for 200 bucks and it does
everything, including block spy ware and ad ware and pop ups, as well.
Or I can get you something cheaper from Pirate Software Co. for $99 it
scans for viruses but doesn’t block pop ups, etc.
Now the GradeAStudent.com techie is taking on the role of trusted
advisor, a consultant to his customer, if you will he is on the same
side of the table as the client. The suppliers are on the other side. If
the client doesn’t like any of the options, the techie can then say:
Look, maybe I can get you a better price from Acme or Pirate or maybe I
can find something that will suit you better from someone else.
In either event, the client isn’t saying ‘no’ to GradeAStudent.com
and they aren’t ‘buying’ from GradeAStudent.com they are buying
‘through’ GradeAStudent.com and from GradeAStudent.com’s suppliers. The
question of GradeAStudent.com�s margin and markup on the sale isn’t
likely to come up at all�it will be the suppliers who will most likely
take heat if the pricing is too high or the offer doesn’t have all the
features (or has too many of them) that the client wants.
GradeAStudent.com can back away from any solution with no loss of face.
This kind of ‘non-selling’, selling is extremely powerful.
Another client of mine, a web developer at EnvisionOnline.ca, was
asking how he might apply Law 1 to his business. I thought about it a
bit and came up with this example for him. He has already designed a web
site for a Home Heating and Air Conditioning Company (HHAC, not their
real name). I told EnvisionOnline.ca: Why not turn HHAC into a quote
machine instead of a seller of AC units or furnaces? The idea would be
for HHAC to consult with their clients, get on the ‘same side of the
table’ and spec two or three different solutions for them. Again, HHAC
clients would (hopefully) tend to see HHAC’s suppliers as the entities
they are negotiating with, not HHAC.
Maybe EnvisionOnline.ca could create an opportunity for itself to get
some recurring revenues by optimizing HHAC’s web site for maximum
search engine traffic and perfecting an online quote system for HHAC.
EnvisionOnline.ca could operate the site for HHAC. Today, what once were
product companies like IBM want to be more like service companies and
get more of their revenues from consulting for clients or operating
things for their clients. It makes sense these types of revenues can be
more predictable and they obviously can lead to more product sales too.
IBM has been very successful at this: operating huge data centers and
other back office operations for major global companies. They now get a
huge portion of their revenues from services. And when these back office
operations need new equipment, you can be sure that IBM supplies a lot
of that as well.
But service companies also want to be more like product companies.
Selling products has its own appeal you make a thing once and you resell
it over and over again.
EnvisionOnline.ca develops products (web sites) with many, many of
the components being repeatedly reused. By operating client web sites
(consistent with the Three Laws of Power Selling, of course),
EnvisionOnline.ca can be more of a service company with more predictable
revenues perhaps.
Now another important feature of the Three Laws of Power Selling is
to make sure that you are applying the Three Laws to not only your sales
to your clients and customers but also thinking through how they might
or should be applying the Three Laws to their efforts to sell to their
clients. Huh?
Now one could carry this on down the food chain indefinitely but I
think applying the Three Laws to two generations of the business-land
ecology is enough to think about at any one time.
So let’s go back to Law 1 and see if we can find an example where we
can apply this type of thinking. How about the case of Brymark.com, a
seller of promotional items. One of their sales people, Dale (not his
real name) is a keen golfer and he wants to sell promo items to Golf
Pros but everywhere he goes, he hears the same story they don’t have the
budget for it.
Now Golf Pros do a lot of teaching (their bread and butter) and Dale
notices that a lot of those keen students are lawyers. Dale realizes
that lawyers (at least in Canada) are usually in tough trying to find
ways to market and sell to new clients Canadian lawyers tend to do less
of those late night television ads than their US counterparts who don’t
seem to mind a direct pitch like say: Have you recently been injured in
an accident? Do you need someone to represent you and take your side?
So maybe Dale can solve the problem this way: he will sell the promo
items to the Golf Pro but he will get one of Golf Pro’s legal clients to
pay. This is how it works: he chooses a promo item that appeals to both
of them the Golf pro and the Law Firm, say, mouse pads. He brands the
mouse pads with both the Golf Pro’s information and the Law Firm’s pitch
too.
Now the Law Firm gives out free mouse pads to its clients, many of
whom are probable golfers, and the Golf Pro gives out the mouse pads to
his clients, many of whom are probably in the market for legal services.
By thinking about how the Golf Pro’s clients sell (or market) to their
clients, Dale has made a sale and created a new marketing channel for
both the Golf Pro (who gets the Law Firm to distribute his marketing
info to their clients) and the Law Firm (who gets the Golf Pro to
distribute their marketing info to his clients).
This is called co-branding and can work with more than two parties as
well. For example, promo items for a high end men’s shoe store might
work well with an upscale jeweler and a high performance auto
dealership.
This kind of selling is more difficult to do because it involves a
minimum of three parties: you, the sales person, and at least two
co-branders. Anytime, you need three approvals to get a project off the
ground, well, that’s tougher to get than a two party agreement.
Obviously, the degree of difficulty goes up as you bring in more
co-branders. Having said this, by making it more difficult for himself,
Dale is also making it harder for his competition to duplicate too. And
in the promo business, which is absolutely cutthroat at the best of
times, that’s not a bad thing.
I really like how the Ottawa 04 International Animation Festival sold
to one of their key sponsors (Electronic Arts, EA). Usually, these
sponsorships are pretty boring put up a banner, hand out some brochures,
demonstrate the products or service. Most sponsors get involved with
good works out of guilt and don’t leverage their sponsorship dollars
very well, if at all.
But the Festival had clearly thought about some of EA’s challenges,
like the fact that one of EA’s biggest problems (circa 2004) is how to
recruit top notch talent. By getting on the same side of the table as
EA, the Festival thought about who EA is selling to; they need to sell
to (i.e., recruit): software engineers, animators and computer graphics
artists. And those just happen to be the kind of people who might
come/be attracted to an International Animation Festival.
So EA brought their recruiting machine to town.
So the Festival was not only thinking about how they could sell to
their customer (EA) but how their customer (EA) could sell to their
customers (software engineers, et al). You can only see solutions like
this when you are sitting on the same side of the table as your client
and looking at their problems the same way they do. This leads us to Law
No. 2.
Law 2 Some Examples of SOLUTION SELLING
Law No. 2 involves ‘solution selling’. I am always amazed at how many
sales people make a sales call on a prospective client knowing next to
nothing (or sometimes absolutely nothing) about the potential client’s
organization and its problems and challenges. It’s hard to sell a
solution when you don’t know the problem.
Solution selling is all about knowing a client’s business and
business model in incredible detail so that your product or service
addresses, in a very direct way, at least one of their key issues.
Solution selling often involves self-financing offerings, where the
money the client needs to have in order to pay you for your services or
products doesn’t actually come from them but from their clients; i.e.,
your client’s clients.
I worked with one NPO (Not for Profit) outfit and we devised and
entire program for them that cost them $100,000+/- to implement but
generated more than $600,000 in net funds from event participation and
sponsorship. They never had to reach into their (short) pockets for a
dime.
Furniture sellers and auto dealers do this all the time they provide
attractive financing deals (OAC, On Approved Credit) like those don’t
pay a cent events until some point in the future or by providing you
with 100% financing at super low interest rates.
I have been involved in mergers and acquisitions where the acquiring
company ends up with more cash after buying the other business than they
had before. These are called ‘accretive’ financing deals they can be
cash accretive or earnings accretive or both. This is another, more
complex form of solution selling.
Another way to look at it is, if I am asked to help sell a company,
one of the first things I might do is to try to find a way to provide
the acquiring company with the financing to do it so they don’t have to
reach into their jeans for any money at all.
In one transaction I am familiar with, the acquiring company bought a
franchise for $30m, half down in cash and half paid at $5m per year for
three years. (The numbers have been changed to protect the identity of
the acquiring company).
They then entered into a long term lease for a facility and received a
leasing inducement in the amount of $20m in cash from their Landlord.
They also put in place a credit facility with their Bank for 50% of the
value of their new franchise.
If you do the numbers, they put up $15m in cash to get into this
business but received back (from the leasing inducement and the credit
facility) a total of $35m so they had $20m more in cash after buying the
franchise than before. Nice work if you can get it.
Accretive deals like this are much easier to do when you are a large
company with a top credit rating and explains to some degree why the
rich get richer and the rest of us, don’t
Real Estate transactions can often be like this too. It’s a form of Bootstrap Capital.
How can you acquire real estate with no money down? I get asked this
all the time. In reality, you usually can’t do this; it’s more like
acquire real estate with little money down. But it can be done. For
those of you who are curious about this, you can read an example of how
Betty and Phil (not their real names) acquired residential rentals with
very little money down.
One of my former students started his residential construction
business with no money down by finding a willing landowner to play along
with him. He optioned a piece of land for almost nothing ($500), put
his sign up, put a trailer on site and he pre-sold 10 units from plans.
With the deposits he received from Purchasers, terms he got from his
suppliers and with the co-operation of the landowner, he was able to
profitably build more than ten single family homes in his first year.
The landowner and his suppliers got paid out of the closings. He had
zero bank financing and practically zero cash when he started out but he
did have one thing credibility. And that can take you a long way.
There are other ways people acquire real estate with no money down.
For example, they might be speculators who intend to flip the land for a
profit before they actually acquire it. Or they could buy land or
buildings that are undervalued.
The latter was especially popular in the real estate go-go years of
the 1980s. Another way of looking at it is they are over-leveraging the
acquisition.
Basically, it works like this: buy an undervalued property; add some
value by doing a lipstick (i.e., superficial) renovation or raising
rents; get it reappraised at a higher valuation; mortgage the property
for more than you paid for it.
Solution Selling and Measuring the ROI for a Potential Client of a Promotional Products Company: AcePromotions.com
Opportunity Is Everywhere if You Look and See
Let’s look at an example of solution selling where a promotional
products company (AcePromotions.com) has decided that they need to be
more than just product pushers. The sales manager for AcePromotions.com
is writing to one of her sales people about approaching Tom Smith Toyota
(TST) using a new approach for promotional products. This is what she
writes.
Hi Guy: why don’t we try something like this with the Smith Toyota
people? Call your contact over there and try to up sell them on this new
solution selling thing we are trying. Let me know how it goes. Btw,
take the lap top with you and the attached spreadsheet. I am sure that
they will like the new approach. Here it is:
1. Let’s suppose that TST agrees to buy 10,000 windshield scrapers from us for $4 each or $40,000.
2. The scarpers say something amusing and informative about TST with a tel. #, web address, RL address on them.
3. TST also says that anyone who brings their scraper in to show them
that they have one before, say, June 30th is automatically entered into a
contest to win a free lease on a car for a cost to TST of $300 per
month say or $3,600 for the year.
4. They are also entitled to a $250 cash rebate from TST on every new
car sold before June 30th just by showing up their scrapers.
5. TST pays AcePromotions.com another $6,000 and AcePromotions.com hires
students to go around to selected gas stations, collision repair
places, car washes and give them out free.
6. We will already have pre-sold these non traditional outlets on this
delivery option. They get the scarpers for free and can use it in their
promotional efforts too.
7. We then gives selected gas stations, collision repair places and car
washes the option to co-brand the scrapers and let’s assume that 50% of
them choose to do so at an additional fee of $2.00 per scraper. Note
that AcePromotions.com is selling half the scarpers for $6.00 and yet
the distribution outlets are getting scarpers for half price. TST is
happy too because they are getting their message into the hands of
consumers who are not yet TST customers.
8. There is an advertising budget of $8,000 to support the new campaign
paid by TST and managed by Brymark.com with TST’s ad agency.
9. To see how you measure ROI, see attached spreadsheet.
10. In this model, TST has to sell 14 new vehicles and 7 new leases in
five months to have benefits that are 33% higher than costs.
11. You can play with the spreadsheet numbers and vary all of the inputs.
12. You should sit down with TST with this spreadsheet and go through it
with them; they will know the variables better than we do.
13. Then we will track the program with the TST people over five months.
14. This is the level of detail we need to do for every proposed solution selling opportunity.
15. It is very engaging for our clients too; they really enjoy this type
of involvement and will fool around with our spreadsheet model till the
cows come home.
16. Also, most clients like TST get the fact that that there are other
indirect results of a program like this�they will get a ton more sales
after the five month period is over that are never actually measured.
People like me don�t enter contests or take freebies but I would keep a
TST scraper for a long time and when it is time to buy a new car, why
there it will be as a reminder about what a good outfit TST is and how I
should consider buying a Toyota anyway.
17. Note that: a. AcePromotions.com’s sales are much higher than if we
just sold promotional products, b. we will have created a host of new
selling opportunities (in the distribution channel; i.e., selling
co-branded promotional products to the collision repair, gas station and
car wash industry an selling them their own promotional products and
delivery solutions) and c. our margins are much better too.
18. Furthermore, AcePromotions.com is more likely to make this sale
because: a. we are providing a total solution, b. we are targeting the
potential clients (future car buyers) of our client (TST) rather than
our client, c. we are measuring ROI for our client.
Good luck, Sally
28-Jan-03 Confidential
Measuring Tom Smith Toyota (TST) ROI
Costs
Scrapers $4
10,000 $40,000 PRO
Delivery Solution $6,000 DEL
Car Lease Prize $300
12 $3,600 PRZ
Cash Rebate $250 REB
Advertising Budget to Promote Program $8,000 ADS
Benefits
Average Profit per Car Sold $3,000 APC
Average Profit per Car Leased $2,000 APL
Average Profit per Car Serviced $1,200 APS
How many additional cars does TST have to sell to have benefits greater than costs?
Solve this set of equations by iteration 1.333 MAR (Margin of benefits over costs)
[APC * n1 + APL * n2 + APS * n] – MAR * [PRO + DEL + PRZ + ADS + REB * n] = 0n1 + n2 = n
n1 = additional new cars sold
n2 = additional new cars leased
assume:
n1 = 2 * n2 2
n1 = 0.666667
n2 = 0.333333
Number of new cars and leased cars such that benefits are 50% greater than costs
try n = 22 $954
Therefore, TST has to sell in the five months before June 30th
new cars 14.66667
leased cars 7.333333
Law 3 Some Examples of NEGATIVE COST SELLING/NEGATIVE COST MAREKTING
Negative cost marketing is really two things one is being able to
show a client (and really show it using a spreadsheet) that by hiring
you or by buying your product, their costs will go down or their
revenues will go up or both. We are going to call this negative cost
selling here.
Two is to find people who will pay you to market your products or
services. We’ll call this negative cost marketing and, somewhat
surprisingly, it can be quite common and would be more commonplace if
people (read marketing professionals) were willing to think more in
these terms to begin with.
The obvious example of this is what pro sports teams do. It seems
incredible to me that people will gladly buy overpriced merchandise and
walk around as unpaid billboards for their favorite sports teams. I mean
in the Great Depression of the 1930s, some poor suckers got paid
(wretchedly) to become walking billboard and shills for local
businesses. Now we do it for free; in fact, we pay sports teams to do it
for them.
Of course, it isn’t just sports teams that are in this space; Calvin
Klein Jeans, Roots and other assorted brand name manufacturers long ago
figured that people would pay to buy your stuff with your name and brand
on the outside of their clothes. What’s with that anyway?
There are many other ways to induce people to market your stuff for
you. One of my former students owns a beautiful, hand crafted wooden
gondola that he charters out all summer. Then he pays to put it in
storage for the winter. I suggested to him that he contact some of the
large commercial office or commercial retail landlords in his area and
see if they want to put his boat on display in one of their atria.
After all, his boat is an artifact a unique (in Ottawa) piece of
artwork really. And while they won’t pay him to put his boat in their
atrium, at least they won’t charge him to do it (we hope). So he ‘saves’
three times over he doesn’t pay to store the boat; he doesn’t have to
pay for the space in the atrium and the free display he gets all winter
to huge numbers of office workers or mall customers is a heck of a
marketing tool for him. Let’s put it this way, if he doesn’t try
something like this, his best marketing tool (his boat) sits hidden
under cover for six months of winter.
Now let’s turn to negative cost selling. To do this, you have to know
how your customer’s business (model) actually works. Study your client
it pays off, big time.
I go through one example of re-engineering a business model for a
friend of mine (Bill Farley, not his real name), who is in the media
training business. We tweaked his business model to help his business
out of a slump and we made it consistent with the Firestone’s Three Laws
of Power Selling, of course. In my view, the latter is the cause of the
former. You can read more about Bill’s Media Training Business Model
Revamp and I won’t repeat it here.
Another friend of mine, Anthony (sorry but not his real name either)
owns his own mail order house and part of his business model is to
create his own customers through negative cost selling. I think he does
it more because he is bored with the normal course of business than
because he needs more clients. He finds that sometimes he can create
more interesting solutions for potential clients than they can for
themselves and, happily, more interesting work for himself. He sees it
as a kind of challenge.
Anthony has recently gotten into the lumpy mail business today Canada
Post and the USPS allow people to send all kinds of weirdly shaped
objects through the mail. They had to adjust their business models too
or face near oblivion.
So Anthony came up with the idea of helping a summer camp for
distressed children raise money by using his bulk mail service. But he
just didn’t go to them with a proposal of give me $15,000 and I’ll mail
out thousands of solicitation letters. I mean how many of these does
everyone see in a year anyway? And where do most of them end up? File
13.
No, he pitched them on sending a select group of CEOs and senior
Managers (from a good quality mailing list he had) a lumpy mail piece
containing a skipping stone and an invitation to a CEO stone skipping
challenge event. Over 90% of these lumpy mail packages got opened and
the response rates were in the stratosphere.
Everyone can skip a stone and everyone has childhood memories of time spent by the water on a perfect summer’s day.
He even got a Toronto quarry to provide the stones and sponsor the mail out too. Now that’s solution selling.
I like even better the example of Peter Patafie, owner of Patafies
Inc., who started his packing and moving supplies business and in five
years, built a $15m a year business from nothing with nothing.
Peter noticed how all the sales persons for moving companies in the
Ottawa area were supplying their customers with packing supplies by
first taking delivery of cardboard boxes, wardrobe boxes, bubble wrap,
tape, tape dispensers, wrapping paper, what have you, in their
warehouses and then the sale person would hump the stuff over to their
clients homes in their vehicles. Peter saw OPPORTUNITY.
He thought that a better use of the sales person’s time was selling
more moves (better for them since they are mostly on commission and
better for the moving company obviously) rather than delivering boxes to
people packing up for their moves. So Peter pitched every moving
company this way: he would sell them packing supplies but his people
would deliver them to their customers.
It was a simple idea but brilliant. Today, 98% of the movers in
Ottawa are supplied by Patafie’s Inc. Peter got all Three Laws of Power
Selling in one fell swoop: 1) he is sitting on the same side of the
table as his customer (where his customer’s customer becomes his
customer), 2) he is ‘solution selling’ (by making his customer’s sales
people more productive) and 3) he is a negative cost too (since his
customer’s customers are paying for the packing and moving supplies).
In essence, the moving company gets money for nothing they mark up
Peter’s packing and moving supplies, sell them to their clients, Peter
delivers the stuff, they never see it, they get the money (less Peter’s
share) but haven’t done any more work and, in fact, have unleashed their
sales people to sell more moves.
A few years later, Peter noticed something else by visiting his
clients. (What a novel concept, wouldn’t email have done as well? Don’t
think so.) They each had a zillion used boxes lying around. Boxes that
Peter had sold his clients clients; after their moves, somehow they
ended up back in the movers warehouses.
So Peter asked them what they did with the used boxes. They paid to
have a recycler take them away. So Peter offered to buy the old boxes
from them (another negative cost!) They might have thought Peter a bit
foolish but they indulged him. Sure, you can buy our discarded
cardboard, they said.
But Peter had noticed that plenty of people were scrounging old boxes
from grocery stores, hardware stores, liquor stores, wherever. People
who didn’t want to buy new boxes. So Peter started selling used boxes
and he turned that into a thriving million dollar plus retail business
in less than two years. Think about it Peter sells new boxes, later he
buys them back at a fraction of the price and then resells them again at
a substantial markup.
Peter has created his own clients seeded the fields and reaped the
harvest, if you will. He created a new revenue stream and a recurring
revenue stream for himself, both critical components to having a great
business. And he made the connection with new customers efficiently and
effectively by first visiting all the moving companies in the area,
which is feasible for one person to do since there aren’t that many of
them. And later, he created a mass market for recycled boxes by niche
radio advertising.
At the beginning of this paper, I made the point that if you have to
knock yourself out to make a connection with potential customers at huge
cost in terms of time or money or both, your business won’t be
sustainable and it will fail. So remember: finding, getting and keeping
customers have to be (relatively) cheap and easy to do in order for your
business to have a chance at success.
Conclusion
Really, Firestone’s Three Laws of Power Selling are woefully
inadequate to by themselves create a truly powerful sales organization;
there’s a lot more to it than my Three Laws, for sure. At its very
essence, power selling is about becoming more creative, thinking a lot
about your customer (and your customer’s customers’) needs. It’s about
hard work. It’s about lateral thinking. It’s about seeing opportunities.
It’s about knowing how the world works. It’s about training your whole
team and I mean everyone including your receptionist and your accounting
staff too to be power sellers.
Your accounting team is a great source of leads; why not reverse sell
to people you buy from (aka, your suppliers). When I was with the
Ottawa Senators, I didn’t like to buy from anyone who wasn’t already a
season ticket holder or prepared to become one; I think we should expect
people to buy from us if we are buying from them, provided it makes
sense.
And nothing is worse (and this has happened to me a lot) than calling
a tech company or calling a real estate company or any type of business
and getting a receptionist who knows nothing about the company she or
he works for. How is it possible for a receptionist not to know what
real estate projects a company has on the go or what new products the
firm just released with great fanfare at a tech trade show? And don’t
blame the receptionist it’s management’s and ownership’s fault if they
have untrained and uniformed employees running around.
In pro sports, they know how important it is to be prepared. They say
that if you develop good habits in practices, it will carry over to
games when the results really mean something, like whether you get to
keep your job or get cut. In any competent military, they are fanatical
about training and preparation because it saves their lives. You want to
be a power seller? Then you and your entire organization need to be
trained and prepared you need to do your homework and you need to learn
how to be a power seller and then you need to practice it again and
again because you will get better at it. You can train yourself to be
more creative if you are alive to that possibility.
At the end of the day, people like to buy from people they like so
you can’t neglect the human factor. My late father, Professor O.J.
Firestone, told me if I wanted to get a deal done then it had to be face
to face. I thought he was being a bit old fashioned but in this time of
widespread email abuse and voicemail hell, I think his advice is even
truer today than it was when he said it to me, in 1982.
Postscript: Recently, I took a course in real estate given by a fine
teacher, Mr. Wayne Hancock of Oshawa and he added an important caveat.
He said: ‘Selling is control.’ I instantly recognized what he meant.
First of all, you always want to be the one who volunteers to write up
the agreement. The pen gives you control. Second of all, most clients
will behave irrationally at some point between negotiating the deal and
closing it; it really doesn’t matter if they are seller or buyers there
are always some kinds of second thoughts going on: either buyer’s
remorse or seller’s remorse is trying to take over their minds. So deals
tend to fall apart. If you have control over your own emotions and you
have some influence with your clients, you can often put Humpty Dumpty
together again by asking them simple questions, like, what is the
alternative? (Summer 2005)
Cold Calling and Successful Selling: The three most important things in business are Sales, Sales, Sales,
1. Before you lift up the phone, think about whom you are calling.
Know something about their business, go to their web site and have a
‘solution’ in mind this let’s you start a conversation with the prospect
rather than making a sales pitch.
2. Even if the prospect doesn’t like your idea, they might still like
you your creativity and initiative and the fact that you bothered to
make the effort to do some research on them before you called. People
like to buy from people they like.
3. If you do this and if you make 50 calls, you should get 10 (20%) F2F meetings.
4. Out of 10 F2F meetings, you should get 4 (40%) sales orders.
5. If your annual quota is $1m in sales and your average order size is $5k, you need 200 orders for the year or 4 per week.
6. That means you need to make 50 calls each and every week to meet your goals.
In summary then, we have:
• Have a conversation starter an idea of a ‘solution’ for them
(‘selling is telling’*) have a success story to tell them about someone
in a similar industry or situation
The Storyteller
• Talk about what their competitors are doing and what they are not doing that gets their competitive instincts going
• Do NOT sound like a salesperson (i.e. like you are reading a scripted message)
• Learn something about the prospect before you make the call
• Be nice to every receptionist (she/he can/cannot put you through to the right contact)
• Always introduce yourself
• Verify facts ‘Who is the decision maker’?
• Always have a call to action ask for the deal and have a paper ready that they can sign
• When you hear ‘yes’ stop talking, thank them for the deal, get a signature and then leave
• Always be courteous even when you get a ‘no’
• Remember ‘yes’ is the best answer but ‘no’ is the second best answer
• ‘No’ is better than a ‘maybe’ since ‘maybe’ just wastes everyone’s time
• A call to action gets you a ‘yes’ or a ‘no’ don’t be afraid to ask for the deal
• If you get a ‘maybe’ tell the prospect you are going to treat that as a
‘no’; they will either change their mind or at least you will have
resolved the situation
• Selling is best done F2F; second best is by telephone; third best is by email fax and snail mail do not even rate
• Schedule appointments by saying I am going to be in your area on such and such a date (book two to four weeks in advance)
• Do NOT call to confirm appointments it gives people a chance to cancel on you
• If people are really rude, look at it as an opportunity to call them
back in six weeks or so they may feel some remorse and you get the
appointment and sale anyway
• Keep an up-to-date data base telephone numbers and email addresses especially
• Always thank people for their time in writing
• Always volunteer to write up the notes of a meeting or the agreement he/she who controls the pen, controls the deal
• Sometimes use a marketing survey to get in the door
• Ask a lot of questions and listen carefully people like to talk about
themselves and their companies; when you listen, opportunity will
present itself
• When people say send me some info, make sure they really want it and it’s just not a way to get you off the phone
• If they say they are not interested, ask if you can follow up in a few months and then do
• Silence is a weapon sometimes just by being quiet, they will answer their own objections and talk themselves into a deal
• DV x Q = $, Differentiated Value times Quantity equals Dollars**; what
this means is you have to talk to your prospects about your
differentiated value what makes you different and better
“In order to be irreplaceable, one must always be different,” Coco Chanel
[Please note that this image has been edited to conform to the policies
of this site wherein all of the content (except where noted in rare
cases) is for a General Audience, Ed.]
• If call is not going well, ask to be included in the next
opportunity: Can you include me on the bidders list next time you order?
Get an email address and follow up
• Use the six degrees of separation to find someone you know who knows
them but don’t rely on third party introductions go after it yourself;
use them as references and sources of testimonials
• Always practice bottom up selling start with a peer-to-peer
relationship before you get the Presidents of the two companies
involved; they should only basically get involved to bless a deal
• Always try for at least a two year deal if every sale you make is
one-off, every year you are like a baseball player, you start over at
000 home runs. If you do multi year deals, your sales are guaranteed to
increase year over year and increase much faster than if every deal is a
one year deal
The Two Step Process – You Only Need to Meet with the Client Twice to get the Deal
Step 0: Study the biz and come up with a case study that is relevant
and tells an interesting story. Call the prospect and start a
conversation.
Step 1: Meet with the prospect face-to-face this is a discovery
meeting but a discussion is taking place about the case study you are
using/suggesting and determining its relevance to their requirements.
You are determining their budget and other factors in this meeting.
Step 2: You make a final presentation, ask for the deal and get a signature or not.
Strategic Selling
See if you can do some strategic selling. Strategic selling is where
the cost to your client of buying from you is negative. This is the
easiest type of sale to make.
For example, a client buys something from you but you have already
lined up someone to buy those products or services from them, you have
guaranteed them a win, basically. See for example:
https://www.dramatispersonae.org/NegativeCostMarketingArchitectFirm.htm
Sales People are Entrepreneurs
A. Every sales person is really running his or her own business.
B. More sales = more income for you.
C. Your cost side is you.
D. The great thing is you don’t have to worry about all those other
kinds of things like paying to keep the heat on; you just concentrate
on your own business, selling more
E. You are (mostly) your own boss.
F. Create your own PWS (Personal Web Site). Put your bio on it, a
picture of you (even on the Internet, people like to see whom they are
dealing with), other interesting material you have created/written
(e.g., any case studies you have written), testimonials about you given
to you by your clients, your contact co-ordinates, etc.
G. You need to be an expert in selling obviously but also an expert in marketing yourself.
H. Remember that the harder/smarter you work, the luckier you get.
Sales are the teeth of the business. Sales people are valuable to
every business and even in difficult economic times, they are rarely
laid off. When a JOB opens up in the Marketing Department, one typically
sees dozens or even hundreds of candidates, all equally well dressed
and well presented. Marketing types mostly make $30 to $50k. Sales
people make $80 to $100k+.
But people are afraid of sales. They think selling is selling stuff
to people who don’t want it when in reality, real selling is providing
timely solutions to real problems clients are experiencing. Successful
selling is a rush and it is very creative. It also involves a lot of
marketing especially if you view your sales JOB as your own business and
a big part of your JOB is marketing – yourself.
Prof Bruce
Prof Bruce @ 3:58 pm
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Negative Cost Value Proposition
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Pre-selling, Finding New Clients, Keeping Existing Ones
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Posted on
Sunday 29 November 2009
Or Why Gadgets and Gizmos Don’t Make for Sound Businesses
I liked this cartoon. To me, it spoke of many business models that
are bound to fail. Sometimes, we think we are getting fitter when, in
fact, we are just setting ourselves up for failure.
Dumb Business Models and Dumb Businesses Get Eaten
A lot of students seem to think that every business model they design
needs to be brand new, never before seen or done. It turns out that,
sure, the Business Model needs to be good but execution needs to be even
better…
I always like to refer to my experience with the Starflyer: a great
consumer product, backed by a superstar athlete (Wayne Gretzky) that
failed to generate significant revenues. The business model was based on
the fact that it was new, it was well designed, it flew really well and
‘Gretz’ was endorsing it.
Starflyer
This was a ‘great’ product when it was first introduced to the marketplace in 1983. It had everything going for it:
1. The endorsement of the greatest hockey player ever (at least in my view)—Wayne Gretzky.
2. A good design—it had a patented (by me) aerodynamic shape (it used a
dimpled surface on the flying disc which, much like a golf ball,
resulted in superior performance). The industrial design was inventive
and useful in terms of playing with flying discs, distances traversed,
accuracy and so on.
3. It used persistence of vision to create a halo effect so that the flying disc could be thrown and caught at night.
4. The small camera sized batteries were neatly tucked away and lasted a long time.
5. Throwing ‘Frisbees’ was ‘catching’ on in a big way. Ultimate was in development.
6. There was just one tiny problem. It turns out that no one wants to play ‘Frisbee’ at night and there was zero demand (or close to that) for the product.
Student entrepreneurs need to know that the market is always right
even when it is wrong. The planet is littered with neat products for
which there is no demand. So, one of the simple rules of business is to introduce products or services that the market actually wants. Don’t necessarily substitute what you think is great for what the market actually wants.
Most successful startups are not based on e = mc**2; they are usually
small improvements of existing products or services—someone has
identified a niche not being filled now or a way of doing something that
is already being done but they see a way to do it better.
There are very few startups like Priceline.com (where the customer
names his or her own price), Google, eBay, Fed/Ex (Fred Smith invented a
whole new category of overnight package delivery), Apple Computer,
Digg.com … where the founder(s) are really breaking wholly new ground
and they are successful.
It is essential to understand whether you have a gadget or gizmo type
of idea (mostly developing into marginal businesses at best) or
something substantial. Gadgets and gizmos make great hobbies but that’s
all. Entrepreneurs should be trying to create more value than that.
Here is an example of a gadget introduced to the marketplace about
twenty-five years ago. It is a neat analog device that allowed a
consumer to turn off the bell or ringer on his or her telephone. In
those days, phones in Canada and the US were rented from the Bell
companies or purchased through them. The Bell companies did not want you
to turn the ringer off—it would tie up their networks with longer
answer times and more redialing. So you could turn the ringers down but
not off. For folks who wanted a quiet dinner—tough luck.
Controlling Bell
The ‘Bell Control’ allowed people to plug their phones into the
device and the device into the wall and turn off their ringers (a safety
light would flicker instead of the phone ringing). It was a cute
device—there were only a couple of problems: a) because the Bell group
of companies controlled the market, there was no obvious channel to
market these devices, b) not too many people really wanted to turn off
their phones.
These problems occur over and over again with gadgets and gizmos—neat
ideas with no real potential to find a market. The best you can do with
these types of things is make a J.O.B. for yourself—there is really no
way to create a lasting business with substantial value creation with
these types of things.
The problem is how to find a market. The toy, game and electronics
markets are dominated by huge industrial players with enormous marketing
budgets.
There is no effective way to gain entry to shelf space—retail chains
will ask the entrepreneur how he or she will support shelf space with
national roll-outs. The answer will be: “Uh, actually, we don’t have
one.”
Well-capitalized companies with huge marketing budgets and strong
management are a formidable group to compete with. Even if the
entrepreneur has great ideas, indeed, possibly much better than existing
toys and games, gizmos and gadgets, they will find it tough going.
It is true that the Internet today makes it possible to compete on a
more even footing but the entrepreneur with a gadget is still highly
likely to do no more than create a J.O.B.
Even a whole series of neat ideas usually can’t create a sustainable
business model—often they don’t even use the same distribution channels
so it becomes nothing more than a grab bag of stuff with close to zero
synergy. Try instead to Get the Business Model Right so the harder you
work the more money you make.
(Just in case you think you have the next Hula Hoop, Trivial Pursuit
or Air Hog, read: Why Large Companies Buy Cashflow Not Ideas, https://www.eqjournalblog.com/?p=431).
Below is a graph from Business Week on why most businesses fail. I’ll
bet you that the top five reasons (too much debt, inadequate
leadership, poor planning, failure to change and inexperienced
management) are in fact related to number six on their list: not enough
revenue; i.e., business not generating enough revenue is probably by far
the biggest cause of business failure and they are not generating
enough revenue because of inadequate leadership, poor planning, failure
to change and inexperienced management, which also means they can’t meet
their debt obligations.
From Business Week August 25, 2003
If you have enough revenue, you will get financing, not the other way
round. This is the lesson of the false boom of the late 1990s when VCs
and others financed startups with interesting business models but no
revenue prospects. This has never worked, in any age.
If you have enough revenue, you can meet the cashflow demands of debt
servicing costs so a focus on revenue growth is vital. One needs to not
only generate the revenue but collect it too. This seems self evident
but a lot of startups don’t do billing, invoicing and collecting very
well.
How long do you think mighty IBM would last if it didn’t collect its
receivables? IBM sells around $85 billion worth of goods and services a
year (one customer at a time, btw) so that means around $7 billion a
month. If they don’t collect for two months that means that they would
have a cashflow shortfall of $14 billion so my guess is that even IBM
would be in serious trouble in less than 60 days.
So we need to be cautious in how we interpret the above Seton Hall
University Stillman School of Business graph. In my experience, the
number one reason for failure is the absence of buoyant revenues. I mean
how many businesses have you heard of folding if their revenue numbers
are going up and up?
Prof Bruce
(Frisbee is a trademark of the Wham-O Corporation.)
Prof Bruce @ 1:12 pm
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Posted on
Saturday 28 November 2009
As the population ages and families get smaller in Canada and other nations, traditions are changing too.
Instead of bringing your child to the Mall for a photo with Santa,
you can now bring your pet. For elders whose children have long since
grown up and moved off, often leaving them to their own devices (you
might be surprised at how many elders have been abandoned by their
offspring), they find that their pets are good company and bring them
great comfort. Caring for a pet gives them a reason to carry on and
improves their mental and physical well being. It’s hard to be sad or
angry when Fido has his head in your lap.
The Ottawa Humane Society brought Santa to a local Mall this weekend
to allow elders to bring their pets in for a photo session with Santa.
They ask for contributions to their cause (whatever you can afford) plus
they sell Humane Society lottery tickets and Xmas Cards too.
It’s a great way to give back to the community, celebrate responsible
pet ownership as well as the loving/symbiotic relationship between pet
owner and pet plus generate decent PR and (painlessly) raise funds for
the Society.
Prof Bruce
p.s. It’s also a great way to bring more people to the Mall, which benefits the Mall’s tenants and ownership.
Prof Bruce @ 4:19 pm
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Posted on
Sunday 22 November 2009
What Walt Rostow, the Aga Khan and Hernando de Soto Teach us about Bringing People Everywhere out of Poverty
Here are excerpts of a short speech I gave at the World Partnership
Walk (hosted by the Aga Khan Foundation*) a few years ago to celebrate
the bringing together of many peoples and cultures in this great
experiment called Canada:
“One of the things I like most about Canada is how everyone from all nations get along in peace in this country.
When I was a boy I had the opportunity to meet Walt Rostow, a
pioneering development economist in the 1950s and 1960s and the Aga
Khan, the great philanthropist, when he visited our school. Later on, as
an adult, I had the privilege of meeting Hernando de Soto, perhaps the
foremost living development economist.
Walt said that nations would develop because they had peace, civic
order, good government, decent education and health systems, adequate
infrastructure, access to capital and efficient and free markets. These
are, of course, dearly held Canadian values as well.
Today, we would add to this, encouragement for entrepreneurship and
entrepreneurs as well as a modern communications system and high speed
Internet. It wasn’t until China and India unleashed their entrepreneurs
that their economies really took off.
The Aga Khan has dedicated his foundation to furthering the cause of a better life for all.
You have heard the expression: “Give a person a fishing rod, not a
fish.” To me, as a teacher at the University of Ottawa, this means that
people everywhere need access to education: it is through education that
people can create more value for themselves and more work for those
around them.
Another key to development turns out to be respect for not only human
rights but also property rights. The two are intimately connected. You
can not have respect for human rights if governments have an unbridled
right to take away your property without recourse.
Former Prime Minister Pierre Trudeau understood this when he
introduced the Canadian Charter of Rights. It was the Prime Minister’s
intention to include property rights in the Charter but he was unable to
do so at the time because of opposition from some of the Provinces who
were concerned that this would impact on their ability to control
natural resources within their jurisdictions.
Mr. Trudeau understood, in part because of the era he lived through,
that when you take away a person’s property and make them homeless, it
is a short step from there to taking away their human rights as well.
Hernando de Soto discovered in his research that property ownership,
and more particularly, home ownership, are also one key to bringing
people everywhere out of poverty. Guess what is the number one source of
startup capital for entrepreneurs? That’s right: it is home equity.
Whether that is a $2,500 USD home in Tanzania or a $250,000 home in
Tallahassee, many great businesses started from modest beginnings.
Without a permanent address, you can not create any value for
yourself or the others that depend on you: you can’t get a loan of any
type without a fixed address. And without a fixed abode, you are bound
to suffer many indignities that come from being rootless and homeless.
Humans were meant to work and without work, there can be no human dignity. To that end, we dedicate this walk today.
Thank you,
Dr. Bruce M. Firestone, B. Eng. (Civil), M. Eng.-Sci., Ph.D.,
Entrepreneur-in-Residence, University of Ottawa, Founder, Ottawa
Senators. June 4, 2006.”
* The Aga Khan Foundation is a non-denominational, international
development agency established in 1967 by His Highness the Aga Khan. Its
mission is to develop and promote creative solutions to problems that
impede social development, primarily in Asia and East Africa. Created as
a private, non-profit foundation under Swiss law, it has branches and
independent affiliates in 15 countries.
Prof Bruce @ 8:40 pm
Filed under:
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The Worst Sports Collectible Ever
Posted on
Saturday 21 November 2009
I received this gift at a recent political event; see: https://www.ottawarealestatenews.com/TrilliumDinnerPinSensMapleLeafs3.jpg.
Prof Bruce
Prof Bruce @ 9:00 am
Filed under:
Posted on
Friday 20 November 2009
By Professor Bruce M. Firestone, B.Eng. (Civil),
M.Eng.-Sci., PhD., Entrepreneur-in-Residence, Telfer School of
Management, University of Ottawa; Executive Director, Exploriem.org;
Founder, Ottawa Senators; Real Estate Broker and Mortgage Broker,
Century 21 Explorer Realty Inc., Brokerage
Introduction
As I have gotten older and perhaps wiser, I have realized how little
has been written on this subject that, at least to my mind, is reputable
and trustworthy. Bankruptcy trustees, who are supposed to give someone
in trouble impartial advice, can’t help perhaps but be influenced by the
fact that if you decide to go bankrupt, that’s a new customer for them.
Banks and financial institutions are unlikely to be your friend in need
if you are facing a financial question. They may, upon hearing that you
are in financial trouble, call your loan immediately—so they can be
first in line to get your remaining financial assets before someone else
does, or before you can either fritter away the estate or transfer it
to someone else (e.g., a spouse or adult child.)
It won’t matter to them that if you did, in fact, transfer your
assets away within a year or so of a bankruptcy, this could be
considered fraudulent and reversed by a bankruptcy trustee appointed by a
court to organize and supervise your affairs. They will place you in
their ‘special loans’ division—those are scary people who only care
about minimizing the Bank’s loss. When you’re in ‘special loans’, you’re
in a heap of trouble.
There really is no such thing as ‘Creditor Proofing*’; it’s a
misnomer. When people use the term they are primarily thinking of
putting their money in secret overseas, numbered bank accounts,
protected by bank non-disclosure laws in neutral countries like
Switzerland or ‘pirate’ havens in the Caribbean. Well, I have bad news
for you—the Swiss won’t do this anymore and there are fewer
jurisdictions anywhere that want to because the cost of not being an
accepted part of the international community—being an outcast nation—is
so high.
Every year, the lecture that I give on ‘Creditor Proofing’ in my
course at Carleton on Entrepreneurialist Culture seems to be the one
lecture that my students ask the most questions about so I figured it
was time that I wrote this up as an essay that other might find useful
too.
Neal Stephenson wrote a ripping good yarn about a group of
California-based techies who work to create an overseas data haven in
his novel, The Cryptonimocon. A ‘data haven’ is another phrase for a
pirate bank really; what is money these days but data? If you use
Internet banking today, all you are doing is paying your bills or moving
your money about as binary code—1s and 0s. So a data haven in
Stephenson’s imaginary Pacific Island nation would be just another place
for people to hide some of their wealth in.
But frankly, if you have to resort to this, you are already in
trouble and maybe doubly so. If you throw your lot in with thieves and
mercenaries in pirate nations, you shouldn’t be too surprised when they
find a way to rip you off. And to the people you deal with in whatever
nation you live, you will have lost a lot of their trust and a lot of
your credibility too so, no, I don’t think off shore secret accounts are
the right way to do things.
My late father-in-law, Ken MacMillan, was an old fashioned guy. He
thought that the best way to credit proof yourself was to not have any
creditors. He listened to pitchmen selling mutual funds and laughed. He
felt that the stock market was a mug’s game—only the insiders win. He
kept his money in a savings account in the Bank. He paid all his bills
on time. He lived within his means. He saved money every month. He paid
cash for his home and only purchased what he could afford.
When Ken passed away, his estate attracted no death duties or
terminal tax liability because he kept all of his money in cash so there
was no deemed disposition of stocks, RRSPs, property (other than his
primary residence, which is tax free in Canada anyway). The Canada
Revenue Agency (CRA, the equivalent of the IRS in the US) didn’t take
away half of his estate; and there were no lawyers and accountants
involved to take away the other half. Distribution amongst the
beneficiaries was done without issue or quarrel unlike many other
so-called, sophisticated families, and their estates that I have known.
I don’t think my father-in-law thought much of me; I was a young
smart aleck as far as he was concerned involved as I was in ‘Big
Business’. I had had all the advantages in life—smart parents who
emphasized education, private schooling and three degrees. Plus I was
fortunate to be born in a country like Canada where people don’t try to
shoot you and there is great opportunity to succeed.
Yes, I had it all as far as he was concerned, including a great wife
(his daughter). But I had also built first a real estate empire and then
a NHL hockey franchise together with a huge land assembly, largely with
debt. He was not impressed.
The late Harold Shenkman, the Founder of Shenkman Corporation, a very
large real estate holding company in Ottawa once told me that: “…the
way I have kept a good relationship with my Bank (the Royal Bank of
Canada) for over 40 years, Bruce, is that they have always owed me
money.” It took a few seconds for it to register and then I laughed as
Harold expected me to. Shenkman Corporation had always had more money on
deposit with the Royal than the Royal had loaned to them.
His son, Billy asked me what I was going to do when I got into
business in 1982. I told him I was going to build office buildings.
Billy said he was going into parking lots. I laughed. At the time,
parking in downtown Ottawa was going for about $25 a month; office rents
in the western suburbs were around $18 per square foot triple net. By
1987, parking rates were up more than threefold to around $80 a month
while office rents were down to about 6 bucks. Running a parking lot is
incomparably easier than developing office complexes and a lot more
profitable too, especially if you already own the land. I don’t have to
tell you who has had the better financial life—Billy or me. I’ll leave
that to your imagination. But certainly, Ken MacMillan would have
understood what Billy was proposing to do—keep things simple, don’t over
extend, buy what you can afford to pay for—in cash.
I was thinking of my father-in-law, one day in 2000. I went to my
Bank to see how my mutual funds were doing. I had left $100,000 in cash
with the Private Bank (an arm of the Bank for upscale customers only) in
1995 for them to invest in their Bank mutual funds for me. Before that I
had these particular funds in GICs (Guaranteed Investment Certificates)
and some term deposits. These are not very exciting investments—but the
principal amounts are guaranteed by the Sovereign (i.e., Canada) up to a
certain preset amount, as are Bank savings accounts (also up to a
preset amount so they aren’t very risky.)
I talked with my private Banker and somehow I seemed to recall that
one of the pitches they had made to me initially was that I would
receive a monthly statement ‘every month’ (!) no less, so I would know
precisely where I was at. But I don’t recall ever seeing one statement
in the five years they had control of these funds. When I asked to see
how my portfolio was doing, I got a series of excuses—it will take time
to pull a statement together (that bought them three weeks). I was also
told: “You have to remember that you can’t judge the performance of the
Bank’s mutual funds over a short period of time.” Finally I said:
“Walter (not his real name), I’m not mad, I just want to see a
statement.”
Well, in the greatest bull market in my lifetime and maybe ever
(1995-2000), the Bank’s mutual funds were among the 10% worst-performing
mutual funds in Canada and they had managed to lose a compounded
average of 2.5% per annum during that period. They had turned my $100k
into less than $90k; a monkey throwing darts at a list of Canadian
mutual funds would almost certainly have done better. Ken was right, I
would have been better off with my cash in my mattress.
How to Get in Trouble
How do people get in trouble; how do educated people with all the
advantages get in trouble? I am sure that there are an enormous number
of Canadians and Americans (and other nations’ citizens too) who are
headed for, or are already in, dire financial straights. There is an
incredible industry that has evolved to ‘help’ people out of
trouble—many of these helpers are dubious in my view but more on that
later.
First, what are the symptoms that you are in trouble? Yes, you need
to self diagnose; like compulsive gamblers or alcoholics or drug
addicts, before you can get better, you need to know and admit that you
are in trouble.
Here are a few of the symptoms:
• you do not pay off your credit card balances every month;
• you receive multiple applications for other credit cards in the mail and you complete these and get those cards too;
• you miss payments;
• your bank lines are maxed out;
• you bounce a few cheques by mistake;
• you can’t keep track of all the payments you have to make;
• creditors start calling your house;
• your spouse goes out to buy an appliance on OAC (On Approved Credit)
and she is rejected because your credit rating (measured by your Beacon
score) has fallen below 650 or 600;
• your bank calls your personal loans;
• you can’t get another mortgage on your house;
• your bank wants you to change your Line of Credit into a term loan so you pay it off and then they won’t renew it;
• you need to go to private lenders for loans at much higher than prime lending rates.;
• you can’t get any new financing at all.
You get the picture and it isn’t pretty.
Now what causes this? Well, we have hinted at a few reasons—you have a
drinking problem or a problem with drugs or gambling. I came to realize
how bad compulsive gambling can be when an acquaintance of mine (an
Appraiser) told me (proudly) how he had recently tweaked his business
model to make his firm much more profitable.
As someone who studies and does research in entrepreneurship with an
emphasis on business models, I was keen to hear how he could transform
what is essentially a pretty simple (and a bit boring) business. I mean
appraisal firms basically send out a bunch of appraisers to assess the
value of your property to make sure it meets the minimum FMV (Fair
Market Value) that the Bank needs in order to get its money back from
the QSV (Quick Sale Value) of your property.
So if a Bank has tentatively approved, say, a home mortgage for you
with a LTV (Loan to Value) ratio of 75% of the FMV, the FMV is the
appraised value and not what you say it is. Basically, if you stop
making your payments and the Bank seizes your property through a Power
of Sale notice, they want to be able to realize the QSV and it had
better at least 75% of the FMV otherwise the appraiser is likely to get
sued*. The Bank wants their money back for sure. (In commercial
transactions, the LTV ratio can be a lot lower (often 50%) and the QSV
(basically what the Lender can get for your property in 90 days or less)
is sometimes used in place of the FMV so the lender is ‘doubly’
protected from loan loss.)
(* By the way, as people found out in the Alberta economic meltdown
of the 1980s, after the hated Liberals imposed their National Energy
Program which crumpled their oil industry, you are not off the hook even
if you hand your Bank back the keys to your house. (Thousands of people
did this in Alberta when house prices sunk to such a degree that the
principal owed on their mortgages greatly exceeded the FMV of their
properties). After the Bank had finished selling these homes for
distressed values (i.e., QSVs), they totaled up their legal fees, their
unpaid interest, their loan losses, and their real estate broker fees
and went after people individually.
So by not dealing with this sort of problem yourself, you may end up
worse off—the Bank is selling your home when everyone else is selling,
which depresses prices further, (in real estate, you make money by
buying low and selling high which is easy to say but hard to do) and you
may end up paying for things ‘twice’. First, you have lost the equity
in your home and, second, you may still end up paying all of the Bank’s
costs anyway. The only way out is to declare bankruptcy (which many of
them did) but this could worsen your situation too—more on this later.
Appraisers usually get paid $150 to $250 for run-of-the-mill home appraisals.
But Morris (not his real name) told me he had developed a new
specialty—the 24/48 hour ‘rush’ appraisal for $500+, more than twice
what he normally gets for a home appraisal. He told me that he has a
special team of elite ‘SWAT’ type appraisers (a LOL comparison, I
thought) who did these rush assignments. Why on earth I asked him, would
anyone need such a thing?
Well, it turns out that Ottawa-Gatineau has two Casinos; and there
are storefront lenders near these places that lend money to (compulsive)
gamblers. These are not banks; these are openly controlled by criminal
elements and their rates of interest including the vigorish (or ‘vig),
are above the legal limit set in Canada (currently something like 60%
p.a.). Their rates including all their ‘fees’ are way above this limit.
Now, Morris told me he has a new middle class, middle aged type of
client who needs 24/48 hour appraisals because, if you don’t pay these
loans back, they don’t send the Bailiff over to your house to put you
and your family out on the road and take your possessions, they send
other types of people—even scarier than Bank special loans officers or
Bailiffs, much scarier. So Morris’ ‘special’ appraisals then are
submitted to an American Bank (AB, not the real name of the institution
either) that has set up shop in Ottawa to exclusively offer ‘home
equity’ second mortgage loans of up to $100,000 in less than 24 hours.
Their rates and fees are also atrocious but less than the legal limit
and it’s better to owe AB money than these other people.
OK, so you’re saying: “It can’t happen to me” or “I don’t have a problem with drugs, alcohol or gambling”. Well, bully for you.
I think the number one cause for divorce is none of the above—it’s
probably financial problems. Yes, I know that people say ‘I didn’t love
him anymore’ but I’ll bet the root cause of many marriage breakups is
financial stress and not that you really fell out of love with him. If
your kids aren’t getting the opportunities you want to give them, if
creditors are calling you at all hours, now that’s stressful.
Interestingly, over 80% of proposals for marriage come from the man
asking the woman; the reverse is true for divorces. Draw your own
conclusions.
Paradoxically, while I believe that the number one root cause for
family breakup is financial stress, I also believe that the number one
reason for financial hardship is marital breakup. It’s a circular
argument but probably true. The nexus of a society is the family; if
parents stay together, it is my belief that this affects, in a positive
way, the social well being and the financial well being of the next two
generations. The single largest class of poverty-stricken folks is
single mothers. Need I say more?
Other obvious causes of financial hardship include: job loss, loss of
a business, insured losses (losses where the insured value is less,
often much less, than the replacement cost—and don’t get me started
about the insurance industry*), loss of markets, loss of a large
account, entry by a new competitor, illness, a change in your
marketplace, inability to collect receivables, a default on a loan owed
to you, loss of hope.
Former (now deceased) Chief Justice of the Supreme Court of Canada,
Bora Laskin, is reputed to have said ‘the insurance industry is one
where large companies take advantage of smaller ones and individuals’
If a large client of yours or a large client of your firm goes
bankrupt, your ability or your company’s ability to collect a receivable
may drop to nil. The knock-on effects of this type of event can often
be devastating and while, most of the time, if you want to know who is
at fault, you just need to look in the mirror, sometimes, the fault is
not yours.
Having said this, if one of your clients is getting into trouble, you
usually have some inkling about it and you should be taking steps to
avoid going broke yourself by diversifying your client base, for
example.
So in the end, for most of us who face financial difficulties in our
lives, the first thing to do is stop blaming everyone else. It doesn’t
matter if someone didn’t repay that loan you made to him or her; if you
can’t collect it, too bad. Get on with the rest of your life. This
brings us to the last cause I mentioned: loss of hope. Human beings can
not live without hope. If you have lost hope, you will never climb out
of debt and you will never creditor proof yourself.
The Personal Bankruptcy Option
Many executives I have met in the US have proudly told me stories of
how they had turned around companies in financial difficulties by taking
them into Chapter 11 proceedings, this being a form of bankruptcy
protection affording stricken companies in the US that have some hope of
emerging from bankruptcy protection with some viable subset of
operations. I think they have a right to be proud of at least some of
these turnaround situations—by getting rid of unprofitable operations
and unproductive employees, they have at least preserved some jobs and
given markets to at least some of their suppliers too and met some
on-going demand from their customers as well.
And for employees who have been laid off, I have seen many go on to
more productive and happier work lives elsewhere. But I can tell you, I
have never met a US executive who has told me about their personal
bankruptcy. Now that is something entirely different. I tell my students
at Carleton University in Ottawa, never, never let yourself go into
personal bankruptcy if you can in any way prevent it.
In the British tradition, personal bankruptcy is a personal disgrace.
I don’t think of it that way, but many people do. However, there are
many, many things you can not do if you have been personally bankrupt
which may include: teach (!), be a member of a police force, have a job
where a security clearance is required*, get a credit card, get a cell
phone, visit some countries, be a Director or Officer of a publicly
traded company, become a professional like an Accountant, buy on credit,
get a mortgage and more besides.
I suppose you can’t get a security clearance because the concern is
that you could easily be bribed to reveal confidential information. When
you are in serious debt trouble, or so the thinking goes, you are
considered potentially unreliable.
Now you may be told that you can skate out of your debts by declaring
personal bankruptcy but that may not be true either. For example, you
can not get out of paying alimony in Ontario by declaring bankruptcy.
You may be told that you can get a complete discharge from bankruptcy
after a few years or even months and your record will be wiped clean. I
believe that is total bunk; there are data havens that exist where your
information will be kept and your personal bankruptcy will follow you
around like a bad disease, forever.
It will come up over and over again—it will haunt you the rest of your life.
And there’s worse. I think if you declare personal bankruptcy, you
end up paying three times. Yes, three times over. First, you will have
to pay the court appointed Bankruptcy Trustee to oversee and manage your
affairs (there, you have a new boss). Second, you will not be
discharged from some of your responsibilities anyway (like, say, your
alimony payments) or the Judge may decide that while you don’t have any
assets left, you have good earning potential. So she or he may decide
that some of your future earnings will be set aside in a pool for your
creditors; so, guess what? You end up paying them back anyway). Thirdly,
after your personal bankruptcy, try getting a telephone hooked up.
There are services that exist for people like this. A residential
telephone service for people with bad credit will cost you twice what
you would pay to Telus, Bell Canada or Verizon… and they won’t allow you
to make any long distance telephone calls either. So now, you’ll pay
higher costs for everything.
So when someone tells you, you should declare personal bankruptcy,
hold your horses and, at least, think about it a bit before plunging off
that particular cliff.
Now I am not counseling anyone to do any particular thing in this
essay—I can offer no advice. But what I can do is at least raise some
issues that might help you consider your options.
I personally believe that bankruptcy should be an option and should
not involve any preconceived notions that you are a bad person. Everyone
can make mistakes. I believe that everyone deserves a second chance.
When I served on the NHL’s Board of Governors, I believed that the NHL’s
drug policy should allow players a second chance. I believed that any
player that came forward and admitted they had a problem with legal or
illegal drugs should get counseling and support from the League, no
questions asked. (Mind you, I also don’t believe in third chances.)
Imagine if personal bankruptcy resulted in your execution. How many
people would go into business for themselves? How many people would want
to be an entrepreneur? None. Bankruptcy should be a means of last
resort but it should also be a means to restart your career. I know from
a life of entrepreneurship that we learn far more from our mistakes—so
we mustn’t throw these people away (sure we don’t execute them or send
them to the poorhouse to work in exchange for their debts anymore but we
kill them just as certainly by ruining their credit ratings).
How to Get out of Creditor H_ll
I wish I could give you a simple recipe that is quick and painless. I
don’t think such a thing exists. But one thing I do know that if you
don’t get control of yourself, you won’t get out of debt.
If you drink too much, stop doing it. If your health is bad because
you smoke like a fiend, eat too much, eat the wrong type of stuff, take
drugs, gamble excessively, watch too much TV, don’t get any exercise,
well, darn it, fix it.
Huh, you say, how is this related to the fact that you’re in debt up
to your eyeballs? Well, I know if you drink a lot, you are NOT going to
be at your peak and you need peak performance from your body and mind to
get out of debt.
I tell people before they become entrepreneurs to be prepared to work
hard, very hard over a long period of years. There is no substitute for
this. Some of my students read about the guy who sketched a business
model on a napkin and sold his company (which had no revenues and no
clients) 18 months later for $120 million USD. Well that is about as
likely as you winning the lottery. I tell my students that you can plan
to get rich but you can’t plan on winning the lottery. So don’t pay any
attention to these types of exceptions—most of us, virtually all of us,
who will have any type of financial success, will do so from concerted
effort over considerable periods of time measured in years or decades.
Terry Matthews told me that it took him 7 to 12 years to build a
great business and he has done it more than once (Mitel and Newbridge
come to mind). So if it takes Terry 12 years, it will probably take you
longer.
Once you have realized you have a debt problem and you have gotten
control of yourself, what’s next? I suggest the next step is to look at
how you can lower your costs. For a guy like me who has spent most of
his entrepreneurship career on the revenue side of business, this is a
latter day conversion. I now realize that no matter how buoyant your
revenues are (either personally or corporately), if you can’t control
your costs, they always rise to exceed your revenues.
One chap I know who makes a fabulous living working for a Fortune 100
corporation got into trouble in the year in which he made the most
money of his career. We’re talking about a person who made more than $40
million in a single career-best year. How is that possible—well, he and
his spouse collect rare artifacts and they overspent in a number of
private auction sales. He ended that year with a horrendous tax bill,
which he couldn’t pay.
So even if you’re mega-rich, you have to hold down your costs.
Now for most of us, it means doing some simple things like:
• reducing the number of phone lines you have,
• having a home office instead of a plush downtown office,
• doing our own filing instead of hiring a clerk,
• answering your own phones,
• sending your kids to public school instead of private school,
• taking a nice GoTravelDirect.com holiday to an all expenses inclusive
resort in the DR for $899 a person including airfare instead of staying
at the Kahala Mandarin Oriental Hotel in Waikiki,
• visiting a qualified, trusted Mortgage Broker and renegotiating your home mortgage interest rate,
• visiting a qualified, trusted Mortgage Broker and increasing your home
mortgage in order to pay off high interest rate credit card balances,
• freezing your credit cards*,
• selling your home and downsizing,
• turning off lights in your home,
• lowering the thermostat,
• getting rid of premium cable services,
• getting rid of cable,
• reducing the number of dinners out,
• brown bagging your lunch,
• planning your day to become more efficient with your vehicles,
• buying gas when it’s cheap,
• maintaining your vehicles so they last longer—doing preventive things like remembering to change the oil once in a while,
• doing minor house repairs and routine maintenance yourself,
• etc.
A lawyer friend of mine told me that he and his spouse have actually
frozen their credit cards in a plastic dish. Every time they want to use
one, they have to take the dish out of their freezer and wait for it to
unfreeze. This delays their purchase by some hours or as much as a day.
By that time, they usually have thought the better of it and return the
dish to the freezer. I realize it sounds hokey but it works for them.
I am sure you can add a hundred more things to my list but you get
the picture. Note that most of the things on my list will find you doing
more for yourself—so again that means getting up earlier and working
longer hours so you need to be fit. When I talk about fitness, I don’t
mean peak fitness like, say, a Brad Pitt or a Jennifer Anniston must
look to. They get $10 to $20 million a film and their entire job is to
look good. Please, don’t compare yourself to folks like this, you’ll
only be disappointed. I mean lifetime fitness, which means a little bit
of fitness (something that you do and will keep doing for years and
decades), a care about your diet, not too much drinking and so on. This
you CAN do.
Now the other side of the equation is the revenue side of your life. Some questions you might ask yourself:
• Can I ask my boss for a raise?
• Should I look for a higher paying job?
• Is there anything else I can sell?
• Should my spouse take a job outside the home?
• Can I start a business that will make us more money?
• Should I get a second job?
• Can I add to our income by doing some consulting?
• Can I make more money by stopping some of the things I am doing and
concentrating on the best opportunities? (My Dad called this ‘supporting
the winners and dumping the losers’.)
There are usually some things you can do on the revenue side of your
life but usually it is pretty small, at least in the short term. So I
typically tell people to focus first on immediately reducing their cost
structure. Hey, I find that once you get into it, it can really
snowball.
There is a huge movement in North America right now focused on
simplifying your life. Do you want to know the number one thing you can
do to simplify your life? Get out of debt.
The Europeans laugh at us sometimes—they call us the ‘work/pajamas
people’. We work all the time, come home, change into out pajamas, go to
sleep, only to do it all over the next day. That’s it, that’s what most
North Americans are doing, with some mindless TV watching to help us
get off to sleep so we can forget what a misery our lives are.
We live to work, the Euros work to live. I mean what is the purpose
of an economy anyway—to give us money to educate our kids, to give us
the opportunity to do interesting things and learn interesting things
ourselves too? Or is it so we can work all the time to pay our bills?
Whatever you do, don’t ignore your creditors—they hate this and will
definitely report you to their credit bureaus, which will kill your
credit rating in a hurry (more on this in a minute). When they phone, be
polite, tell them what steps you are taking to pay them (even if you
are late) and then live up to what you said you would do.
Now at the end of the day, maybe you just can’t get out from under
the heap of debt. What to do? Well, I have asked you to at least pause
before you declare personal bankruptcy because of the serious
consequences that I believe result from that drastic step.
But I have found that if you are honest with your creditors, at least
some of them will cut you some slack. In business, your suppliers don’t
want to see you fail—they like having customers to sell to. So, for
businesses in trouble, one of the first places you go to is your
suppliers.
Now this can backfire—they may instantly cut you off. It’s a risk.
When I was with Terrace Investments Ltd., we had a policy of not
kicking our tenants out when they had a financial problem and not suing
them either. We felt we would get much further ahead by working with our
tenants—lowering their rents by agreement during tough times and
getting it back during better times. We estimated that we saved about
40% of our tenants from the dustbin that way and we NEVER wasted any
time suing bankrupt tenants that went broke—we had better, more positive
and productive things to do than engage in soul-destroying litigation*.
I can’t think of who it was that said (and I paraphrase here): “If a
man should steal my watch, I shall fight him for it. But if a man should
sue me for it, I shall take it off and give it him, glad to have gotten
away so cheaply.”
So sometimes you can make a proposal yourself to your creditors and
have them accept longer payment terms, lower interest rates or even get
their agreement to take less than face value on your debts.
On the other hand, some residential landlords when they hear you are
in financial trouble will take immediate punitive steps against you—like
try to evict you or distrain your premises. (The latter is a term you
see more frequently in commercial real estate. Basically, it means that
the Landlord can lock you out of your premises and seize everything
inside as recompense for their unpaid rent.)
I realize that making a proposal (whether you do it yourself or get
expert help from a recognized, trusted professional) is risky but I am
assuming that you are out of other options. And you have gathered by now
that I believe you are probably better off most of the time to make
your own decisions and handle your own affairs.
And I have found that if you are honest with people, most of them
will cut you some slack. When I started out in business in 1982, a smart
lawyer by the name of Kent Plumley told me that the most valuable thing
in business was your reputation. I didn’t really get it then but I sure
do now. If you have a good reputation, people will hire you, buy from
you, sell to you and, when you get in trouble, help you as best they
can. I believe that the number one thing in life is not love; it’s
trust.
Still, I have known Banks that just get a whiff of trouble and
they’ll pull the trigger on your loans (they ‘call’ your loan, i.e.,
demand immediate payment in full) even though you may not have even
missed a payment. They do this so they can be first in line to grab what
they can from your estate (a bankruptcy estate is not the same as the
estate you leave on your passing but I can see how sometimes it feels
that way). They absolutely shouldn’t do this but if you look at most of
the personal Bank lines of credit agreements and other types of debt
agreements, the Banks usually have a lot of weasel words in there that
pretty much allow them to do what they want.
When you have a big debt problem, one of the things you can try to do
is a debt consolidation. This can be done informally (like when you
re-mortgage your house to pay off your credit cards) or formally through
a proposal to creditors (which you will need legal and professional
help to do).
The latter is a kind of delaying tactic—you are trying to feed an elephant but only one peanut at a time.
Remember that you must change things—whatever you have been doing, it
isn’t working. I can’t tell you how many people seem to be frozen in
the headlights when they see a debt problem coming at them but refuse to
change what they are doing*. You must act.
“It is the definition of insanity to repeat the same things over and over again and expect a different result,” Anon.
What to do if You or Your Company is Petitioned into Bankruptcy
Fight it, especially if it’s personal bankruptcy. I believe that it
is hard and maybe even impossible to fully recover from personal
bankruptcy. If a vindictive creditor just wants to hurt you, they may
try to petition you into bankruptcy. You don’t have to accept that.
This will be a court proceeding and you will need a lawyer but you
should appear and argue against this if you can. I believe that most
judges will be somewhat sympathetic to someone who wants to repay his or
her debts; is making efforts to do so and wants to avoid the stigma of
personal (or corporate) bankruptcy.
I have also found that meeting face to face with your most difficult
creditors is generally a good idea—they see that you are not such a bad
person after all. They will see your pain up close. You are far more
likely to work out a deal if you can get an in-person meeting than if
you have your lawyer talk to their lawyer. In most cases, their lawyer
doesn’t want to settle anything. They make money by dragging the case on
and on—lawyers usually get paid even if no one else does*.
I find it frankly incredible that NHL owners and NHLPA members
allowed two lawyers to attempt to resolve their labour dispute. Both
Gary Bettman and Bob Goodenow are well trained, combative lawyers and,
if I was ever in a jam, I could do a lot worse than having either of
these two men defend me. But I can’t imagine how the League and its
Player Association ever came to terms—in fact, Bob Goodenow had to be
joined at the table by his players before a settlement could be reached
and he basically lost his job over this.
I have seen hardhearted creditors melt in these kinds of meetings. It
also gives you an opportunity or your lawyer an opportunity to tell
them that even if they got a judgment against you (which you will
defend), they still have to enforce it and that may not be easy. A lot
of people don’t know that just because they have won a court case and
have a judgment against you, they might not actually receive anything
for it. A judgment can be appealed. A judgment that is upheld must be
enforced. First, there will be a debtor- creditor examination to see if
the debtor has any assets left. Then, the creditor has to find a means
to collect on his or her judgment—the Government and the Courts won’t do
that for them—they are on their own. So an expensive court proceeding
that can take years may be worthless even if they win. Much better to
get the cooperation of the debtor who might be able to make at least
partial restitution. And that restitution might not be in the form of
cash or assets—it could be in the form of services. You could work for
them!
A friend of mine called me up a few years ago in tears. Kevin (not
his real name) was incredibly upset—the Bankruptcy Trustee (called in by
his Bank unexpectedly) had just entered his premises and was in the
process of taking over his business and his files. His Bank had told him
that they would give him notice if they were going to do anything
precipitous. They didn’t but I can understand why most of the Special
Loans Bank officers don’t want to give people like Kevin any notice—they
are afraid of last minute fraudulent transactions to remove assets or
cash from the business.
But Kevin wasn’t like that; he was still working hard to save what
had been a very successful financial services company. The Company was
knocked over by a single (large) transaction that had gone south. Many
good businesses are ruined by they themselves not being able to collect
their receivables.
Kevin asked me: “What do I do? They’re at my door asking me all sorts of questions, demanding answers from me right away!”
“The first thing you do, Kev,” I answered, “ is nothing at all. I
want you tell them the (smart) truth*. Tell them you’re very upset right
now (which is true) and you will fully cooperate with them. Tell them
you’re sick about what has happened but that you have to go home right
now. Then just take your personal effects and leave immediately.”
* I learned from another clever lawyer, Scott MacLean that one must
always tell the truth but it must be the smart truth. No one expects the
truth anymore in our media saturated society. The smart truth keeps you
out of trouble. The truth hangs you. How you say things makes a huge
difference. Here is an example—Coke came out with a vending machine a
few years ago that adjusted soda prices when the weather changed. They
also came out with a media release that basically said ‘we have invented
a vending machine that raises soda prices when it gets hot.’ You can
imagine how that went over: ‘large company denies thirsty customers on
hot days’. The smart truth would have been to say: ‘we have invented a
vending machine that lowers prices on cold days’. Same thing but
completely different result. The spin on this would have been: ‘Company
cuts customers a break on cold days’. Coke’s new vending machine has
never been rolled out.
One thing that happens in our society when things go wrong is that we
always want to find someone to blame. And that someone is you. I told
Kevin to call me from home. Here is what I told him the next steps
should be:
• Call the Trustee the next day and arrange for him to send you a list of questions that he needs help with.
• Take the initiative.
• Offer to help.
• However, never answer their questions off the top of your head.
• They have done this dozens, maybe hundreds of times and they know how
to think around corners. You have done this (hopefully) never.
Therefore, it is a very unequal playing field and likely to result in a
very unequal result.
• Remind yourself that they are not your friends.
• Remind yourself that they may be trying to trap you into saying things
that incriminate you even though you have done nothing wrong.
• Answer their questions on paper first. Then sit on your answers for at least 24 hours.
• Read them again. See if they still make sense.
• If you can’t handle it yourself, get a lawyer.
• Don’t get bullied or rushed into premature answers. Tell them you’re trying as hard as you can to get all the info they need.
• Start by giving them something innocuous to show that you are cooperating and this will buy you some time.
• Remember what happened to Patty Hearst—she not only got captured by
the Symbionese Liberation Army, she was brainwashed into becoming a gang
member. This is known as the Stockholm Syndrome, which means that any
of us can be forced to do things we would normally abhor if we are under
sufficient duress.
• If people keep telling you, you are a bad person, you may eventually
come to agree with them even if you did nothing wrong. (This entire
essay is based on the fact that you are a trustworthy person trying to
get ahead honestly in the world but, like everyone else on the planet,
you make mistakes of omission.)
• This is what Crown Attorneys (District Attorneys in the US) count on
in a cross-examination—that they can brow beat and rush you into
damaging admissions. Even experienced, professional witnesses feel
intense stress during these types of crosses.
• You would be surprised what people will admit to—even things they did not do just to get them to stop.
• You never let people like this put words into your mouth. Don’t repeat
bait words like: “Isn’t it true Mr. Smith that you paid bribes to City
officials to get your permits released?” You don’t answer: “I never paid
bribes” because the next question will be: “Well, Mr. Smith, if you
don’t like the word ‘bribe’, what word would you use?” You can see where
this might take you. The smart answer is: “We have records and invoices
from the City for all of the costs for our building permits.” The word
‘bribe’ never passes your lips.
• Remember the ‘pen is a long arm from the grave’. Never write anything
down that you would not feel comfortable seeing on the FRONT page of
your local newspaper.
• This goes for email too.
• Especially for email.
I also talked to Kevin about some other stuff too. I told him that I
would allow him to feel sorry for himself for three days. The first day,
you are allowed to drink some wine or whatever and wallow in self-pity.
The second day, try to get some extra rest. The third day, I want you
to get some exercise. By the fourth day, apart from trying to deal with
the fallout from your company’s bankruptcy (which can go on for years
and you are just going to have to learn to live with), I want you to
start planning your new future.
Your Credit Rating
Now if you owe money to the IRS or CRA (in Canada), you should know
that this is very serious. In Canada, CRA can get an ex parte judgment
against you—this means that they can get a judgment against you without
you being in court or even being notified of the fact that a legal
proceeding has taken place. This is atrocious. Common law suggests, at
least to me (and I am not a lawyer so this is just a lay person’s
opinion), that taxation without representation is immoral and held to be
illegal. For you not to be at least notified and have an opportunity to
defend yourself against the claims of your own government is
disgraceful.
With a judgment against you, they now have the power to ruin your
credit rating, to send a bailiff in without notice to take your stuff,
to garnishee your wages from your employer, to seize any property you
have and much more.
If you credit rating is torpedoed, you’re sunk. Your spouse won’t be
able to go get that new tool he wanted or the new fridge she wanted OAC
(On Approved Credit) because your Credit Score has fallen too low.
Credit bureaus are hugely powerful—they keep track of all your credit
cards, your mortgages, your Bank debt and much more. Privacy in Canada
and the US is a joke—you have none.
Anyone who is a member of a credit bureau can request your credit
history (called a credit report) and they are going to know a lot about
you. Did you know that just the number of requests that are made on your
credit rating lowers your Beacon Score*? So if you just sold your condo
and your old car to move your family into a new home, buy a new washer
and dryer, a new fridge, a new car, some curtains and some other nice
stuff OAC or if you approached a few Banks for a mortgage (and each of
them will query your credit report), your Beacon Score just took a big
hit. Huh? What’s with that? Isn’t that what the big box stores, the car
dealers, the Banks, the Government want you to do? Isn’t that what your
Mom and Dad told you to do when you grew up—be responsible, get a house
in the suburbs, have a couple of kids, drive a nice car?
And your credit rating goes down!
Every time someone ‘pings’ your credit report, your Beacon Score will
go down by 3 points. If you have a lot of involvements (e.g., you are
an entrepreneur with fingers in a lot of pies and you are busy starting
new ventures, developing new technology and new ways of doing things,
building new facilities, creating lots of jobs—i.e., doing the things
that entrepreneurs should be doing), then there could be many requests
for a credit report on you. Every time you do a new financing, your
credit rating could go down. Not only is this unfair, it actively works
against society’s best interests as well as the individual’s. This
practice should stop, in my opinion.
Now if your credit rating goes down, everything becomes more
expensive—you can’t take advantage of that don’t pay a cent event
until…. No interest until…. You have to pay cash for everything or if
you borrow money, it will at a higher interest rate.
Ken MacMillan was right all along. If you can manage it, don’t borrow money and live within your means.
Having said this, you have the absolute right to demand from each
credit bureau (there are two main ones in Canada), a free copy of your
credit report. They must provide you with one. And I have found that it
really pays to pull your report from time to time—they make mistakes and
have out of date info on file and you must correct these. Never allow
something to stay on your credit history that is wrong.
It takes a huge effort to get the credit bureaus to change something
that is out of date or is wrong but you must be persistent. A bad credit
report is a career killer and a business killer.
So monitor your credit report and do things that will improve your
Beacon Score like retire your credit cards, pay off your back taxes,
etc*. Your score will go up over time as you gain control over your
financial life.
To give you a sense of how important this is, a friend of mine who
works for a major Bank in Canada tells me: “I have witnessed how quickly
the Bank will terminate credit products if the client is deemed to be
too high risk—even if they have made ALL of their minimum payments.
Working there, I have also seen first hand how difficult life can be for
people who have declared bankruptcy or those who have unsatisfactory
credit history.
Banks have any number of ways they can ruin your credit rating. One
of the most abusive I have ever heard of was brought to my attention by a
Small Business Owner—he called me in some distress to tell me that a
crucial order for materials had been derailed when his cheque was
returned to his supplier, NSF (Not Sufficient Funds). He couldn’t
believe it. I had just helped him sell a piece of real estate he owned.
The net proceeds from that sale were to be used to expand his business.
He had received a certified cheque from his law firm’s trust account
drawn on a major Canadian Chartered Bank.
Now a certified cheque in Canada is treated the same as cash. Huge
transactions occur every day based upon Bank certified cheques—not just
real estate closings but purchase of shares in a corporation, mergers
and acquisitions and a thousand other types of financial transactions
depend on the sanctity of certification. National economies like
Argentina’s where the banking system has unraveled (circa the early
2000s) and all transactions have to be in cash suffer greatly from a
lack of trust and the speed at which business can take place is reduced.
Speed is one of the most critical factors that determine a nation’s
productivity and its standard of living.
It is actually against the laws of Canada not to inform a client that
a hold is being placed on their cheque. A Bank in its defense might say
that they put a hold on a certified cheque to ensure it was not stolen
or altered. Banks are particularly concerned with large cheques but,
almost by definition, certified cheques will be for larger amounts than
run-of-the-mill transactions. What will this mean for Canadian commerce
if the practice becomes more widespread? I am sure it will not be good
for Canadians.
I think that every city economy (which is really a city-state in the
sense that, for most people these days, your economic well-being is
probably far more tied to how well your local economy is doing than the
national or global economy) has a certain ‘speed limit’ attached to it.
That is, the maximum speed at which a local economy can move is limited
by many local factors such as how fast your lawyer moves, how fast your
local financial institutions react to your requests for financing, how
fast your customers make up their minds, how fast your suppliers can
move, etc. My perception is that business moves a lot faster in Hong
Kong, NYC and Singapore than it does in Toronto or Sydney. And Toronto
and Sydney move a lot faster than folks tend to in places like Ottawa
and Vancouver say. Anything that increases speed in your city-state will
increase overall productivity and increase overall financial well-being
there. The reverse is, unfortunately, also true and having Banks put,
say, a ten day hold on certified cheques is problematic.
Back to Paul’s (not his real name) story, his Bank had put a hold on
his deposit for ten days while the certified cheque ‘cleared’. I was
flabbergasted and offered to call his Bank for him right away. I spoke
with the Branch Manager. I told her: “This is highly unethical and might
even be illegal. How can you do this to Paul? On what basis have you
put a hold on a certified cheque issued by one of our largest, most
prestigious law firms and a major Canadian Chartered Bank? What are your
concerns? Have you done this to other SMEE clients? Is this a policy of
your Bank? What are you going to do to make it up to Paul?”
She agreed to release the funds immediately but did nothing else.
Paul had to make amends with his supplier and he was lucky that he
wasn’t reported by his supplier to the credit bureaus. Passing NSF
cheques is a big no-no but it can happen to anyone.
I was pretty sure that this was an isolated incident until two more
SMEEs told me the same thing happened to them. This is atrocious
behaviour on the part of Canadian Banks.)
Even if you have bad credit, over time you can rehab your rating. I
tell my students to absolutely not declare personal bankruptcy when they
graduate because they have way too much student debt but sometimes, it
happens. I may not see them until years later when they are starting
their own businesses and have not awoken to the fact that they have bad
credit and can’t get, say, supplier credit.
This is not good.
So I tell them to re-establish their credit by taking some small
steps in that direction. For example, I tell them to get a credit card
(yes, I really do) but one with a really low limit. And then use it from
time to time on absolute essentials and pay off the full balance every
month.
Credit card companies may allow someone with bad credit to have a
credit card by establishing a cash collateral account and clearing the
card regularly. For example, a friend of mine who recently went through a
formal, court-monitored proposal to her creditors managed to keep one
of her credit cards by informing her Bank in advance of the filing. They
agreed to allow her to keep one card with a $3,500 limit, which they
cleared every Thursday against a cash collateral account that she
maintained at $5,000.
She is a high earning professional who had made some terrible
investment choices. She travels a lot in her business and, for her, a
credit card is an essential tool.
It takes time but you can rebuild your reputation.
The Proper Role of Debt
One of the things I recommend to my students is that they buy their
own homes, condos, town homes, whatever as soon as they can. To do that,
most of us need a mortgage.
A mortgage can be a form of useful debt—it allows you to buy a home
sooner and is a form of forced savings. I ask my students how many of
you can save $700 a month. Not many put up their hands. I ask how many
of them can afford to pay $700 a month in rent. Most of them can manage
this.
Well part of every month’s blended mortgage payment is going to pay
off the principal and this will add up over time to a mortgage-free
home. So let’s say that an average of $700 a month went into principal
repayments over a five-year period, that’s $42,000 ‘saved’. Now most of
us, if we had this in a bank account somewhere, would find ways to spend
this money but because it is locked into bricks and mortar, we
generally keep it.
Home equity is the most important form of savings we typically tend
to have—it is easily accessed if we get into a jam by re-mortgaging the
home and, around the world, it is the single most important source of
capital for new business formation (far, far more important than Venture
Capital).
Also, there is a little understood but important wealth effect that
comes from paying off a home mortgage—it is called imputed rent. If you
own a home free and clear, you are much better off then because of this
(at least in Canada. In the US, mortgage interest is tax deductible [I
believe the only country that does this] and this changes things
somewhat.)
The way to understand imputed rent is as follows:
1. You own a home free and clear.
2. You decide to move out and rent your home out for $2,000 per month.
3. But you need to live somewhere, so you rent a comparable home for $2,000 per month.
4. Your former principal residence (now a rental property) is producing
income for you and let’s just assume you net $24k a year (i.e., your
costs are zero).
5. However, you are in the 50% marginal tax bracket, so you have to send
CRA half of this amount—you are left with $12k after tax.
6. But you are paying rent of $24k a year to your Landlord so you are out $12,000 in CASH.
7. Therefore, you are $12,000 better off staying in your principal
residence. This is a very real effect* if somewhat hard to grasp.
Australia and Switzerland actually tried to estimate imputed rents
and tax them. You can imagine the public reaction to that—you have been a
good citizen all your life, you have invited your neighbors over for a
mortgage burning ceremony only to find that the Government is going to
tax you on a rent you don’t actually receive. These efforts run contrary
to common sense and were doomed to failure. A home-owing citizenry is a
group that has a stake in their societies and obviously putting elders
out on the street because they can’t pay their taxes on imputed rents
isn’t good public policy.
So buying your own home using a mortgage is likely to be a good idea
for most people—not all debt is bad. But buying a NHL hockey team with
debt is probably a bad idea.
One of the first things that new Commissioner Gary Bettman told me in
1993 was pay off the debt on the franchise. Hmm. That would have been
good advice. I am better at giving good advice than taking it.
So there is good debt and bad debt. To me, good debt is secured debt
so that, if for some reason you can’t make your payments, when you sell
the underlying asset, the debt goes away. A mortgage on your home or
office building, for example, could be classified as ‘good debt’. It is
less clear that a car loan, secured by your automobile, is good debt
because cars can depreciate faster than you can pay off the principal.
So perhaps a better definition of good debt is that it is secured by an
asset whose value is likely to exceed the unamortized portion of your
debt throughout its term.
No matter how careful you are at managing debt, it is always possible
to get into some kind of difficulty. You can be upside down on the
equity in your home in a hurry if the market crashes as it did in parts
of the US in 2008/09 when home prices collapsed in Florida, Arizona and
California by as much as 50%.
Bad debt is unsecured personal debt where the only recourse is to
you– this is the case with credit card debt and student loans, for
example. Now one could argue that student loans are a form of ‘good
debt’ since they form part of an investment in human capital (you) and
can increase your income potential.
So another definition that people use for good debt is debt that can
create a return on investment. But I think this is too broad a test
since you could rationalize taking on heaps of credit card debt to
invest in a business that subsequently fails and then where are you– in
creditor H_ll, for sure.
How to Reduce Your Risks and Protect Your Family
I have already said that, in my view, you don’t protect your family
by hiding your assets on Pirate Island. This will lead to huge distrust
amongst folks like the IRS or CRA, the media and many others (your
ex-wife or ex-husband, for example). My father always told me: “Be proud
to pay your taxes in a great country like Canada, but don’t pay more
than you have to.” The latter part of the sentence was always told sotto
voce.
So you are completely free to arrange your affairs in a way that is
efficient and effective, as long as it is legal and simple and meets
GAAP (Generally Accepted Accounting Principles). The legal and GAAP
part, I will largely leave to you to figure out (with help from
professional lawyers and accountants). The simple part needs more
elaboration.
I always laugh when I read in the media that people (i.e., NHL
Owners) are buying their teams for tax loss purposes. NO ONE SHOULD EVER
BUY ANY BUSINESS TO LOSE MONEY.
I think we waste an incredible amount of resources and time, trying
to figure out ever more complex schemes to avoid paying taxes—this is
called financial engineering. Every financial engineer I have ever known
eventually went bankrupt. They engineer such incredibly complex
transactions that eventually no one really knows what is going on. Human
beings constantly overestimate their intelligence and complexity is the
enemy of success.
So rule number one—keep your affairs simple. The best way we have yet
discovered to hold assets for long periods of time is the LLC—Limited
Liability Company*. Apart from a few institutions that are bound
together by ‘other directed’ means (like the Holy Roman Catholic Church,
The Emperor of Japan or the House of Windsor), the longest lived
organizations on the planet are incorporated companies.
Most of my students think that a LLC is just that—it totally limits
your personal liability. It does put some limits on your personal
liability but it is not a 100% guarantee. Your company’s creditors can,
in certain circumstances, breech the wall of limited liability. In
Ontario, for example, Directors and Officers may be held personally
liable for environmental contamination or non-fulfillment of statutory
obligations like remitting GST (Goods and Services Taxes), PST, income
source deductions and so forth. In order to avoid such personal
liability, Directors must show that they have been duly diligent, like
remembering to ask at each BOD (Board of Directors) meeting if such
statutory obligations have been met. And remember, the due diligence
defense never applies if fraud is involved and you have been party to
it. In the US, personal liability has been further extended to include
the accuracy of financial statements for public companies. Investors
large and small rely on these published statements, so they have to
right.
So I tell my students, start early: incorporate a personal holding
company (PHC) and put your assets in there except for your principal
residence. Because in Canada you can sell your principal residence tax
free, it should not go into your PHC.
I believe that your principal residence should go into your spouse’s
name—the spouse who is not actively involved in high-risk business. In
Ontario, if you get divorced, half of everything you own goes to your
partner and vice versa. So don’t worry about your partner running off
with the house. Try to put your home out of the reach of any potential
creditor so if things go wrong, at least you’ll have somewhere to sleep.
Don’t pledge your house to secure loans if you can avoid it. Try to pay off your mortgage as soon as you can.
Your creditors (in Canada) can get at your RRSPs. So make sure you max out your spouse’s RRSPs before your own.
I understand that some types of insurance products (like seg
[segregated] funds) are creditor proof but don’t ask me to explain them
or whether they are a good investment. Ask a trusted professional
investment advisor.
Most of my entrepreneur friends are really good at taking care of
their businesses and really bad at taking care of themselves. So I asked
Sandra Pollack, a knowledgeable and trusted financial planner from
TRIMARAN Financial Limited (sandy@trifina.com) for her help in
understanding seg funds and pensions for entrepreneurs. Here is what
Sandy wrote:
“Many entrepreneurs ask me if there is a way that they can protect
their RRSPs from creditors and/or taxes and the answer is yes and no.
Segregated funds have been often discussed as means of doing this. I
will attempt to highlight what these funds are, the advantages and
disadvantages of including these as part of an investment portfolio, and
then perhaps an informed decision will be able to be made.
Segregated funds are pools of securities that are managed and offered
by insurance companies. These contracts are regulated by the
Provincial Insurance Acts. As such, they enjoy benefits such as probate
protection, the potential for creditor protection and capital
guarantees that are not available with common mutual funds. These plans
can be in the form of term deposits or mutual funds.
As these are considered life insurance contracts, with proper
beneficiary designations (e.g. Parent, spouse or child), also known as
preferred beneficiaries, these funds may also be distributed outside the
estate at the death of a person and paid directly to the beneficiary.
Under provincial insurance law, life insurance annuity contracts
issued by life insurance companies are exempt from execution and seizure
by creditors of the policy owner if there is a preferred or irrevocable
beneficiary designation.
While there have been many attempts to challenge this “protection”,
the Supreme Court of Canada has confirmed that these funds may be exempt
from seizure with the understanding that the transaction of depositing
these monies into segregated funds was not carried out in “bad faith” in
order to avoid creditors. Although each individual case may be
challenged, it depends upon the surrounding facts and circumstances.
The courts may look back five years to determine that no bad faith has
occurred.
For example, if John Smith, a successful entrepreneur, who has been
in business for 10 years and has consistently contributed to an RRSP in
the form of segregated funds, is forced to declare bankruptcy, there is a
very good chance that his funds would be exempt from creditors. If
John had never invested in segregated funds, was aware of current
financial challenges that the business was undergoing and decided to
transfer his RRSPs into segregated funds a year or two previous to
declaring bankruptcy, the funds would more than likely be challenged by
creditors and be seized.
As such it would be wise to start investing in a segregated fund from
day one to avoid potential challenges, should a bankruptcy occur due to
unforeseen future circumstances.
Another useful tool to have in your “creditor proofing” toolbox is an
Individual Pension Plan (IPP). This is a defined benefit registered
pension plan that a company contributes to on behalf of the owner
manager/employee. The contributions are tax deductible to the company
and non taxable to the employee (owner/manager).
This type of pension plan is primarily designed for the high income
earners over the age of 45 who have a history of earned income of
$100,000 (minimum). An actuarial calculation is used to determine how
much past service and current contributions can be made on behalf of the
individual, and in many situations, lump sum contributions of $60,000
or more can be deposited from the company in the name of the employee.
The calculations assume retirement at age 65; however, the funds may be
withdrawn at age 69.
The plan must be registered with Canada Revenue Agency and is fully
creditor protected since it is a bona fide pension plan. The costs to
administer these plans have decreased significantly due to technology
and the competitive market place. For the right individual the IPP is
an opportunity to redirect earnings from the business that are totally
tax deductible and invest them in a pension to provide retirement income
for the entrepreneur. Since this is a pension, the funds are protected
from creditors.
Many successful entrepreneurs are so busy pursuing opportunities and
reinvesting capital to spur the growth of their businesses, that they
often miss out on a couple of simple planning strategies, that will
provide them liquidity and peace of mind when an unforeseen financial
event has the banks and creditors closing in on their heels. It may be
wise to take the time to diversify income that the business earns and
set it aside in a retirement pot as well.”
You probably should own a very small percentage of your PHC; your
spouse should own the majority. Again, if you get in trouble, the PHC
may not go down the drain with you. Also, if you own only a nominal
shareholding in your PHC, upon your passing, the taxes you will pay on
the forced deemed disposition of your assets will be minimal. Your
terminal tax return will not then leave an enormous tax liability for
your heirs to pay, at least, not on this account. Remember, companies
can live forever, you won’t.
If you have a home office for your PHC, some of the costs of running your home may be tax deductible.
If one of your companies has some success, you can pay
inter-corporate dividends between two Canadian companies tax-free. So
you may be able to find efficient ways to get money into your PHC and
out of your PHC into the hands of yourself or your family.
For example, you or your spouse or both might become consultants to
your PHC. And your PHC might be a consultant to your clients. Often a
first step toward full-on entrepreneurship is to turn yourself into a
consultant instead of an employee. I was last an employee in 1982 when I
worked in the Department of Public Works in Ottawa. I left government
service that year to become a consultant for a few local real estate and
service companies. This has certain advantages such as taking all your
compensation with few, if any, source deductions and being permitted to
deduct certain costs against your income such as the cost of running
your home office, parking fees when you visit clients, entertaining
clients, marketing and biz dev costs, etc. It wasn’t until 1995 that I
finally clued in to the idea of forming a PHC which made the last years a
bit more productive.
Even after I became more of an entrepreneur in my own right, I kept
the PHC going and consulted with the companies I was helping to start.
At a minimum, the PHC certainly allows you to establish more control
over, keep better track of, and even leverage more of your investments.
If you think you have it tough in terms of risk exposure, look at
what my architect students face during their professional careers. At
one time in Ontario, architects were not permitted to incorporate—they
worked in sole proprietorships or in design partnerships that exposed
them to unlimited personal liability for malpractice. In addition, their
exposure was not time limited; if a building they had worked on at any
point in their careers developed problems, they could be sued no matter
how much time had passed.
Under pressure from the OAA (Ontario Association of Architects),
Ontario now allows architects to practice in incorporated firms and term
limits their liability as well. LLCs and LLPs (Limited Liability
Partnerships) can help to shield architectural practioners from some
personal liability although they can never relieve shareholders,
beneficiaries, practicing architects, retired architects, directors or
officers from errors of commission. I don’t see any reasons why
architects shouldn’t practice in LLCs and I would probably go one step
further and suggest that they hold their shares in their LLCs in their
PHCs, as long as this was permitted by their governing bodies in
whatever State, Province or Country they may practice in.
In any case, every practicing architect or entity (such as a LLC)
engaged in the practice of architecture must carry errors and omissions
insurance (for example, as required in Ontario by the Architects Act RSO
1990). When things go wrong in construction, the plaintiff tends to sue
just about everyone ever connected with a project including: the
contractor, the sub-trades, the architect, the engineers, the investors,
the mortgagee, you name it.
Many practicing architects may not think of themselves first as
entrepreneurs (they tend to think of themselves, I believe, foremost as
artists) but indeed they are. Like most writers, poets, novelists,
painters, dancers, musicians, composers, videographers, screen writers
and other creative persons, they are not paid every two weeks by an
employer who not only ‘feeds’ them but protects them from liability and
provides them with nice benefit packages and a pension plan. So they too
need to think a bit about creditor protection so they won’t die broke
(or at least, if they die broke, they did so out of choice).
There are many things you can do to try to protect your family and
you should try to follow through. Most entrepreneurs that I know are so
focused on making their businesses succeed that they never do any
personal or family financial planning and this is a shame because bad
things do happen to good people.
At the very minimum, you should create a personal balance sheet (PBS)
to keep track of the things you own. You can do this informally (if you
know something about accounting) or formally with help from a
professional accountant.
While not a formal legal arrangement like a LLC or a Family Trust, a
PBS will help you understand what you own, what liabilities you may have
incurred and maybe it will help you see opportunities you may otherwise
have missed.
One of my former students, Claire (not her real name) had bad
credit—she had a vehicle repossessed some years earlier for chronic
non-payment. She had also defaulted on a credit card. She had matured a
lot since then and, in fact, had started a successful computer service
business. We got hold of the credit card company, she made good on the
past debt and even received a new card too. She also made a deal with
the finance company to make a partial restitution (which they agreed to)
and clear the account with them. When we created a PBS for Claire, we
found that services businesses like hers were valued at somewhere
between .5 and 1 times revenues, and even at .5, she had a very positive
PBS with practically no debt. Within a year, she was able to purchase
her first home.
Conclusion
We now know (from reading this essay) that, in Canada, your RRSPs are
not safe from creditors. If you get into trouble, creditors like CRA
can force you to cash in your RRSPs to pay them off.
In the US, your IRAs are protected from creditors, properly so in my
view. I mean we have to understand the difference between errors of
commission and omission. Most of us make mistakes but these are what are
called ‘honest’ mistakes. We mucked things up and have gotten in over
our heads and can’t pay our bills. We didn’t do it intentionally. These
are errors of omission.
Prof Bruce
Copyright. Professor Bruce M. Firestone, B.Eng. (Civil),
M.Eng.-Sci., PhD., Entrepreneur-in-Residence, Telfer School of
Management, University of Ottawa; Executive Director, Exploriem.org;
Founder, Ottawa Senators; Real Estate Broker and Mortgage Broker,
Partners Advantage GMAC Real Estate, Brokerage. Ottawa, Canada. October
2009.
Comment:
Just a quick point, Bruce, about credit scores. Assigning a value or
number to each inquiry on your credit can be misleading. There are many
factors to consider. For example, one inquiry could be zero points (you
are allowed six hard inquiries per year, one bi-monthly) or as much as
20 points (say if it is the18th inquiry in less than 30 days).
In the latter case, you are seeking many types credit for some reason (which makes creditors nervous).
The credit score is all about performance over time. Everyone talks
about what lowers the score, but no one gives you the “secret” how to
improve it.
No “secret” really. As plain as the nose on your face. Pay off your
credit each month. Certainly use it each month, but pay it. Live within
your means.
In one sense the score represents whether you are the master of your
credit or a slave to it. Your choice. You are in control. Accept the
responsibility for your actions.
John R. Walsh, Mortgage Agent, Mortgage Alliance, Nov. 2009.
Postscript:
More recently, Mark Sherboneau from Foundation Private Wealth
Management and Susan Tataryn, lawyer and CA, have been working with us
on the issue of creditor proofing for entrepreneurs from the earliest
stages of their careers. Most financial planning groups are not
interested in entrepreneurs until they have at least six figures or
preferably seven figures of liquid assets.
Mark and Susan have worked out a system that will allow entrepreneurs
to set up a trust at an early age with minimal startup costs. The trust
is:
1. run by a trustee or trustees;
2. the trustee can be a corporation or a tripartite group of three (trusted) persons;
3. the beneficiaries of the trust would, in most cases, be the settlor
(the person making the gift himself or herself) plus members of their
family and possibly a charity or their alma mater, for example;
4. the division of the trust when it is wound up would probably not be
specified as to which beneficiary gets what: this would be subject to
discussion between the settlor and the trustee(s) at that time, with the
trustee(s) making the final decision;
5. the settlor would set initial conditions for the trust such as it is
not to be wound up until age 55 (60 or 65) which would prevent the
beneficiaries from accessing the funds in the trust until a certain age.
This is to protect the beneficiaries essentially from themselves since
most people can not resist buying cool stuff if they could get their
hands on the money;
6. the funds invested in the trust would most likely be invested fairly
conservatively in vehicles like corporate class mutual funds so that
almost all taxes are deferred to the trust windup and, when it is wound
up, capital gains taxes would apply which improves tax efficiency by
quite a margin;
7. the trustee(s) are obligated to protect the gift as best they can;
8. benefits are distributed according to the settlor grant, the
settlor’s wishes and knowledge and best practice of the Trustee(s);
9. The Trustee(s) have legal title (not the beneficiary) so that the assets can not be attacked by creditors;
10. the diversity of interests of the beneficiaries means that a
premature windup of the trust is unlikely since all beneficiaries in
every Province of Canada (except Alberta) have to unanimously agree to a
windup which means the trust is resistant to external pressures from,
say, creditors or a money-hungry beneficiary.
This structure is designed to give the entrepreneur some financial
assets that will be available to him or her and other beneficiaries at a
later stage of life. These financial assets would be difficult for
creditors to attack and, at the same time, they would be protected
against premature disposition because the entrepreneur himself or
herself wanted to use the funds for something else, like another startup
or a trip to the DR or a new car…
The financial assets would probably not be invested aggressively in
‘Petrogold’ penny stocks on the VSE, say. This is supposed to be the
third or fourth ‘silo’ of personal investing, namely:
1. The first silo might be the matrimonial home which, at least in
Canada, is likely to be owned directly by the spouse with the lowest
risk profile. When it is sold, a principal residence in Canada is not
subject to capital gains tax. Also, in most divorces, the matrimonial
home is a shared asset so the value of the home (or a share in it) is
not likely to run away from the entrepreneur.
2. The second silo is other real estate owned or controlled by the
entrepreneur: perhaps a multi-residential dwelling and an office
building that is rented to the operating company. This real estate is
usually owned by a PHC, Personal Holding Company.
3. The third silo is the operating company where the entrepreneur
expects significant returns on equity and where they have perhaps the
most risk. The operating company is also likely to be owned by the PHC.
This structure allows the controlling mind to move money from eligible
Canadian Corporations (say the real estate company or the operating
firm) to the PHC tax free using inter-corporate dividends. Funds are
also moving from the operating company to the real estate company in the
form of a fair market value rent. Real estate also generates CCA,
Capital Cost Allowance, which creates a capital dividend account which
can be divdended out to individual shareholders, tax free. Finally, the
shareholders of the PHC (typically, the entrepreneur and his or her
family) can be paid by the PHC or receive dividends from the PHC so as
to minimize taxes overall. This is an efficient tax structure, creates
diversity in the asset mix and works well operationally.
4. The fourth silo is the Trust we discussed above and it is obviously not owned by your PHC but by the Trustee(s).
These days, if you could see 5% to 6% returns over the long haul from
your principal residence, 8% to 12% from your other real estate
holdings, 18% to 22% ROE in your operating company and 3% to 5% from
your Trust, that would be a realistic and satisfactory result for most
of us.
Here is more information provided by Mark and Susan:
Prof Bruce
Prof Bruce @ 9:18 am
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