 |
 |
||
 |
 |
||
  |
How To Beat The Mutual Fund Companies At Their Own GameYou'd have had to be living on a desert island with no TV, newspaper or internet connection to have missed hearing about the great mutual fund scandal of 2003. The issue was that some mutual fund companies allowed certain hedge funds to engage in after-hours trading, sometimes incorrectly referred to as market timing. Unfortunately, some companies have used the confusion about the term "market timing" to further their own cause. How? They have used this issue to pretty much ban all forms of trading their funds, and some companies are imposing hefty short-term redemption feesâ€"penalties for all intents and purposesâ€"in the name of avoiding impropriety. But the real idea behind it all is: Buy our fund and never sell it! These companies advocate a stubborn Buy & Hold philosophy despite the devastating effects that approach had on investors' portfolios during the recent bear market. Performance is immaterial to themâ€"they want your money in their fund whether it's going up or down. With all of the negative press over the months you'd think that mutual fund companies would have cleaned up their act and started giving more consideration to the individual investor. Not so. This was brought home to me when a fund manager of an $800 million mutual fund called me to see what my plans were in respect to holding our positions with his fund (about $2 million). I explained my trend tracking methodology and he got very angry when he heard I would protect my clients' accumulated profits by selling his fund if it were to drop 7% off its highs. His blustering made it quite clear that he did not like anyone managing for the benefit of their clients; he only cared about what was best for him and his company. So, what can you do to prevent being taken advantage of? For one thing, do what your mutual fund company does â€" not what they tell you to do. Adopt a strategy for following trends, such as I do, and use the mutual fund manger's superior stock picking ability to your advantage by buying and holding only as long as the fund is performing well. Remember, the fund manager has one big disadvantage over you: He always "has to" be invested so that the public can purchase shares in his fund. You don't! If market conditions dictate that you are better off in the safety of a money market account because we are in a severe downtrend, then you can take your money and run for cover. He can't. He is constantly trying to adjust his portfolio to ever-changing economic conditions so that his potential losses are minimized. At the same time you are being told that his fund is the investment for all seasons. Don't fall for it! You as an individual investor are really in the driver's seat. Unfortunately, you have probably been conditioned to think that Buy & Hope is a good investment strategy, when in fact it is a losing proposition. Bottom line is, use a well performing mutual fund during strong up trends and get over to the sidelines during trend reversals. (That's exactly what I did for my clients in October, 2001, and we retained the lion's share of their profits while Buy & Holders kept insisting the emperor was wearing new clothes.) Pretty soon you will feel that you are in charge of your financial destiny and any chosen mutual fund is merely a tool to bring you closer to your goals of maximizing your gain and minimizing your losses. Other articles by this author »
About Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about
objective, methodical approaches to investing for over 10 years. He
eluded the bear market of 2000 and has helped countless people make
better investment decisions. To find out more about his approach
and his FREE Newsletter, please visit: www.successful-investment.com. Related
And here is another random article you might be interested in... How To Create A Business Note That Is More Attractive To A Note InvestorYou are selling your small business (business value under $1 million for this article). You would like the buyer of your business to come in with an all-cash offer, or be able to qualify for an SBA guaranteed loan. However, in many cases the owner of the business ends up taking back the financing because the buyer is not able to make an all-cash offer or does not qualify for an SBA guaranteed loan. So you create a "business note" and you now become the "bank". At first that may seem okay, but after a couple of years of receiving payments you may decide you want to get back into business and you need the cash that is tied up in your business note on which you are receiving payments. So now you want to sell your business note to raise cash for your next business venture. What is it worth? That will depend a lot on how you structured the note. The objective of this article is to help you structure the note so that it is more attractive to a prospective business note buyer. Assumption: This article discusses the structure of a note that includes only the business assets of a business. If a business also includes real estate that is being sold at the same time as the business, that real estate should be sold in a transaction that is financed separately from the business assets. This allows each to be valued and financed in the most optimum manner. For example, it may be possible to finance the real estate with a lower down payment, for a longer term, with a lower interest rate, and without a personal guarantee. The objective of a business note buyer or investor when buying future business note payments is to minimize the risk of a default on the note. Therefore, they look for specific things when evaluating the purchase of future payments from your business note. Those include the following.
Unlike the purchase of a piece of real estate, the tangible assets of a small business may not be adequate to cover the amount due on the business note if the buyer of the business defaults. Therefore, the business note buyer is looking for ways to lessen the likelihood of a default. If there is a default on the note, the business note buyer will require that the business buyer follow through on their personal guarantee which secures the business note. A cash down payment of at least 33 percent should be made by the business buyer. This down payment should not come from borrowed funds. The reason for requiring such a large down payment is to make it less attractive for the buyer to "walk away" from the business if they encounter problems. If they have a significant amount of their own money invested in the business, they may think twice about walking away from the business when things get tough. If the down payment was less than 33 percent, then the business note buyer will require that the difference be made up by additional payments on the business note. The business note buyer wants to see that the new owner of the business has at least a one-third equity investment in the business between the combination of cash down payment and payments made on the business note while operating the business. Business note buyers want to see that at least two monthly payments have been made on the note by the new owner of the business. For new owners of professional practices such as doctors or dentists, a larger number of paid monthly payments will be required. This serves a couple of purposes. It should show that the new owner is generating cash flow from the business. It also allows the new owner to see if the business is meeting their expectations. As part of the "due diligence" performed by the business note buyer, they will interview the new owner to see if any problems exist that might lead to future problems making payments on the business note. They will want to know if the new owner was "mislead" by the seller of the business. The buyer of the business should have a credit score of at least 600. A higher score is required by the business note buyer when the value of future business note payments being purchased reaches a certain level. Any "clouds" on the business buyer's credit history should not be current. These should have been resolved before purchase of the business. The business note must be personally guaranteed by the buyer. It cannot be guaranteed by the company buying your business. Specifically, it cannot be guaranteed by a person signing on behalf of the company. If there is a default, the business note buyer will be coming after the personal assets of the individual(s) making the personal guarantee. A personal financial statement for the buyer should be obtained to verify that they have the necessary assets should it be necessary to fulfill the personal guarantee. The maximum amount a business note buyer will buy in a single transaction is between $300,000 and $450,000. You can create a business note for more than this maximum amount, but the business note buyer won't buy more than their maximum at one time. This means when the period is completed for which payments have been sold any remaining payments will once again come to you. At this point you will have the option of selling future payments again, if you want to. The cash flow of the business must be adequate to service the note and provide additional cash for the new owner to live on. The cash flow should be at least 1.25 times the amount required to service the note. The business should have been in the same location for at least 3 years (4 years for restaurants and bars), and it should have been profitable over that time. The term of the note should not be longer than 72 months with 36 to 60 months being preferred. You can create a business note for longer than the recommended period, but a business note buyer will only buy the number of payments with which they are comfortable. The objective is to minimize the risk to the note buyer. The longer the term, the greater the likelihood that something will go wrong. The note buyer is looking to minimize their risk because the note is not fully secured by the assets of the business. A key item related to the term of the note is the term of the lease of the space in which the business operates. In order to avoid a major disruption to the business due to a problem renewing the lease, the term of the lease should be at least as long as the term of the business note. The business note must be in first lien position. The business note cannot be a second position lien behind a bank loan. If there is a default, the second position lien holder may have a difficult time recovering their investment. The business note should be fully amortized over its term. There cannot be a balloon at the end because there is probably no way to refinance the balloon at the end of the note term. If a bank was not willing to finance the original transaction, it is unlikely that they would be willing to finance the balloon at a later date.(Notes: Some business note buyers may accept a balloon if it can be amortized within 24 months using the same monthly payment used to pay the note. Other business note buyers may buy payments up to a few months before the end of the note term, but leave the balloon for the business note holder.) The business note buyer wants to see that the new owner of the business has prior experience running the type of business being purchased. This is especially important for the purchase of a "high-tech" business or a professional practice. The assumption is that someone with experience in the type of business has a better chance of succeeding than someone without prior experience. One of the biggest factors contributing to the discount that the seller will have to take when selling the future payments is the difference between interest rate on the original business note, and the yield required on their investment by the business note buyer when they buy the future note payments. Therefore, the interest rate on the business note should be set as high as possible while still allowing a monthly payment that can be covered by the cash flow of the business for the term of the note. The deal is not done until the paper work is done. There are stories where people documented the sale of a business on a napkin or restaurant place mat. That will not be adequate if you have any thought of selling your business note in the future. There are four main documents that should be produced. It is recommended that a lawyer be used to help properly prepare these documents. The documents are listed below.
The UCC-1 documents that the seller is holding a "perfected" lien on the business. This document is filed with county government and is part of the public record. If there is a default, this document indicates that the business seller will be first (after tax liens) to receive proceeds from the sale of any business assets. The "chattel security agreement" is a list of the tangible assets of the business. This will usually be the furniture, fixtures, and equipment that are the tangible assets of the business. The intangible assets are things like a loyal customer base that can be lost if the new ownership does not provide the service received from the previous ownership. The chattel security agreement does not become part of the public record, but is necessary to document what the tangible assets were at the time of the business sale. If any vehicles are part of the security for the business, the title of the vehicles should indicate that you are the owner of the vehicles so that the new business owner cannot sell these vehicles without your knowledge. The promissory note documents the details of the sale like value of the note at the time of sale, the term of the note, the monthly payment, the interest rate, and any other special terms such as late payment fees. The purchase agreement ties the whole transaction together. It may contain information that is not specifically contained on the other documents such as provisions to provide periodic financial statements to the seller which could then be made available to a prospective note buyer for evaluation. The promissory note or the purchase agreement should not contain any "offset" statements which would allow the business buyer to deduct from payments made on the note due to problems running the business or problems with equipment purchased as part of the business. If the promissory note or purchase agreement does contain "offsets", then the business note buyer will require at least 6 months of seasoning to see if there have been any events that would activate the "offset" provisions. The following table summarizes the factors contributing to a business note that will be more attractive to a prospective note investor. Note Factor Preferred Value for Note Factor Buyer's Down Payment At least 33% in cash that was not borrowed Minimum Number of Payments Already Made (Seasoning) 2 monthly payments (more are preferred and more are required for professional practices) by the new owner Buyer's Credit History Buyer must have a credit score of at least 600 with no recent "clouds" on credit history Personal Guarantee Personal guarantee required (cannot be a person signing on behalf of corporation or partnership) Total Amount of Payments Being Sold Maximum is $300,000 to $450,000 in a single transaction (note can be created for more than this amount, but the maximum that can be sold at one time is $300,000 to $450,000) Cash Flow of the Business Cash flow should be at least 1.25 times the amount of the monthly payment on the business note. Length of Term of the Note 72 months maximum but 36 to 60 months is preferred (Note can be created for a longer term but business note buyer won't buy the payments beyond a certain point.) Lien Position of the Note First lien position only Amortization of the Note Note must be fully amortized within the note term Experience of the Buyer The buyer should have prior experience in the type of business being purchased. Interest Rate As high as possible such that cash flow can support the required payment for the term of the note. Documentation For Sale
Real estate that is part of the business should be sold in a separate transaction from the business assets Of course, a business note can be structured other than recommended above, especially if the seller does not anticipate selling future note payments. However, if the seller has any thought that they might want to sell future note payments, then the seller should follow the above recommendations as much as possible. If you have an existing business note or are in the process of creating one as part of the sale of a business, and you are thinking about selling some or all of your future payments on that note, then we can help you determine what an investor would be willing to pay for those payments. Please contact us today for a free, no obligation quote on the sale of your future business note payments. Other articles by this author »
About Afra AmirSanjari
Afra AmirSanjari is the Principal for Peacock Capital. Peacock Capital specializes in solving the cash flow challenges of Small/Medium Businesses, Government Vendors and Individuals with innovative financial solutions by providing a network for securing operating capital. Related
|
