News and Tips on structured settlement transfers.

December, 2010

31
Dec 10

Selling Your Structured Settlement Online Now

You’ve got some kind of a structured settlement – maybe from a lawsuit, maybe from winning the lottery, maybe a note secured by a mortgage or a business.

But it’s just sitting there. Your next payment could be months away. You need cash now. What can you do?

Thanks to sites like QMAP, you have access to a fast, easy online marketplace where you can shop your note or settlement to willing buyers to come up with the best deal for you. So – what’s next?

Put out the details of your settlement arrangement, and what you want to sell. You can sell all of the future payments if you want, or sell only a few of them. It really depends on how much cash you need. Using a site like QMAP, you can list the details and get offers from interested buyers.

Shop Around. Like the song says, don’t be sold on the first offer. Every buyer of structured settlements is different. There are some firms who do a high volume of business and have well-known names in the business. Others might be small or start-up businesses looking for a return on your structured settlement. Some firms may start out with a low offer, only to come back with a higher one when you say no. Remember that when you sell a structured settlement, you will receive less in a lump sum than you would have received altogether over time. This is how companies make money – and how you get the cash you need right now.

Fees. Buyers of structured settlements are in the business of making money on the difference between your total payments and the cash they pay you now. But the buyers incur costs in doing so; they have overhead (office staff, communications expenses), legal fees, court fees, and the interest cost of getting access to the cash they will use to buy your note. As a result, the deal you’re offered may include varying amounts of fees. Each offer should be up front about the fees that will come out of your lump-sum settlement.

What’s the Money For? Annuities, particularly those entered into as part of a personal-injury settlement, are intended to support the annuitant for a period of time. The buyer of your settlement is looking to turn a profit, however, and is not concerned with why you want the money or how you plan to spend it, or how the loss of this annuity will affect your personal finances. However, the court may have to review and approve the sale of your settlement, and will want a compelling reason for the sale of your settlement. Don’t be vague. If you want to sell, you should have a good reason to do so, such as a compelling financial emergency, college tuition, or a solid business or investment opportunity. Be prepared to substantiate your reasoning.

If you need help selling your structured settlement, annuity or lottery payments,
contact us today. We are here to answer your questions and help you obtain the
highest possible price for your payments.

30
Dec 10

Why Companies Purchase Structured Settlements

If you’ve got a structured settlement as the result of a lawsuit, or winning the lottery, you may be visiting a site like QMAP to consider the possibility of selling it for up-front quick cash. But what motivates the companies that buy the settlements?

Investment Return. The most compelling reason for a company or investor to get into the structured settlement purchasing business is the potential for huge returns on their investment. Consider that these companies buy all, or part, of the stream of payments you have been guaranteed for just pennies on the dollar. The goal for the purchaser, of course, is to get that lump-sum payment as low as the buyer will accept. The result can be returns substantially greater than any investment on the market.

Security. Once the structured settlement sale has been agreed to and approved, the buyer is virtually assured to get the stream of payments he has purchased. Most structured settlement annuities that result from lawsuits have been set up or purchased through insurance companies, so as long as the insurer is creditworthy and likely to stay in business, there is virtually no risk to the purchaser that he won’t get his cash flow later. Installment payments for lotteries, paid by the government, are even more secure.

Fees. In addition to the return on investment that the purchaser will receive, they can also cover their upfront costs by charging a fee as part of the structured settlement sales transaction.

Getting into the Business. Of course, the purchaser of the structured settlement has a pretty full plate. To get into the business of purchasing structured settlements, the company must have quick access to cash. If the settlement purchaser does not have the cash on hand, he must somehow secure it elsewhere – this means a cash advance on which he will have to pay interest. He’ll likely also incur legal fees getting help with the purchase contract, navigating the court system, etc. There will be overhead, too – office staff, communication costs, and so on. All of this is a substantial up-front investment for a new company in the structured settlement business.

The sale of a structured settlement will have to be approved by the court. Because the court and the seller will want to check the structured settlement buyer’s reputation, it may be difficult for a start-up to compete with bigger, established names. Also, if there has already been substantial work put into finding the seller, figuring up an offering price, and drafting the sales contract, only to have the court refuse to approve the sale, those costs are sunk. Still, even one successful purchase of a structured settlement can cover of that and make an immediate profit.

29
Dec 10

Should You Cash Out Your Structured Settlement?

When you settled your lawsuit, won the lottery, or entered into some other structured transaction, it probably seemed like your best option at the time. But now that some time has passed, and life has happened to you, you might be re-thinking the whole thing. Should you sell what you have for quick cash?

First, understand that if you sell your structured settlement, you will receive much less in a lump-sum than you would have collected over time. Still, there may be very good reasons to take your payout.

Expenses. A financial emergency may be pressing on you. You may be facing unemployment, medical bills, foreclosure, or legal troubles that have become unbearable. If the cash you’ll get from selling your structured settlement is enough to cover and take care of the emergency, then cashing out might be a good idea. Paying off a crushing debt load might be a good reason to cash out too – even though you’ll get less in a lump sum than you would have gotten over time, if you’re facing double-digit credit card interest rates, wiping out the balance could be well worth it. Just don’t get yourself back into debt again.

Education. If you or a family member are going (or going back) to school, cash from your settlement can help cover tuition and fees. But before you cash out for this reason, check other sources of financing. Scholarships or government grants are ideal. If that’s not available, check into student loans. If the interest rate on a student loan is lower than the effective interest rate you’re earning on your structured settlement, you’re better off with the loan.

Going Into Business. Maybe you always wanted to start a business, or you may have stumbled upon an irresistible opportunity. Your settlement may provide the cash you need to pounce on that opportunity quick. Before you sell, consider other possibilities for financing the venture, such as a bank loan or a business partner. And check out your new opportunity thoroughly to make sure it isn’t a scam and that the profit potential is there.

Know Thyself. One more thing to consider: what not having the annuity will do to your future finances. Structured settlements are intended to lock in future income. If you’ve won the lottery, you likely don’t want to work the rest of your life. And if you have a settlement as a result of a personal-injury lawsuit, you may not be able to work. What will you do if that income is no longer there? If you are a spendthrift who has trouble managing money, who is prone to impulse buys of toys and trips, think long and hard before cashing in that settlement.

28
Dec 10

Analyzing Business Financials (part 4):

This is the last part of a series of posts discussing what potential buyers review when considering a business for purchase. This will help potential buyers, as well as potential sellers looking to spruce up their product.

Prior Year Financials. If possible, get financials from the business going back five years or even longer, if available. Check all of the ratios for trends. Look at all the financial ratios discussed in the prior posts to those throughout the industry to see how this particular company is performing. Are things getting better, or worse?

Sales Detail. If possible, find out who’s buying from this business. Are there a lot of first-time buyers? A number of regular buyers? Or are there only a few buyers? Large retailers have been known to pick small suppliers and become their number-one customers, only to later squeeze those retailers for smaller margins, effectively putting those vendors are out of business. If this company has all its eggs in one basket, walk away.

Accounts Payable. Who are the vendors and suppliers this business is using? What are their payment terms? How do those terms compare with the accounts receivable terms, and how well clients are paying their bills? Even if a business is profitable, cash flow is important, so if money is going out faster than coming in, walk away.

Cost Detail. If possible, obtain detail of the specific costs the firm incurs to do business. How are they spending their money? What are they paying their employees? Are the employees’ salaries competitive with similar businesses, or are they overpaying (or underpaying) their staff? What are they spending on sales and advertising? Again, is this competitive in the industry? Consider the expenditure detail and what you would change upon purchasing the business. Are your planned changes something the business – and its clients – would accept and survive?

Location, Location, Location. Just like any good piece of real estate, a business is dependent on the local area for its value. How is the local area doing financially? Are people moving in, or are they leaving? Of course, this isn’t important for all businesses; for example, if most sales are made online and shipped far from the home office, location isn’t quite as important.

Business Valuation. You should seek the help of a professional to perform these evaluations, especially if you are new or unfamiliar to the industry this business is in. Consider enlisting a business broker, someone who makes his living buying and selling businesses (much like real estate). Alternatively, consider a CPA who is certified in business valuation.

Why is this business selling? This is perhaps the most important question to ask of any business that’s up for sale. Why are they looking to sell? Is the owner simply looking to retire, or are they seeing negative trends that have told them it’s time to cash out and run?

27
Dec 10

Analyzing Business Financials (part 3):

In addition to financial statement ratios, here are some things a potential business buyers will consider. This is a resource if you’re looking to buy – or if you’re looking to spruce up a business (or business note) you’d like to sell.

Financial Details. If at all possible, examine the detail underlying transactions for the business. Many entrepreneurs use a business as a tax write-off for items they buy and use personally. This can affect the numbers you’re reviewing in the financials, so be on the lookout for these types of transactions.

Inventory. What do the inventories look like? If you are able to examine the inventories in person, consider whether they look brand new, or whether they have an inch of dust resting on them, implying that they’re not selling. Trust your gut – do you see customers actually wanting to buy this stuff? You might consider taking a business valuation specialist, such as a business broker, with you for this inspection.

Furniture, Fixtures, and Equipment. Much like the inventory, what does it look like? Is it new, or old and broken down? Can you use it? Will it attract potential buyers to your business? Can you use it, or will you have to modify what you have (i.e. pay more money) to make it work? Is it paid in full, or are there still leases in effect that you’ll have to pay?

Liabilities. What does the business owe? Are there outstanding loans or leases? Mortgages? What about contracts with suppliers or employees? What about outstanding liens or other liabilities? Get a good idea of what the business owes – and what you’ll have to pay. A lawyer can be particularly helpful in finding this out.

Taxes. Does the business owe taxes to the IRS or to the state? Are there back tax bills that need to be settled?

Accounts Payable and Accounts Receivable Detail. Again, if possible, take a hard look at the underlying vendors or clients that make up these numbers. Get a solid understanding of the creditworthiness of the business’ clients. How likely are you are to get the cash you’re owed? How much, and how soon, will you have to pay your suppliers? A profitable business means nothing if there is no cash flow, so if Accounts Receivable aren’t converting quickly to cash, this is a red flag. Are those A/R sales legitimate, or could they be fraud?

Returns. Pay close attention to any returns figures listed on the financial statements. Again, this is a favorite place to hide fraudulent “sales” that aren’t turned into cash. Even if there’s no fraud, a high rate of returns does not bode well for the profitability of this business.

Industry. Consider the industry this business is in. Is it a growing industry with lots of potential, or is it stagnating? Is this an emerging line of business that is untested?

27
Dec 10

Analyzing Business Financials (part 2)

If you’re considering buying a business and want to determine its financial health, here are a few more measurements that might help you.

Fixed Asset Turnover. Purchasing of plant and equipment are typically a business’ largest outlays. How well are they performing. Divide revenues by the average property plant and equipment (beginning versus ending PP&E divided by 2). The higher this ratio, the better the business is doing at turning its assets into profit. Of course, not all companies rely on capital expenditures to do business, so keep this in mind.

Sales per Employee. Divide total revenues by the total number of employees to determine how much money the enterprise is making on each employee. A bigger number is better. But, just like Fixed Asset Turnover, keep in mind that all businesses are different; this ratio will look different on a firm that is less labor-intensive.

Gross Profit Margin. Gross Profit is total revenues less the cost of goods sold. Take Gross Profit divided by Sales to determine the gross profit of every dollar of sales.

This measures the company as a whole, however. You can focus this ratio even further to determine the gross profit margin for each type of product sold. For example, if you’re not sure whether Product A or Product B is the better performer, calculate Gross Profit Margin for each of them. Businesses use this type of analysis to determine which product lines to keep.

Operating Profit Margin. To find out the profit on every dollar of sales after all inventory costs and sales expenses are considered, take operating profit (gross profit less operating and sales expenses) divided by total sales. This will give you an even more focused view of what the company is able to retain in profit after all its necessary operating expenses are considered.

Net Profit Margin. The strictest measure of a company’s profitability, this takes Net Profit divided by Sales. This gives you the most narrow measure of how well the company is controlling operating expenses in order to turn a profit.

Operating Cycle. This is the most complicated to calculate, but worth it. If a business isn’t turning sales into cash, it’s not worth your investment. The Operating Cycle is Days Inventories Outstanding plus Days Sales Outstanding less Days Payables Outstanding, where

Days Inventories Outstanding = Average Inventories (beginning inventory plus ending inventory divided by 2), divided by the cost of sales per day (cost of sales / 365).

Days Sales Outstanding = Average accounts receivable (beginning A/R plus ending A/R divided by 2), divided by net sales per day (net sales divided by 365)

Days Payable Outstanding = Average accounts payable (beginning A/P plus ending A/P divided by 2), divided by cost of sales per day (calculated in Days Inventories Outstanding, above).

Once you add these together, you’ll see how many days, on average, it takes a business to turn sales into cash. The shorter the cycle, the more liquid the business.

25
Dec 10

Analyzing Business Financials (part 1)

If you’re holding a note secured by a business and are looking to sell, one of the things a potential buyer will consider is the financial health of the business. There are lots of measures for this, but here is a rundown of some of the key ratios used.

Current Ratio. The current ratio is, simply, total current assets divided by total current liabilities. Current assets and liabilities are those that are immediately liquid, or have a term of less than one year. If this ratio is less than 1, it suggests that the business does not have enough assets to pay off its immediate liabilities.

Quick Ratio. This is much like current ratio, but this formula divides quick assets (current assets less inventory) by current liabilities. The quick ratio takes away the effects of inventory that might make the current ratio look better than it should, since inventories are not immediately liquid.

Accounts Receivable Turnover Ratio. Take accounts receivable at the beginning of the period plus accounts receivable at the end of the period and divide by 2. That’s Average Accounts Receivable. Then divide Sales by Average Accounts Receivable. This gives you some indication of how current the business’ receivables are, and how reliable the customers are for making payments.

Return on Assets. This is a measure of how well management is using its assets to make a profit. Divide Net Income by Average Total Assets (beginning assets plus ending assets divided by 2). The higher the number, the better job management is doing of employing existing assets.

Return on Equity. Divide Net Income by Average Shareholders’ Equity. The higher this ratio, the better the company is doing to maximize the shareholders’ return on their investments.

Operating Cash Flow to Sales. Using the Statement of Cash Flows, divide net cash provided by operating activities to Sales for the year. The higher this ratio, the better job management is doing at turning sales into cash. If this ratio is low, even when sales are increasing, it can indicate that management is doing a poor job of collecting on receivables, extending too much credit, or, worst of all, recording fraudulent sales.

Cash Flow Coverage. Again using the Statement of Cash Flows, divide Net Cash Provided by Operating Activities by Capital Expenditures (expenditures for property, plant, and equipment) OR by short-term debt expenses. The higher either of these ratios, the better the company’s ability to meet its various obligations with cash on hand.

24
Dec 10

The Downside of Annuities (part 2)

This is the second post in a series discussing the pitfalls of annuities, specifically variable annuities. Regulators and the media have given increased attention to these products in recent years, as more cases have surfaced showing they have been sold to people who were unaware of the terms and risks involved.

Risk. A fixed annuity pays a fixed, and stated, rate of return throughout the annuity term, and so is likely invested in very safe, low-return investments. A variable annuity, by contrast, is usually invested in mutual funds or other products that have a higher return but are definitely riskier. While there is certainly a place for higher-return investments as part of an overall financial planning strategy, this could be disastrous if a substantial portion of your retirement savings – money you can’t afford to lose – is parked there. Take a hard look at the underlying investments for any annuity. A sales rep will emphasize attractive returns, but don’t stop there. Find out where, exactly, your money will be invested. Will it be invested in mutual funds based on untested industries or uncertain emerging markets? Will it be invested in high-risk, high-return “junk” bonds?

Death Benefit. Variable annuities often feature a death benefit that guarantees your heirs will receive the full value of the annuity in the event of your death, even if the annuity has lost value. This may sound like a good deal, but it isn’t free. Usually, there is a charge, perhaps one or two percent per year, for this benefit. That doesn’t sound like much, but calculate what this percentage means in real dollars, and then compare this amount to going rates for life insurance. You might be able to buy a life insurance policy outright for the same amount or less, providing exactly the same benefit to your heirs.

Hefty Fees. Variable annuities have notoriously high fees. Why? Because everyone involved needs to make their money. The mutual funds underlying your investment have fees, and those fees have to be passed on to you. The insurance companies want to cover their costs – particularly the commissions they pay on the sale of variable annuities – and so they pass on fees to you, as well. Unless you’re earning above-average returns that cover all of these fees, you would almost assuredly be better off investing your money outright and managing it yourself.

Other than keeping a large sum of money that you could spend too quickly out of your hands, most of what a variable annuity offers could be done on your own. Consider any variable annuity with a skeptical eye.

23
Dec 10

The Downside of Annuities (Part 1)

While an annuity can be a useful part of a retirement plan, the term “Variable Annuity” has become a dirty word in regulatory circles in recent years. There have been thousands of cases of people, particularly seniors, being talked into variable annuities that were completely inappropriate for them.

In 2009, a class action lawsuit against nationally-known insurance company Allianz alleged that some 340,000 people were sold risky variable annuities, and were misled by slick sales reps about the underlying terms and penalties of these annuities. They earn fat commissions on the sales of these products, so the incentive to sell – and the pressure they put on you to buy – is huge. Here are some things to watch out for if you’re being pitched this kind of product.

Surrender Penalty. The insurance companies who sell annuities don’t make any money if you’re able to pull the funds out whenever you want. So they tack on a “surrender penalty,” a percentage that the company deducts from your account if you close your account sooner than they would like. Read the fine print – you may have to wait three, five, seven years or more before you can take your money out without giving up a big percentage of it to do so. That means, if you’re unsatisfied with the annuity company, or if you have a financial emergency and need cash, you lose out big time. And depending on your age and life expectancy, what are the odds that you will outlive that surrender period?

In the Allianz case, the annuitants alleged they were promised an “upfront” bonus for purchasing the annuity that would offset the surrender penalty. The annuitants claimed, however, that Allianz was not on the hook for this bonus for fifteen years, and for some annuitants, the bonus never materialized.

Taxes. Annuity salesmen emphasize that these products grow tax-deferred, and that’s true. While your money is locked up in the annuity, you pay no taxes at all. Once you begin taking withdrawals, you pay taxes on the earnings portion of your annuity. But these earnings are taxed as income at your income tax rate. By contrast, were you to put your money in a mutual fund on your own, the earnings would be taxed each year as capital gains at just 15%. If you’re in a tax bracket higher than that, having your money in an annuity has actually cost you more in taxes.

The next post will address further red flags of variable annuities.

22
Dec 10

Annuities – The Basics

An annuity is, simply, a promise to make a series of regular payments over a period of time. The annuity contract spells out the terms of this promise.

There are various types of annuities, but this discussion centers on those used for retirement or income planning. An annuity can be a great way for someone to guarantee an income for himself and prevent himself from blowing his savings too early.

An immediate annuity is created when someone uses a lump sum of cash, such as accumulated retirement savings, to purchase an annuity. The annuity will consist of payments usually made over the life expectancy of the retiree. A deferred annuity occurs when someone makes periodic payments into an annuity; when all of the payments are made, the annuity begins making periodic payments to the annuitant.

Annuities can be fixed, that is, they pay a fixed interest rate over the life of the payments. This is a very safe and conservative option, but deprives the annuitant (that’s the person receiving the payments) the opportunity to reinvest the annuity funds into an investment with a higher rate of return.

A variable annuity does not provide that guaranteed rate of return, but also allows the annuitant more control over the investments underlying the annuity – and therefore a greater chance at earning more money. Generally the annuitant (and probably his investment advisor) will choose an allocation of investments designed to generate the desired return. The annuity may also call for reallocation at periodic intervals, where the annuitant can change the underlying makeup of his investment portfolio. One downside of this more active management of the annuity funds is the fees involved with buying, selling, or reallocation of the investments.

The structure of your annuity depends on the initial investment, interest rate, underlying investments, your life expectancy, and the beneficiary arrangements on your annuity. Obviously, the longer your life expectancy, the smaller the regular payments must be. If your annuity provides for distributions to your heirs in the event of your premature death, this changes your payments too.

Also important is the financial health of the company who issues your annuity, often an insurance or investment company. If this company becomes defunct, your annuity could be at risk, so you should research and be satisfied with the issuing company’s financial stability prior to buying in.

While an annuity can be an excellent retirement planning tool, there are plenty of investing and tax issues you should consider before deciding if one is right for you. significant risks and tax issues associated with them. Shop around, and talk to a competent financial and tax planning professional before you choose an annuity.

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