News and Tips on structured settlement transfers.

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.

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Uncategorized
25
Dec

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.

Annuities
24
Dec

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.

Annuities
23
Dec

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.

Annuities / Tips
22
Dec

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.

Tips
21
Dec

Who Can Take My Lottery Money?

Congratulations! All of your numbers match up and you are the proud winner of a huge lottery prize! Time to start thinking about the cars, mansions, and vacations you will buy, right? Maybe not. As soon as word gets out about your newfound wealth, there are sure to be others to stake a claim.

Ex-Spouse. It’s fairly well-established that if you win the lottery while married, the winnings become joint property. Things get more cloudy, however, if there is a pre-nuptial or post-nuptial (yes, there is such a thing) agreement, or if the winning ticket is purchased after you’ve separated but before the divorce is final. Much of it depends on where you live, but the court can also take into consideration the circumstances surrounding the purchase of the ticket, the duration of the marriage, whether the marriage produced any children, and so on. Even if a court decides that your lottery winnings are all yours, your ex will likely want to revisit any child-support arrangements you might have.

IRS. Before you collect a penny of your winnings, the Feds will take their cut. If you’ve won more than $5,000, 28% is taken off the top and you will receive a Form W-2G to help you report your winnings on your tax return. If you opt for your winnings in an annuity, tax is withheld on the annuity payment each year.

State. If your state has an income tax, they will get a cut, too. Additionally, if you’ve racked up a tab for, say, delinquent child support or back taxes, you’ll have to settle up before you make that shopping list.

Everyone Else. Of course, you’ll get requests from every charity, would-be entrepreneur, relative, friend, ex-lover, and anyone else you’ve met for money. But be extra vigilant for underhanded attempts to get at your fortune. Watch out for bogus invoices from companies you’ve never heard of showing up in the mail. Collections agents may resurrect old or invalid debts and try to collect, even though they have no right to do so (they do this to people who haven’t won the lottery, too). Lots of lawyers and financial advisors will offer their services to you, but check references to make sure they’re competent and legit. And, unpleasant as it may be, think about your personal safety.

You. Plenty of lottery winners have overspent and gone broke. Think of yourself as your own worst enemy, especially if you’ve had money troubles in the past. Avoid major changes in lifestyle; a fleet of sailboats or several vacation homes might be fun to own, but the upkeep and taxes will drain your fortune, too. Get with that financial advisor you hired to set up a strict budget.

Notes / Sellers / Tips
21
Dec

Selling a Business Note

If you owned a business and sold it, the purchaser may have given you some cash and a note for the balance. If you’d rather not wait for payments and want to sell that note now, you can exchange some or all of the future payments in exchange for a lump sum up front. Like a sale of a structured settlement or lottery award, you will receive less in total than you would have over time, but if you need cash right away, this may be a good option.

When considering what your business note might be worth, prospective buyers consider many factors, including the following:

Note Terms. The longer the term of your note, the less it is likely to be worth to a purchaser; they don’t like to wait for their cash, either. Five years (60 months) appears to be a rule of thumb, investors don’t like to see longer terms than this.

Interest Rate. Of course, prospective buyers stand to make more money on a note with a higher interest rate, and will pay more for it.

Down Payment. A larger down payment made when the buyer purchased your business indicates a stronger business and a more creditworthy note payor.

Business Characteristics: Is this business in a growing field? How established is it? How strong is its client base? How have sales been lately?

Assets. The business is the collateral for the note, but what does the business own? Does it have strong financials, a good cash balance, and valuable underlying assets?

Liabilities. The prospective buyer is certain to check for other potential claims against the business, such as loans, lawsuits, or tax liens.

Seasoning. Investors often like to see that one or two payments have already been made against the note; this is referred to as “seasoning.” A successful payment history suggests that default is less likely in the future.

Should you enter into an agreement to sell your note, you’ll need to assemble documents for the buyer.

Notes and Contracts: You’ll need the actual promissory note you received, and the contract for the sale of the business.

Security Agreement: This is the contract that demonstrates your interest in the business itself if the payments aren’t made on the note – in other words, it proves your collateral.

Proof of payments made on the note to date.

Financial statements and/or tax returns for the business.

This is a short list, of course, and you may be asked for much more. Bottom line is, the prospective buyer will want lots of assurance as to the strength of the note.

Tips
19
Dec

All in the Letters – A Guide to Financial Advisor Certifications

If you are shopping around for a competent financial advisor, or FA, to help you decide whether to sell a structure settlement, or the best way to invest the proceeds, you should consider their education, experience, and expertise. One easy way to get an idea of a prospective FA’s background is to look at the letters after his name; that is, whether he carries any special certifications or professional designations. Attainment of any of these suggests a minimum level of knowledge and/or work experience. Here’s a guide to some of the more likely ones you’ll see when evaluating prospective advisors.

Designations of professionals with general financial planning knowledge:

CPA – Certified Public Accountant. CPAs have studied accounting and have passed exams to earn the certification. CPAs can specialize in a number of areas, however, so if you are seeking a CPA who has further expertise in financial planning, look for the PFS, or Personal Finance Specialist, designation.

CFP – Certified Financial Planner. This designation is given by the Certified Financial Planner Board of Standards, Inc., to candidates who have completed extensive study in financial planning, have passed certification exams, and have attained experience in financial planning.

ChFC – Chartered Financial Consultant. Much like CFPs, the ChFC has demonstrated knowledge of financial planning topics, passed certification exams, and has gained related work experience.

Designations of professionals who concentrate on investments:

CFA – Certified Financial Analyst. A designation for professionals who have at least three years of work experience and who have passed rigorous exams concentrating on portfolio management and investment analysis.

CFS – Certified Fund Specialist. This professional concentrates on analysis and investment in mutual funds.

CIC – Chartered Investment Counselor. Another designation that emphasizes investing.

Designations of professionals who concentrate on insurance and estate planning:

CFTA – Certified Trust and Financial Advisor. This person has passed an exam that focuses on retirement and estate planning, investment management, and taxation.

CLU – Chartered Life Underwriter. This is a designation administered by the American College, and goes to individuals who have demonstrated expertise in the areas of estate planning and life insurance.

This is far from an exhaustive list; many other designations exist, each with their own qualifications. While a professional certification should not be your sole criterion for choosing a financial advisor, the institutions that award these designations usually require the professionals to maintain certain ethical standards and even continuing education. You might consider giving a few bonus points to these professionals when choosing the one who will help you.

Structured Settlements / Tips
18
Dec

Finding the Right Financial Advisor

Virtually every post here has recommended that a prospective seller of a settlement, lottery award, or mortgage note seek the advice of both legal and financial counsel. You can open the phone book to “Accountants” “Financial Advisors,” or “Financial Planners” to get a list of names, but this isn’t enough to find someone qualified to help you.

References. Talk to people you know about how and where they get financial and investing advice. Find out what types of services they got from the professionals they hired; optimally, you want someone who handles your type of settlement on a regular basis. If you have a settlement as a result of a lawsuit, your attorney might have suggestions, but you should evaluate their recommendations with the same critical eye as any other.

Professional Associations. Accountants and financial advisors often belong to professional associations, such as the American Institute of Certified Public Accountants or the National Association of Personal Financial Advisors. Find your local chapter for these organizations and talk to them. Ask about members who’ve handled your type of situation before.

Beware. Beware of financial advisors who work on commission, or who work solely with one or two investment organizations. Beware any accountant or advisor who guarantees investment returns and glosses over the risks. If they’re anxious to get their hands on a large sum of cash, they may be too eager for you to sell your settlement, rather than give you objective advice about all of your options.

Fees. Many financial advisors work for “fee-based,” “fee-plus-commission,” or “commission-based” compensation. This means that they earn a commission or the products or services they sell you. While this is legal and doesn’t mean the advisor is dishonest, it may lead him to steer you toward the products that will earn him a commission. By contrast, a “fee-only” financial advisor doesn’t work for commission; you will pay him directly for his services. While this means a cash outlay up front for you, it also means he has no incentive to lead you toward a particular product and may give you more objective advice.

Certifications. Look at any professional designations your prospective advisor has. Designations such as CPA (Certified Public Accountant) or CFP (Certified Financial Planner) indicate that the person has certain levels of education and/or has passed certification exams. Ask the prospective advisor about his qualifications. If he has a professional designation, check to make sure the designation is still active and good standing. For example, you can check with your state’s regulatory agency for Certified Public Accountants to ensure a CPA has a valid license.

The Interview. Most importantly, talk with your prospective advisor on the phone or in person. Get the details about his qualifications, and determine whether his areas of expertise meet your needs. Ask about prior experience with your type of settlement. Ask him specifically about relationships with investment and insurance companies, and how you can be sure that his advice is independent and objective.

Uncategorized
18
Dec

What is Pre-Settlement Funding?

If you are the plaintiff in a personal injury case, you may have been approached about something called pre-settlement funding, litigation funding, personal injury funding, or accident funding. Alternatively, your attorney may have suggested you consider the possibility. So, what is it?

Pre-settlement funding is, essentially, a loan (even though it is not called a loan) against the expected value of your lawsuit, once it is resolved. You make a promise to repay this loan once (and if) the lawsuit is decided or otherwise settled. Of course, there will be interest on the repayment, so you will pay back more than the original amount of the loan. Since a lawsuit can take months or even years, the plaintiff – especially if an injury has made him unable to work – might be in dire need for cash, and this is the most compelling reason to choose pre-settlement funding. However, much like selling an annuity or structured settlement, you can expect to get much less cash from a pre-settlement funder than you would from an outright settlement. The main reason to seek out such a settlement is some immediate need for cash.

So, consider whether you truly need cash up front. Consider whether other funding sources are available to take care of the bills you are facing. Carefully evaluate any offers you receive to make sure what you give up in the future is worth what you need now.

Pre-settlement funding loans are usually “non-recourse,” that is, there is no obligation for you to repay the advance, even if you do not reach a settlement or your lawsuit is unsuccessful. As a result, the prospective lender will take a critical eye of you and your lawsuit in order to compensate them for their risk. The amount of money that your prospective lawsuit is worth to them can vary greatly, from a few hundred to several thousand dollars.

Expect that prospective lenders will contact your attorney to talk about the specifics of your case, especially the likelihood that you will prevail. There may also be specific requirements for a pre-settlement funding, depending on the state where you live. Prospective lenders will likely charge a generous discount rate in order to cover their costs, the risks of taking on a loan to you, and to make a profit. You can also expect that there will be fees over and above the discount rate, such as “legal fees,” “processing fees,” or “origination fees.”

Should your suit be successful, you’re on the hook. So make sure that any pre-settlement funding is absolutely your best option.

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News and Tips on structured settlement transfers.

Let Companies Compete to Buy your Structured Settlement!

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