As I outlined in the post RIPPING business owners who think you should shop local TO SHREDS, I’m convinced a full 90% of small business owners are disgruntled ex-employees who decided that they were going to be the boss, dargbloomit.
Because these folks aren’t entering the venture with the proper mindset, they make a lot of mistakes. Ultimately, they boil down to the same handful of things over and over (and over) again.
Here are 5 of the most common mistakes business owners make.
A local photography shop personifies this common business mistake.
They’ve got a nice studio and are only one of three locations in town that can take passport pictures. They do a reasonable passport business and a few family portraits, too.
Desperate to increase their business, the photography place decided to expand into retail. Soon the front of the studio was filled with used DVDs and other such nonsense. It’s not even photography related!
Why this place wanted to expand into retail is beyond me. Then, friends of mine went to ask the photographer for engagement/wedding photos. They had a budget of $500 for engagement shots and $2,500 for the wedding.
The response? “I’m not interested in dealing with Bridezillas.”
So to review, instead of expanding into the wedding picture business with 10 times the margin of passport photos, this photography studio decided to sell junk. Why expand into something you’re not good at when there’s a big opportunity in your core business staring you in the face?
This brings me to point two…
There’s a really easy way for the average small business to put themselves head and shoulders above the competition.
Be good at what you do.
An example? Don’t mind if I do. Most of the time, interactions with small business owners go something like this.
“Hey, I’d like (item). Can you get it in for me?”
“I don’t know. Can you give me a little time to check and I’ll call you?”
(two weeks later)
“Hey, did you look into that item for me?
“I’M WORKING ON IT. GOD. STOP HASSLING ME.”
If you’re providing a service, the way you present yourself is equally as important as actually doing the damn job. In Alberta, right now there are thousands of former oilfield employees who have decided to become handymen. Most of them struggle because they aren’t professional. They do things like providing verbal instead of written quotes and don’t show up when they’re supposed to.
There are a million ways to differentiate a business from its competitors. You can be cheaper than the rest. You can do a better job. You can offer a unique spin on a product or service. And so on. But — and this is crucially important — you can’t do all those things. Pick one and become incredibly good at it. Expansion should only be considered once you’ve mastered the original business.
A word of caution before committing to be the lowest priced operator. This is much tougher than you’d ever imagine. There’s a reason why your competitors charge what they do.
Easy payment solutions
I can’t believe how many businesses don’t make it easy for customers to pay them.
Getting back to the contractor example above, an incredibly straightforward way for a handyman or plumber to differentiate themselves would be to accept credit card payments. A good way to accept payments is with Paysafe, as they have everything you need to accept and process payments globally. Technology makes doing this incredibly easy. All you need is a smartphone reader and a 20-minute lesson on how to use the software.
It’s not just about credit cards, either. If none of your competitors offer payment by cheque, do that. Ideally, the more options you can offer, the better.
Don’t make it difficult for customers to pay you. It’s that simple.
Skipping on marketing
This was one of my big problems as the World’s Worst Mortgage Broker(TM). I assumed people would just find me because I was the only broker in town.
This was not a smart way to do business.
Here’s the math I didn’t get back then. Say the average mortgage paid me $1,500. If I spent $300 per mortgage transaction on marketing, I’d still make a net profit of $1,200 for approximately 5 hours of work.
Instead I dabbled in free stuff. I built a Twitter and Facebook page before abandoning both after a month. I started a mortgage blog that lasted about six posts (and wasn’t read by anyone except me, either).
Spend a minimum of 20% of revenue on marketing. Don’t have 20% to spare? Then you need to get into a better business.
Follow a simple rule when it comes to spending your precious capital. Track the return of every dollar meticulously.
Say it cost you $20,000 to open your own hair studio, cash that was borrowed at a 10% interest rate. Anxious to pay off the debt, you throw every extra nickel towards the $20,000. In a year, that bad boy is paid off.
But at what cost? Say that $20,000 could have been invested in fancy machines that do perms (Do ladies still get perms? Serious question). Those machines generate an additional $10,000 in annual profit.
Paying off the debt immediately saves our hero $2,000 in annual interest. But it comes at the cost of $10,000 in missed profits. As long as subsequent investments generate more than $2,000 each year in profits, the debt should remain as long as possible. Even at 10%.
Unless you have the kind of generous parents who can afford to drop tens of thousands of dollars on your education, it looks like you’re going to be stuck paying for your own education. Don’t sweat it. Having to pay for things yourself builds character.
Most people pay for their post-secondary using a combination of factors. Many will work during the summer months. Some will be able to hit up scholarships. And others will have a sugar daddy, willing to give them cash in exchange for, uh, companionship.
That last method isn’t recommended, especially if you’re a dude.
The process is mostly the same in the United States, but slightly different enough to warrant a blog post. Here are four significant differences with student loans between the two nations.
Related: the case against going to college
College is crazy expensive in the United States versus Canada. Especially when you compare elite schools down south to equivalent institutions up here.
Take McGill, one of Canada’s top schools. A student from Quebec will only pay $2,328 per year in tuition. Someone from one of Canada’s other provinces will pay $7,227 annually, while international students will pay between $15,000 and $40,000. Each will also have to pay an additional $1,000 for books.
Compare that to Brown, which is one of America’s top schools. Tuition for the 2017-18 school year is $52,231. How anyone affords that is beyond me.
What ends up happening is U.S. students end up much deeper in debt than their Canadian peers. The average Canadian ends up with approximately $25,000 in student debt after their university degree is completed. The average American student will owe more than $37,000.
Both Canadian and American student loans are administered by their respective governments. But Canadian borrowers will likely deal with their provincial government rather than the feds.
Here’s how the Canadian system works. The federal government comes up with a certain number of guidelines. Each individual province decides whether they’ll follow these rules or tweak them to their own liking. Quebec, naturally, has its own set of rules. So does Ontario and Alberta.
In the United States, loans are handled exclusively by the federal government through the Federal Student Aid program.
Working with banks
In the United States, many student loans are issued by the federal government itself. These loans are called Stafford and Perkins loans, and are directly subsidized by the U.S. government. These loans are capped at approximately $10,000 per year for each student.
This isn’t enough for the average borrower, so many turn to private student loans. The largest player in this part of the market is Sallie Mae, which specializes in student debt. Sallie Mae has approximately $150 billion in student loans outstanding. In addition, many banks offer private student loans.
In Canada, most student loans are done directly with the government. Students can borrow up to the cost of their tuition each year from the feds, plus a top-up for books and other incidentals. If a borrower needs more, they can then hit up a private bank for more cash. Banks tend to market their loans to people who need more than the average loan – like doctors.
For the most part, whether you live in Canada or the United States, you have to pay back your student loans. Bankruptcy won’t get rid of them, either.
There are loan forgiveness programs in both Canada and the United States. In the U.S., you must first get a job with the government or an approved not-for-profit organization. Then, after you’ve already made 120 qualifying monthly payments, you can apply to have your remaining student loan balance forgiven.
It’s a little different in Canada. Doctors and nurses who work in remote communities can apply to have their student loans forgiven. There are also several provincial programs that will forgive a portion of someone’s student loans (via tax credits) if they live and work in a province for a certain amount of time.
The bottom line
Essentially, both Canada and the United States have very similar systems designed to encourage as many people to attend school as possible. There are only small differences between the two. For more information about Canadian student loans, consult a student loan expert.
That’s not even clickbait, either. I really did that well.
Let me take you kids back to a special time in my life, last week. Ah, last week. What a time to be alive. We weren’t at war with North Korea and the UTTER HORROR of the Fyre Festival was yet to be upon us.
And your BOY Nelly was buying himself a stock.
That stock was Canam Group Inc. (TSX:CAM), which might be in the most boring business in the history of the world. The company is the largest fabricator of steel components in North America. These steel structures are then used in buildings, stadiums, bridges, and so on.
Canam has also historically been in the stadium roof business. If you know a stadium with a retractable roof, chances are Canam was involved in it. The roof business isn’t as steady as the steel structures business, since these roofs are complex. In 2011, Canam posted big losses because the new roof for Vancouver’s B.C. Place ended up costing much more than anticipated. The same thing happened in 2016 with some unnamed roof project that was probably the new Atlanta Falcons stadium. So management officially announced they are getting out of the stadium business.
Canam shares ended up reaching a low of $3.19 in late 2011 before recovering to more than $15 in 2014. A similar decline just happened, shares fell from a peak of $15 to below $6 before recovering a bit.
There was more to like about Canam, too. Earnings came in at $1.08 per share in 2015, $0.70 in 2014 and $0.74 in 2013. The company was clearly capable of posting decent earnings when things went right. Shares also traded approximately 50% lower than their stated book value. And I was paid a decent dividend of around 2.5% to wait.
So I jumped in on Tuesday and bought shares at $6.30 each. I set a target price of between $13 and $14, expecting the stock to trade at that level in 2-3 years.
It didn’t take nearly that long. On Thursday morning I woke up to news the founding family (along with a private equity firm) were taking the company private with a bid of $12.30 per share. Shares immediately opened at $12.15 each, and I sold into the strength. I got $12.17 each for my shares.
That translates into a 93.2% return in just two days. If we want to get frisky (or if I just want to brag), that works out to a 17,009% return annualized. Hot diggity daffodils!
And it was in my TFSA account, so that bad boy was all tax free. Now I just need to figure out where to put my new cash. I’m thinking all on red, baby!
Other stocks I bought
I won’t spend too much time on these, mostly because I have other crap to do. What? Video games count.
The first stock I bought was Yellow Media (TSX:Y). Yes, I’m well aware the Yellow Pages are no longer a thing. Approximately 70% of the company’s revenue in 2017 will be from its digital business, which is growing well and has plenty of potential for consolidation.
Free cash flow in 2016 was $97 million. Shares have a current market cap of $207 million. That puts shares at just a little over 2x free cash flow. Yellow Media might really be the cheapest stock in Canada.
Debt is a bit of a concern, with approximately $400 million outstanding. There are about $300 million worth of secured notes with a 9.25% interest rate that mature on Nov 30th, 2018. If free cash flow doesn’t fall off a cliff, I think $150 million of additional debt could be paid off by the maturity date. They also have the right to refinance starting May 31st.
I paid $7.95 each for my Yellow Media shares, so I’m down a little today. My target price is $18.
The other stock I picked up in the last month was Canaccord Genuity (TSX:CF). Now that I think about it, it’s a lot like Canam. Canaccord has a decent niche in the investment banking world, as well as an active wealth management business. Investment banking in Canada was the shits in 2016, but has recovered somewhat this year.
Canaccord also has a mountain of cash on its balance sheet and only a tiny bit of debt. Shares were just a little above tangible book value when I bought (I paid $4.83) and the company had posted earnings of $0.39 per share as recently as 2014. Management also bought back shares when the price was low.
Canaccord shares get crushed every time the capital markets part of the business falls into the toilet. It happened in 2008, 2011-12, and 2014-15. Each time Canaccord shares either doubled or tripled off their lows in a couple of years. I’m hoping to do the same. My target price is $12.
Hey, he’s back!
You guys are only excited because of incredibly low expectations, but I’ll take it.
Let’s talk a little about share buybacks. For those of you who don’t know what in the prey hell a share buyback is, it’s when a company takes extra money and uses it to buy its shares back in the open market.
A simple example. Say you had a $1 million company that’s divided into a million shares, each worth a dollar. It earns $100,000 one year, capital that doesn’t need to be reinvested in the business. So you decide to use the cash to buy back shares. Your company is still worth $1 million but there’s only 900,000 shares outstanding. So each share is now worth $1.11.
It’s easy to see why the holders of the remaining 900,000 shares are fans of this scenario. Their shares are worth more despite not doing a damn thing.
Many top companies regularly buyback shares, but they really half-ass it. Each year, management get a certain number of shares as bonuses, mostly just for existing. To mask that dilution, companies will buy back just enough shares so the total outstanding shares don’t go up.
Aside: Here’s what I’m talking about — enough with the joke share buybacks.
I recently discovered an ETF dedicated to share buybacks. The First Asset Canadian Buyback Index ETF (TSX:FBE) “provides investors with exposure to a portfolio of equity securities of quality companies with active share buyback programs that have significantly and consistently reduced their issued and outstanding share count.”
Does it deliver? Let’s take a closer look.
The terrible ETF
There’s a simple way to check whether this ETF delivers on its promises. We can look at the top 10 holdings and see what’s happened to the share count from the end of 2013 to 2016.
Let’s table this up, bitches.
||% Change in Share Count
|West Fraser Timber
|Brookfield Asset Mgmt
|Canadian National Railway
So, overall, that ain’t bad. A total of four out of ten increased their share counts in the preceding three years, but two did so only marginally. WE’RE ONTO YOU, ROGERS AND CAMECO.
The fund has 40 total holdings, but it doesn’t actually put the holdings online, so I needed to consult the latest fact sheet. It’s limited to the top 10.
Before writing this post the most recent fact sheet I could find was from September 30th. Here are the top 10 holdings back then. Try to stifle your laughter.
||% Change in Share Count
The holdings back in September decreased their total share count by less than 1% on average over the preceding three years. Encana did two major share issues in the preceding three years. The CEO of Constellation Software has gone on record and said he dislikes share buybacks.
These are the kinds of companies to be included in a share buyback ETF? Really?
Check under the hood
Before we give this ETF too much crap, keep in mind it follows the CIBC Canadian Buyback Index, which actually has a history of outperformance.
Still, you’d think the index would be built in a specific way. The companies with the largest share buybacks would be top positions, while the ones that don’t make any significant progress wouldn’t make the list.
But it isn’t set up that way. Aimia has repurchased 12% of its outstanding shares since 2013. Telus has bought back 5.4% of its shares. They don’t show up anywhere in the top 10 holdings. The top holdings are a mix of true share buyback superstars and companies who take the practice as seriously as I take my latest diet.
The lesson is to look under the hood of these specialty ETFs. Which takes away from the entire point of buying an ETF in the first place. You don’t buy ETFs to do research. If you do the work, you might as well just build your own portfolio.
Anyhoo, if you’re looking for companies that buyback their shares on a regular basis, you can probably do better than the First Asset Buyback ETF. Just too many swings and misses.
It used to be that reverse mortgages were only considered as a last resort – like breaking the piggy bank once all other sources of retirement income have run out. However, this is no longer the case and a growing number of advisers are recommending reverse mortgages for their clients. Now, this is not to say that reverse mortgages are right for everyone. But if you are considering one, then here are five reasons why reverse mortgages can help retirees.
Before we get started, let’s look at what a reverse mortgage is. In simplest terms, these loans allow seniors to tap into the equity they have built up in their homes without having to make any payments on the interest or principal if they live in their home.
These loans have been around since the 1960’s and are only available to seniors age 62 or older. As mentioned, there are no monthly payments but borrowers will have to show that they can continue to pay property taxes, utilities, and homeowner’s insurance.
Perceptions of reverse mortgages are changing. According to All Reverse Mortgage, a direct lender of reverse mortgages in California, the program ‘has helped thousands of homeowners to safely access the equity in their home to better enjoy your retirement years.’
With that in mind, here are the reasons why a reverse mortgage can help in retirement.
Control Your Spending
Living on a fixed income requires discipline, a lot of discipline. For retirees, this means balancing withdrawals from their investment portfolios and savings accounts. However, this can be tricky – especially if their portfolio is comprised on securities – as timing withdrawals can be difficult at best.
This is one way which reverse mortgages can help as the added liquidity helps to balance out withdrawals and in some cases, can even allow retirees to keep the principal in their retirement portfolio. Doing so allows them to grow their account at a time when the added income can help to cover the costs of living longer more active lives.
Another plus of this approach is that retirees can use their reverse mortgage as a line of credit. This way they can use the reverse mortgage to cover regular monthly expenses and then time withdrawals from their core portfolio to pay down the balance.
Delaying Social Security
Did you know that delaying Social Security until the age of 70 can increase the benefit by more than 30%? While this sounds great, for many seniors holding off on applying for Social Security can be difficult to achieve.
Enter the reverse mortgage. By using this tool, senior can get the extra income they need to bridge the gap until Social Security kicks in. Granted, you don’t want to drain all the equity you have built up in your home; but small monthly payments can help to supplement income.
Paying Taxes from IRA Conversions
IRAs are a great retirement savings tool. However, converting a 401(k) or a traditional IRA accounts to a Roth IRA account does have one downside – taxes. Especially if you haven’t reached the age of 70 ½.
As such, a reverse mortgage can give you access to tax-free capital which can be used to pay the taxman when you convert your IRA. I know they should have made it simpler but let’s face it we are talking about taxes here and nothing is every that simple.
Increase the Size of Your Estate
I realize this might sound counterintuitive as one of the biggest concerns about reverse mortgages is how they will affect one’s estate. However, the reality is that a home is a single asset – and one which might rise or fall depending on market conditions.
As such, a reverse mortgage is a way to reallocate some of the equity into different investment vehicles – some which may grow faster than the value of a home. Thus, reverse mortgages can help to increase the size of your estate.
Setting Up a Rainy-Day Fund
Unexpected expenses can be the bain of your retirement as they can deplete the savings you have built up over years. As such, reverse mortgages can help to cushion the blow of expected expenses during retirement. In this way, you can pay the expenses while not having to worry about what will come next.