Small Business Owners: Take Inflation Into Account
When planning for the future, it is imperative that entrepreneurs take inflation into account. The 3% figure that you hear in the media is really just core inflation. A few years ago the government decided not to include food and energy (two areas where costs have increased most for consumers) in this number. When these and some other key items are properly accounted for, the actual inflation rate may be in the 8-9% range.
So what does that really mean?
Say you have $1 that you want to maintain over the course of 10 years. You do not want to grow the money, or lose it. You just want your dollar at the end of those 10 years. If you keep it in a drawer you will not maintain that $1. Even with the misleading rate of 3%, at the end of year one you have $0.97 and it steadily decreases from there until you have about seventy cents.
We must also realize that whatever the rate is, it will not be the one that applies to us. This is because inflation is specific to individuals, not groups. If you are elderly then the cost of drugs are critical. If you are a teenager you are more concerned the pricing of communication devices and music. If you own an electrical contracting business the cost of copper is on your mind.
It is easy for busy small business owners to focus solely on dollars needed today, but we need to always factor in all deductions. Besides inflation, you have taxes and fees. When choosing an investment strategy or pursuing a business opportunity, think ‘final ROI’. Using the top tax rate and the real inflation rate, a planned $100 profit is really less than $50. Ensure to build in extra income so your money is worth what you need it to be when you are ready to use it.
The Edge is Always People
You are continually bombarded by the financial services industry with suggestions as to where you should put our money. Young entrepreneurs are generally given two options. They should put their capital into either buildings/equipment within their own business, or diversify externally in stocks, bonds, or real estate. They are told that these investments will give them an edge.
Yes, to get ahead you have to have an edge. I will agree with that part. However there is a third capital investment option. This is known as human capital, or simply investing in people. You see, leading technologies, great customers, and new equipment will all help, but many of your competitors have these same inputs, and therefore they aren’t really going to be an edge. But your human capital is something that can’t be copied. This is the actual storage of competencies, knowledge, and skills that will make the difference.
The early growth stages of a business are the optimal times to invest in yourself and your employees. You need to build early income to save anything. These savings should go into people, not stock markets. Don’t get way ahead of yourself. Only later, when earnings are somewhat predictable and stable, does it make sense to consider major external investments in the conventional sense.
The Business of Relationships
You believe you offer your customers what no one else can. But they believe they can always find another source or, at least, something similar. No matter how unique we think our products and services are, they are not the secret sauce. That is what you offer that no one else can. It is a deep relationship based on trust. Relationships are the difference between a service contract approach, in which you do business with someone you know and trust, and a project-oriented approach, which calls for continual bidding and new people.
A while ago I had a client phone me, telling me that I had done an excellent job but they were moving on. I was naturally curious as markets had been strong and this particular client had made a 52% percent in the previous 12 months. Had a competitor made 62%? Would the service be much better? I asked whether they would consider leaving half of the portfolio with us. They declined, saying they would get a lower fee at the bank if they consolidated investments there.
At that moment I realized that we had not yet built a meaningful relationship. It was simply about seeking a supplier who could do a job cheaper. If the main focus is on secondary items instead of overall results then it won’t work. In their mind I was still a commodity. Establishing relationships is crucial. You and your unique business culture are the primary assets you have, and optimizing relationships will generate a higher ROI than anything else you can do.
The Cost of Lost Opportunity
How much is that two-hour lunch break costing you? How much earning power are you wasting when you decide quitting time is a few hours early today? Have you ever asked yourself what the value of your time actually is? The actual dollar-figure of each hour of your life? It can be an eye-opener and an impetus to change work habits.
Your time is valuable to you; everyone who has to sit through dull meetings or who pushes paper without putting much thought into it knows that your time is not being used to its best advantage. You may not be able to control all these time-wasters, but what about those common ones we all encounter? Long lunch breaks, early Friday afternoons, missed meetings, a dead end job. Just how much is it costing you?
If you have a billable rate for clients, you can figure this out quite easily. Say you charge $200 per hour. Does this mean that every hour you are not doing billable work costs you $200? That two-hour lunch break? $400. Leaving a half hour early? $100. How much lost income do you accrue at the end of a week? A month? A year? Maybe $100 loss now and then for the sake of your mental health is worth it; but the cost of frequent lost opportunities can – and do – add up quickly.
You will probably find that your free time is extremely valuable! And your work time becomes that much more efficient.
Common Shareholder Agreement Issues – By Peter Tobias, Barrister & Solicitor
The following is an excellent article written by Peter Tobias that outlines of some of the key items that shareholders should address when they are considering the appropriate terms for a shareholders’ agreement to govern a closely-held business corporation.
1. Will every shareholder or only the holders of a specified number or percentage of shares have the right to nominate a director?
2. Will certain individual shareholders also be officers? If so, what offices and relevant responsibilities, duties and authority?
3. Will certain individual shareholders or directors also be employees? If so, in what kind of employment arrangement, for what salary, what duties, benefits and can they be discharged without cause by a majority of the directors? If they neglect their duties, could they be discharged and be required to sell their shares to the others?
4. What kinds of transactions or actions will require unanimity of the shareholders to approve? Are there other transactions which require less than unanimity, perhaps 51%, 66 2/3% or 75% of the voting shares? Consider major financing, capital expenditures, business transactions, or the sale of the business or a major part of it.
5. Is any personal security or loans to be given by the shareholders to support obligations or borrowing by the corporation? If personal security or advances are given, is each of the shareholders to indemnify the others so that the potential exposure to loss is proportionate to the relative holdings of shares?
6. Are there any assets held by any of the individual shareholders such as real property, trademarks, recipes, formulas, machinery or other things which should be clearly transferred to and held in the corporation before the others join as shareholders?
7. Are the distributable funds or profits to be distributed equally in proportion to the holding of shares? Are certain performance bonuses to be paid first before calculating profit? Is repayment of loans made by current or former shareholders to be paid before coming to any amount which is available for distribution?
8. Is there to be an outright prohibition on the transfer of shares by the current shareholders without complying with the kinds of provisions discussed below, or is there an intention to allow transfers by Will, to a holding company or trust without permission if the principal or current controlling group remains in control and the holders by virtue of the transfer are immediate family members of the original holder?
9. Is there to be any restriction on the issue of additional shares? Does any one or more of the shareholders have a preemptive right to take all or any of the issuance of the additional shares?
10. Does any shareholder have the right to demand that any of the other shareholders or all of them to purchase its, his or her shares should certain conditions occur?
11. Does any shareholder have the right to call on any of the other shareholders to sell his, her or its shares should certain conditions occur?
12. Is there to be a right of first refusal over shares proposed to be sold by a shareholder? If so, would it require the shareholder proposing to sell to offer to the other shareholders first, and only if they refused to purchase on the proposed terms, the shareholder proposing to sell could sell to a third party? Or, in the alternative, would a shareholder proposing sale be required to find a willing buyer who would make a written offer, which the other shareholders would then have a period of time to match?
13. Is there any reason to have a shot-gun by sell to deal with a potential impasse in the operation and ownership of the corporation?
14. How will the shares of a shareholder who breaches a contract with the corporation, quits their employment, competes or commits some other default be dealt with?
15. How will the shares of an individual shareholder who had died be dealt with? Does the corporation have insurance on any or all of the lives of the shareholders?
16. Would the shareholders be prepared to take on confidentiality obligations? Non-competition and non-solicitation obligations? If so, would these run for a certain reasonable time after the departure of the person from the business? In determining this, what product area, geographic territory and period would apply?
17. Would the shareholders prefer to use arbitration to settle disputes, or would they prefer to have direct access to the courts?
As you can see, there are a number of considerations that go into shareholders agreement. Peter does an excellent job of laying them out for you but I recommend talking with a qualified individual to ensure you have all of your bases covered.
