Finance

10 Investment Opportunities For Entrepreneurs

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One thing often associated with entrepreneurs is that they are not averse to taking the occasional risk or two, with their attitude being that, over time, the wins will outweigh the losses. Risk also plays a part in investment planning, and as all financial planners who are honest with you will tell you,  there is some level of risk that the value could go down in every investment.

Thankfully, with effective investment planning and professional financial planners advising you, your experience should be one of rising investment values rather than diminishing ones. That brings us to the question of what investments you will make.

When discussing investments with your financial planner, you will soon discover several ways to invest money, and the characteristics of each one vary. Some investments are incredibly high risk; others have minimal risk. Some are complex; others are simple. Some offer high returns, others steady growth. As you can imagine, with all those variations, investment planning means making several decisions.

To get you started toward making some choices, we have listed ten investment options that many entrepreneurs have opted for. Not all of them may be recommended by your financial or investment planner, and the returns and risks vary greatly, so make your choices wisely.

Savings Accounts: One of the more straightforward and very low-risk options where you deposit your cash in a high-interest savings account or term account, and your balance increases due to compound interest being applied over time.

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Why is it so difficult to value a business?

Why is it so difficult to value a business?

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You are your reviewing your personal situation and you need to value your business, for estate planning purposes or in case you are planning to sell the business. You see ten different valuators and everyone comes up with a different value of your business and everyone has a disclaimer saying that the actual selling price could be different. The true value of the business is what someone is willing to pay.

Until you find that person, you never know what the final price will be. When you sell your house, if you live in a subdivision, many houses are either identical or very similar, the lot is the same, the front elevation may look different but the house is very similar. One house may have a few more upgrades and you can factor that into differentiating the two houses. It is much easier to value a house because you can compare it to the house that sold in the same neighbourhood.

When if comes to a business, no two businesses are identical. You have have a franchise with identical name, price of products etc but no two locations have the same value – why? Each location is unique, the traffic count could be different, the product mix could be different, the average purchase price and average sales per customer can be different. What is the same between these two businesses – the name and nothing else. One location could be making money and another could be losing money, they cannot be valued the same.

Many years ago I saw a fast food franchise, it was in an office building. Two main tenants of the building moved out but were still paying the rent because they were unable to sublet the space. As far as the landlord was concerned, the building was fully occupied however the head count in the building was down by 50% because of so many vacant floors in the building. As a result of the lack of people in the building, the fast food restaurant was struggling and ultimately went bankrupt.

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Consequences of using withholding taxes as cashflow instead of paying the government

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Times are tough and suppliers are slow paying. You have bills to pay, the bank is not lending you more money but you have collected sales taxes from customers, you have paid your employees their net pay but you have not remitted the withholding taxes to the government, should you dip into those funds and use them for running the business? The answer is no, you should not dip into the trust money. You collected it on behalf of the government and if you use their money, there are significant penalties that will result.

The government tax authorities are not lenient when you use their money. They may lien your company, seize bank accounts and create havoc on the operations of the business. I have seen a company not pay sales taxes to the government over an 8 year period. The government placed a lien on the business for unpaid sales taxes and interest. The owners stated how can the government do that, we worked so hard to build up the company and they are trying to close it down. Whose money was used to build up the company? It was not theirs. The bank would not lend them money, no one would so there is the temptation to use money in your possession and hope
to deal with the problem later. The government may be able to go after the directors of the company personally to pay the trust money collected by the Company and not
remitted.

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Valuation of a Business

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If you sales are dropping and costs or rising, owners unfortunately will end up having to reduce or eliminate their salary. Fluctuating the owners’s salary should have no impact on the valuation on the sale of a business. Most investors will look at normalized earnings to value a business.

Normalized earnings are usually calculated backwards, starting with the net income reported on the financial statements. Add back all personal expenses and I typically add back the owners salary.

Then I reflect a salary for what you would have to pay to replace that owner. if the owner is taking only $20,000 in salary but you determine that you would have to pay say $65,000 for an independent person to replace the owner, then you would reduce normalized earnings by $45,000. If there were no other adjustments except for the salary adjustment, you would drop the reported income by $45,000 in my example above ($65,000 which you consider normal less $20,000 actually taken out by the owner).

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Controlling costs to increase profits before selling your business

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The goal of many business owners is to maximize profits which can be done by increasing prices or decreasing costs. Many companies have tried to do both but concentrate on minimizing prices. First they reduce staff levels or they may automate and change the manufacturing process to achieve efficiencies. Others have outsourced manufacturing to foreign countries.

On April 29, I wrote a blog about manufacturing in China – is there an advantage or it is becoming too expensive and in a few years, manufacturing will be returning back to North America. I read in a local newspaper yesterday that a Canadian company was moving their manufacturing plant back to Canada because China was becoming too expensive. My predictions were correct but the timing was much faster than I originally thought.

The stock markets and the financial markets believe that outsourcing to a foreign country is far cheaper than producing in North America. It is for some products but those which are very automated processes, there is not a lot of labor costs in the cost of the goods sold. Businesses go to China and the Far East to save on labor costs. As processes are becoming more automated, the savings that businesses incur keep getting smaller. The costs of transportation, the cost of having to have your inventory in a container on the water for four weeks means that your working capital is tied up, you cannot go just in time delivery easily because you have to fill up an entire container.

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