Wealth Management

Voted #6 on Top 100 Family Business influencer on Wealth, Legacy, Finance and Investments: Jacoline Loewen My Amazon Authors' page Twitter:@ jacolineloewen Linkedin: Jacoline Loewen Profile

August 29, 2012

Do Business Owners have a Bias Against Risk?

Public market companies have their knuckles rapped by Mark Carney for sitting on their excess cash and not putting it at risk in order to grow their businesses. An MBA finance class would agree-- that unused capital indicates a lazy balance sheet.
But does this apply to private companies too? 
Do they need to risk their capital too? 

Risk and the Private Business

Here’s a quick test for you. Put yourself in the shoes of an owner of a business and assess your appetite for risk.
Let’s say you are the owner of a medical device company and your management team comes to you and wants to launch a new product. Your team has done the analysis and it would cost $5M to bring to market, and the expected returns would be significantly greater. As the owner, you know that $5M will come directly from your own pocket, your credit line at the bank and the amount of money you can take out of the business for retirement.
The other option is to carry on with the normal business, which is going at a slight growth rate with the market stable enough.
Here is how you, as the owner, might weigh the risks: “Right now, I’m profitable. If all goes well, the new product will grow my $10M company to $30M, with a cash flow of $1M. If it does not go well, I’m in the hole for $5M and it will take me five years to break even and get back to where I am now.”
Pass!

Jacoline Loewen   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726

August 7, 2012

Does Your Company Have a Visual Brand? Check These Out.

Does your company have a visual aid that is recognizable for its brand?As private equity advisors, when we get a company ready to meet investors, we make sure there is a distinctive brand.  This applies whether it is the brand painted on the side of the roofing trucks or the drilling equipment. The time when brands were just for pop stars and make up are gone.
Most of the recent marketing successes are visual successes, not verbal ones. Here are 10 examples from Visual Hammer (www.visualhammer.com).
  
1. The lime.
Until 2009, there had never been a Mexican brand on Interbrand's list of 100 most valuable global brands. There is now: Corona, the beer with the lime on top of the bottle.

Today, Corona is the 86th most valuable global brand, worth $3.9 billion. In the United States, Corona outsells Heineken, the No. 2 imported beer, by more than 50 percent.
  
2. The chalice.
A second imported beer is moving up the ladder in America and for exactly the same reason Corona was so successful. It's Stella Artois from Belgium.

Stella Artois is the Budweiser of Belgium, so ordinary fast-food restaurants sell it in plastic cups. 

No plastic cups for Stella Artois in the U.S. market. The importer provided bars and restaurants with its unique, gold-tipped chalice glasses.

Today, Stella Artois is one of the top 10 imported beer brands in America.
  
3. The silver bullet.
The only mainstream beer that has increased its market share in the past few years is Coors Light, the silver bullet.
 
Coors Light has already passed Miller Lite, the first light-beer brand, and recently Coors Light also steamed past Budweiser to become the second largest-selling beer brand in America.
  
4. The duck.
Then there's the remarkable transformation of Aflac, the company that brought us the duck. In the year 2000, the company had name recognition of just 12 percent.

Today it's 94 percent. And sales have gone up just as dramatically.
The first year after the duck arrived, Aflac sales increased 29 percent. And 28 percent the second year. And 18 percent the third year.
  
5. The pink ribbon.
In 1982, Nancy Brinker started a foundation to fight breast cancer in memory of her sister, Susan G. Komen, who had died from the disease. Since then, Susan G. Komen for the Cure has raised nearly $2 billion.
 
Today, it's the world's-largest non-profit source of money to combat breast cancer. A recent Harris poll of non-profit charitable brands rated Komen for the Cure as the charity that consumers were "Most likely to donate to."
  
6. The red soles.
Look at the success of Christian Louboutin, a French designer who regularly tops The Luxury Institute's index of "most prestigious women's shoes."
 
In 1992, he applied red nail polish to the sole of a shoe because he felt the shoes lacked energy
 
"This was such a success," he reported, "that it became a permanent fixture." And ultimately built the phenomenally successful Louboutin brand.
  
7. The green jacket.
In the world of professional golf, there are four major championships: (1) The U.S. Open, (2) The British Open, (3) The PGA Championship and (4) The Masters. The first three are hosted by major golf organizations, but the Masters is hosted by a private club, the Augusta National Golf Club. 

Every, year the Masters gets more attention than any of the other three events.
  
8. The colonel.
Consider KFC, now the leading fast-food restaurant chain in China with more than 3,800 units in 800 cities.
 
To most Chinese people, the letters "K F C" mean nothing, but Col. Sanders is known as a famous American and the leading fried-chicken brand.
  
9. The Coke bottle.
What Coca-Cola calls its "contour" bottle is 96 years old. Few are currently sold but recently, the company gave its iconic bottle a major role to play in its advertising programs.

The results have been impressive. Recently Diet Coke passed regular Pepsi-Cola to become the second best-selling cola drink.
  
10. The cowboy.
And look what the cowboy has done for Marlboro cigarettes. The year Marlboro was introduced, there were four strong cigarette brands in America: Lucky Strike, Camel, Winston and Chesterfield.  

Yet today, Marlboro is by far the leading brand, outselling the next 13 brands combined. 

It's also the world's best-selling cigarette brand.

Jacoline Loewen, Director,   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726

July 27, 2012

He's Baaack - Henry Blodgett

Not George Clooney.
I just heard that the USA IPO market is about to be jump started by allowing newly listed companies a vacation from Sarbanes-Oxley regulation. The authorities have finally realized they have driven their financial market into the ditch with their excessive regulation. IPOs are down 90% and sitting here in Canada, we send companies to London AIM and do not look at the US anymore.
The regulations are being taken away around analysts having to have a Chinese Wall (are we allowed to say that anymore?) between corporate finance putting together the deals and the analysts advising on whether to buy or sell the shares in the deal. Back in the late 90's, Henry Blodgett advised millions of investors to buy AOL and not Amazon. I was one of those investors with Merrill Lynch at the time. What a disaster that was.
So the US regulators, who have finally clued in their regulation has beaten away the world, are taking off the restrictions. Henry Blodgett can be at the board room table again, helping sell the deals and fund.

Jacoline Loewen, Director,   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726

Should Banks Take Their Losses Through Free Market Mechanisms.


Some business owners tell me that they believe the mainstream financial sector has convinced an entire generation to buy and hold because it suits their business model that is asset-driven rather than performance-driven. 
Are the bulk of financial institutions simply regulatory oligopolies with asset-harvesting business models more concerned with fees and proprietary speculative activities than with providing any useful services to savers and retail investors? Is this a true reading of the finance industry?
My husband was a financial analyst for a broker dealer and they would only issue reports on buy or hold or sell because their brokerage would process the changes and charge a fee. That model has changed. Large financial firms in the USA appear to have an intrinsic institutional bias to be bullish. Where is their incentive to tell you not to invest in something, as they will usually be operating a fund in that area. This need to keep the investor invested is causing sophistry as being "underweight" unattractive asset classes rather than encouraging selling.  The investment insight is too often: sit tight, everything will go up in the long-run. These conversations about concern over stock performances are becoming common and there is an increasing noise. Most of these entrepreneurs are not critics of the financial sector, and neither am I. They appreciate their role. So what is the problem? Has the sector become too large? Did the corporate finance whiz kids take the reins from the bankers and change the race too much?
Here are the questions I have heard from business owners over the past few years:

Question 1: What is the Profitability of Banks?

Corporate profits attributable to the US finance sector were effectively stable from the 1950s to the early 1980s from 5% to 15%, then as the growth in the money supply turned sharply higher on a sustained basis in the 1980s they peaked at 40% in the early 2000s and still remain around 30% - substantially higher than long term averages. 
On an asset basis the numbers tell a similar story. The 20 largest banks in the US have combined assets of approximately 90% of GDP. The five largest banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs - have combined assets of approximately 60% of GDP. These numbers are roughly 3 times what they were in the 1990s.
Canada's leading bank, TD which is now in the USA, had a thoughtful look at this very issue. The CEO asks why the bank executives should make more than the business owners. He said that if the bank is making more than those who create the wealth, that will have a long term impact on the Canadian economy. That is fantastic leadership and probably why TD is the still the leading bank in Canada and on the list of top 20 banks in the world.
The concern is the appearance of the American finance sector's intimate relationship with government and central banks. It is not surprising that it grows faster than the underlying economy. Newly printed money flows into and through the finance sector acting as a wholesale subsidy that drives corporate profits, compensation and speculation. Despite widespread belief to the contrary, government intervention into broad swathes of the financial sector to support "too big to fail" banks or, more accurately, to prevent capital destroying business activity from being eliminated to the benefit of the entire economy is not a positive for future growth.  When it is funded via expansionary monetary policy, business owners know this and see it is laying the groundwork for stagflation.

Question 2: What is the Long Term Impact of Government Bailouts?

I was fortunate to be at a speech by Stephen Roach, Economist for Goldman Sachs, who once suggested taking a bat to Paul Krugman, and I am paraphrasing:
Whatever you subsidize you actually encourage. By subsidizing failure we are ensuring bigger failures in the future and worst of all penalizing well-run businesses. He said that the firms that were prudently managed leading up to the crisis should have benefited from the demise of their poorly-run, profit over customer service, riskier competitors.  In a free economy, capital would have flowed to the profitable businesses rather than the loss making ones. The fact that this didn't happen creates a perverse "if you can't beat'em, join'em" mentality with respect to risky and imprudent business practices.  
 I worked for a bank as the corporate strategist, and it was owned by the founders and a wide pool of banks executives, then it went on the stock market. They kept their good banking practices at a cost to their bottom line growth. During the 2000s, they did not want to do high risk swaps and derivatives or risky deals and they were asked, "Are you in business or not?" Why should they now get penalized again? They lost out money on the upside and they lost out money on the downside. 
Did you see the documentary on the bail outs with the few bank heads seated around a table with George Bush and the candidate Obama and McCain? It seemed so cozy. I know it was a terrible time with the whole US economy ready to go down the chute and no one really knew what to do. Yet, the business owner I worked with at the same time period, did not have cozy talks with government leaders. Is that too much power in a few hands or is that good management? We learned later that bankers picked Obama as the Presidential candidate of choice, and fed him information (and money) not given to McCain. Is that crony capitalism? 

Question 3: Who Really Gets Helped By Low Interest Rates?

Another question asked by entrepreneurs and owner-operators dealing with banks is, What exactly is the primary purpose of low interest rate?"
We are told it is to save the economy, but is it really it is to save the American banks? It gives them time to get their house in order.
Owner-operators are getting denied loans. The CFOs understand why. After all, would you loan $10M to a business during this economic climate at a low interest rate? No. You would put it into commodity stocks or gold because for a way lower risk, you are getting a similar return. 

 Question 4: What are the Bank’s Housing Losses Doing to the Economy?

Stephen Roach actually gave me the answer. He thought the banks would be asked to eat their loans and take the hit via the free market. So far, that does not seem to have happened. 
Low interest rates are simply a case of robbing Peter to pay Paul as capital is being "strip-mined" from savers via low interest rates and in effect "donated" to the financial sector. Roach argued that the enormous size of the American and financial sector coupled with the American Bank's current insolvency, which the constant bail-outs are attempting to disguise, will be a drag on growth for years unless losses are allowed to take place via free market mechanisms. 

July 26, 2012

Bringing professional management into a family business


Every family business has its battles over growth. Advisers can wax poetic about how to increase wealth, but owners inevitably think they know best and often trust only their children to take charge.
Nowhere are these differences as stark as they are on the subject of embracing professional help to build the business.The subject remains an awkward stumbling block for too many family firms, which control up to 40 per cent of GDP and 43 per cent of the jobs in Canada. The federal government is keen to see growth and it wrings its hands over the dearth of big Canadian family businesses such as worldwide titans Wal-Mart, Smucker Foods, Samsung or BMW.
A study by McKinsey found that a key reason family businesses survive beyond the second generation is through the appointment of professional management. With an outsider as CEO, a family business tends to live past the third generation. It's particularly interesting to note that these legacy businesses tend to outperform corporations, both public and private. But that sizzle does not sell the steak.
When you ask in-laws or second generation sons and daughters in family businesses to explain the allergic reaction to professional management, they frequently sigh and tell you founders tend not to listen to advisers. To understand the reluctance of owners is to work in their shoes, which typically means 15-hour days. They achieved success by doing it all themselves. It is counterintuitive to seek help, especially when the expertise costs money.
The next generation, in general, is under paid but it is the first line of resource for employment and trust. Families in the jewellery business, for example, have the pressure of working with high-value products that can be easily stolen. Family members may not be the sharpest knives in the drawer, but they fulfill the trust requirement of the job description.
In private, family business owners will explain that any amount of time spent on succession planning, exit strategies or learning about private equity is time spent not earning money. They rarely even approach the discussion of bringing in professional CEOs. There is a higher sense of achievement from the daily work than there is from getting out the red pen and planning. "It is faulty logic," says Tom Deans, who worked in a family business and wrote a treatise on his experience in Every Family's Business.
"That is the common reaction, but as soon as family businesses do put in the tools, they start to run better. Few family businesses have a planning culture. The entrepreneur is a problem solver who is great at putting out fires. This is very different from the problem of how to protect the equity in the business and the retained earnings. The biggest problem, in fact, is the long-term plan for the business."
Family firms turn to their accountants first, and then their lawyers, who are smart but, in fairness, are not business experts. Owners are basically relying on professional technicians who are trained to take instruction, not to take the often- frightening risks necessary to grow a business. Lawyers may not want to forge relationships with professional CEOs, and they may have a light sprinkling of knowledge about private equity partners who, they assume, will ruthlessly bring in their own lawyers and accountants.
Why would these professionals press owners to bring in outside management and risk their relationship? Laissez-faire, mon ami.
Family business should be turning to wealth managers who know how to diversify money and minimize risk. "They must evaluate and anticipate the need to re-invest, divest, partner or exit," says Guillaume Lagourgue of UBS Wealth Management.
Taking on private equity partners for a five-year period reduces risk with fresh capital, but it also forces the awkward truth - maybe it is time for family members to step aside and make room for a professional CEO. With these changes, a family business is far more likely to become a legacy beyond the founder's lifetime. Once an owner experiences the new wealth, in hindsight sharing control seems like a no-brainer.
Bringing professional management into a family business also challenges the family lifestyle, the comfortable power, the good-enough revenues that pay mortgages. The cost of letting go of some of that control will boost a family's wealth for retirement. It could also produce a legacy Canadian family business that does not end up sold as a branch office.
Special to The Globe and Mail
Jacoline Loewen is a private-equity expert for business owners and the author of Money Magnet: Attract Investors to Your BusinessShe is the director of Loewen & Partners and the Exempt Market Dealers Association.
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