Creditor Protect Yourself

Here's another one of my Profit Magazine columns. I wrote it 5 years ago. It is still good advice today.

Recently I had lunch with the poster boy for entrepreneurs who crash and burn but live - quite comfortably - to tell the tale. He thanked me for saving his financial life. A few years ago Bill (not his real name) came to see me for some business advice. Bill was anxious to expand his business. I listened intently to Bill’s story and his plans. I reviewed his business plan and financial statements. I then proceeded to provide him with comprehensive advice as to what I thought he should and should not do.

Unfortunately, Bill ignored virtually all of my advice and ended up in corporate and personal bankruptcy a few years later. Fortunately, he did listen to one important bit of advice that I imparted to him on that fateful day. The piece of advice that Bill did follow was to creditor protect himself. As a result, when he went through the bankruptcy process and lost his business, he managed to keep his house and all of his personal financial investments.

I want to share this advice with you too, so that if you ever end up in the same position as Bill, you too will have a nest egg with which to start over.

The nature of entrepreneurship is that we tend to be risk takers. Furthermore, to be successful we must be fully engaged in growing our business. Often this leads to the unfortunate result that we don’t look after our own personal financial needs in the most responsible and/or timely manner. On top of everything, we tend to be risk takers in our personal investments. Many of us fail to put basic financial planning tools in place in order to safeguard ourselves and our families. Simple things such as wills, powers of attorney, life insurance, etc., are often left to be addressed at a later date.

My advice to you is to make getting your personal house in order a priority.

The bottom line is that as an entrepreneur you are taking on tremendous risks. You are the officer and director of your company and, therefore, take on all of the statutory liabilities of your business such as tax and other source deductions, health tax, employment standards, workers compensation, HST and so on. You may have personally guaranteed all or part of your company’s debt. You may have even mortgaged your home to finance your business. If the s—t hits the fan, you could lose everything.

In most investments higher risks translate into the potential for higher returns. Obviously, you embarked on your business adventure with this goal in mind. However, typically (particularly in the early stages of your business) you either pay yourself very little or, in many cases, nothing at all. By reinvesting your profits in your business, the ironic result is that you are taking higher risks and receiving lower (current) returns.

Manage the Risk

What should you be doing to manage this risk? You can do some basic things like diversifying. Rather than leaving your profits in your business as retained earnings, take money out of your business from time to time and build a nest egg by investing conservatively. Resist the impulse to invest in other businesses in your sector or industry. Even  though this may be within you comfort zone, if there is a downturn, you could easily lose it all.

Other suggestions involve making sure that you have planned your estate. Do you have adequate life insurance? Disability insurance? Critical illness insurance? Is your will up to date? What about a living will? Do you have a power of attorney?

Separate Assets in Your Spouse’s Name

The first, simplest and least expensive credit protection strategy for your nest egg is to put assets in your spouse’s name (provided that he or she isn’t also an officer and director of a company, has signed personally at the bank or has other potential liabilities). When Bill went through personal bankruptcy, he and his family managed to keep their home because the title was in Bill’s wife’s name. Making your RRSP contributions into a spousal plan, rather than into an RRSP in your own name will safeguard your retirement savings from your creditors.

Segregated Funds

Bill was also able to retain his personal financial holdings because they were invested in segregated funds. Segregated funds are investments in mutual funds through an insurance company. Because these investments are insurance contracts purchased from an insurance company, they are governed by the insurance legislation in each province and are exempt from being seized by creditors. The same is true of a traditional insurance policy. Most major insurance companies offer a wide range of mutual funds so that you can select a portfolio that is consistent with your personal investment objectives. While the management expense ratios (MERs) for segregated funds are slightly higher than the management fees payable for the same mutual fund purchased outside of the insurance contract, consider the higher cost a small price to pay for “creditor protection insurance”. Segregated funds can be purchased in registered (i.e. RRSPs and RESPs) and unregistered investment accounts.

Individual Pension Plan (IPP)

Another relatively inexpensive way to creditor protect your retirement savings is to set up an Individual Pension Plan (IPP). An IPP is a defined benefits pension plan that you can set up for yourself. As a pension plan regulated under provincial and federal pension legislation, IPPs are administered as trusts and are creditor protected. A further benefit of an IPP is that the contributions are not fixed as they are with the maximum RRSP contribution. As you get older the tax deductible contribution increases every year. There is a lot more to IPPs than this simple introduction. Talk to a financial advisor who has an expertise with IPPs. Many financial advisors purport to know about them, few really know what they are talking about. You can always call me and I will refer you to someone!

Family Trust

A more expensive way to creditor protect yourself is to set up a family trust. In this instance, you would pay a lawyer to set up a trust naming you and the other members of your family as contingent beneficiaries. In other words, the trustee has complete discretion to decide whether to pay anything from the trust to you. You could be the trustee or you can name someone else as the trustee. As a contingent beneficiary you have no absolute right to the assets in the family trust. As a result, in theory your creditors cannot force the trustee to turn over the assets of the trust. There have been instances where a court has ordered the trustee to turn assets over, particularly where the trust was established on the eve of an insolvency.

Offshore Creditor Protection Trust

You can add a belt and suspenders and safeguard against an overly zealous Canadian court by going offshore and utilizing a foreign third party trustee for your trust. An advantage of this approach is that a Canadian court will not have any jurisdiction over the foreign trustee. In addition, depending on the foreign jurisdiction you choose, the foreign country will have a statute of limitations that provides that the claim must be commenced in the foreign country within a specific period of time. Usually, by the time your creditors complete their claim against you here in Canada and figure out that they will have to pursue your assets in another jurisdiction, the statute of limitations will have expired.

One caveat - If you transfer your assets into any of these vehicles when you are technically insolvent, your creditors may have the right to trace the assets and unwind the creditor protection steps that you have taken. Therefore, it is important to set up these protections well in advance so that they are part of your ongoing estate planning considerations and not merely a way to defeat your creditors.

Bill was able to buy me lunch because he took my creditor protection advice. He put his house in his wife’s name and moved his financial assets into segregated funds. Bill may have lost his business, but he still has his nest egg so he can start over again. Will you?

Partnerships - A Necessary Evil

I have reviewed some of my earlier writing from my book, Lessons from the Edge, and from my Profit Magazine columns and have decided to share some of what I consider to be the "best of". Here's one on partners:

It’s said that business partnerships are like marriage: easy to get into, messy to get out of. Surely you’ve heard horror stories about breakups that nearly ruin the business, if not the divorcees. When Jana Matthews and I polled entrepreneurs about their worst mistakes for our book, Lessons from the Edge, well over half the stories involved partnerships.

It’s also often said that partnerships are a necessary evil. Whoever came up with that one got it half right. Partnerships are often necessary, but they are not necessarily evil. Whether a partnership goes bad depends largely on what its participants invest in managing it. In fact, there are many simple ways to foster the productivity and longevity of even the most unlikely alliances.

Why does anyone choose to have partners at all? Usually, an entrepreneur requires something only a partner can bring to the table (in exchange for equity, that is), such as money, contacts or a skill set. Sometimes an entrepreneur needs the confidence that can only be provided by working with someone else. Having someone to bounce ideas off can be very helpful—after all, running your own business can get lonely.

You can trace the roots of most failed partnerships to the beginnings of a business. The partners become so enamoured with the potential of their venture that they jump into bed before determining whether they share the same values and expectations. In some cases, entrepreneurs spend more time interviewing and checking the references of prospective employees than they do of their future partners.

Even if they’ve met their perfect match, many partners fail to discuss their respective responsibilities and contributions, such as what happens if more money or resources are needed, how decisions will be made and how they will get out the partnership. And they neglect to put it all in writing. (I’ll grant you that a shareholders’ agreement can be very expensive, but far less expensive than a litigated breakup.)

But some partnerships fail despite their solid foundations. Differences in ambition, work ethic or simply the stage of life can result in the relationship changing midstream.

As in marriage, don’t take your partnership for granted. Renew your partnership vows at least once a year. Go on periodic retreats to review your goals, roles and expectations. And if you don’t? Inevitably, problems and frictions arise that require patience and understanding to resolve. Employing a facilitator or coach to mediate a partners’ retreat can help resolve issues that have percolated to the surface.

Face it: partnerships take a lot of work. To make it a little easier, I’ve compiled a list of my favourite tips and tactics for making alliances fruitful and long-lasting:

1. Check out your prospective partner. Make sure that you share the same values, your skills are complementary and you have the same timelines. A 50-something partner will want to retire when the 30-something partner is just coming into his or her own. Don’t hesitate to conduct a background check: investigate references, do a credit search. Create some conflict during your “courtship” to see how your prospective partner reacts.

2. Put it in writing. Ideally, you should have a shareholders’ or partners’ agreement drafted by a lawyer. The pact should address all aspects of the partnership: what you are contributing, how decisions are made, how disputes are resolved, who is responsible for future capital injections and, most importantly, how you get out of the relationship. Even if you can’t afford a lawyer, at least write something down on the back of a napkin!

3. Have an annual retreat. Get away from the office once a year to review where you’ve been and where you’re going. Revisit your mission statement, business plan, etc. Address any issues or festering problems. Don’t be afraid to have it facilitated by a professional moderator or coach. It may help you resolve some issues or reach higher goals.

4. Get out more. Talk to businesspeople outside of the partnership. An EO or YPO forum or discussion group can provide a useful venue for exploring issues before you are ready to raise them with your partners. After all, your fellow entrepreneurs may have already been there and done that. Better yet, they won’t be afraid to tell you when the problem isn’t your partners, but you. 

Union Leadership is Missing the Point

I was listening to a debate on 640AM Toronto radio the other day between financial guy and Mr. Happy Capitalism, Lou Schizas, and Ken Lewenza, the head of the Canadian Auto Workers union. They carried on the usual boring debate - Lou said Canadian unionized wages are low because that's all the market will bear and Ken said that it was unfair that CEO salaries are so high relative to the rank and file worker. Back and forth they went, without addressing what in my mind is the real issue.

As I see it, the 1% vs 99% debate comes down to simple economics. The high paying middle income jobs have been exported to lower wage countries (the 99%), while the scarcer and more skilled jobs remain in North America and earn substantial salaries (the 1%). It occurred to me that the North American labour movement is misdirecting their attention. Rather than focusing on the 1% while more and more of their jobs are leaving the country, the unions, and environmentalists and human rights advocates for that matter, should be working towards higher wages, improved labour conditions and basic human rights in the countries where the middle income North American jobs are going.

The unions, environmentalists and human rights advocates are busy attacking what's left of the North American economy, while China, India and the other BRIC countries grow at close to 10%. China and India are not part of the Kyoto process. In China workers have little in the way of human rights. So while the disgruntled workers and their leadership occupied most major North American cities in 2011,  jobs continued to go to lower cost markets.

So, what's to be done, if fighting over the remaining scraps of the North American economy is not the answer?

I think that its time for the North American union movement to move on and grow up. Unionized workers in North America have the best working conditions in the world. What they don't have is demand for their labour skills because they can't compete globally at current wage demands.

The North American labour unions should take the fight to the real enemy - low paying labour in the developing world. Its time for the unions to organize and speak out on behalf of the workers who are taking their North American brethren's jobs. Rather than fighting over whether the CEO gets paid to much, why not fight for improved wages, labour conditions and human rights in the developing world. Imagine if Chinese factories had to meet the labour red tape that exists in North America. Imagine if Chinese factories had to meet the same environmental protection legislation that exists in North America. Imagine if workers in developing countries had basic human rights - such as freedom of speech and the right to vote. Their labour costs would rise and their competitive advantage would evaporate.

It is high time that the labour movement realize that they are fighting the wrong enemy. Their North American employers have nothing more to give if they are now fighting over whether their boss is being paid too much. They are rearranging the deck chairs on the Titanic, while their jobs continue to flow out of the country. Its time that the union leadership earn its pay and lead a global fight for fair wages, working conditions and human rights. The ultimate beneficiaries will be the North American worker, who will no longer have to compete with one hand tied behind their backs.

Jazz Thomas Cook and the Lost Art of Corporate Communications

My family and I travelled to Nuevo Vallarta, Mexico for a one week all-inclusive vacation the week of Christmas for a much needed rest. The resort - the Occidental Grand Nuevo Vallarta - was fantastic. However, the flight to get there was a nightmare. Our carrier was Jazz Thomas Cook, which I believe is operated by Air Canada.

While delays can be expected at this time of year due to weather and traffic, however, poor communication regarding the reason and length of the delay cannot be excused, particularly in this era of instant communication - the internet, email, bbm, sms, Twitter, Facebook, etc.

Our flight was scheduled to depart at 9 am EST on December 23, 2011. We dutifully showed up at the airport 2 hours ahead of the departure time to check in. We were advised that the flight was on time and we were excited to start our vacation.

At 8:30 am or so, we were advised by the gate attendant that the flight was to be delayed due to unidentified equipment issues. By 10:30 am, it was announced that the flight was delayed until 9 pm and that we should go home until 7 pm. We were offered taxi/limo vouchers, on which the telephone numbers of a limo company and Jazz Thomas Cook were handwritten for our convenience. We were told to check the Jazz Thomas Cook website or call the number that had been provided to us. We weren't happy about the delay, but could understand that safety must come first. So, off we went home.

As the time for departure from home to go back to the airport approached, I attempted to find out whether the flight was still departing at 9 pm. I went to the Jazz Thomas Cook website, but could not find any information about our flight. (Either it wasn't there or the site was impossible to navigate.) I then called the number that I was given. After navigating through the usual menu of options and sub options, I finally got to the recording for "Today's Departures", which said that there were no departures today and promptly hung up. Finally, I checked the Greater Toronto Airport Authority website, which said that the flight was still departing at 9 pm. So, off we went back to the airport.

Upon arriving at the airport and finding the gate, the posting at the gate said that the flight was still leaving at 9 pm. However, as time went by it became apparent that 9 pm was no longer realistic as no plane had arrived. Finally, at 9 pm the flight number and departure time disappeared from the board at the gate, with no update. The passengers at this point got very agitated as there had been no public announcement about our flight since we were sent home at 10:30 am that morning. The GTAA employee at the gate either didn't know anything or was stonewalling for some reason. The natives continued to get more and more restless.

Rumours starting circulating that there was going to be an unscheduled stop in Windsor, Ontario (of all places). The GTAA employee (whose name was Brenda, with no last name) continued to stonewall. Eventually the plane arrived and was boarded without any explanation for the delay. When asked whether it was true that we were stopping in Windsor, Brenda refused to answer and simply said that the captain would provide us with the flight plan update.

Once on board, we finally took off at 11 pm, some 13 hours after the scheduled departure time. We did stop in Windsor for fuel (apparently, this plane with its load couldn't make it to Puerto Vallarta from Toronto).

The bottom line is that Jazz Thomas Cook treated us like mushrooms in the dark for over 12 hours. There was absolutely no meaningful communication with the passengers for a ridiculously long time and I can't for the life of me figure out why. Passengers, particularly Canadian passengers, are inherently reasonable. Had Jazz Thomas Cook opted to provide us with periodic updates as to the status of the flight, a lot of angst and anger that was directed at the carrier and GTAA staff could have been avoided. I am told that this is typical communication protocol for most airlines. We have all heard horror stories about passengers stuck on a plane for 7 or 8 hours without food, water, restrooms, access to the gate or an explanation. I just don't get it.

The prevailing wisdom elsewhere in business regarding corporate communication is to get out in front of the issue (think about the way Michael McCain handled the listeria crisis a couple of years ago). Why do airlines treat the passengers with such disrespect? Jazz Thomas Cook has a lot to learn about corporate communication best practices.