#PaisleyGirlandPoshBoy

Six Years Later

It's been a few years since my last confession....

If you googled Stewart Domke you would have found a lot of commentaries about how I learned not to be a Compliance Officer of an IFA firm.

For those who know me, it was never my skill set, but following my business partner breaking his back in a car crash, and being the sole director, there weren't many choices.

I learned lots of things in a business crisis -

1. Most people don't care

2. Most of your closest friends fall into 1 above

3. Of the people who do care when you go through a crisis 100% of them have been through a crisis

4. And 100% of them truly are your real friends

So, I have fought my way back through vilification, virtual bankruptcy and self doubt but I believe more than ever that if you are a business person not only will you fail in order to succeed, you require to do so.

Go on google Stewart Domke - make your own mind up about me


Sent from my iPhone

PS

I hope to provide a different kind of style of blog posting over the next few months

--
This message has been scanned for viruses and
dangerous content by MailScanner, and is
believed to be clean.

Back on the Blog- Start Ups

As you can see, I haven't posted a blog for a long time. The reasons will become obvious over the next few month.

I wrote about selling my IFA business and about the practical steps involved in it. Then I actually sold my business and I have had some of the worst experiences of my life.

Having bought businesses for 10 years and had to manage the process after acquisition. Having also made many mistakes in that process, I had no idea what I was in for when I sold my business.

I have now been working on a consultancy basis with the firm that bought out my business and I want to share a number of the lessons I have learnt acting as an adviser to businesses rather than making the decisions.

I have also got involved in a brand new start up and am working closely with another one. I love start up businesses. I think the blind faith and luck that is involved in taking the plunge in a new business is amazing.

When you have seen the effects of the mistakes that you make over many years, and the build up of troubles in a business in hard economic conditions, seeing businesses at the other end of their life is wonderful.

Business people need to make mistakes- and if those mistakes are genuinely out of naivety, lack of skill or experience, then they should be forgiven over time. Startups are times when those mistakes are magnified, because the business is just finding its culture and meaning.

If you are thinking of starting up and worried about making mistakes, the advice of our experienced and very ancient non-exec stuck with me "You will make mistakes, learn to recognise them faster"

New Rules for your pension to stop your company going bust

 

 

Do you have a trading business that is going through difficulty and the bank won’t support it.

 

Do you have a sensible business proposition and you can’t get the bank to support it

 

At the same time you don’t want to be at the mercy of outside investors

 

Under revised rules from 1 October 2008, your pension can invest in your company, within a series of rules that we will outline below. This can provide a lifeline to your company and the external investor will be you (as your pension fund)

 

What types of companies can do this ?

 

Any pension scheme can invest in unlisted companies, as long as those companies do not have residential property assets in them, but there are rules about “connected parties” and you have to invest your pension in a business that you can provide a sensible valuation for.

 

The “connected parties” rule mean that you could not previously invest in a company, you or your close family had a controlling interest in (more than 25%). This has changed. If your company has less than £6,500 in tangible assets on its balance sheet then the connected party rules may not apply. So you may have a trading business with only small assets which has a reasonable turnover. You may be able to use your pension scheme to invest into it and provide it with cashflow.

 

If you have a business with more than £6,500 of assets on the balance sheet, perhaps a commercial property, it may still be possible to structure help in other ways. Please contact us using the enquiry form.

 

What Pension funds can I use.

 

Until 1 October this year, it was possible to use pension funds to buy unlisted company shares (i.e. private limited companies) but you could only use money from your own contributions, you could not use money that was “protected”, for example it came from contracting out of SERPS or from the guaranteed element of final salary pensions. Now all pension funds can be used

 

Is this suitable for all businesses

 

No, this is a complex process and involves investing your pension fund in high risk and illiquid assets, but those assets are your business, so it can be suitable for some people. You should take independent financial advice from a firm with a specialist knowledge of pension transfers. You can check a firms authorisation status at www.fsa.gov.uk and you should check within their “permissions” that they are authorised to advise on pension transfers and opt outs.

 

City Gate have been advising small businesses on their pensions arrangements for 7 years. Its directors have been through the process of using this method of funding for clients and know exactly how the process works.

 

This funding method is not suitable for property investment companies, partnerships or LLP’s. It is currently only suitable for UK trading companies

 

Start Ups

 

It is worth mentioning that this scheme is ideal in the current market for certain start up operations, where it is more difficult to get bank or investor backing. There is a need to obtain a valuation of the business plan from a qualified accountant and we do have access to qualified partners for this.

 

Does City Gate manage the process

 

City Gate will consider your circumstances quickly and advise you whether you could use this method of pension funding to invest in your business. We will carry out this initial assessment free of charge and generally within 48 business hours of you providing us authority to contact your pension schemes.

 

After this, we will provide you with a detailed report and discuss all of the aspects of the arrangement with you and your advisers. We can then implement all of the plan and finalise the arrangement.

 

We can also provide you with appropriately qualified professional individuals to assist you, if you do not have them.

 

Case Study 1

 

Jim had a recruitment company. He had previously worked in a large recruitment firm and had built up a significant company pension scheme. He had been trading well, so he had taken on more staff.

 

In order to meet the cashflow pressures, he had factored his bills, which was great, it allowed him to expand and someone else worried about cashflow.

 

Then two crunches happened at once. The economic slump meant that nobody was recruiting, so he was dependent on a few accounts to feed him. This made his factoring company nervous and they started to restrict his funds. Additionally, his clients paid slower, so he was funding up to his limit.

 

The second crunch was liquidity, his factor was funded by the bank and they made them restrict the facility further. Jim had staff now and he had nowhere to go when it came to wages time. He had enough in the bank for one more salary run

 

At the same time he knew that if he could just hold it together, that there would be a huge opportunity for small companies to get back into the market and no lack of available candidates.

 

His business clearly has a value and we were able to provide an investment from his pension to provide liquid capital to fund him through the downturn and prepare for the inevitable upswing.

 

Jim realises he is taking a risk with his pension, but it was either that or loose the business. The factor had personal guarentees and could have bankrupted him. Now his pension fund is his only investor- something that makes him happy

 

Case Study 2

 

Elaine had a brilliant idea for a new coffee shop. It was a perfect business for her. It wasn’t likely to be affected by the downturn. She had identified premises and someone to work there. She just needed the capital to get started.

 

She had a relationship with the bank for 30 years. They had said they would lend her the money if she put her equity up as security. Then, as a result of the credit crunch, they said that they wouldn’t lend and that it was because she had no experience.

 

She had a friend who said that he would invest in it with her, and although she thought it would be good to share the risk, she didn’t have any idea whether he would be a silent partner or he would put his oar in.

 

We arranged for a business plan to be drawn up and she used some of her pension assets to act as seed capital for the venture. It gives her enough working capital to not worry and she only has her own pension scheme to answer to.

 

Elaine knows that it could go wrong and that she could loose part of her retirement income as a result, but she is doing what she wants to do and answering only to herself.

 

For more information on this have a look at www.citygategroup.co.uk

 

 

 

 

Directors- make sure you are protected

Small business owners are under intense and compounding pressure. I know- I am one!

 

Here is the checklist of things to do if you feel the pressure – mostly just watch your back stuff that should be second nature, but at times like this sometimes gets forgotten

 

1. Have you got liquidity? Have you got your own little secret pool of liquidity? You should,

 

2. Check your bank position. Are you exposed to an overdraft review coming up? Relationship banking won’t work, having a fallback position will, I will be publishing a note on new forms of investment capital from your pension scheme shortly.

 

3. Watch other trade credit arrangements, factoring could be “crunched” so the only people they can squeeze are you.

 

4. Your debtors are going to push their luck with credit and some of them will fold. There is nothing you can do about this other than the age old motto, all your eggs. If you are exposed, get diversified. Also get in first, and don’t be afraid to take a deal.

 

5. Your trade creditors are going to treat you in the way I have just described your debtors. Take advantage of the crunch, play fair, but everyone is having it tough. Do deals

 

6. Keep your key clients close, make them know that you value them

 

7. Have a plan and be prepared to change it. Small businesses will be the ones who will take advantage of the upswing (when it happens)

 

8.  MAKE SURE THAT YOU HAVE DIRECTORS AND OFFICERS PROTECTION. Don’t cancel it. You ust don’t know when you might need it. Ditto life and critical illness. If you have a heart attack now, you will thank me!

 

9. Stay positive- someone is making money, even if it isn’t the taxpayer.

 

 

 

 

Stewart Domke, MBA,ASI, CertPFS

Group Operations Director

 

City Gate Group Ltd

1 Park Circus

Glasgow G3 6AX

 

Tel: 0141 332 4141

Fax: 0141 332 4142

 

 

Members of the City Gate Group Ltd are authorised and regulated by the FSA

 

 

This message is confidential and legally privileged. If you are not the intended recipient, please delete it immediately and advise the sender.   As this message originates from the internet, we cannot verify that it is free from viruses, scripts or other elements which may be harmful to your computer or network   Save trees- don’t print unless you need to

 

http://stewartdomke.blogspot.com/ 

 

 

 

Auto Enrolment in UK Pension Schemes

There is a huge debate over auto-joining pension schemes. If you are an employer, and you set up a pension scheme for staff, do you want them automatically enrolled or do you want them to sign up.

 

You can see the pros and cons from the employer’s side-

 

1. If you set up auto join, everyone goes in, so you don’t get a huge amount of hassle explaining the scheme to members and financial advisers around your work place while staff take time to think about whether they join or not
2. At the same time, maybe it is good for them to reflect on the generosity of their employer contributing to their old age. So many benefits are just a “given”- maternity pay, holidays, getting away before 9pm. Taking just 5 minutes to opt in sounds like a good thing
3. But then, if you auto enrol them, then you have to pay for them, whether they would really have joined. Younger staff would perhaps just take the money and spend it. One of my colleagues cashed in a final salary scheme for his first decent guitar. He reckons he did the right thing.
4. What about short term and temporary contracts. More red tape and hassle for employers.

 

From the staff point of view it is difficult to think of the downside apart from being forced to save, get tax relief and probably an employers contribution without having to even think about it.

 

The government has to do the balancing act. Euroland says it might breach our human rights, the UK Government says it should be brought in and is seeking ways to ensure that it is. From the government’s point of view, it will certainly pull many people out of retirement poverty who would only get their through sheer lethargy of not joining an available scheme.

 

Having dealt with schemes for a number of years you would be shocked at how many people don’t join a scheme that is set up and waiting. And how many people say that they had no idea that it was even there. You don’t believe them either, but you will have to bail them out in retirement, while they enjoy their extra pint today.

 

 

Self Certification Mortgages

 

The credit crunch gets blamed for a lot of things, but it is fascinating to see what has been going on in the self certification market.

 

Self Certification, in case you don’t know is telling a lender what your salary is without having to prove it. Over the last few years, it has developed from a niche based product to highly touted favourite of equally desperate brokers and lenders.

 

Historically, “self cert” was where self employed people with highly fluctuating income, could get round the need to produce three years audited accounts or physical proof of their tax assessment before lenders would lend. They simply told the lender what they were earning and in the higher lending amounts, their accountant signed off to the fact they could afford the payments. Voila up to 85% loan to value.

 

But then lots of greedy people got on the bandwagon. Employees could certify their irregular commission or bonuses and borrow 5 or more times their salary. With some lenders, they just made a quick call to the place of work, checked your job title and job done.

 

Some lenders would lend clients with unlimited arrears on their current mortgage up to 75% of their home value with full self cert. Can you guess their name?

 

The regulator warned brokers that if they lied about clients’ income they faced being struck off or disciplined, which did not have a huge effect, but the credit crunch and inter bank lending has absolutely changed this sector.

 

Personally, I think it is a shame, the traditional self cert is a very important aspect of funding for small business people. Let’s face it, these people should be living in the best houses so that they can pledge them to the bank when they get the jitters about their trading businesses.

 

I also think that lenders have over-reacted and will calm down in die course. There are still a number of schemes working on self cert basis, albeit on reduced total loans and a much smaller number of lenders. Expect a tougher ride on underwriting, more delays and tell your IFA absolutely the truth about your income. If he offers to fudge the numbers, walk away- he really doesn’t value his licence. Of the few self cert lenders left they do vary markedly on their income multiples and affordability calculations. Some lenders will lend on a multiple of your profits, share of profit, earnings; some on your affordable income.

 

There may be other ways to legitimately increase your net profit, consider car allowances under the fixed cost car scheme to increase net income or pension contributions to increase gross emoluments. Think dividend instead of schedule D for a period if you are a company director.

 

There is no doubt that there are buying opportunities coming in the housing market, but it is not for the faint of heart- so business people will want to take advantage. My message- think outside the box, use all of the available products, but do not buy it if you can’t afford it. IT REALLY IS AT RISK IF YOU CAN’T KEEP UP THE PAYMENTS, however you got the mortgage.

Oil Prices hit $100/barrel

Many people laughed at the $100 forecast per barrel for crude only a few years ago. Yesterday that price became a reality.

What is the impact for investors?

Firstly what has brought the price to this point- many economic and political factors have had a bearing, lack of investment in refining and production, the dollar position and the importance of hedge fund commodity dealing.

Fundamentally supply and demand is a important consideration, world oil consumption in 2004 to 2.7m barrels per day- this has been seen by some commentators as the tipping point. There is also a generally held view that OPEC is running out of spare capacity

So, how much should investors worry? There is no doubt that this will be a major factor in world economic conditions- many investors will recall the impact of the last period of high oil prices in the 1970’s .

Prices will no doubt be pushed up as suppliers pass on the costs to consumers.

In Euroland and the UK much of the impact is yet to be felt because the pricing of oil is in dollars

This represents opportunities to invest in the sector but investors should have a careful eye to the cost side of these businesses.

There are many smaller energy companies that have seen significant upswings in their price, but investors should look to larger integrated companies too. Eggs and Baskets- as always!

Supermarket Life Insurance -- a cautionary tale

Get cheap life insurance at the checkout rather than getting advice from an IFA- why not? Cut out the middleman, reduce commission, they are basic products aren’t they?

Well no, they are not. They are simple in execution, but when you really need them, then you understand the advantages of setting them up correctly.

If you take out a life policy on yourself, an own life policy- the way most people do- then the policy goes into your estate on death. What that means is that it gets dealt with as your estate, if you have a will your loved ones may have to wait for probate to be granted. If you don’t have a will then the problems can really start. Don’t forget your will can be challenged to, so if your family circumstances have step children or other interesting complexities, then think carefully.

Then the other big issue- if you take out a policy to protect your children while they are still dependent and you and your partner die, the kids can’t get the money directly and you haven’t specified how and where the money goes. Will you leave it to a court?

A bit of simple planning makes such good sense. If you are insuring a partner, then get them to take out the policy on you and vice versa. This way, if you die during the policy life they get the payout straight away.

Anything more complex, consider a trust. Insurance companies will give you a trust to go round your policy free, although you might want to take legal advice and tailor it for your own needs. Your IFA will guide you as to the right trust.

If you set up a trust, you will appoint trustees and they will get the policy proceeds, your trust will have laid out what you want to happen. As a for example, in the circumatances we gave earlier- your children could be left an income until they are 21 or 25 (or any other age) with grants of capital for buying a house or education up until then and then the full payout of the balance.

Choose an independent trustee with care- you could choose a professional, like a lawyer or a family friend who knows how you think, but generally choose someone of your own age or younger so that they are likely to be there if needed.

You can see the problems with commoditising this product- there is so much under the surface. And make a will!

Google Alerts for Investors

If you are interested in the news that makes the market and like me know that sentiment often drives the news, then the new beta service from google can be useful to track a number of things that may be happening in your portfolio.

Google will aggregate information in the news and on blogs and send you an e-mail on a regular basis selected by you. Designed for people to keep up to date on their competitors or their teenage friends from school (that's not me in case you ask, but yes I do have a facebook entry!)

Highly useful if you are trying to stay up with the news and don't use an RSS filter- this way you can get the info sent straight to your mobile e-mail.

Directors' Duties - The Companies Act 2006

The new directors duties as set out in the companies act 2006 are starting to get everyone's interest. A recent solicitor's briefing tells us that the fact that directors' duties are now set out in black and white and are available to everyone is likely to result in directors being placed under greater scrutiny than is currently the case.

Just so that you remember, on 1 October 2007, new duties were spelled out for directors and further rules come into force in October 2009- this changed from 2008 this week.

By the way, to my friends who run FSA companies, your duties under the companies act are magnified by your parallel duties under the principle based regulation, and if you cannot demonstrate audit of your management processes, you haven't done them.

Isn't it time to carry out an audit of your directors' duties?

1. Check you understand your new duties. Ignorance is no defence.

2. record your compliance and all your material decisions

3. Check your service agreements and your policies for HR and compliance

4. Check your directors insurance complies with the new act- check you understand what it covers you for.

Maybe a good time to review your overall insurance, keyman, shareholder protection, ill health benefits too.

SIPP Property and Divorce

There has been an excellent arrangement for business owners to buy their commercial property through their pension scheme- but there are dangers too.

The advantages have been well rehearsed before:

1. Tax relief on your pension payments which can then be used to fund the purchase
2. You get tax relief on the rent payments but the pension scheme doesn't pay tax on the rental received
3. You can borrow inside the pension (albeit not as much as you used to- only 50% of the fund now, but nothing stops you borrowing and putting the contribution in)

Some new advantages since last April

1. So called "connected persons" rules disappeared, this stopped you buying from your own partnership or from yourself or family members. This rule stopped many professional firms which owned their practices buying them back
2. New rules allow much bigger contributions, so even though the funding with borrowing rules are cut, you can make bigger pension payments in

But I want to focus on some problems today

1. Imaging buying your firms property, and then a partner divorces. The ex-wife will either have a say in the arrangement or have to be funded out by debt if possible or more contribution s. You need to have an honest conversation with the parties prior to entering into this arrangement if there is a possibility of this.

2. Syndicate arrangements. Often business people fall out and no surprise, they get entered into a heated debate about business assets. Unless you have a syndicate agreement (a kind of pre-nup for SIPPs) then you could get into real trouble. A syndicate agreement sets out what happens in lots of circumstances and how it will be arbitrated.

4. Remember that you can insure things too, both the buildings and the members. Maybe even the key people in the business if it will have a direct impact on the covenant of the pension scheme.

As all financial products SIPPs are great in their place, but consider all the aspects round about them

World Wide Wills

A client brought to my attention the issue of wills when you hold property or assets in other jurisdictions.

Clients who have a home in Spain are often advised to make a will there, but it can cause problems. The last executed will can end up the legally valid one, so the executors can be left with issues to deal with- granted many times the lawyers get the sense of what is happening and make things make sense, but it is fairly obvious that there may be a case where they don't.

An innovation is the world wide will, offered by a number of trust companies and lawyers is a mechanism to ensure that your will is executed in a way that covers all your property.

Worth thinking about

P.S. Remember that Spain does not recognise trusts, so arrangements like UK trust planning don't exist there. There are a number of ways to effect the same advantage.

One way to do so is to create a debt or mortgage on the Spanish property and put the money in a jurisdiction where you can use trust planning for your familly, and that has other income and capital gains tax advantages.

The key issue is to give careful consideration to your assets, how they are held, and what you want to happen to them, then talk to soemone competent to tell you how the tax interactions work. Then review the arrangement regularly. Otherwise you are asking for trouble.

Selling your IFA business- practical steps

According to the plimsoll analysis of the IFA sector I received today, "Times have never been better in the IFA sector with many companies making exceptional profits"

While that is no doubt true, there is a definite growing IFA underclass, unable to keep up or even fully understand the regulator, principle based regulation, where the RDR is going to take them. They know they will have to get out of the business sooner rather than later- so they need to think about how to get the best value for what they have.

What practical steps can owners of small IFA firms take to improve the value of their business?

1. Data

If you want to sell your business for the highest value, your new owner needs to know where the client information is, that it is complete, full and in a system that he can integrate into his own. So check this, now.

You don't need a fancy database- and if you do buy one, check that it can export to Excel type arrangements so that your acquirer doesn't have to go to lengths to integrate it.

You don't have to have the full fact find details in there either, just basic contacts details, phone numbers, e-mail addresses. You can use the insurance company uni-pass system to get the latest data from providers. Tell your acquirer you have audited your data against the insurance company records. It is worth money to you.

2. Clean Compliance

One of the things that I see regularly when carrying out due diligence on small firms is that you think that things have been done, but there is no evidence or audit trails. Look at your compliance records, especially areas where you know that an acquiror will focus, because the regulator has said they are looking at- and build an audit trail- evidence that you have ticked this box.

TCF- record a minute of your staff meetings and put this on the agenda- every time, draw up a checklist of the things you have considered: change your Terms of Business to incorporate

Anti-Money Laundering- have you got a record, is it considered every year, refreshers etc

3. Funds under Advice/ Management

Smart acquirers are looking to build funds- that's where the big multiples are for them. So get into the mind set of how your acquirer exits. He wants to value his whole book on the total funds. The more you give him what he wants, the more value you can achieve.

So this goes back to data- show your clients assets, not just the ones you control, but the ones on the fact find that you don't. Show the client's cash deposits too.

If you show what you have, how much trail income you have built, but also how much more could come from your client bank, you make it easy to get the best value.

I'll talk about other aspects of getting best value soon.

Pre Budget Report and Insurance Companies

The pre budget report was a shocker no doubt! The new CGT rules with 18% taxation has received a huge amount of interest and critisism, but the reaction from insurance companies has been particularly strange.

There has been wide ranging criticism of IFA's who make a living from selling insurance company bonds. Is it because they have mythical tax status, additional allocation or is it because they pay advisers up to 7% commission, but the real issue is the insurance companies who push them so hard.

Now along comes the new chancellor and makes collective investments appear much more sensible, with a lower overall tax charge for many people and the ability to use your CGT allowance each year. What do the insurance companies do?

Well, I had one unnamed company in yesterday telling me how good bonds still are. Why I asked? Because you can get a higher allocation and the client doesn't pay up front, he replied.

What about the tax charges, I asked. Ok, maybe offshore bonds then, he said.

Clients and advisers should take care. Insurance bonds may have a limited use unless the insurance companies get the chancellor to make an early U-turn.