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Sunday, October 30, 2005

The Problem with Pensions

This article is interesting, although it misses a crucial point: as people live longer, they will outlive their companies. It is quite likely that GM, Ford, and IBM won't be around in 20 years, at least as independent companies, and virtually all job growth in the past decades has been at relatively young small to medium-sized businesses. Therefore, company-centered pension plans of the traditional variety are doomed.

For my part, as a Silicon Valley software engineer, my retirement strategy is simple: save as much money as I possibly can, whether in IRAs, Roth IRAs 401Ks, or taxable accounts. Other than a couple of big outfits I worked at early in my career, I've spent most of my working life in startups or as an independent consultant - as has everyone in my circle of friends. As an aside, my strategy is to fund a 401K to the tax-deductible limit, set up my wife's self-employed 401K similarly funded to the tax-deductible limit, and fund Roth IRAs.

Given that I've seen numerous companies come and go, it's hard for me to feel outrage at the loss of what the Chinese would call an iron rice bowl. Anger at fat-cat executives or whatever, while seemingly satisfying, is misplaced - and given the collosal amounts of money involved, impoverishing every one of them won't help much. Also, if anger at executives is called for, it is in agreeing to big pensions when negotiating with unions instead of higher salaries that could provide money to save for retirement.

I'm not sure how to solve the problem; maybe in addition to the self-managed 401K approach, workers could set up pension-management companies that they take from employer to employer, and their employer at the moment - and the employee - could jointly fund the plan, with the split based on negotiation.

On the Tax Reform Proposals

The President's tax reform committee has come out with a collection of fairly small-bore ideas for tax reform, with the main objective being to get rid of the Alternative Minimum Tax. This article is a fairly good analysis of the tax proposals.

The three main proposals include:

o Changing the mortgage interest deduction from a Schedule A deduction on interest for a mortgage of up to 1,000,000 to a tax credit of 15% on the interest for the max FHA conforming mortgage, typically between $300K and $350K. While getting rid of some of the energy pumping the real-estate bubble may be a good idea, this will pop it and is likely a political nonstarter.

o Eliminating the deductibility of state income and property taxes from Schedule A. This, along with the mortgage interest change, would basically fry anyone living in a state with a state income tax who bought a house - or a condo - recently, particularly in high-cost "blue states" that Republican Presidential candidates may someday want to carry.

o Getting rid of the employer's tax deduction for employee medical insurance for amounts beyond $5K for individuals or $12K for families. Presumably, this is meant to be a sort of tough-love to get employers to force down medical insurance costs, or to pressure them to offer high-deductible insurance that can be used with a Health Savings Account. But, in an age of fear over medical costs, this would also appear a political nonstarter.

The main weakness of the above is that they are all politically tough, but are definitely smallthink tinkering. If you are going to do the political heavy-lifting to reform the tax code, why not swing for the fences? There are lots of interesting ideas, such as a consumption tax, a flat tax, or a national sales tax. (Personally, I like a flat income tax, with a big front-end deduction). All have strengths and weaknesses, but they are big-deal enough to generate excitement and advocates, as opposed to simply being annoying and politically dead.

Thursday, October 13, 2005

A random walk through the world of buying small businesses

My wife is a business broker, and the progress of her deals is a constant topic of dinner-table conversation. Frankly, her work is typically more interesting than mine; at dinners, I say "I'm a programmer", talk quickly about embedded databases as eyes roll at the sheer geekitude of it all, and turn the conversation over to her, which can yield an hour of interesting discussion. Since she's too busy to blog about her work, I am going to give it a try.

What is a business broker?

A business broker is to small businesses what a real-estate agent is to properties. In California, business brokers need real-estate licenses and work under the same brokerage model as real-estate agents. Real-estate agents can and do sell small businesses, but business brokers are generally more successful at actually moving businesses since they focus exclusively on businesses and rarely deal in property that is not attached to a business.

The skill-sets to be a good business broker include an element of accounting and finance, and solid writing and speaking ability. There is a large sales component in business broker work, so the ability to handle "cold calling" and having a thick skin are important. Good project management skills and initiative are mandatory; frequently, deals get "stuck" because someone or another isn't moving, and the ability to spot this and deal with it quickly is needed to get the deal done. Creativity is also important; small businesses often have poor, incomplete, or nonexistent books, and business brokers often help buyers to verify revenue by examining secondary sources like utility bills, laundry tags, supplier receipts, etc.

Another crucial skill is the ability to explain complex deals to people with limited English ability, since, at least in our area, many if not most business buyers and sellers are first and second-generation immigrants.

One major difference between business brokerage and real-estate is marketing methods. It is often important for business owners to be able to sell their businesses confidentially, as "public" knowledge that a business is for sale can hurt the business by driving away customers and employees. Posting a business on a multiple-listing service is sometimes an option, particularly for "asset sales" of closed or failing businesses, but is rarely an option for operating businesses. So, it is typical for ads to be posted to public boards or Internet sites using general location terms as opposed to specific addresses.

The main actors in a small business transaction obviously include the buyer and seller, but less obviously the landlord of the property, who can make or break the sale by accepting a "lease assignment" to the buyer or not (and is usually under no legal or contractual obligation to do so), various government agencies, banks handling SBA loans, and occasionally franchises. Because of this, good business brokers have to become skilled in working with landlords, dealing with bureaucracies, developing relationships with banks, etc.

Interacting with Business Brokers

As a Buyer

As a buyer, most biz brokers will ask you questions before showing you their business inventory. If you approach the business buying transaction as if you were buying a house, this may seem a bit off-putting, but remember that many of the sellers want to keep the transaction confidential - so they don't want random people walking in off the street asking "Is this store for sale!" Also, it is far from unknown for buyers to try to go behind the business broker's back to transact the sale with the seller directly - cutting the biz broker out of her commission - so the biz broker will almost always insist on some sort of confidentiality and representation agreement before giving out addresses and financial information. This has happened to my wife on three occasions, all of which involved legal action.

If you are looking to buy a business from a business broker, another thing that you should remember is that - unlike real-estate - only a very small number of potential buyers actually buy a business. So, while you always deserve good treatment, don't expect the business broker to spend vast amounts of time with you until the biz broker has determined your "seriousness" as a buyer. Serious buyers typically have at least some of the following attributes:

o Past experience managing or owning a business or at least the willingness to be an owner-operator.

o Realistic cash-flow expectations.

o Access to enough assets to buy the business, to operate it, and to satisfy the landlord that the rent can be paid even if the business loses money for awhile.

o Experience in the desired type of business.

The following are marks of unserious buyers:

o Buyers who ask for the addresses and financials of businesses before signing a confidentiality agreement. If you really want to establish unserious credentials, get angry with the biz broker when asked.

o Buyers who don't know what type of business they want.

o Inexperienced buyers who expect to successfully operate the business as an absentee owner. This sort of buyer often "chickens out" when they realize that being an absentee owner means they have to find a manager they can trust, which is very hard.

o Buyers with unrealistic cash flow expectations.

o Buyers without enough assets to handle the business.

o Buyers who are likely to be "temporary" owners, such as newly unemployed software engineers. Frequently, these sorts of buyers end up getting a job halfway through the business buying process, so experienced business brokers learn to be wary of them.

A Comment about Landlords

Many inexperienced buyers wonder why the biz broker is interested in whether they are able to actually run the business successfully. After all, as long as the money successfully changes hands at the closing table, why should the seller, much less the business broker, care if I go out of business the next day?

The reason is that either the commercial property landlord or the bank lending you money to buy the land the business is on will carefully judge your ability to pay _them_, which means figuring out your chances of successfully running the business. Also, in most commercial lease assignments, the seller is "on the lease" for several years after assigning the lease to the buyer - meaning that if the buyer can't pay the rent, the landlord will go after the seller - so the seller will also want to deal with a buyer who can successfully pay the rent.

If you've read this far, thank you. I'll post something about the "sale side" later.

Sunday, October 02, 2005

Global Warming: Three Questions Need Answering

The problem with the global warming debate is that the debaters have jumped past the real questions and gone straight to the conclusions they favor, and rattled off the policy implications they favor.

In my opinion, the argument for global warming is a tad too convenient, given the awful track record of gloom&doom prediction. After all, in the 1970s, global cooling was the gloom & doom story of the day.

But I'm willing to be convinced, and here's my three questions:

1. Is global warming occuring?

2. If so, is it primarily due to human factors, such as CO2, or due to natural factors, such as natural variability in climate and solar output? Question 2A: what can be done about it?

3. If the answer to 1 is Yes and 2 is also "Primarily due to human factors" and "There is something that can be done", what precisely can be done?

The "Kyoto Narrative" to the above questions would be:

1. Yes.
2. Yes, and the problem is primarily CO2 emissions from rich countries.
3. The policy remedy is to regulate CO2 emissions in rich countries for now, and get the bureaucratic infrastructure in place for a far more restrictive regime later.

Note that if the answer to 2 is "Natural factors" (as reports from Mars indicate may be the case, particularly if increased solar output is causing solar-system-wide warming), policy remedies would be significantly different, focusing on mitigation as opposed to the "climate management" strategy of Kyoto.

Before the world spends trillions on any efforts, we need hard answers to these questions.

Why I voted for Bush

Bo Peng's post "Our Democracy has Failed" is an important one and hopefully he'll post the additional articles he mentiones at the end of his post.

I do think I should reply to his post here, at least partially.

As someone who voted for Bush in the last election - although this was more due to lack of choices than strong support - my perception of the media is almost a polar opposite. The MSM jumps at every opportunity to bash Bush and the US generally, emphasizes "issues" with its body-count coverage of Iraq, while largely ignoring successes. Editorials are almost universally anti-Bush, and story selection and wording, even in supposedly neutral wire-service stories, frequently show clear anti-Bush bias.

As for the Democrat failure in 2004 to win my vote:

o John Kerry's profound mediocrity. His only skills seemed to be in getting rich women to marry him, and having diarrhea of the mouth. Many took this for erudition because his speeches and answers to questions were so long and convoluted that few understood them - including Kerry himself, I suspect. (As a computer person, I'm well aware of the power of obfuscation and lengthy jargonese as a weapon to both make someone go away and to impress them with your soaring intellect.) Also, I was profoundly unimpressed with his support for the North VN enemy in his visits to Paris in the early 1970s . Maybe a Hollywood type like Jane Fonda could get away with this, but not someone asking for my vote to be Commander in Chief.

o Whatever the casus belli of the Iraq war was - and no, I don't buy the "Bush lied about WMD" argument as it was silly to begin with and not believed by those Bush fans Chirac of France and Schroeder of Germany in addition to the CIA - we were in it and the only exit strategy is victory. Someone so beholden to the antiwar crowd to win a national election would be likely to cut-and-run, particularly given Kerry's personal and political history during the Cold War.

o For whatever reason, even though I'm agnostic, I'm not as allergic to religion as some. Frankly, I do get a sense that many regard active religious belief to be a sign of intellectual deficiency. This, in my opinion, is not a valid position. And I accept that, for anyone who's religious, the framework of their religion will at least partially inform their positions on issues and policy. (It's impossible not to, in the same way that anybody's store of wisdom and knowledge informs their positions on anything.)

I do oppose Bush's position on federal funding of stem-cell research, but this is a fairly minor policy question for me. I don't mind "faith-based initiatives", since religous organizations are frequently better organized to deliver many types of services than the government - as we saw with Katrina.

But my support for Bush was far from passionate, and I would have voted for a Democrat like Joe Lieberman; I actually voted for Lieberman in the CA primary. My objections:

o Bloating out the budget. In my opinion, the Medicare "prescription-drug benefit" is Bush's single worst domestic policy initiative, and needs to die quickly. While I don't buy the argument that Bush "stole the surplus" - the Clinton-era surplus projections were massively flawed as it turned out - I do see the questions around government finance as the biggest issues facing us now. I do agree with Bo that something is fundamentally broken in Washington; the Republicans - and Democrats - in Congress are behaving like a typical political machine with all its attendent corruption. Gerrymandered districts are to blame for part of this, but a big part of this is "rebels" who were to reshape government in the mid 1990s, have become the Institutional Party, lining their pockets with K Street lobbyist cash and shoveling pork at their districts.

o A profound tone-deafness on media relations and "public diplomacy". Due to the left-liberal inclination of most reporters, the MSM is always poorly disposed to Republican presidents. But this doensn't mean it can be ignored. And some actions were truly stupid from this perspective, such as the abrupt tossing out of Kyoto, instead of doing what Clinton did: mouth sweet nothings to the environmental types who regard it as a Sign that You Care while pointing out that it'd never pass the Senate (which voted 97-0 against it in a nonbinding vote in 1998). In particular, the Kyoto action killed Bush internationally, long before Iraq.

Now, if you've read this far, a final major point is that the weakness of the Dems isn't that they or the media isn't getting the dirt out on Bush. They are, but the fervent wish that The Latest Dirt will erupt into the next Nixon Watergate Moment will never be granted.


Because too much of the country doesn't trust the Democrats to lead. Until they kick out the Michael Moore's, the Hollywood airheads, the wierdos, and the race-baiters, they'll simply be too strange to be credible with "red" America. And it would help if they had philosophies about the world other than "let's work with the UN and maybe the bad guys will go away". Some domestic policies other than tax increases, protectionism, and tossing money at the pet causes of civil-service unions would help too.

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