It is crucial to fully understand and properly manage your property tax obligations. By understanding the amount of property taxes you are paying and what you should actually be paying you can reduce your company’s expenses. By reducing expenses, you can increase revenue.
“The amount of property tax paid by a company directly impacts their financial bottom line,” says Derk Beckerleg, executive partner at Secrest Wardle.
Smart Business spoke with Beckerleg about valuation methods, how to minimize property tax expenses and the importance of keeping thorough documentation.
How can a company most effectively manage property tax?
The best way to manage property taxes is to either hire someone in-house or retain a property tax consultant. A property tax consultant can be an attorney or there are professionals that do nothing but property tax consulting. Either way, you should have a professional who can analyze the amount of taxes that your company is paying and how much tax you really should be paying.
What are the dangers associated with failing to consider county and state tax requirements?
When you fail to properly consider and understand county and state tax requirements or any municipal tax requirements for that matter it’s going to have an impact on your company’s bottom line. By failing to pay attention to the requirements, you could possibly pay taxes that you don’t really owe.
What methods are used to determine the value of a property?
There are three methods of valuation: cost approach, sales comparison approach and income approach. The cost approach is essentially what it costs to build a building on a piece of property. With the sales comparison approach, you compare the property that you have with other similar properties that have sold. The income approach primarily applies to investment and rental properties. If a company owns an investment or rental property, it is generally valued by projecting the amount of future income the property will produce. It’s important to know the kind of property you have and the appropriate method to value that property because if you ever get into a dispute as to what your property is worth it generally falls into being valued in one of these three categories.
How can future property tax expenses be minimized?
The amount of property taxes that a company pays with respect to any piece of property is based on the value of the property. Therefore, if your property has been overvalued by the municipality that serves you, then you may be paying more property taxes than you should.
The only way to determine whether your property is overvalued is by hiring a property tax consultant who can analyze the kind of property you have, determine whether it’s properly valued and as a result determine if the property is being overtaxed. In the event that the property is being overtaxed you can contact the municipality’s assessing department and try to informally work out an agreement to reduce the property taxes. In failing that, oftentimes, you will need to file an appropriate lawsuit claiming that your property is being overtaxed.
In what ways can an expert help a company manage property tax compliance?
An expert can help a company determine if its property is properly valued and is therefore paying the right amount of taxes. If it appears that the municipality did not use the correct method of valuing the property, the expert might indicate it would be appropriate to hire an appraiser. It’s been my experience that the cost of an appraiser is almost always justified because municipal assessors give a lot of credence to formal appraisals as a method to properly establish what a property’s value should be. Retaining an appraiser can help a company reduce its property taxes.
How important is to keep thorough property tax records?
It is absolutely crucial to keep proper and thorough records with respect to your property taxes. It amazes me how many large companies don’t have a current running list of when they bought a piece of property, what they paid for it and when they got rid of it. They’re being taxed on property that they may no longer own, which certainly negatively impacts them.
With respect to investment property it’s important to know what the property’s vacancy rate is, what you’re renting the property for and what other properties in the area are renting out for so if you get into a dispute over property value you will have complete documentation for the assessors. Recordkeeping should be done on a regular basis and checked on a regular basis to make sure what you are being taxed for is what you have.
DERK BECKERLEG is an executive partner at Secrest Wardle. Reach him at (248) 539-2808 or email@example.com.
The U.S. Commercial Service provides offerings to help small and mediumsize businesses expand international sales. With trade specialists in more than 100 American cities and more than 80 countries, the primary thrust of the U.S. Commercial Service is to help equip businesses with the knowledge and tools necessary to navigate the foreign market.
Currently, one of the few bright spots in the flagging local economy is exporting, says Tim Murphy, first vice president for Comerica Bank.
“So far this year, California exports have totaled $49.7 billion, an increase of 10 percent over 2007,” he says.
Smart Business spoke with Murphy about the U.S. Commercial Service, what it provides and how a company can secure export financing.
What is the U.S. Commercial Service?
The U.S. Commercial Service is a division of the Department of Commerce that assists small- to medium-size businesses in exporting their products and services throughout the world. It helps educate companies about how to tailor their activities to a specific market with respect to their product slate, financing, marketing, assembly and logistics. In 2007 alone, the U.S. Commercial Service counseled 25,000 U.S. companies. This counseling facilitated exports worth $21 billion and helped create or retain 275,000 jobs in the United States.
What type of assistance does the U.S. Commercial Service provide to exporters?
The U.S. Commercial Service works with companies just getting started in exporting and helps companies increase sales to new global markets. Their services include world-class market research, trade events that promote a company’s product or service to qualified buyers, introductions to qualified buyers and distributors, as well as counseling and advocacy through every step of the export process. Probably the most popular service offered is the Gold Key service. Prescreened appointments with buyers and distributors are arranged by the trade specialist before an exporter arrives in any country. Help with travel, accommodations, interpreter services and clerical support are also part of the service.
How does the U.S. Commercial Service partner with corporate organizations to build awareness of exporting opportunities?
The U.S. Commercial Service recognized that it has limited resources and decided to expand the U.S. export base through innovative government and private-sector partnerships. By using each other’s organization, data bases and global/regional networks they are able to reach as many small and medium-sized enterprises (SMEs) as possible. Under the partnership program, seminars are co-sponsored to support the domestic and international marketing efforts of these SMEs. Topics range from ‘Export Basics 101’ to market- or industry-specific topics. A popular alternative to the seminar is the webinar a seminar conducted on the Internet and telephone. This can reach participants all over the country and allow access to industry specialists located globally. Finally, trade missions are an excellent way for SMEs to cost-effectively visit specific countries and meet with pre-screened business opportunities.
How can a company secure export financing?
Trade-cycle financing is financing that starts at the pre-export stage and continues all the way through the collection cycle. Two programs that we found to be very helpful to exporters are the working capital guarantees program offered by the Export-Import Bank of the United States (Ex-Im Bank) and the Small Business Administration (SBA). Additionally, we have a private insurance product that we call a trade payables policy, where we make short-term working capital loans to U.S. exporters that are guaranteed by private insurance. The loan proceeds can be used to purchase finished products for export or to pay for raw materials, supplies, labor and overhead to produce goods for export.
What other options are available?
Since exporters are selling globally, they need to consider how they differentiate themselves from the competition. Two ways of achieving this is to offer competitive terms and to price in the local currency (i.e. euro or yen). Both of these have additional exposures for the exporter, but they can be mitigated by using export credit insurance and hedging strategies.
While cash in advance is great if you can get it, many exporters find that they need to offer terms to their foreign buyers. Credit insurance policies protect against both the political and commercial risks of a foreign buyer defaulting on payment. In addition to the risk mitigation, insured receivables can be used to obtain bank financing.
To eliminate foreign exchange risk, an exporter can sell the foreign currency for delivery at a future date through a forward contract. This is called hedging and allows for the company to lock in a rate, assuring the company of a certain profit margin. Subsequent changes in rates will not affect the company’s profit margin.
TIM MURPHY is first vice president for Comerica Bank. Reach him at (562) 463-6530 or firstname.lastname@example.org. As a partner with the U.S. Commercial Service, Comerica Bank has the opportunity to work closely with its local offices in San Diego, Los Angeles and Ontario.
Many homes and apartment buildings constructed before 1978 contain lead-based paint. While the presence of lead paint, in and of itself, does not necessarily pose a hazard to a dwelling’s tenants, it can be harmful to young children under the age of 5 if the integrity of the painting surface is compromised by chipping and peeling. Lead exposure claims are especially pervasive in inner-city areas that typically have older housing.
“As a person in the rental property business, it is very important to protect oneself from childhood lead exposure claims or lawsuits,” says Rebecca Filiatraut, partner at Secrest Wardle.
Smart Business spoke with Filiatraut about how to protect oneself from lead exposure claims, how the remediation process works and what type of legal liabilities can arise.
How can landlords/property owners protect themselves from lead exposure claims?
First and foremost, a property owner should have his rental property inspected by a certified lead remediator if it was built before 1978 to determine if there are any lead paint hazards present. If there are lead hazards at the property, he or she should hire a certified lead remediator to perform the repairs in order to prevent the spread of lead dust and chips during the process. Secondly, whether or not the property contains or has ever contained any lead-based paint hazards, the owner must provide Title X disclosure statements as well as the EPA pamphlet titled ‘Protect Your Family From Lead in Your Home’ to all tenants at the inception of their leases. It is also wise to obtain a signed and dated statement from the tenant acknowledging receipt of these materials.
Title X disclosures provide the tenant with a written statement by the landlord indicating if the property has ever tested positive for any lead paint hazards. The requirements of Title X are federally mandated and are strictly enforced by the Environmental Protection Agency. A landlord or property owner can obtain copies of these documents either from their local health department or from the EPA Web site located at www.epa.gov.
In addition, any complaints from tenants about chipping or peeling paint conditions should be promptly and thoroughly investigated by the property owner.
How does the remediation process work?
Remediation of lead hazards can be a costly and time-consuming process. If a child is found to have an elevated blood lead level by his or her pediatrician, a referral to the appropriate health department is usually made. Following referral to the health department, an inspection will be conducted to determine the actual source of the child’s exposure. If it is determined by the health department inspector that the rental property does have areas of hazardous chipping and peeling lead paint, a written notice will be sent to the owner of the property, and the owner will have a period of time within which to complete all repairs, usually 30 to 60 days. Occasionally, it is possible to receive a grant to cover the cost of the remediation through HUD or even Section 8.
If the landlord or property owner intends to perform the remediation work him or herself, it is extremely important to remember to completely encapsulate, preferably with Visquine, the area being remediated in order to contain any lead dust, which could contaminate other areas of the property, including the soil surrounding the property itself. The area being remediated must also be wet-sanded, as dry sanding will only serve to spread the hazardous lead paint dust and further contaminate the subject property.
What type of legal liabilities can arise from lead exposure?
If a child is found to have an elevated blood lead level due to exposure determined to have occurred while living at a particular property, legal liability may result. A child may be entitled to receive a monetary sum to compensate him or her as a result of damages due to the high lead levels. These damages can include loss of IQ points, learning disabilities requiring special education, behavioral problems, and other related brain or neurological damage. Certainly, the damages in these cases can be very significant.
Additionally, if a landlord or property owner is found to have knowingly violated the requirements of Title X, liability may be deemed admitted and the only issue remaining for the trier of fact will be damages. Outside of the context of civil liability, a fine can also be imposed by the EPA against a property owner who has not provided the requisite Title X information to his tenants. This fine could be up to $10,000 per property. In recent years, the EPA has been conducting independent audits of landlords and property owners across the country to determine compliance.
REBECCA FILIATRAUT is a partner at Secrest Wardle. Reach her at (248) 539-2827 or email@example.com.
The relationship between a borrower and bank does not end with the disbursement of a loan. After funding has been secured, a commercial banking officer works closely with his or her back-room operating unit to make sure loans are processed correctly.
“If the loan isn’t being handled properly, there are all kinds of ramifications that will carry through to the financials of a company,” says Carol Malecha, vice president of loan servicing for MB Financial Bank in Chicago. “They could have their loan not accrue correctly, they could be faced with an incorrect payment or they could be reporting incorrectly in terms of their liabilities and assets.”
Smart Business spoke with Malecha about what business owners should know about the treatment of their loans, what happens at the bank after a loan is approved and the importance of communication among a bank’s operating units.
Beyond interest rate, what should business owners know about the treatment of their loans?
After everything is signed, sealed and delivered, customers need to know that their loan is going to be treated with the respect that it was treated with when they were taking out the loan. Customers should ask what their bank does to ensure that there is quality processing. Is the operating unit on board with the philosophy of relationship banking? A banking relationship should be customer focused, not operationally focused. This should be evident from the origination of the loan to the payoff of the loan.
After a loan is approved, what happens at the bank?
After a loan is approved, the operating unit gets the original, signed documentation. Then the loan is keyed into an operating system, called the host system. The loan will get boarded with the proper interest rate, the proper term, the proper accrual, the proper billing instructions, etc. Once it is in the system, the bank processes the loan payments and disbursements through the life of the loan. This can be done in several ways: through account officer contact or through item processing where the payment stub is sent with the payment. There are many touch points in the bank that have to work in harmony to provide the quality service every customer should expect and demand.
What role does a bank’s internal communication play in the loan process?
An operating unit communicates with internal customers more than external customers. For businesses to run seamlessly, there needs to be open communication among the account officers, commercial banking associates and consumer lenders. For example, with complicated attorney-prepared documents, there has to be open communication from the time the credit is reviewed through the loan documentation events because all of the terms of the loan have to be clarified in order for the loan to be put on the books correctly. A customer should ask for examples of how his or her bank’s operating units communicate with each other because this is very important. The more open the communication and straight-through the processing, the greater
the efficiency and quality of the service.
Who at the bank should business owners be in contact with?
If it is a commercial relationship, a business owner should be in contact with his or her relationship manager, commercial officer or commercial officer’s associate. This makes the most sense because a relationship is already established; they know each other and they have developed a rapport so they understand what needs to be done. In turn, they will communicate with operations on behalf of the customer. The goal is to ensure that there is a common understanding of the loan on the back end, ensuring the loan is managed in compliance with the terms of the agreement.
What problems can come from banks that sell loans to the secondary market?
Loans to the secondary market do not have an impact on the customer. The relationship between the selling bank and the secondary lender — whether it be Fannie Mae, Freddie Mac or another lender — is between the bank and lender and does not affect the customers at all.
What steps can a company take to fully leverage its bank’s products and services?
The best thing companies can do is develop a personal relationship with their account officer or relationship manager. They’re the professionals who know the most about what the bank can and cannot do. There is a wide variety of products out there other than loans that can help a business, including new electronic processes and online banking. A relationship manager should be aware of these offerings and if his or her customer would benefit by taking advantage of additional products.
CAROL MALECHA is vice president of loan servicing for MB Financial Bank in Chicago. Reach her at (847) 653-2885 or firstname.lastname@example.org.
There are a number of benefits that can be gained from obtaining an audit of financial statements even if there is no third-party requirement. Good auditors will familiarize themselves with the business and operations of a company and share valuable advice that may lead to more cost-effective ways to operate.
By leveraging the knowledge gained through the auditing process, an auditor may also make suggestions to management on ways to improve internal controls to ensure accurate reporting and guard against fraudulent activities.
“If an auditor discovers fraudulent activities with respect to financial reporting, these would be reported to management,” points out Rachel Simon, executive vice president of Gumbiner Savett Inc.
Smart Business spoke with Simon about audited financial statements, how to go about finding an auditor that recognizes your needs and the importance of starting the process early in the year.
Why is it so important for businesses to have audited financial statements?
Audited financial statements are needed by businesses for a number of reasons. They are required by various federal and state regulators, such as the Securities and Exchange Commission (SEC) for companies whose stock is publicly traded, the Department of Housing and Urban Development (HUD) for certain real estate developers and the National Association of Securities Dealers (NASD) for futures brokers.
Audited financial statements may also be required by lending sources, such as banks, current investors or potential investors. Sometimes, a company’s owner may request a financial statement audit so that he/she may obtain comfort about the financial reporting or to put employees on guard.
How should a company go about finding an auditor that recognizes its needs?
Various factors should be considered when a company’s management or audit committee (for publicly traded entities) decides to find a new auditor. Management should begin by trying to get references from its bankers, lawyers or management of other companies. Having an accountant that specializes in the company’s industry or type of regulatory reporting is an important factor. Some examples of industries that require specialized accounting knowledge are not-for-profit, real estate, banks, investment companies, broker-dealers and entertainment.
The ‘right fit’ as to the size of the accounting firm should also be considered. A company that is working with an accounting firm that is too big may not get the attention it deserves. On the other hand, a company that is working with an accounting firm that is too small may not get the appropriate level of expertise that is required.
Lastly, management should make sure that the accountant that has been selected to do the audit is in good standing with its state board of accountancy and the American Institute of Certified Public Accountants.
How should a business prepare for an audit of its financial statements?
The person(s) who will be responsible for providing the auditors with financial information should meet during the year with the auditors who will be in charge of the audit so that they can learn about the business that is about to be audited and to discuss what will be needed to perform the audit. The auditors will usually provide a list of the items needed. This first meeting should happen as early in the year as possible, since the auditors may perform some interim test work prior to the entity’s year-end.
Many times, auditors obtain and document an understanding of the company’s business and internal controls prior to their year-end fieldwork. In order to have as effective and efficient of an audit as possible, information to be provided for the audit should be completed accurately and completely prior to the start of fieldwork.
How can business owners benefit from a financial statement audit?
In addition to providing the auditor’s report, there are many other benefits that can be derived from a financial statement audit. Because an auditor is required to obtain an understanding of the company’s business and internal controls, an auditor may become aware of and recommend ways that the entity can improve its internal controls over financial reporting or profitability. The auditor is also required to perform certain procedures regarding a company’s policies and procedures to detect and prevent fraud. Any suggestions of ways to improve the detection and prevention of fraud would be recommended. Finally, an auditor may discover tax savings measures while performing the audit.
RACHEL SIMON is executive vice president of Gumbiner Savett Inc. Reach her at email@example.com or (310) 828-9798.
For many general legal services, such as residential real estate transactions, simple wills and other day-today legal issues, general practice lawyers are likely to provide you with the best service at the most reasonable price. If the matter is more complex, however, you should seek the counsel of a lawyer who acts as a specialist and focuses on a certain area of law.
“If you have a more complex issue, like a patent matter, a business to pass on to your loved ones or a complex commercial transaction, then you’re likely to need someone who works primarily in that specific area of the law,” says William P. Hampton, co-chairman of the Executive Committee at Secrest Wardle.
Smart Business spoke with Hampton, a former Oakland County Circuit Court judge, who is frequently asked for recommendations of the names of attorneys for businesses and individuals who are in need of potential legal representation, how to understand costs and fees and what types of results can be expected.
How should one go about determining if he or she needs legal representation?
A good way to determine whether you have a legal problem or need legal assistance is to ask a lawyer. Without speaking with a lawyer, you may not know if you need help. To make this important step easier, many lawyers will initially discuss and determine whether you have a legal problem without charging a fee. Once you have decided which lawyer to call, you should ask the lawyer whether he or she charges a fee for the initial consultation and, if so, how much. This meeting is very important to understanding whether you need legal representation.
What information should be obtained when meeting with a prospective lawyer?
Ask the lawyer how much time will be needed for the initial consultation and set aside an appropriate amount of time in your schedule. Familiarize yourself with all of the facts available about your legal matter before the meeting. For instance, if you want your will drafted, put together a general inventory of your assets and specific items that you wish to leave to your beneficiaries as well as a list of the full names and addresses of those beneficiaries. Ask the lawyer in advance what documents you should bring with you and gather any other relevant documents that you think may be helpful.
What questions should be asked?
It is important to discuss with your lawyer how much experience he or she has in dealing with cases similar to yours. If your lawyer doubts his or her competence to handle the matter then be sure to ask for a referral to other lawyers who are familiar with cases such as yours. Also, ask about the outcome of the other cases that the lawyer has handled.
Be perfectly candid during the meeting about all aspects of your matter and avoid withholding any information regardless of whether or not you believe it will help or hurt your matter. Make sure your lawyer covers both practical solutions to the problems as well as all of your options under the law. Do not try to convince the lawyer of the merits of your position by exaggerating the facts. If you know, make sure you tell the lawyer the position taken by a potential adverse party.
How are legal fees typically calculated?
You should understand from the first meeting how much your lawyer will charge to handle your case. Costs are different from fees. Note that you are usually responsible for court costs, filing fees, etc.
An important step to more accurately estimate the cost of legal representation is to make sure your lawyer fully identifies and explains the legal problems you face. Your lawyer should then give you some idea of the amount of legal fees as well as expenses for the action that he or she is going to handle for you. Whether you are charged on an hourly basis or a contingent fee basis, the reason for the fee should be fully explained to you in writing.
How can one get a sense of how long the matter will take?
Ask your lawyer how long it has taken him or her to bring cases similar to yours to a conclusion in the past. You should inquire if your case involves issues more complex than his or her previous cases and whether or not that will affect the expected time to bring this case to a conclusion. Also, ask your lawyer what he or she believes to be the best-case as opposed to the worst-case scenario with regard to the amount of time that he or she expects the case will take.
WILLIAM P. HAMPTON is co-chairman of the Executive Committee at Secrest Wardle. Reach him at firstname.lastname@example.org or (248) 539-2826 .
Corporate sustainability is a business approach aimed at creating long-term value for stakeholders by implementing strategies and practices that protect and support the natural resources that will be needed in the future. Companies that have sustainability programs in place embrace opportunities and manage risks that arise from economic, environmental and social developments.
In a rapidly changing world, now is the time to implement a corporate sustainability strategy, says Richard Plewa, senior vice president and director of corporate sustainability for Comerica Bank. “Global drivers, including water scarcity, resource and food scarcity, energy security issues and climate change, are going to transform the way that economies work.”
Smart Business spoke with Plewa about corporate sustainability, why a growing number of companies are embracing this new business model and how a company can benefit from sustainability.
What are the primary principles, or pillars, of corporate sustainability?
The basic concept of sustainability is to meet the needs of people today in ways that do not compromise the ability of future generations to meet their needs. When you take the concept which comes from a 1987 United Nations commission that looked at the trade-offs between economic development and environmental quality and translate it into today’s business setting, it is clear that business is more than just about profits. In fact, a business’s total performance needs to be viewed as its financial performance plus its social performance plus its environmental performance.
Why are more and more companies embracing corporate sustainability?
The world is changing quickly. As we look around us, we see that there are concerns about energy, national security, climate change and water and food security. More and more people are waking up to the reality that we have to live on the planet in a way that is different from how we have in the past. By the middle of this century, we will have 10 billion people on this planet right now we have 6.7 billion people and there is only one earth’s worth of resources to meet the needs of all of these people. The resources will not go very far unless we learn to use them very differently. We can’t afford the wastefulness; we can’t afford to continue pumping greenhouse gases into the atmosphere. Recent advances in science have enabled us to see that ecosystems all over the planet are already in decline. As people wake up to this reality, businesses are waking up to the reality that people and businesses have new needs, and we need to offer new products, services and solutions to help people live in this world of resource constraints and accelerating climate change.
How should a company go about formulating a sustainability strategy?
You need to take a good look at your stakeholders customers, employees, host communities, suppliers and those who provide capital to your business and you need to understand how your business model and the products and services that you provide are going to be impacted by the global changes we are facing. Having figured that out, you need to think about how the organization should respond to those challenges. What will shake out of the analysis is a list of priorities for action that is going to enable you to manage the risks of operating in this new world and drive the way you decide to pursue opportunities.
How can a business benefit from sustainability?
Businesses that take sustainability seriously are going to be better managers long-term of both risk and opportunity. This means that they will be able to create value for their shareholders and other stakeholders by reducing costs, reducing risks, growing revenues and improving their brand and company reputation. Having a sustainability program in place also helps to both attract and retain high-quality employees who care about which companies they work for and want to do more than just generate wealth they also want to make the world a better place while they do it. A company with a sustainability program tends to attract young creatives and set loose a wave of innovation.
Why is it so important to emphasize actions rather than words when it comes to corporate sustainability?
It is important to walk the talk because a good many people are justifiably skeptical about claims that aren’t matched with deeds. In fact, the term ‘greenwashing’ refers to companies jumping on the bandwagon of the green movement without doing the deep work of changing the kind of company they are and making a substantive commitment.
RICHARD PLEWA is senior vice president and director of corporate sustainability for Comerica Bank. Reach him at (734) 930-2401 or email@example.com.
Enterprise value is an amount that represents the entire economic value of a company. In essence, it is a measure of the takeover price that an investor would need to pay in order to acquire a firm. Calculated by adding a corporation’s market capitalization, preferred stock and outstanding debt together and then subtracting cash and cash equivalents, enterprise value is a more accurate reflection of a company’s takeover cost than market capitalization alone.
In order to increase enterprise value, says Lou Savett, managing principal of the strategic transaction services group for Gumbiner Savett Inc., it is important to position your company for future earnings growth. “The way to increase earnings is by taking a hard look at your marketplace and seeing to what extent you can expand it,” he explains.
Smart Business spoke with Savett about enterprise value, the importance of having a strong management team in place and how to best preserve the value of a business when in the selling process.
What steps can a company take to increase its enterprise value?
First of all, a company has to make a determination about where they fit in the marketplace. There are wholesalers, retailers, manufacturers and service companies, each of which has a separate group of component ingredients that makes it more or less valuable. Underlying all of that is the fact that the enterprise value of a company is almost always determined by some version of discounted future cash flow. If you are able to diversify your market, get into areas where there is less price resistance and get into rapidly expanding marketplaces, then you are increasing enterprise value because the future cash flows will be greater than they are now.
We also know that pricing multiples change with regard to the future components of the company’s vision. If you are not growing then you are unlikely to get a high multiple. If you are growing very rapidly, in a way that people believe will continue, you might get a multiple that is two or three times higher.
What is the main driver that affects the enterprise value of a business?
The main driver will always be earnings and the question will always be: What sort of future earnings will a prospective buyer be convinced can be attained? The higher this number is the better off you will be. Philosophically speaking, there are only two ways to increase business. One way is to sell the same product to more people. The other, is to sell the same people more products. You need to do both of those things. Wells Fargo Bank, for example, recently bought an investment banking group and a national insurance brokerage company, expanding the services that it can sell to its clients.
How can a strong management team increase enterprise value?
A company needs to take a hard and sincere look at its management. Generally speaking, when we walk into a company there is usually one key person. If you ask that person, he will quickly tell you that the company is what it is because of his efforts. If you tell that to a prospective buyer the pricing multiple will be reduced nobody wants to take a chance on the genius being there forever. On the other hand, if you can say we have a management team that through thick and thin can run this company for its highest and best purposes then the amount of enterprise value goes up.
What role does enterprise value play in succession planning?
Enterprise value comes to the fore with any type of exit strategy because it accurately predicts what the person or group who is exiting will get in the way of benefits. When you do your succession planning, you want to build your enterprise value up to a certain point. For example, let’s say that your succession planning involves putting together an Employee Stock Ownership Plan. Your contributions to the plan are in percentages of your capital stock, so if the enterprise value keeps going up, you put less shares in the plan and keep more for yourself. You will get a bigger bang for your buck tax wise if you continue to increase enterprise value while you’re in the midst of succession planning.
How can business owners best preserve the value of their business when in the selling process?
We advise our clients to bring together their core management group and get them involved in the selling process. If you don’t do that people will get scared that their job doesn’t have a future and either leave to a competitor or make other plans that aren’t in your best interest as a seller. As you move forward in the selling process it is important to determine what to tell your customers and vendors and when to tell them. All of this has to be handled very delicately. If you don’t, and something goes wrong in the selling process, you’re going to lose a lot of value.
Electronic bill payment solutions allow businesses to trim costs while improving efficiencies. By eliminating the need for customers to deliver or mail paper items, payments enter the collection stream quicker and with less effort than through traditional methods.
Electronic payment alternatives enable bill payers to make payments at their convenience 24 hours a day, seven days a week through a variety of convenient electronic options including debit cards, major credit cards and electronic check. Companies using an electronic bill payment solution can improve their record keeping while saving time and costs.
“Electronic bill payment allows a company to automate the payment collection and posting processes,” says Joy Gilmer, senior vice president of treasury management for Comerica Bank’s Western Market. “It reduces or eliminates exception items, therefore saving time in internal costs.”
Smart Business spoke with Gilmer about electronic bill payment, how the concept works and how companies can benefit from the solution.
In what ways have banking solutions advanced during the past several years?
In the past, accounts were settled with cash and checks either on-site or by mail. Banking solutions have advanced to mobile solutions transactions can be conducted electronically, over the Web or over the telephone line. With checks now being intercepted and converted into electronic form, the process and exchange can be conducted electronically.
How does the concept of electronic bill payment work?
Electronic bill payment allows companies to offer their bill payers an electronic payment alternative without making a large investment in infrastructure and staff. Payment options include making payment via the Internet, interactive voice response or a human contact center representative.
A company should first try to understand what its customers are asking for based on customer comments, typically through its existing sales and customer service teams. It then sits down with its bank respresentative and begins to form a customized electronic bill payment solution, which can include payment delivery channels, settlement choices, payment parameters and security controls.
What benefits does an electronic bill payment solution provide to business customers?
The electronic bill payment solution is a value proposition for companies and enables them to better serve their customers by providing additional payment options, flexibility and convenience. Customers are able to make their payments when and where it is convenient for them to do so. A company is now empowered to collect payment 24-7, which accelerates the accounts receivable timeline and results in quicker deposits of funds. It also automates the updating of the accounts receivable system, reduces fraud, eliminates audit concerns related to the storage of private financial data of customers, eases account reconciliation tasks and provides new customer service tools for internal staff.
What kind of fraud protection and security measures are incorporated into an electronic bill payment solution?
There are multiple fraud protection security measures, which include the number of days a payment can be made, number of payments made in a day or specified time frame and ZIP code validations. Companies can restrict their customers and only allow them to pay via a particular settlement option, such as a credit card, particularly if the company has already experienced returns for non-sufficient funds in electronic checks. Also, card verification values can be set up, which are similar to a security code on the back of a credit card. In some cases, a company may elect not to accept an electronic payment by using a negative file, also known as a stop file. You see this feature used a lot with mortgage companies because in some cases accepting a payment could cause legal issues down the line.
How can electronic bill payment be branded with a company’s own identity?
At Comerica, with our Easy Pay option, we brand the solution with the client’s own logo, look and feel. If the company chooses the Internet-only solution, our client needs to provide us with its current Internet site address and a file containing its logo so that our site will look like the client’s. If the client cannot provide us with those items, we will work with the company to build a site.
JOY GILMER is senior vice president of treasury management for Comerica Bank’s Western Market. Reach her at (714) 435-3931 or firstname.lastname@example.org.
In the current economic environment, obtaining a business loan can prove to be a challenging task. In order to improve your chances, it is important to understand what criteria banks are looking at when making their decisions.
It is also important to understand that the relationship established between a bank and a borrower does not conclude once a loan has been disbursed.
“A commercial banking relationship is not just about providing loans and banking products to a customer,” says David Song, first vice president of Comerica Bank’s Western Market. “A bank needs to make the utmost effort in understanding the dynamics of its customer’s business to be able to provide optimal banking solutions to the customer in a proactive manner.”
Smart Business spoke with Song about the hurdles that businesses must overcome in order to obtain a loan, how banks analyze risk and under what circumstances yield requirements may be waived.
What basic hurdles must be surmounted in order to obtain a business loan?
In general, there are six hurdles that businesses are subject to when obtaining loans:
- Credit policy: Every bank has a set of
credit or loan policies. These policies generally determine the types of lending transactions acceptable to the bank.
- Credit analysis: This hurdle focuses on
the risk of the proposed loan transaction.
- Loan structure: This determines whether
the repayment terms and conditions sufficiently match the repayment capabilities of
- Loan and account profitability: A loan
request may pass the first three hurdles with
no problems but fail miserably if it provides
little profit to the bank from the transaction.
- Loan documentation: A loan cannot get
funded until it is properly documented and in
compliance with guidelines and policies.
- Loan management: The final hurdle focuses on how the fully disbursed loan is managed by the bank. It mostly involves the bank’s internal procedures but requires the borrower’s compliance with the terms and conditions of the loan.
How does the bank analyze the risk of a proposed loan transaction?
The credit analysis hurdle is ultimately a test of management’s skills and capacities. It is management’s policies, decisions, investments and actions that determine whether the bank gets repaid. Credit analysis involves historical analysis and projected analysis. While historical analysis focuses on past financial performance and the borrower’s track record in repayment of debt, the projected analysis focuses on the borrower’s prospect of generating sufficient cash in future periods to service the debt.
There are five possible sources of cash to pay interest and amortize debt: cash from operations, additional equity, sale of nonoperating assets, additional borrowing and liquidation of business. A bank analyzes and assesses the prospect of generating cash from all of these sources with primary emphasis on the first one. The better the prospect of the first source, the more likely the loan will get approved.
Why do banks establish minimum yields?
Just like the businesses receiving the loans, banks must ensure that their cash returns exceed their expenses. Most banks have established minimum yields on loan transactions, depending on the loan size and risk levels. Thus, a loan proposal is subjected to a set of minimum yield requirements, which consider the cost of the transaction in terms of the cost of funds and overhead expenses as well as projected revenue from the interest income, fees and deposit balances.
Under some circumstances, yield requirements may be waived. Sometimes, a bank may do certain transactions that do not meet the minimum yield requirements if there are other relationships with the same borrower or related entities that provide sufficient yield from the overall relationship. In the current difficult banking environment, this has become extremely important to all banks.
What type of documentation is required for funding to be released to the borrower?
Full documentation of all of the agreed-upon terms and conditions, including the loan amount, interest rate, fees, repayment schedule, collateral, UCC (Universal Commercial Code) filings where appropriate, loan covenants, reporting requirements and so on, must be documented before funds can be released to the borrower. Required documents include a promissory note, loan agreement, security agreement, guaranty (most cases), resolution to borrow and agreement to furnish insurance. Depending on the case, additional documentation may be required. For example, when there is a shareholder loan or loan from an affiliate, banks may require a subordination agreement.
How important is the banking relationship after a loan has been disbursed?
The relationship between the bank and the borrower does not end with the disbursement of the loan but actually begins with the funding, as the bank and the business continue to develop a long-term mutually beneficial partnership. These days, everyone talks about relationship banking, but it is much easier said than done. Ongoing communication based on trust and sincerity usually forms the basis of an enduring relationship between a bank and its customer.
DAVID SONG is first vice president of Comerica Bank’s Western Market. Reach him at (562) 463-6502 or email@example.com.