Jerry Roche

Tuesday, 29 January 2008 19:00

Perception versus reality

In many corporate circles, arbitration is a popular alternative to litigation because it’s perceived to be less expensive and faster. Perceptions, however, are not always reality.

“Arbitration is a voluntary, binding process for resolving disputes,” says Daniel V. Flatten, a partner at Porter & Hedges LLP, Houston. “It is important for business owners to know not only the availability of arbitration but its reach, scope, enforceability and disadvantages.”

Smart Business talked to Flatten about key issues that company officers should know before considering arbitration.

Does arbitration result in lower costs than litigation?

Regretfully, no. First, the cost of the arbitrators is substantial. Most are either lawyers or other experts in their fields who charge competitive rates for their experience and expertise.

Second, cases in arbitration involve the same questions, disputes, motions, hearings and discovery as disputes in private civil litigation. Depositions and written discovery are no cheaper in arbitration proceedings than in civil litigation.

What about faster resolution?

Historically, the arbitration process has not delivered. Just as in private litigation, it takes time to frame the issues and complete discovery. If a panel of three arbitrators is involved, the hearing must be scheduled when all three are available — usually a matter of months in advance.

The actual trial or hearing might be slightly shorter than a court trial, but that factor is usually outweighed by the arbitration panel’s frequent reluctance to limit evidence at argument. Added to this is the frequent dispute as to whether the controversy is even eligible to be arbitrated. The party opposing arbitration files suit either on the merits or seeking to void the arbitration agreement, and this dispute must be resolved before the arbitration itself can proceed. While well-established case law defers arbitrability decisions to the arbitration panel itself in a properly worded agreement, this is a frequent tactic that both delays the arbitration and makes it more expensive.

What is the importance of the controlling jurisdiction?

Jurisdiction is important in several ways. First, the Federal Arbitration Act and similar statutes in most states recognize arbitration and make it enforceable in the courts. While the acts do not create substantive law, all confirm strong public policy favoring arbitration and give the courts a mandate to enforce it.

Then there is a geographical aspect to the jurisdiction question. Unless the agreement says otherwise, the law of the jurisdiction in which the arbitration panel sits is ordinarily assumed to be the law governing the dispute.

How can a company involved in arbitration manage costs?

In much the same way as in general civil litigation. If the issues can be narrowed, then discovery and trial will presumably be shorter and less expensive. Unfortunately, this requires cooperation by the other side or some willingness on the part of the chairman or the arbitral panel to enforce limitations. Arbitrators are less likely to do so than courts, perhaps because they recognize the lack of an effective appellate process.

Also, the parties can agree on limited discovery — a prime driver of cost and time. In my experience, this is a mixed bag. Some limitations can be agreed on, but with electronic discovery still in its infancy, the process is becoming more expensive, not less. Here again, one needs either an agreeable adversary or a firm decision-maker on the panel to limit discovery.

General policies for reducing arbitration costs include: identifying and narrowing the issues in dispute, narrowing discovery to items in dispute, narrowing search standards for electronic discovery, reducing the number and duration of depositions, and even manning the trial team with correct levels of experience and expertise. Unfortunately, all are much easier said than done.

Who is generally responsible for paying arbitration costs?

The typical ‘American rule’ allows for each party to bear its own fees and expenses. The less-common ‘British rule’ forces the loser to pay the winner’s attorney’s fees and incidental expenses.

In addition to attorney’s fees, common expenses associated with arbitration include written discovery, expert fees and expenses, and travel. Even non-expert witnesses frequently require travel and reimbursement for time lost from work.

Unfortunately, at the time you are crafting your arbitration agreement, you don’t know whether you will win or lose.

If the agreement contains a ‘British rule’ provision, the definition of winner and loser should be considered. Under some state rulings, a judgment by the plaintiff for any recovery constitutes a win regardless of where it fits in the settlement posture of the parties immediately before trial.

DANIEL V. FLATTEN is a partner at Porter & Hedges LLP, Houston. Reach him at dflatten@porter or (713) 226-6664.

Sunday, 25 November 2007 19:00

Letters of intent

Formal letters of intent are usually integral to the process of consummating a business transaction — especially larger more complex transactions. Those letters can be legally binding or nonbinding. Confuse the issue, and it can become a costly proposition.

In order to avoid any missteps when drafting a letter of intent, it is absolutely necessary to consult with an attorney.

“The main reason to consult an attorney is to create a well-drafted and well-thought-out letter of intent,” says Michael J. Petersen, a partner with Shulman Hodges & Bastian LLP. “A lawyer experienced in transactional work can help a client avoid pitfalls that will come back later when enforceable agreements are negotiated. He or she can provide you with a letter that is either binding or nonbinding, depending on which option is best for your company.”

Smart Business talked to Petersen about the confusion that can exist in situations that calls for a letter of intent.

What is a letter of intent?

Letters of intent are the first step toward contracting between the parties involved in a transaction. The classic definition of a letter of intent is a document that is supposed to be nonbinding and that describes the critical elements of a transaction. However, as deals have evolved into larger and more complex structures, binding letters of intent — which give a short summary of key provisions of a deal — are now being used. Letters of intent can have very substantial legal and financial implications. They reflect commitment on both sides, and the parties involved often will commence making corporate decisions based on a letter of intent.

Part of what a letter of intent does is help parties think through and agree on key terms of the contemplated transaction. It forces precision and forethought. Even if it is a nonbinding letter, it will be used by both sides as an agreement in the negotiation process if either side attempts to vary from its terms.

A great deal of preliminary negotiation goes into a letter of intent because key elements of a deal are included, such as pricing. Also, as transactions have become more complex, it is almost a necessary step to put key elements of the deal on paper so that both parties can have the same intention before a contract.

Specifics can vary from relatively little detail to quite detailed. The more detailed a letter of intent is, the more likely it is to be ruled binding. In a typical transaction, the letter of intent will tend to be three pages to six pages in length and not overly detailed. It will hit upon the key aspects of the deal, like price, assets and closing time-lines. It might also include a binding confidentiality agreement.

A short letter of intent often becomes a 20-page to 60-page legal contract — or even longer — when the final, legally enforceable contract is drafted. Rarely will you see a letter of intent spell out dispute resolution, arbitration provisions, choice of law and details of closing.

A well-drafted letter of intent also works as a disclaimer. It usually begins and ends with, ‘This is a nonbinding letter of intent. Any final agreement is to be negotiated between the parties and will include additional significant terms.’ That helps establish the intent of the parties — but it’s not necessarily a silver bullet.

Why be so careful about signing a letter of intent?

It is possible for businesses to believe that they are not bound by a letter that actually is binding. If a dispute arises, the courts examine the letter itself and the behavior of the parties — including any press releases or other communication — to determine if the parties are legally bound to the terms of the letter.

What kind of disputes can arise between the two parties that have signed a letter of intent?

Obviously, the biggest is whether it is binding or nonbinding, which is only tested if the deal falls apart. Not going forward can end up being an extremely expensive process for one of both of the parties involved.

The largest trial verdict in this country’s history was $10.6 billion. The issue was whether a letter of intent was binding or nonbinding. Pennzoil had entered into a memorandum of agreement to acquire Getty Oil. Texaco made overtures and ultimately purchased Getty for more money than Pennzoil had offered in the memorandum. The Texas courts found that the memorandum was, in fact, a binding agreement, and Texaco was liable to Pennzoil for $10.6 billion.

The lesson is that you can have a poorly drafted letter of intent that contains enough detail that the court deems it a binding contract. And the core moral is that you need a lawyer to help you make it either binding or nonbinding, depending upon the approach you want to take.

MICHAEL J. PETERSEN is a partner with Shulman Hodges & Bastian LLP. Reach him at or (949) 340-3400.

Sunday, 25 November 2007 19:00

Building your work force

Continuing education programs are important providers of the training workers need, and businesses that offer continuing education to their employees find the return on their investment is high.

“Learning never stops,” says Dr. Patricia A. Book, vice president for regional development at Kent State University. “It is lifelong, and it has benefits that go beyond increased employee retention and productivity.”

Smart Business spoke to Book about the benefits of continuing education and the programs available from area schools.

Who benefits from continuing education?

Nontraditional students were the exception, but now they’re the norm in American higher education. Continuing education has generally been thought of as serving nontraditional students, or adult learners, many of whom are already in the workplace. In some cases, these students already have a degree and are looking to stay current with continuing professional education in fields such as nursing, accounting and law. In many cases, it’s because there’s been a change in policy or requirements in their fields. Another candidate would be an adult who has some college courses, but he or she didn’t have a chance to finish because of work, military or family requirements. These students seek additional coursework so they can attain an associate or bachelor’s degree. Adults age 24 and older now represent 43 percent of all undergraduates. Also, today, a majority of the graduate and first-professional students are enrolled at the master’s level and attending part time.

What are the benefits?

There’s long been a correlation between improved job performance, increased earnings and increased educational levels. Higher employee retention is also a byproduct of continuing education. When employers can provide career development, employees feel more loyal, leading to higher retention rates. But, beyond the corporate and personal benefits, continuing education has societal benefits. We see that students are more engaged with their communities in a variety of ways, such as higher voting levels and greater participation in volunteer activities.

What programs are available?

There are many different types of continuing education. First, there are programs for professionals in fields with continuing education requirements, like attorneys, social workers and teachers. Another popular option is executives pursuing executive master’s of business administration degrees. Another option is customized programming. Colleges and universities work with employers to identify their work force needs within the company. Programs are then customized to meet the company’s needs and are incorporated into the work cycle. This could focus on senior-level management, supervisors or line workers. Because many adult learners have full-time jobs, classes can be scheduled for evenings and weekends to make them more accessible. These classes are often designed to help workers position themselves for advancement within their organizations. Finally, companies can help continuing education providers design courses that are pertinent to their employees’ interests.

What are stumbling blocks to engaging a corporation in educating its employees?

Competitive pressures here are so great that companies don’t feel they have the immediate financial wherewithal or time to devote to employee training. They’re in survival mode, just trying to keep their costs down — and training and educational dollars seem to be easy to cut. In Ohio, the state created the Enterprise Ohio Network to supply targeted industry training dollars that education providers can use to support training. Not a lot of money is available, but it opens the door for companies that want to participate in continuing education.

What learning options are available beyond standard in-class sessions?

Continuing education is much more accessible in a variety of formats than it ever was, which is wonderful because the demand is incredible. We just began a new venture called Kent State On Demand, in partnership with Time Warner Cable. It offers continuing education credits for attorneys, social workers and counselors via cable television, from the comfort of their homes, whenever it’s convenient. Because massive amounts of data can be stored in computers, it is sometimes difficult to turn all that data into information that management can use for decision-making. As a result, businesses are now in the market for knowledge managers and business intelligence experts, so online degrees are becoming more common in this specialty area. Finally, companies can seek open-enrollment programs where they can send managers to a series of classes on a particular topic of interest, like Lean Six Sigma.

What about educating minority businesses?

One of the issues that’s important to Northeast Ohio is that our minority community is lagging behind in educational opportunities. Engaging these groups in higher education has become a high priority. For example, we’re interested in working with smaller African-American- or Hispanic-owned companies to help them accelerate their growth. Institutions of higher learning are making a special effort to advance economic inclusion in Northeast Ohio because we can’t leave that segment of the population behind and progress as a region.

DR. PATRICIA A. BOOK is vice president for regional development at Kent State University. Reach her at (330) 672-8540 or

Friday, 26 October 2007 20:00

Finding financial talent

Since Sarbanes-Oxley legislation was passed in 2002, companies are faced with stricter regulatory pressures, elevating the demand for sound corporate accounting and financial skills. Such skill sets are not always easy to find.

“The most significant challenge is finding qualified talent at appropriate experience levels,” says Kristen L. Backo, CPA, director of recruiting at Resources Global Professionals in Pittsburgh. “Businesses seeking financial talent must show that their opportunity will enable the job seeker to make a valuable contribution and grow professionally.”

Smart Business talked to Backo about the most efficient avenues to explore when in need of accountants and other financial specialists.

Where might a company find financial talent?

You can either look within your current organization, or you can look beyond your organization and industry and hire for growth potential.

First, don’t let people move out to move up. Most job seekers cite a lack of growth opportunities within their current organization as the No. 1 reason they are exploring the market. Career development is extremely critical to finance professionals, yet many companies prevent them from pursing opportunities in other areas of the company. If you institute career development programs, you can help employees grow their career while remaining with you.

If you do not promote from within, you may not have the luxury of hiring talent with very specific skill sets and the corresponding industry experience. I personally have followed the ‘best-available-athlete’ model for hiring. When labor markets are tight, I want to hire the best available athlete with the greatest potential for growth.

Making good hiring decisions goes beyond just checking off boxes of skills and prior systems experience. Hire the professional who has the nonquantitative attributes that you believe will make that person the most successful in the role.

What are some creative strategies for hiring in a tight labor market?

Finding the right financial talent needs to go beyond running ads and searching job boards. The best hire is usually someone who isn’t even looking but listens to the right opportunity when it presents itself.

  • Use your network. Making the people you know and value in the business community aware that you are searching for a new employee may yield unexpected results. Someone you thought was completely happy with his or her organization may jump at the chance to learn more about your opportunity or what your firm offers.

    Asking for referrals is another great way to uncover passive job seekers. Your contact might have worked with an outstanding professional years ago who might be the ideal fit for your role but might not even be thinking about making a job change.

  • Go beyond professional organizations. Look to alumni organizations, graduate programs, trade affiliations and local business organizations to tap into even more professionals.

    Retiree groups are an ever-expanding source of talented professionals who can be tapped on an interim basis or who can rejoin the work force in a less demanding role. These relationships allow them to be productive while enjoying the free time that a demanding career did not afford.

  • Institute referral bonus programs. Referral bonus programs have long been a practice of professional service and public accounting firms. They are designed as incentives for current employees to provide leads to other professionals of the same qualifications. Latest trends have companies expanding those referral bonus programs to friends of the firm or any person who provides an introduction to the right talent that results in a hiring decision.

  • Offer creative work solutions and hiring bonuses. To attract the best talent available, many companies have instituted hiring bonuses for tough-to-find key skills, such as technical accounting or SEC reporting. Companies should also consider more flexibility in the workplace in the form of compressed workweeks, work-from-home options or part-time schedules. Additionally, many firms, such as ours, can provide creative work solutions to help professionals manage their work-life balance.

  • Create a strategic recruiting plan. Hiring professionals in a reactionary mode always results in pressure situations where companies could sacrifice standards to ease the pain of unfilled key positions. So create a strategic recruiting plan that makes hiring financial talent a top priority of managing the finance function. Ensure that the right activities are included in your plan. Make recruiting an ongoing business process of your organization. Utilize professional service firms that can help fill any key positions within your finance organization on an interim basis while allowing you the time to conduct a thorough search.

KRISTEN L. BACKO, CPA, is director of recruiting for Resources Global Professionals in Pittsburgh. Reach her at (412) 263-3304 or

At the first sign of corporate financial difficulties, directors and officers should examine the effect of their decisions on a number of interest groups, according to Gary Pemberton, a litigation partner at Shulman Hodges & Bastian LLP.

“You will be scrutinized,” Pemberton says. “Examine every decision you make. If your company ends up in bankruptcy, management’s prebankruptcy decisions may mean the difference between a creditor getting a nickel on the dollar or 50 cents on the dollar.”

Smart Business spoke with Pemberton, a business and bankruptcy litigator who has tried a number of cases involving failing companies, and asked him about the “zone of insolvency” and the perils it creates for corporate officers and directors.

What is the ‘zone of insolvency’?

The courts have come up with two tests that they have used to determine if a company is in the zone of insolvency. One is the balance sheet test. Do liabilities exceed the reasonable value of a corporation’s assets? The second is a cash flow test. Is a company not able to pay its debts as they come due in the ordinary course of business, or is the company about to enter into a transaction that will result in it being unable to pay its debts as they come due?

While the courts have shown some flexibility in applying these tests, if either of these situations exist, a prudent director or officer will assume that his or her company is in what is called the ‘zone of insolvency’ and act accordingly.

What are management’s general duties, regardless of a company’s financial health?

As a matter of law, there are two general duties. One is the duty of loyalty, which means that actions must be taken in good faith and in the corporation’s best interests. The other is the duty of care. Management must take steps to be reasonably informed of all available material information. It has to act, based on that information, as any prudent person in the same position would act under similar circumstances.

If a manager abides by these two simple rules, he or she will get the benefit of what is called the Business Judgment Rule, which means the court will likely find that he or she has fulfilled management’s fiduciary duties and will not second-guess a decision simply because it turns out badly.

How does the zone of insolvency change a manager’s actions, and what are some practical actions that a top manager can perform for a company in financial difficulty?

The law has become very muddy in this area. Just a few months ago, the Delaware Supreme Court held that a creditor cannot bring a legal action against a director for breach of fiduciary duties. Whether other state courts will follow Delaware’s lead is an open question.

Regardless of what the courts decide, when faced with financial difficulty, a smart director who is not already doing so should start holding regular board meetings and scrutinize everything. Hiring experts, such as insolvency attorneys and financial advisers, is another smart move, so that if later questioned, the directors and officers can claim they made informed decisions based on prudent advice.

There are a few other practical steps management should take if their company has entered the zone of insolvency:

  • Avoid taking action that favors equity over creditors — for instance, paying a dividend or redeeming stock.

  • Avoid actions that could be deemed fraudulent transfers, like giving away a product or service for less than its fair value.

  • At the end of every board meeting, introduce and vote on a resolution that all transactions approved are in the best interests of the corporation, and have the minutes reflect why that is the case.

  • Disclose any directors’ interest in a third party that is involved in company business. Make sure it’s on the record and in the board meeting minutes.

  • Don’t hide from creditors. Directors and officers are better served by being fully transparent.

  • Ensure you have independent decision-making by creating an audit committee with independent members to make recommendations on any insider transaction (which should be avoided when a company is in the zone of insolvency).

  • Avoid preferring one creditor at the expense of another, unless there is a significant business reason to do so.

  • Avoid any self-dealing, which will negate your protection under the Business Judgment Rule.

  • When evaluating fundraising transactions or the sale of corporate assets, recognize that these will be scrutinized by shareholders and the company’s creditors.

  • Examine the corporate directors’ and officers’ insurance policy carefully for material terms and exclusions.

  • Purchase D&O insurance, or bargain for changes in the amount of coverage and terms of the current policy.

Is resignation an option?

A director’s natural instinct is to abandon a sinking ship. But by leaving, you’ve essentially removed your influence from future actions of the corporation, and your resignation may be a breach of your fiduciary duties. You will be called to account for your prior decisions anyway and leaving may create the implication that you knowingly made decisions that were not in the company’s best interests.

GARY PEMBERTON is a litigation partner at Shulman Hodges & Bastian LLP. Reach him at or (949) 340-3400.

Thursday, 26 July 2007 20:00

Real estate blues?

Real estate, to a large extent, drives Orange County’s economy. It is our biggest and most valuable commodity, and it affects local businesses on many levels.

So it is not good news that real-estate-related bankruptcies have recently surged — especially among mortgage lenders who specialize in the sub-prime market.

“There is more fallout from what is happening in the real estate market every day, and it seems to be spreading through the local business landscape,” says James Bastian, partner and head of Insolvency and Reorganization Practice at Shulman Hodges & Bastian LLP.

Smart Business spoke to Bastian about what business management should do to cope with the prevailing Orange County real estate downturn.

Please explain in detail the current Orange County real estate market.

For several years, the real estate market here was booming, due in large part to the sub-prime lending market. Many people qualified for loans that were based on the value — or perceived value — of the real estate, rather than on the borrower’s ability to repay.

With property values escalating so fast, lending practices got more and more aggressive. Lenders avoided many of the normal underwriting procedures, like verifying the borrower’s income or scrutinizing tax returns. They could — and did — charge higher-than-prime interest rates. Anybody with a pulse was getting a huge mortgage, and it was sometimes even more than the value of the home.

The local real estate market, fueled at least in part by these kinds of loans, surged. Big and small mortgage companies grew. Financial institutions then paid large premiums for the loans they originated, and many people got wealthy. Everybody was happy. The brokers were getting their cut, and the banks were getting their cut.

But many homeowners soon found that they could not afford the monthly payments. When they started defaulting — sometimes in the first month — the big banks got nervous. What you have been seeing in the last several months is that the funding sources, called warehouse lenders, are demanding to be repaid from the mortgage companies, who have responded by cutting staff, shutting down or filing for bankruptcy.

The whole market was destined to eventually unravel because the loans should not have been issued in the first place. If a prospective borrower could not make the payment, he or she should not have been given a huge mortgage.

So the once-robust mortgage business in Orange County now appears to be dying. The market is tapped out. Executives are being laid off, as are loan processors, appraisers, title people — anybody associated with the chain of documenting a mortgage. As a consequence, these businesses do not need as much office space, so the commercial real estate market will suffer as well. It is a domino effect, and the first dominoes have fallen.

Why are businesses that are not related to real estate so concerned?

Anybody who watches Orange County business should be concerned. When you have a large segment of the local economy that is very frenzied and that business starts to go away, the region’s economy will be negatively affected.

Executives should be concerned because, on a personal level, their home values are going down. Their employees’ home values are going down. If their employees face foreclosure or have to go into bankruptcy, there may be potential distractions. It is all linked.

How should business executives react?

Businesses that are thinking about relocating or acquiring more commercial space should watch and wait. There might be space becoming available and deals to be had for space that was occupied by a player in the mortgage arena. In the near future, there might be opportunities to purchase commercial real estate in a somewhat distressed environment.

Right now, executives need to be concerned and sensitive to employees who may be suffering financial hardships. They need to understand the issue and figure out the impact on their business, if there is any. The problem can potentially affect virtually anyone, including friends, neighbors and colleagues.

Sure, opportunities can be found in a downturn, like purchasing investment property or a new house at lower prices. But because there is a lot happening on the national level — the war, a presidential election — I would be careful about making any immediate decisions that have an impact on your financial well-being.

This could be the beginning of a significant downturn in our local economy or just a cooling-off period, but one thing is obvious: There is more real estate development — both commercial and residential — being undertaken on a strictly speculative basis than any other time since the late ’80s and early ’90s. This may be history repeating itself or just an opportunity to enter the market before it takes off again. Either way, we are living in an interesting time.

Executives have to devise an effective strategy for protecting themselves while capitalizing on this situation. It is always easy to play Monday morning quarterback, but the focus must be on being proactive and either avoiding a problem or taking advantage of an opportunity.

JAMES BASTIAN is a named partner and head of Insolvency and Reorganization Practice at Shulman Hodges & Bastian LLP. Reach him at

Thursday, 26 July 2007 20:00

Parting ways

According to Joel J. Guth, an advisor in Smith Barney’s Citigroup Family Office, selling to an outside third party is actually easier than selling the business to a family member or a group of key employees. “You can have open negotiations without feelings getting hurt,” Guth says. “There is less emotion involved.”

Smart Business, as part of its continuing series on exit strategies for business owners, talked to Guth about selling to a third party.

When you refer to a third-party buyer, what do you mean?

There are two kinds of third-party buyers. One is a strategic buyer who makes the purchase because it’s a strategic fit for another existing business. The other is a financial buyer, a pure investor who is buying the business because he thinks the cash flow can grow and he can generate a return on his investment.

What are the differences between a strategic buyer and a financial buyer?

Many times the strategic buyer is looking to cut costs and take advantage of synergies with existing businesses. This may mean the new owners will close locations, move offices and reduce jobs to eliminate any overlaps. As the new owner, a strategic buyer may ask the prior owner to leave immediately after the sale closing.

The financial buyer is usually looking for a business that can operate ‘as is.’ This usually means keeping the current facilities, management team and the bulk of the employees. Many times, a financial buyer will want the prior owner to continue to run the business and may offer lucrative incentives to help continue the success of the business.

Historically, one of the main differences between the two buyers has been the price each is willing to pay. Strategic buyers have been known to pay a higher multiple than financial buyers. However, as more and more money has flowed into private equity firms, the multiples private equity firms are paying has increased.

What are the advantages to, or benefits of, selling to a third party?

You can have open negotiations with a third party without feelings getting hurt because you’re selling an asset in a truly open market. Also, multiple bidders can create a higher value and better terms for the seller because of the competitive process. Selling to a third party can be extremely attractive for owners who want their cash upfront and want to have very little of their financial future tied to the future success of the business.

The main reason people sell to third parties is they realize a third party is willing to pay a significant amount more than employees or family can pay. Many times, in order to give the owner what he needs to accomplish his objectives, the only solution is to sell it to a third party.

What are the drawbacks to selling to a third party?

The immediate concern can be the culture, mission or vision of the company that the owner has spent 25 years cultivating. You give up most control when you sell to a third party.

As mentioned before, the employees are always a concern because a third-party owner may come in and wipe out a portion of your work force.

It comes back to the seller’s goals and objectives. If he is ready to walk away, then a strategic buyer may be a better fit. If he is not ready to walk away, he may need to pursue financial buyers.

Has the number of businesses being sold increased in recent years?

Movement has increased dramatically. A successful business owner may get three or four phone calls a week. It is all a function of the good economy, generous lending standards, demographics and the huge increase of capital in private equity funds. In other words, credit is readily available, baby boomers that started companies are now getting ready to do something else, and there are billions of dollars waiting on the sidelines to buy good businesses.

The rise of private equity capital has increased the flexibility an owner has when selling his business. A private equity firm is willing to buy 100 percent of the business or allow the owner to retain a portion of the equity in the business. For owners who think they are three to five years away from permanent retirement, a private equity group may offer a way to take some money off the table today, and owners can still run the business for a few more years.

Finally, with the dollar weakening, we’re starting to see an increasing number of foreign investors coming into the marketplace. U.S. businesses have become cheaper for these foreign investors.

Citigroup Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and non-bank products and services through various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC. All references to Citi Family Office Financials Professionals refer to employees of Citibank. N.A. or Citigroup Global Markets Inc. Some of these employees are registered representatives of Smith Barney, a division of Citigroup Global Markets Inc., that have qualified to service Citi Family Office clients.

Citigroup Global Markets Inc. Citicorp Investment Services. and Citibank are affiliated companies under the common control of Citigroup Inc.

JOEL J. GUTH is an advisor in Smith Barney’s Citigroup Family Office. Reach him at or (614) 460-2633.

Thursday, 26 July 2007 20:00

Training and the bottom line

There are many ways that well-trained employees benefit a company’s profitability. “Training provides a positive return on investment beyond the traditional more-widgets-per-hour measurement,” says Anne Hach, executive director of training and development for Corporate College, a division of Cuyahoga Community College. “If you fully look at the productivity of your employees, and you fully look at the costs associated with poorly trained employees, the value of training becomes obvious.”

Smart Business spoke with Hach about how high-performing organizations justify their training budgets.

What impact does an effective training program have on a company’s bottom line?

Effective training programs should have specific learning objectives, measurable outcomes and in some way impact the productivity of a company. The positive impact is crystal clear when you’re talking about hard-skill training for employees who are, for instance, actually engaged in making widgets.

If training helps an employee who usually makes three widgets per hour make four widgets per hour, there is a measurable impact on the bottom line. The same goes for sales training. If a sales training program helps a person increase their percentage of closed sales by 10 percent, they are that much more productive.

Regardless of the competency, it’s important to match your outcomes and your expectations to the content and depth of the program. Long-term impact comes from consistent, connected training.

What about training in the soft skills, like communication, conflict resolution, leadership and management?

It’s a little bit deeper level of thought when you try to justify leadership training. For all companies, linking the bottom-line impact to the benefits of training can help explain the importance to people at all levels of the organization.

The costs of a bad manager add up. There are the costs associated with selection and hiring, as well as the impact that bad managers can have on the people around them. Lower productivity, higher turnover, time spent with HR and poor customer service are all real costs that can be attributed to poorly trained managers.

It’s a little bit simplistic, but it’s incredibly important to consider training’s impact on one of the great American business traditions: promoting from within. When you take the guy who can make eight widgets an hour and promote him to foreman, you may not take into consideration whether the guy’s a leader. But with the proper training, you can make him as productive in his management skills as he is a producer of widgets.

Also, when one of your dependable managers leaves, you quickly find that one of the huge costs of running a business is on-boarding leaders. But if you’ve got bench strength, and you can promote someone from within, that’s a much more cost-effective way of growing your leadership and your organization.

In what other ways can training save money? Fewer accidents? Lower liability insurance rates? More employee stability? Better products, ergo more sales?

Those are the classic ways that training can save you money or can earn you more money. Another way is through improved customer service. For instance, one unhappy customer generally results in a direct revenue loss. Having a well-trained customer service employee can minimize the monetary loss or avoid the loss entirely.

Another issue revolves around having your employees well trained in human relations. What if the company is involved in a sexual harassment suit, mainly because an employee wasn’t properly informed? How much money does that cost? How much money does the company save by not having to endure a court battle — not to mention the financial liability should you lose?

Should a training program be a part of company culture?

Training outcomes should be imbedded in a holistic approach. The goal is to create a culture of learning. Instructional training should be a part of the overall picture, but there’s also self-directed learning through the Web or even something as simple passing a pertinent book around the office.

Training proponents who justify the cost of training to their boss are winning only half the battle. You must also take it to your employees. If they attend training sessions, they are investing time so you need to make sure they understand the value to them.

Training doesn’t need to be confusing. What’s important is to make sure that learning is always happening. You have to really think about the value of having a high-performing organization and the multitude of steps you must take to get your people to that level.

ANNE HACH is executive director of training and development for Corporate College, a division of Cuyahoga Community College. Reach her at or (216) 987-2962.

Monday, 25 June 2007 20:00

Consumerism and the Internet

Passing additional financial responsibility for their health care to employees — more premiums, higher co-pays, higher deductibles and coinsurance — has stimulated the concept of health care “consumerism,” according to James Repp, Corporate Head of Sales for AvMed Health Plans.

“For an employer to require additional financial responsibility without giving (his or her) employees the proper support is irresponsible,” says Repp. “Providing them with the proper health care information will help them spend their out-of-pocket money more prudently.

“Consumerism starts with an awareness that quality, cost and service vary. And responsible employers should be urged to provide resources so that employees are better armed to make decisions.”

Smart Business spoke with Repp about how certain services can educate employees and also stimulate them to improve their health and well-being.

How can the Internet help?

If you start at the most basic level, the Internet is a tool to provide access to claims information, like how employees stand relative to their deductibles and their coinsurance limits. Such Web sites can also demonstrate the value that the health insurer brings through their network arrangement — not only the bill charges but also the actual negotiated rate that the employee has to pay.

Some interactive Web sites also provide general health information. Patients can go online and enter in a specific disease or procedure, and as you navigate through those topics, the site asks additional questions. It then walks them through alternatives to the disease or procedure in question and lists questions that can be asked of the physician.

What if a person can’t access the Internet?

One of the missteps that a lot of health care carriers have made is that they’ve almost exclusively driven their consumerism platform through the Internet. The online tools are very important, but they shouldn’t be used in isolation.

It’s also important to provide 24-7 access to actual human beings who can help answer questions and let their subscribers or members know what information is available. A high percentage of the people accessing provider Web sites are simply overwhelmed with trying to navigate them. If they have an advocate who can help them, it becomes easier.

The next level of support is more attuned to helping find a doctor and a hospital. Members can put in criteria relative to quality or proximity, and the site will produce a report based on that criteria.

The most appealing model is to have online services available 24-7 but also to provide access to advocates through a telephone-based 24-7 system. The most advanced programs add access to registered nurses through a nurse-on-call service 24-7. When you fuse those services together, you get the most powerful combination.

What cost-saving measures can an employer recommend?

When you start to get into financial engagement, that’s when the awareness and understanding of the variability become important.

Members need access to the cost of certain procedures and the cost of using network versus non-network providers.

Ultimately, employers must begin to impact the thought process of their employees by convincing them that making some simple lifestyle changes today can minimize future out-of-pocket costs. In the past, there wasn’t that incentive to stay healthy because their out-of-pocket expense was relatively low and fairly fixed.

Getting your employees to take at least some of these low-cost actions today can be driven by providing incentives.

How will the health care system change in the near future?

One is that there promises to be further transparency of costs, which will really cement consumerism into the health care model. Most of the cost information being communicated today is coming from the carrier side of the business, it’s not broadly available, it’s built on averages, and it doesn’t break down to a specific disease, facility, procedure or physician. We’re looking at full disclosure of the entire health care model, and the Internet will be one of the components that can provide that information.

The other piece is the creative financial arrangements around providing additional incentives for employees to save for health care: the health savings accounts, health reimbursement arrangements, flexible spending accounts -- all those mechanisms that provide favorable tax treatment. In the past, there were relatively low premiums, high levels of coverage and low outof-pocket expenses so people weren’t forced to save. Now, with higher deductibles and the cost-sharing increase, people are going to have to start saving for health care. Incentives make complete sense.

JAMES REPP is Corporate Head of Sales for AvMed Health Plans. Reach him at (305) 671-6122 or

Monday, 25 June 2007 20:00

At the core

Brad Kleinman of Corporate College, a division of Cuyahoga Community College, thinks that mastering five core skills will enable entrepreneurs to be successful in both business and in life.

“You can’t measure the five skills anatomically,” says Kleinman, associate director of the Key Entrepreneur Development Center. “But knowing where you’re weak and where you’re strong allows you to focus on an optimal training program for you. Education can vastly improve whatever innate skills you have.”

Smart Business talked with Kleinman about the five core skills and how they can help ensure a small-business person’s success.

What are the five core entrepreneurial skills?


  • Management of self — A dedicated entrepreneur needs a certain amount of self-discipline to continually get up early and stay up late to ensure the business’s early success.



  • Management of others — An entrepreneur needs to focus on his or her strengths and fill in weaknesses with other individuals to help reach your goals.



  • Communication — Of all the core skills, the ability to communicate is perhaps most key to a successful business and a successful life.



  • Decision-making — This is not just the ability to make a hard decision, but the ability to make a quick decision, using technology to mitigate risks. Given our current economics and the emerging global economy, quick, accurate decisions are essential.



  • Opportunity recognition — One of the most important skills is the ability to see gold where others see a void. Many people, depending on their mindset, might not see an opportunity around Cleveland. We see opportunities everywhere.


Is passion for your job a core skill?

Some people just want to be in their own business and stick with that — no help, just go. There will always be people that will still be successful and make something great happen, no matter how few people they interact with.

Other people want to work with others. Either way, there has to be some excitement about learning and doing business.

Passion alone does not determine whether you’ll be successful, but if you want to be a successful entrepreneur and be in it for the long haul, you have to stick to it. Passion goes hand in hand with ‘stick-to-it-iveness.’

If you don’t love what you do, there’s no room for you in the entrepreneurial world. I’m not saying that you have to like what you’re doing to make a lot of money. But believing in your business and having passion for it can help immerse it in viral buzz and good word-of-mouth.

How important is continuing education to a busy entrepreneur?

Nobody’s perfect. Everybody can get better. We should always be on a path of constant improvement and striving for excellence, especially if we have the passion for it.

We work for a large percent of our life, so we might as well have a good time doing it and be really good at it. We need to train our minds and our bodies all the time to be better at what we do.

From a student’s standpoint, professional development classes can be a comfortable and informal experience, or they can be a hands-on experience where a business planner dives into business plans.

You can enhance your business experience by listening to people who have been successful and kicking some ideas around with them. When you work with people on these ideas, you create an environment that reinforces the notion that this isn’t just about making money, it’s about doing good, about providing value for others.

How important is actually experiencing what it’s like to have your own business?

We work with a lot of different businesses that are in the small-scale lifestyle arena. It’s the American dream.

Anyone who might be thinking about being a small-business person cannot know whether they’re capable or whether they can be successful unless they experience it. I suggest starting a small business on the side while you work a 40-hour-a-week job, if you do not have a noncompete agreement with your employer. You get to find out your business strengths and weaknesses, and you get to explore your market with a long-term perspective — not because you have to make a dollar now.

You’ve got to try some of this stuff, you’ve got to experience it. It’s all about what works for you. Go out and make it happen.

BRAD KLEINMAN is associate director of the Key Entrepreneur Development Center at Corporate College, a division of Cuyahoga Community College. Reach him at (216) 987-2946 or