Things started slow, but his hard work paid off. Trans-Matic has helped transform Western Michigan into a new industry center for deep-draw metal forming.
The company has unwaveringly recognized and cultivated its core competency of innovative engineering in the metal forming industry. The employees’ collective talents, skills and efforts have yielded dramatic improvements in performance, functionality and cost competitiveness for Trans-Matic’s customers.
Competition is intense and Thompson recognizes the importance of being responsive and agile with regard to the changing needs of the customer base. Several customers have initiated global operations and have asked Trans-Matic to supply materials to those foreign locations. The company is responding with new ventures in China and is looking at expanding into Eastern Europe and perhaps Mexico.
Customers are also asking Trans-Matic to augment its offering by adding assembly services for finished goods to the traditional parts supply business. Trans-Matic has the people and foundation required to meet these needs and ensure the company’s success well into the future.
The company is also focused on its people. It is a learning organization and is focused on and invests heavily in enhancing employee competency and performance through training and education.
Trans-Matic also has a plan that since 1974 has paid more than 7 percent of total employee wages in the form of cash bonuses, funded by performance improvements.
How to reach: Trans-Matic, (616) 820-2415 or www.transmatic.com
His company had bought large amounts of videos in anticipation of high sales, but when the sales didn’t come, he had to find something to do with the inventory.
It was at this time he decided they should try renting the videos in order to recover some of the costs. From this idea sprang Family Video, a chain of 460 stores that is the fourth largest in the country.
As the company began to expand and open other stores away from Springfield, Hoogland had a vision that as the company expanded, instead of renting space from someone else, it would purchase each location and either build new stores or remodel existing ones.
Each store purchased was usually paid off in five years. Each site was constructed so that the space not only would have a Family Video store, but other retail space was also created so Family Video could generate customers and income from renting out the other retail space.
Hoogland realized that the video market could be a fad and wanted to make sure that he left all of his options open in case the industry began to decline. If that happens, Hoogland will still own the property and the stores and can convert those spots into rental property.
The company continues to open 30 to 40 new locations each year.
How to reach: Family Video Movie Club, www.familyvideo.com
He was convinced that his focus on risk management, driven by his research into the unique characteristics of convertible bonds, could provide long-term investment performance.
His expertise was quickly proven, but convertible bonds were an obscure and complicated investment that most people knew little about. Calamos worked hard to educate people on their value, appearing on panels, writing articles and penning his first book on the subject in 1988.
Calamos knew that demonstrating superior performance over time would set his small firm apart from others in the industry. Using the core convertible expertise, he expanded the business across asset classes including equity, high yield and alternative strategies.
His success goes beyond formulas and statistics. Integrating family members into the business has been key, as has providing growth opportunities for employees. His nephew joined the company right out of college and is now the co-chief investment officer, and John Calamos Jr. has been involved in the company for 20 years.
The investment team is entirely homegrown. The growth of the firm has made it possible for a series of bright young people to join the firm as analysts, add value and be promoted up through the organization.
“Creativity and innovation have been key elements of our success,” Calamos Sr. says. “Our management team is dedicated to contributing to the environment and supporting the culture for human capital to flourish.”
Calamos Asset Management was ranked as the second fastest growing business in Chicago in 2005.
How to reach: Calamos Asset Management, www.calamos.com
“Bringing Mike to CSMG underscores a major change at the company as we continue to innovate and expand the traditional ways of managing sports clients,” says Alan Nero, chairman of CSMG. “We are thrilled to gain Mike’s vast experience in the strategic development of worldwide brands. His natural leadership style and brand savvy are well-known throughout the marketing community and will help CSMG represent the future of sports management.”
In his new position, Hall oversees CSMG’s entire global operations and leads the company in growing the brand equity of its athletes through effective management, marketing, corporate consulting, content development and new initiatives based on digital media and technology. His experience in building global brands will be instrumental in helping CSMG fulfill its long-term strategy of bringing traditional sports marketing into the digital age and becoming the leader in sports and entertainment management.
“I look forward to the challenge of continuing the outstanding service that CSMG’s founder and chairman, Alan Nero, has provided to sports clients over the past 23 years,” Hall says. “I am fortunate to have the best group of agents and staff in the business and the leadership talent to make CSMG the world’s premier sports management company.”
BROWN GIBBONS LANG & CO.
Brown Gibbons Lang & Co. made several promotions and appointments.
John R. Tilson became managing director from his position as director. He has 15 years of experience in investment banking.
In another move, Michael D. Shaffer was promoted to vice president from senior associate. He is responsible for managing the firm’s analyst staff.
In addition to these promotions, the company hired Julie A. Crothers as communications director. She previously held positions with Morningstar Inc. and JPMorgan Global Asset Management.
The company also promoted Sean J. Sullivan to vice president. He previously worked as an associate. He has completed transactions mostly in the health care, business services and industrial manufacturing areas.
Parksite Inc. named Ron C. Barthel chief financial officer.
Before joining the company, he was a partner with McGladrey & Pullen LLP’s Great Lakes practice and specialized in advising middle-market manufacturing and distribution businesses.
He earned bachelor of science degrees in accounting and finance from Eastern Illinois University.
DiamondCluster International hired Chris C. O’Brien as partner in the company’s public sector practice.
He previously worked as chief information officer of the City of Chicago. In that position he earned several awards, including Crain’s Chicago Business’ 40 under 40 and one of Government Technology Magazine’s Top 25 Doers, Dreamers and Drivers.
Ocean Tomo hired Kevin Sheehan to head the institutional sales and marketing effort for the firm’s asset management group.
He joins the firm from GE Asset Management, where he was senior vice president of institutional sales. Prior to that, he worked for Nuveen Investments.
DEL GLOBAL TECHNOLOGIES CORP.
Del Global Technologies Corp. appointed M. Thomas Boon to the newly created position of vice president of global sales and marketing at Del Medical Systems Group.
He joins the company from Bekaert Progressive Composites, where he was general manager for its global business with responsibility for operations in the United States and Spain.
JMB Insurance hired Barry Gersowsky as chief administrative officer and chief financial officer.
He previously worked as executive vice president and chief administrative officer at Learning Curve International.
NATIONAL STOCK EXCHANGE
National Stock Exchange appointed Michael A. Watkins senior vice president, general counsel and secretary of the exchange.
He previously worked as senior vice president and deputy general counsel for Wachovia Corp. He earned a J.D. from Columbia University School of Law and a bachelor of arts degree from Princeton University.
THE CHICAGO BOARD OF TRADE
The Chicago Board of Trade hired Kevin J.P. O’Hara as chief administrative officer and chief strategy officer.
He previously worked as executive vice president and co-general counsel of the New York Stock Exchange Group Inc. Prior to that, he served as CAO and general counsel of Archipelago.
CSMG made two executive appointments as part of its long-term growth and leadership strategy. Jonathan Siegel was appointed chief financial officer.
Additionally, the company named Marty Pereira chief operating officer.
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“Identity theft is a huge issue right now,” says Nancy Stachnik, vice president, retail marketing manager at MB Financial Bank in Chicago. Defined as the act of deliberately assuming another person’s identity, identity theft is a crime that finds crooks rummaging through garbage cans to find old bank and credit card statements, stealing personal information in computer databases, and thieving information from organizations that store large quantities of personal information.
On the Internet, identity theft frequently takes place through e-mail, with schemes like “phishing” taking hold when an unsuspecting consumer or business owner gives out sensitive information to a party that looks or sounds like a legitimate firm, such as a bank or government agency. “They try to get you to give up personal information,” says Stachnik, a past victim of identity theft herself, “and it’s difficult to tell which are legitimate, and which are not.”
Smart Business spoke with Stachnik about what companies can do to protect themselves and their employees from identity theft scandals.
Why do businesses need to be concerned with identity theft?
Identity theft is one of the fastest-growing consumer crimes, and it applies to businesses as well. The indirect effects can be particularly damaging. Take for example the firm that accepts a credit card from someone who is using a stolen card, or someone who is impersonating another individual. Not only does the victim feel the negative effects, but the business also does. The crimes aren’t always computer based, nor do they have to take place in the online world. In fact, most of the identity theft that’s out there right now happens in decidedly low-tech environments, like mailboxes and garbage cans. Regardless of where it takes place, the fact that it’s a growing problem for both consumers and businesses makes it a problem that shouldn’t be ignored.
How can a business protect itself from identity theft?
A business has to protect its information just as closely as a consumer does. Tax identification numbers, for example, need to be guarded carefully and should only be released under controlled access. Credit card statements should be reviewed on a regular, and timely basis to ensure that they match up with actual receipts. If you’re using a business debit card, you’ll want to compare them to your bank statements to make sure that there are no unapproved charges on them. If your bank provides check images, check through them to ensure that no one has hijacked your checking account number. And remember that vigilance is your best weapon against criminals who will use Tax ID numbers, account numbers and other means of stealing identities and using them illegally.
Businesses also need to be vigilant in protecting their own records and those of their customers from identity theft. You don’t want people going through your trash and stealing information. Shredding, rather than just throwing away, sensitive documents is one way to ensure that they don’t get what they’re looking for. Guarding customer records is equally as important, since your company’s livelihood relies on their repeat business.
What other strategies should a company consider in its attempt to thwart identity theft?
The best defense is to have controls in place to protect any and all critical information. A trusted employee or colleague who has access to important passwords, for example and who is given autonomy in signing important documents could at some point turn dishonest and use that information to steal from the company. Business owners need to remain extremely vigilant, and not let their guard down, when it comes to protecting critical information and monitoring the types of reporting that would unveil a fraud right up front. A large sale to a new customer, for example, may turn out to be a fraud if that customer is using a stolen identity to make the purchase. To avoid falling prey to these schemes, be sure to check identification and credit before getting too enthusiastic over the size of an order.
Where can a business go for help with these issues?
There is quite a bit of information available online, as well as in other media, to help consumers and businesses protect themselves and respond accordingly to identity theft. There’s also a lot of resource material available for victims, or those who are trying to head off being a victim. There are also a couple of Web sites that serve businesses of all sizes to ensure they are not victimized by identity theft, such as The Identity Theft Center (www.idtheftcenter.org/busrisktest.shtml).
Will we see more identity theft schemes in the future?
This isn’t going away, and it’s something that we’re going to have to learn to live with. As companies do more business online and more business internationally, the risk of falling victim to identity theft will certainly rise. And while banks, credit card networks and other institutions scramble to put measures in place to deal with it, it’s ultimately up to the business to make sure that its own sensitive information is protected. It’s another cost of doing business.
NANCY STACHNIK is retail marketing manager at MB Financial in Chicago. Reach her at (888) 422-6562 or firstname.lastname@example.org
For Homi Patel, chairman, president and CEO of Hartmarx Corp., a century-old producer of men’s suits, changes in business culture posed a life-or-death dilemma: Stay focused on a product with declining market share, or adapt.
So Patel established a diversification strategy that used acquisitions and internal product development to propel Hartmarx toward a successful future. And with dedication and hard work, that strategy has paid off.
To many members of corporate America, the advent of casual Friday was a relief a day to work in comfort, without being hampered by suits and ties. But to Patel and Hartmarx, the popularity of casual Friday signaled a disheartening trend.
“The suit market, back about 10 years ago, 15 years ago, started to decline rather precipitously with the casualization of America,” says Patel. “It started off with casual Friday, and soon it became casual every day. It was just very obvious that the market that we were in was declining at 5 to 7 percent a year, and I don’t care how good you are, if the global market is declining, it’s not a good place to be.”
Patel and other company executives took stock of what they had a 118-year-old company with a respected and trusted brand that was intensely focused on a failing market. They needed to get into growing markets women’s wear, sportswear, golf wear.
Hartmarx could no longer be just a men’s suit company. It needed to diversify.
There were only two ways to achieve product diversity: Create new products internally, or acquire companies that were already producing them. Rather than pick and choose, Patel decided to pursue both.
Building on relationships
For Patel, acquiring companies is an ideal diversification strategy. By purchasing another company, Hartmarx not only gets a time-tested product with established market share, it also gets an experienced management team that understands the product and its consumers.
In fact, a competent management team that is willing to stay with the company after an acquisition is one of the main criterion that Patel and his executive team look for in a potential acquisition because, as Patel learned the hard way, the production of men’s suits takes niche talents that may not transfer well to other apparel niches.
“When you’ve done something for a long period of time, that’s your expertise,” says Patel. “As we moved into another level of products, we thought we could take our own people who have done tailored clothing and introduce them to other products and let them do other things. We found out very quickly that that doesn’t work.
“Even though apparel is apparel, men’s wear is not women’s wear, and tailored is not sportswear, sportswear is not golf wear. There’s significant differences and nuances between each subset of the industry. You do need whole new teams.”
Patel also looks for other things in potential acquisitions: an upscale product line, high inventory turnover and profitability. And he often finds those companies through Hartmarx’s employees.
“We ask all of our divisional people, people who run the businesses, the sales managers, etc., to keep their eyes and ears open when they go to shows, when they talk to retailers and when they’re in markets,” Patel says. “(We ask them) to try to figure out who are the up-and-coming companies and who would make a good fit. We get names of people and companies that we would like to acquire from the ground up.”
By identifying companies through business networks, Patel often finds that the companies he wants to acquire aren’t looking to sell. The Hartmarx team works to establish a laid-back personal relationship with the leadership of the potential acquisition, giving the acquisition’s leaders take time to understand Hartmarx, its businesses and philosophies and giving Patel the opportunity to gauge whether the company’s leaders will be a good fit with Hartmarx.
“We’re looking for people who still have an interest in working for some length of time, [at least] five to 10 years,” says Patel. “We are looking for people who have creativity. And I think what we look for is the fit of the human beings more than anything else. We use an expression are they our type of people?
“It’s one of those things that’s kind of hard to define, but when you go through an acquisition ... you get a sense whether you’ll fit with the rest of the organization or not. We know it when we see it.”
This relationship-based approach is often successful, if time-consuming, and it allows Patel to avoid a significant hurdle that he doesn’t want to face: competition for the purchase.
“While we will look at businesses that are for sale, we generally don’t like to get into bidding wars, particularly of late because the price of businesses skyrocketed,” he says. “In the last two or three years, private equity has come in and really raised the prices of retail businesses and apparel business significantly. And so it’s hard for us to compete with private equity in particular bidding for a business.
“We prefer not to get into bidding wars; we prefer to identify individual companies and then work with their management.”
Once a company agrees to join Hartmarx, leaders from both sides establish a five-year plan. This plan is vital in two ways. First, it establishes clear expectations for the acquired company’s performance, post-acquisition. Second, it establishes a profit-sharing payout for the acquired company’s owner, based on reaching those goals. As a result, says Patel, acquired companies don’t need intense supervision or management.
“We don’t manage the business,” he says. “Our general propensity is to leave entrepreneurs alone they become our general managers. We have a very clear set of guidelines as to what is expected of both parties, what the financial rewards are. We’re here to help, if we can help add synergies to retail relationships, sourcing relationships, but we let them run their businesses very autonomously. As long as we’re meeting targets, then we’re good.”
From the inside out
While Hartmarx devotes many of its resources to securing the right acquisitions, its leaders also encourage the development of new ideas and concepts internally. This internal production is vital, says Patel, because with the increase in the number of private equity firms, Hartmarx may not always be able to afford new acquisitions.
“As the price of acquisitions continues to get higher and higher, growth through new, internally generated, organic programs is going to become more and more important for us,” he says. “And we’ve embarked on a number of new projects which are growing from within a greater number of products being offered under existing brand names, the development of new brands, etc.”
These new products and brands may be the future of Hartmarx, so the company does everything it can including offering financial incentives to encourage leaders to continually generate new ideas.
A large portion of Hartmarx’s executives’ compensation is based on the short-term and long-term performance of the businesses they oversee. And the only way those businesses reach their goals is if they are continually energized by an influx of new products.
“We have think-tank teams in each group or each business who are coming up with ideas as to what they should be doing, and then we decide which ones merit” funding, he says. “For them to reach their long-term goals and earn long-term bonuses, they need new ideas to be funded, and to be funded the ideas need to be good. So there’s an internal competition for funding.”
And while the competition can be fierce, when it’s time to fund ideas, leaders turn from competitors into collaborators. That’s because the decision to fund an idea is reached by consensus among Patel, the CFO and other executives, and the leaders of each business. By including everyone in the decision-making process, leaders not only get to promote their own concepts, they also get to see whichconcepts are gaining approval, increasing their own chance for success in the future.
A balanced approach
This diversification, while necessary, doesn’t mean that the company has forgotten its roots Hartmarx is still devoted, at least in part, to its tailored clothing lines. In 2006, the company will achieve what Patel identifies as the perfect product mix: half of its business will be focused on tailored lines (suits) and the other half devoted to nontailored lines (sportswear).
By maintaining its traditional product lines, Hartmarx has also maintained a steady influx of revenue. While the tailored market is on the decline, it still brings in enough to fund the company’s diversification efforts, and its two sides work together to keep Hartmarx a major player in the apparel market.
“We have a suit business that is basically large market share, nongrowth, generating a lot of cash,” says Patel. “The strategy essentially is to take the cash generated by this static business and invest it in growth businesses where we don’t have large market shares. One generates cash and one uses cash, so we take the cash from one and put it into the other, and use it to either grow from within or find acquisitions.”
Hartmarx’s dual-diversification strategy helped the company achieve nearly $600 million in total revenue in 2005 and increase its 2005 net earnings by 48 percent over 2004.
Beyond the company’s financial success, its diversification has added a level of security in the face of the recent trend toward consolidation of retail stores and suppliers.
“Consolidations continue unabated,” says Patel. “As a result of that, the power structure continues to move toward the large stores, who are more interested in creating their own brands and doing private label. Private label is probably the most important element in their strategy of gaining profitability.
“If they can do it on their own without manufacturing, they’ll put that margin in their pocket.”
That margin is good for the large stores but not so good for Hartmarx. Not only do private labels mean more competition for consumers’ attention, they also mean Hartmarx has to work harder to sell its apparel to retailers, because now the company’s sales team has to convince retail buyers to purchase a brand that will compete with its own label. Not an impossible task, but one that’s more challenging than selling to a retailer without its own label.
But by acquiring many brands and expanding into niche markets, such as golf wear, Hartmarx has built a relative safety net for itself.
“No brand accounts for more than 20 percent of our business,” says Patel. “We’re diversified enough that we’re not too terribly affected by consolidation.”
Overall, the diversification strategy has created a stronger, more balanced and more adaptable Hartmarx, providing a foundation for increased future success.
Says Patel, “It helped our earnings, and it’s helped us position ourselves as a broad apparel company, as opposed to a narrow segmented company. Overall, we’ve been pleased.”
How to reach: Hartmarx Corp., www.hartmarx.com
“It’s important to counsel clients on how to best protect their innovations and inventions so they maximize their value and do not trespass on the rights of others,” says Alice Martin, a partner at Barnes & Thornburg and co-chair of its Life Sciences Practice Group. “Clients need assistance in determining what to protect and how to best accomplish that goal, which may mean writing patent applications, requesting trademarks and copyrights, and unfortunately litigating either offensively or defensively.”
Smart Business talked to Martin about the importance of obtaining patents, trademarks and copyrights; what kind of companies need protection; and how intellectual property relates to funding for medical research.
What kinds of medical field research results need to be patented?
Any composition, method or device made by the hand of man is potentially patentable as long as it’s novel, nonobvious and useful. However, patenting is not to be undertaken lightly; the process is time consuming and expensive, and protection is temporally limited. If the product, method or device is valuable and has a long-term life span, a patent may be worth considering.
Pharmaceutical patents are well known for medicines. Also patentable are new products made through molecular genetics, such as compositions to turn off disease-causing genes or to interfere with gene products, or molecules targeted to attack cancer cells. Diagnostic assays detect diseases by using various immunological techniques such as antibodies that react in the presence of the disease, or molecular genetic methods to determine the presence of a disease-related gene.
Medical devices such as replacements for damaged bone and cartilage incorporate mechanical and biological components, including stem cells, are considered as well.
Computer programs and methods for health care and medical reports are potentially patentable. Vaccines are patentable, such as the recently approved vaccine for HPV. Therapies for Alzheimer’s disease and other neurological developments such as multiple sclerosis are being developed.
Trademarks and copyrights should also be considered as protection. Sometimes these are more valuable than patents because they have longer terms. We also work quite a bit with universities because they are often at the forefront of early stage research
What are some common patent problems?
Because researchers often progress toward the same goals using the same research techniques, it may be difficult to obtain a patent due to public disclosures that the patent office considers not-novel or obvious. Or similar patent applications may reach the patent office at the same time, resulting in an ‘interference’ litigation to decide who has the rights to the invention.
Another problem is improvement patents. One company may have a patent for a process or drug that includes A, B and C. Another company may find another step or element - step D that improves performance. The second company could get a patent if it can prove that the step or element is not just a routine or obvious improvement over A, B or C. However, if you have to do steps A, B, C as well as D when practicing the improvement, or if you have to give the patient a drug including A, B or C, as well as D, that infringes on the first company’s patent.
A common way to overcome this problem is for the companies to enter into a cross-licensing agreement. The first company wants the improvement provided by the second company, which wants the benefit of its improvement. So a resolution is to negotiate so that either or both company can use steps A, B and C while adding Step D.
Some of the smaller companies that can’t afford to conduct the trials required for regulatory approval [through the U.S. Food and Drug Administration] or to commercialize their invention can license their patents to a bigger company that is able to move the invention from the bench to the marketplace.
Can an existing patent be used to prevent a competitor from making an improvement?Patents should not be able to prevent a competitor from making an improvement. However, patents must be enforced to exclude others from making, selling or using the already patented composition, method or apparatus.
No matter how altruistic a company, university or individual wants to be, funding is needed from somewhere. When a company has spent millions of dollars developing a drug, it wants to keep others from making, using or selling that drug device or method; otherwise the shareholders won’t be able to recoup their research and development losses and further investments are discouraged.
ALICE MARTIN is a partner at Barnes & Thornburg. Reach her (312) 214-8316 or email@example.com.
Develop a plan.
Most entrepreneurs when they start out don’t have a long-term plan as to where they are going. You have to be looking out for the future. You have to develop a plan and communicate the plan very well with everyone in the organization.
If a quarterback went into a huddle during a football game and only half the huddle heard the play, how successful would that play be? You have to make sure that everybody on your team understands what the plan is.
You have to surround yourself with the best people possible and delegate to them. Most entrepreneurs can’t make that transition. They start out as a small business owner, and they are wearing multiple hats and are controlling all different parts of their business.
And at some point, for them to be able to grow their business, they have to be able to take off one of those hats and hand it off to someone else and let them take care of that part of the business.
Fortunately, I have been able to bring in some great people that I have been able to delegate to, and they do their jobs better than I could do their jobs.
Create a good work environment.
There is an outside firm called the Great Place to Work Institute that will come in and do an interview of your team members. They will give us feedback on how we are doing and the areas we need to improve.
We go around to each one of our divisions once a year and do a formal strategic planning process where we have an outside facilitator sit down with a group of 15 to 20 people from each one of our divisions and get input from them as to where they feel we need to improve and the areas that management can help them execute their jobs better.
We also have a process called opportunity for improvement where our team members can submit ideas about how to make the company better. (The ideas) are reviewed by a panel of their peers, and we get feedback to them within two weeks about whether we are going to move forward with their idea or whether we are going to shelve it because it is a major initiative and we don’t have the capital funds to move forward with that initiative, or if it’s something that maybe we have tried in the past and it doesn’t work. We have a constant feedback loop.
We also use behavioral-based safety. It gets every person in the organization involved in the safety process, out making observations and able to stop any job. We can have an individual that [is hired] at STARCON today, and if he goes out on a job site next week and sees something that he thinks is unsafe, then he has the authority to say, ‘Stop. I am not going to do this job because I am concerned about some things.’
Then we will address those concerns and try to make the job as safe as possible and then proceed with it. In the areas of safety, we empower everyone in the organization to take control of it.
Invest in education.
We have a very extensive training program for all of our team members. We do skills training at all levels. We have a leadership development program where we take up-and-coming leaders and put them through a formal process to teach them management skills.
We have a college tuition reimbursement program, so everyone in our organization, if they want to take additional college classes, if they get a B or higher, the company reimburses them for that tuition. We really built a culture where we believe people should be life-long learners, and we invest a substantial amount of time and money into training and developing our folks.
You have to have compassion for the people in your organization. I am a good salesman. I could sell ice to Eskimos. But if I don’t have people who can perform, then the company doesn’t succeed.
You have to have compassion for the people that are out there on the front line doing the work. Take care of them every day and understand their needs, not only their needs on the job site but their personal needs and their family needs.
If you have compassion for your people and show them that you really care about them, then they’ll care about the company. Then everybody wins.
We’ve been growing by about 25 percent a year, and that creates opportunities for people. Everyone today wants an opportunity to move up. If you put together a good plan and bring good people together and your organization continues to grow, you will continue to create opportunities, which allows you to bring more great people into your organization.
Never lose touch.
The greatest piece of advice is to not lose touch with the people that are out there doing the work. I had a custom trailer made, and I can cook 500 pounds of beef briskets at a time. I make a point of going out to our job site and cooking lunch for our team members. On our major job sites, I do this once a year.
I then have an opportunity to reach out and touch all the individuals in the company who are out there working on the line, and it gives them an opportunity to give me feedback. Not losing touch with the people that really get the work done is critical to the success of any company.
Too many times, as companies get big, there are so many layers between the guy at the top and the folks who are out there doing the work that it gets filtered and you lose touch with what is really happening in your company. HOW TO REACH: STARCON, (815) 478-4615 or www.starcon.org
According to Charles Schultz, a partner at Barnes & Thornburg, there are three major components that have to be considered in the sale or purchase of a practice.
Smart Business spoke with Schultz about the tax benefits and precautions in such sales. He spoke about the three parts of a practice and how both buyer and seller can benefit if they are willing to negotiate.
What is a practice?
A practice is composed of three assets. The first part is the furniture, fixtures and equipment. This includes exam tables, desks, chairs and medical equipment. These are considered the hard assets.
The second part is the accounts receivable. This means all of the money that is due to the practice from services provided prior to the sale. There are [normally] five to six months worth of services provided that have yet to be collected because of a delay in insurance coverage. Receivables can be a large asset.
The third asset is called the goodwill or intangible asset. That is defined as the name or reputation the practice has among patients or other physicians. This is the word-of-mouth reputation that makes the practice valuable.
How can a physician receive a tax break by breaking down the practice into three parts?
We use book value to declare the value of the hard assets. The book value is the purchase price of the equipment less the depreciation the practice has taken on the equipment. You want to allocate the purchase price to the assets that are depreciated as quickly as possible. Furniture and fixtures are depreciated over five to seven years. Other assets are amortized over a longer period of time. Therefore, it is necessary to allocate your price to be able to recoup your purchase price for tax purposes in the shortest period of time.
There are two options with the receivables. First, the buyer does not purchase the receivables. Instead, he or she distributes them to the seller, and the corporation pays a deductible compensation. Another option is for the buyer to purchase the receivables and then distribute them as deductible compensation. This can be compared to taking a loan from the seller, and instead of paying a lump sum at the sale working out an agreement where the receivables are paid over a number of years to the seller. This offers a tax break, because compensation is tax deductible.
The goodwill asset also can be a substantial amount of money. To receive a tax break, one should pay that amount of money as a severance benefit. This is deductible to the corporation and not taxable to the buyer. This makes taxes for the seller a little higher because it becomes an ordinary income tax, but a seller can increase the cost of the goodwill to balance this amount.
What should a physician be aware of when selling a practice to a corporation?
Most practices are owned by corporations, many of which are C Corporations. If you sell a practice to your C Corporation, most sales are going to be charged with a double tax. This is a negative aspect, because one ends up being charged at the corporate level and then again at the income tax level. This does not benefit the buyer or seller because the major portion of money is being paid in taxes instead of going to the physician.
How can a physician buy a medical practice?
There are two ways to purchase a practice. The first way is to buy stock in the corporation. From a tax perspective, purchasing stock is often problematic. If someone buys stock, you will want to structure the purchase price as a payment to him or her for something other than stock. This means paying the receivables and goodwill as compensation or severance pay as mentioned previously.
Another risk of purchasing stock involves liabilities. The seller must be honest at the sale to disclose any liabilities, but there is still a risk of malpractice suits and things yet to be filed. The benefit of this purchase is that any contracts, deals or agreements that exist in the practice are honored if the entire stock is purchased.
The other option is to buy the assets of the practice from the physician directly and allocate something that gives you the quickest tax benefit possible. Compensation is immediately deductible. Therefore, you will want to characterize as much of the purchase price to the seller as the severance benefit or compensation for services already provided to receive a deduction. Allocating assets that depreciate faster creates better tax benefits.
CHARLES J. SCHULTZ is a partner at Barnes & Thornburg LLP. He is a member of the Healthcare Department. Reach him at (312) 214-8305 or charles.schultz@BTLaw.com.
Joe Mansueto is proof that a hobby can turn into a successful business. Mansueto had a passion for investing and in 1984, he used that passion to develop products and tools to help mutual fund investors make better investment decisions. Morningstar was born, and today, the $227 million company is a leading provider of independent investment research and caters to a variety of investors. Mansueto, chairman and CEO of Morningstar, has received the Rosenthal Award for Excellence in Investment Research from the University of Chicago and the KPMG Peat Marwick High Tech Entrepreneur of the Year Award. Smart Business spoke with Mansueto about the importance of passion and patience when starting a company, how to find the best employees and how he is making Morningstar a global name.
On starting a company
Read everything that Warren Buffett (CEO of Berkshire Hathaway Inc.) has written. Go to berkshirehathaway.com, read all the annual reports, and I think it will give you some really great advice about what are good businesses, what are bad businesses, how you can develop competitive strengths.
You have to be patient. Successful businesses aren’t built overnight. It’s going to take five or 10 years to really build a successful business. If you think you are going to do it in a few years, you are deceiving yourself. You need to be prepared for that long haul, and you have to have the patience and perseverance to see that through. Sometimes people are in such a hurry, they get discouraged when they don’t see immediate success.
Try to build a business around a passion of yours. If you can build a business around a passion, then it’s not work, it’s something you really enjoy, and your odds of success go up. If people start a business merely because they want to make money or they envy the profit margins of certain businesses, that’s probably not the best reason to start a business. It’s not going to see you through the down times. You have to have passion and exude passion for what you are doing.
Starting a business is a full-time activity. It’s more of a lifestyle choice, and it’s going to consume you. You have to prepare to run your life in a way that accommodates that. It has implications not only for yourself but those around you. If you are married, what does it mean for your spouse? If you have a family, what does it mean for your family? When I started Morningstar, I was single and unencumbered in every which way. I had no mortgages, no family, so in some ways, it was very conducive to spending a lot of hours working. Today, I have three children, and it’s a different set of circumstances.
On finding and training employees
There are a lot of liberal arts graduates who don’t quite know how to make the transition to the business world. In our early years, we did a lot of hiring of very bright people with liberal arts backgrounds who went into many roles here. The down side is, it takes a little longer to train those people, but I think over time, they can learn the finance side and you get very strong talent. We did some slightly unusual things in hiring that other financial information companies probably didn’t do.
We are always looking for the best minds, maybe looking less at the particular background of somebody but getting the right person with a good ability to reason and communicate well. It’s kind of like the sports team that hires the best athlete. He’s not so much looking to be the quarterback right now, but instead of just looking for quarterbacks, look for the best athlete to draft and then find a way to use that athlete. In a similar way, we are always looking for the best talent and not so much trying to hire a business school graduate to fit into a certain role but have a more expansive view of the kind of person we would consider. That diversity in hiring has worked well for us.
We have an MDP program — management development program — where we hire leading graduates from universities, principally in the Midwest. Typically, we bring them into, say, our product support area.
They may work a year in product support, getting to know who our customers are, supporting all of the products. Then they might rotate to our data area and spend a year compiling our databases, learning how that’s done. After a couple of years of this rotational program, they can go into more specialized roles, be it product management or an analyst role.
Once they have that body of knowledge, then they can go on. A lot of times during that two-year period, they are getting a CFA or they might be going to night school getting an MBA. We certainly support a broad-based training and educational program. We pay for MBA schools, CFAs training, etc.
On growing internationally
First, it comes down to people and making sure that you have the right group of people. We try to hire overseas people in the same way that we hire people in the U.S.
We want to have one Morningstar globally. We want to have the same kind of office space — it sounds inconsequential, but it’s really important to have the same physical space — all over the world. We have a very open atmosphere at Morningstar. There are no private offices — we support collaborative teambuilding and teamwork — so that we have the same look and feel globally.
We want the same client experience globally. If we are hiring the same kind of people, they need to behave the same way with the clients overseas. We need to offer the same kinds of products that we have in the U.S. overseas. More and more, we are creating global products, products that are developed here or overseas that are multilingual, multicurrency. We are supporting global products capabilities. Those are some of the things that we do to ensure that there is a consistent experience with Morningstar, no matter if you are in Milan, Hong Kong, Tokyo, Australia or Chicago.
HOW TO REACH: Morningstar, www.morningstar.com