Building a successful business requires an owner to transform from technical expert to master strategist. The focus must be on working "on the business" rather than on working "in the business." Their efforts are no longer applied only to a product or service, but now must be expanded to include financial and operational management, production, delivery and aftermarket service.
A master strategist treats his business as if it is for sale -- every day. Every decision must be evaluated by answering the question, "Will taking this action enhance shareholder value in the company?" And, at the end of each day, the master strategist must answer the question, "Am I building a business worth buying?" There is only one acceptable answer to these questions -- yes.
There are two caveats to any strategy -- it must be designed to increase the chances of success, not simply aimed at reducing the likelihood of failure; and it must provide a competitive advantage by differentiation and delivery of unique value.
Most competitors in the marketplace strive to maintain a reputation for a quality product, low price and high service quality. All of these are easily copied among competitors, and therefore, every product will appear increasingly similar. The key is to offer a product that is different in a unique and genuine way. Products that deliver a unique mix of value and appeal cannot be easily duplicated and will identify your brand as the market leader.
Together, the individual strategies form a strategic plan. The master strategist recognizes that for a strategic plan to be successful, there two parts -- development and action.
To develop strategies, a master strategist must examine critical issues; determine how the organization's strengths and skills can be employed to address the critical issues; analyze the opportunities available; and select the best approach.
To develop action plans, he or she must identify goals to accomplish; specify what results (or objectives) are to be achieved; specify how those results (or objectives) will be achieved; specify by when they must be achieved.
In most businesses, 20 percent of your customers yield 80 percent of your revenue. And even more important, 20 percent of your customers yield 80 percent of your profit. The problem is that neither of the 20 percent groups contain exactly the same customers.
Therefore, you must identify the top 20 percent of the following (that are responsible for 80 percent of your profit) and develop strategies and action plans to enhance their effectiveness.
* Sales. Top sales staff (create a support team to increase their productivity). And target top customers, territories and distributors.
* Market segments. Top products, services and territories
* Production. Top production employees and top production problem-solvers
* Quality. Product(s) with most defects and type of defects
* Employee retention.Reward the top 20 percent with inventive bonuses and benefits for increased productivity.
Strategies are not etched in stone; they must remain fluid and adaptive. As such, a master strategist is careful to avoid the three pitfalls of planning:
* Failing to successfully communicate your strategies and action plans
* Failing to manage change
* Failing to make the hard choices
Without effective strategies and action plans, success will be merely a matter of luck.
Kenneth Sweet (firstname.lastname@example.org) is the executive director of consulting services for International Profit Associates Inc. IPA's 1,700 employees offer consulting services to businesses throughout the United States, including Alaska and Hawaii, as well as Canada. Reach him at (847) 808-5590 or at www.ipa-iba.com.
These exchanges are known by several names, including like-kind exchanges and the more frequently used Starker exchanges. The beauty of using Section 1031 is that it permits the taxpayer to avoid capital gains tax on the increase in value of the property being exchanged.
Real estate tax-deferred exchanges have been allowed under the Internal Revenue Code since the 1920s. However, it wasn't until the Starker v. United States lawsuit in 1979 that taxpayers could do a nonsimultaneous exchange of real estate. The only problem was that the Internal Revenue Service had not prescribed any rules or regulations advising taxpayers on how to proceed with Starker exchanges.
Recognizing the problem, the IRS issued final regulations providing codified provisions on how to do exchanges in 1991, and nine years later, issued Revenue Procedure 2000-37, which recognizes the use of "reverse" like-kind exchanges. Up until then, the IRS rules pertained only to "forward" exchanges, or exchanges in which the old or relinquished property was sold by the taxpayer, who then acquired the new or replacement property.
So how does the taxpayer actually do an exchange? In doing a forward exchange:
* The taxpayer first sells his old or relinquished property.
* The taxpayer then identifies new or replacement property within 45 days of the sale of the old property and, generally speaking, closes on the purchase of the new property within 180 days of the sale of the old property.
A qualified intermediary then holds the proceeds from the sale of the relinquished property until directed by the taxpayer to pay out the proceeds to acquire the replacement property. In effect, the taxpayer never receives the relinquished property sale proceeds but rather rolls the proceeds into the purchase of like-kind replacement property.
By doing this, the taxpayer can defer the capital gains tax because the taxpayer theoretically never received cash and consequently is not required to pay a tax. If later on the taxpayer decided to sell the new property and again does an exchange, the capital gains tax would again be deferred.
The taxpayer can do as many exchanges as he or she wishes, without ever paying a capital gains tax. When the taxpayer dies, the property receives a "stepped up" cost basis and capital gains have never been taxed.
A reverse exchange produces the same results. In a reverse exchange, the taxpayer acquires the new or replacement property before the old or relinquished property is sold. This situation arises when the seller of the new property tells the taxpayer that he or she must buy the replacement property right away or lose it. The reverse exchange operates within the same 45- and 180-day guidelines as the forward exchange and, again, the taxpayer theoretically never receives any cash.
One of the advantages of using Section 1031 is that although the taxpayer is supposed to exchange real estate for like-kind real estate, any real estate located in the United States is considered like all other United States real estate. That means that a farm in Wisconsin can be exchanged for a shopping center in Illinois.
Note, however, that Section 1031 only applies to property held by the taxpayer for productive use in a trade or business, or property being held for investment. So if you want to exchange your personal residence for your neighbor's house across the street, a 1031 exchange won't work.
Finally, a 1031 exchange can also be used to exchange personal property such as airplanes, railroad equipment, computer equipment, boats, trucks, cars and agricultural equipment. Unlike real estate, however, like-kind is interpreted much more narrowly. That is, a boat must be exchanged for a boat, etc.
Be sure to work with your attorney to realize the tax advantage available under Section 1031. Richard S. Witek, JD, is vice president, Trust Administration, at MB Financial. Reach him at (312) 633-0333 or through the company's Web site, www.mbfinancial.com.
No matter how many letters your operation sends out every day, it's a pretty good bet that Paul Bailey, president of ProSORT Services, sends out more.
ProSORT is one of several presort bureaus that works with companies mailing enormous volumes of first class and standard (read: junk) mail and provides them with discounts that range from a penny to several cents for each letter. For companies mailing millions of letters a year, the savings can add up quickly.
Bailey's team processes about 300 million letters each year, working 24 hours a day, seven days a week, and closing only for the major holidays.
ProSORT is a natural, albeit tangential, outgrowth of Bailey's background in banking. He worked at Continental Bank in operations, sorting checks and rendering and mailing out statements. When Continental was sold to Bank of America, Bailey went to another company and had his first direct experience with a presort operation.
It wasn't a good one.
"I just wasn't really happy with the level of service and commitment that I was getting," Bailey says. "So, I did what a lot of people do. If you don't like it, do it yourself. I contacted some of my friends in banking, and was fortunate to get enough people to give me commitments that if I would open this business, they would give me mail to process. It was a nice transition."
Bailey has created a successful enterprise, the second largest presort operation in Chicago. Now, his challenge is to make sure it's not a secret.
"My mission is to just let people know that there is this process out there, this business that's called a presort bureau -- that we do work with the postal service, we do work with companies," Bailey says. "And you're going to hear a lot more about us. It's a fascinating process, very high-tech and very interesting."
Smart Business spoke with Bailey to learn how he plans to stretch the envelope.
How has the presort industry changed in your 20 years in the business?
Dramatically. In the early days, everything was sorted by hand. You prepared (letters) into bundles with handfuls and a rubber band around them. It went to the postal service, and the post service would toss it into different bins. The mail would be taken out to a post office, and a carrier would come in and get his bundles, and he would sort them down into his route order. Then he'd go out and deliver them.
We've gone from that to where we are now -- mail goes through an automated system, typically at the rate of 35,000 to 45,000 letters per hour. It's barcoded and sorted into a tray. It is given to the postal service; they put on a machine that reads those codes and automatically sorts it into carrier walk-sequence order. The carrier doesn't have to do his own hand-sorting any more.
How big is the presort business?
The private mail business, which includes presort bureaus, letter shops and companies that prepare the mail, account for over 70 percent of the mail that goes into the system every day. How much of that goes to presort bureaus, it's hard for me to say.
There are presort bureaus in every major market across the country, and probably cities as small as less than 100,000 people. A city with 50,000 to 80,000 people may have a presort bureau.
How do you plan to grow your operation?
In handling first-class mail, you are limited to a geographic area of certain ZIP code ranges. There are companies that are acquiring presort bureaus in major markets across the country and establishing networks. Most presorters stay within the market that they are established in.
We are growing our standard mail business, and in that business, we are not limited, we can move mail anywhere. We just negotiated an agreement where we will be moving mail from Virginia, Texas, Oklahoma and Iowa to be commingled and sorted. We commingle multiple clients' mail into one big mailing. At this point, that's my objective, to focus on that part of the business.
So acquiring smaller operations isn't an option?
The companies that are acquiring presort bureaus are looking down the road and speculating that at some point in time, the postal service will offer additional discounts for a presorter to move mail from one city to the next. First-class mail currently has to be moved by the postal service and their authorized contract carriers. Standard mail I can move with my own contract carriers, and there are additional discount incentives built into the process for me to do that.
There are some who believe that the postal service will provide additional discounts for first-class mail, and those companies are looking down the road and saying, in order to be effective, I'm going to need to need presort operations in major metropolitan areas. I'm just not sure that that is going to happen, but I'm keeping my options open.
Did Sept. 11 and the anthrax scare have an effect on your industry?
The anthrax scare itself, no. There are different types of mail. There is individual to individual, there's individual to a company and there is company to an individual.
The companies that we deal with go to great lengths to secure their mail to make sure that it is clean and safe. And they want us to be able to do the same until it gets into the hands of the postal service.
Anthrax is not a major issue with a presort bureau. We're simply not dealing with an individual's mail. 9/11 did have an impact on another segment of mail that we do handle -- marketing mail, standard mail -- some people call it junk mail. What happened after Sept. 11 is that if you were doing a major mailing to New York, you couldn't get mail delivered. There was a huge drop in standard mail from 2001 until now.
Finally, this year, market mail has really started to come back strong, and the volume will probably exceed the volume of first-class mail for the first time in history.
How about the National Do Not Call registry?
The Do Not Call, I believe, has (helped the presort industry). Instead of letting telemarketers try and promote your service or product, I think a lot of those companies are going back to direct mail, saying this is the way to do it.
Are you expecting the volume of standard mail to increase?
That is the part of the mail business that is growing the fastest. That's the part where, this year, the volume of mail will exceed the first class volume. (The U.S.) Postal Service will handle somewhere in the area around 200 billion pieces of mail this year. Traditionally, it's been about 52 percent first class, 48 percent standard. We think that is going to swing to about 51 percent standard, 49 percent first class.
The volume of first-class mail will decrease for a number of reasons. One is individual-to-individual correspondence. People will use e-mails, people will send faxes. They will look for ways to get their messages to someone else faster. E-mails and instant messages are great for that.
Can smaller operations take advantage of presort bureau service?
Last year, we developed a new service we call ProSORT Now. And what we're doing, we're taking the postage savings to smaller mailer that mails maybe only one letter a day. And the way we're doing that -- one of the major costs involved in processing mail is going out and picking it up and bringing it back -- a vehicle, a driver, insurance, gasoline, all that.
We've come up with our own mailbox. We go to an office building, we work with a property manager for that building, and we are saying we are offering another amenity for your clients -- that is the ability to use basic discounted postage, which saves them about two cents a letter, and all you have to do is use the lower rate and drop your letter in this box.
Our objective is to collect a thousand, 2,000 letters out of each box each day. So, instead of putting it in a blue box, we say put it into our white box. That's how we want to disseminate those savings even down further.
How is that offering being received?
It's an educational thing. When you're dealing with people who only mail a few letters a day, everyone thinks that only the (U.S.) postal office can do this.
Nobody's paying 37 cents. Everybody's getting a discounted rate, and you can, too. But what really sells them is the delivery service. I think it is going to be something that is really going to take off across the country.
I think presort boxes are going to become as common as a FedEx box, a UPS box, a DHL box. I think you're going to see them everywhere.
Does you operation have any special security requirements?
Security is very important. When you're talking about mail, we're talking about a public trust here, particularly first-class mail because we're dealing with correspondence between a company and a client -- invoices, statements, payments, credit cards. This is extremely important information, and it must be safeguarded.
My clients go to great lengths to make sure their facilities are safe and secure. When they hand that mail to me, they have to have a great deal of confidence that it's going to be as safe in my hands as it was in theirs and as it will be in the hands of the postal service.
We do handle a huge volume of negotiable instruments; we've gone the extra mile and adapted the mail handling security recommendations of Visa and MasterCard. It's a closed facility (with) a security guard, cameras and everything else -- background checks on employees.
The last thing you want is a situation where a customer trusted you with mail, and it got lost or stolen or damaged in any way.
What's next for ProSORT Services?
I see a lot of really good things. I think that presort is going to become a much more commonplace product that people are familiar with, that a lot more people are going to use and smaller businesses will be able to use. The relationship that we have with the postal service continues to get stronger and stronger. We are very strong allies and partners.
I see the postal service looking for ways to expand that relationship. There's definitely the possibility there might be additional incentives for us to start moving first-class mail to entry points closer to where it's going to be delivered.
I think there's also the possibility that postal will look at us and say, 'You guys have got buildings and you've got capital tied up in equipment and trucks and people, and you can help us do some of our overflow processing. HOW TO REACH: ProSORT Services, (630) 323-0606 or www.prosort.com
This age-old adage is as applicable today as it was when it was first coined. It is incumbent upon senior management to drive the revenue numbers higher every day, every week and every month, while at the same time absolutely controlling the company's expenses.
Managing your company without a clear understanding of how the financial decisions you make every day affect your company is akin to driving a NASCAR racecar while looking only in the rearview mirror.
Many years ago, there was a shift in the accounting world to tax-based accounting to keep up with the requirements of the Internal Revenue Service. This has enhanced IRS compliance but has been a disservice to managers and business owners trying to run their company by the numbers.
Measuring business success is a two-step process; the first is developing a realistic variable budget, and the second is capturing and utilizing the data to make informed decisions regarding the operation of the business.
To effectively measure the performance of a company, the owner or senior management must identify the critical variables that affect operations. This process starts with identification of the distinct revenue streams the company has or would like to develop. Historical data, coupled with competitive analysis and market trends, allows for realistic forecasting. This process also allows senior management to hold the sales function accountable for specific performance and to fine-tune marketing efforts.
The next step is to identify the variable costs -- labor, labor burden, materials, subcontractors, equipment rental, expense, scrap and warranty and applicable royalty expense, etc. -- within the operation. By carefully analyzing variable costs and measuring the results on a percentage basis, as opposed to dollar amounts, senior management is able to react and control variable costs related to revenue fluctuations. The information generated from these categories is a direct reflection of the ability of your line managers and employees to manage and control costs.
The impact of overhead is often misunderstood, and too often, the consequences are fatal to the company because management did not understand the direct relationship between overhead and gross margin.
There are two types of overhead that management must take into consideration: indirect and general/administrative overhead. Indirect overhead expenses are the costs associated with performing the functions of product production, but the costs are spread over the entire organization. Examples are product development costs, estimating expense, supervisor wages, consumable supplies, government compliance, uniforms, equipment maintenance and associated labor, auto expense and small tools and supplies.
General and administrative overhead typically accrue independent of business operations. Examples include accounting expense, depreciation, bank charges, interest expense, office rent, office payroll, owner's payroll, office supplies and professional fees.
By carefully identifying and forecasting the company's critical variables, developing a realistic budget, driving the numbers daily and measuring performance on a weekly basis, senior management can understand and control the numbers critical for company success. Mike Rudd (email@example.com) is director of client services for International Profit Associates. IPA's 1,700 employees offer consulting services to businesses throughout the United States, including Alaska and Hawaii, as well as in Canada. Reach Rudd at (847) 808-5590 or at www.ipa-iba.com.
This external "advisory board" has a vested interest in helping client businesses thrive, but all too often, business owners underestimate the value of keeping the positions in play. Unfortunately, the importance of establishing and maintaining good working relationships with all three advisers is often underrated, as are the ways advisers' interrelationships can advance an owner's interest. In fact, it's rare for most business owners even to consult this group of advisers regularly.
Properly chosen bankers, attorneys and CPAs, however, can provide a "spoke in the wheel" advantage that saves businesses money while helping to ensure that strategic plans are, indeed, strategic -- and that the business team is advancing toward its goal.
For example, a business owner considering an acquisition should first call his or her attorney to learn what is involved in such a transaction. The next calls will be to the banker to discuss financing and the accountant to analyze tax and other financial impacts. When the accountant, banker and attorney have established working relationships independent of the business owner, they are comfortable consulting each other to answer questions, and the whole process works smoothly.
Leveraging that expertise can be extremely beneficial to business owners, but it's important to select advisers who are best suited for a particular business, in terms of size and other areas of expertise.
When an imbalance is present as, for example, with a medium-sized firm that uses medium-sized law and accounting firms but a major international bank, the level of service could suffer. The business owner is probably dealing with partners in the law and accounting firms, but at the bank, the task may be delegated to a junior officer. The different backgrounds of these advisers can impede communication within the triangle offense and may prevent the business owner from leveraging the advisers as effectively as possible.
In addition, businesses that select the wrong-sized firm can end up paying for services they never or only occasionally use. Many businesses use their accountants only to prepare statements and annual reports, their banks only for checking accounts and loans, and their attorneys only for general business purposes.
If that's the case, they should be working with generalists in each specialty. If those generalists are the right people, they can refer clients to equally competent professionals when unusual needs arise.
For example, an accountant will know who provides pension planning, auditing or inventory control services; an attorney knows where to find expertise in litigation or estate planning; and a banker can make referrals for mezzanine debt, investment capital or leasing services.
By seeking referrals for such specialized needs from advisers they know and trust, business owners can pay for those services only when necessary. The fees for larger, full-service professional firms may be more than the value the business owner receives from those firms.
More important, a trusted triangle can coordinate the play off the bench during significant actions such as out-of-territory expansions, when multiple issues often require multiple players on all three fronts. A strong triangle can work closely with internal staff such as comptrollers or CFOs and marketing managers to address the complexities of any major undertaking.
Business owners are, of necessity, focused on their businesses, but those who don't make full use of their personal triangle offenses may be missing the opportunity to score a three-point advantage and truly achieve their goals. Jim Houston is senior vice president in the commercial banking department of MB Financial Bank. Reach him at (773) 292-5403 or www.mbfinancial.com.
“I think, at the end of the day, the enrichment of life going forward is what’s very important,” Coffey says. “I think architecture helps bring people together.”
Coffey may design buildings with the idea of bringing people together, but sometimes he must bring them together before any ideas even make it to paper.
Whether it is the DePaul Center, the University of Illinois Chicago, or any of the several theater rehabilitation projects he’s undertaken, Coffey doesn’t wait for someone to come to him. He often seeks out and brings together the individuals necessary to get a project done. It’s what he calls being a proactive architect.
Coffey has been honored for more than just his design abilities. Among the recognition he has received: Chicago Leaders Under 40 Award (1994), Crain's Chicago Business; Chicago Leaders in the Arts 1998, Chicago Tribune; and Who's Who of Chicago's Leaders 1999, Crain's Chicago Business. His organization was recently named a Chicago firm of Excellence, Among the firm’s list of projects are Millennium Park Tower, Sherman Plaza, Joffrey Ballet Center, Chicago Theater, Palace Theater and Red Line Subway. He is licensed to practice in all 50 states and has projects in more than a dozen.
When he isn’t working to bring the community closer together with his designs, Coffey participates in a number of organizations. He serves as chairman of the Chicago International Film Festival and on the boards of the Steppenwolf Theater Company in Chicago, The Shakespeare Globe Center in London, The Chicago Opera Theater and the Chicago Central Area Committee.
Coffey has recently designed a theater project for Schaumberg.
“It’s going to truly be a landmark,” he says. “People are going to say, ‘Wow!’
Architecture is really one of the few specific arts in that it’s not just art it’s a business thing or a functional thing, but like art it can uplift your spirits and make your life better.”
Coffey is also involved in The American Institute of Architects, The Urban Land Institute, The Executive Club of Chicago, The International Facility Management Association, The League of Historic American Theaters and The National Trust for Historic Preservation.
Smart Business Chicago spoke with Coffey to learn more about his philosophy on architecture and how he approaches his design projects.
What is the role of a proactive architect?
It’s really an architect in a leadership position, making projects happen and putting together teams of people that might not normally be put together in order to make a project go forward, but also might not normally happen all by itself.
An example would be the DePaul Center, which was a 650,000 square-foot building that the city was going to tear down. It was right on State Street. I helped arrange the city of Chicago and the DePaul University and some other groups to come together to save the building and rebuild and turn it into a downtown Loop Campus headquarters with city offices and retail in it.
If that hadn’t occurred it probably would have been torn down and a federal office building built there instead.
How was the project initiated?
There was an interim call, which was from a civic group that said ‘what can we do about this?’ I said, ‘you need to find a user to save it. Why don’t we talk to DePaul?’ A week later we were having meetings and it all fell into place after that. It was combination of two of us prompting each other.
It’s won AIA awards and Urban Land Institute awards and all kinds of design and business-related awards for the impact it’s had on the neighborhood and the university.
You focus more on cities than individual buildings.
Usually the great cities London, Paris, Rome, Berlin are a composite of many buildings put together. Some are background and some are foreground, and the combination is what makes the place great and also makes the individual (buildings) many times greater.
Does the city’s character influence the people within it?
To a great degree. It’s the stage that regularly happens within. For instance, with Chicago you have a bolder kind of character that comes out with the people. And that’s also the case with the architecture, and also a very strong, solid kind of quality of construction and thoroughness of detail with Chicago architecture that in some ways is what Midwest leaders are all about as well. It’s a yin and a yang where the two feed off each other. They shape each other. The architecture comes from the culture and the culture is shaped by the architecture.
Why are you so involved in theater projects?
The other art that makes a difference in peoples’ lives is the performing arts, along with architecture, which is a more static building. And a lot of what I’m about is trying to get people to come together and have a better living experience. The arts are a part of that, and I’ve always found the idea of people coming together to watch a play or an opera or a ballet or a musical or a drama to be really an uplifting experience for all of the people involved, as well as the artists. Those kinds of good experiences can be clustered together with several theaters to create a district or a center. That has a tendency to spur other kinds of city life and cultural life that ranges from restaurants to living downtown on down the line. It’s a fairly holistic look at why they’re important to the cities. And they’re very fascinating buildings to work with because, almost like all other buildings they deal with all five senses in a way that’s not that typical.
How is working with a historical building different than a new construction project?
You become the original architect’s partner. And you have to think about what they were trying to do with the building both from the design standpoint, but very importantly in the technical and construction standpoint because whenever your designing a building you make decisions about how to build it. When I’m doing it for a new building, it’s one thing. When I’m doing it in relation for an old building, I have to think, ‘well, what was this guy probably thinking when he put that column or beam in that location, and was it important to the building? Is that what makes it stand up?’ Usually with an older building you don’t have all the original documents. You don’t have x-ray vision; you can’t see the walls to see exactly what all those walls are doing. Once you put yourself in the mind of being the original guy’s partner, you start to understand the building that much better.
How to reach: Daniel P. Coffey & Associates Ltd. (312) 382 9898 or www.dpcaltd.com
But it is increasingly common for private equity firms (a.k.a. "financial sponsors") to be active in M&A and be willing to pay premium prices for middle market companies. Indeed, with more than 900 domestic private equity funds that that have collectively raised more than $325 billion in the last decade, private equity firms are a real M&A force.
A leveraged buyout (LBO) is a transaction in which a significant portion of the purchase price is funded with junior capital, including senior and subordinated "mezzanine" debt. It enables financial buyers to "leverage" returns on their equity investment and use the cash flows generated during the investment period to pay down debt and fund the company's growth.
Private equity firms typically look to harvest their investment within three to seven years by selling the acquired company to another buyer, taking it public or releveraging the company and pocketing a large cash dividend.
Factors affecting private equity fund activity
Several factors contribute to the increased appetite of financial buyers and the notable spike of their recent activity. Most significant is the sheer volume of capital available, both equity and debt.
As credit markets have improved, more lenders have returned to the middle market and are under pressure to deploy capital. Second, high-yield bond activity has been on the upswing. In 2003, there was a dramatic increase in high-yield issuances as compared to the previous three years. Moreover, while 2003 was a good year for high-yield issuances, the volume of high-yield issuances in Q1 2004 nearly doubled from their level in Q1 2003.
Third, there is a disparity between the amount of private equity capital raised and private equity capital deployed over the past several years. While the level of fund-raising declined substantially over the past three years, much of the private equity capital raised between 2000 and 2002 has gone uninvested, and many of the investors in private equity funds are pressuring for more rapid deployment.
Several private equity funds are faced with the prospect of either spending the money or having to give it back to their investors.
An additional factor that has enabled financial buyers to compete and win auctions has been their ability to act as a pseudo-strategic buyer in certain situations.
With the recent downturn in the initial public offering market, private equity funds own an increasing percentage of U.S. businesses. If a private equity fund already owns a portfolio company that is similar to the business for sale, opportunities for cost-reduction synergies exist, which can further drive a private equity investor's returns on invested capital (both for the company it already owns and the company it is seeking to acquire), and ultimately, justify a premium purchase price.
The partial sale -- two bites at the apple
Most private equity funds will consider purchasing less than 100 percent of a business to allow existing owners to co-invest with them in the company. In fact, most prefer to partner with successful managers and will set aside additional equity capital to support a corporate growth and/or acquisition plan. In other words, private equity investors are often willing to purchase a partial yet controlling interest in a business, allowing the owners to diversify their holdings, "take chips off the table," and yet remain motivated toward continued growth of the company and capitalize on such upside when the equity fund sells or recapitalizes the business in the future.
An investment banker will help familiarize the company owner with the private equity market and sale or partial sale to private equity funds as a logical alternative to the typical exit strategy of selling their businesses to strategic buyers.
David Sulaski (firstname.lastname@example.org) is the leader of Brown Gibbons Lang & Co.'s Private Equity group and a U.S. and cross-border new business development specialist. Reach him at (312) 658-1600.
"When I'm out parking for my family, I am any other customer, and because I don't own any of the facilities, I'm very respectful of our clients' need to maximize the revenue," says Wilhelm, who's been with Standard Parking nearly 20 years.
But that doesn't mean he forgets his role.
"At that point, I become a paying customer, and I still keep both eyes on the ball in terms of writing a report on what I saw," he says. "There's nothing more disappointing to me than going into one of our facilities and seeing one that is not being managed to my standards. You can imagine what happens and the tornado that almost immediately results when I find one that I don't like."
In addition to his self-styled role as facilities watchdog, Standard Parking's recent initial public offering added a new twist to his CEO duties -- he's now head of a public company.
"Approximately three years ago, we found ourselves highly overleveraged following the merging and acquisition of eight parking companies together," says Wilhelm. "In March of 1998, the two primary companies in the merger were Standard Parking, the company I grew up with here in Chicago, and APCOA, a Cleveland-based provider of parking services. We bought six other parking companies within the following year. We used low-grade bonds to facilitate the financing."
The debt created by the mergers and acquisitions didn't sit well with Wilhelm, who, at the time, was president and COO of the company. Adding to the debt was the economic downturn following Sept. 11, 2001. The terrorist attacks, and the fallout, hit Standard Parking particularly hard because a large number of the parking facilities it manages are located at airports, where it also manages shuttle bus operations.
"We were flying in the face of a real economic cycle," he says. "We are generally a service vendor in buildings that support office buildings, the airport industry, high-end hotels where we provide valet and parking services, and our ability to create profitability for our company rests on the demands of those industries.
"With increased office vacancy rates and a downturn in passenger enplanements, and a downturn in overnight hotel stays over the last couple years, we were further challenged in terms of the turnaround that we had designed for the company."
The merger also created some surprises for Wilhelm and his team.
"We found that we had inherited several deals at some airports and in some office buildings that, with the downturn in the economy, put contracts that had been very profitable for the company in a losing situation," he says. "The challenge was to sit down with those clients and renegotiate terms that were fair for both sides. That was the most contrary behavior.
"Normally, we're working with clients on acquiring new properties and renegotiating extended terms, and for us to have to go back and utilize language that enables us to renegotiate based on catastrophic events was really new for us."
But that was only the beginning. Wilhelm and the other directors formulated a plan to bring the company back to stability and position it for further growth.
"We found that the debt load that was placed upon the company was frustrating from the perspective of growth opportunities," Wilhelm says. "About that time, three years ago when we put the current management team together, we laid out a strategy where we would, methodically, over a period of years, try to delever (unleverage) the company's balance sheet to take away any remaining hurdles from what we thought could be a fairly effective growth rate."
That strategy was designed to establish credibility with the company's primary stakeholders -- banks, bondholders and owners -- and allow Standard to stand alone as a new, beefed-up entity.
Explains Wilhelm, "We felt that the best way to do that was just to put our noses to the grindstone and produce solid quarterly year-over-year results. By establishing that credibility, in what turned out to be a down economic cycle, if we could show that growth on a quarter-by-quarter basis, we would have credibility to go back to the marketplace and, through a series of creative financing methods, reduce our debt load and enable the company the opportunity to grow the way that we felt that it could."
That period of strategy culminated with the decision to take Standard Parking public; its IPO was completed in June. The stock was initially offered for $11.50 per share and has been as high as $14.69. It was selling in the mid to upper $12 range as of mid-July.
Adaptation to meet consumers needs
Wilhelm joined the company in 1985, and since then, he has seen a number of changes.
"The industry has become more sophisticated," he says. "The use of technology, whether it is hardware in the field that enables us to control the revenues we collect from our customers and then ultimately provide to our clients, is much different than it was when I joined the company. The software that drives that hardware has improved over the years, which enables us to capture most, if not all, of the revenue that we're entitled to."
But it's not just the technology that has become more sophisticated. The clients themselves are much more savvy when it comes to parking revenue opportunities.
"I think our clients have become much more sophisticated and demanding over the last 20 years," Wilhelm says. "Parking was an afterthought in some of the buildings that we manage, whether it was the airport industry or the office building industry or the medical field or some of the other vertical markets that we serve. The clients were rather sleepy regarding that revenue stream.
"Over the last 15 years, we have seen that level of sophistication grow. They recognize that the parking revenue that we provide to them is often the second largest profit center in their entity. And as such, they're demanding (more) in the form of revenue control, marketing and amenities for their customers."
Those demands are realized in a variety of ways, including Standard Parking's patented musical theme floor reminder system. The company uses songs and pictures help parkers locate their cars. At O'Hare International Airport, the Chicago Cubs dominate the first floor of the parking structure, followed by the Bears, White Sox, Black Hawks, Bulls and Wolves on deck six.
"We made a conscious decision many, many years ago, as we were developing Standard Parking, that we were going to separate ourselves from our competition by offering superior products to our clients," Wilhelm says. "That enables us additional profitability per contract because clients tend to incentivize us to maximize the amount of revenues they collect. That's really the key to our business model to be in the parking management business and to be able to maximize revenue to our clients.
"(That is why the company developed) the idea of reminding people where they parked by virtue of music and themes, the Standard Road Assist product, the Midas Car Care program, FilmsToGo or some of the other products or the services, including our Little Parkers program for children that we offer at our locations."
One operation that makes Wilhelm most proud is Standard University, the company's continuous training program. Classes include revenue control systems, self-park vs. valet, employee grooming, product delivery standards, facility maintenance standards and risk management standards.
"The top 400 people in the company are continually enrolled -- and that includes me," Wilhelm says.
Wilhelm contends that his job has changed over the years. As the company grows, he spends an increasingly disproportionate amount of each day with investment bankers, attorneys and accounting firms.
"As my job has become more sophisticated, I deal in a little different realm," Wilhelm says. "The part of my job that I enjoy most, almost every day is stopping in one of our facilities and ensuring that the product that we have promised our client is being delivered."
And while the toughest hurdles may be behind them, Wilhelm knows there are still some challenges to come.
"We're very focused now on taking our improved financial condition and leveraging that to continue to grow the company," he says. "Some of the barriers that existed -- being weighed down by debt -- were relieved by virtue of the preliminary financial transactions that we did over the past few years. The recent IPO and the associated the renegotiation of our senior credit facility with our banks -- and we're delighted to have their support -- enables us to tear down any of the barriers that were remaining in terms of executing and realizing the business vision and model."
And with those barriers lowered, Wilhelm says it's time to look ahead at growth.
"The focus now, with the handcuffs off, is how can we grow our product line and how can we grow our market share by virtue of continuing to improve the product," he says. "That is the focus of the near future. At some point in the future, we will be making decisions on how best to leverage the capital that we'll be generating for the company." How to reach: Standard Parking, (888) 700-PARK or http://www.standardparking.com
Education: Undergraduate degree, finance, and MBA, University of Utah
First Job: Zellerbach Paper Co. (which became Crown Zellerbach), driving a truck and forklift
Career moves: Crown Zellerbach and Acco World Corp., which was acquired by Fortune Brands
Boards: RR Donnelley, Pactiv Corp.
Resides: Lake Forest
What is the most important thing you've learned in business? You need to understand that the beauty of any strategy is your ability to execute it. It's part of growing up and maturing in businesses. Things at times look interesting and intellectually stimulating. In the end, it's your ability to delivery that makes the rubber hit the road.
You have to experience many things and see many things over time, and that helps you do a better job of figuring out what the possibilities are.
What is the greatest business challenge you've faced and how did you overcome it? Probably the biggest challenge has been our office products business, where there was a significant consolidation with the resellers. We had to totally remake our business front end to back end to be able to compete and succeed in that business. It takes time, and no one person does that; it's absolutely a team of folks that makes those kinds things happen.
Whom do you admire most in business and why? I'm tempted to say Jack Welch. He was a guy who was able to run varied businesses, and he ran them well. Our approach is quite different than his would be. There's no one person.
I love to see what other people (do), evaluate it, and see what applies or doesn't apply. I learn from people I see in business, people I've worked for and people who work for me.
I can't tell you the number of things I've learned from folks who actually work for me. It's hard for me to pin a person. I learned so many things from so many different people.
One size doesn't fit all in business. There's no single way to succeed. There are many ways and many approaches. And oftentimes, the best approach is a combination of approaches. You see snippets of that with different companies or folks. It's fun to appreciate that and then try to sit down and figure out how it might be applicable to your own business.
Life's all about choices and alternatives. Rarely is there one choice.
Or did they? It's impossible to know for sure. But even larger companies -- which were expected to achieve HIPAA compliance a full year earlier -- still have work to do. A recent survey of 1,200 privacy and security officers conducted by the American Health Information Management Association found that fewer than 25 percent felt their organizations were fully HIPAA compliant.
Since large companies have greater resources and typically more robust compliance operations, it's doubtful that smaller companies could have fared much better in meeting their April 14, 2004, deadline. Despite the one-year extension for compliance, many employers may still be struggling to reach their HIPAA goals -- or wondering what they may have missed.
Paying the piper
The penalties for noncompliance can be steep. Civil fines are $100 per violation, but if personal medical information is intentionally released with the goal of inflicting harm, criminal penalties are up to $500,000 and 10 years in jail.
Heavy-duty enforcement efforts notwithstanding, most employers are eager to ensure that their employees receive the personal privacy they deserve. In addition to engaging legal support, many are working closely with their insurers, brokers and others to ensure that both the spirit and letter of HIPAA are met.
And although prefabricated HIPAA compliance kits are popular with many smaller employers, there is no substitute for a rigorous process that benefits from expert advice.
The fully insured factor
For plans providing benefits solely through insurers and HMOs, the impact of HIPAA's Privacy Rules are fairly minimal. This assumes that the plans and plan sponsors don't create or receive any personal health information other than "summary health information" for limited purposes or enrollment information.
Fully insured plans meeting this definition do not need to name a privacy officer, deliver a privacy notice (this is the insurer's responsibility) or create and provide training on special privacy policies or procedures. However, they should consult their professional advisers about how the privacy rules might impact them.
Because the HIPAA burden is substantially greater for insured customers who create or receive personal health information, insurers will generally shield these customers from any nonsummary health information.
HIPAA check for the self-insured
HIPAA rules are more complex for self-insured companies, including those that only partially underwrite their health plans. If you are one of these employers, chances are you have already made significant progress on HIPAA compliance or may even be 100 percent completed.
However, if the April 14th deadline passed and you're worried you may be risking fines or penalties, ask the following questions. Has your company:
- Created procedures to ensure secure handling of personal health information?
- Trained the right people to ensure that these procedures are followed to the letter?
- Appointed a privacy officer to oversee and document HIPAA compliance and ensure that complaints are handled appropriately?
- Ensured that those with whom you do business -- such as vendors and business partners -- understand your policies and have agreed to follow them?
- Given each plan participant a notice describing your privacy practices so that they understand how their personal health information will be handled?
- Revised your plan documents to describe in detail how you will use and disclose health information?
If you answered yes to these questions, chances are you're on your way to HIPAA compliance. If you answered no, it might be wise to contact your legal counsel, broker or other professional adviser to square things away.
Either way, remember that HIPAA deadlines, unlike those dreaded tax deadlines, were not designed to be an end point but a starting point -- for a continuing effort to preserve and protect your employees' privacy.
Michael Eve is general manager for Aetna's North Central Region, covering 16 states. He has responsibility for the customer segment representing all employers with 51 to 300 employees. With more than 22 years of insurance experience in finance, sales and service, network contracting and administration, he has an in-depth knowledge of the employee benefits business. Reach him at (312) 928-3397 or EveMF@aetna.com.