Utilizing federal income tax laws, construction cost estimation and appraisal methodologies, cost segregation studies can counteract this cash flow strain by aiding in the identification of those costs that qualify for accelerated depreciation methods over shorter periods and creating a significant tax deferral.
In recent years, the value of cost segregation studies has escalated as Congress has passed new laws and the Internal Revenue Service has issued new rulings resulting in the acceleration of these tax benefits.
Congress increased depreciation benefits in 2002 when it passed the Job Creation and Worker Assistance Act of 2002 and introduced bonus depreciation. This statute enhanced the benefits of cost segregation by permitting a 30 percent deduction of the eligible cost in the current period, with the remaining 70 percent eligible for regular depreciation deduction treatment.
In 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003 improved these benefits further when Congress temporarily increased the limit of current year bonus depreciation to 50 percent of qualifying assets. Unfortunately, bonus depreciation will expire at the end of 2004.
Coupled with Congress' statutory changes regarding bonus depreciation, recent IRS pronouncements also support cost segregation studies. In March 2002, the IRS improved the tax benefit available for prior year investments that had not been properly classified when originally capitalized by issuing Revenue Procedure 2002-19.
Preceding IRS regulations had permitted the adjustment of the depreciation recovery periods on assets previously placed in service and to capture catch-up depreciation that should have been realized in prior years.
This catch-up depreciation was treated as an accounting method change and was computed in accordance with Section 481(a) of the Internal Revenue Code, commonly known as the 481(a) adjustment. However, prior to 2002, the IRS required taxpayers to spread the adjustment over four years from the year of the change. The new regulations eliminated the prior four-year spread and allowed taxpayers to report 100 percent of the 481(a) adjustment in the current year of the change.
The IRS issued clarifying Temporary Regulation 1.446-1T (e) (2) in December 2003 to remove vague language and corresponding uncertainty in the regulations about accounting method changes. The clarification left no doubt as to a taxpayer's eligibility to file IRS Form 3115 and therefore granted automatic consent from the IRS to make changes in depreciation methods.
This same month, the IRS also issued Revenue Procedure 2004-11, waiving a previous rule that required a taxpayer to wait two years before correcting a change in an accounting method.
In January 2004, the IRS further encouraged cost segregations when it outlined approved cost segregation processes and asset classifications in its Cost Segregation Audit Techniques Guide (CSATG). This thorough manual covered both tax and nontax aspects of cost segregation and, more important, clearly identified the IRS' position on the tax classification of a number of different property types.
All of these recent legislative and regulatory changes have made it easier for companies to begin realizing the return on their investment faster. Bonus depreciation may soon be gone; nevertheless, these new developments make cost segregation studies more instantly beneficial.
Consequently, companies should incorporate these studies into their overall business strategy, especially if they are considering a large capital investment.
EDWARD D. MEYETTE, CPA, can be reached at (616) 752-4234 or email@example.com.
While it is easier to measure in some industries than in others, measuring and creating performance criteria in a professional service firm can be challenging. But it does not have to be that way.
Professional service firms, like all other companies, have key matrices that they operate under. These can be calculated at an overall corporate level, departmental levels and at individual position levels.
It is incumbent upon senior management to identify, benchmark and track their firm's key matrices. Once this is accomplished, not only can firm performance be measured daily, each employee and each department can be measured daily as well.
Given this data, it is possible to design incentive compensation programs designed around performance criteria -- criteria that is specific, measurable and attainable. In this manner, each individual employee, each department manger and even each company executive can have personal compensation and incentive packages geared toward both meeting quotas and goals and also on excess profit-based incentive programs.
The key to daily management of the overall organization and each individual department is the ability to track what is happening on a daily corporate flash report. If you cannot measure it, you can not manage it. The roots of measuring are the benchmarked key matrices. Utilization of this methodology provides firms with a real-time ability to hold both employees and overall departments accountable, not just at the end of a financial reporting period, but hourly or daily. Why manage the game after the final whistle blows when it can be managed on a play-by-play basis?
When a company is run in such a way that everyone knows they can measure themselves against others or against stated tangible goals, productivity and performance tend to increase. The company then has the ability to publish this data on a regular basis internally, creating a positive environment of both individual and departmentwide competitiveness.
With these programs in place, performance awards are easy to define. Why wait for the end of the year to offer these? Instead, give them out throughout the year and create an environment that revolves around rewarding constant measurable excess performance.
The question often comes up around year-end based bonus programs. All too often, these programs become expected rather than earned by employees. Across the board, year-end bonuses do not act as an incentive. They actually have the opposite effect.
After all, if a self-perceived overachiever gets a year-end bonus similar to that of an employee who just does what is required, where is the incentive to excel? Rather than cut back, the overachiever finds a new employer that recognizes and rewards performance.
The key to running a productivity-based organization that consistently outperforms its own lofty goals is designing performance and incentive plans that are constantly achieved by a few and realistically achievable by many.
Constant and frequent reward wins the day.
Gregg Steinberg (firstname.lastname@example.org) is president of International Profit Associates. IPA's 1700 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.
Transaction costs can significantly increase the cost of any acquisition. With so much at stake, the discussion of how transaction costs are classified by the Internal Revenue Service has spanned more than a decade.
Plagued by uncertainty, taxpayers historically relied more on speculation than fact when determining which costs qualified for deduction. Recently, IRS tax regulations finally defined the deductibility rules for these expenditures and outlined the importance of proper documentation.
Evolution of the law
The transformation from ambiguity to clarity, while welcomed, was not easy. The evolution of transaction costs law began in 1992, when INDOPCO Inc. v. Commissioner first established the precedent that expenses incurred as part of an acquisition should be capitalized if they produce long-term benefits. The IRS attempted to soften its translation of this U.S. Supreme Court decision, issuing an explicatory ruling, which differentiated deductible investigatory costs and nondeductible capital expenditures.
This clarification stipulated that deductible costs existed if the expense was incurred prior to the "final decision" date and was "investigatory" in nature. Investigatory was defined using a "whether or which" test.
This guideline considered fees instrumental in determining whether to acquire a business and which business to acquire as deductible. While this interpretation and a later bank acquisition court case calmed many issues surrounding the categorization of the transaction costs, it created a new topic of debate -- the decision date.
A clear translation
Finally, in December 2003, the IRS established clear regulations that outlined when and how a cost was considered deductible. The ruling defined specific "facilitative" costs that demanded capitalization and others that did not regardless of when they were incurred.
This explanation also introduced the "bright line" test. This bright line established consistent guidelines to follow when figuring the key decision date.
The analysis defined the decision date as the first of two dates. The first is the date a letter of intent, exclusivity agreement or other similar papers (with the exception of a confidentiality agreement) is implemented by an agent acting on behalf of the acquirer or target.
The second, the date the taxpayer's board of directors (or a committee representing them) approved the transaction's material terms, or if a board's approval wasn't necessary, the date the parties signed a binding written contract.
Proving your point
While this clarification simply defined the criteria needed to classify transaction costs, taxpayers were still strongly encouraged to provide documentation that supported their classifications. In the case of acquisition fees paid to investment bankers -- known as success-based fees -- the IRS instituted special documentation requirements.
In fact, the IRS went as far as to define the requirement stating supporting documents "must consist of more than merely an allocation between activities that facilitate the transaction and activities that do not."
Any success-based fee not substantiated with the proper contemporaneous documentation was automatically judged facilitative and accordingly, not tax deductible. In addition, the IRS attached a deadline requiring that taxpayers complete all necessary paperwork by the return due date for the year in which the transaction closed. The requirements may seem strict.
Success-based fees are commonly the largest source of expense incurred after the acquisition process. Moreover, investment bankers' billing methods make qualifying the exact time of their service difficult.
As a result, documenting the percentage of fees incurred prior to the decision date is easier said than done. But despite the obligatory paperwork, wise taxpayers wanting the maximum possible deduction welcome the guidance these new regulations bring.
PAUL AILSLIEGER, JD, LLM, is a senior manager, and LOU MILLER, CPA, is an executive with Crowe Chizek and Company LLC. Ailslieger is in Iraq to serve his country's call to duty. For more information about transactions cost, contact Miller at (574) 236-8661 or email@example.com.
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.