Roger Vozar

PFSweb, a growing business providing e-commerce solutions to many major retailers, was courted by several communities when it was looking for a new location for its professional staff of more than 400 employees.

The company ended up opening its new facility in April 2012 in Allen because the city and the Allen Economic Development Corporation best understood its needs.

“The entire economic development group listened well in terms of what our needs and requirements were. The city’s been great,” says Mark Layton, founder and former CEO of PFSweb. “One year in, I don’t have anything negative to say about our experience in Allen.”

Smart Business spoke with Layton, who recently left PFSweb to pursue other business opportunities, about the factors that led to the move and a 10-year lease in Allen.

Why was PFSweb looking to leave its Plano, Texas facility?

We had been there about 20 years and there were growth issues, as well as a parking problem. Our real estate professionals encouraged us to take a broader look at the market and it became apparent that there was an opportunity to create competition.

The challenge was that we had two distinct uses — a worldwide data center and a call center operation — that potentially required different types of facility solutions. Vacancy rates had been so high in downtown Dallas that it was cost effective to relocate to a space that also gives us significant ability to expand and contract to meet our needs.

The city of Allen didn’t have a suitable site for the call center, but obviously played a part in relocation of our headquarters and technology development lab.

What separated Allen from the competition?

The building our commercial real estate representatives and the economic development corporation brought to us had some great amenities and potential. The owner offered flexibility in configuring the space correctly for us, building out a corporate park with a running track, basketball courts, horseshoe pits, etc. He also allowed us to be single tenant even though the space was bigger than what we needed — he delayed a requirement for us to lease the space for several years, giving us room to grow.

What role did the city and Allen Economic Development Corporation play?

Their help regarding financial supplements was very important. Dallas, Richardson and Frisco were also aggressive in trying to lure us, particularly when the call center piece was separated and we had about 400 relatively high-paying jobs that were very attractive.

The city of Allen and its economic development group showed a lot of awareness and understanding of our challenges relating to accounting regulations and how the incentives could be shown on our books to help reduce overall expense. Accounting regulations want you to take incentives in a lump sum; our profit and loss statement would have shown a higher rental through the entire 10-year term and a big financial windfall in the final quarter.

Other economic development corporations handed us a standard contract and didn’t show a desire to change the terms and conditions. With Allen, they had dealt with these issues with other public companies, and their familiarity was a breath of fresh air. We didn’t have to do a lot of education as we did with the other groups. Language needed to be structured correctly and it required flexibility as their legal group worked with our accountants. That was a differentiator for us.

Would you recommend the city to other companies looking to relocate?

Certainly, from my standpoint it has been a great experience. The only drawback is that Allen doesn’t have a large inventory of buildings, although the city is addressing that situation and there is land that can be developed if companies want to build to suit.

It’s been a great relationship and the economic development corporation did a wonderful job for us. We would absolutely recommend Allen to other companies looking for this type of office space.

Mark Layton is the founder and former CEO of PFSweb. Reach him at (972) 881-2900 or

Reach the Allen Economic Development Corporation at or call (972) 727-0250.

Practically no one reads software licensing agreements, but the terms they set allow software companies to access your computer network for an audit. And when they decide they want an audit, software companies may attempt to gather information without executive management knowing.

“They will send the audit request in an email because a formal letter has a greater chance of going up the chain to management. The email will say the audit right is in the contract and to run the attached script on your computer system,” says Jason H. Beehler, an associate with Kegler, Brown, Hill & Ritter.

“That script was created to find as much usage as possible. It will look for any occurrence of the software’s name, even if it has no correlation to the installation of the software. The company, usually without thinking, will go ahead and run it and it comes back with an unbelievable number. All of a sudden the software company is asking for $100,000 or $500,000 or more, depending on how extensive they allege the overuse is,” says Beehler.

Smart Business spoke with Beehler about procedures companies should follow to manage software licenses and what to do if a software company requests an audit.

How should companies respond to an audit request?

Treat it like an audit request from the IRS. Whoever receives the request should notify someone on the executive side — CEO, CFO, CIO — and the executive should contact in-house or outside counsel to review the licensing agreement and understand the company’s rights. What is the script designed to look for? Is the license agreement valid and enforceable?

You also want to make sure that, before any audit request comes in, the person who manages software purchases is proactively tracking software licenses and usage. A person may have moved on to another job or department and the copy still exists, although no one is using it. Simply removing software from computers prior to the audit can legitimately decrease your exposure by reducing the number of users.

Often employees have software programs they don’t use. From an IT perspective, it’s easier to create a master template for a desktop software suite that is loaded on computers. You may have what registers as 100 users of the software, but the number of people actually using it is 15.

What if the script has been run?

If you get a letter that says you owe $200,000, contact your counsel, and then together you can call the software company’s general counsel and see if you can negotiate. It could be that $60,000 of that total is interest and, of the remaining $140,000, maybe half corresponds to the actual number of unpurchased licenses in use. If there’s legitimate overuse, you can structure a settlement and offer to pay over a period of some months or years.

If you can’t reach a settlement, consider filing suit before the software company files, so you can choose the court. It’s much better to fight on your turf and your terms. When you file, the software company may very well countersue for copyright infringement and breach of contract. But at least you will define the case on your terms, and you may not have to litigate in the software company’s backyard.

Are more software audits being conducted?

Yes. It could be a function of a difficult economy, either because the software companies are feeling the pinch or because they suspect that users may be engaging in unauthorized copying in order to save money. The prevalence of downloaded software presents an opportunity for software companies if they suspect people aren’t tracking their licenses well.

IT experts say software companies could put controls in place to prevent unauthorized copying. That’s what makes these claims interesting, and that issue should be explored if it comes to litigation. The argument that the software company had an opportunity to prevent copying and now seeks damages for activity it could have stopped could be a significant issue at trial.

Jason H. Beehler is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5452 or

For more information on Kegler, Brown, Hill & Ritter, please visit

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter

A job change can be a stressful, busy time, which is why many people forget about 401(k) funds and simply leave them in a former employer’s plan.

“I can’t emphasize enough that people need to properly educate themselves about their options,” says Robert D. Coode, a principal at Skoda Minotti Financial Services. “Most people we encounter are hesitant to rollover old 401(k) funds because they aren’t aware of their options.”

There also is a tendency to think amounts aren’t significant enough to warrant attention. The average person holds 11 jobs between the ages of 18 and 44, according to the Bureau of Labor Statistics, so each 401(k) account might not be substantial.

“But when you start consolidating plans, they become more meaningful,” says Bob E. Coode, CSA, a partner with Skoda Minotti Financial Services.

Smart Business spoke with Robert and Bob Coode about options available for 401(k) plans when you leave a job.

Why shouldn’t you leave 401(k) funds with a former employer’s plan?

Many people wind up with up to seven retirement accounts during the course of their careers. That poses a problem with record keeping. But the bigger problem is not having anyone to help you manage these accounts. It makes sense to consolidate them into one IRA.

Some people think that having multiple plans makes them diverse. But, if there’s significant overlap among the accounts, it actually defeats the purpose.

When leaving a job, what options are available regarding 401(k) plans?

The options are:

  • Leaving funds in the old plan.

  • Transferring funds to the new employer’s plan.

  • Directly rolling over money into an IRA.

  • Taking a taxable distribution.

Taking a distribution is not recommended; too many people see old 401(k) accounts as found money. While some people don’t have a choice, many will regret taking the money early and having less money set aside for retirement. The distribution could drive up a person’s tax bracket, cost more in federal taxes, and impose a 10 percent penalty if the participant is under 59½ and there is no hardship, such as medical expenses or an impending foreclosure.

Usually, the recommended option is a direct rollover into an IRA, which provides freedom of choice. In employer-based plans, the employer or the company managing the plan makes all the decisions about the number and types of investments. Typical 401(k) plans offer 15 to 20 investment choices. An IRA rollover gives access to a much wider array of investments.

Every IRA account should have a combination of equity, bonds and fixed income, and alternative investments to varying degrees, depending on the person’s age and risk appetite.

What are alternative investments?

Examples are long/short mutual funds, managed futures, real estate, commodities and currencies.

People may be wary of the word ‘alternative,’ but these are simply investments that don’t necessarily correlate with the market. Alternative investments are favored primarily because their returns have a low correlation to the three traditional asset types — stocks, bonds and cash.

These investments have been available to large endowments and high net worth investors for a long time and worked so well that fund companies made them available to retail investors.

With a traditional equity mutual fund, all investments are long term. Managers are required to keep 85 to 95 percent invested in equities at all times. If the market is due for a correction or a bear market is anticipated, they can’t short a stock or move into cash to protect the investor. A long/short mutual fund, which can be considered an alternative investment, has the ability to hold stocks for a long time or short the market if a correction is due.

Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

Robert D. Coode is a prinicipal at Skoda Minotti Financial Services. Reach him at (440) 605-7119 or

Bob E. Coode, CSA, is a partner at Skoda Minotti Financial Services. Reach him at (440) 605-7182 or

Insights Accounting & Consulting is brought to you by Skoda Minotti

Publicly held companies generally receive greater media attention about scrutiny from shareholders and government regulators than private companies, but that doesn’t mean that private companies are immune to lawsuits regarding management activities that can disrupt operations and create a financial burden for the business.

“People think that privately held businesses and nonprofits do not have much exposure. The reality is that there are many lawsuits that are brought by shareholders, employees, regulatory agencies, competitors and customers that are not covered by general liability insurance. Only a directors and officers policy can provide coverage for an actual or alleged wrongful act, breach of duty or mismanagement,” says Peter Bern, CEO of Leverity Insurance Group.

Smart Business spoke with Bern about the risks private companies face and how directors and officers insurance (D&O) can help limit exposure.

What are some potential D&O claims for private companies?

Regardless of your company’s size, the legal cost to defend a director, officer, or employee is substantial, as are the potential penalties that can be personally incurred. Because of the personal liability risk, which is not covered under a personal insurance policy, protecting these key individuals and the entity itself is critical.

Private companies have investors, shareholders, creditors and employees that can bring lawsuits alleging wrongful acts, mismanagement, breach of duty or neglect. Regulatory agencies, suppliers, competitors and customers can also be plaintiffs.

Types of lawsuits include the following:

  • Breach of fiduciary duty, including self-dealing and conflicts of interest.

  • General business mismanagement and bankruptcy.

  • Failure to deliver services.

  • Failure to disclose information.

  • Disclosing materially false or misleading information.

  • Regulatory agency actions and investigations.

  • Merger and acquisition complications and objections.

  • Shareholder derivative actions suits.

  • Freeze-out mergers forcing minority shareholders to sell stock below fair market value.

How can companies determine what coverage they need?

Because there is no standardized policy, it makes it difficult to comparison shop. There are special endorsements or enhancements that can be placed on these policies. It’s a matter of analyzing needs and selecting the necessary limits and coverages accordingly.

Underwriting factors for D&O insurance include company characteristics such as:

  • Age: Companies with less experience and shorter history of effective management are riskier.

  • Industry: Investment banking and securities expose executive management to more risk than those experienced by board members of a small nonprofit.

  • Financial stability: If a company’s finances are unstable, there is a greater chance of becoming insolvent during a lawsuit.

  • Litigation history: Insurers will analyze a company’s history of previous lawsuits and any adverse business developments.

Is D&O coverage becoming more commonplace?

It’s been around for a long time, but it had been very cost prohibitive. Also, directors and officers thought it wasn’t necessary to purchase coverage if the company wasn’t publicly traded. But even nonprofits have exposure. They have volunteers donating time, making decisions and moving money; D&O covers them if there is mismanagement.

Still, many companies are not aware D&O insurance is available. Without D&O coverage, executives are not protected personally — business pursuits are excluded from homeowners insurance.

Whether you’re a privately held, nonprofit or a public company, it is likely that your business can benefit from a D&O liability policy. Since there is no such thing as a ‘standard’ policy, a professional insurance agent is invaluable when purchasing D&O coverage. He or she will understand your organization and can help design a policy that will meet the needs of the directors and officers, shareholders and the entity itself.

Peter Bern is the CEO of Leverity Insurance Group. Reach him at (216) 861-2727 or

Keep up on issues that could impact your business at Leverity's LinkedIn page.


Insights Business Insurance is brought to you by Leverity Insurance Group

Recovering from a flood or fire is hard for a business. But dealing with problems caused by a lack of business continuity plans or inadequate insurance can make it worse.

“The better you can plan for how to deal with an incident, the better off you’ll be,” says Lawrence J. Newell, CISA, CBRM, QSA, CBRM, manager of Risk Advisory Services at Brown Smith Wallace. “I say ‘incident’ because it could be something not always thought about in typical disaster terms, such as a breach of credit card information.”

Smart Business spoke with Newell and William M. Goddard, CPCU, a principal in the firm’s Insurance Advisory Services, about developing business recovery plans and the insurance options available to reduce risk.

What goes into a business continuity/recovery plan?

One component is a business impact analysis, placing a value on what the business needs to operate. Layered underneath are the business processes, which include the business continuity plan and its identifying process flows. For example, length of shutdown is part of the business continuity plan, which contains timelines.

Then there is the disaster recovery plan, which covers anything the business depends on that is IT related. Information has more value than just the data because of the intelligence built around it. So you need to identify where that data is processed, stored or transmitted.

There is also a communication plan, making sure an incident is communicated upward, downward and outward — upward to the executive management team, downward to the enterprise and outward to customers and business affiliates. Part of the communication plan is identifying the impact, whether it’s a simple outage or a more widespread incident such as a tornado, flood or hurricane.

What options are available to manage risk?

In the example of a credit card breach, there are risk reduction processes such as applying security standards developed by the credit card industry. There’s also cyber risk insurance, which insures costs to locate the problem, including hiring experts to do that, notification of cardholders, and business interruption loss.

What do businesses need to know about disaster coverage in insurance policies?

Generally, what we think of as disasters — earthquakes, hurricanes — are covered under property insurance. But business insurance policies also contain sublimits. For instance, you can have $100 million insurance coverage, but the sublimit might be $25 million for a flood. Policies carry different sublimits, and a company planning to use insurance to cover these disasters needs to be aware of them.

What is co-insurance, and how does that impact claim payments?

After a loss, the insurance company will judge the value of a building, say it’s $1 million. A co-insurance clause is typically 90 percent, meaning that the building should be insured to 90 percent of its value — so you’ve bought $900,000 insurance coverage on a $1 million building. If it burned to the ground, you would be paid $900,000. But if you only bought $800,000 insurance coverage and were supposed to buy $900,000, all recovery is based on having 88.8 percent of the coverage you should have. If a small warehouse fire causes $100,000 in damages, you wouldn’t be paid $100,000, but $88,800. This concept of co-insurance is frequently in policies and can be punitive for loss recovery.

How can insurance costs be reduced?

Insurance companies will inspect your property and following their recommendations can make you a better risk, reducing premiums. It’s also important to figure out exactly what coverage you need — it’s best to get an independent adviser. There have been many court cases involving inadequate insurance; they’re expensive to bring and hard to win. It’s better to get it right when you buy the policy, so you should have someone other than the person who’s selling you the insurance answer your questions and conduct an analysis of your needs.

William M. Goddard, CPCU, is a principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or

Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or

We can help you prepare for disasters and get better insurance coverage. Learn more.


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A company’s mission can be a very powerful tool for building employee engagement and fostering a winning culture. But that can’t be accomplished simply with a mission statement posted on a wall.

“It’s not so much about creating a statement. A company mission lives and breathes, whether it’s documented or not,” says Greg Stobbe, SPHR, J.D., Chief HR Officer at Benefitdecisions, Inc. “The mission is what drives the culture, which is what drives the organization.”

Smart Business spoke with Stobbe about the importance of having a mission and the impact it can have throughout your organization.

What is a company mission?

There’s a unique answer for every organization, but the mission is the what, why, who and how of the company; it’s the reason it exists. The mission isn’t developed — it’s already there, you just need to uncover it.

The mission is the organization’s ultimate goal, if you don’t have one you can’t truly define success or failure. It’s like a ship without a navigational system, you’re not going to know your course or if you’ve reached your destination because you don’t have one.

What are the benefits of having a mission?

The benefits are directly proportionate to the effort and thought that went into designing, implementing and maintaining focus on tracking the mission. There will not be any benefits if it’s just a statement, whether oral or written, and nobody pays attention to it.

Time spent on devising, developing and articulating a mission is a savvy investment in human capital that will pay dividends in the financial success of the organization. Employees who feel invested, who understand their roles, become engaged and emotionally attached. It would be very difficult for someone to be emotionally attached to an organization unless the person knew the mission and it resonated with him or her.

With the economy improving, employees might be apt to look at a position elsewhere for more pay. But when you have employees who are emotionally invested, their first motivation is not compensation. You can do more with a smaller group of employees who are passionate about the cause than with a larger group who show up for the paycheck. A passionate, engaged workforce can accomplish great things and that all goes back to the power of a company mission and how that affects employee engagement.

How is the mission articulated?

You need to work with employees on establishing the mission. It’s not like the secret recipe of Coca-Cola that’s kept in a vault in Atlanta and only three people know it. The mission drives the culture, and you should know what it is when you walk into a company’s headquarters. Once you know the company mission, everyone should know it and live it. If you approach any employee, he or she should be able to articulate what the organization's overall mission is and how his or her contributions are aligned with it.

What are the challenges faced in the process of developing the mission?

First and foremost, the mission has to come from the top — the CEO and/or the board of directors. They need to be stewards of the process. Companies can hire a consultant to put together a mission statement, but if that’s just because the CEO wants to check a box, it’s not going to produce any benefits. Companies with winning cultures are the ones where senior managers embody the mission. Through their example, it cascades down to all levels so that everyone, from the person at the front desk to the clerk in accounting, up through the C-suite knows the mission, and it’s something people live every day.

How is the mission accomplished?

Theoretically, if a company achieved its mission, the reason for the company ‘to be’ would no longer exist. Therefore, it is important to carefully consider your mission and thoughtfully craft it. The difference between the missions of ‘to feed hungry people’ versus ‘to eliminate hunger’ is evident. The former being an event, and the latter a true mission. An engaged workforce will ‘reboot’ each and every day and strive to achieve the mission.

Greg Stobbe, SPHR, J.D., is Chief HR Officer at Benefitdecisions, Inc. Reach him at (312) 376-0456 or

Insights Employee Benefits is brought to you by Benefitdecisions, Inc.


It would be nice to be able to have the philosophy that you can’t put a price on health, but the reality of rising costs in the health care industry means that approach can’t work.

“As a country, we can’t continue to spend 20 percent of our gross domestic product on health care without making sure we’re getting the best possible value,” says Dr. Brandon Koretz, associate professor of clinical medicine at the David Geffen School of Medicine and student in the Executive MBA Program at the UCLA Anderson School of Management.

Koretz says before entering the MBA program he had a tendency to spend whatever it cost to provide a valuable resource.

“My perspective was, ‘let’s get it.’ Now I understand that every dollar spent on one thing is a dollar that is not available for something else. I understand more fully the trade-offs and their implications,” he says.

Smart Business spoke with Koretz about the MBA program and the perspective it has given him on the health care industry.

Why were you interested in the MBA program?

I’m a geriatrician by training and care for Medicare patients. I also work at an academic health center and teach others how to provide care.

Medicare is at the cutting edge of financial changes in health care, and there’s a need to provide the best possible care at the most reasonable price; I need to understand the financial principles to ensure that is occurring. My Hippocratic oath isn’t just a promise to the patient in front of me, it’s also an obligation to be a good custodian of resources provided by society, which is paying for that patient’s care.

How has the program changed your views regarding the health care industry?

It’s given me another tool set to use when considering problems, a perspective I didn’t have before. In medical school, I didn’t have a finance or accounting class. I’m now a much more informed decision-maker when making budgets.

I’ve been able to bring business principles back to the people I teach. UCLA’s medical school is great about training doctors to understand up-to-date scientific literature, but we not only need to provide technically good service, we also need to meet patients’ emotional needs. If you’re rude, patients aren’t going to come back or may not follow your medical advice. So I’ve initiated discussions about things like wait time and how it can be improved. In years past, doctors would say, ‘That’s not my job.’ But, of course, it is; evidence is being accumulated that shows clinical outcomes are better when there’s a stronger connection between patient and doctor. A conscious focus on service can strengthen these connections.

How does the Anderson experience differ from other MBA programs?

What’s amazing at Anderson is how it is a community of learners. There’s an incredible diversity among students. Faculty can walk me through the fundamental concepts of finance while teaching people who work in the finance industry. Students are also sensitive to that diversity, and a person with a financial background will help me during a break when there’s something I don’t understand. There’s no ego or shame involved. People tutor each other — one group came in weekends on their own time and set up a series of tutoring sessions for students who didn’t understand accounting.

The expression I hear is, ‘At Anderson we take care of our own.’ Everyone works together to ensure the best possible learning experience. I’ve been able to develop a broad network of people in many industries. One project involved gathering information about the travel industry. Using resources at Anderson, a dozen interviews were set up within days. When it comes to Anderson, whatever else you’re doing stops. We really take care of each other.

Dr. Brandon Koretz is associate professor, clinical medicine, David Geffen School of Medicine at UCLA. Reach him at (310) 206-8272 or

Insights Executive Education is brought to you by UCLA Anderson School of Management

The federal financial institution regulators want to avoid a repeat of risky lending practices that contributed to the recent recession. New guidance sets higher standards for borrowers, including private equity firms and companies, seeking leveraged loans.

“This is a proactive move on the part of bank regulators to avoid some of the underwriting pitfalls that institutions encountered prior to the recessionary conditions we had going into 2007 and 2008,” says Dickie Heathcott, a partner at Crowe Horwath LLP.

Smart Business spoke to Heathcott about the guidance — which had a compliance date of May 21 — and what it means for borrowers and financial institutions.

What is the guidance, and do financial institutions have to adhere to its provisions?

Although a guidance isn’t necessarily a rule, it effectively becomes one in the field. Banks have to follow it because that’s what regulators are going to use when they examine the bank.

The guidance, issued by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC), covers transactions with borrowers who have a degree of financial leverage that significantly exceeds industry norms.

It focuses on sound, levered lending activities, including:

•  Underwriting considerations.

•  Assessing and documenting enterprise value.

•  Risk management expectations for credits awaiting distribution.

• Stress-testing expectations.

• Pipeline portfolio management.

•  Risk management expectations for exposures held by the institution.

The guidance applies to all financial institutions supervised by the agencies, but significant impacts are not expected for community banks because few have substantial involvement in leveraged lending.

Are there certain industries where leveraged lending is of particular concern?

Construction and development lending is being looked at very closely because of what’s happened in recent years. This type of lending is generally considered commercial real estate lending.

The OCC and the Fed released a white paper in April with findings from the regulators’ study of bank performance in the context of the 2006 interagency guidance, “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices.” That guidance established supervisory criteria for banks that exceeded 100 percent of capital in construction lending and 300 percent of capital in total commercial real estate lending.

According to the paper:

•  13 percent of banks that exceeded the 100 percent construction-lending criterion failed during the economic downturn from 2008 to 2011.

•  23 percent of banks that exceeded both the construction and commercial real estate criteria failed from 2008 to 2011, compared to 0.5 percent of banks that exceeded neither criteria.

•  An estimated 80 percent of losses in the FDIC fund from 2007 to 2011 were attributed to banks exceeding the 100 percent construction-lending criterion.

What does the guidance mean for businesses seeking loans?

Business owners can look for financial institutions to be very cautious in their underwriting. They will not have access to credit like they did in 2006, even though it seems that the economy has stabilized.

Regulators are being proactive; they can see that credit underwriting is loosening up. Quality deals are being priced so thin that financial institutions are looking at areas where they can make more profit, which, of course, brings additional risk.

From a financial institution standpoint, it’s becoming a very competitive environment again. That means pricing more thinly or a loosening of underwriting standards. Institutions may be willing to finance certain types of loans they would have pulled the reins in on completely three or four years ago. The guidance is about ensuring that to the extent institutions enter into leveraged financing again, they do so in a more prudent manner.

Dickie Heathcott is a partner at Crowe Horwath LLP. Reach him at (214) 777-5254 or

Website: For more information on regulatory guidance for financial institutions, visit Crowe’s Regulatory Reform Competency Center.

Insights Accounting is brought to you by Crowe Horwath LLP

Companies looking to grow and needing an infusion of capital have several options, which come with various costs and requirements.

“We look at capital on a sort of continuum, with equity perhaps being the most expensive form primarily because of its diluting impact on ownership of the company. At the other end, there’s self-generated working capital derived from profitable operations,” says Paul Gibson, senior vice president and Eastern Region market manager at Bridge Bank. “In between there are a variety of financing options to assist a growing company.”

Smart Business spoke with Gibson about where small businesses fit along the continuum and options they have available to secure working capital.

What is the least expensive option to get working capital?

There is no cheaper form of capital than self-generated profits. Apple, Inc. is an example of a company that continues to be profitable and has a huge war chest of cash available for any need. But most small and growing businesses are not capitalized like Apple and look to banks to assist in the form of senior debt. This financing is usually based on a bank’s prime lending rate as its index and has a modest margin over, or under, this index. These loans are structured, including a senior secured lien on all assets through a Uniform Commercial Code filing and frequently have financial and/or performance loan covenants. There may be a borrowing formula and an advance rate against receivables as well. There is a direct relationship between pricing and structure, as all pricing is ultimately dictated by risk. When a business can’t adhere to a traditional covenant structure, the looser structure usually translates to increased pricing.

It’s best to determine working capital and growth capital needs first when exploring financing solutions. Next, identify the various capital sources starting at the least expensive and work down until sufficient working capital is obtained. Many times it’s possible to meet all needs with senior debt, but there is a limit to how much is available and that is largely determined by the profile and complexion of the company — overall assets, liabilities, cash flow, liquidity. All of these factors help identify risk.

Many growing businesses find it difficult to obtain traditional senior debt financing because they’re focused on growth at the expense of profitability. Some banks specialize in assisting companies in this dilemma, forging strong relationships long before the mega-banks will.

What’s next if companies can’t obtain sufficient senior debt?

Another potential source of working capital is subordinated debt, also known as mezzanine debt or venture debt. Subordinated lenders do not recover their first dollar in a liquidation scenario until the senior lender has collected its last dollar. This type of financing can take many forms.

With subordinated debt there is generally less structure than with senior debt. The reduced or even lack of covenants and junior lien position contribute to increased risk. Because there’s greater risk, subordinated debt also has a higher price.

Some banks offer these instruments, but more often commercial finance companies, hedge funds and other non-bank lenders offer them. The higher rates they charge are reflective of the higher cost of their capital, usually in investor funds or a bank line.

Why is cheaper not always better?

The true cost of capital shouldn’t only be measured in simple dollars or as the spread of basis points in an interest rate. The least expensive capital isn’t always the best capital because there are more factors than just price, such as opportunity costs, ease of use, flexibility of structure and other intangible benefits. For example, a low-interest loan with a covenant package that’s too restrictive can potentially result in a business disruption when a covenant violation occurs. Balancing pricing and structure relative to individual needs is critical when evaluating multiple loan options.

Most people assume that competition is the primary driver of pricing, but it’s not. Risk determines pricing — whether it’s equity or debt — and competition further refines it. Companies should understand their risk profile. It’s a powerful tool in helping to achieve the best outcome for a business’s financing needs.

Paul Gibson is a senior vice president, Eastern Region market manager, at Bridge Bank. Reach him at (703) 481-1705 or

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Trademark, copyright and intellectual property (IP) laws can vary greatly in foreign markets, so it’s vital to seek local legal expertise before doing business internationally, says Michael J. Ioannou, a partner at Ropers Majeski Kohn & Bentley.

“Local law firms know the system, including the politicians and judges,” Ioannou says. “It’s no different than doing business here. If a Florida company has a problem in San Jose, they could send someone, but they would most likely hire an attorney here. It makes sense to have someone like me who has practiced law here for 32 years and worked in the local courts.”

Smart Business spoke with Ioannou about how companies can avoid legal problems when expanding into foreign markets.

What are some important issues to consider before entering a foreign market?

From a general standpoint, you need to understand the business environment. You can accomplish that in India, for example, through the National U.S. India Chamber of Commerce, Confederation of Indian Industry or the National Association of Software and Services Companies, which caters to high-tech companies.

You also should be checking local laws with the help of a local lawyer in the country or near where you want to do business. So, if you’re going to mainland China, there are good attorneys in Hong Kong that can advise you or connect you to counsel in mainland China that they know well.

What mistakes do companies make when doing business overseas?

They might rush into a market without checking other companies’ rights and get sued for infringing IP rights in the foreign country. Apple thought it had acquired rights to the iPad trademark in China from a Taiwanese company, but courts said a subsidiary of that company still owned the rights in China. Apple paid $60 million in a court-mediated settlement. So one route is to buy the trademark, but you still have to ensure that what you’re buying is legitimate.

It’s the same situation with foreign companies coming into the U.S. A client with a chain of Indian restaurants wanted to expand here and found a restaurant on the East Coast that used the name in interstate commerce first — that’s the test for trademarks, first use — but the restaurant didn’t have the trademark registered. Instead of spending money to argue in federal court that the restaurant didn’t have first-time use, the client bought the restaurant and trademark. It was cheaper than paying legal fees in a later dispute over the name.

How can businesses protect themselves from legal problems?

When entering a country, you want to secure trademark rights for your product there. If you can, obtain patent protection, register and apply for a patent in China or India, for example. A patent in the U.S. is not enforceable in India or China. You can stop someone from shipping goods into the U.S. that infringe on a patent here, but you can’t stop a sale occurring in India or China based on a U.S. patent.

Pharmaceutical companies are having problems getting inventions patented in India because there’s a huge market there for generic drugs. India doesn’t even recognize software patents. One client in India was threatened by a U.S. company for IT support services offered here. It was a U.S. patent, so as long as the function that was within the patent claim was being done in India only, the U.S. company couldn’t claim infringement.

What can companies do to fight patent infringement?

In India, for example, you could file a lawsuit in civil court, but that could take 15 years to reach a resolution. However, the entity that’s infringing laws in India may be doing business in the U.S., which would provide another angle to file a lawsuit here for unfair competition. You also may be able to intercept their goods from coming into this country, depending on the nature of the IP rights being infringed.

But if you have a counterfeiter in Shanghai that’s only selling goods there, you have to use the local courts. Things are getting better in terms of that kind of infringement — that’s why you’re seeing a lot more activity to enforce rights in China, for example. Just be cognizant that you can’t expect a perfect day in court as a foreign company coming into these jurisdictions.

Michael J. Ioannou is a partner at Ropers Majeski Kohn & Bentley. Reach him at (408) 287-6262 or

Learn more about Michael J. Ioannou.

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