Daniel S. Shea, managing director of W.Y. Campbell & Co., a subsidiary of Comerica Inc., says that banks have also played a role in the active market, given their willingness to fund deals.
Smart Business spoke with Shea about the current climate for selling businesses, the types of buyers who are driving the market and how valuations should be handled.
What’s the current environment like for selling a business?
It’s one of the best markets since the late ‘90s. Buyers are aggressive because they have cash and feel good about the economy, while banks are helping by providing acquisition debt. At the same time, sellers see what a good time it is to sell, given the activity levels of buyers and historically high prices. It’s a liquid market, which isn’t always the case.
Toward the end of 2005 and on into 2006, it appears that the growth in the number of deals has started to level off. We don’t believe that transaction volumes are going to go down, we just see them leveling.
What types of buyers are driving the market?
The strategic buyer has been more active in recent periods and is looking to benefit from the synergies that can accompany a purchase, such as with a target’s customers, products, channels and geographic locations. Both public and private acquirers are aggressively seeking growth through acquisition to complement internal growth initiatives.
There are also private equity firms that go out and raise capital for the purpose of buying and holding companies. They look to grow sales and profits before selling anywhere from one to seven years down the road for a nice return. According to Private Equity Intelligence, through September 2005, private equity capital fundraising surpassed the level achieved in all of 2004, so there is a tremendous amount of capital waiting to be invested.
When contemplating selling or acquiring a business, what should a CEO or business owner consider?
If they’re a seller, they need to be mindful of making a market for their business. Most middle-market companies are privately held so the process is not as easy as selling stock on the open market. With private companies, there is no established market for the business; you have to make the market.
Hire someone who can prepare and provide the appropriate information in a compelling manner under confidentiality agreements to qualified prospective buyers and then assist in establishing a price, a structure, and terms and conditions acceptable to both parties. Sellers want multiple buyers bidding for their business to ensure they can drive a good deal too many lose value (and time) by engaging in what we call one-off transactions.
Buyers, both strategic and financial, need to make sure the perceived benefits of the acquisition are for real. Strategic buyers in particular need to have a realistic integration plan and a realistic forecast of expectations for the combined entity, because studies show that the majority of transactions fail to meet objectives. The way to fix this problem is to set realistic objectives and then don’t overpay you can pay at most for the value the acquisition creates and, ideally, less would be better.
How should the valuation be handled?
The market will decide the eventual price, but it behooves sellers to have a good idea of the likely outcome before initiating the sale process. Realistic expectations are critical, or a lot of time and money will be wasted.
Sellers should have their investment banker develop an estimate prior to engagement. This estimate should triangulate the results of a variety of valuation techniques including guideline public company and recent transaction analyses.
We rely on discounted cash flow analysis as well, because this technique provides for more granularity. It is where you take a look at the expected future cash flows of the business and value the business based on what those cash flows are worth today.
People talk about multiples of various accounting measures such as sales or earnings to arrive at initial value estimates or as rules of thumb, but discounted cash flow analysis is the predominant technique employed for estimating value at a more thoughtful level.
DANIEL S. SHEA is a managing director of W.Y. Campbell & Co., a subsidiary of Comerica Inc., and head of the firm’s Southern California office. His responsibilities include relationship management and client representation in sell-side, buy-side and private placement transactions. Reach Shea at email@example.com or (310) 297-2894.
Daniel S. Shea
W.Y. Campbell & Co.
“Generally, a mid-sized business is going to have a closely-held ownership: either one entrepreneur, a partnership or a small group of people,” explains Morgan Rector, regional manager of wealth and institutional management at Comerica Bank. “There tends to be a higher level of dependence in terms of where these individuals see their net worth and income coming from than in a public company.”
Smart Business spoke with Rector about investment strategies.
What are some of the most important factors that a CEO or business owner should consider when they plan their investment strategies?
First, you want to make sure that you’re working with an institution that you’re comfortable with and is a good fit for your company. If you’re a mid-sized company or larger, you don’t want to work with a financial institution that is so small that they don’t have the breadth, the products or the services that meet your needs.
Secondly, you want to be able to sit down with somebody, like your investment advisor or banker, who understands all of the different products and services and how they fit the specific needs of your company. Start a dialogue with your financial institution, which should discover the specific needs and risk characteristics of the business, and match up an investment strategy that fits with those needs and characteristics.
What are some common mistakes that businesses make in their wealth management strategies?
It’s not unusual to see executives or business owners have strategies that are way too conservative with respect to the needs of the company or themselves. If they’re looking at a longer time horizon, or if they need to grow their asset base, they can integrate investment in stocks and asset classes, other than high-quality fixed income, into an overall investment strategy. What we tend to see are companies that can accommodate more risk and really need more in order to accomplish their financial goals.
When investing in global markets, how can a business best strike a balance between risk and return?
You can get a better understanding by modeling historical results and seeing how the international financial market, and investments in those markets, track with local markets. This way, you might find that by layering in some exposure to international markets, you might create more diversity in your investment portfolio, lower the risk and potentially increase the return.
Do you recommend one entity to keep tabs on investment opportunities, administrate trusts and oversee tax issues?
From a convenience and a trust standpoint, that may serve you. It is important to find an entity that is solid financially and one where you don’t have the risk of potential financial issues. With one entity, you get the convenience of packaging all these things together so you’re getting communication all at the same time and all in one statement. On top of that, it’s easier for that entity to integrate all of the different things you’re doing so that there is an interrelationship. I’m a proponent of that, but it depends. If it is a smaller entity, maybe one that hasn’t been around that long, you might look to create some diversity so if there is a problem it won’t drag down the whole financial picture.
What type of questions should one ask when looking for an institutional management partner?
Some of the key questions are: “How long have you been in business? What’s your financial backing? How strong are you? What has your performance been in the past?”
Beyond those, it’s really seeing the type of questions that the financial advisor asks you. If you go into someplace and they quickly say, “We can do it. Just tell us what you want and we’ll give it to you,” then you’re probably in the wrong place. But if you go into someplace and they say, “Let me ask you a lot of questions so I understand what you’re about, what you’re looking for, what your risk tolerance is, and what your time horizon is,” that’s going to give you an indication that you’re in the right place. Because you’re in a place where your financial advisor is customizing something to meet your specific financial needs and is not just giving you off-the-shelf products.
MORGAN RECTOR is regional manager of wealth and institutional management at Comerica Bank. Reach him at (310) 281-2471 or firstname.lastname@example.org.
Lance Gordon, DBA and assistant professor at Woodbury University, predicts that as technology progresses, it will become even harder to reach fragmented audiences. “Consumers are going to be media independent,” he says. “They’re going to be wired and receiving media messages that they have total control over.”
Smart Business spoke with Gordon about how to maximize marketing budgets, the changes he expects in niche marketing and the importance of adapting to these changes.
How should business owners define the right niche market for their businesses?
First you must develop a strategic platform for the company get control of how you’re going to manage strategic thinking and how you’re going to spend your money on marketing. You can’t identify niche as a term and make it stand alone as a concept when it comes to developing strategy. You have to have other terms working and blending with that concept. One of those, of course, would be positioning.
What are some of the obstacles that a company faces when positioning its brand?
One of the important things that business owners need to realize is that everything is in flux, everything changes. Markets are in perpetual motion and target audiences are continually migrating and driven by trends. You have to change with the times.
When targeting a niche audience, how can a business best maximize its marketing budget?
Opportunities abound in this area. When I define niche to my students, I say niche is the better-than factor. What that means is ‘What are you doing better than your media competitors?’ You don’t have to go and spend an awful lot of money, just take advantage of the consumers that do visit your establishment and make sure that they are getting your promotional materials.
Also, there are wonderful new opportunities that have come along in Internet advertising. A company called SpotRunner offers television commercials to small and mid-sized businesses for $500 to $2,000. These are prepackaged television commercials you simply drop your logo and marketing message into a spot that has already been created. You can pretty much cherry pick where you want to be in the market. It has the potential for taking off when you consider that there are (more than) 10 million local businesses in the United States.
What other trends do you see in niche marketing over the next few years?
It’s wide open. You have a whole Game Boy population that has never read a newspaper in their life and these people are going to grow up and become media-savvy adults. It’s considered a disgrace, if when the phone rings, you have to jump up off the couch and run to get the landline. You have to start looking at product placement and making your product available where people are on the Internet.
The other thing that is going to happen is that after an entire generation of millennials gets to the point where they’ve had encroachment into their personal lives by identity theft, they’re going to become super-resistant to marketing messages. It will become more and more difficult to reach them.
How does niche marketing translate globally?
I had an interesting experience where I addressed about 35 Chinese businessman who were all entrepreneurs. I did a presentation to them, through an interpreter, about how they should be thinking about marketing and the new global economy.
I warned them that the core concepts that their sons and daughters were going to be getting at most major universities and colleges are concepts that are no long applicable to the present-day world. They are going to have to pretty much reinvent it themselves.
Some of the research that I’ve done shows that the Internet era doesn’t really start until the year 2010. What happens in the future with broadband will so incredibly change the media arena that the entire area of marketing is in flux.
New emerging economies that are starting from scratch are probably going to have the competitive advantage in the near term unless people who have the willingness and ability to do research start getting smart and really understanding what sort of change is out there and letting their students benefit from that.
Lance Gordon, DBA, is an assistant professor at Woodbury University. Reach him at (818) 252-5153 or Lansing.Gordon@woodbury.edu.
“In this day and age, most communication is being handled through e-mail,” says Hormazd Dalal, president of Castellan Inc. “I would say that 80 percent of business communication is now handled by e-mail. Basically, you cut yourself off if your e-mail system goes down.”
Smart Business spoke with Dalal about what type of e-mail system is best for businesses and what type of e-mail recovery solutions businesses should have in place.
What different e-mail systems are available?
Corporations and small businesses typically set up their own mail server. This means that the mailboxes are stored on that server and it is stored locally in the business. Having their own server makes it easy for them to collaborate between one user and another. It also enables them to backup their mail, and for confidentiality issues, keep it onsite.
The typical home user subscribes to a POP (point of protocol) service where the mailbox is housed somewhere on the Internet on a server. This is not advisable for businesses because it means that mail is scattered all over the company.
Last, there are big companies like Microsoft, Yahoo and Google who offer Web-based mail that you can access through the (Internet), but the mail is stored on their servers. Microsoft has Hotmail, Google has Gmail and Yahoo has their own mail system.
For businesses, which system is best and why?
The best system for businesses is to have your own mail server. Out of the business systems, the best seller is Microsoft Exchange, and hands down, it has the largest market share. The reason for this is because users access their mail via Outlook, which is the No. 1 mail client in the world.
There are also other products made by Oracle, and specifically, Novell, which makes a product called GroupWise, and IBM, which makes Lotus Notes. These are the main business systems, and having your own mail server is best.
How should viruses and spam be handled?
For business users one must protect the server at the gateway where mail comes into it. There are many products that filter messages before they even get to the user’s mailbox. Spam is something that is new, but there are many products out there that analyze and tag spam before it gets to the user’s mailbox. The user then has the ability to manage it by using the native features of the e-mail system.
What e-mail recovery solution should a business have in place?
You should be backing up your mail server and the information store. There are several ways of backing up. Typically you backup the entire information store. The problem with this is that if you just need to recover one or two messages, you run into the issue of having to restore the entire database.
One way around this is to implement what we call brick-level backups, which backup each individual mailbox separately. The other way is that most new mail systems have retention policies on them. So if you hit the delete key, you can set a retention that ensures that the e-mail is not actually deleted out of the server for 90 days. This way any mail that has been deleted manually within the past 90 days can still be recovered.
How do you see e-mail systems evolving over the next several years?
The new tools that are being implemented make it very easy for users to access their e-mail from remote devices. Currently, most corporate users can access their mail from any computer in the world. Many people can even have access from their PDAs and cell phones. Things will be evolving where you will be able to access your entire mailbox through a small little device that you hold in your hand. You will probably be able to do it through your car very soon.
In the future, I think viruses will automatically be protected (against), spam will be automatically filtered and mail will be available on numerous devices. You will be able to check e-mail in your car, on your cell phone, on your PDA and, last but not least, from any computer anywhere.
Hormazd Dalal is president of Castellan Inc. Reach him at (818) 789-0088, ext. 202 or email@example.com.
“If you don’t have the right person in the right position, you can’t do your job or meet your objectives,” says Dr. Ken Nielsen, the president of Woodbury University. “If I don’t have the right person teaching architecture, then we won’t be able to deliver the product to our client, the student.”
Smart Business spoke with Nielsen about what attributes to look for when making a hire, how to keep valuable employees in the fold and where to assign a company’s best employees.
What is the most important characteristic to look for when making a hiring decision?
Attitude is the single most important characteristic that you look at with any employee. If they have the attitude that matches the mission and goals of your institution and what you’re trying to achieve, the success will likely come.
In our case, I am very clear that one of the attitudes we have at Woodbury is that this is a family-oriented university. If you don’t have the attitude that you can be warm and fuzzy and get your arms around the student and say, ‘I’m going to help you in every way possible to have success,’ then you won’t fit in this organization.
There are also some other things that I look at when hiring employees. I look for a history of successes. Were they the class president in their third-grade class? Did they sell more newspapers then the other kid? Did they earn their way to camp by selling candy?
If you look at small success patterns, it’s something that you follow throughout their life. If they’ve been successful in the past, they’ll be successful in the future.
Once you’ve identified the right people for your organization, how do you identify which positions they should be in?
In our role at the university, we try to identify the right people, but we have very specific positions that they’re going into. For instance, if I’m hiring a vice president for finance, then I’m looking for a finance person. We won’t take just anybody and then try and fit them into our slots. We look for those specific skills that an employee might have.
I would say for a CEO of an organization the most important responsibility is to hire the right people. Then after hiring the right people, the vision needs to be set for the institution, and goals and objectives set for the employee. And then you get out of the way and let them do their job.
Once you have a good fit, what are some ways to keep a valued employee on board with the company?
You need to pay them the right salary and you need to increase that salary as their responsibilities or their experience expand with the organization. You need to have a system of goals and objectives that you set annually and that you review monthly. This feedback is very important and they need to know where they are and what their status is.
There are other rewards that you can give people, by verbal recognition and by other kinds of recognition within the organization, so that they know that they are being successful. On the other hand, if a person is not doing well, during the monthly progress reviews you need to be clear with what you expect and what you want.
Is it important to mix one-on-one communication with group communication?
Absolutely. In my case, I have a weekly staff meeting with my six direct reports and then I also meet individually with them once a week. Communication is an ongoing process and it has to go both ways. You have to be open to hear from your direct reports their objectives, their ideas and things that they think need to be changed. Certainly the CEO still needs to make the decision, but they need a lot of input.
Where should a CEO or business owner put their best people?
You put your best people on the biggest problems or the biggest opportunities. For instance, we recently went after a bond to finance some buildings. I put our best finance person in charge of that responsibility to help us through that process. Whether it’s an opportunity or a problem, you want to get the best people to solve that issue.
Ken Nielsen is president of Woodbury University. Reach him at firstname.lastname@example.org.
Many people seeking respite from chronic pain have discovered the healing powers of Eastern medicine. Complementary procedures, used in conjunction with Western techniques, can help patients find relief. Treatments include acupuncture, therapeutic massage, tai chi exercises, herbal medicine and alterations to medication intake.
Dr. Ka-Kit Hui, director of the UCLA Center for East-West Medicine, believes that integrating traditional Chinese medicine alongside modern Western medicine can help to improve the health care system.
“The low-tech, low-cost, high-touch, self-help model will hopefully allow us to provide solutions to some of the problems we have in terms of our health care system,” he says.
Smart Business spoke with Hui about the differences between Eastern medicine and Western medicine, why complementary medicine has become so popular and how businesses can benefit from this approach.
What are the differences between the practices of Eastern medicine and Western medicine?
In Western medicine, we use the reductionist approach to try and locate where the organs, cells and molecules are in trouble. In general, other approaches look at the whole system, it’s more holistic. It’s more hands-on, more qualitative and it focuses more on body, mind and spirit.
People who use these methods tend to be health conscious, or they are desperate, because Western medicine hasn’t been able to help them and they’re searching for ways to complement what Western medicine cannot do.
How have you integrated the theories and practices of both Eastern and Western medicine to achieve positive results in patient care?
The two systems are complementary. The Chinese approach looks at the macro aspect and Western medicine looks at the details. Oftentimes, we are only successful in Western medicine to zero in on the certain things that we can actually do.
But other times, we don’t know why (patients are) not well. And that’s where Eastern medicine comes into play. It works without knowing all the details. It works by rebalancing the system and reestablishing the flow by using the body’s own mechanisms.
In a sense, we use Western medicine to make sure that we are not missing anything, particularly life-threatening problems. But there’s a role for both.
It’s like a flip shade pair of glasses: each lens looks at the system very differently. By using Western medicine to look at the trees, branches and roots, and by using Chinese medicine to look at the forest, we have a much more comprehensive view.
You founded the Center for East-West Medicine in 1993. What challenges did you face in getting funding for your vision?
At first I didn’t have any funding. In 1993, people thought this was all quackery. It was very tough. I actually donated my own money.
When I saw patients and gave talks, anything in excess of what I got paid, I would chip in to help build the program. I believed it would be very helpful for patients and for society in general.
What do you believe are some of the reasons that complementary medicine has become so widely embraced?
Everyone wants to stay well and seek solutions to problems where Western medicine has not been successful. Also, the worldview that complementary medicine focuses on resonates with a lot of people. They want more time with practitioners, they want doctors to be more hands-on and look at them as a person, and they like natural healing.
Very few people are rejecting the use of Western medicine; they use it in combination. Patients really like doctors to be able to provide a comprehensive approach and we aim to provide an integrated model.
How can businesses benefit from this approach to medicine?
A lot of people have health problems related to their lifestyles. When they are stressed, they do things that are unhealthy like eat too much, smoke, drink and use medication.
When you have pain, and you just take pain pills, you’re masking the problem. It’s important to pay attention to how much pain is going on: back pain, headaches and overuse of people’s arms on their computers. We think of health problems like heart disease as separate, but it’s all related.
We need to look at the social environment, the natural environment, look at peoples’ lifestyles and then create an overall plan to see how to improve the whole system. I believe that if this approach is done right, we can have a much more productive work force.
Also, it will handle some of the high costs of health care that we are experiencing 40 (percent) to 50 percent of our GDP, or $1.6 trillion. If we, as a society, redistribute the way that we spend our health care dollars, we will have a much better health care system and a much better society.
Dr. Ka-Kit Hui is director of the UCLA Center for East-West Medicine. For more information on the Center, visit www.cewm.med.ucla.edu.
“Even though many estates now are under that $2 million range, it doesn’t mean you shouldn’t think about these things,” she points out. “In particular, the idea of what happens if you don’t die, but become incapacitated; that’s a real crucial one for taking care of yourself and your affairs.”
Smart Business spoke with Quay about the initial steps to take when establishing an estate plan, strategies that can be utilized in reducing estate taxes and the importance of periodically reviewing the plan once it’s in place.
What steps should be taken when establishing an estate plan?
You should give really serious thought and consideration to questions concerning what you want to have happen at your death, and prior to your death, should you be unable to take care of yourself.
Questions like, Who are your heirs and what do you want to leave them? Are there conditions or strings attached? Is giving to charity important? Who do you want to have named as your trustee or executor, and what are your wishes concerning health care decision-making?
Those are all questions that the attorney who’s going to write up your estate plan documents is going to ask. It will save a lot of time if you think about them prior to the meeting. You might also want to include your tax adviser and financial planner in the process to make sure that everything is covered and things aren’t missed.
What are some of the documents that should be included?
Most of the basic plans are going to include a will, a living trust and instructions for health care decision-making. Depending on the complexity and the size of the estate, there could be a few or many more trusts for various purposes, most of which are designed to save state taxes.
There can also be a need for either new insurance policies or getting rid of some insurance polices, so those should also be reviewed as part of the process.
Why is creating a trust so helpful in estate planning?
A living trust provides a whole variety of benefits. Avoiding probates and the related costs and publicity that can occur is one of the ones that most people know of. But I think that a benefit that’s equally important is the ability to transfer control of your affairs to someone you trust, should you become incapable or unwilling to manage them yourself.
What are some strategies to help reduce estate taxes?
Strategies that work for both married [couples] and singles are creating life insurance trusts to remove life insurance from being taxed at death and gifting to reduce the estate tax prior to death.
For very large estates, or those involving business interests, there are other more complicated trusts that can be used to reduce estate taxability. One of my favorite strategies that really works well is to use charitable remainder trusts prior to death, because they reduce the estate for tax purposes, they obtain the current income tax deduction, they provide income stream for yourself for others and they benefit a good cause all at the same time.
If children are involved, what special factors should be taken into consideration?
An estate plan with minor children needs to designate who’s going to take care of the children if something happens to both parents and provide the funds for them to be taken care of. That makes it mandatory for anyone with children, even if they don’t have a large enough estate to worry about estate taxes, to have at least a will to designate who takes care of the kids.
How often should people review their estate plans?
Estate plans need to be reviewed whenever there is a change in circumstance like a death, a divorce or a move to another state. A change in a business interest, like a purchase of a business or a sale of a business, might also mean that the plan should be updated or changed. Certainly whenever Congress changes a law, the estate plan should be looked at to make sure that it still accomplishes its goals.
Mary Ann Quay is co-managing partner at Vicenti, Lloyd & Stutzman LLP. Reach her at MQuay@vlsllp.com
Having an effective system in place to recover intellectual property is akin to an insurance policy; hopefully you won’t need it any time soon, but having one in place is mandatory. Hormazd Dalal, the president of Castellan, says, “It’s [data recovery is] a lot of work if your backups are good and it’s close to impossible if you don’t have good backup.”
Smart Business spoke with Dalal about the best practices involved with backing up intellectual property, what data should be backed up and what some of the different recovery scenarios are.
What are some of the best practices for backing up intellectual property?
There are two major kinds of backup: incremental and full. Incremental backup is where you only backup the data that has changed. This is something that was very popular about five to six years ago when backup devices were more expensive and capacity was hard to find.
Now that the prices of backup devices have dropped, we recommend full backup, which means backing up your entire data every single day. [Solutions include] a single tape or tape changer and one person who’s assigned to swap tapes every day. This is the only realistic way of making sure that your intellectual property gets taken off site.
Another solution is a hardware appliance which makes a real-time backup of your data as you make changes to it.
What specific intellectual property should be backed up?
Everything that you consider important to you. This also includes infrastructure data like the directory of users, security permission, etc. E-mail should all be backed up and databases like Oracle and SQL should be backed up. Don’t forget your accounting application either.
Why is it important that the infrastructure information is backed up?
It’s important because in the event of a disaster you don’t have to rebuild your network. If the directory is backed up, it can be restored with its permissions for each user. Without these permissions, e-mail or applications will fail.
In the event that a disaster does occur, what are some of the different recovery scenarios?
It depends on the kind of disaster. If your servers are completely destroyed and inoperable, then you have to purchase a brand new server, install the latest operating system and then restore all of the data.
If you have custom applications then you need to make sure that whichever vendor is maintaining them has the ability to reinstall the application. The data, which is presumably on tape because you backed it up, will enable you to restore the information.
With regard to e-mail, if you lose just a few important e-mails it is possible to restore them, provided that you implemented brick-level backup. This backs up each e-mail box separately rather than the entire database , allowing the restore of a single mailbox. The downside of this is that it takes up a lot of time because you have to backup everything twice. Another solution is to implement a script, which will export mail out to special files, which can then be restored.
How long can a business expect the recovery process to take?
If you’ve just lost one file, between a few minutes to a half-hour. If you’ve lost a server, between eight hours and 24 hours. And if you’ve lost your entire network, of say five servers and the entire work station, it can take eight to 12 hours per server, and one to two hours per work station.
What would be your advice to a company that is down for an extended period of time and they have deadlines looming?
Call a professional that makes it possible to get certain systems up and running. You may not have access to your old data, but can continue working on e-mail and create new documents. There are ways to mitigate server crashes. They are very expensive, but you can cluster your servers so that if one fails the other will keep working.
If a company does not have a backup system in place to protect their intellectual property due to budget concerns, what advice would you give them?
It’s the most important thing in any network this is where they should be spending their money. It’s unacceptable not to be backing up data. They have to find the budget to back up their data. Remember that your information is stored on devices with moving parts and eventually they will fail. Backing up data is the most important aspect of IT.
A ‘disaster’ by definition is unanticipated. A proper backup solution means that a disaster affects your company for hours or days. Without the backup solution, will your company open its doors again?
Hormazd Dalal is president of Castellan. Reach him at (818) 789-0088, ext. 202, or email@example.com.
Mark Neubauer, a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department, has noticed that as the length of employees’ tenures has lessened, the number of conflicts has grown.
“Increasingly in California and elsewhere, as more and more business turns on the development of innovative ideas, trade secrets become increasingly important,” he says. “As a result, there is a tension between an employee’s mobility and the ability of companies to keep what they paid that employee to develop.”
Smart Business spoke with Neubauer about how to best protect a company’s intellectual property if a key employee leaves, what information should be included in an employee’s contract and what steps should be taken if a noncompete agreement is breached.
What steps should be in place to ensure that a company’s intellectual property is protected?
First of all, in terms of trade secrets and confidentiality, they should only allow access as needed. Very often, that involves passwords for computers to get access to certain confidential information, and materials kept secure, such as in locked cabinets ... so that there is not general access to information a company wants to protect.
For other types of intellectual properties, such as copyright, there’s a device called a work-for-hire agreement which, especially in the advertising and entertainment industries, is very important to have people sign. Absent that, the creator, which could be the employee or independent contractor, could own the copyright of a work or a portion of the project.
What information should be included in an employee contract?
It is important with a contract to specify that the employee acknowledge that he or she is receiving confidential information and that they agree that the information belongs to the employer. This can be true especially in sales, but also people working in research and development.
Generally, with certain exceptions, covenants not to compete are disfavored in California, but agreements to protect an employer’s trade secrets and covenants limiting competition to protect those trade secrets are potentially allowed.
Having the employee acknowledge at the beginning of the relationship,”If I receive this information, I acknowledge that it belongs to the employer” is important. An assignment of copyrights and/or invention and a work-for-hire agreement are also important.
If an employee has signed a noncompete agreement but takes a job with a competitor, what steps can the former employer take?
The first step is to put the new employer and employee on notice that your former employee has an agreement not to compete or use any information they obtained (previously). Courts recognize the argument: Why buy a business when you can steal it for free?
If you develop your business through a series of employees, and those employees are diverted to a competitor, the competitor can potentially gain an advantage. In other words, the competitor doesn’t have to invest the capital or start-up time or costs. It’s much easier to just hire an employee.
California will protect the employer against the competitor using those trade secrets, so the first thing is to put both the employee and the new employer on notice with a demand letter that they not engage in that use.
The second thing ,of course, if that does not work, is to consider litigation, including a temporary restraining order and preliminary injunction.
What evidence does a business need to pursue legal action against a former employee whom it suspects has leaked confidential information?
The most interesting evidence in today’s market is e-mails. People have the mistaken notion that if you delete something on your computer, it’s gone. There are a number of companies, witnesses and employees who are finding out that doesn’t happen.
The first thing to do is to check the hard drive when an employee leaves and make sure that it is sequestered. Then go through and see whether or not the employee was downloading confidential information prior to leaving.
The second thing is to find out the circumstances under which the person left and whether he or she attempted to recruit other employees.
What steps can a business take to decrease the likelihood of losing a key employee to a competitor?
The first one is to make sure your employees are well-paid. Generally, when employees leave for a competitor, it’s because they’re thinking there is greater advancement or they’re going to make more money.
Keeping salaries competitive, keeping morale high and keeping your employees happy are the best ways to avoid losing key employees.
Mark Neubauer is a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department. Reach him at (310) 255-9144 or firstname.lastname@example.org
“If California is doing poorly because of the tech sector or the trade sector, you can be pretty sure that the whole economy at the nationl level is also going to be struggling,” says Comerica Chief Economist Dana Johnson. “Likewise, if those sectors are strong, the national economy is going to be strong. It really is a bellwether for the rest of the economy.”
Smart Business spoke with Johnson about business conditions for 2006, how the devastating hurricane season could affect the economy and the red-hot real estate market in California.
In 2006, do you think general business conditions will be better, about the same or worse?
I think business conditions will be about the same overall, but in the early part of the year, somewhat worse. We’re going to be going through a soft patch in the economy this winter as household spending growth slows quite perceptively.
This will be due to a combination of higher energy costs, higher interest rates and smaller increases in house prices. These three things together will cause most households to spend more cautiously.
We’re going to go through a period this winter, and maybe into the early spring, where household spending growth, which has been one of the main sources of support for the expansion, will grow more slowly before reaccelerating.
For the year as a whole, growth in 2006 will be similar to the growth we’re getting in 2005.
How will the hurricane season affect the economy in the upcoming year?
The aftereffects are of two sorts.
One, there is some ongoing upward pressure on energy prices, the most dramatic being the market for natural gas but also the market for gasoline. The knocking out of some refining capacity has definitely created a bigger increase in gasoline prices than you would have expected based on where crude oil prices have been trading.
That gap, however, is going to be relatively short-lived. We’re going to see most of the refining capacity restored by the end of the year, and we’ll get back into a more normal relationship between crude oil prices and gasoline prices.
The more lasting impact will be from the knocking out of natural gas production in a significant number of wells in the Gulf Coast region. There is not an ability to import natural gas in the quantity needed to make up for lost production there, so I think we’re going to see pretty painful natural gas prices all through the winter heating season.
What challenges will businesses face due to increased energy prices this winter?
A lot of businesses will have trouble passing on their higher energy costs to their customers. Particularly hard hit, of course, will be anybody that uses energy to provide transportation services or in their production processes.
The net effect will be that profit margins are squeezed, which will take some starch out of the economy.
Real estate prices have skyrocketed in California. Do you believe businesses that own real estate will continue to benefit from these evaluations or will demand for real estate cool off?
Demand is going to cool to a degree. I think we’re seeing the lag effect of higher short-term interest rates that the Fed has put in place and the impact of some guidance by the Fed to lenders to be careful in providing highly leveraged forms of financing for real estate acquisitions.
These factors will combine to cool off the housing markets, and as that happens, the commercial real estate markets will cool off as well.
How is California’s economy similar to other parts of the country and how does it differ?
California’s economy ... accounts for about one-eighth of the national economy. At first approximation, it doesn’t have a strikingly different behavior than the country as a whole.
I think it’s fair to say, though, that California is more involved in foreign trade than many parts of the country and it’s more involved in the growth of the knowledge economy with the high number of tech ventures that are concentrated in the state. New trends emerge more quickly in California with regards to the globalization process and regards to high-tech enterprises.
But at the end of the day, the history of California’s economy is that it grows in line, or maybe just a touch faster, than the national economy.
Dana Johnson is chief economist for Comerica Bank. Reach him at (734) 930-2401 or through the bank’s Web site, www.comerica.com.