Arthur G. Sharp

Friday, 26 December 2008 19:00

Cancellation of debt income

Cancellation of debt income (CODI) from distressed properties is becoming more prevalent in today’s economy. The term CODI sounds discouraging; however, there are a few opportunities to minimize the current tax impact as a result of debt forgiveness or debt restructuring.

As Jackie Matsumura of Burr Pilger Mayer explains, “There are several ways to deal with the inability to make loan repayments, including short sales, workouts, foreclosure, abandonment, to name a few.” But, she adds, “There are different tax and nontax implications for each of them, and dealing with distressed properties is definitely not something that owners want to do alone.”

She recommends property owners seek the advice of a tax professional before making any decisions.

Smart Business discussed the tax implications of CODI with Matsumura to learn more about them and the importance of seeking tax advice early.

Is cancellation of debt income always taxable?

No, not always. CODI is generally taxable, but there is a provision in the tax law which allows the exclusion of CODI from taxable income. The provision applies to individuals and businesses, and to name some exceptions for real property owners — let’s call them ‘taxpayers’ — who file Chapter 11, who are insolvent, or who have qualified real property indebtedness or qualified principal residence indebtedness qualify for the exclusion. In addition, there are specific tax consequences as a result of the exclusion; for example, net operating losses are reduced by the exclusion amount, tax credits are reduced, and/or the tax basis in property is reduced.

Also, the determination of whether CODI is taxable depends on the type of taxpayer, meaning whether the taxpayer is an individual, corporation or a pass-through entity. In a partnership situation, the determination is not made at the partnership level, but at the partner level. As a result, one partner’s allocated CODI income may be treated differently from another partner’s because one may be insolvent but the other may not, or one may file Chapter 11 but the other may not.

How can tax professionals help parties involved in buying and selling distressed properties get through the CODI maze?

Tax professionals can help taxpayers deal with distressed properties on the front end. Factors that affect tax results include what type of property is held, whether it is a principal residence, investment property or real estate used in a business; how the properly is held, say, by an individual, corporation or a partnership; what type of loan is involved, whether it’s recourse or nonrecourse; or if the taxpayer has other businesses or has other unrelated tax issues to consider. Their tax advisers can assist in projecting out the tax implications of restructuring debt, when combined with other aspects of the taxpayer’s tax situation, or recommend the ideal timing of certain events to minimize taxes. Also, careful planning is necessary because the character of income may differ between CODI and loss from disposition of property (ordinary income versus capital loss).

Are laws regulating disposition of distressed properties and CODI changing?

Yes. For example, Congress recently enacted the Mortgage Forgiveness Debt Relief Act of 2007, which allows homeowners to exclude up to $2 million of debt that is forgiven through Dec. 31, 2009. One thing to note, however, is that the amount is not really tax-free, because the basis of that property is reduced by whatever is excluded from income; so it’s really a deferral of tax.

Is it in lenders’ and owners’ best interests to cancel debt tied to distressed properties?

That depends. It is generally a business decision as to what the pros and cons of cancelled debt are from both the lenders’ and taxpayers’ perspectives. Taxpayers try restructuring the debt with lenders so that they can keep their property and protect their credit ratings. And, lenders do not necessarily want to foreclose on distressed property, sell it and get whatever they can for it. That could be more costly than trying to work out a deal with the taxpayers. Each lender works with the taxpayer differently. Some are willing to explore other options and others are not, so the taxpayer may not be able to control that decision.

Does anyone benefit from forgiving taxpayers’ debt on distressed properties?

A reduction in the amount of debt may benefit both the taxpayer and the lender. One scenario is where the lender works with the taxpayer to reduce the balance of the debt, but in exchange, receives a partial interest in the ownership of the property or the entity that owns the property. This way, the taxpayer is able to keep the property and the debt repayment is more manageable, and the lender would share in the future profits generated from the property.

Since there are multiple scenarios with different tax consequences, it is highly recommended that taxpayers seek counsel very early in the process.

JACKIE MATSUMURA is a partner in the Tax Practice at Burr Pilger Mayer. Reach her at or (925) 296-1035.

Tuesday, 25 November 2008 19:00

Tax changes are here

Allegedly there are two things certain in life: death and taxes. Death is irrevocable. Taxes are subject to change, especially in California, where significant new tax provisions have been enacted into law recently. They range from new net operating loss (NOL) suspension and credit utilization limitations to increased penalties for under-payments of estimated quarterly tax payments. The provisions will not affect all companies, but sorting out which ones they do can be confusing. In some cases, enlisting the help of professional financial advisers might be advisable.

“If a company has the capability to analyze its tax situation, it can do that,” says Gary Hui of Burr, Pilger & Mayer. “But, if it needs outside help, working with professional advisers might save it time, money and aggravation.”

Smart Business spoke with Hui about how and when companies should start preparing for the changes.

Are all California companies affected by the new tax provisions?

No. Corporations with taxable income less than $500,000 in 2008 and 2009 tax years are not affected by the new NOL deduction suspension or credit utilization limitation provisions. The revised California NOL carryover provision will impact all ‘loss’ companies, though. In short, any state NOL generated by a corporation in a tax year beginning on or after Jan. 1, 2008, will have a carryover period of 20 years as compared to 10 years in the prior law. It is especially useful for life science companies due to their long development cycle and regulatory approval process.

Finally, aside from the fiscal impact to a company, the new law will also have impact on a company’s accounting for income taxes for SEC reporting purposes, if the company is publicly traded.

Are all life science companies exempt from the underpayment penalty?

The new 20 percent underpayment penalty, which is in addition to any other existing penalties, specifically targets corporations with unpaid taxes in excess of $1 million in tax years beginning on or after Jan. 1, 2003. With a California corporate tax rate of 8.84 percent, that translates to taxable income of at least $11.3 million. Life science corporations in the development stage are unlikely to have that level of taxable income.

How will these tax provisions affect California companies?

Corporations with taxable income of $500,000 or more in 2008 and 2009 will not be able to use their net operating losses generated in prior years to reduce their taxable income in those years. However, if the corporation has California research tax credits, which is most likely in a life science corporation, it may use the available credit to reduce up to 50 percent of its state tax liability. Consequently, a California corporation with taxable income not less than $500,000 in 2008 and 2009 will have to pay at least 50 percent of the tax liability in those years, even if it may have net operating loss and/or research tax credit carryforwards that would otherwise reduce the CA tax substantially.

When should California companies begin preparing for these tax provisions?

They should start immediately to assess whether the NOL suspension and credit utilization limitation provisions would affect them, since these provisions have direct cash flow impact. Also, if the new 20 percent penalty applies to any of the prior year tax filings, the corporation is allowed up to May 31, 2009, to amend the affected tax return and pay the additional tax to mitigate or eliminate the penalty.

Will these tax provisions have a detrimental effect on California companies if they do not prepare properly for their implementation?

Yes, any underpayment of tax will trigger penalty and interest. Any potential underpayment of tax and the related penalty and interest will have to be included and disclosed in the audited financial statements of a publicly traded company.

Are there any other new tax provisions of which companies should be aware?

Several. The first two quarterly estimated tax installments will carry higher percentages for tax years beginning on or after Jan. 1, 2009. Tax credit may be assigned to other combined group members for them to reduce their tax liabilities in tax years beginning on or after Jan. 1, 2010. In the old law, the tax credit was attached with the combined group member that earned the credit and could not be utilized by other members of the combined group.

Other NOL related provisions do not have immediate cash flow impact on a corporation in 2008. For example, the carryover periods for NOLs generated prior to 2008 are extended by two additional tax years and by one additional tax year for the NOL generated in 2008. A new NOL carryback provision will allow a limited carryback of NOLs generated in a tax year beginning in or after 2011 up to two preceding tax years.

Incidentally, for California LLCs, the payment date of the LLC fee has been accelerated to the 15th day of the sixth month of the taxable year, instead of the 15th of the fourth month of the following tax year.

GARY L. HUI, CPA, is tax senior manager with Burr, Pilger & Mayer. Reach him at (415) 677-3324 or

Sunday, 26 October 2008 20:00

Preventing financial fraud

Fraud and embezzlement cost local organizations millions of dollars annually. Consistent with national trends, organizations with fewer than 100 employees are the primary targets. And, nationally and locally, there is an increase in financial crimes in which people are colluding with internal or external partners. Cooperation increases their chances of success, because collusion cases are more difficult to detect, as the perpetrators tend to be more creative than those who work solo. But, they can be exposed if organizations are diligent about curbing fraud and embezzlement.

“Statistics show that companies that institute effective fraud policies experience a material reduction in financial losses should economic crimes occur,” says Frank Suponcic, CPA, CFE, a principal with Skoda Minotti.

Smart Business spoke with Suponcic to learn more about how organizations can reduce those losses, maximize their earnings and save themselves embarrassment.

What measures can organizations take to minimize their risks?

One of the most effective ways to minimize risk is to review and test internal controls continuously. Even though many executives believe their companies’ internal controls are adequate, that might not always be the case. The material discrepancies between what management thinks is in place versus what employees are actually doing can be significant. That explains why constantly reviewing internal controls is a major deterrent to fraud and embezzlement.

Organizations can also educate their employees and vendors about what is expected of them regarding fraud and implement a fraud hot line outside the company through which employees and vendors can report anonymously real or perceived fraudulent activity. This hot line can be tied in with the American Institute of Certified Fraud Examiners, local CPAs or law firms; there are a multitude of sources. The hot line should not be tied directly to company sources, though, because the people receiving the fraud alerts might be involved in the fraud.

Another step is to implement and enforce fraud policies. A surprising number of organizations have such policies in place but do not enforce them. Also, providing economic incentives to employees to encourage them to report fraud is helpful, as is the willingness to follow up on tips. Often managers will dismiss tips as hearsay and find out after they have been victimized that they were accurate. That is too late to prevent their losses. A clearly written fraud policy can reduce the chances of that happening.

How does a fraud policy help?

The policy is a ‘thou shalt not steal’ document that allows companies to communicate with their employees on the reporting procedures they should follow if they suspect that fraud is going on. Importantly, the policy should be written and signed on an annual basis by all employees, from the top down. It sets the tone by specifying that fraud will not be tolerated at any level of the work force and lays out the consequences to employees. All employees who sign the policy acknowledge that they have not perpetrated economic crimes and do not intend to in the future. The signed document is a valuable tool should they commit such a crime and fall back on an excuse like they were only ‘borrowing’ the money, as unauthorized ‘borrowing’ is a fraudulent act.

What makes up an effective fraud policy?

The policy outlines specifically what constitutes fraud and explains what the consequences will be, e.g., perpetrators will be prosecuted and, of course, terminated, and the company will seek restitution. It should include what activities are considered inappropriate and provide examples of fraud, such as misappropriation of checks, paying personal bills with company funds or using company property without permission. Ideally, it should be disseminated to outside vendors and customers in light of the increase in collusion cases that involve people outside the companies. That makes outsiders aware of the company’s firm position on fraud and may lead to alerts from them about the occurrence of internal fraud.

Is it costly to implement an effective fraud policy?

No, and it’s money well spent. Some of the anti-fraud recommendations have a dollar tag associated with them. Others do not, since they are nothing more than changes to policies that are already in place. Setting up a ‘whistle-blower’ program or a hot line is relatively inexpensive. There might be fees associated with steps like changing where customer deposits are sent. It might be advisable for small business owners to have their companies’ bank statements sent to their houses. That way, they can personally monitor every check or wire transfer to make sure it is appropriate. About 85 percent of all fraud that occurs is done through checkbooks and cash. So, simple mechanisms like reconciling every bank statement or setting up a physical lockbox for cash can deter fraud.

Overall, the costs associated with instituting an effective fraud policy depend on how inclusive a company wishes to make it.

FRANK SUPONCIC, CPA, CFE, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or

Thursday, 25 September 2008 20:00

Finding the right fit

If you have recurring back pain, would you go to a general practitioner or would you go to a back specialist? Likewise, if a company needs to hire a forensic accountant or other financial specialist, it should not outsource the task to a generalist search firm. A more logical approach would be to partner with a service firm dedicated to financial staffing to complete the hiring process.

“Make sure you find someone who specializes in the area of expertise that fits your needs,” says Robert Gaglione, the managing director of Skoda Minotti Financial Staffing. “A ‘one person fits all’ search process simply does not work.”

Smart Business spoke with Gaglione to learn more about the value of working with financial staffing specialists, what to look for when hiring them and what benefits accrue from doing so.

Why should a company delegate the financial professional hiring process to an outside firm?

The hiring process for a financial specialist is conducted most effectively by someone who is well versed in that specialist’s field. Turning the selection process over to experienced specialists saves the company time, money and effort. It also results in the hiring of the candidate whose credentials best match the company’s needs, culture, etc.

What can a financial staffing specialist add to the hiring process that a company’s own personnel cannot?

For one thing, staffing specialists look beyond a candidate’s tangible assets. Generalists are very good at determining some of those intangibles, such as why a person might be a good personality fit for a large company but not for a small one. But, when it comes to the details of a particular position, staffing specialists have an edge.

For example, if a company is looking for a Sarbanes-Oxley (SOX) professional, staffing specialists who have worked with SOX for years can get into the specifics with candidates during interviews. A generalist firm might not be able to do that. Remember, people can put whatever they want into their resumes, but interviewers have to go beyond those ‘bullet points’ to identify who the best qualified candidate for a job may be.

Specialists can also write and place the ads for jobs with more specificity, and follow up on them administratively. Plus, they can recruit people who are not even looking for jobs because of their extensive contacts in the specialty. In short, they epitomize the old saying, ‘time is money’ as far as clients are concerned. Financial staffing specialists save them both — in large quantities.

What criteria should a company consider when selecting a financial staffing firm?

The companies that really get it right — and the ones that have the lowest amount of turnover — are the companies that match their financial staffing firm with their own goals. One criterion for a company is to seek referrals from trusted sources that have had good experiences with a financial staffing firm. Also, find a firm that specializes in the specific area of expertise for which the company is hiring. A final criterion is to partner with a staffing firm that has a quality process in place. For instance, avoid a firm that takes a job order and simply feeds candidates whose names are taken from a database that has been in existence since the invention of the abacus. Look for a service firm that wants to interview the client to determine the exact tangible, intangible and technical parameters of a search, and which selects and presents candidates based on them specifically.

How does a staffing firm differentiate between A-level and lower-tier financial specialist candidates?

The firm looks at a variety of qualifications, starting with knowledge of the field and technical expertise, schools and certifications, and where the candidates honed their skills. For example, financial professionals who have worked in public accounting tend to have more diverse experience than their counterparts who have not.

Generally speaking, the analysis goes well beyond the candidates’ skill sets. Proficient financial staffing specialists look at the candidates’ exposure to different companies, different processes, different IT structures and different industries. They look closely at the candidates’ experiences in looking at how different companies have done different things. The candidates’ diversity of experience are key factors in the selection process. People who have done more and been exposed to more tend to be more promotable — and are exactly the types of candidates financial staffing specialists are best qualified to present.

ROBERT GAGLIONE is the managing director of Skoda Minotti Financial Staffing. Reach him at or (440) 605-7295.

Saturday, 26 July 2008 20:00

Simplifying FAS 109

Search the Federal Accounting Standards Board (FASB) Web site for information about FAS 109 and you will find 14 pages of technical bulletins, accounting pronouncements, interpretations, opinions and assorted topics. No wonder accountants think it is so complicated. Yet, FAS 109 can be made easier for those who do not work with it consistently — and, at times, for those who do.

Satisfying FAS 109 requirements can be simplified, especially if the parties involved listen to one another’s concerns, work together to boil the standard down to its nuts and bolts, and resolve any inconsistencies that exist in the reporting process.

Smart Business spoke to Jim Parks of Burr, Pilger & Mayer LLP about how to demystify FAS 109, access experts and employ effective communications as a tool for the tax provision process.

What is FAS 109?

FAS 109 is an accounting standard that requires that financial statements reflect the tax consequences of all book/tax differences. Its primary objective requires companies to recognize the amount of taxes payable or refundable for the current year and compute deferred income taxes for future tax consequences of events that have been recognized in their financial statements or tax returns.

Why is meeting those requirements so complicated?

It doesn’t have to be. There is no doubt that FAS 109 can be frustrating even for people who work with it regularly. But, satisfying its requirements lies in distilling the tax preparation process into five separate and distinct steps for calculating tax provisions: identify permanent and temporary differences, calculate current income tax expense, calculate deferred income taxes, determine the need for a valuation allowance, and record the calculations on the financial statements.

Following these steps enables someone reasonably proficient in accounting and tax matters to prepare a tax provision. Virtually all tax provisions and software follow these steps in some fashion.

How can companies navigate through the calculations and required documentation?

One way is to follow Edmund Burke’s advice: ‘Good order is the foundation of all great things.’ Building on that premise means including in the process the proper tools and worksheet templates. But they won’t do the trick alone. Tax preparers need a little more to be successful! One path is to partner with trained and experienced preparers, utilize state-of-the-art technology and apply well-defined processes and procedures.

What benefits accrue from following that advice?

Tax provisions prepared by experienced personnel with the proper procedures in place yield better results. Regarding the people process, tax provisions should be prepared by trained and qualified individuals familiar with the local jurisdictions. The preparers could include in-house personnel and outside professionals. It is highly recommended that personnel familiar with the applicable jurisdiction prepare and/or have input on a tax provision. This is particularly important for foreign and state jurisdictions.

What role do technology and processes and procedures play in satisfying requirements?

Adequate technology is essential to a well-prepared tax provision. Companies and their outside accountants demand it. There are several good software programs available to preparers. Many companies, however, use Excel-based programs very efficiently. A world-class software template should be able to address downloading of company financial statements, automatic book/tax difference updates, jurisdictional issues, currency conversions, foreign tax credits, valuation allowances, etc. Additionally, documentation supporting the calculations and technical conclusions reached should be clearly presented and understandable to the reader.

The processes and procedures applied should be used with a high degree of integrity. Any deviation will likely produce unsatisfactory results. Through strict adherence to the tax provision processes and procedures companies can consistently ensure quality. This often entails the use of checklists, flowcharts and internal and external reviews.

Should the tax preparation process be done independently by internal personnel and advisers?

No. Companies need significant coordination among their auditors, outside service providers and internal personnel. Everyone is better served if they are talking ‘on the same page’ two to three times a year. This is one of most important elements of the tax preparation process. It’s also where professionals can excel and provide better services.

The tax preparation process should include a series of meetings among the practitioners that clearly lay out the expectations, time-lines and deliverables, and measure against desired results. A planning meeting maps out expectations. A post-review meeting is essential to obtain feedback, which enables everyone involved to adjust accordingly and learn.

Systemic coordination of the tax provision process is a key element to success. It’s a function of consistently improving upon what works the best. And, it doesn’t hurt to listen to what others have to say.

JIM PARKS is a tax partner with Burr, Pilger & Mayer LLP ( Reach him at or (408) 961-6383.

Monday, 26 May 2008 20:00

Know what you sign

Companies are sometimes surprised to learn that their contracts are on occasion anything but enforceable.

Even the seemingly plain terms of negotiated contracts and form contracts have loopholes. If your business depends on certainty, and you want to avoid “he said, she said” disputes, carefully drafting and reviewing contracts before signing can help avoid problems down the road.

Smart Business spoke with Clay Steely, a litigation partner with Porter & Hedges LLP, to learn more about arguments used to avoid the plain terms of contracts and to assess how companies can protect themselves from such arguments.

What are some common arguments used to defeat contracts?

In what I call ‘private’ contracts, parties normally negotiate to memorialize a specific deal to avoid factual disputes over the parties’ obligations in the future. Two common arguments used to defeat private contracts are 1) the deal is not as expressed in the contract, or 2) a party misrepresented some fact that improperly induced the other party to enter into the contract.

To try to address/avoid these arguments, many contracts expressly state: ‘This contract contains all the agreements between the parties and no representations outside the contract are enforceable’ (a merger/integration clause). Seems straightforward, right? Not always. Claims that a party misrepresented the deal or improperly induced a party to enter into a contract (fraud) are commonly used to try to defeat contracts. Even when a contract contains an express merger clause like the one noted above, the inquiry does not end. Courts many times will analyze how the clause is worded and who was involved in the transaction when the clause was put in place. If a court finds that a contract is unclear, the terms were not expressly addressed in a contract or that a merger clause is insufficient, a business may be faced with having a jury decide the meaning of the contract. In short, the document you thought would help you avoid uncertainty and any future disputes does not help at all. However, carefully crafted written contracts can address and try to eliminate some of this uncertainty as well as potentially costly future problems.

What are some problems with form contracts?

Purchase orders and invoices contain terms. Everyone has seen them. Very few people read them. Many times each party’s documents have different or new terms. The problem then becomes which documents’ terms control? Such a dispute is sometimes referred to as a ‘Battle of the Forms.’ For example, if your purchase order does not limit the transaction to your terms, if you accept an invoice that states you agree to waive certain rights or bring your dispute in a different state, those terms may be enforceable.

How can I avoid some of these problems?

Careful drafting and review of all contracts can help. For private contracts, use well-drafted language — like merger/integration clauses — to try to avoid future problems. Carefully consider the use of clauses requiring a party to pay for problems caused by the other party’s actions (indemnity). Be as specific as you can on the duties and obligations of the parties. For form contracts, talk to your employees. Tell them to read what they sign, even the small print on the back of a document. If there is any question that the contract is changing/waiving a company’ rights or contractual terms, then they need to discuss that issue before signing the contract.

Draft your forms so another party’s documents can not change your terms. But be sure that your terms meet the requirements of the jurisdictions in which you are doing business. For example, some terms waive a trial by jury or stipulate what law applies or where any lawsuit must be filed if a dispute arises. Since individual states’ laws may differ on these subjects, verify that the state in which you are doing business allows such a waiver of venue choice. Waiver of a right to a jury, choice of law, choice of venue (place a dispute will be litigated), limitation of damages, liquidated damages (setting the amount of damages for certain problems) and many other clauses can be very helpful.

As a litigator, I routinely see out-of-state companies forced to litigate contractual matters in Texas because they did not have the correct language in a private contract or some representative signed a form contract in Texas that had terms and conditions forcing the company to litigate in Texas under the other side’s terms.

Small contractual matters no one thought were significant can end up being expensive, not because the dispute is large, but because the company is forced to litigate in a place it did not choose, under terms it did not want. Be wary of these issues and, at the same time, use knowledge of the issues to protect your business. A lawyer can help you do both, and help businesses be sure that the contract they bargained for remains the contract that is enforced.

CLAY STEELY is a partner with Porter & Hedges LLP. Reach him at or (713) 226-6669.

Wednesday, 26 December 2007 19:00

People are your foundation

In today’s tight employment market, a company’s greatest asset is its people. Utilizing a recruiting firm is one of the most cost-efficient ways for a company to find people worth investing in. Let’s face it: It is the people within an organization who contribute most to its success or failure. From the receptionist who creates a first impression to the accountant who saves the company thousands of dollars by finding an error in the books, every employee contributes to a corporation’s bottom line. Unfortunately, finding high-quality employees is not always easy.

Smart Business spoke with Ashley Theriot Creel of Delta Dallas to learn more about how a company can find a recruiting firm to which it can entrust its recruitment process and attract the A-level people it needs to remain competitive.

Why is hiring A-level people important to an organization?

I had the opportunity to listen to the CEO of the Container Store, Kip Tindell, whose company has been named the No. 1 place to work by Fortune magazine eight years in a row. He said it takes one good employee to complete the production of three below-average employees. Furthermore, one A player, or top performer, can produce what three good employees can. There’s no need for a company to hire talent that is average, at best, when it can maximize its budget to identify and attract the best talent in the market.

Are companies better off using external sources in the recruiting process?

Companies that rely exclusively on their internal HR departments to fill positions may find it counterproductive. HR staff members will spend much of their time writing job descriptions, posting them on their companies’ Web sites, perusing hundreds of resumes and attending job fairs. Keep in mind that they will be doing these things while attempting to manage core competencies in their organization. Each of these recruiting techniques draws on valuable HR money and time. Remember the saying, time is money and money is time? Why not use your resources to partner with a recruiting firm that spends all of its time and money on directly recruiting and delivering A players to its customers?

How does a company find a recruiting firm to partner with?

First, do your homework and be sure they do theirs! Be sure to choose a recruiting firm that is well established in your market. Are they affiliated with networking partners or organizations? Are you just another number or are you a client that they take the time to listen to? Be sure they take the time to do a thorough profile of your company. It is important to partner with a firm that takes the time to work alongside you throughout the process.

How does such a profile benefit a client?

A recruiting firm should ‘profile’ a company in order to find the most qualified candidate for a position. The profile should contain information such as the company’s culture and history, the job description, the hiring manager’s personality, team dynamics, salary, benefits and what makes a successful hire in that department. That information is then taken to the candidates, and matches are made by recruiting experts that are trained in recruiting and interviewing techniques. This process can help an organization identify employees who will fit in to its environment for years to come. In turn, if a company is considering partnering with a recruiting firm, it will want to profile the recruiting firm, as well. It is always a good idea to learn as much as you can about the firm you are partnering with, and establish what differentiates it from the rest.

What criteria should a client apply when seeking a search firm that can meet its specific requirements?

It is always a good idea to learn as much as you can about the firm’s history in the marketplace as well as its company story. Be sure you know as much as you can about its operational process and its recruiting processes. Ask about its testing, screening and interviewing techniques and learn about its business model. Better yet, go and see it for yourself. I invite my customers to come and meet our leadership team, to learn about our processes and get to know us as a company. When you see that the recruiters and the leadership are truly experts in their field, you can then begin to trust they will deliver the best of the best to your organization.

The time that is invested in building a partnership with a recruiting firm can save a company more time and money than it would have ever imagined.

ASHLEY THERIOT CREEL is vice president of sales with Delta Dallas. Reach her at or (972) 788-2300 x147.

Wednesday, 26 December 2007 19:00

Poor planning is a losing strategy

Strong business skills alone are not enough for business owners who want to reach their full potential. They must implement strategic plans to help them meet that goal. But, some owners get so focused on day-to-day operations that they let the future take a back seat to the present — and what lies in between.

As hard as it may be to find the time to plan, they should develop measurable short-, mid- and long-term goals, link short-term goals with long-term outcomes, develop realistic budgets and financial forecasts, tie objectives to measurable actions, and establish road maps for their strategic growth. That is strategic planning, the process of developing a methodology and making it the company’s way of life. How do they do that?

Smart Business spoke with Ken Haffey, a partner with Skoda Minotti, about strategic planning, and how it can enhance a business’s chances of success and durability.

Why is strategic planning important?

It gives business owners an idea of what they want the company to look like in the future and how they are going to get there in the most efficient, effective way. If they don’t engage in the process, they might find themselves losing ground to their competitors who do. They may not be nimble enough or quick enough to make changes within the organization or to match their competitors’ strategies as the market changes around them. They are left on the outside looking in as opportunities arise — and pass them by.

Is it an ongoing process?

Yes. One of the key things to remember about strategic planning is that it is a very fluid process. It provides a sanity check for owners to make sure that things are moving forward, rather than stagnating. Business conditions change; owners have to change with them. If they don’t have a plan in place that can be executed quickly to help them adapt to changes, they will be ill prepared to function in a competitive market, let alone survive.

Owners have to establish regular touch points in their strategic plans to make sure that things happen in a timely fashion and that change can follow.

Does strategic planning involve both long-and short-term goals?

Definitely. Plans should go out for at least 24 to 36 months to address the fluidity in business cycles. They should also contain components that address the next six to 12 months. In any case, they should reduce the impact surprises can have on businesses when changes occur. After all, eliminating the adverse impact of surprises is one of the purposes of strategic planning.

Does it follow specific formats?

Not at all. It can be as simple as writing notes on a napkin or as formal as sitting with partners, managers and other key people to brainstorm, write down ideas and feed them to a software package designed specifically to create a strategic plan. The important thing is not how strategic planning is done; rather, it is that the process is performed on an ongoing basis with the company’s future in mind.

How do companies benefit from it?

It results in improved operations, expanded market share, increased company value and it enhances the ability to take advantage of opportunities as they come along. A match between being strategic and opportunistic is the best place for business owners to be when running a company. The same holds true for managers of divisions, departments and other units within the company. And, it is important to note that strategic and opportunistic must complement each other. Some people get caught up in the opportunistic part but don’t have strategies in place to take advantage of opportunities when they arise.

Opportunists without plans find themselves reacting rather than ‘proacting.’ That is not where they want to be. Strategic planning also enhances a company’s competitive position. The organizations with the best strategic plans tend to be those that react most quickly and most efficiently to market changes. They also tend to be the ones with leaders who focus on everyday operations and future opportunities simultaneously. Strategic planning allows them to do both.

Who should be involved in it?

The primary person is whoever is responsible for the operation of the business. Depending on the type of organization, others who should be involved include financial, operations, marketing and sales. Some companies might benefit from working with consultants to gain an external view of market forces and how they fit in to the overall competitive picture. In short, the process should include the business leaders of the different departments and areas throughout the organization. The inclusion of these leaders enhances the chances that the result will be the organization’s plan, not the boss’s plan. In fact, that should be one of the goals of strategic planning.

KEN M. HAFFEY is a partner with Skoda Minotti, a CPA, business and financial advisory firm based in Mayfield Village. Reach him at or (440) 449-6800.

Sunday, 25 November 2007 19:00

Keep the good ones

The first 90 days on a job are the most critical for a new employee. Employers need to understand that this period is the most significant for a new hire. With the unemployment rate currently less than 4 percent, retention of good talent is critical. One path to employee retention is to implement an effective on-boarding program. Employers need a strategy to integrate new hires into a corporation’s procedures, culture and vision.

Smart Business spoke with Leslie Peterson to learn more about the value of on-boarding both temporary and direct-hire employees.

How does an employer benefit from a strong on-boarding program?

Companies that have structured on-boarding processes in place spend fewer dollars on recruiting and hiring due to a lower turnover rate. Perhaps the best benefit of on-boarding is employee retention, partnered with loyalty and increased productivity. According to Westwood-Dynamics’ Web site, employees who go through such a program stay with a company for at least three years longer than employees who are not offered an on-boarding process. The relative cost of on-boarding is low compared to the cost of turnovers. The expense of one employee turnover can be up to 1.5 times the salary of the position.

How do employers create a successful on-boarding program?

There are a variety of ways to set up a solid on-boarding program. Employers can start by evaluating their current plan, creating a checklist and providing a mentor. The primary goal is to set up the new hire for success through information and training. The on-boarding program needs to be consistent and ongoing with follow-up throughout the employee’s first year. Periodically checking in with new hires and assessing their development will assure them of commitment to their success.

When does the on-boarding process begin?

Ideally, on-boarding begins before the job is even accepted. The employer should ask new employees to explain their concerns about the job before they start. When new employees are permitted to relate their fears early, employers can be proactive about potential tough periods in their process. By mainstreaming the new-hire process, employers can retain top talent and help their bottom line grow.

Post acceptance, the hiring manager should go over some key items with new hires, providing specifics as to where to park, dress code, items to bring for paperwork, when to arrive, whom to ask for and what to expect on the first day. That process will ease the new employee’s jitters, save time and serve as a starting point to plug him or her into the company.

What can employers do on an employee’s first day to ease his or her transition?

The first day of a work with a new employer is difficult. Often my candidates have told me that they feel out of place or uncomfortable asking for basic information that is second nature to seasoned employees. They need to be given a tour of the office, introduced to the team, shown restroom locations and told what time lunch is typically taken. These are simple suggestions but having a basic working knowledge of the office can ease tension on that first day. In addition, established employees can check in with them periodically to engage new hires and make them feel welcome.

What steps should be taken after the first day?

The most crucial step is to check in with new employees to see how they are handling training and adjusting to the team. Thirty days into a new position, a new hire can begin to wonder if he or she made the right decision. Why? Relationships. Employers should check in with the new hire at the 30-day mark to see how the training process is preparing the employee and to see if he or she has developed at least one relationship with a fellow employee. Pairing new employees with a mentor connects them with the team, gives them a forum to ask questions and helps them to learn the company culture.

What is important to new hires during the first 30 to 60 days in a new position?

Challenges and successes begin to surface between 30 and 60 days after a hire. Sometimes, new hires still wonder if they really know what is expected of them, if they have had an opportunity to exercise their strengths, if they received recognition recently and whether co-workers care about them as individuals. If the answers to these questions are no, then the employer and the new hires should discuss why that is and to whom the employees can talk to resolve these problems.

Ultimately, investing in people with the right values and tools of support will deliver the organization’s goals and everyone will reap the rewards.

LESLIE PETERSON is an executive recruiter, CTS, with Delta Dallas. Reach her at or (972) 788-2300.

Sunday, 26 August 2007 20:00

Ten bad business contract decisions

Business contracts often fail to include specific terms that provide basic, fair protection to all parties involved. As a result, businesses expose themselves to unnecessary disputes that, even if they win, leave them less than whole. Including sensible protections will help the parties to a business contract avoid disputes, or shorten litigation should it arise.

Smart Business spoke with Neil Kenton “Ken” Alexander, a partner of Porter & Hedges LLP, to identify the most common shortcomings in business contracts.

What are the most frequent shortcomings in business contracts?

My top ten list includes: no default interest rate; no provision for attorneys’ fees and litigation expenses; reliance on oral agreements; no notice of claim provisions; inadequate dispute resolution provisions; poorly drafted insurance and indemnity obligations; absence of proper warranties; no well-considered damage limitations; failure to conduct a risk assessment; no qualification of contract counterparties. These defects appear often in everything from insurance policies to supply and service agreements to construction contracts.

What is the impact of these shortcomings?

Without proper provisions for interest rates on default, attorneys’ fees and litigation expenses, well-crafted insurance and indemnity obligations, and warranties, it is practically guaranteed that a business owner will be exposed to risks it did not want, or will not be kept whole if the contract counterparty breaches. If the contract is signed without good notice of claim or dispute resolution provisions, or without applying proper risk assessment or qualification of the parties, the innocent business owner may be drawn into an expensive, time-consuming legal battle.

Why are these defects so common?

Business people sometimes rely on contracts provided by a trade association, an industry group, a customer, supplier, or even a competitor that are not well-tailored to the situation. A big reason is complacency. Sometimes business owners focus on the good things they expect from a transaction, but do not carefully consider the bad things that may cost far more than the revenue from the contract. They get lulled to sleep by repeat business, or assume that a standard contract protects their interests.

How can business owners make sure their contracts protect their interests?

Two important steps happen before you ever speak to an attorney. First, consider the real-world risks that the contract poses for all parties, not just you. If it places a risk on a party who does not understand it, or cannot manage or insure it, the result likely is nonperformance and maybe a nasty lawsuit. Second, contracts rarely really fully protect you from a dishonest, incompetent, or under-financed contract counter-party, so qualification of the companies with which you do business is essential.

I recommend specifying an interest rate on past-due sums, because the law provides for interest substantially below what most business people regard as sufficient to cover the real cost and risk of delayed payment.

What contract matters especially deserve review by counsel?

Here are some key examples. Courts almost never award attorneys’ fees to the successful defendant, unless the contract says so. In other words, if the other contract party brings a meritless lawsuit against your company, you do not recover your attorneys’ fees. A more level playing field is created in many situations if the contract provides that the prevailing party will recover attorneys’ fees. There are also many other expenses of litigation that are not recoverable unless the contract says so.

I encourage my clients to think through whether they want their contracts to be subject to arbitration, jury trial, bench trial, or mandatory mediation. Arbitration is good for some contracts; it is lousy for others. If you pick arbitration, have some well-considered specifics about the kind of arbitration you want.

Lots of contracts that I see in litigation, especially standard form contracts, have poorly drafted insurance and indemnity provisions. Indemnity provisions are often under-inclusive, over-inclusive, unenforceable, or downright incomprehensible. If you cannot figure out what it means, do not expect a court interpretation that you will like. Indemnity and insurance provisions are not one size fits all.

Your contracts need to contemplate what damages each party is really on the hook for. Lost profits? Costs of delay? Only outof-pocket costs?

Lawyers are like doctors. A checkup with one who is qualified to deliver preventive care is vastly cheaper than dealing with a problem through surgery or litigation. Good counsel sophisticated in these matters will help you create contracts that make all parties happier and lower litigation risks. If you fear involving counsel will make negotiating a good deal with the other party more difficult, maybe it is time to look for new counsel.

NEIL KENTON ALEXANDER is a partner with Porter Hedges LLP. Reach him at or (713) 226-6614.