Much of the discussion about oil and gas production in Ohio has focused on hydraulic fracturing used to facilitate production. But fracking, as it’s often called, is only part of the process that takes the oil and gas from the ground to consumers.
“The wells are just one part of the overall industry. You can drill a well and be prepared to produce gas and natural gas liquids, but these materials have no place to go until you have a pipeline and processing facilities,” says Scott Doran, director, Kegler, Brown, Hill & Ritter Co., L.P.A.
Smart Business spoke with Doran about the various stages in the production of oil and gas, and the permits and regulations that govern them.
What permits are required for oil and gas production operations?
In addition to the drilling permits, you generally need permits for the pipelines that will take the gas from the well pad to collection and processing points. The Ohio Department of Natural Resources (ODNR) manages drilling permits; The Ohio Environmental Protection Agency (EPA) has authority to issue air permits. The Ohio EPA, the U.S. Corps of Engineers and other agencies are involved in pipeline projects. Construction of the pipeline may necessitate impacts to streams or wetlands, and you have to consider historical preservation and endangered species issues.
You have to delineate every resource along the expected path of the pipeline, which means sending engineers or field personnel to identify streams, wetlands, historic properties and potential endangered species habitats. Of course, that also involves getting easements and permission from landowners. Those field people prepare voluminous reports, and you identify the best path for the pipeline that achieves project objectives while avoiding as many resources as possible.
If a project does impact streams or wetlands, you can apply for and obtain a permit authorizing the project, but you also have to mitigate those impacts by restoring the streams or wetlands at the site or somewhere else, or buying wetlands mitigation credits. It’s expensive, but there are a number of mitigation options to compensate for these unavoidable impacts.
Why are air permits needed?
Air emission of certain natural gas occurs during the drilling process, and the U.S. EPA and Ohio EPA have established strict permitting requirements regarding how to manage emissions during and after drilling. After drilling, there are emissions associated with the transfer and storage of materials.
It used to be that companies commonly flared off excess gas — they didn’t want to or were not able to manage the gas, so they would burn it. New permit requirements are being phased in that will require the capture of that gas.
What is required regarding wastewater collected from drilling operations?
In Ohio, a regulatory decision was made that the wastewater associated with oil and gas exploration and production is to be injected into permitted disposal wells. These disposal wells are generally off-site and operated by disposal companies that collect waste from tanks at the well pad. They’re injecting the waste 10,000 feet into the ground in porous rock, where it is designed to remain.
Drillers and wastewater treatment companies are working very hard to demonstrate effective mechanisms to treat and recycle that water, because millions of gallons are used for every well and fresh water is very valuable.
Do you expect regulations to change as the industry expands its operations here?
Regulations will undoubtedly continue to evolve, but the basic structure is in place. There is every indication that companies are continuing to make substantial infrastructure investments in Ohio, and there is a regulatory program that is overarching and impacts every step of the process.
This industry is going to have an environmental impact, but it can be done in a very responsible manner. Economically, it will be a good thing for the state. There will be some trials and tribulations along the way, but overall Ohio is doing a nice job to ensure a very substantial long-term benefit while protecting environmental resources in Ohio.
Scott Doran is a director at Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5412 or email@example.com.
For more information on Kegler, Brown, Hill & Ritter, please visit www.keglerbrown.com.
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Don’t wait until you want to sell your business to find out you could have done more to make it more attractive to buyers.
Tim McDaniel, CPA/ABV, ASA, CBA, principal at Rea & Associates, says there are eight key factors that determine the salability of a company. Knowing how your business stacks up in these areas provides benefits even if you’re not thinking about selling.
“The more you make your business sellable, the more fun it is. Your business is sellable when it’s less reliant on you, there’s less risk, more cash flow and higher growth. You might work on all of those things and decide it’s so much fun you wouldn’t want to sell,” says McDaniel.
Smart Business spoke with McDaniel about salability factors and what buyers are looking for when considering an acquisition.
What are the key factors that determine whether a business is sellable?
There are eight main buyer considerations:
- Financial performance. The better and more consistent recent performance is, the more assurance it gives a buyer.
- Growth potential. Whereas financial performance is more about history, growth potential looks at the future. A future income stream with a lot of potential is very attractive. There are times when past performance might not have been great, but there appears to be a growth opportunity on the horizon.
- Switzerland structure. The business does not overly depend on any single customer, employee or supplier — they remain neutral if there is a loss in any of those areas. For example, one business owner had 80 percent of its business with one customer and went bankrupt when it lost that business. Things like that make the business less sellable.
- Valuation teeter-totter. Essentially, this is about having up-to-date equipment. If your equipment is old, you either have to invest in new equipment or a buyer will pay you less because they’ll have to buy new.
- Hierarchy of reoccurring revenue. Alarm systems sell for a premium because they have monthly reoccurring business, which lowers the risk. Reoccurring income is very important to buyers, and it’s particularly attractive if it’s under contract.
- Monopoly control. Future cash flow is important, and the higher the barriers to entry, the harder it is for a competitor to take away market share. Few people can start a business to compete with the iPhone. However, if you want to compete against a painter, you just have to hire people who are skilled at it and advertise.
- Customer satisfaction. High customer turnover will create ill will in the marketplace at some point and certainly makes a business more difficult to sell.
- Hub and spoke. This addresses how well the business can survive without you. Many small businesses are dependent on one person and will fall apart the day they leave. That makes the business less valuable and difficult to sell. A buyer might have some of the purchase price based on you staying, and have you sign an employment contract. That’s why it’s important to start building a good management team and relying on other people.
How can a business improve its salability?
Not all businesses excel in each of the eight areas above. However, an owner needs to work toward improving those areas where it is weak in order to make the company more sellable. Start by identifying what drivers need attention, and then develop specific action plans to positively impact them. You will watch the value of your business increase dramatically. It’s not something you want to start working on two weeks before you sell. It’s a process that takes time and focus.
Often, business owners are too busy running day-to-day operations to sit back and consider their business’ value. Yet, there is benefit in looking at the business through the eyes of someone who might be interested in buying it.
Tim McDaniel, CPA/ABV, ASA, CBA, is a Principal at Rea & Associates. Reach him at (614) 923-6532 or firstname.lastname@example.org.
Determine your business’ sellability score at www.reacpa.com/my-sellability-score.
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There’s an adage in business that no one is irreplaceable. But in nearly every company, there’s at least one person whose contributions are so essential that their unexpected death would be devastating to the future of the business. Taking out a life insurance policy on those essential employees — what’s known as key person life insurance — is a way a company can protect itself from the impact of losing a key employee.
“You never want to think about something terrible happening to anyone, but if it does, this is a way you can be sure your business will continue,” says Deb Welsh, a life risk consultant at Clark-Theders Insurance Agency Inc. “It’s not just about one person. It’s a way of making sure your business as a whole is protected.”
Whether it’s a founding business owner with years of institutional knowledge or a chief engineer who makes your technology possible, key person insurance can be a lifeline to a business in a time of crisis, she says.
Smart Business spoke with Welsh to learn more about this simple but essential business-protection tool.
When is key person life insurance something to consider?
Key life policies are part of a business continuation or succession planning process, so it’s an important component of protecting the ongoing life of a business.
It might be two partner-owners who want insurance on each other so the business can continue if one of them died. But it doesn’t have to be an owner. It could be a sales director who’s critical to maintaining revenues. Maybe it’s a person who maintains your key vendor relationships.
Having a key life insurance policy on that person ensures that you will have the resources to cover lost sales, find someone to take his or her place or pay off debt. You want to avoid any period of time where you’re wondering, ‘How are we going to replace this person and make up lost revenue?’
How are these policies usually structured?
The policy is written on the life of the key employee. The person is the insured, but the business owns the policy, pays for the policy and is the beneficiary of the policy.
Why don’t more companies utilize key person life insurance?
The biggest reason is that it’s not a high priority. Business owners have so many things coming across their desks every day that they don’t necessarily have the time or realize how important it is to have this in place.
In general, life insurance is often something we don’t want to talk about even though we know we need it. Key person insurance policies are one of the biggest things lacking in most companies’ insurance profiles.
Also, the perception is that the cost will be more expensive than it actually is. As a hypothetical example, a 40-year-old healthy male covered for $500,000 on a 25-year term would carry a $740 annual premium. That’s a small amount of money to pay to cover one of your most important employees.
What do you tell business owners about why key person life insurance is so important?
It gives a sense of security to your employees, your clients and your vendors. If you have a large vendor that you use frequently, you may have a significant amount of debt with them. This policy can help give the vendor security that if something were to happen, they would still get what you owe them.
It’s also a way that other employees will know that you’re putting things in place to ensure a future for your company. They won’t have to worry about waking up and finding out that the sales director is gone, and wondering what that will mean for the business and their jobs.
You’ve put your life into your business. You never want to think of something terrible happening to anyone, but if it does, this is a way to know the business can continue.
Deb Welsh is a life risk consultant at Clark-Theders Insurance Agency Inc. Reach her at (513) 644-1280 or email@example.com.
Insights Business Insurance is brought to you by Clark-Theders Insurance Agency Inc.
The Small Business Administration’s (SBA) lending program is a major part of U.S. business growth, and these loans can often be substituted for traditional commercial loans with some benefits to the borrower.
“With SBA loans, a business owner can increase his or her cash flow and sometimes get approved for higher loan amounts than traditional commercial loans,” says Steven Valiquette, second vice president and commercial loan officer at First State Bank.
Smart Business spoke with Valiquette about how SBA lending works and what business owners need to know.
What are the advantages of SBA loans versus traditional commercial lending?
The SBA allows for longer amortizations than most typical bank financing, so business owners can utilize extended terms. For instance, real estate can be amortized over 25 years with SBA financing, but the bank may only offer 20 years with traditional bank financing. As another example, equipment can be amortized over seven to 10 years with SBA financing, while traditional bank financing may be limited to five years.
Another advantage to SBA loans is lower out-of-pocket expenses when compared to traditional commercial loans. The SBA also allows the borrower to roll fees into their loan balance, which isn’t normally the case.
Lower collateral requirements are another benefit. The SBA has higher loan-to-value ratios compared to traditional commercial loans.
What type of loans will the SBA finance?
The SBA can generally finance the same types of business loans that a bank can, with the major exception of non-owner occupied real estate. Term debt such as real estate or equipment purchases are typically financed with SBA 7(a) or 504 loans, and lines of credit can be financed with a SBA Express loan or SBA CapLines.
How can a borrower increase its chance of being approved for a SBA loan?
First, talk to several financial institutions. Find financial institutions in your market that make loans to businesses similar to yours and work with bankers who understand your industry. Other best practices are:
• Develop a good business plan. Be ready to explain why customers are going to want to do business with you and how your business is going to compete in your market.
• Take the time to understand the risks associated with your business and provide mitigating factors.
• Provide realistic projections with best case, worst case, most likely case and break-even scenarios. Having detailed projections can help mitigate some of the risk associated with the loan request.
• Develop alternative ways the loan can be repaid if business is slower than projected or, in worst-case scenario, fails.
• Maintain a good personal credit history. Many bankers feel if your personal credit isn’t handled properly, there’s a good chance your commercial loan payments will not be either.
What else do business owners need to consider?
Take your time and develop a well thought out business proposal. For many small businesses, the bank is not only looking at the financial statements or the business projections, but also the person or people behind the company.
Always provide the information your banker is asking for because any information he or she is requiring is a tool used to evaluate your request.
It’s also important to put focus on management’s experience. If management can demonstrate a strong knowledge of the industry and the ability to handle adversity, this may help ease some of the risk of the loan request.
Finally, try to anticipate your future financing needs. Commercial or SBA loans take some time to close, so you need to plan for it. Remember, it’s easier and less stressful to seek financing prior to the actual need.
Steven Valiquette is second vice president, commercial loan officer, at First State Bank. Reach him at (586) 445-1058 or firstname.lastname@example.org.
Website: For more about SBA loans, visit www.thefsb.com/sba.
Private equity firms use pools of capital that are raised from a variety of sources. This capital comes not only from wealthy individuals, but also from insurance companies (that pay retirement plans and annuities) and pension funds.
As a result, school teachers, police officers and others often have a portion of their retirement assets allocated to private equity, which bolsters the overall investment returns of the fiduciaries that run these funds. These higher returns are increasingly important in today’s low interest rate environment. Private equity firms use this capital to invest in all sorts of companies, creating jobs and economic growth along the way.
“Private equity firms are easily and inaccurately portrayed as corporate pirates,” says Jackie Hopkins, managing director, Sponsor Finance Group, at FirstMerit Bank.
“But these firms are willing to invest in businesses that need capital to grow as well as companies that might go bankrupt if not supported with new capital in exchange for ownership. In order to induce them to accept the risk of these investments, private equity firms need high returns. Sometimes the returns are very large. Sometimes the firms lose their investment. Either way, they provide critical capital that allows the economy to grow.”
Smart Business spoke with Hopkins, who lends to private equity firms, about how these serial entrepreneurs operate.
How does the private equity world work?
Private equity companies use pools of capital from investors, called limited partners. The general partner of the private equity firm is tasked with finding good investment opportunities to generate above average returns. The partner is usually paid operating expenses and a portion of the profits earned. In most cases, the general partner buys a controlling interest in a company with a leveraged buyout (LBO), and uses his or her expertise to improve revenue and profitability, such as helping a Midwest firm expand product sales internationally. After three to seven years, the company is typically resold.
What is a leveraged buyout?
In an LBO, an investor uses debt to finance a portion of the purchase price of a company. Depending on the underlying business risk of the transaction, the amount of debt can be very low or up to 65 percent of the purchase price. Using debt allows the investor to amplify his or her return. In addition, interest costs are deductible while equity capital is not, providing a built-in bias toward debt financing in the capital structure.
The debt to equity ratio changes depending on market conditions — today, the average equity investment for a middle market company is 40 to 45 percent in a LBO. For larger companies, it is usually less, because a bigger company can absorb more financial risk.
How is private equity financing different than traditional middle market bank loans?
Traditional middle market loans focus on the balance sheet —assets, inventory, receivables, equipment, real estate, etc. — so if the company is unable to service its debt out of earnings, the collateral can be sold to repay the debt.
Private equity financing tends to be enterprise value loans, looking at the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Financial institutions look at selling the entire company as an enterprise for a multiple of EBITDA. They consider how sustainable the EBITDA is to figure out how much debt the company can safely carry. So, if you think the average multiple of a middle market company is six times (that is, its total value is six times its most recent EBITDA), the bank might lend up to three times. The inherent risk is the possibility that EBITDA will decline or that the prospects for the company or the industry lead to a lower multiple. So to qualify for this type of enterprise loan, a company should have a sustainable level of EBITDA that is not too concentrated in terms of customers, products or suppliers, and is not prone to cyclical swings.
Jackie Hopkins is managing director of the Sponsor Finance Group at FirstMerit Bank. Reach her at (312) 429-3618 or email@example.com.
Website: Get information about FirstMerit’s Sponsor Finance Group services.
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The Affordable Care Act (ACA) contains a total of 91 provisions, bringing change to the insurance market and impacting the type of coverage employers offer their employees.
“Many of the upcoming ACA provisions depend on the size of your employee population,” says Marty Hauser, CEO of SummaCare, Inc. “Employers need to understand these provisions, as they will likely determine what kind of coverage you offer your employees.”
Smart Business spoke to Hauser about how some key provisions impact employers.
What are some provisions impacting all employer groups?
Although some provisions of the ACA are based on the number of employees an employer has, others apply to all employer groups, regardless of size. These provisions include, but are not limited to, guaranteed issue and renewal of health insurance plans, no pre-existing condition exclusion, employer notification of the health insurance marketplaces and an increase to the maximum allowable reward for health-contingent wellness programs.
Beginning Oct. 1, 2013, employers will be required to notify employees of the availability of the health insurance marketplace, formerly known as exchanges. The marketplace is an online portal that will allow consumers and employers to find and compare different health insurance options. Employers must provide employees, regardless of plan enrollment status or part-time or full-time employment status, a written notice informing them of their coverage options. The Department of Labor (DOL) has created three different model notices for employers to communicate this information to employees, and these are available on the DOL’s website.
Another provision impacting all employer groups is the increase to the maximum allowable reward for health-contingent wellness programs from 20 to 30 percent of the cost of coverage. The program must meet five regulatory requirements to qualify as a health-contingent wellness program.
What are some provisions impacting small group employers?
Beginning in 2014, the marketplace will operate a Small Business Health Options Program, or SHOP, that offers choices when it comes to purchasing health insurance for small group employers — with up to 50 employees in 2014 and increasing to 100 employees in 2016 — and their employees.
Through the SHOP, employers will eventually be able to offer employees a variety of Qualified Health Plans (QHPs) from different carriers, and employees can choose the plan that fits their needs and their budget. In 2014, however, small group employers will be limited to offering only one QHP to their employees, as the provision allowing choices between multiple carriers has been delayed until 2015.
In addition to the availability of the SHOP, small group employers with fewer than 25 full-time employees, or a combination of full-time and part-time employees, may be eligible for a health insurance tax credit in 2014 if they offer insurance through the SHOP and meet other criteria, such as the average wages of employees must be less than $50,000, and the employer must pay at least half of the insurance premium.
What are some provisions impacting large group employers?
Effective Jan. 1, 2014, employers that employ an average of at least 51 full-time employees are required to offer employees and their dependents an employer-sponsored plan or the employer pays a penalty, often referred to as ‘pay or play.’
This provision has specific criteria meant to not only define and determine the number of employees in the group, but also to confirm the employer is providing affordable, minimum essential coverage. Part-time employees count toward the calculation of full-time equivalent employees, and there is no penalty if affordable coverage is offered.
If an employer doesn’t provide adequate health insurance to its employees, the employer will be required to pay a penalty if its employees receive premium tax credits to buy their own insurance. The penalties will be $2,000 per full-time employee beyond the employer’s first 30 workers. Penalties paid by the employer will be used to offset the cost of the tax credits.
Marty Hauser is CEO at SummaCare, Inc. Reach him at firstname.lastname@example.org.
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Federal and state laws generally require that employees are paid minimum wage, as well as overtime compensation when they work more than 40 hours in a week. Many white-collar workers are exempt from these rules, but employers need to be careful about how they classify employees.
“There is no system to ask the federal government if a certain position is exempt. So, employers need to make educated guesses about the duties of a particular job and, based on language in the regulations, decide if that position is exempt,” says Stephen P. Bond, a partner at Brouse McDowell.
Smart Business spoke with Bond about how to properly classify employees as exempt or nonexempt, and the risks involved with improper classification.
Does paying a salary mean a position is exempt?
No, although that’s a common misconception among employers. The first test is that the salary must be at least $23,660. Then, the employee’s job duties — not title —must also fall under one of the exemptions in the regulations. The title doesn’t matter because it doesn’t necessarily mean the same thing at different companies.
What job duties can be exempted?
There are three main exemptions:
? Executive — Exactly what it sounds like: primarily being the head of a business or a department, and supervising other employees.
? Administrative — White-collar, management-level worker whose job involves discretion or independent judgment. Clerical work wouldn’t qualify because it isn’t directly related to management of the business operations.
? Professional — This is the most ambiguous area. It requires that the worker have special knowledge or expertise, typically based on a college degree. However, a college degree doesn’t necessarily make a person exempt.
There also are exemptions for certain duties in the computer field and outside sales, as well as one that covers any employee making $100,000 who regularly performs at least one of the duties of an executive, administrative or professional employee.
How can an employer lose an exemption?
One way is by not being consistent about paying the employee a salary. If you dock someone for missing part of a day, that demonstrates that he or she was not really a salary employee, and cannot be exempt.
However, there is a separate provision that applies if an exempt employee is off work for Family and Medical Leave Act purposes, and allows for deductions that do not affect exempt status.
What are the penalties for incorrect classification?
If an employee’s claim is deemed correct and an exemption did not apply, he or she may be able to claim unpaid overtime for the past two years, as well as collect damages and attorney fees. A disgruntled employee could contact the Department of Labor’s (DOL) Wage and Hour Division and trigger an audit that could result in back pay awards for several employees.
Even when employees are correctly classified as nonexempt, companies can run into trouble in terms of hours worked. If employees work at their desks during lunchtime, that counts as paid time. If you give an employee a smartphone and say he or she has to respond to emails even when at home, that also is work time. Those types of claims can cost a lot of money because employees typically have a record of their hours and the employer doesn’t have anything to contradict it.
How can companies avoid misclassification?
You need to have a qualified human resources person conduct an analysis. It has to be someone who understands all of the implications, and will take the time to consider the various positions and where they fit.
Also, it’s a good idea to re-evaluate exemption status as job duties change, especially if you’re going through a reorganization.
A lot of times, management makes decisions based on what makes economic sense at the time. That’s fine as long as everyone is getting along. But then an employee is fired or disgruntled for some reason and files a claim with the DOL
Stephen P. Bond is a partner at Brouse McDowell. Reach him at (440) 934-8110 or email@example.com.
Insights Legal Affairs is brought to you by Brouse McDowell
Performance-based compensation is the variable component of total compensation that may be paid to an individual, team or even companywide upon achieving some defined performance metric. For instance, when a salesperson is paid a commission for achieving a sales target, or an annual bonus is distributed after meeting a companywide goal.
“You need some form of performance-based compensation to keep top performers motivated and happy,” says Brian Berning, managing director at SS&G’s Cincinnati office. “They want to believe that they can make as much as they possibly can if they are able to achieve goals. And with a variable component, there’s rarely a ceiling on it.”
Smart Business spoke with Berning about using incentives to benefit both the employee and the company.
How do companies typically pick incentives for performance-based compensation plans?
It’s largely based on defining goals and setting performance benchmarks around them, which can be for an individual, team, companywide or any combination of the three. It’s important to understand that without consequences, positive and negative, it’s not a goal — it’s a wish. The best companies develop incentives with clear, objective and measurable goals, stating exactly how to successfully get to the target.
You also want to target the right people. A shop foreman of a manufacturing company can influence on-time delivery but shouldn’t be tied to goals for meeting sales initiatives.
Which incentives can be problematic?
Those that are difficult to explain, to measure or achieve are prime for failure. Remember you’re trying to reward results that are largely influenced by behaviors in connection with the company’s goals. So, if the incentive is tied to a behavior that the responsible party has no control over, or the performance measurement isn’t in alignment with meeting the desired goals, it simply won’t work. Employees must be able to understand it, measure it and achieve it.
Why is it important to avoid rushing in?
Look at various scenarios and test to make sure that they mathematically work — that they’re achieving your desired goals. There’s nothing more embarrassing than implementing a performance-based incentive structure that doesn’t work.
On a commission-based structure, for example, be careful when trying to reward certain behavior. If you sell two products, product A and product B, and you want to encourage additional product B sales, you may increase B’s commission. But if everyone is focused on selling product B, there could be a loss of sales in product A. It’s better to use minor awards or only change the commission structure minimally, enough to keep people conscious of it, but not enough for them to ignore product A.
So, talk to your staff and others, and make sure the plan is designed properly.
How can awarding equity in a private company be problematic?
There seems to be two situations that prompt a company to look at a plan like this.
1. Senior management thinks that by giving employees ownership, it is going to motivate results. But by giving stock, you haven’t tied that to goals. The award isn’t instantaneous; employees don’t have more cash. As an owner, how is an employee going to behave any differently?
2. The business uses this as a tool to recruit talent when cash flow is tight. It may work, but it can have consequences later if it doesn’t work out with that employee.
There are other options that look and feel like equity, such as contractual arrangements that don’t necessarily result in the award of true stock or units in a partnership.
What should management be doing to measure, review and adjust these plans?
Measure it frequently and pay promptly. Otherwise, people will lose interest in it.
When reviewing or adjusting the plan, that should be far less frequent. If you’re continuously tweaking your plan, you’re going to create confusion. If there’s some anomaly, fix it immediately, but if you’re making wholesale changes right away, you made a mistake and didn’t do your due diligence. A well-defined performance-based compensation plan provides employees with an upside they feel they can achieve that ultimately helps the company.
Brian Berning is managing director at the Cincinnati office of SS&G. Reach him at (513) 587-3270 or BBerning@SSandG.com.
Website: SS&G was named a top workplace in Northeast Ohio.
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Some leaders take an “old school” approach to change management — employees get a paycheck, so they’ll deal with any changes without a need for much explanation. But that sets the organization on a path toward failure.
“The biggest problems are when leadership does not account for the fact that resistance is definitely an option,” says Mark Deans, practice leader in Organizational Development & Change Management at Sequent.
“You could build a perfectly streamlined business process, or add the most efficient tool, but if employees don’t understand how to execute it to meet your expectations, it’s not going to succeed. Try as you might, you can’t make people do things,” Deans says.
Smart Business spoke with Deans about ways to ensure successful implementation of a change process.
What is involved in change management?
It’s supporting a change in business processes or systems, technology, etc. The practice of change management applies to any significant change in an organization, including leadership change as part of an acquisition or divestiture. It’s about how employees are supported through the change process.
The methodology is that there is a journey the organization, departments and individuals go through, and each has a completely different time path. Two people might do the same job, but each has his or her own change capability, and it’s a matter of identifying and managing all of those within an organization to make the change as seamless as possible.
How does the change process work its way through an organization?
First and foremost, leadership must be on the same page. Start with getting leaders aligned so they can be the driving force behind the change, helping each individual understand his or her part.
Organizations are taking a more holistic view nowadays. A change might mean more work for some departments but provides an overall net benefit for the organization. It used to be that each silo fought for its own interests. Now, it’s about how departments operate together, and some teams taking a hit if necessary to ensure the overall organization is as successful as possible.
One of the first steps is acknowledging the need to change, and the benefits. There should be some compelling reason, whether it’s regulatory changes, an attempt to improve market share or boost the bottom line. If the overarching goal is to improve margins, explain what that means for each group, and ultimately for each individual. You have to manage change upfront and get everyone onboard at the start rather than waiting for problems. It’s analogous to going to the dentist. If you see your dentist on a regular basis, keep your teeth clean and get X-rays, you can catch cavities when they start and are easier to fix, instead of not going for a long time and having major damage. The same holds true for change management, if you start a project and haven’t thought about how to communicate it to employees, going back and fixing it is much more difficult.
Is it important to state a desired outcome?
Absolutely. That is where some companies fail as well. They make a change and aren’t sure why. A company buys hundreds of iPads as part of a mobile technology strategy without addressing the intended use. So people are updating their Facebook status or playing Angry Birds because they don’t have a burning business reason to utilize these tools. That might be a ridiculous example, but there are plenty of cases in which companies want to hurry up and do something because it’s a shiny, new object.
You also need to accept it if a change didn’t work. Evaluate the success of the change, including what happened and didn’t happen as planned. Change projects always take longer and cost more than expected. Organizations that handle change well go back and figure out what they did well, and what could have been done differently. Then they remediate anything that did not get executed as well as planned. They learn from the experience so the process can be improved next time.
Mark Deans is a practice leader in Organizational Development & Change Management at Sequent. Reach him at (614) 410-6028 or firstname.lastname@example.org.
Website: Visit our website to understand how to successfully incorporate change at your company.
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Business operations are subject to a number of internal and external risks, as are ownership interests in businesses. How organizations and their owners address these risks can have a significant impact on the value of businesses and interests therein.
“An enterprise risk management process involves identifying risks relative to an organization’s objectives, assessing them for likelihood and impact, developing a response strategy and monitoring progress,” says John T. Alfonsi, managing director at Cendrowski Corporate Advisors.
A well-defined enterprise management process (ERM) framework can protect and create value for organizations and their owners, he says.
Smart Business spoke with Alfonsi about ERM to better understand its applications.
Where is risk addressed in a business valuation?
The most common method of valuing a business is the ‘income approach,’ which requires a valuation analyst to project a business’s future cash flows, then calculate the present value of the sum of these cash flows by employing an appropriate discount rate. The valuation analyst must address risk in two primary areas: projected future cash flows and the discount rate. Effective ERM processes can help businesses increase value by affecting the estimates for these quantities.
How does risk impact projected cash flow?
There exists a risk that an organization will not achieve its projected figures. As such, the process by which management projects future cash flows can impact a valuation analyst’s assessment of the business. A key risk in the process is information integrity, the quality of information generated through monitoring and data assimilation.
Information integrity allows management to make well-informed decisions and should provide a valuation analyst with greater confidence in a business’s projections.
Valuation analysts can analyze information integrity by examining historical projections and assessing elements of the internal control environment.
A valuation analyst also should examine the variance between historical projections and a business’s actual performance. If a strong correlation exists, a valuation analyst can be highly confident in current projections, if the process employed by the organization remains constant. If not, the analyst must examine the variance between the past projections and actual performance to discern whether bias existed in past estimates and current projections.
What about risks in the discount rate?
The discount rate is the yield necessary to attract capital to a particular investment, given the risks associated with that investment. A project with relatively high risk will require a relatively high yield to compensate an investor for bearing these risks.
In determining the discount rate, there are two sources of risk that need to be quantified: systematic and unsystematic.
Systematic risk is the risk one must bear for taking on a risky investment in the market. However, systematic risk is estimated by calculating the return to public equities due to availability of data. The ERM process has little impact on systematic risks unless the business’s performance is heavily tied to market performance.
Unsystematic risk is sometimes broken down into two components, industry risk and company-specific risk. Industry risk reflects the risks identified with the industry in which a business operates. Company-specific risks encompass all other risks, including size, depth of management, geography of operations, customer and/or vendor concentration, competition and financial health.
How can ERM processes mitigate company-specific risks and increase value?
An ERM process should quickly gather and assimilate high-quality information for use in the organization’s decision-making process, allowing the organization to rapidly assess the impact and likelihood of risks associated with changes in its internal and external environments. Early assessment and mitigation can help preserve value and capitalize on risky events when competitors do not react as swiftly to environmental changes
John T. Alfonsi is managing director at Cendrowski Corporate Advisors. Reach him at (866) 717-1607 or email@example.com.
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