Jayne Gest

When you own a stock you’re taking a risk on that company, hoping to be rewarded for its future success. With bonds, you’re taking interest rate and credit risk on a locked-in interest rate paid long-term by the company. Most people confine their portfolio to just these two basic asset categories, thereby only getting rewards associated with those risks.

Alternative investments use other risk/reward strategies that could possibly enhance returns and create additional, more diversified return streams than just a stock and bond portfolio can provide, says John Micklitsch, CFA, director of wealth management at Ancora Advisors, LLC.

“For a long time, these strategies have been available mainly to institutional investors only in the form of hedge funds and private partnerships that have high minimums, lock-up periods and other associated nuances,” he says. “But increasingly, these alternatives strategies — and their alternative sources of potential return — are now being made available in liquid, public mutual funds, exchange-traded funds, or closed-end fund formats that are tradable and accessible to retail investors and smaller institutions alike. What this means for investors is the potential to build more diversified portfolios than ever before.”

Smart Business spoke with Micklitsch about liquid alternatives and how to take advantage of this diversifying vehicle.

How do you define liquid alternatives?

Liquid alternatives are, first and foremost, investments that are publicly traded and can be sold anytime, just like a stock or a mutual fund. That is the liquid side. Second, liquid alternatives are investment strategies that have the potential to diversify portfolios beyond just what holding stocks and bonds can do. So, liquid alternative investments are publicly traded investment funds offering daily liquidity and that deploy strategies beyond simply holding stocks or bonds. Some examples of alternative strategies that are now available in liquid form include: market neutral, long short, currency, commodities, managed futures, global macro, merger arbitrage, risk parity and short biased, to name a few. When included, these strategies have the potential to add significant diversification benefits to a stock- and bond-only portfolio, and therefore could be of interest to investors.

What is driving the increased number of alternative investment choices available to investors?

For a long time, large institutional investors have been investing in strategies beyond stocks and bonds to diversify their portfolios. Increasingly, the investment firms who manage these types of strategies have become interested in tapping into the retail (individual) and smaller institution investment space. They have accomplished this by opening up mutual funds with many of the same characteristics as their prized institutional alternative strategies. This trend should continue because coming off of the 2008 financial crisis, retail investors have become very interested in improving their overall portfolio diversification in an attempt to avoid the kind of volatility they experienced during the crisis. Liquid alternatives can play a role in accomplishing that.

What role do they play in an investor’s portfolio?

These strategies can act like shock absorbers to a traditional stock- and bond-only portfolio, in the sense that they can dampen volatility by improving overall diversification. They also have the potential to enhance realized returns because with a less volatile portfolio, investors are more likely to stay the course with their investment plan over the long term. The end result over a substantial enough period of time — five to 10 years — should be a smoother, steadier march toward your goals.

What are some of the risks of these investments?

These strategies are getting a lot of attention and interest, and therefore are attracting a lot of new players. It is important to know the pedigree and capability of the firm launching this type of mutual fund. There is a real risk of inexperienced firms putting strategies out that may not achieve their objectives. You can mitigate this risk by working with an adviser who has a high-experience level in evaluating, monitoring and selecting alternative investments.

Another risk, if you want to put it that way, is the risk that your portfolio goes through a period of underperformance in an up market because these diversifying strategies do not keep pace. Investors forget about the need to diversify in a bull market and diversifying strategies go by the wayside. Greed takes over and fear becomes a distant memory. It is precisely at these moments that markets are at their most dangerous and when investors should be working with their advisers to evaluate their diversification strategies. So the risk becomes not sticking with it, suffering through the period of underperformance and then not getting the benefit when market conditions change.

How should investors interested in adding liquid alternative strategies to their portfolio go about it?

The benefits of liquid alternative strategies outweigh the risks, in our opinion, but the benefits are more likely to be realized if you work with an experienced adviser who is knowledgeable in this type of space. A reasonable fee for advice would be more than justified in helping you to select the proper liquid alternative investments for a portfolio. In addition, to get the true benefits of these diversifying strategies, investors should consider at least a 10 percent to 30 percent allocation within their portfolio depending on their goals, risk tolerance and objectives. Retail investors and smaller institutions have never had so many tools at their disposal to diversify their portfolios. The key is knowing how to use them, which ones to select and the proper portfolio weighting.

John Micklitsch, CFA, is the director of wealth management at Ancora Advisors, LLC, a SEC registered investment advisor. Reach him at (216) 593-5074 or johnmick@ancora.net.

Insights Wealth Management & Investments is brought to you by Ancora

The Cleveland-area real estate market doesn’t have the highs and lows as compared to the national trends, but that’s not to say it hasn’t been slow. Over the past five years, land sales came to a halt, developers stopped speculating new development and new construction became scarce. However, Joseph V. Barna, SIOR, a principal at CRESCO Real Estate, says that a slowly improving economy combined with a shortage of available, functional, existing structures, will spark a need for new development.

“For example, the technology corridor along Euclid Avenue, from East 40th Street to the Cleveland Clinic, has seen a tremendous amount of redevelopment as well as new construction,” he says. “Five or six years ago, when you drove down Euclid Avenue, you’d see a lot of deteriorated vacant buildings. Now you see that many of them are full to capacity, including the new construction.”

Smart Business spoke with Barna about current and future real estate trends and how to find the right opportunities.

What is the state of commercial and industrial real estate in the U.S. and how does it compare with Northeast Ohio’s market? 

Over the past five years, the real estate industry has been depressed across the U.S. However, when markets are challenged, many figure out alternative ways of overachieving and new trends emerge. This, combined with a slowly improving economy, has led to an uptick in activity.

Cleveland is viewed as a second- or third-tier market with a declining manufacturing base and not a large distribution hub, so it does not experience the volatility the balance of the industry does. Most industrial users are in the 10,000- to 50,000-square-foot range, within single-tenant or multi-tenant


The industrial vacancy rate in Cleveland is at about 8.3 percent, which is under the national average of 9.3 percent. This is somewhat misleading, as new construction has been shut off and some larger, older inventory demolished. As the economy went south, people bought existing buildings and either expanded or renovated them because the cost was significantly lower than building new. Therefore, the existing inventory is dwindling away. The same is true for the combined blended vacancy between the central business district and suburban office markets, which is at about 12.2 percent, under the national average vacancy rate of 15.2 percent. Again, there’s been very minimal new construction in our office market.

Within the Cleveland area, what areas and types of property are hot? 

On the industrial side, the airport area in southwest Cleveland has a very low vacancy rate and is always in demand. Also the I-480/I-77 sector, south of Cleveland, is in high demand, as well as the southeast. In general, in Northeast Ohio, it’s difficult to find well-maintained, functioning manufacturing buildings. There’s also a shortage of high-cube, clean distribution space on the west side of Cleveland.

What will the future of Cleveland’s real estate market look like?

There’s an ongoing need for functional product to accommodate current and future demand. On the sales side, as product diminishes, building values are starting to creep up. Land should also start selling again. There may also be a need for new construction for those requiring specialized buildings. Growth markets will be primarily in specialized manufacturing or a niche-type industry, which can’t be easily reproduced elsewhere because of regional expertise in such manufacturing areas as polymers. The biotech and health care industries are also in a constant state of growth.

As for leasing, there is still a glut of multi-tenant space for users in the 5,000- to 50,000-square-foot range and today’s leasing rates are about 6 percent lower than five years ago. This means pricing will stay flexible for this product type.

How can business owners succeed in this environment?

If you’re a tenant, you’re in the driver’s seat. You can be pretty aggressive on what you want and how you want it because of the amount of available space in that mid-market range. If you’re in an existing lease, start looking at least a year out on the renewal in order to evaluate alternatives. Then, you know what you have to negotiate with while sitting down with your landlord. Because lease values are down, it may be in your best interest — if your location works and your needs aren’t going to change — to go in earlier for a blend-and-extend. You offer to extend your commitment to the property if you can renegotiate your lease rate today. Most landlords welcome the opportunity to secure a tenant for a longer period and will give up a little now instead of losing a tenant down the road.

If you’re a property buyer, you’re going to see a swing toward a seller’s market because of the lack of product, especially if it’s a good, functional building.

Is now the time to buy or lease commercial property?

It’s a good time to do both. If you can find what you need it’s going to cost significantly less than new construction. And while there is still some inventory it’s a good time to ensure you’re not missing an opportunity, because values will increase. In terms of being a tenant, it’s a great time to do your lease deals or re-up early.

Real estate is in a constant state of change. So, be aware of market trends both across the country and locally, and revisit your long-term objectives every couple years. Surround yourself with the right professionals, whether a real estate attorney, contractor, appraiser, banker or real estate broker, to get the most for your expenditures. Whether it’s a good or bad market, there are always positives. You just need to understand your goals and how to take advantage of what’s out there to better position yourself for the future.

Joseph V. Barna, SIOR, is a principal at CRESCO Real Estate. Reach him at (216) 525-1464 or jbarna@crescorealestate.com.

Insights Real Estate is brought to you by Cresco

In some grocery stores, your smartphone uses GPS to ping you when you’re near items on your shopping list. Other retailers allow customers to order something online, and when they arrive to pick it up from the store, the item(s) is already bagged and ready to go. Others still provide customers with options of where to buy, where to pick up or have delivered, and have price guarantees in order to create a positive customer experience and resulting sales.

With the retail industry facing challenging times, savvy risk managers are helping their companies manage costs and allocate capital strategically while finding ways to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk Solutions.

“These risk managers have the opportunity to help shape the business as they manage operations and costs,” she says. “At most retailers, risk managers are responsible for mitigating — for keeping the operation efficient, making sure that the use of insurance, self-insurance and alternatives are in line with overall company objectives, and that the treatment of risk is agreed to by all internal stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics, marketing, merchandising or IT.”

Smart Business spoke with Serpico about the current risks that retailers face and the best ways to mitigate them.

What is new in the retail industry with risk?

Aon compiles a retail industry analytics report annually, collected from proprietary data and client interviews, identifying the top 10 risks. Retailers say the global economic slowdown is the No. 1 risk. With consumer discretionary spending as the biggest driver of retail sales, the industry constantly battles variables that are out of its control, such as gas prices.

Second, retailers worry about damage to their reputation or brand. For any retailer, the worst possible scenario is that customers stop shopping in their stores. The third-biggest risk is a market of increasing competition, one of the biggest retail trends. How are people making their shopping decisions? What does this mean for retailers, and how can they respond? For example, how do they prepare for a situation in which a customer walks into the store, and tries something on before buying it at a lower price on their mobile device?

Other risks include:

  • Distribution or supply chain failure.

  • Regulatory and legislative changes, particularly surrounding workers’ compensation, normally the largest contributor to a retail risk manager’s total cost of risk.

  • Technology failure.

  • Failure to innovate and meet customer needs.

  • Failure to retain top talent and, therefore, manage crime, theft, fraud and employee dishonesty. With plenty of turnover, there is a need for safety training and internal loss control to ensure not only a good store experience for customers but also employee safety and that employees are behaving in ways beneficial to the company.

What risks are critical priorities to manage?

Most retailers have gotten really good at managing the more traditional risks — property, workers’ compensation and general liability. For example, they know how to get their stores running after a natural disaster and have programs to get associates back to work after an injury.

Emerging and changing risks are the new focus. These include network security, product liability for vendors, and wage and hour litigation. Network security is key, as this feeds in to a retailer’s reputation. It has customer data, employee data, financial information and, in some cases, medical data, and the risk is ever evolving because bad actors are getting craftier and losses are high profile.

Vendor/supplier contract management also is critical. A store might have products from 50 countries, so how does it control and manage contracts and litigation while understanding its exposure? Additionally, employment practices liability policies exclude wage and hour claims. However, this often drives a retailer’s exposure. Finally, retailers must continuously innovate and drive down costs so savings can be passed on to customers.

What best practices address common mistakes for retail risk managers?

As an industry, margins are thin, so retail risk managers need to carefully analyze their portfolios to determine the best use of capital. For example, should you have higher retentions on certain programs because the loss history is predictable? Or perhaps you might be buying too much insurance on other programs. Maybe there is a way to self-fund a certain amount of loss and buy excess capacity, which could reduce fixed costs. Is there an alternative that has not been considered?

If you have a loss that is not insured, have you vetted the process internally? Do you know how it will be funded? Risk managers ask these questions while working to create operational efficiencies for their companies. Asking questions helps avoid buying too much or too little insurance. Risk managers can also identify maximum capacity for loss across multiple lines of business. For instance, a $10 billion retailer may be able to absorb a penny per share of loss in a given year. However, you need to know what would happen if you have losses totaling five cents a share in a worst-case scenario year with a fire in your main distribution center, a customer death in a store and a security breach that compromises customer data. It is important to get feedback internally, and ensure that all stakeholders understand decisions being made around insurance and the effect those have on the business from a financial perspective.

Know your overall retentions and whether they are aligned with the corporate strategy. Some companies are extraordinarily risk averse, so retentions are low, while others are very comfortable managing their own risk. It is up to risk managers to know the company appetite and make decisions that align with the financial objectives. In addition, whenever there’s a loss, multiple internal stakeholders need to be involved in the process.

Lynn Serpico is a managing director and the National Retail Practice Leader at Aon Risk Solutions. Reach her at (203) 326-3464 or lynn.serpico@aon.com.

Insights Risk Management is brought to you by Aon Risk Solutions

The role that private equity firms play in our economy through business growth and job creation is fundamental. However, the general public — and many astute business owners — mistakenly think of private equity firms as if they were Gordon Gekko, character from the movie, “Wall Street,” taking over businesses, eliminating jobs and trying to make money by shutting down companies and selling assets.

“I’ve often been astounded by the disconnect between the actual performance of private equity-backed businesses and the general public’s perception of what private equity is all about,” says Scott McRill, CPA, director in transaction advisory services at SS&G’s Cleveland, Ohio, office.

As a result, the private equity industry has recognized the need to be more open and vocal about what they are, what they do and the positives they bring to the economy, he says.

Smart Business spoke with McRill about the misperception of private equity’s role and how companies can benefit from this type of capital.

How has the private equity market evolved into what it is today?

In the 1970s, many business owners who started companies with family money in the post-WWII era had limited choices if they wanted to grow their business. They could take the company public through the public equity markets, infuse more family money or sell the business outright to a larger company. Private equity capital became a viable alternative, giving business owners another option. If you compare the job growth of companies owned by private equity to the overall economy over the past 10 to 15 years, it’s pretty astronomical. From 1995 to 2009, private capital-owned companies produced job growth at a rate of 81.5 percent compared to only 11.7 percent for all other businesses. Similarly, in the same period, private capital-backed companies produced sales growth of 132.8 percent compared to 28 percent for all other businesses, a surprising statistic to many.

How have lending policies driven more businesses toward private capital investment?

The lending environment always goes in cycles, and the involvement of private equity as a rule hasn’t gone away. However, the ratio of how much funding comes directly from private equity firms in the form of equity versus from banks and lenders in the form of debt has changed.

In the mid-2000s, there was a lot of economic growth and private equity investment, but the amount of money private equity firms were required to put into deals was less as a percentage of the total capital required to get a deal done than it is today. For example, 80 or even 90 percent might have come from lenders in the form of debt and the remaining 10 or 20 percent in the form of equity capital.

After the credit markets froze in 2008, private equity continued to invest in businesses but became more cautious and were required to put more of their own money into deals. In 2009 and 2010, it was not uncommon to see 50 to 75 percent of the capital coming from private equity firms, and lenders only providing 25 to 50 percent.

The lending environment has loosened some in the past couple of years, but it’s still relatively difficult, which can be partly attributed to the uncertainty regarding tax laws, interest rates, etc. Deals in the past 12 months might have a leverage model that is, for example, one-third equity, two-thirds debt.

Where does the negative perception of private equity come from?

There are always risks from private equity, and news stories are often negative about a private equity-backed business shutting plants down or a company that went bankrupt. Of course that happens, but the raw statistics show in many more cases private equity helps grow businesses, make them more profitable and create more jobs over the long term.

Other negative connotations can be attributed to the misperception that private equity is a secretive ‘club,’ which is highlighted by the nature of the word ‘private.’ Private equity firms receive a management fee for their expertise, but make the majority of their money by growing companies, producing more profits within those companies, and typically selling that company to another investor and sometimes taking the company public. Many have assumed bad things are going on behind the scenes at private equity firms, but private equity firms normally want the company to expand and become more profitable.

How are private equity firms responding to the negative bias, along with pressure for more disclosure?

The private equity industry has realized that the negative perception has to be dealt with, and industry professionals are trying to open up a widespread dialog about the industry and the positive things it has done for the economy. At the same time, they recognize there is going to have to be more, rather than less, disclosure and transparency about the industry. By the nature of the ‘private’ equity investments, the specific details of individual deals are private and confidential and probably won’t ever be disclosed widely by the industry. However, the inner workings of private equity firms — how they operate, the management fees they charge and, most importantly, the story about the economic growth engine they provide for small businesses — could become more widely available, especially with the political pressure for disclosure.

Many very entrepreneurial and talented business owners or operators are really good at what they do. They are really good at making widgets, selling certain services and serving their customers. But, the private equity world is foreign to many of them; it’s not something that they’ve ever really needed to tap into, so all they’ve heard is the negative soundbites. A faction of very talented business owners still need to be better educated about the good things the private equity industry does to expand companies and create more jobs.

Scott McRill, CPA, is a director in Transaction Advisory Services at SS&G’s Cleveland, Ohio, office. Reach him at (440) 248-8787 or SMcRill@SSandG.com.

Insights Accounting & Consulting is brought to you by SS&G

In recent years, federal estate and gift taxes have been in a continual state of change. As a result, estate planning documents may no longer contain the best options to get individuals, especially those with high net worth, to their goals. And this changing landscape may not be stabilized any time soon; if Congress fails to act before the end of the year, individuals will face significantly lower estate and gift tax exemption amounts and higher tax rates in 2013, says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors.

“Similarly, while the extension of the 15 percent long-term capital gains rate provided ongoing windows of opportunity for those wishing to harvest gains at the lowest long-term capital gains rate in our country’s history, there seems to be no doubt that this historically low rate will be higher in 2013,” says Neals.

Smart Business spoke with Neals about how to react to potential changes in federal estate and gift tax law and capital gains rates.

What does the current landscape mean for wealthy individuals?

For estate planning, as a result of drastic changes in tax rates and exemption amounts, high-net-worth clients should talk to their legal advisers to determine what flexibility is built into the plan for these quickly changing laws. Will their current estate planning documents effectuate their wishes, and will their plans be carried out with similar results regardless of the federal estate and gift tax exemption amounts at the time of death?

The same holds true for the likely changing long-term capital gains rates. Examining assets and current and future personal tax obligations can allow individuals to be strategic and potentially take advantage of the current 15 percent long-term capital gains rate.

Individual should discuss questions and concerns with their investment advisers, accountants and possibly, legal counsel. This ensures that all possible consequences are examined before initiating a sale that would result in a long-term capital gain and avoid surprises that would negatively affect other aspects of the client’s financial picture and/or plan.

What are the federal estate and gift tax exemption amounts and rates, and how could they change?

The federal estate and gift tax exemption amount is $5.12 million per individual, with a tax rate of 35 percent for estates or gifts in excess of that amount. In the absence of new legislation, on Jan. 1, 2013, the rates will return to pre-Bush-era tax cut rates — a $1 million federal and gift tax exemption, with the excess taxed at 55 percent. This could mean the difference between an individual with a $5 million estate paying no federal estate taxes versus paying millions at the time of passing.

Another unknown is what will happen to portability, which makes a deceased spouse’s unused portion of the federal tax exemption available to the surviving spouse. In addition to the higher estate tax exemption, the increased gift tax exemptions amounts have also created a window of opportunity that could allow wealthy individuals to transfer assets to the next generation or second generation heirs without incurring transfer tax, thereby decreasing their own taxable estate.

What could happen to estate and gift taxes?

Determining where these exemptions and rates will head is speculative. While there seems to be consensus on the likelihood of higher long-term capital gains rates, the future of where estate and gift tax exemptions land is still very much unknown. The Obama administration has alluded to supporting a return to 2009 rates, with a $3.5 million federal estate tax exemption and a 45 percent tax rate on the excess, while Republican candidate Mitt Romney’s plan has suggested doing away with the death tax, while keeping the gift tax in place with a $1 million exemption and a 35 percent top gift tax rate. What takes place in the November elections will guide the direction of these tax laws and their upcoming expiration.

What planning techniques can provide flexibility for the current tax landscape and the one that lies ahead?

All individuals should consider a comprehensive review of their estate planning documents. In recent years, it was a common and appropriate planning technique for practitioners to draft estate planning documents that used formula provisions to dispose of assets at the time of a client’s death. With the roller-coaster exemption amounts, this type of formula planning could lead to unintended consequences. For example, in the case of ‘formula documents,’ high exemption amounts could allow all of an individual’s estate to be placed into a trust for their children, leaving the surviving spouse with no assets. Creating documents without formulas allows flexibility as tax laws change.

Have your advisers work together as a team. Your estate planning lawyer, accountant and investment adviser should be working toward your common goals, not giving you advice in a vacuum. This protects you from unknowns and allows you to ask questions and feel comfortable letting the advisers guide you.

How can business owners take advantage of the current rates?

For those with certain closely held assets that are likely to appreciate quickly, including ownership in a private business, certain techniques can allow the transfer of wealth with tax benefits through the use of estate planning tools. However, time constraints may limit options, as valuations and planning can take a considerable amount of time.

For investors who have over concentrated positions or are holding assets with a low cost basis,  selling this year may allow them to take advantage of the 15 percent capital gains rate. In the absence of legislative action, the long-term capital gains tax rate will increase to 20 percent at the beginning of 2013.

If you believe you may benefit from historically low rates and high exemption amounts, contact your advisers to discuss taking advantage of them before the end of the year.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or cneals@fcbanking.com.

Insights Wealth Management is brought to you by First Commonwealth Bank

Whether employees smoked used to be a hands-off subject for employers; that was their own business. Today, however, a cultural shift is driving management to take on employee smoking as a way to reduce health care costs and increase productivity, and smoking cessation programs are increasingly being rolled out as part of an organization’s overall wellness program.

“The key is the culture within that employer’s organization — really taking a top-down approach, having the business owner or CEO promote, champion and buy in to the program,” says Steve Martenet, president of HealthLink.

Employers also need to take a long-term approach to the effectiveness of smoking cessation programs because it is difficult to quit, and payback on the investment won’t happen in the first year. Additionally, the program needs to be tailored to each organization’s unique needs.

Smart Business spoke with Martenet about how to effectively employ smoking cessation programs and how doing so can impact the bottom line.

Why should employers care if employees smoke?

First, they should care from a humanistic standpoint, as caring about whether your employees smoke gets to quality-of-life issues. Smoking is the cause of nine out of 10 deaths from lung cancer, three out of 10 deaths from all cancers, nine out of 10 deaths from chronic obstructive pulmonary disease, such as emphysema, and one out of five deaths from heart disease, according to the Campaign for Tobacco-Free Kids.

From a business and cost perspective, there are very real costs in terms of health care and lost productivity as a result of having a work force that smokes. Each smoking employee costs an employer $1,000 per year due to direct medical claims, absenteeism and additional building maintenance, according to National Cancer Institute data.

And when compared to nonsmokers, the Mayo Clinic found in a seven-year study of 30,000 of its workers that the average health care costs of its smoking employees and retirees was $1,275 more per year than those of its nonsmoking employees.

How can employers encourage employees who smoke to quit?

There are steps employers can take to decrease the number of employees who smoke.

  • Educate employees about the dangers of smoking.

  • Create an environment that discourages smoking, which includes not allowing smoking in the building and/or on your property.

  • Offer smoking cessation programs as part of a corporate health and wellness strategy.

What are some best practices for smoking cessation programs?

A number of tools can be used as part of a smoking cessation program, such as:

  • Ongoing support and motivation.

  • Personalized plans to quit.

  • Rewards for participation and achieving milestones.

  • Integrating cessation efforts with health care benefits, such as paying for nicotine replacement therapy.

  • Having customized data that reports on the program’s effectiveness.

Each situation is different, depending on how big an issue smoking is for an employer and on the workplace culture, so use these variables to customize the program to meet your specific needs. With self-funded insurance, it is easier to create unique one-on-one lifestyle management programs. For fully insured employers, some insurance companies will offer — depending on state mandates — smoking cessation as part of wellness programs, either embedded into the basic offering or sold as an add-on or rider.

Many employees won’t quit in the first year, so be persistent. Every year, 17 million adults attempt to quit and only 1.3 million succeed, according to AllOneHealth Group. Smoking cessation programs require a three-year investment to break even, with benefits exceeding costs after five years when it has become ingrained in the culture of that organization.

Are cessation programs more effective than charging smokers more for health insurance?

There is a carrot-and-stick approach, and charging more is certainly a stick approach. However, a lot of employers combine the two approaches because it is easier to charge a smoker more if you are providing them with an opportunity to quit. Employers should consult with corporate attorneys before they differentiate what they charge for smoking and nonsmoking employees, as some state laws may prevent fully insured companies from doing this. In fact, the federal government thinks so much of the practice of differentiating that it is built into the health care reform act.

Smoking employees cost more and from an employer’s perspective, the ability to charge more could help offset that health care cost. Still, the addictive nature of smoking means such penalties are more of an incentive not to smoke than a reason to quit.

How does tobacco use impact employers’ costs?

Tobacco costs the U.S. $96 billion in health care expenditures and another $97 billion in lost productivity each year, according to the Centers for Disease Control. There is a huge opportunity for employers to find the right smoking cessation program for the organization. There is already incentive for many employees, as studies have found that 68 percent of smokers want to quit.

An example of the impact on cost is Illinois, which recently more than doubled its cigarette taxes. As a result, 72,700 Illinois kids will not become smokers and 53,400 adults will quit, according to the Campaign for Tobacco-Free Kids. In Missouri, voters will decide Nov. 6 whether cigarette taxes should be raised by 73 cents. HealthLink supports increasing the state cigarette tax, which is the lowest in the nation at 17 cents. Through the tax code, the health of the community will improve. Employers can do this on a smaller scale through an effective smoking cessation program.

Steve Martenet is president of HealthLink. Reach him at (314) 923-4474 or steve.martenet@wellpoint.com.

Insights Health Care is brought to you by HealthLink®

The way business owners can raise private capital is undergoing an unprecedented expansion.

Pursuant to the Jumpstart Our Business Startups (JOBS) act, the Securities and Exchange Commission (SEC) has proposed new rules that would permit general solicitation and general advertising for certain private placements.

Comments were due by Oct. 5, with the final rules due out shortly.

“It should certainly spur investment,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

“The average small business owner might have a $10 million per year company and want to raise a million dollars for an acquisition, a new product line, division or plant, or want to hire or need to grow,” he says. “They may not know the kind of people who can write those checks, and if they don’t, they can now advertise for


Smart Business spoke with Smith about how private placements work and what the future holds.

What is a private placement? 

Under the Securities Act of 1933, the sale of securities must be registered or meet a ‘safe harbor’ exemption.

These exemptions are primarily contained in Rules 504, 505 and 506, although Rules 504 and 505 are not often used. Rule 506 provides that a company can sell an unlimited dollar amount of securities to an unlimited number of ‘accredited’ investors, and up to 35 nonaccredited investors.

An individual accredited investor is someone who meets one of the qualification criteria, including:

  • Net assets in excess of $1 million, excluding private residence.

  • An individual annual income of $200,000 per year or a joint income of $300,000 per year for the last two years and anticipate reaching that level again in the current year.

Entities have to meet different criteria to be considered accredited. Under current rules, companies can take up to 35 purchasers who do not meet the accredited investor test. If you are issuing securities to nonaccredited investors, however, you will want to provide adequate disclosures.

Additionally, there are prohibitions on general advertising and solicitation. This significantly restricts who you can solicit.

Why might a business owner utilize a private placement to raise capital?

Growing companies in need of capital and not in a position to borrow could benefit from a private placement. In this lending environment, banks are extremely conservative in their underwriting criteria. So, if a company is growing quickly, capital is generally not available to it through traditional means if it doesn’t have the collateral.

Smaller, privately held companies can’t afford a public offering’s cumbersome registration and reporting requirements. By doing a private placement, the business can raise additional capital through the issuance of equity. Owners give up a piece of their company, but theoretically, are growing the company, so the owner has a smaller piece of a larger pie.

By retaining an experienced attorney, you can structure a private placement in a way that meets your long-term business goals and is attractive to potential investors.

The attorney can assist the business with preparing a private placement memorandum, describing who they are, what they do, why they’re raising capital, the uses of the funds, and includes their business plan, projections, financial statements and risk factors.

This information becomes part of the solicitation materials used to attract potential investors and also protects the company from liability.

What are the new rules for private placements?

The new SEC proposed rules will permit the use of general solicitation and general advertising to offer and sell securities so long as you meet specific criteria, including:

  • The securities can only be sold to accredited investors.

  • The issuer of the securities has an obligation to take reasonable steps to verify that an investor is in fact accredited. For example, if a purchaser claims his net worth is in excess of $1 million, the issuer should ask for a personal financial statement and supporting documentation to demonstrate that net worth.

The intent is to open up additional avenues of capital for small business in order to stimulate the economy and job growth.

How much will the solicitation rule change private placements? 

Most small businesses don’t have a group of high-net-worth individuals waiting to invest.  It’s hard to go to your friends and family and ask for a million dollars. There are a lot of companies with good stories to tell and solid financial statements, but without the right kind of investor contacts. So, if they could go to an attorney or investment banker, put together a package, advertise and openly solicit accredited individuals and companies, it’s going to significantly increase the flow of funds into small businesses.

What are the risks regarding general solicitation and advertisement?

It does create an environment where there is more opportunity for fraud and misrepresentation. Investors will have to be careful and do their due diligence to assure they are making good investments in good companies. The documentation and disclosures will become that much more important. If we weren’t coming off a very difficult recession and sluggish economy, it’s unlikely this rule would have been implemented. For now, it is a way to get capital to small businesses to spur growth. Banks can say they have money to lend, but they’re not lending it. There are many companies that are struggling to get capital; they’ve had lines of credit reduced and borrowing bases limited. It’s very difficult for a growing company to get enough capital to continue on its growth cycle. This new rule should help.

Peter J. Smith  is a member at Semanoff Ormsby Greenberg & Torchia, LLC.  Reach him at (215) 887-4132 or psmith@sogtlaw.com.

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You know that picking the right name for a startup company or new product line can play a major part in its success. But name selection should not be driven only by marketing; it is vitally important to consider the legal ramifications. “It may be years down the road, but if you didn’t do due diligence in selecting and protecting your mark, you could end up losing all or part of the investment you have made in it,” says Timothy Skelton, partner at Ropers Majeski Kohn & Bentley PC.

Smart Business spoke with Skelton about how getting your company, product and domain names right is well worth the effort.

How should you pick your trademarks when starting a new venture?

When choosing a name, don’t get boxed in. Think big. Pick a name you’ll have to grow into; don’t limit yourself. When picking a brand name, assume that your company will become a national, if not international, player in not only the specific limited area that you’re starting with, but also any other products and services that would fit within the general scope of your mission statement.

While it’s tempting to pick a trademark that describes your product, you are better off using a made-up word like ‘Exxon,’ or a suggestive name, like ‘Sleekcraft’ for boats. This will not only give maximum protection for your name, but also limit the chances that you will have a conflict with another business down the road.

And of course, selecting a brand name and domain name go hand-in-hand. You might have the greatest product name in the world but if the domain is unavailable, it’s not an option for you.

Is it worth the trouble to register your names? 

A name has legal protection as soon as you use it. But registration is still vitally important and well worth the investment. Without registration, your ability to protect your mark is diminished. Registering the mark not only makes it stronger, but also provides enhanced remedies for infringement.

Trademarks need to be registered separately for each international class of goods that applies. For instance, articles of clothing are in one class and handbags are in another. If you make both clothing and handbags, you should have registrations in both classes.

Additionally, trademarks do not automatically apply outside of the country of registration. Therefore, if you’re doing significant business outside the U.S., you need to consult a trademark attorney to make sure that your registration is extended to the other countries in which you do business.

Once you’ve selected a name, how do you know if someone else is using it?

First, to check if the name is being used in a similar category, visit the U.S. Patent and Trademark Office (PTO) website to use its searchable database. Once a name has passed this first cut, engage the services of a professional trademark search company. For a relatively modest fee, the search firm will find all similar sounding names, as well as the product categories that each is in.

If it turns out that another company is using the same or similar name and it’s a close call, there is a series of questions you can ask. These are common-sense factors that the courts use to determine if consumers are likely to be confused between the two. Some of these factors include:

  • How similar is the mark you want to use to the one already existing? Note that misspellings don’t count. For example, the PTO will translate ‘Kustom Kars’ to ‘Custom Cars.’
  • How strong is the other trademark? A strong mark will receive more protection. Because it is purely descriptive, ‘Kustom Kars’ is considered a weak mark. On the other end of the spectrum, both because it is well known and a completely arbitrary or fanciful word, ‘Exxon’ is considered a very strong mark.
  • How related is the product or service that you want to offer to the product or service being offered by the other user? The more they’re different, the better.
  • Even if you’re not currently operating in the same market, what is the likelihood that you will end up there in the future? A frequently encountered problem is if someone else is already using that mark on clothing or other promotional items that may limit your ability down the road to promote your product — even if your products are in completely different spheres. This is especially important if you aim to create a lifestyle brand, such as Nike or Harley-Davidson, where customers will purchase products outside the core business just because the brand conveys a certain image.

Once you have narrowed your choices down, it’s time to consult a trademark attorney to answer some final questions and get the registration process underway.

What should you consider when choosing a domain name?

Problems with a domain name can be as disastrous to your business as problems with a brand name. While there are distinctions and legal differences between domains and trademarks, the safest course is to treat a domain name the same as a trademark. Apply the factors outlined above.

To see if a domain name is available, do a free WHOIS search online. Even if your chosen name shows up as taken, enter the domain into your browser anyway. If the site is not active, you may be able to buy it. If the contact information is not on the inactive site, use WHOIS to find the owner or registrar and make an offer to buy the domain. It could be the best money you ever spent.

Timothy Skelton is a partner at Ropers Majeski Kohn & Bentley PC. Reach him at (213) 312-2055 or tskelton@rmkb.com.

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There is a reason the saying, “Location, location, location” has persisted in the real estate business.

Take, for example, CIO Thom Davis, of Omega Environmental Technologies, and his wife Grace, founder and CEO. In 2009, they moved their Dallas-based company 10 miles down the road to where they were living in Irving, Texas. They found that relocating to the new ZIP code brought a number of advantages.

“When you have your business in one city and live in another, it’s hard to be as involved as you’d like and still have your full work day,” says Davis.

In addition to improving the personal amenities surrounding them, the couple also tapped in to a host of business perks with the help of the Greater Irving-Las Colinas Chamber of Commerce.

Smart Business spoke with Davis about what Irving has to offer, why they made the change and how other businesses may benefit from making the move, as well.

What led to the decision to move, and why Irving?

The business needed to double its space, as we’ve been pretty fortunate in our growth over the years. When we looked at where we should move, Irving was our first choice.

There were a number of reasons we picked Irving and one was to get closer to an airport. We manufacture and distribute mobile air conditioning parts for a range of vehicles to 87 countries, so we’re doing a lot of international business, shipping some 25 percent of our products through airlines.

We wanted to improve access in and out of the facility and be easily reached by customers and suppliers. The company is now about six minutes from the Dallas/Fort Worth International Airport.

It also was a good fit culturally. My wife and I had been living in Irving for 12 years and wanted to be more involved in the city’s civic life. Irving is a very diverse city — some 53 languages from 96 countries are taught in the school system — which fits in well with Omega because our 66 employees represent 13 nationalities.

Irving has two paid symphonies, one volunteer symphony, an award-winning musical theatre and many activities that are convenient and inexpensive. And that’s not even looking at the cultural benefits of both nearby Dallas and Fort Worth. Since relocating, 15 of Omega’s 66 employees and their families have moved into Irving.

What aspects of the city have helped your business?

Transportation and location are definitely big assets. There are major north/south highways and east/west thoroughfares that either run right through Irving or are on the edges of the city. One new addition is the light rail, which will be very convenient for foreign guests who are used to train travel, allowing them to visit companies in the area. The leg from downtown Dallas to Irving opened in July; the section that runs from Irving to the airport is under construction and scheduled to open in 2014.

There are plenty of comfortable hotels scattered throughout the city and there’s no price point visitors can’t find. Our customers typically stay for a week and many bring their families because when you’re leaving Brazil or Italy to come to the U.S., you’re not coming for an overnight stay. With Irving’s central location, visitors’ families are easily entertained in downtown Dallas, which is only 15 minutes away, and downtown Fort Worth, which is only 20 minutes away.

Are there any other factors about Irving that makes it a good fit for businesses?

There’s a willingness to help on behalf of the city, aided by the Greater Irving-Las Colinas Chamber of Commerce, because there’s an understanding of how important business is to Irving. Dallas didn’t offer any incentives when we looked at space still within the city but closer to the airport. With a smaller city — Irving consists of more than 216,000 people — there’s more support from city leaders and staff, and it involves people who are higher on the administrative chain.

Irving has more than 8,500 companies, including the headquarters of five on the Fortune 500 list and a presence of almost 50 more on the Fortune list. It also has more U.S. Chamber Small Business Blue Ribbon Award Winners than any other city in the U.S. It’s a city that spends a lot of time and energy trying to recruit and help the small and large businesses already there.

How has the city helped your business since the move?

There were some incentives that came from the chamber of commerce and the city itself. Since most of our goods are shipped offshore and purchased in the U.S., the city granted us a tax abatement. Irving also designated us as a free trade zone, which means as long as we move products in and out of the city in 90 days, we don’t have to pay personal property tax on those products.

What is your advice to other companies that are considering relocating?

The first thing you need to do is contact the chamber of commerce. Many chambers, such as the Greater Irving-Las Colinas Chamber of Commerce, are the economic development arms for cities. These chambers have put together programs to help make it a one-stop shop for new businesses coming in.

So instead of having of run all over trying to find this person and that person, the chamber will give you the guidance and help you address any issues, such as obtaining permits.

Thom Davis is chief information officer at Omega Environmental Technologies. Reach him at (972) 812-7099 or thom.davis@omega-usa.com. Visit Greater Irving-Las Colinas Chamber of Commerce at www.irvingchamber.com.

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With assistance from the Patient Protection and Affordable Care Act (PPACA), millions more Americans will now have basic health coverage and will be seeking services possibly resulting in billions of dollars flowing into the US health care marketplace. The health care industry has begun reacting to this new legislation and expected inflow of insured Americans, by moving rapidly toward a “bigger is better” model, says Chris Pritchard, national health care practice leader at Moss Adams.

“A key concept that consumers of health care services will deploy and one to which the health care market is reacting to is the concept of consumerism. Consumerism embodies the process through which consumers consider at a minimum three basis purchases attributes when choosing which health care services to buy. The three attributes consumers will consider at a minimum are cost of the services being provided, the quality of the services being provided and access to the required services needed," says Pritchard.

To meet demands for better quality of care for less, Pritchard says health care providers have begun to merge and are creating affiliations to improve quality statistics, take advantage of cost synergies and provide for increased capacity to improve access to services being purchased by the public.

Whether it is the government, an employer or an individual, that entity is trying to get the highest quality in the quickest time for the least amount of money.

Smart Business spoke with Pritchard about how this transformative consolidation has positive and negative ramifications for employers and employees.

How is the concept of consumerism impacting health care?

Health care organizations know the importance of consumerism. States have departments that monitor quality, cost and access, while independent regulatory and watchdog agencies do the same. Health care providers themselves publish favorable quality of care, price lists and access time statistics on their websites for public consumption and consideration in their pursuit of services.

Consumerism will also be a factor with the state-based health insurance exchanges set to begin in 2014. Participating insurance companies will offer benefits in the exchanges, and employers and or employees will make their purchase decisions using cost, quality and access to purchase coverage. California has one of the largest groups of uninsured people, especially when considered on a per capita basis, so these exchanges will likely have a large effect. Employers have the choice of providing high-quality benefits to their employees as a retention and recruiting benefit, or they can choose to not provide benefits at all and have their employees participate in state exchanges to purchase health care coverage.

What are some examples of health care consolidation?

The health care marketplace is making substantial moves, as the number of transactions — health care affiliations, combinations or acquisitions — are up tremendously compared to previous years. Large private equity funds have put billions of dollars in play to reap the benefits of these mergers and acquisitions. In addition, on the quality side, community hospital providers that don’t have a higher quality score are looking for health systems or academic medical centers that do have high quality scores and available financial resources with which to affiliate or merge. That, in turn, helps attract additional patients. There is also the idea that the larger an organization gets, through economies of scale, the higher the probability of achieving cost synergies.

Physician groups have been an area of focused consolidation. They are primarily the gatekeepers of referrals, so organizations that can control physician groups can then control referrals into their organization and the associated revenue streams.

What are the possible negative implications of consolidation?

The potential problem is that health care organizations could get so large that eventually they have geographic leverage over the federal, state government payors as well as the local communities. Employers could potentially face higher costs because of the geographic control these organizations will have on the marketplace pricing of services.

In the early 1990s, a similar phenomenon transpired where mega health systems merged to a size where the Federal Trade Commission and or the Justice Department moved to break up these groups because they had too much control over the marketplace. There are investigations under way in California today to ensure that those grouping together won’t have the opportunity to raise prices and create a monopoly. So far, most of the mergers, affiliations and consolidations have gotten through the anti-trust laws, but at some point, the groupings are going to run into that.

Will this larger block of insured’s lessen the quality of care that employers and their employees can expect?

The quality of care won’t likely change because health care providers are or will be partly reimbursed based upon quality measures. The issue is likely going to be access — whether they can continue to provide access with a large base of users coming in. Organizations are strategically trying to make their waiting rooms larger or are looking at the concept of concierge service to make patients feel like they are being taken care of.

An employer and its employees will need to decide what is more important. If insureds can’t obtain access, they may decide on a plan with lower quality and better access, or they may be willing to pay more for both high quality and access.

Consolidation isn’t likely to stop any time soon, even if the political climate changes and PPACA is repealed or amended. The funding for certain aspects of health care reform may differ with changes in Congress or the presidency, but regardless of what happens, the industry will continue down this M&A path.

Chris Pritchard is the national health care practice leader at Moss Adams. Reach him at (415) 677-8262 or chris.pritchard@mossadams.com.

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