Morgan Lewis Jr.
There are two principal areas in which creative tax practitioners have sought to expand the provisions of Section 1031: Delayed/multiparty exchanges and reverse exchanges.
Section 1031, as originally enacted, contemplated a direct exchange of qualifying property between taxpayers. Section 1031 and the Treasury Regulations now permit the deferred recognition of gain on the sale of appreciated property through a delayed exchange, but only if certain requirements are met.
Essentially, if a taxpayer (1) sells appreciated property (relinquished property), (2) identifies new property to be purchased (replacement property) within 45 days of the closing of the sale of the relinquished property and (3) closes on the purchase of the identified replacement property by the sooner of 180 days of the closing of the sale of the relinquished property or the due date for the taxpayer’s tax return for the tax year in which the sale of the relinquished property occurs, the taxpayer will have met the requirements for the deferred recognition of gain through a delayed exchange.
There are several aspects of delayed exchanges that should be noted. First, the taxpayer will not be afforded the 180 days to close on the purchase of the replacement property where there is less than 180 days before the due date of the taxpayer’s return, unless the taxpayer files an extension to file the return.
Second, the selling taxpayer may not hold the proceeds from the sale of relinquished property pending the purchase of the replacement property. Instead, a qualified intermediary escrow agent must hold the proceeds. A delayed exchange must be adequately documented, and transfers of title to the property and proceeds must demonstrate that all requirements have been met in order to qualify the exchange for delayed like-kind treatment.
Reverse exchanges were born from situations where the taxpayer wanted to purchase replacement property prior to the sale of the relinquished property. As with delayed exchanges, these types of exchanges took place for many years without any legislation or guidance from the IRS.
In 2000, the IRS published Revenue Procedure 2000-37, which provided a safe harbor under which the taxpayer’s categorization of property as replacement property or relinquished property for reverse exchanges would not be challenged if the property is held in what is known as a qualified exchange accommodation arrangement.
That arrangement requires that the arrangement must be in writing, ownership of the replacement or relinquished property must be transferred to a qualified intermediary called an Exchange Accommodation Titleholder (generally a separate legal entity such as a newly formed limited liability company) and the 45-day and 180-day time limits applicable to typical delayed exchanges must be met.
Delayed and reverse exchanges are generally used with larger transactions involving real estate or other investment property, and have been used more and more frequently with personal business property such as rental car fleets, airplanes, antique automobiles and coin collections. Such exchanges, however, demand advance planning and can involve considerable expense.
Given these safe harbors permitted by the IRS, when anticipating purchasing or selling a business or investment property, purchasers should consider well in advance of closing whether they have any business or investment property of like-kind that they desire to sell or purchase which would permit them to utilize the tax deferral techniques outlined above.
John P. Wilkerson Jr. works in the Commercial Law practice area of Carlile Patchen & Murphy LLP. His practice focuses on banking, tax abatements and real estate law with an emphasis on commercial real estate financing. Reach him at (614) 628-0790 or JPW@cpmlaw.com.
Q: I have taken great pains to set up a corporation (or limited liability company) for my business because this shields me, the owner, from personal liability, right?
A: Unfortunately, the answer is not always yes. A business owner, or even a nonowner officer, can be held personally liable by both the state and federal government for failure to collect, withhold, report and pay both the employee and employer portions of income, unemployment, Social Security, sales and corporate franchise taxes.
In many cases, a significant penalty can be assessed (personally) in addition to the amount of tax owed.
Q: Who is subject to personal liability?
A: Any owner or officer of the business who exercises control or supervision over any tax and financial affairs of the entity; handles or supervises any disbursement of funds; or sets priorities of payments among creditors.
These individuals are known as responsible parties.
Employee federal tax withholdings
The responsible party is personally liable for any unremitted required withholdings (which include income, Social Security, unemployment, gambling winnings, interest and dividends subject to withholding, distributions from retirement plans, payment of interest and dividends to nonresident aliens/foreign corporations, disposition of a U.S. real estate property interest by a foreign person and various federal excise taxes), provided that the IRS can show that the employee willfully (which can include recklessly) failed to collect, truthfully account for or pay to the IRS. In addition to being personally liable for the amount of the tax, there is an additional penalty equal to 100 percent of the amount owed.
Ohio corporate franchise tax
Until this tax is phased out, failure to pay by any corporation conducting business in Ohio can result in personal liability, penalties and liens. Furthermore, both the responsible party and the corporation may be restrained from conducting any business within the state until all taxes, fees, penalties and collection costs are paid in full.
If your business has annual gross revenue/receipts in excess of $150,000, you must register by Nov. 15, 2005, for the new commercial activity tax, which is gradually replacing the corporate franchise tax.
Ohio sales tax and employee state withholding taxes
For failure to file required reports and/or pay the tax due, Ohio law imposes personal liability on any employee (as well as their supervisors) who directly prepares the reports and/or makes payments.
Ohio use taxes
This excise tax is levied on the storage, use or consumption of tangible personal property or on the benefit of any service provided that is not subject to Ohio sales tax. In this case, the seller (which can include salespersons, representatives, peddlers, canvassers, agents of a dealer, distributor, supervisor and/or employees), regardless of whether they make the sale on someone else∏s behalf, is personally liable for any uncollected or unremitted amounts. To protect yourself and your employees from personal liability in these instances, it is vitally important that adequate checks and balances are in place within your organization. Your attorney or accountant can offer valuable advice on how to establish them, as well as audit your current systems, to help educate and protect all persons involved. If you aren∏t the business owner, you may want to have a discussion with the owner to be sure you and others are protected.
As the business owner, you can ensure everyone gets the limited liability you thought they were getting when you set up your business entity.
Robert B. Barnett Jr., is the managing partner of Carlile Patchen & Murphy LLP, a Columbus law firm focusing on representing closely held businesses and their owners, with practice areas including business, litigation, employment/labor, real estate, construction, intellectual property, estate and tax planning. For more information, call (614) 228-6135 or visit www.cpmlaw.com.
Education: California State University - Bakersfield
First job: Cleaned swimming pools at Worthington (Ohio) Community Pools
Career moves: Manager of a chain of Nautilus of America health clubs in Texas before founding CheckFree in 1981
Boards: Metatec Corp. board of directors
What is the greatest business lesson you've learned?
I'd go all the way back to the reason why we were able to survive through the craze of the Internet era, which was -- despite what people might think -- it was not any fun for us because everything was out of control. We have always been in the business of building new markets, and we invented the national electronic billing and payment market.
What we constantly referred back to is the earliest, most important lesson, and that is you always have to make sure the company is positioned to survive because you can do great things, but only if you survive. We never got so carried away or allowed anybody else to get us so carried that we got too far ahead of ourselves.
We spent a ton of money eating up a lot of things that we were doing because the Internet allowed us to do so, and investors at that time allowed us to do so, but we never lost sight of the fact that it was unreal.
What is the greatest business challenge you have faced, and how did you overcome it?
Without question, the biggest business challenge was the craze of the Internet. On every front it was challenging. The number of people, shareholders, who were clamoring for you to spend crazy amounts of money to do crazy things, and they'd throw the money at you to spend it.
The amount of money that was being poured into stupid ideas that, competing against us, had no right to even exist, and yet we had to deal with it because they were muddying up the market, they were slowing down rational things that we were doing, they were confusing our customers.
When we came out of it, we always kept track of exactly how we would cut our costs back to a rational level. When we came out of it, we came out of it three generations ahead of where we otherwise would've been in terms of the technology we had in the marketplace.
Whom do you admire most in business and why?
There are lots of people doing a great job. I'm in a pretty heady class in that, early on, one of my early deals was with America Online. Steve Case is about my age, and I got to watch what Steve Case did, and he ultimately bought TimeWarner.
I'm doing OK, but I'm pretty far behind that.
Education: In 1963, Keller earned an undergraduate degree in economics from Princeton University, where he was a National Merit scholar. He received an MBA in 1968 from the University of Chicago Graduate School of Business, where he was a Graduate School of Business Fellow.
First job: Selling and delivering around his neighborhood corn and tomatoes grown on his grandfather's farm
Career moves: Motorola Communications Division, 1964 to 1967; Bell & Howell Education Group, 1968 to 1973; founded Keller Graduate School of Management (which still exists as the graduate school of DeVry University, but otherwise evolved into DeVry Inc.), 1973 to the present
Boards: Member of the board of trustees of the University of Chicago and Princeton University, and chairman of Princeton's School of Engineering and Applied Sciences Leadership Council; director of Nicor Inc.; vice chairman and trustee of the Chicago Zoological Society; trustee of the African Wildlife Foundation.
Lives: Oak Brook
What is the greatest business lesson you've learned?
When something in your business isn't working ... change it.
What is the greatest challenge you've faced, and how did you overcome it?
When Ron Taylor and I started our education business in 1973, our initial offering was a Certificate in Business Administration program. It was designed to give students the most immediately usable half of a strong four-semester MBA program in one semester, on a double time basis. It was only offered on a full-time, total immersion basis. The students who signed up found it very satisfying, but not enough students signed up. After several very small classes, it was clear that our little business would fail unless something changed. We changed several things, one of which was to begin offering the CBA part-time at night as well as full-time during the day. We changed, and happily for us the changes worked, and we began to grow steadily.
Whom do you admire most in business?
Thomas Watson Jr., for the ethics and beliefs he espoused, and for his vision in leading IBM to create the foundations of the Information Age.
But Rogers, who today has 73 employees and manages $14 billion in assets, swayed investors by branding his firm philosophy as patient, slow and steady. He even sported a tortoise as the corporate logo, and named his newsletter "The Patient Investor."
"It was really hard to gain credibility without a track record and being youthful," Rogers says. "What ultimately overcame that was people could see the passion strategy we had for our investment strategy and philosophy."
The bulk of Ariel's business is in its no-load mutual funds, which are made up of only small or mid-cap companies. Smaller companies have been Ariel's focus from the beginning, Rogers says, even when such investing wasn't popular with the big firms.
Rogers spoke with Smart Business about the state of mutual fund investing and how his firm emerged unscathed after the Internet bubble burst.
How has mutual fund investing changed in the last 10 years?
All of us in senior management are spending more time thinking about compliance issues and legal issues than ever before. What we've done at Ariel is to delegate that to Mellody Hobson, our president, who really oversees all the operations, legal, financial part of the shop, and that frees me up to be chief investment officer.
It means you have to structure your organization to make sure you have enough lawyers and compliance officials to make sure you stay on top of all the changing rules and regulations.
Which regulation has impacted Ariel most directly?
The one that concerns us the most is you have to be very careful what you write in your quarterly letters to shareholders. Under some of these interpretations, you always have to worry that someone could come back and sue you based upon something they read in one of your publications.
We come from the perspective that we've always wanted to communicate clearly and openly and transparently with our shareholders, and that's why we write a quarterly letter even though we don't have to. You can do it twice a year; we've always chosen to write it four times a year.
It's a little investment thing where we're spending a lot of time now thinking, do we have to ratchet back some of the creativity in our written work because of this new environment?
Why have you chosen to focus only on small and mid-cap companies?
When I started the firm almost 21 years ago, I had a strong belief that small and mid-sized companies could grow faster than larger companies because they're smaller, more nimble; they'll be able to grow more consistently. And at the same time, hopefully, you could do original, creative research on smaller and mid-sized companies and buy them while they're inefficiently priced, before all the big organizations found out about them.
You've positioned Ariel as a "slow and steady" investment firm, but these smaller companies are usually associated with higher turnover. How did this philosophy evolve?
We've had the turtle logo and the patient investor theme from the very beginning, since 1983. I was 24 when I started the company, and I felt the need to assure potential investors that I wasn't a gunslinger or risky investor, but I was gong to be a more prudent, patient, disciplined type of investor. So I got the idea to name our newsletter "The Patient Investor" and stuck with that theme ever since.
Our turnover is very small. Our typical turnover is about 20 percent a year, which implies we own the average company for about five years. You're right, especially when we started the company, there were not a lot of value, long-term investors in small caps.
We were fairly unique back then. There's more competition now than ever, but still most smaller cap investors are more aggressive investors.
What were some of the challenges you faced in those early days?
Being young was clearly a major challenge. I even looked younger than I was.
I didn't have a track record. I had never done money management before, so you're trying to convince people to trust you with their savings. It was really hard to gain credibility without a track record and being youthful.
What ultimately overcame that was people could see the passion strategy we had for our investment strategy and philosophy. They could hear the discipline and the focus we had when we explained our strategy, and slowly but surely, we started to build a track record. Those first few ideas we talked about really turned out well.
What is the biggest misconception consumers have about investing?
The biggest misconception, clearly, is past performance has a lot to do with future performance. It's the strangest thing, but it's a clear misconception. You see it all the time both in mutual funds and individual investments.
If you look back to the bubble years a couple years ago, everyone bought the hot funds that had been up 100 percent the year before. Of course that was the worst place to invest. They bought the hot stocks from the Internet because they had gone up and up, and of course those stocks collapsed rapidly.
The exact opposite happened a year ago. Everyone was down in the dumps and saying the market was never going to come back and people weren't going to get back in the market and you shouldn't invest in technology. And what's happened? The market has boomed the last 13, 14 months, and technology stocks have led the rally.
What was your attitude during the Internet bubble?
We couldn't figure it out. We'd never seen anything like this; it doesn't make sense. Our view was, we're going to stick to our core beliefs, we're not going to get swept up in this euphoria and fall into that trap. That was something that was hard to do, but it was important that we did it.
People would ridicule you for being too conservative, buying the boring, dull stocks and missing out on the hot computer concepts or the latest PDA or Internet concept. I remember reading one article right at the height of that period talking about all the money people in Silicon Valley were making and all the new issues that were occurring. You just saw that people were totally obsessed with how to get rich quick, no longer thinking about how you build great company.
Ultimately, businesses succeed and thrive and grow when they're adding value for their customers.
How to reach: Ariel Capital Management Inc., (312) 726-0140 or www.arielmutualfunds.com
Education: B.S., business, Georgetown University, 1960
First job: Newspaper route from age 6 through high school
Career moves: Started at IBM, then moved to RCA in 1960, where he rose to vice president of marketing; then executive vice president at Sperry Univac until 1973. President of a small Pennsylvania manufacturing firm until 1979, when he formed Heico Cos. LLC.
Boards: Board of directors, Georgetown University and Illinois Institute of Technology, as well as several portfolio companies
Lives: St. Charles
What is the greatest business lesson you've learned?
That integrity matters. That's the biggest lesson I learned.
What has been the greatest business challenge you have faced, and how did you overcome it?
The greatest challenge I ever faced was when I took $150,000 of equity from my house, borrowed more than $10 million, and interest rates in 1979, '80 ramped up. We were paying 23 percent, and I had to straighten around a company that hadn't made money in eight years.
When I went in, one of the mistakes I made is I did not realize every August the whole plant shut down. When I put the company together, I had about $250,000 surplus cash available, and virtually all of it was gone by the end of July.
We were operating on a shoestring for the month of August, and we lost a little bit more in the month of August, and then September we broke even, and we've never had a negative month since.
Whom do you admire most in business and why?
David Sarnoff. I admire him because he was the guy who started RCA, which was the first company I worked for. I admire him the most because when you list the things that he did ... probably he and (Thomas) Edison impacted more Americans than any other human being.
For example, he's the guy that created broadcast radio and broadcast TV. He was the guy who was responsible for television and color television. He was the guy who was responsible for talking movies. He was the guy who was responsible for the whole concept of broadcast.
There were a number of things that he did with RCA during the '30s through the '60s that were just revolutionary to American industry.
A small manufacturer here. A telecom company there. Heisley eventually amassed 40 companies with $1.5 billion in annual sales, yet few people knew much about the former computer industry executive.
Then he had to go buy a basketball team.
The decision in January 2000 to buy the struggling Vancouver Grizzlies thrust Heisley into the national spotlight. He vowed that he would strive to keep the professional basketball team north of the border, but a year later announced he would move the team to Memphis.
What followed was fan outrage, frivolous class action lawsuits and media criticism -- par for the course whenever a professional sports team is uprooted from its home turf. The unfortunate reality, however, is that professional sports is a business, and outside of a few major markets, basketball is one of the least profitable ventures.
Heisley, as well as the team's previous owners, knew Vancouver could not financially support the team.
"The Canadian dollar had dropped substantially," Heisley recalls. "You're paying your players in American dollars and collecting from your fans in Canadian dollars. The franchise was losing substantial amounts of money. It became obvious to the NBA, after I had lost quite a bit the first year, that it could not make it in Vancouver."
Heisley is used to making the hard decisions, though. That's his job. Through Loop-based Heico, he acquires smaller companies that are often either distressed or in bankruptcy. He then makes them profitable by selling off the underperforming parts, eliminating waste or creating a new management team.
None of these steps is easy or popular. If they were, every company would be doing them.
"People always say to me, 'How do you find out what to do?'" Heisley says. "I just ask the people in the company, they know. It isn't a secret. It's just that nobody has the will to do it."
Unlike most turnaround artists, Heisley doesn't sell his acquisitions as soon as he fixes them, when the potential sale price is at its peak. Rather, once the companies are part of Heico, the revenue generated helps finance future acquisitions.
Today, Heisley owns more than 40 companies within a diverse set of industries, including steel wire products, pre-engineered metal buildings, heavy equipment, telecommunications, plastics and food production.
"Most of everything we've touched has turned out to be successful," Heisley says. "I don't mean to be arrogant about that, but most of them at one point have been very successful."
You can thank the Grizzlies for bringing his special talent to light.
Computers to concrete
Heisley didn't start out his career as an turnaround specialist. After graduating from Georgetown University in 1960, the Alexandria, Va. native spent 13 years in the computer business, first with IBM, then RCA, and finally at Sperry Univac, where he rose to executive vice president.
"When I started back in 1960, some people were predicting that a few hundred computers would do all the data processing for the whole industry," Heisley says. "There were less than 100 computers installed at that time."
By 1973, Heisley tired of the big corporate environment and accepted a position as president of a financially struggling manufacturing firm in Pennsylvania. After turning that company around, he learned of another distressed manufacturer, Diversified Products Groups of Conco Inc., in Mendota, about 55 miles south of Rockford.
Intrigued by the opportunity to revitalize another company, Heisley took the $150,000 equity he had in his home and borrowed more than $10 million from banks to purchase the manufacturer -- which hadn't made a dime in eight years.
"The company had really lost its way," he says. "It had been around since the early 1900s and had built up a lot of baggage over time. They needed someone to come in and straighten out the product offerings, get rid of a lot of bad business practices."
In the first six months, Heisley sold four of the manufacturer's six divisions and eliminated $6 million of inventory. The remaining divisions, Spartan Tool Co. and Field Controls Co., became the first companies under Heico when it was created in 1979. Those businesses are still part of Heico today.
From the money generated in the first turnaround, Heisley set out to acquire more companies, but he found the only ones he could afford were distressed businesses, in or near bankruptcy.
"I never had the financial contacts in the early days, when people were doing mezzanine financing with junk bonds," Heisley says. "This wasn't a grand strategy. It was just my target of opportunity."
Heisley never heard of business acquisition practices, which were coming into vogue in the early 1980s, like issuing high-yield bonds to finance leveraged buyouts. The practice, popularized by financier Michael Milken, who later served two years in prison for securities fraud, is blamed for causing the savings and loan scandal of the 1980s.
Although he never used them, Heisley believes that using junk bonds to acquire small to mid-sized companies prevented the collapse of many companies.
"Because of junk bonds, companies exploded because they had access to the financial markets," he says. "(The markets) were denied to any company other than one of great size because the only way you could get any financing would be if you were an investment-grade company. I don't think that's truly appreciated."
It's the management
With more than 40 businesses under his umbrella, many of which were purchased out of bankruptcy, Heisley knows what kills a company -- management.
"If the company had no problems, you wouldn't need any management," Heisley says. "Management is there to look out in the future, see problems developing and steer the ship around those rocks and problems.
"What happens many times is management, over a number of years, has a tendency to say, 'This has worked for us in the past, this is what we do.' They lose their ability to be flexible enough to handle changes, and if you really look at it in five years, 75 percent of what you're selling is going to change. In effect, over a five- to seven-year period, you're recreating your company. If you're not, then you're more than likely on your way to going out of business."
Often, though, in the smaller companies Heisley acquires, everyone in the company knows the problems reside with inflexible management, but no one is willing to do anything because of a personal relationship with the employer.
"Generally, the problems in the company revolve around people," Heisley says. "You have to bring in new people with new ideas, and some of your best friends are the guys that are going to have to be replaced. It's just human nature to not want to make that decision.
"A guy like me coming in, who has no relationships with people, it's easier for me to do it."
By far, Heico's highest-profile acquisition was the Memphis Grizzlies. The NBA team, which was purchased for a reported $160 million, came to Heisley's attention through former NBA coach Dick Versace, whose late brother Rocky was Heisley's childhood friend.
Versace asked Heisley to invest in the Grizzlies. The longtime Bulls fan was intrigued by the idea of turning around a struggling basketball team the same way he had turned around so many struggling manufacturers.
When he purchased the team, then in Vancouver, he quickly learned that it would not last north of the border. After spending an estimated $47 million in the first year to help the team survive in Ca nada, Heisley asked NBA Commissioner David Stern for permission to move the team to a more financially viable location.
Cities like Louisville, New Orleans, Anaheim and even suburban Dixmoor tried to lure Heisley, but Memphis' civic and business community made an offer too good to refuse. In March 2001, Memphis-based FedEx announced that if Heisley brought the team to town, it would buy arena-naming rights, estimated at $100 million. For its part, the city offered to issue $226 million in bonds to pay for the new arena.
"It was one of the largest cities that did not have a major professional sports franchise in any sport, and we felt that that was a key criterion because you'd have 100 percent of the attention of the business community and everything else," Heisley says. "FedEx was very anxious to get a major sport down there, and they were willing to make some significant commitments. The city and the state of Tennessee were very anxious to get a professional basketball team in Memphis.
"The end result (is that) we put together an attractive package that is going to totally revitalize the franchise."
As with his other acquisitions, Heisley revitalized the management team, this time in bold fashion. He stunned the basketball world by luring Los Angeles Lakers legend Jerry West to Memphis as the franchise's president of basketball operations, just eight months after West retired as executive vice president of one of the NBA's premier franchises. Like Heisley, West liked the challenge of a turnaround.
"I want to help make a difference," he said at the time.
The same day West came on board, the Grizzlies announced the hiring of Gary Colson -- one of the most successful coaches in NCAA Division I history, with more than 500 career wins at four different schools -- as assistant to the president.
West and Colson joined a basketball operations team that already included Versace, who had just been named general manager.
"Who you work for makes a huge difference in enjoying your job," West says. "I have been so impressed with Mike. He wants to win so much and is committed to creating a winner for Memphis."
And that has been the standard operating procedure for Heisley throughout his career -- do what it takes to create a winning operation.
How to reach: The Heico Cos. LLC, (312) 419-8220
Over the past century, it has worked to protect the interests of Chicago businesses and boost the region's economy. Some of its highlights include helping to organize a group of business leaders -- called the "Secret Six" -- to fight Al Capone and the rising tide of organized crime and corruption in Chicago public office.
It also helped establish the Regional Transportation Authority to improve public transportation in northeastern Illinois.
In 2001, the chamber, along with city leaders, successfully lobbied Boeing to relocate its corporate headquarters to Chicago from Seattle, making it the city's largest public company. Most recently, it launched the Chicagoland Entrepreneurial Center, an affiliate of the chamber, to serve as a single resource for Chicago's emerging businesses.
The chamber's mission is to make the Chicago area "the most business-friendly region in the country," no small task considering the challenges facing its manufacturing base.
Chamber CEO Jerry Roper spoke with Smart Business about the challenges facing the region and the chamber's efforts to fight taxes and encourage entrepreneurism.
What has the chamber done this year to make Chicago "the most business-friendly region in the country?"
We defended the right of commercial and industrial property taxpayers to appeal to the state Property Tax Appeals Board (PTAB). Legislation was introduced in the General Assembly that would have prevented businesses in Cook County from appealing unfair assessments to PTAB -- a right that businesses in every other county in Illinois enjoy. Such a bill would have cost Cook County businesses millions of dollars.
(We also gained) approval of the O'Hare Modernization Program, which will add another runway at O'Hare International Airport, reconfigure seven others and provide western roadway access to the airport. Chicago's airports inject over $40 billion annually into the economy and impact over 500,000 jobs.
There is nothing more important to securing the region's economic future than improving O'Hare, and the chamber continues to consider this one of its top priorities.
We continued to review and monitor the state of Illinois, Cook County and the city of Chicago's budget to ensure that government is there to serve the needs of the business community. In particular, we are continuing to show examples of how newly enacted taxes, fees and other costs affect the day-to-day operations of employers across the region.
We expanded the Chicagoland Entrepreneurial Center, an affiliate of the chamber serving Chicagoland's emerging businesses, with new programs and services but, most importantly, linked our emerging businesses with the more established corporations in the region.
What are some economic/business challenges facing the region, and how can the chamber help overcome them?
There are a number of critical economic and business challenges facing the Chicagoland region. Our unemployment remains high, so putting people back to work is a major challenge.
Another challenge is convincing state and local governments that their tax, fee and other cost structures dramatically impact the business climate. Too often, elected officials believe that their actions do not affect the company bottom line and that there will always be the ability to ask for more. At some point, the well runs dry, and these companies consider leaving, cut jobs and investment, or go out of business. Making sure decision-makers understand this is a challenge in our current business climate.
What issues are your members most concerned about?
The chamber's members are concerned about tax and fee levels, particularly Illinois' overreliance on property tax.
Another major concern is the rising cost of health care. Many businesses simply cannot offer health insurance at current rates, and those that do provide health coverage are taking steps to reduce costs.
Employees are paying higher co-pays and deductibles, and certain services are not being covered. Health insurance rates have increased between 10 and 18 percent annually over the last several years, and those costs are extremely difficult to cover in this economy.
Our members are also concerned about the growing congestion on our roads, highways, railways and in the skies. One of the chamber's top priorities is working to ensure that businesses are able to move goods and people, as well as their work force, across the country and around the world in an efficient manner.
How has the region's entrepreneurial environment changed in recent years? Are we seeing fewer start-ups than in the late 1990s?
The difficult economic times in recent years have not given many people the encouragement they need to begin their own entrepreneurial venture. Many people are not satisfied with the unstable nature of the corporate world and would like to go into business for themselves.
We see that trend growing. But there are still many issues confronting regional entrepreneurs: access to customers and markets, access to capital and adequate access to infrastructure -- both physical and virtual.
Three years ago, the chamber, together with AT&T, the Illinois Department of Commerce and Community Affairs, and 11 other organizations, launched the Chicagoland Entrepreneurial Center to serve as a one-stop resource for Chicagoland's emerging businesses. Since then, the center has served more than 2,000 emerging businesses and expanded its offerings to provide emerging companies access to one-to-one counseling, networking, and peer learning from more established Chicago area companies.
With the center's help, these companies have gone on to secure funding, form strategic partnerships, win major contracts and make informed decisions that continue to grow their businesses.
The center has a unique combination of programs and services and connections to area businesses and organizations that make it a powerful, single resource for Chicago's growing number of entrepreneurs and emerging businesses.
How is the chamber active in the statehouse and in Washington in terms of lobbying for legislation and funding for Chicago businesses?
The chamber maintains an active government relations staff that works not only in Springfield with the General Assembly, but with the city of Chicago and the local governments in the six counties of northeastern Illinois.
We have two registered lobbyists on staff, and I am also registered. In addition, we occasionally contract for additional help at the state and local level. Politics in Illinois is so closely tied to the condition of the business climate that our members believe it is essential we remain actively involved in the political process.
While we do not track the daily schedule of Congress, we maintain active involvement in coalitions around specific issues -- transportation, in particular -- that keep us involved and informed about federal actions.
What are the chamber's plans for 2004?
In its next 100 years, the chamber is focused on furthering entrepreneurship and economic opportunity in the Chicagoland region.
We recently announced a new chamber chairman, Bob Crawford, president of Lake Forest-based Brook Furniture Co. who is an entrepreneur in his own right, to help lead the chamber into its next 100 years.
We recently appointed the first-ever president to the Chicagoland Entrepreneurial Center, Mayor Richard Daley's former technology adviser, David Weinstein, and the first-ever Center Board of top Chicago business leaders. David is a serial entrepreneur and a thought leader on entrepreneurship and emerging business who is leading the center to new heights. How to reach: Chicagoland Chamber of Commerce, (312) 494-6700 or www.chicagolandchamber.org
In fact, he's just in the next office. You can hear his voice through the wall.
Divell is late because he's debriefing a couple of technicians about a recent installation of his firm's service management software package. Those duties are not unusual for the CEO of a 35-employee software developer, but Divell has been trying to hold fewer of these meetings in the last few years.
In 2000, he and the other founding partners of Garfield Heights-based Data-Basics Inc. hired a management team to run the day-to-day operations so they could focus on long-term strategic planning. Sometimes, however, it's hard to let go.
"I have to admit, I do get pulled back in sometimes," Divell says. "But the more stuff you have to do in other areas, the less the temptation there is. The worst thing that can happen to me is not to have anything to do."
Divell has been busy lately expanding the company beyond the construction and engineering industries where Data-Basics honed its niche. He's out pitching the retail and facilities management industries, going to trade shows and writing articles for industry magazines. And Divell has hired a public relations firm for the first time in his company's 29-year history.
"If we hadn't built the new management team, we wouldn't have come to that conclusion," Divell says. "Now we can look at the medical market, food service, elevator companies, companies that sell material handling equipment. It's just enormous."
There aren't many software developers founded in the 1970s that are still around, especially smaller firms, which are usually crushed by the major players or acquired.
Not Data-Basics, which traces its roots back to 1972, when Divell met fellow Case Western Reserve University graduate students William App and Rick Martin, who would form Data-Basics two years later.
Through the university, the students won a contract from Texas Instruments to write business-to-business software applications. The success of their first project led to more work for the trio.
"We decided we were bringing a lot of money in and we wanted to form a company," Divell says. "We wanted the university to share in that. They really didn't want to do that, so we incorporated and did it ourselves."
Eventually, the entrepreneurs grew tired of writing software for other companies and decided to create their own business management applications for service contractors, construction companies and architectural firms.
"I looked at one of my partners and asked, 'Do you know about accounting? Because I don't know anything, but how bad could it be?' says Divell, who now laughs at his youthful hubris. "He was a math major, and furthermore, he has a photographic memory. He's one of the brightest guys I've ever met."
In 1974, Data-Basics was founded in Cleveland, and eventually built a name nationally as the preferred job-cost accounting software for construction firms and civil architectural and engineering firms. In the early days, however, there were some setbacks.
"The first job we did, we put in a complete system for $4,000 and it took us two years," Divell says. "You have to be good enough to survive your mistakes. The whole thing: The people, the product, the organization. If there's a problem with any one of those, you're done."
Enter the personal computer, which in the late 1970s was still a novel concept.
"They were working on mini-computers and mainframes," says Jean Knox, Data-Basics' technical marketing manager and author of three software training books. "In the 1980s, we have this next batch of new technology that we have to be able to respond to. The question is, where is the world going to go? Is it going to stay on these Wang computers or is it going to adapt to the PC?"
The answer was obvious to Divell.
"It was clear in our minds, even at that time, that the way the chip technology was going that performance was going to be increasing drastically and price was going to continue to go down," he says. "You could see that PCs were going to be the future."
In 1983, Data-Basics' software, then called CMAS, was re-engineered for the IBM PC. Five years later, it was updated for a multiuser, networked environment.
The software development cycle is not unlike that of the auto industry. What you start working on today won't come to fruition for five or even 10 years. Data-Basics' flagship software suite, SAM Pro Enterprise, has more than 2 million lines of code and continues to grow. In this industry, you have to be thinking where the market is going to be in the next decade, not what it's demanding now.
That's why, when a new software operating system called Windows came along in the early 1990s, Divell had to once again play the prognosticator. Should he reconfigure his software for Windows or just do a quick fix like many of his competitors and make it look like it's Windows-compatible, leaving the same DOS-based architecture underneath?
"We knew that it would be three to four years before the hardware would even keep up," Divell says of the first Windows version of the software. "The machines were just flat-out too slow."
Banking on the success of Windows, Data-Basics started from the ground up, re-engineering its flagship product and renaming it SAM Pro Enterprise.
"As it turns out, it worked out because the Internet builds on what we have," Knox says. "We didn't have to throw it away and start over again. That was taking a chance. It's an informed chance because these guys really know what they're talking about, but it's still flipping a coin in the air to a certain extent."
In 2000, Data-Basics reached the point where it needed to tap new markets. Divell stepped down from his day-to-day operational duties to seek those markets.
Co-founders App and Martin focused strictly on new software development. A new president, a director of product engineering, a lead software engineer and a marketing manager were added to run the daily operations.
Divell, though, has not lost sight of what made Data-Basics successful in the past as he looks to the future. Just as he was able to predict in the 1970s that the PC would dominate the industry, later followed by Windows in the 1990s, it's safe to say he will know where to lead his company today.
"Marketing needs visions of the future, too," he says. "It's a matter of spending time, getting out and trying to develop some vision of what markets you attack and are viable for you, that you can adapt the product to."
Divell's first target was the facilities management industry, which resulted in a 50 percent increase in Data-Basics' client base. To date, it has 500 clients worldwide.
"It's an area we could be a dominant player in within the next year-and-a-half, two years," he says. "We're quickly becoming the dominant player. We've sold systems to a number of vendors who are at these shows.
"Now the problem we have is, who do we go after next? It's exciting, actually." How to reach: Data-Basics, (216) 663-5600 or www.databasics.com
Luckily, the only thing this tiny water beetle eats is a type of aquatic weed that has become a nuisance in many of the Great Lakes and in Northeast portions of the United States.
The beetle's sole diet is the Eurasian milfoil, a long, feathery weed that grows so rapidly that it strangles native plants and interferes with boating, fishing and swimming. It can grow in water one to 20 feet deep, depending on water clarity. And unlike most plants, when it hits the surface, it doesn't quit growing.
"They've been known to stop a 150 horsepower outboard motor dead in the water," says Marty Hilovsky, whose company, EnviroScience Inc., introduces milfoil weevils into water systems to eradicate the weed. "You can get up to 1,000 stems of the weed within a single square meter of lake bottom. That's how dense it is."
The weeds came from Asia to the United States during the 1930s for use in aquariums. Once they were accidentally introduced into public waters, they became almost impossible to control.
Efforts to control the weeds cost the United States millions of dollars annually.
Enter Middleburg College Professor Dr. Sallie Sheldon, who in the mid-1990s, after nine years of research, confirmed her theory that this type of water beetle would be an effective, environmentally-friendly and low-cost method of milfoil control.
Hilovsky, who heard Sheldon speak at the college on the topic, licensed the rights to breed the beetles and sell them as the MiddFoil Process.
Since the Stow-based company launched in 1998, EnviroScience's Lake Management Division has used its MiddFoil Process in more than 75 lakes in 10 states. That division has reported an annual growth rate of 80 percent, and Hilovsky is anticipating another record year of sales in 2003.
But what's to prevent another company from breeding these beetles for the same purpose? Nothing, Hilovsky says, but EnviroScience is way ahead of any competitor in terms of expertise, and holds several proprietary breeding methods.
"We're the originators, and we've been doing this for six years now," Hilovsky says. "It takes an awful lot of specific know-how on how to culture them in large numbers and how to stock them." How to reach: EnviroScience Inc., (330) 688-0111