Many entrepreneurs devote the vast majority of their time to building their businesses — creating new products or services, building a team and developing new client relationships — often at the expense of ensuring that there is a viable way to monetize that value at some point in the future.
Unfortunately, this often leads to surprises down the line in the form of a delayed exit or a loss of value upon exiting the business, says Christopher F. Meshginpoosh, director, Audit & Accounting, at Kreischer Miller, Horsham, Pa.
Smart Business spoke with Meshginpoosh about the exit planning process and how to begin.
How soon should an entrepreneur start planning an exit strategy?
The reality is that it is never too soon to begin planning. Oftentimes, some of the early decisions, such as the form of the entity or the nature of the equity issued to the owners, end up having a significant impact on the timing or value of an exit.
Sitting down and spending some time early on thinking about long-term personal goals and exit options can help minimize problems down the road.
What are some of the exit options that an entrepreneur should consider?
There are a wide range of potential options that an entrepreneur can consider depending on his or her objectives. For example, there are strategies that an entrepreneur can use to transfer ownership to other owners, to nonowner employees, to family members or to outside investors.
What should an owner think about when contemplating a sale to another owner?
If this is a potential outcome for the business, owners should formalize their agreement about the mechanics and value of the transfer. If owners wait until an exit is imminent, it is often very difficult to get the parties to agree on these types of matters.
By entering into a buy-sell agreement that defines how the transfer will occur, owners can avoid many problems and distractions down the road.
What if the owner would like to keep the business in the family?
We see that quite a bit in our client base, and the good news is that there are several options available, including negotiating buy-sell agreements, transferring through gifts to other family members, establishing grantor retained annuity trusts, or establishing family limited partnerships. However, these options are all dependent upon identifying and grooming specific family members who can lead the business upon the departure of the existing owners.
Can you describe some of the strategies that can be used to transfer the business to existing employees?
First, there is one prerequisite: existing ownership members have to make sure that they have a plan to hire and develop managers who are capable of running the business. Assuming those managers are already in place, owners can provide senior management with equity incentives that reward management for increases in the value of the business.
This not only aligns management interests with those of ownership but also provides a way to gradually transfer ownership interest in the business. Once an owner is ready to transfer the remaining interest, it is often possible for management to obtain sufficient debt financing to purchase the owner’s remaining interest in the business. Other options include the formation of an employee stock ownership plan, or ESOP, to gradually or immediately redeem existing ownership interests and transfer those interests to employees.
What are the options if there are no other owners or employees capable of buying the business?
In those situations, either a partial or complete sale to a third party is necessary. Determining the right party is often a function of the owner’s goals, as well as of the willingness of market participants to purchase the business.
For example, if the owner is willing to continue to work in the business for a period of time, options such as a sale to a private equity firm or a roll up might be good alternatives. The sale of a partial interest to a private equity firm might also provide the owner with some upside potential if the business continues to increase in value.
If the owner plans to cease involvement at the time of a transaction, then other options such as the sale of the entire business to a strategic buyer might be the best alternative. Regardless of the strategy, owners really need to prepare for a transaction well before the planned exit.
In light of the time it takes to prepare, how do you recommend that an owner start the exit planning process?
There are many potential alternatives, and each one has its own unique complexities. Consulting with experienced advisers — including accounting, legal and wealth management professionals — is essential to avoiding obstacles and maximizing value upon an exit.
Christopher F. Meshginpoosh is a director in the Audit & Accounting group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Patent law is one of the most complicated areas of law. Not only does a patent combine both law and technology, patent laws are also developed from many sources, such as the US Patent and Trademark Office and the federal courts from all over the US. It is only natural that many inventors and entrepreneurs are confused with its nuances and complexities.
Below are some of the common misconceptions about patents:
1. If I obtain a patent, I have a right to use and sell the invention.
A patent provides the right to exclude others from making, using or selling the patented invention. Many companies find this very valuable, as they can expand or preserve their market shares, demand licenses or royalties, and prevent competition. A patent does not provide a license to use, make or sell a product. Having a patent does not guarantee that you will not be exposed to any liability for infringing other peoples’ patents. You do not need a patent to manufacture or sell a product. However, you will not have any exclusivity, and any company can compete with you. Many investors do not like to invest in non-patented ideas or businesses of start ups, as they are afraid that bigger and well established companies can freely compete against them.
2. I must have a prototype before I can apply for a patent.
If you can describe your invention such that a person skilled in the art listening or reading your description can make and use your invention without much experimentation, then you are ready to apply for a patent. Obtaining a prototype may be good in terms of refining the manufacturing process or ironing out any flaws of the concept, but it can be very expensive and can take some time. Many companies that file patent applications do not have working prototypes.
3. I can stop an infringer with a "patent pending."
A patent pending merely means you have a pending patent application that still needs to be examined by a patent examiner. Since your invention has not been proven to be novel and to meet the other requirements to obtain a patent, you really have not perfected or cemented your exclusive rights. Your patent pending may, however, allow you to seek for retroactive damages if you obtain a judgment for patent infringement against infringers, for instance, all the way back to the time your application was first published.
4. I must have a patent search done prior to filing my patent application.
A patent search is not mandatory. However, it is worthwhile to do, as it may save you time, resources, and money. The patenting process can be expensive and can take over three years. You should try to determine your chances of obtaining a patent. After all, you do not want to spend the time, resources, and money only to find out that your idea has been practiced before.
5. All patents are the same.
Whether you are trying to protect your invention or you are trying to make sure you do not infringe on another’s patent, you need to know what each type of patent means. Design and utility patents protect different aspects of an invention, and they provide different scopes of protection. Design patents only protect the way articles look, their shapes, configurations, or their ornamentations. Utility patents, on the other hand, protect the way articles are used and the way they work. From the standpoint of protecting your invention, design patents may be very easy to be avoided and thus offer very limited protection. From the standpoint of making sure you do not infringe on another’s patent, utility patents may require that you consider various types of infringement. They may require that you review their file histories and consider their related counterparts, such as continuation and divisional applications.
6. If I modify a patented product by 10, 20, or 30 percent, I will be free from patent infringement liability.
There are various ways a patent can be infringed — literally, by equivalents, or by contributory infringement. Literal infringement means the claim language of the patent directly corresponds to the infringing product. Thus, if you do not review the claims of a patent, you may never know whether you infringe it regardless of how much you have modified your product. Even if you have reviewed the claims and believe that there are differences between the claims and your modified product, you may still infringe by the doctrine of equivalents. Under the doctrine of equivalents, if your modified product contains elements identical or equivalent to each claimed element of the patented invention, your product still infringes the patent.
7. As an owner of the company or as a research supervisor, I should always be listed as an inventor to my employees' inventions.
It is crucial to name the right inventors on a patent application. A patent can later be invalidated if it did not include the right inventors. An inventor in the patent sense must have contributed to the conception of the invention. Patent owners and inventors should not be confused. If the idea was conceived by an employee, you should have the employee assign his rights to the company. This is the proper way of making sure that the company will own the rights to the invention, and not by adding yourself as an inventor simply because you own the company. If the idea was conceived by a lower ranking employee, it does not mean that you have to list the employee’s supervisor as the inventor. The key is to determine who contributed to the conception of the invention that is claimed in the patent application.
Because there are many misconceptions about patents, it is important to seek the advice and guidance from a registered patent attorney.
Roland Tong is a Senior Patent Attorney at Brooks Kushman, PC and can be reached by phone at (213) 622-3096 or by email at firstname.lastname@example.org. Brooks Kushman, PC (www.brookskushman.com) is a full service intellectual property law firm in Detroit and in Los Angeles with attorneys having advanced degrees in various technical fields.
Credit insurance, which has been around for many years, is a custom financial tool that protects a business from losses due to insolvency or past due/slow pay from their customers.
This problem of insolvency or past due/slow pay from customers isn’t expected to stop any time soon, either. U.S. corporate default rates are expected to rise this year, as marginal companies that already refinanced debt in the last few years stumble because they didn’t reduce debt and just pushed out payment schedules, according to a USA Today article.
“This insurance product can be a cost-effective device for transferring risk — premiums are tax deductible while reductions in bad debt reserves are not,” says Shelley C. White, assistant vice president with SeibertKeck.
Smart Business spoke with White about why the value of this insurance is consistently being demonstrated during economic financial crisis time and time again.
How does credit insurance coverage work most effectively?
If your company does business in which it extends a line of credit for merchandise orders or other accounts payable, then this insurance protects you against losses because when you extend credit to a business, your own financial solvency gets tied in with that account. Coverage can apply to a single debtor or a greater spread of risk by including all of your unquestioned buyers in excess of a certain dollar amount. Annual sales of at least $1 million can make the program more cost effective.
Why should employers look into buying this type of coverage?
Business owners must be more attentive regarding the management of their accounts receivable in the face of this global economic climate. There are more business failures both domestically and internationally. This was borne out by increased worldwide demand for credit insurance across all geographies in the first quarter of 2012, according to the Global Insurance Market Quarterly Briefing. The United States saw a modest increase in demand of less than 10 percent, with the largest demand increase in Asia.
Credit insurance provides catastrophic loss protection that can be used by businesses of all sizes and by all business sectors. There are many benefits as to why a business owner will purchase this coverage. Some include:
- Increasing credit to your existing customer base and extending credit to new customers.
- Improving cash flow.
- Enhancing bank financing by increasing borrowing capacity. Banks will lend more against insured receivables.
- Reducing bad debt reserves and freeing up cash.
- Utilizing it as a risk management tool to improve business planning by elimination of unknown risk.
How does credit insurance protect you better than just looking at a customer’s payment history?
Unfortunately, payment history is not a valid predictor of default. Close to 50 percent of all payment defaults rise from stable and long-term customers. One sudden loss could have a devastating impact on you and your business. Consider that your receivables are a concentration of all your cost and profit, and in many cases, you create them based on a customer’s promise to pay. Therefore, there is a tremendous amount of risk facing your business. Credit insurance is a great tool to remove this disastrous risk from a balance sheet.
What do business owners need to know about purchasing this insurance?
The level of indemnity ranges from 80 to 100 percent depending on your credit management experience, accounts receivable portfolio and premium target. Policies are designed to fit a business owner’s need for coverage. Risk retention comes in the form of co-insurance and deductibles and helps in lowering the premium. Co-insurance is a percentage of the loss you retain on each insured account.
There are only a small handful of carriers that specialize in this type of coverage. Each will have their own risk appetite, underwriting philosophy, and method to how they structure and administer their policies.
Underwriters will research, approve and monitor the accounts you want to insure. They also will approve coverage limits on the customers you want to insure. You will want to provide underwriters with a balanced spread of risk that will offer best pricing and terms. It’s important to clarify with the underwriter your maximum terms of sale, lead times for customer orders and note any special circumstances that might require additional coverage.
You can insure the entire accounts receivable portfolio or a select number of accounts. The premium will be based on your loss history, customer credit quality, spread of risk, and deductible and co-insurance levels in the policy. Usually the premium is less than half of one percent of insured sales.
Your customers’ payment history is not a valid evaluator of their failure to pay. Having a carrier watching over your covered accounts and helping evaluate credit limits is a great advantage to a business owner’s risk management plan. Nonpayment and slow pay by your customers will weaken a company. Credit insurance can help protect a company’s biggest asset — your own business credit.
Shelley C. White is an assistant vice president with SeibertKeck. Reach her at (330) 867-3140 or email@example.com.
Insights Business Insurance is brought to you by SeibertKeck Insurance Agency
Employee productivity is important to any business’ success, and if an employee is too overwhelmed by personal or behavior problems to perform at his or her highest level, the company’s productivity will suffer as a result.
To address those issues, many employers are turning to Employee Assistance Programs (EAPs). An EAP can help identify issues facing troubled employees and direct employees to resources such as short-term counseling, referrals to specialized professionals or organizations, and follow-up service to help them address those issues, says Ron Carmassi, a sales executive with JRG Advisors, the management arm of ChamberChoice.
“EAPs offer a safe environment where an employee can discuss problems with a counselor who can make a confidential and professional assessment and provide referral to a mental health professional if necessary,” says Carmassi.
Smart Business spoke with Carmassi about EAPs and how they can assist your employees, improving both the lives of your workers and the productivity of your business
What are EAPs designed to accomplish?
First created many years ago in response to businesses’ concerns about the impact of employee alcohol and drug abuse on bottom-line productivity, employee assistance programs are now designed to deal with a much wider and more complex range of issues that are confronting today’s work force. Modern EAPs are designed to help workers with issues including family and/or marriage counseling, stress, depression, financial difficulties, crisis planning, illness, pre-retirement planning and other emotional, personal and wellness needs.
The expansion in the scope of EAP counseling is often attributed to the change in our social fabric. Double wage-earning households, an increase in the number of single parent households, economic crises, changing and more demanding career patterns, and technological advances have created new and different types of stresses, which affect the health and productivity of many employees.
Individuals experiencing a personal or family crisis and who are under chronic stress often have nowhere to turn for advice and assistance other than the EAP that is offered by their employer.
What is the benefit to employers that offer EAPs?
Many employers realize a direct link between employee well being and employee productivity. The difference in value and productivity between happy and unhappy employees can be profound, as personal and work-related problems can manifest themselves in poor job performance, adversely impacting the company’s overall productivity.
Employers often perceive that the biggest advantage of an EAP is the positive impact it can have on employee productivity, but there are other benefits as well. For example, businesses offering EAPs often see a reduction in absenteeism, an increase in morale, fewer work-related accidents, a reduction in incidents resulting from substance abuse and an overall reduction in medical costs, resulting in a significant savings for the company.
In addition, employers that include an EAP as part of their benefits package are often viewed as more ‘employee-supportive’ than competitors that do not offer this type of program. That, in turn, makes the EAP a tool for both employee attraction and retention, potentially resulting in lower turnover.
Another advantage of the EAP is that it frees up the company and its personnel to focus on operations, rather than devoting work time to issues that are not directly related to productivity, deadlines and other business activities that result in growth and added revenue.
What should an employer consider when choosing an EAP?
The characteristics of EAP programs vary, so it is important to compare programs to understand exactly what you are getting before you sign on. In addition to cost structure, other factors to consider before purchasing an EAP include the qualifications of the staff that will provide counseling.
Staff should be professionally licensed with established relationships with local and/or national health groups and they should also be engaged in continuing education initiatives so that they remain current. Be sure to inquire about the extent of training services because EAP training programs vary in scope and subject matter.
Convenience of services and responsiveness of staff are also important factors to consider, and business owners should seek out EAP providers with facilities in the same geographic region as the company so that employees can visit before, during or after work. The EAP should also include a toll-free telephone line that is operational around the clock
What would you say to employers who say they can’t afford to sponsor yet another benefit?
While employers understand the value of an EAP, many are concerned about the cost of implementing and maintaining this type of program, particularly with increasing costs for other insurance and employee benefit programs. And while it is true that the employer generally bears the cost of the EAP, many employers are surprised to learn they can institute an EAP at a relatively small expense to the company, often with monthly fees ranging from just $2 to $6 per employee.
More often than not, once employers become involved in an EAP, they come to believe that the return on that investment is well worth the cost.
Insights Employee Benefits is brought to you by JRG Advisors, the management arm of ChamberChoice.
The TV show, “Are You Smarter Than a Fifth Grader?” is fun because it highlights how much young students know that their parents have long forgotten or never knew.
But, measuring up to fifth-graders is equally difficult in other areas. For instance, how would most adults answer this question: “Are you as fit as a fifth-grader?”
“It’s likely that most adults don’t know how fit they are and they are probably less likely than fifth-graders to be able to find out,” says Dr. Michael Parkinson, senior medical director of Health and Productivity, for UPMC Health Plan. “Many employers do health risk assessments for their employees, but they do not realize that the absence of risk does not equal fitness.”
Smart Business spoke with Parkinson about how employers can better gauge and encourage fitness among their employees.
Why compare an employee’s fitness to that of a fifth-grader?
That is certainly an arbitrary standard, but what got me thinking about it was when my fifth-grade son came home with what was called a ‘Fitness Gram’ that showed how he scored in a number of physical tests designed to measure his fitness. What struck me most was how detailed the test was, most especially when you compare it to anything that could pass as its equivalent in the corporate world.
Employers have been measuring and promoting workplace wellness primarily through use of a health risk assessment that measures personal health behaviors and self-reported height and weight, or body mass index (BMI). Many employers add biometric screenings, which include blood pressure and lipid or blood fat levels, as well. And, of course, all employers are now required to pay for preventive care at no cost to their employees.
Are health risk assessments ineffective in measuring fitness?
They have a purpose, certainly, but they can be misleading. In health risk assessments, those whose scores indicate low risk are considered to be the most healthy. But what employers do not realize is that an absence of risk does not equal health. Absence of risk does not equal fitness. To be blunt, in the corporate world, the bar has been set too low on wellness.
How can the bar on fitness be raised?
One of the tests my fifth-grader had to take measured his aerobic capacity and is known as ‘VO2 Max.’ Aerobic testing is rarely, if ever, a part of any corporate wellness test for an adult, even though the information is vital.
Aerobic capacity shows the maximum capacity of an individual’s body to transport and use oxygen during incremental exercise. It is widely recognized as the test that best reflects the physical fitness of an individual.
It is also been shown to be the best single predictor of ‘all cause mortality,’ or how long we’ll live. Greater aerobic capacity has been associated with the ability to better perform both physical and mental work, clearly required in today’s demanding and competitive workplace.
Why should the fitness of employees matter to an employer?
Fitness tests generally assess muscle strength, endurance and flexibility, all of which are of great importance in the workplace. However, unlike elementary students, adults are rarely tested in these areas. Musculoskeletal injuries such as strains and sprains are due often to obesity, lack of core body strength and fitness.
Musculoskeletal injuries are a leading cause of lost workdays, as well as medical and disability costs. Back injuries, slips and stretching mishaps are common work-related incidents that employees face and that could be avoided with improved core body strength.
Is BMI an important measure of fitness?
Body mass index, or BMI, is a measurement test that is a common feature of most health risk assessments and it is used to determine whether an individual’s body weight differs from what is normal or desirable for a person of that height.
BMI is a measurement based on a formula that takes into account your height and weight in determining whether you have a healthy percentage of body fat. In general, BMI is an inexpensive and easy-to-perform method of screening for weight categories that have the potential to develop into health problems. But, again, it doesn’t indicate anything in terms of fitness levels and it doesn’t really say how healthy you are, just that you might be at risk for obesity.
How can employees raise their fitness levels?
Fifth-graders are often more fit than adults because, generally speaking, they are more active. In order to improve fitness, people need to participate in some kind of moderate aerobic activity for 30 minutes a day, five days a week. It does not matter if the 30 minutes is broken into three 10-minute segments.
What’s important is to try to get moving. Some exercise at any level of intensity is better than none as you start to build endurance.
It’s funny to think about comparing employee fitness levels to that of fifth-graders, but the message is serious. Any company that wants to take wellness to the next level should think about measuring fitness the way fifth-graders do, and, in the process, see how their employees measure up.
Insights Health Care is brought to you by UPMC Health Plan.
In a typical commercial real estate transaction, the seller is taxed on any gain realized from the sale of his or her property. However, there are mechanisms available by which the tax liability associated with these gains on sale can be deferred by reinvesting the sale proceeds into another property through a 1031 like-kind exchange. Section 1031 of the Internal Revenue Code provides that no gain or loss shall be recognized on the exchange of property held for use in a business or for investment.
Smart Business spoke with Greg VanKirk, CPA, partner with Plante Moran CRESA, about the benefits and guidelines of exchanging property under 1031 exchange rules and how it compares to a typical real estate sale.
What are the benefits of a 1031 exchange?
The primary reason for a property or business owner to execute a 1031 exchange is to defer taxes on gains incurred on the sale of a property. In essence, you are able to redeploy capital into investments that are greater in scale, more diverse or more aligned with your business or investment strategy. An example that illustrates this could be exchanging a parcel of vacant land for an income-producing property while deferring the tax liability incurred from the original sale.
Regardless of how you reallocate your portfolio within the IRS guidelines, the 1031 exchange strategy allows you more to reinvest at a time when real estate prices are at historic lows. Even if the property or building you are selling is depressed, deferring depreciation recapture is part of the equation.
At this time the long-term capital gains tax rate for individuals is 15 percent for at least the remainder of 2012. If this rate were to rise to 20 percent, as many are currently projecting, more businesses would be expected to take advantage of 1031 exchanges and then wait until a time period when the rate is lower to realize gains.
What are the regulations of a 1031 exchange?
There are some strict rules and guidelines that determine what constitutes a valid exchange. The first stipulates the exchange must be between qualifying properties of like-kind. Most real estate, held for use in the trade of business or for investment, will qualify with the exception that they must both be within the borders of the U.S. Some personal property can also qualify for an exchange, but is not like-kind to real estate. Property that specifically would not be considered qualified includes inventory or stock in trade; stocks, bonds, or notes; other securities or debt; partnership interests; and certificates of trust.
Timing is another significant guideline that cannot be extended for any hardship or circumstance short of a presidentially declared natural disaster. There is a 180-day window during which the seller involved in the transaction must search, identify and close on the purchase of the new property in order for the 1031 exchange to be valid. While more than one property may be identified initially, the property being purchased must be identified as part of the exchange no more than 45 days from the time the seller’s property is relinquished and closing on the new property must be complete within 180 days of the transfer.
The total purchase price of the property to be acquired must be equal to or greater than the total net sales price of the property being relinquished and all of the equity received from the transaction must be used to acquire the property targeted in the 1031 exchange. If the replacement property purchase price is less than the relinquished property, a tax will be applied to the difference. Another fundamental rule requires that the net equity in the replacement property must be equal or greater than the net equity in the property sold, or the purchaser will be required to pay the tax on the amount of decrease.
Finally, the sale must also go through a qualified intermediary— simply selling the building or property and using the proceeds to purchase another disqualifies the exchange. These intermediaries are companies that work full time facilitating such exchanges. A qualified intermediary needs to be an independent organization that will handle the funds from the original sale through the exchange process and then deliver the money to the closing agent. The intermediary will also be responsible for filling out all of the appropriate tax forms and exchange agreements related to the process.
Does the current real estate market favor an exchange?
Every situation is different and an unbiased real estate professional can lay out all of your options to help you determine if a 1031 like-kind exchange is a feasible option. Owners selling their business may want to consider offsetting any gains on real estate by purchasing an income-producing property.
Depressed real estate values on one hand offer appreciation opportunity, while on the other hand limit the amount of quality real estate available for exchange. If the capital gains tax rate increases, experts would expect the amount of like-kind exchanges would increase.
Greg VanKirk, CPA, is a partner at Plante Moran CRESA. Reach him (248) 223-3395 or firstname.lastname@example.org or visit www.pmcresa.com.
Insights Real Estate is brought to you by Plante Moran CRESA
The commercial real estate market has been hard hit the last several years. While the residential market has suffered equally, commercial real estate typically falls the hardest and climbs the fastest. It has seen higher highs and lower lows than many other components of the market, but lenders are beginning to loosen their belts as things begin to slowly improve, says Andrea Bucey-Tikkanen, vice president of commercial real estate lending for Lorain National Bank.
“That many commercial lenders feel cautiously encouraged could be an indicator of improvements to the economy as a whole,” says Bucey.
Smart Business spoke with Bucey about the commercial real estate market and how banks’ lending practices have begun to thaw.
How has the overall commercial real estate industry been performing?
This year has brought the beginning of a recovery within the commercial real estate industry. There is more activity than there has been in some time, and more banks, insurance companies and other financing conduits are back at the table and proactively looking to lend. Since mid-2008, the industry has been fraught with frightened lenders and floundering borrowers. This year, there is more confidence and optimism on both sides of the table.
What has been the effect on commercial real estate developers?
Commercial real estate developers are a strong and resilient breed. The recession caused many within the industry to fail —some previously solid, good developers are out of business. However, the survivors are exceptionally creative and nimble and have less competition. That said, the role of government in the banking world is serving as a buffer; banks continue to be closely monitored, which prevents the pendulum from swinging too rapidly. The pace of recovery is measured and slow.
How have current market conditions impacted interest rates?
Many banks have been absent from the lending arena for a protracted period of time, either because they chose to sit on the sidelines or because their own poor performance forced them to do so. Banks with money to lend have had less competition and a borrowing base that needed capital. Simple supply and demand drove cost, and while the overall interest rate indexes have been exceptionally low for years, banks could — and did — pay little heed to the indexes themselves. Base rates may have been low, but spreads were thick. In recent months, that has changed dramatically. Spreads are greatly reduced from where they were as recently as late 2011.
Banks lending on commercial real estate consistently during the recession were doing so in a challenging and cautious market. The spreads applied during the worst of times reflected the level of risk inherent in the transaction. Interest rates are the way in which a bank is compensated for the risks it is taking. A riskier, more challenging market equals a higher price for the end user which, in this case, is the commercial real estate developer.
Has lenders’ behavior helped or hindered the market?
There have been bad cops and good cops in the lending arena. A number of lenders were so panicked by the economic downturn that they looked for ways to decrease any and all real estate assets within their portfolios, whether they were performing or not. To encourage their borrowers to refinance elsewhere, bad cops used any and all efforts, including applying punitive interest rates and failing to extend maturity dates on otherwise performing loans. The good cops were the lenders that provided capital consistently, in many cases helping to resurrect a challenged asset by providing the dollars needed to refinance. A good cop in this recent environment had numerous lending opportunities on good assets that were simply the victim of circumstance.
Have economic times influenced the types of real estate deals being done?
Absolutely. There are developers that have not only succeeded in recent years but thrived. They responded to challenges by adapting and using the market to their advantage. This can be seen in the number of ‘value add’ projects being financed, which is the purchase — oftentimes for a markedly reduced price — of a floundering project, be it with high vacancy, a failed owner, or a lender desperate to dump an asset. These low prices have provided the developer that has had capital with a unique opportunity to cheaply buy an asset, provide it with a heightened level of attention, affect its turnaround and vastly increase its end value. These types of projects continue to be popular.
Is the recovery sustainable?
There is a ripple effect brought about by the ‘value add’ concept. A landlord who has paid less for his or her asset can charge his or her tenants less rent, which forces neighboring properties to adjust their rental rates downward to maintain tenancy, regardless of the price they paid and the level of debt upon their particular asset. This downward pressure on rents will serve as an ongoing challenge — some would call it a correction — for the foreseeable future.
What actions can a developer take to help improve their odds of success?
There is nothing a banker likes better than an honest borrower. Surviving these past few years has taken talent, perseverance and luck, but it has also forced a level of brutal disclosure. Successful developers have proactively worked with their lenders, disclosing early and regularly fears they have or problems they’re facing. A good lender will listen and help work creatively toward a solution. The end result is mutual success and a healthier market.
Andrea Bucey-Tikkanen is vice president of commercial real estate lending for Lorain National Bank. Reach her at (216) 520-7310 or abucey@4LNB.com.
Insights Banking & Finance is brought to you by Lorain National Bank
Philanthropy can do more than make you feel good. In fact, recent studies show it can improve financial performance, enhance brand image and reputation, drive sales and customer loyalty, and increase a business’s ability to attract and retain employees. Additionally, research has shown when price and quality are equal, more than 75 percent of consumers would switch brands when a company is associated with a good cause.
“Businesses have many ways to establish a charitable giving program, oftentimes choosing to support causes that touch an organization or that their employees feel strongly about,” says Kathleen Zenisek, marketing director with First State Bank. “This may entail supporting national or global causes, which make the nation and the world a better place, but dollars locally spent can have a profound impact on your world and direct marketplace.”
Smart Business spoke with Zenisek about how to localize your philanthropic efforts and support causes that help those in your community.
How can a business learn more about the needs in its local community?
In metropolitan Detroit, there are three programs — Leadership Detroit, Macomb and Oakland — that help local leaders expand their knowledge about the assets and issues in their respective counties and surrounding region.
The nine-month program, which starts in September, requires participants to meet once a month for a day to learn about a specific topic that affects the county, including government, education, health and human services, arts, religion, business, justice, the environment and more. With unique learning experiences, exclusive field trips and tours, and access to a variety of proven leaders, graduates emerge from their experience eager to make a difference.
With so many overwhelming needs, how can a business decide between national or local charities?
Giving locally makes sense because you know where and how your dollars are being spent. Local charities and nonprofit organizations understand the interests and values of the community. They typically have fewer layers of administration, so more of your money is likely to go directly to the cause.
See if your community has a food bank, soup kitchen or children’s home. Think about what you can do in your community to make a difference and think about your passions. With local donations, you don’t even have to donate money; your time can be just as valuable. For example, First State Bank works with a county food bank that supplies food for 55 neighborhood food pantries and every year organizes a Thanksgiving food drive, which engages customers, as well.
What should a company consider if it wants to align its business with a charity?
Many businesses align their community involvement with their strategic business goals. For instance, an ad agency might support its industry by providing an annual scholarship to an aspiring graphic arts student or donating art supplies to needy schools. Construction companies might consider donating time and materials to organizations that rebuild their own communities. Consider your industry and how your talents and resources can help solve a particular social problem.
As a community bank, First State Bank sees declining property values and resultant foreclosures as one of the biggest issues impacting our community. Despite efforts to keep people in their homes, sometimes houses are reverted to the bank, as with one recent homeowner. We then gave the home to a local school district to begin a hands-on building renovation program, and while the framing and drywall were going up, so was the outlook — and housing value — in the neighborhood.
How can businesses consider developing products that help to better the community?
Sometimes it’s as simple and immediate as offering discounted products or services to veterans or seniors. Other times, the effects are felt later on.
For example, the Detroit regional area has been hit hard with foreclosures. With growing interest in ‘purchase-renovation-sale’ as a means to maximize investment dollars and to improve neighborhood home values, First State Bank developed a short-term loan program for people who personally transform injured or distressed properties, then sell. With this program, vacancies can drop in hard-hit areas, tax revenue can return and real estate agencies are able to aggressively market homes with missing parts. From the buyer to seller to next-door neighbor, it’s a win-win situation for the community. We also recognize that some customers truly need help. Partnering with GreenPath Debt Solutions, a local and respected not-for-profit money management organization, customers are offered debt and credit counseling at no cost.
Not all volunteer and philanthropic opportunities need to have clear-cut business goals. The real goal is to find a local cause or two that you can be passionate about and then support them in a variety of ways. Your sincere, enthusiastic involvement will go a long way toward helping your community and business.
How can being a good corporate citizen benefit businesses?
Perception means a lot to consumers. A recent study showed 80 percent of Americans have a more positive image of businesses that support a cause they care about. Two-thirds said they’re more likely to trust businesses that are aligned with social issues.
Participating in or sponsoring an event may persuade consumers to do business with you. Community events that used to be free to residents are now being re-evaluated, presenting opportunities for businesses to step up. Saving the community’s fireworks, tree lighting ceremony, or movies or concerts in the park from cancellation can make your business a hero.
Giving closer to home can improve quality of life and build a stronger local community.
Kathleen Zenisek is the marketing director with First State Bank. Reach her at (586) 445-6717 or email@example.com.
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The constitutionality of the Affordable Care Act was upheld recently by the U.S. Supreme Court, defining and solidifying many legal obligations employers have when it comes to health care coverage for employees.
“The crux of the Affordable Care Act is to make ‘minimal essential coverage’ more available,” says Christopher J. Carney, chair of the Labor and Employment Practice Group at Brouse McDowell. To achieve this, the Act contains provisions referred to as the ‘employer mandate’ or ‘play or pay.’
However, he says the Act does not require employers to provide minimal essential coverage.
“It is more accurate to state that the Act requires employers that meet a certain minimum employee threshold to make available minimal essential coverage or pay a penalty for failing to do so,” says Carney.
Smart Business spoke with Carney about some of the law’s caveats and what employers need to know in order to become compliant.
How does the law impact employers of various sizes?
The employer mandate provides that ‘large’ employers, or those with 50 or more full-time employees, are required to offer full-time employees health coverage effective Jan. 1, 2014. Businesses with fewer than 100 employees will also be eligible to shop for plans in health benefit exchanges that each state is required to establish as part of the Act.
What are the consequences of noncompliance?
Starting in 2014, large employers will be assessed an annual fee of $2,000 per full-time employee — in excess of 30 employees — if any full-time employee is not offered coverage and enrolls in and receives an income-based tax credit to participate in an insurance exchange. For example, assuming at least one employee satisfies the tax credit requirement, a business with 51 full-time employees that does not offer coverage must pay a monthly penalty of 21 (51 total employees minus 30) times the per-employee penalty amount, i.e., one-twelfth of the annual $2,000 per full-time employee. For purposes of the Act, a full-time employee is one employed at least 30 hours per week on average.
Furthermore, if an employee opts out of an employer’s health plan — either because the employee’s share of the premium would exceed 9.5 percent of his or her income, or because the employer’s or insurer’s share of the total cost of benefits is less than 60 percent and the employee obtains a tax credit for coverage in a health insurance exchange — the employer is also subject to a penalty.
Under these circumstances, the employer must pay a monthly penalty of one-twelfth of $3,000 multiplied by the total number of full time employees who obtain the income-based tax credit for that month. This penalty is capped at one-twelfth of $2,000, multiplied by the total number of full-time employees.
How do the state exchanges come into play?
The Act provides for government-run health benefit exchanges from which individuals and employers with fewer than 100 employees can purchase insurance. Plans in the exchanges will be required to offer four levels of coverage that vary based upon factors such as premiums and out-of-pocket costs. Premium and cost-sharing subsidies will be available for low-income families.
Each state is required to have its own health benefit exchange. If a state chooses not to create its own health benefit exchange, then one will be set up by the federal government. Ohio Gov. John Kasich says the state will not create its own and will rely upon the federal government’s health benefit exchange.
Considering the efforts to derail the Act, what would you advise an employer to do?
Employers should continue with their efforts to comply with the Act’s requirements and some provisions need immediate attention. For example, employers and insurers must provide a Summary of Benefits and Coverage for the open enrollment period beginning on or after Sept. 23, 2012. The SBC is similar to, but does not supplant, the Employee Retirement Income Security Act’s Summary Plan Description. If an employer’s SBC fails to satisfy the requirements of the Act, then the employer is subject to a penalty of $1,000 per failure, per participant. Another example is that the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 for 2012 and going forward.
I would not expect a repeal of this law any time soon. Therefore, employers should determine the extent to which the new rules apply. Because the Act does not apply uniformly, an employer should review the law to identify which requirements apply and the compliance deadlines corresponding to each requirement.
When must employers come into compliance with the law?
The Act was passed on March 30, 2010, and not all changes set forth were imposed immediately. Generally, the provisions that were not controversial went into effect first. The provision prohibiting health plans from denying coverage or limiting benefits for children under the age of 19 because the child has a pre-existing condition went into effect immediately. But the ‘play or pay’ provisions for employers go into effect after Dec. 31, 2013.
What can legal counsel offer as employers look to come into compliance with the law?
Particularly when an employer is close to the 50-employee threshold limit, legal counsel can be helpful in identifying and analyzing employer options and obligations. The ‘play or pay’ regulations have not even been promulgated yet, but expect them to be complicated. Issues that will likely require the assistance of counsel include how to account for independent contractors to whom employee functions have been outsourced and whether common ownership of business would require the aggregation of employees.
Christopher J. Carney is Chair of the Labor and Employment Practice Group at Brouse McDowell. Reach him at (216) 830-6825 or firstname.lastname@example.org.
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On June 28, 2012, the Supreme Court announced its decision to uphold the majority of President Barack Obama’s 2010 healthcare law. Known as the 2010 Patient Protection and Affordable Care Act (PPACA), the law includes hundreds of provisions.
The Supreme Court upheld the mandate that all nonexempt individuals maintain a minimum level of health insurance coverage or pay a tax penalty. It also upheld new reporting requirements and mandates for employers that offer coverage to their employees, as well as coverage and benefit requirements for health insurers.
While the Supreme Court’s decision confirmed that Americans will see significant changes to the health care industry in the coming years, it also left many individuals wondering about the personal impact this decision will have on them, their families and their businesses.
“While the Supreme Court’s ruling does not affect current coverage for most health insurance policy holders, it is understandable that many are wondering how the ruling affects them personally in the future,” says Marty Hauser, president of SummaCare, Inc. “And although we don’t have all the answers, we do know some things to help employers and individuals work their way through the mandates and provisions of PPACA that may affect them.”
Smart Business spoke with Hauser about what the Supreme Court’s decision will mean to individuals and employers in the coming years, as well as what employers should be doing now to prepare for the upcoming mandates.
What does the Supreme Court’s ruling mean for the average American?
The ruling of the Supreme Court and the provisions under PPACA affect everyone, from the individual with pre-existing conditions to someone who can’t afford health insurance, to the employer that provides coverage to employees and the health insurance company that administers the plan and benefits. Overall, the goal of PPACA is to make health care coverage available to more individuals than ever before.
The ruling not only affects the availability and affordability of health care, but it offers peace of mind for individuals by requiring insurers to provide 100 percent coverage of some benefits, including preventive care and wellness visits, immunizations and some types of counseling and testing.
What are the next mandates and/or provisions that will affect employers and individuals?
Effective Aug. 1, health insurers are required to cover women’s preventive services at 100 percent. This includes well-woman visits; gestational diabetes screening for women 24 to 28 weeks pregnant and those at high risk of developing gestational diabetes; human papillomavirus DNA testing every three years; sexually transmitted infection counseling and HIV screening and counseling; contraception and contraceptive counseling; breastfeeding support, supplies and counseling; and domestic violence screening.
In addition to newly covered preventive services for women, another provision of PPACA that will affect employers and individuals is the Summary of Benefits and Coverage provision. The SBC provision applies to both fully-insured and self-funded group health plans and is meant to help employers and individuals compare benefits between different insurers and/or plans.
The SBC document is designed to describe health plan benefits, including what the plan will cover, limitations and coverage examples. The SBC document must be provided to participants of a health plan enrolling or re-enrolling on or after Sept. 23, 2012. Check with your insurer to determine their process for providing the SBC.
What mandates go into effect in 2013 that will impact employers and/or plan sponsors?
Upcoming mandates slated to go into effect in 2013 for employers and/or plan sponsors include Form W-2 reporting for the 2012 tax year; a $2,500 limit on employee contributions to health Flexible Spending Accounts for plan years beginning in 2013; a requirement for employers to notify employees of the availability of health insurance exchanges; a 0.9 percent tax on earned income of high-income individuals under the Federal Income Contributions Act; and a 3.8 percent Unearned Income Medicare Contribution tax for high income individuals/families.
What mandates go into effect in 2014 that will impact employers and/or plan sponsors?
Mandates effective in 2014 include the ‘pay-or-play’ mandate; employer certification to Health and Human Services regarding whether the group health plan offered to employees provides minimum essential coverage; an increase in permitted wellness incentives from 20 percent to 30 percent; automatic enrollment of new employees in a group health plan for large employers with 200 or more employees; a 90-day waiting period limit for coverage; coverage of certain approved clinical trials for non-grandfathered plans; guaranteed availability and renewability of insured group health plans; prohibition on pre-existing condition exclusions; and complete prohibition on annual dollar limits, which will primarily impact those in the individual market.
What should employers/plans sponsors be doing now to prepare for upcoming mandates?
The most important thing employers or plans sponsors should do now is to start talking to their insurer about insurance options available to them and consider their long-term goals and strategies. It’s also important to figure out when the mandate and provisions will affect the coverage and benefits offered to employees, as some mandates and provisions go into effect upon renewal and are not automatically required, and not every provision applies to each plan type.
Because parts of the mandates and rules aren’t fully written, guidance is still needed. Employers and plan sponsors should pay attention to information regarding upcoming items as information is released.
Marty Hauser is the president of SummaCare, Inc. Reach him at email@example.com.
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