The ability to prevent check fraud is critical for businesses of all sizes and across all sectors. After all, checks are still the predominant method of payment for goods in the United States. Fortunately, new technologies are making the process of safeguarding against check fraud simpler and more cost-efficient.
“There are billions of checks written in the United States every year with over 30 billion projected in 2008,” says Regina Calhoun, manager of national check sales for Comerica Merchant Services. “Protection against check fraud and its associated losses becomes paramount to a business’s financial vitality.”
Smart Business spoke with Calhoun about how checking solutions have advanced, the advantages of accepting checks and what kind of fraud protection and security measures are available.
How have checking solutions advanced in recent years?
Checks are converted electronically now at the point of sale. Checks are taken for COD (cash on delivery) for catalog merchants or any type of mail order merchant. Anybody that is shipping goods and products can take checks via the Internet. Also, the consumer can mail a check into the merchant and have the funds guaranteed.
Advanced checking solutions available through banks make the process of check acceptance simple. Merchants just need to check their customers’ IDs and get a phone number that they write on the check. The merchants can then convert the check, deposit the check into their bank, or use back office conversion, which is ideal for merchants who have locations throughout the country and want their accounting centralized. Back office conversion allows each individual branch to scan their checks through a machine so they don’t have to physically take them to the bank every night.
How does the cost of check acceptance compare to credit card acceptance?
There is an incredible difference. All of the regulations pertaining to credit cards are consumer driven. Most of the issuing banks allow a consumer to dispute a charge for up to 180 days. Check guarantees, which include stop payment coverage, eliminate the risk of charge-backs for businesses. Let’s say I write a check to a merchant and then become unhappy with that merchant. Even if I put a stop payment on the check, the merchant will still be covered on those funds.
How do delayed payment programs work?
A delayed payment program allows merchants the ability to provide customers with a flexible payment option that helps increase the probability of closing a sale. This service allows the customer to delay check settlement for up to 30 days while the merchant receives full funding within 48 hours. Furniture companies, auto dealerships and those in the medical field often take advantage of delayed payment programs because they get their money upfront. Everyone is happy because the customers gets their product and the merchant is funded within 48 hours.
What kinds of fraud protection and security measures are available with checks?
Checks operate off of databases with assigned risks and parameters. It’s like when you use a credit card to make a very large purchase that falls outside of your normal spending parameters; your credit card company will be on the phone with you. In the checking world the merchant receives a response called ‘call center.’ The merchant calls its bank who speaks with the writer of the check to confirm his or her identity and make sure the transaction is not fraudulent.
When accepting a check you want to make sure it is not a check printed off of someone’s computer. There is a specific type of magnetic ink on legitimate checks. One of the easiest things to do is to rub your fingers along the MICR line that contains the routing and account numbers. If the ink rubs, it is a fraudulent check.
How should a company go about selecting a financial institution that will meet its check processing needs?
Research, research, research. There are several Web sites out there, including the Better Business Bureau’s, that have extremely good information. After you’ve conducted your initial research, put together the criteria you’re looking for, go out for bids and have people come in and present their products. Ultimately, it’s important to pick a financial institution that will be the best fit for your business.
REGINA CALHOUN is manager of national check sales for Comerica Merchant Services. Reach her at (713) 898-1584 or firstname.lastname@example.org.
It is crucial for entities involved with construction projects to protect themselves through risk allocation. The most effective way to allocate risk is by properly utilizing both insurance and indemnification.
“The ultimate financial risk is borne by an insurance carrier with the identity of the insurance carrier being determined and controlled by the various indemnification and insurance provisions in the contract documents,” says Robert Chaklos, executive partner of Secrest Wardle’s construction practice group.
Smart Business spoke with Chaklos about risk allocation, the importance of insurance protection and indemnity provisions, and other methods that can be deployed to mitigate risks.
Why should a construction company use risk allocation?
To fully comprehend the concept of risk allocation, one must understand the structure inherent in construction projects where the financial risks exist. The construction entities or companies involved in construction projects all face some level of financial risk, not only during the course of the project, but for many years subsequent to its completion. These risks vary, and are a function of the construction entities’ position within the hierarchy or chain of command common to most construction projects. These entities typically include the owner of the project, the architectural team in place to design the project, the management team in place to manage the project, and finally the contractors and/or subcontractors contracted by the owner and/or the management team to perform the actual construction work. Not surprisingly, the financial risk is most significant at the top of the hierarchy, but risk allocation is used to shift those financial risks down the chain of command as contractual leverage decreases.
What role does insurance play in risk allocation?
The first level of risk allocation is through insurance protection afforded either directly to the construction entity by its own insurance carrier outside the contract documents or indirectly through insurance requirements within the contract documents. Therefore, insurance coverage is provided either by the insurance carrier contracted directly by the construction entity or by insurance carriers contracted by construction entities down the chain of command, who are contractually bound to provide insurance coverage for the protection of those entities up the chain of command.
For example, the owner of the project will typically have its own insurance policy in place, but will also require that the management team and contractors provide insurance protection to the owner, as well. Likewise, the management team will allocate risks to its own insurance carrier, as well as to those insurance carriers of its contractors through insurance clauses in the contract documents. Typically, the language in the contract documents and in the insurance policies will provide that the contractor’s insurance coverage is primary.
Why is indemnification such an important consideration?
Indemnity provisions will allocate the financial risks down through the chain of command so that the construction entities with the most financial risk, i.e., the owner and the management team, allocate their financial risk to the contractors. This is justified as simply a cost of doing business; the contractors have very little, if any, contractual leverage. The strength of the indemnity provision and the effectiveness of its use in risk allocation is determined by the precise language of the indemnity clause. The entity bearing the risk through an indemnity provision is typically the contractor most directly responsible for the work that caused the financial risk that must be allocated. Fortunately, if each contractor has its own insurance policies in place, then even though the contractor bears the financial risk between construction entities, it is the insurance carrier that ultimately bears the financial responsibility.
What other steps can be taken to mitigate risks?
In addition to allocation, risks can also be mitigated or eliminated. This can be accomplished by the owner through provisions in the contract documents, or through due diligence performed both before and during the project. Since the financial risk typically results from the work performed by construction companies, control over the company and its work force by the owner can mitigate or eliminate the risk. These steps would include the owner’s due diligence in selecting the members of its construction team, which ensures that a qualified and experienced work force will complete the project. The contract provisions can also be used to ensure that the work being performed is monitored directly by each employer and is supervised by the management team. Focusing on safety and quality of work will typically reduce and potentially eliminate property damage and personal injury or improper workmanship and the use of defective materials. The owner may also require that all work be performed and all materials be used pursuant to government and safety standards.
ROBERT CHAKLOS is executive partner of Secrest Wardle’s construction practice group. Reach him at email@example.com or (248) 539-2824.
The U.S. Commercial Service is designed to help small and medium-size businesses expand into international sales. With trade specialists in more than 100 American cities, the primary thrust of the U.S. Commercial Service is to equip businesses with the knowledge and tools necessary to navigate the foreign market.
Over the past several years, a confluence of factors including free trade agreements, technological advancements, and U.S. government programs and partnerships have converged to simplify the export process.
According to B. Peter Knudson, senior vice president and regional manager, international trade finance at Comerica Bank, now is the ideal time for businesses to engage in exporting.
“One of the few bright spots in the U.S. economy today is the export market,” he says. “Because of the weakness of the dollar and the weakness of the U.S. market, exports have been increasing and have created a lot of new opportunities for U.S. companies, particularly small- to mediumsize enterprises.”
Smart Business spoke with Knudson about the U.S. Commercial Service, the services it provides and how a company can secure export financing.
What is the U.S. Commercial Service?
The U.S. Commercial Service is the trade promotion arm of the U.S. Department of Commerce. Its primary purpose is to help create economic opportunity for American workers and businesses. The U.S. Commercial Service does this through promoting trade and investment with the objective of promoting prosperity and a better world throughout. The U.S. Commercial Service provides the opportunity for companies particularly small-to medium-size ones to utilize the resources of the U.S. government.
What type of assistance does the U.S. Commercial Service provide to exporters?
The U.S. Commercial Service has trade specialists in 107 U.S. cities and more than 80 countries who will work with companies directly to either help them begin to export or to increase sales internationally. Services include market research, trade events, introductions to qualified buyers and distributors, education, and counseling and advocacy throughout the export process.
How does the U.S. Commercial Service partner with corporate organizations to build awareness of exporting opportunities?
The Department of Commerce selects certain companies to help promote their activities through a ‘forced multiplier effect.’ Basically, it joins forces to leverage both the private company that is its partner and the government resources that the Department of Commerce has. It looks to partner with private-sector companies that it considers best in class. Some of its partners include UPS, FedEx, eBay, the law firm Baker & McKenzie and, most recently, Comerica Bank.
How are corporate partners selected?
Corporate partners are selected on a number of criteria, including being considered as best in class, having a recognizable name, being regionally or globally strong, and having a stake and being involved with international trade and business. Also, they must possess a significant customer base that is either currently seeking to expand its international business or seeking to enter the international business field.
How can a company secure export financing?
A company must first have a relationship with a commercial bank, and it must have the ability to qualify for credit under normal credit terms. An important component for companies that are looking to expand into exporting is what we term trade cycle financing. This method of financing allows banks to help companies finance the sale of their products from the initial order through to the collection of the accounts receivable. There are many ways in which they do this, including working with the Export-Import Bank of the United States and obtaining export credit insurance from private companies. Banks also provide normal working capital as well as assistance in helping hedge the foreign currency risk that might be involved with international business.
How should a company proceed if it is interested in working with a partner of the U.S. Commercial Service?
Through their partnership with the U.S. Department of Commerce, there are corporate organizations that can be of assistance, including Comerica Bank. They can introduce a potential exporter to one of the trade finance specialists of the Department of Commerce and help them identify markets, identify distributors and provide financing so they can be successful in their business expansion.
B. PETER KNUDSON is senior vice president and regional manager, international trade finance at Comerica Bank. Reach him at (310) 297-2849 or firstname.lastname@example.org.
Integration plays a crucial role in mergers and acquisitions transactions. In order to blend operations into one harmonious company, it is important to create an acquisition integration strategy in advance of a deal’s closing.
A well-executed integration strategy is designed to quickly align the management and employees of both companies around the transaction’s fundamental goals. Without a solid integration plan in place, momentum within both organizations may suffer.
“A successful integration requires a disciplined and well-structured integration plan with clear objectives and timetables,” says Rick Parent, vice president of Gumbiner Savett Inc.
Smart Business spoke with Parent about how to integrate acquisitions, who should be involved with the process and the importance of blending the cultures and employees of two different companies.
Why is integration such an important aspect of an M&A transaction?
Mergers and acquisitions are designed to build market leadership and create long-term shareholder value by fast-tracking the capabilities of an entity. Only a successful integration of a business combination will allow the newly combined entity to achieve its objectives. A successful M&A transaction requires a structured and disciplined integration of people, processes and systems. It is important to identify as many integration issues as possible during the preplanning and due diligence phase of an M&A transaction in order to mitigate risk and increase likelihood of integration success.
How should a company go about building an acquisition integration strategy?
In order to build a successful acquisition integration strategy, executives of the merging entities need to understand and properly address risk areas of the integration process such as culture, communication and growth targets. A sound integration strategy includes building a good operational partnership between the two company’s cultures and developing clear and timely communication strategies. It is also important to budget and prepare for the additional costs that will be required during integration. A common myth is that a result of a business combination is an eventual reduction of ‘back-office’ costs. Oftentimes, the opposite occurs, and management is perplexed as to why the administration costs of the combined entities are greater than the sum of the administrative costs of the entities prior to the combination.
Who should be involved with the integration process?
The integration process should be managed by a transition team. On top of that team should be an operational executive with excellent strategic and interpersonal skills. It is important that the operational executive devote full attention to the integration process and be relieved, to the extent necessary, of daily responsibilities during the transition period. The new entity should dedicate adequate resources to the transition team and should even consider hiring outside consultants.
What are the keys to a successful integration?
One key part of the integration plan is managing organizational and cultural changes. The inability to effectively integrate work cultures is largely considered the No. 1 reason for M&A failure. Other key parts of the integration plan include communicating the vision and business logic of the deal to employees and investors, separating the post-merger integration process from the core business, monitoring core business performance and establishing early warning systems to alert management to any decrease in revenue. Lastly, it is important to constantly challenge decisions and assess progress after the integration is deemed complete.
What steps can be taken to blend the cultures and employees of two different companies?
The first step is having a clear understanding of the level of disparity between the organizational cultures of the two companies. Once that understanding is achieved, the executives need to focus on the way decisions are made in their companies and come up with a way of combining the different decision-making approaches. At the core of corporate culture is the company’s mission and values. It is important to understand the extent to which the most talented people from each company adopt the new mission and values.
How long should the acquisition and integration process last?
The timing and duration of the integration process is of crucial importance for the pay off that can be realized. Otherwise, delays in the process can lead to operational inefficiencies and unplanned cost overruns. The integration process should start at the earliest when the structure, jobs and roles in the new organization are known.
RICK PARENT is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
The business industry has long desired to avoid stale claims. Over time, the record retention policy of a company may result in the destruction of documents that could support its defense. Witnesses move or change jobs and can be hard to track down. Memories fade, and the potential for a meaningful investigation can disappear. Michigan law, through statutes of limitation, limits the time period in which a plaintiff can bring suit against a prospective defendant.
“Generally speaking, a statute of limitation begins to run from the time the claim accrues,” says Michael Crow, executive partner at Secrest Wardle. “The claim accrues, for the most part, at the time the wrong occurs.”
Smart Business spoke with Crow about the “discovery rule” and recent legislative developments that could significantly impact businesses operating in Michigan.
What is the ‘discovery rule’?
The ‘discovery rule’ protects diligent plaintiffs who fail to bring a timely claim because of either the latent nature of their injury or the inability of the plaintiff to identify the proper defendant. The ‘discovery rule’ applies as an exception to the statute of limitation when the plaintiff discovers an injury and the causal connection between that injury and the defendant’s breach of duty to the plaintiff.
In other words, if a plaintiff has no reasonable method by which to determine whom to sue for his injuries or, by the nature of his injuries, is unaware for some period of time that he was injured, the ‘discovery rule’ provides a window of time during which a plaintiff may file a lawsuit after ‘discovery’ of the relevant facts. The ‘discovery rule’ has been applied for decades by the Michigan Court of Appeals and the Michigan Supreme Court.
How was the ‘discovery rule’ recently interpreted by the Michigan Supreme Court?
In July, 2007, the Michigan Supreme Court issued its opinion in Trentadue v. Gorton, 479 Mich 378 (2007). This case involves the November 1986 rape and murder of Margaret Eby crimes that remained unsolved for years. In 2002, DNA evidence established that Jeffrey Gorton, an employee of his parents’ corporation, which serviced sprinkler systems on Mr. Eby’s property, committed the crime. In August 2002, upon learning of the identity of Ms. Eby’s killer, the Eby estate filed suit against Gorton, his parents and his parents’ corporation.
The plaintiff’s complaint alleged several theories of negligence. The defendants argued that the action of the Eby estate was barred by the three-year statute of limitations for wrongful death actions. The plaintiff asserted the common law ‘discovery rule’ applied as an exception to the period of limitation. The trial court and the Michigan Court of Appeals accepted the plaintiff’s argument and denied defendants’ motion for summary disposition.
The Supreme Court in Trentadue, however, reversed the lower courts, dismissed the plaintiff’s claim as ‘time-barred’ and thereby functionally eliminated the ‘discovery rule.’ The Court held that no ‘court-created’ or common law ‘discovery rule’ exists. Only when the Legislature has specifically included a ‘discovery’ provision in a statute of limitation (i.e. medical malpractice; certain actions against contractors) is it available to extend the time within which a lawsuit may be filed.
How will the decision affect businesses that operate in Michigan?
Under the Trentadue decision, Michigan defendants no longer need to brace for the prospect of lawsuits that may not be filed for years. Other than the few isolated situations where the Legislature has codified a ‘discovery’ based exception to the statute of limitation, the statute of limitation will be strictly applied.
The Trentadue decision provides a measure of certainty regarding document retention, investigations and memorializing witness testimony. Such a holding will also provide businesses additional certainty regarding future finances.
The response of the Michigan Legislature to legislatively reverse the Trentadue decision was immediate. In September, 2007, a bill was introduced to incorporate the ‘discovery rule’ into the statute of limitations. In essence, they are responding to the Supreme Court’s position that the ‘discovery rule’ only exists if codified by the Legislature.
The proposed statute, which is currently before the Judicial Committee, eliminates language that provides when a lawsuit may be filed and employs a new trigger adopting the ‘discovery rule’ approach from the common law. Significantly, the proposed statute goes even further and provides that ‘discovery’ only occurs when the plaintiff knows the name of the intended defendant. Should this proposed legislation be enacted, the benefits of Trentadue would be eliminated and the potential for stagnant claims would increase. We are continuing to monitor these legislative developments for our clients.
MICHAEL CROW is an executive partner at Secrest Wardle. Reach him at (248) 539-2804 or firstname.lastname@example.org.
Section 404(b) of the Sarbanes-Oxley Act, known as SOX 404(b), requires that companies evaluate the effectiveness of their internal controls over internal reporting and have this audited by their external auditors. Since the Sarbanes-Oxley Act was passed in 2002, the SEC has delayed SOX 404(b) compliance for smaller reporting companies. The delay can be an extended window to improve internal controls.
“Complete your testing and management report so there is sufficient time for the auditors to perform their test of your work, and also their own independent testing before the reporting deadline,” advises Richard Kam, principal for Gumbiner Savett Inc.
Smart Business spoke with Kam about SOX 404(b), what is required of a small reporting company’s auditors and how to prepare for an SOX 404(b) audit.
When do smaller reporting companies have to comply with SOX 404(b)?
Currently, the SEC requires the company’s independent auditors to provide their attestation to management’s SOX 404(a) report for fiscal years ending after Dec. 15, 2008. For companies with calendar year ends, this would be as of Dec. 31, 2008. However, in a Dec. 12, 2007 SEC release, a one-year delay was proposed, which has not yet been approved by the SEC, but it appears likely.
What is required of the auditors?
Auditors of public companies are bound by the standards set out by the Public Company Accounting Oversight Board (PCAOB). PCAOB Auditing Standard No. 5 (AS5), An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements, sets the requirements of the auditors. It is available to anyone for free on the PCAOB Web site (pcaobus.org). I recommend that CEOs, CFOs and their staff read the standard to understand what their auditors will be asking of them.
What can a business expect from auditors in their compliance with AS5?
The auditors will consider the work performed by management in reaching the conclusion reported under SOX 404(a). As indicated by the title of AS5, the auditors will integrate their audit of internal controls with their audit of the financial statements. This should allow for efficiencies as the auditors may be able to reduce testing in the financial statement audit if the internal controls are found to be reliable. The auditors will take a top-down, risk-based approach. This allows them to focus on the areas they consider to be of highest risk. Some areas of concern to the auditors may include controls over:
- significant and unusual transactions
- journal entries and adjustments, especially those made at the period end and at the financial-statement level
- related-party transactions
- areas requiring significant estimates by management
Taking into account their understanding of the company and its system of internal control, the auditors will consider each financial statement line item (cash, accounts receivable, inventory, etc.), the nature and complexity of the account and the related reporting risks. The auditors will consider what can go wrong as well as the associated controls at the entity level and at the activity level. Consideration will be given to the strength of entity level controls when designing tests to perform on the activity level controls.
The auditors will also consider the reporting process, which may include:
- how information is entered into the general ledger
- the selection of accounting policies
- initiation, authorization and recording of information in the general ledger
- recurring and nonrecurring adjustments to the quarterly and period-end financial statements
- how quarterly and annual financial statements and related disclosures are compiled
Procedures the auditors will perform to test the operating effectiveness of a control will include a mix of inquiry of appropriate personnel, observation of operations, inspection of relevant documentation and reperformance of the control.
How important a role does the control environment play in the auditing process?
A key component of entity level controls is the control environment. This addresses the ‘tone at the top.’ The auditors will consider if management promotes effective internal control over financial reporting and has sound integrity and ethical values, and if the board or audit committee understands and exercises the appropriate level of oversight on financial reporting and internal control.
How should management prepare for the SOX 404(b) audit?
Management should base its 404(a) evaluation of the effectiveness of the company’s internal control over financial reporting on a suitable recognized framework (e.g. COSO framework). Re-emphasize to the board and audit committee their responsibilities related to internal control over financial reporting.
Communicate with your auditors early about what the scope of your testing will be, including the number of transactions you intend to select and the period you will cover. Discuss the way you are setting up the files and who will be doing the testing. Conduct testing throughout the year to correct any control deficiencies and retest them for effectiveness before the year-end audit.
RICHARD KAM is a principal for Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
Amaster plan serves as a community’s guide to the future. Containing a plan, or set of various plans, along with descriptive text, graphs, charts, illustrations and pictures, the document describes what a community currently looks like and what it wants to be in the future.
“Master plans enable companies to assess, on a number of levels, whether the community it is considering for a relocation or expansion project is a good fit,” explains Steven Joppich, executive partner at Secrest Wardle.
Smart Business spoke with Joppich about master plans, why they are so important in the development process and how they can aid businesses looking to relocate or expand.
What is a master plan?
To answer this, it is necessary to first understand that most communities have zoning laws or ordinances. Those ordinances adopt a zoning map and written regulations that essentially divide up the community into various districts. Each district allows certain types of uses of the property in that district and has special requirements regarding height, parking, property line setbacks and so forth.
The master plan is more of a guide for the future sometimes it is even referred to as a future land use plan. It is usually prepared and adopted by the community’s planning commission, but the city council or township board will have input in the process. Once it is completed, the city or township uses it to determine how properties might be rezoned or whether any special uses might be considered for properties throughout the community. In Michigan, each community is required to review its master plan at least once every five years to make sure that it remains up to date with changing circumstances.
Why are master plans important to the development process?
It is important to prospective developers because it is an upfront disclosure to them of the types of uses that the community is looking to have located within its borders. If a developer sees a piece of land that looks ripe for development, he or she would then be able to look at the zoning laws and the master plan to see if that developer’s vision for the property meshes with the community’s vision for the area.
It should be recognized, however, that a prospective developer may not want to solely rely on the current master plan and zoning ordinances for this assessment because the master plan is regularly reviewed and updated, and zoning ordinances can be changed. As a result, among other things, communicating directly with the planning, building and community development departments of your local government should be seriously considered, as well.
How can a community’s master plan help a company that is looking for a place to relocate or expand its business?
A company looking for a place to relocate or expand will have many other concerns beyond simply meeting the requirements of the zoning laws. It may be looKing for a market for its goods. It may have shipping needs. It may be looking to locate close to a certain industry or a major client. It may have a number of officers and employees that will be relocating, or it may need to staff the facility with new employees. Those officers and employees may want to live close to work, they will be concerned about home values and standards of living, and they will need good schools and after-school programs for their kids, not to mention entertainment, cultural and social activities for themselves. A community’s master plan is an excellent source for information regarding these types of issues.
Is there a way to deviate from a community’s master plan or zoning if a company finds a property that fits its needs in all other respects?
Yes there is, but most communities are reluctant to do so. Usually, it will only be considered if it can be shown to the satisfaction of the reviewing body that the proposed use is a reasonable alternative to what is shown on the master plan and that the property cannot be used otherwise. Among other things, it will also be crucial to establish that the proposed use does not negatively impact the surrounding properties and the community’s overall master plan objectives.
How soon should a company establish contact with the local government when it is in the process of seeking out a site to develop in a community?
It depends, but in most cases, it is best to establish contact as early on as possible. Some communities are looking for the right businesses to develop or redevelop areas of their communities. You can often identify this from their master plans and Web sites.
STEVEN JOPPICH is an executive partner at Secrest Wardle. Reach him at (248) 539-2816 or firstname.lastname@example.org.
The U.S. dollar, still the benchmark for world currency, has been sagging the past several years. A detriment to U.S. consumers and U.S. companies that import products, the weakening dollar benefits some players in the global marketplace.
“Exporters will generally see their sales increase as the price of their product becomes cheaper in foreign currency terms,” says Gary Loe, vice president, foreign exchange at Comerica Bank.
Smart Business spoke with Loe about the weakening dollar, who benefits from it and why he expects the dollar’s value to increase as the year progresses.
What are some of the factors behind the weakening of the dollar?
Current economic factors that may be signaling recessionary conditions in the U.S. economy and could undermine confidence of U.S. dollar-based assets include the downturn in housing, turbulence in the equity markets and job woes. Additional interest rate cuts by the U.S. Federal Reserve could further erode the return of investors as lower interest rates may produce additional inflationary pressures, lowering the dollar’s value. Also, continued budget and trade deficits tend to weaken the U.S. dollar.
We are in an election year and increased political uncertainty could warrant a more cautious approach to holding assets based on the U.S. dollar. Lower oil prices could reduce demand for U.S. dollars, as oil is priced in U.S. dollars globally. More and more countries are diversifying away from the U.S. dollar as their principal reserve currency and are substituting the euro, pound, yen and others.
Who benefits from the weakening dollar?
Exporters will benefit from the weakening dollar. Mutual funds with overseas investments rise along with the currency they are denominated in as long as the funds don’t hedge against currency movement. People holding foreign currency accounts or notes will benefit as well as people holding gold; gold is priced in dollars across the globe and generally rises when the dollar loses value as buyers using other currencies drive up the price as it becomes cheaper. Also, our trade deficit should decrease as U.S. entity sales outside the country increase, and U.S. companies will buy less from foreign trading partners. The weak dollar is encouraging foreign manufacturers to set up factories in the U.S., bringing jobs and other economic benefits.
How does the dollar’s lower value help exporters?
The weak dollar makes American goods and services less expensive in the global marketplace. Therefore, exporters should increase their sales. The entities buying the exporters’ goods will be able to purchase them with fewer units of their own currency. Also, sales could increase as buyers shift purchases they currently transact with entities in other countries.
Do you expect this trend to continue?
In the long run, we should see the trend continue. The two major factors driving this are, one, the current account deficit a broad measure of U.S. global trade and investment and, two, the federal budget deficit. Experts don’t expect either to narrow significantly anytime soon, so in the long term, the dollar could very well keep falling.
What is your forecast for the dollar in the remainder of 2008?
There are many reasons why we could end 2008 with the dollar at a higher value than today. The U.S. Federal Reserve has made it clear that it wants to be ‘ahead of the curve,’ meaning it would rather risk a little inflation than bear the consequences of a recession. Unlike in the recent past, when interest rate cuts weighed on the dollar, new cuts may be viewed by the market as a monetary stimulus and spur investment, help correct housing imbalances and aid in minimizing the effects of a recession.
The dollar trend of the past few years, coupled with a stabilizing to improving equity market, will tend to encourage U.S. dollar demand (investment) as U.S. investments are bargains compared to anytime during the past few years. Higher oil prices (higher inflationary pressures) will tend to increase demand for U.S. currency. The upcoming elections could help the U.S. dollar as policies are re-enacted, amended or abolished. At the end of the day, foreign central banks will not want super-strong currencies, as it tends to diminish demand from the world’s largest consumer market the United States for foreign goods, which is needed to boost the rest of the world’s economies. I believe dollar positives will outweigh dollar negatives, and we will end the year with a slightly higher dollar.
How do fluctuations in the dollar’s value affect today’s global economy?
The U.S. has the biggest impact on the global economy and its monetary unit value, and fluctuation has the greatest effect relative to other currencies. The value affects company profits, budgeting and manufacturing costs. It has ramifications on capital investment, plant openings and closings. For example, some companies that have outsourced customer service and call centers to India have returned these centers to the U.S., since the weak dollar has eroded the cost benefits of operating overseas. It all underscores the importance of hedging currency risk to help mitigate variances from companies’ forecasts and plans.
GARY LOE is vice president, foreign exchange at Comerica Bank. Reach him at (800) 318-9062 or email@example.com.
Employee stock ownership plans, or ESOPs, are the most common form of employee ownership in the country.
Originating more than 80 years ago, ESOPs were first recognized by the government in 1974. Now thousands of companies have these plans covering millions of employees.
Among other things, ESOPs can be used to provide shareholder liquidity, to motivate and reward employees, and as an attractive form of debt financing. “There are many ways a company can benefit from an ESOP,” says Michael Savoy, managing director of Gumbiner Savett Inc.
Smart Business spoke with Savoy about ESOPs, how they have evolved and the benefits they provide.
How have ESOPs evolved over the years?
Employee stock ownership plans have been around since 1916 when Sears Roebuck decided to fund its pension plan primarily with company stock. The basic concept was that the employees’ ownership of Sears stock was not only a good retirement benefit, but was also an excellent way to motivate employees to improve the company’s profitability and, thus, the value of what they owned. In the early 1970s, the concept caught the eye of Senator Russell Long of Louisiana, who was the chairman of the Senate Finance Committee, and the whole idea gained momentum within the government. In 1974, with the help of Senator Long, the concept of employee ownership was formally recognized by the federal government. Since then, a series of tax laws has been enhanced and modified to provide tax incentives that encourage employee ownership.
How can a company benefit from the establishment of an ESOP?
Firstly, a business owner can, under certain circumstances, sell his or her shares to an ESOP and either defer or, in some cases, completely avoid paying taxes. Companies can also make tax-deductible contributions to ESOPs, which results in a tax shield that creates value. Employees who purchase all or part of a company through an ESOP have a unique opportunity to build wealth via the underlying stock appreciation without assuming any personal liability. Finally, one of the most important benefits that companies can realize from the establishment of an ESOP is what I call the productivity benefit. Published studies have shown that companies report significant productivity improvements after establishing an ESOP.
In what ways can ESOPs spur employee motivation?
If employees own a piece of the business, they do things differently than if they are just employees. At an ESOP seminar I attended, a CEO related a story about a receptionist that now owns a piece of her company. The receptionist was put in charge of purchasing office supplies. All of a sudden, she started taking bids and shopping around for the best prices. This resulted in the company saving tens of thousands of dollars. This is just one aspect of productivity improvement, and it illustrates how people at all levels take pride in ownership.
How do ESOPs create a shareholder liquidity alternative?
Most business owners today have the majority of their personal net worth tied up in their business. Through the use of an ESOP, they are able to sell some, or all, of their company to employees. They can still maintain control of their company and, thus, diversify their assets while in most cases paying absolutely no taxes on the transaction.
What is the difference between a nonlever-aged ESOP and a leveraged ESOP?
The difference is that no borrowing takes place with a nonleveraged ESOP while borrowing takes place with a leveraged ESOP. A nonleveraged ESOP is similar to other tax-qualified pension or profit-sharing plans. A company can make annual tax-deductible contributions, generally limited to 15 percent of employee salary, to an ESOP in the form of cash or stock in the company. If you donate additional shares of stock to an ESOP, not only is the company getting a tax deduction for the value of those shares, but there is no cash coming out of the company.
In a leveraged ESOP, the company borrows money, either through the shareholder or a third party, such as a bank, to repur-chase shares from the existing shareholder. In the case of a leveraged ESOP, the limit for annual tax-deductible contributions is 25 percent of employee salary. An additional benefit is that payments of both principle and interest are tax deductible.
How do ESOPs create value?
Aside from the potential productivity improvements, there are also many economic benefits. As we discussed earlier, with nonleveraged ESOPs, if you donate shares of stock, your company is making no cash contributions and, thus, tax savings are realized simply through the issuance of additional shares of stock.
For instance, if a $1 million dollar contribution were made in the form of stock, a company with the 40 percent corporate tax rate would be saving $400,000 in taxes and there would be a $400,000 cash flow improvement. There is no other type of vehicle that allows this type of transaction.
MICHAEL SAVOY is managing director of Gumbiner Savett Inc. Reach him at (310) 828-9798 or firstname.lastname@example.org.
All businesses have trade secrets, including, but not limited to, proprietary research and development, strategic plans and personnel practices. One of a company’s most important assets, it is paramount to safeguard trade secrets.
“Senior management must recognize the critical nature of trade secrets and properly protect them as they would any other valuable asset,” says Bruce Truex, senior partner at Secrest Wardle.
Smart Business spoke with Truex about what elements of a business are eligible for trade secret protection, how long protection lasts and how confidentiality agreements can be crafted to protect trade secrets.
What elements of a business are eligible for trade secret protection?
Every business has information that it wants to keep secret. But not all information used by a business qualifies as a trade secret. A number of requirements must be met to qualify for that status. First, a trade secret must consist of information. Second, the information must derive economic value actual or potential from the fact that it is a secret. Third, the information cannot be generally known by the public or others in the industry. Fourth, the information must be treated as a secret and be subject to reasonable efforts to maintain its secrecy.
Trade secrets encompass both business and technical information. Trade secrets include unpatented inventions and processes, future products, non-public company documents, test data, formulas, patterns, compilations, programs, devices and techniques. The courts have recognized as trade secrets customer lists, customer information, marketing and business plans, strategic plans, surveys, data, pricing information, research, financial information, manuals and instructional methods. Even negative information concerning failed projects or programs has been treated as a trade secret.
How long does trade secret protection last?
The protection of trade secrets is very different from the protection afforded to other forms of intellectual property. Unlike copyrights, patents and trademarks, there are no expiration dates for trade secrets. A business can maintain information as a trade secret simply by keeping it secret. There are no forms to fill out or applications to register. As long as the trade secret remains a secret, the law allows for a perpetual monopoly concerning the secret information. In contrast, most patents are valid for only 20 years.
Unfortunately, trade secret protection is reasonably easy to lose compared to other forms of intellectual property protection. A trade secret, under certain circumstances, can be legally reverse engineered; that is, by starting with a known product and working backward to find the method by which it was developed. Trade secrets offer no protection from individuals who develop the same secret independently. Trade secret status may also be lost over time. A new technology today may, over a short period of time, become generally known and quite common.
How are trade secrets interpreted by the courts?
Simply not telling anyone about confidential information is not enough to preserve its secrecy. Courts require active steps to ensure the secrecy of valuable information. Trade secret protection stems from the common law of the 1800s. Today, Michigan has adopted the Uniform Trade Secrets Act, which defines trade secrets. The Act is fairly broad and protects almost any information that provides the owner of the secret with a competitive edge.
How should confidentiality agreements be crafted to protect trade secrets?
Confidentiality agreements, which have been approved by the Michigan courts for some time, are contracts between two parties to not disclose to others certain information that the parties have identified as confidential.
A confidentiality agreement should contain a description of the confidential information not to be disclosed. It should also describe the information that will be excluded from the definition. Every confidentiality agreement must detail how the information is to be handled by the recipient. The recipient must agree not to disclose the information to third parties. The agreement should also restrict the use to which the confidential information may be put. Typically, an employee is prohibited from using the confidential information for any matter other than the employer’s business.
The most important remedy to include in a confidentiality agreement is a provision allowing the owner of the information to obtain injunctive relief if the agreement is breached. The provision should state that both parties agree that any breach of confidentiality would result in irreparable harm, thus avoiding the need to submit proof of harm in court before obtaining an injunction. The agreement should also provide that the party breaching the promise of confidentiality must pay the other party’s costs and attorney fees incurred in enforcing its rights under the agreement.
BRUCE TRUEX is a senior partner at Secrest Wardle. Reach him at email@example.com or (248) 539-2852.