Chelan David

Friday, 30 June 2006 08:44

Personal risk management

There are a number of different perks that can be awarded to executives. Country club fees, use of a company car, limousine services and complimentary tickets to sporting events are just a few of the common ones.

A less glamorous, yet ultimately more rewarding, benefit is providing access to a personal risk management program. After all, as executives’ incomes grow so does their need for the best in personal insurance products. Offering this type of benefit allows a company to protect their executives on a personal level. Meanwhile an executive’s assets can grow unhindered by liability issues.

“Today, personal risk management equals wealth protection,” says Seth Gilman, vice president of Sander A. Kessler & Associates Inc. “A risk management program is ideal for companies with a large amount of highly-compensated executives.”

Smart Business spoke with Gilman about why it makes sense to offer executives a personal risk management program, what factors should be considered when choosing a program and how companies can benefit from offering this service.

What is the importance of a personal risk management program for business owners and executives?
Most successful individuals have very complex, ever-changing risk profiles that demand sophisticated and specialized risk management services. Ultimately, you need to try and align the resources that are available out in the market that include insurance, risk management, employment and security issues. All of these issues need to be addressed.

Just as business owners and executives would address such issues on a business basis, they need to also address them on a personal basis. Ultimately, by working through this process, they will be able to secure the peace of mind that accompanies making sure that the assets and lifestyles that they’ve worked so hard to achieve are fully protected.

What exposures or concerns do most successful business owners and executives have about their current program?
The No. 1 issue that concerns business owners is personal liability. Because of their increased public prominence, their multiple homes and larger extended families, a single serious liability issue can wipe out a large percentage of their wealth and erase all of the benefits they achieved from their prudent financial planning.

What factors should be considered when determining the correct program?
Because the number of wealthy business owners and executives has grown so dramatically, there are some new insurance products that are designed to cover not only their primary homes and autos but also their vacation homes, yachts and art collections. These products are specifically tailored for the high-net-worth family. When seeking coverage, they want to make sure that they have the correct insurance contract that covers their requirements. They should work with insurance companies that are experienced in meeting the needs of high-net-worth households and who have the type of contracts that are appropriate.

How can a company benefit from offering this type of program to its executives?
This type of program provides a valuable service to top executives. It demonstrates to the executive that not only are they appreciated on a business level, but that they will be taken care of on a personal level. This can be done by giving executives access to the marketplace at no cost to the company itself. The executives are responsible for the premium, but are awarded a significant discount. For example, if the company has a large number of highly compensated executives, they can access excess liability policies with very high limits and receive a large discount based on volume. These are technically individual policies that the executives pay for, but because the company offers them, and it’s all within one company, they can receive discounts of up to 50 percent. This is a great perk for executives because they can have everything taken care of for them inhouse. Many times, they are so busy that it can be difficult for them to take care of these concerns at home. It’s an efficient and effective way to get those folks covered.

What types of companies offer this kind of perk?
Obviously, it doesn’t make much sense for just a business owner or a company with only one or two executives. But for a company with a number of highly compensated executives, it can be advantageous. Also, it is a great way for companies to make sure that their executives are not only taken care of on a professional level, but also on a personal level.

SETH GILMAN is vice president of Sander A. Kessler & Associates Inc., a property and casualty insurance and employee benefits firm. Reach him at (310) 309-2200 or

Thursday, 29 June 2006 20:00

Your financial fingerprint

Everyone has his or her own unique financial fingerprint. That’s why it is important to have a customized financial plan that is tailored to meet your specific goals and objectives.

While it’s common knowledge that creating a suitable financial plan is important to ensure future security, sometimes other pressing matters take precedence. For many busy executives, the demands of career can eclipse the need for personal financial stewardship.

“Many times, business owners are very busy running their own businesses and can ignore their personal financial situations,” points out Stephen Kearns, senior vice president and regional manager of wealth and institutional management at Comerica Bank. “Since both are interrelated, it’s very important to take a look at how one pool of assets affects another.”

Smart Business spoke with Kearns about the importance of having a customized financial plan, what should be included and how to find a financial planner that has your best interests at heart.

Why is it important to create a customized financial plan?
A customized financial plan can literally be the blueprint for a solid financial foundation. As an individual who may be a business owner or be of high net worth, it is important to take a look at your overall financial situation as it relates to assets, expenses, lifestyle — currently and beyond retirement — and how you want to pass your assets on. It’s not unusual for people to be so concentrated on one particular area of their finances that they ignore another area to their detriment.

What are some of the components involved in developing a tailored plan?
Developing a plan is a step-by-step process that should take a look at, among other things, specific financial objectives. For instance, how much of an education fund will be necessary to see your children through college? What will be needed for a financially secure retirement? How can an individual maximize the bequest to heirs and minimize taxes?

These are the types of questions that one can anticipate being asked during the financial planning process. The quality of the results of a good financial plan depends on the information that is given to the financial planner upfront. Also, it’s important to note that a financial plan should be reviewed regularly. It should not be looked at as a snapshot in an individual’s life; it should be viewed as a fluid, changing document.

How should business owners transition their business when planning for retirement?
They need to answer some very fundamental questions. For example, do they want to pass the business on to a family member or do they want to sell the business outright? What type of control do they want to have in the process?

The sale of a business can be one of the most heavily taxed transactions in the tax code. That’s why it’s important to approach the entire planning process from a perspective that takes into account tax efficiency and one that ultimately helps to determine the best strategy for that particular situation.

What type of impact does inflation have on retirement funds?
When you combine the income that you expect to receive from Social Security, personal savings and investment income, the outlook for retirement may actually appear very healthy. But the impact of inflation over the years can seriously erode the earning power of those resources. For example, if inflation averages 4 percent over the next 15 years, your buying power drops dramatically. In other words, $1,000 today would be worth a little over $500. Over 25 years, that $1,000 may be worth only $350. Part of the planning process should be to develop a strategy that emphasizes preservation of your purchasing power while using all possible means to reduce and control investment risk.

How should one go about screening a financial planner to make sure that he or she has your best interests in mind?
It’s important for a financial planner to be a full-time specialist who is not burdened by the need to sell products or earn commissions. Objectivity is key when developing a proper financial plan.

Some of the questions that one might ask of a financial planner are: Does the financial planner or the financial planning organization have the ability to recommend nonproprietary investment products and services? Do they have a network of tax specialists, CPAs and estate-planning attorneys that they can refer to when working on a financial plan? Do they have experience in creating plans for business owners or high-net-worth individuals? Also, one should not be afraid to ask to see a sample financial plan in order to get an idea of the depth and quality of a typical financial plan that is produced by the individual or the firm they’re speaking with.

STEPHEN KEARNS is a senior vice president and regional manager of wealth and institutional management at Comerica Bank. Reach him at or (310) 281-2428.

Wednesday, 17 May 2006 12:55

Short term versus long term?

Change can be a powerful tool. In fact, in a dynamic business world, maintaining the status quo can be imprudent. Overhauling production techniques, deploying a new customer service model or replacing key personnel are all moves that can help a company flourish.

But when implementing organizational change, it is crucial to keep an eye on the long-term prize.

“When we push back the short-term mentality and try to look at the longer term we make better decisions,” says Don St. Clair, vice president for enrollment management and marketing and adjunct faculty member of organizational leadership at Woodbury University.

St. Clair spoke with Smart Business about organizational change, the dangers of ineffectively communicating change to employees and the importance of establishing metrics upfront.

What are some of the reasons that companies implement organizational change?
The most obvious reason is that there is a performance gap: there’s a gap between what is and what we would like to be. It could be that the organization is underperforming, it’s not meeting its sales or customer service objectives, or it’s not innovating in an appropriate manner. Then there are some forward-thinking organizations that adopt the principle of, ‘If it ain’t broke, fix it anyway.’ Those are organizations that are always looking to improve and always looking to be ahead. Organizational change may be implemented; not in response to a problem, but simply to forestall problems and stay ahead of the competition.

What are the dangers of poorly communicating the purpose of organizational change?
It’s probably the most often-seen mistake. We sit in the executive suite and we come up with really good ideas. We put together a plan and we assume that because we know the basis for the idea and the change that it’s going to trickle down to everybody else — and it doesn’t.

Consequently, when change is happening and people don’t know what’s going on, it’s human nature to assume or fear the worst. If you’re going to engineer successful organizational change, people have to have the opportunity to buy into that change. At the very least, you want to them to accept the change, but what you really want is for them to embrace it.

How have new technologies affected how organizational change is communicated?
Think how many channels for communication there are and how quickly information spreads. If something happens in Tel Aviv or Baghdad, we know in 15 minutes. The same thing is going on in your organization. E-mail has profoundly changed the nature of communication because it is instantaneous and the corporate rumor mill can now fly at the speed of the Internet. Simply having a meeting and telling people about change are no longer enough. You’re going to have the meeting and then the people are going to have their own interpretations. What you have to do is embrace all of the methods of communication that your employees are embracing and communicate as quickly and clearly as possible.

How can management help alleviate employees’ stress about change?
The best way to alleviate stress is to let people know what’s going on, why it’s going on, how it’s going to happen and when it’s going to happen. Just because you tell people what’s going on doesn’t mean that everyone is going to love you; they may not like the change and they may be resistant. But if you’re communicating and informing, at least you have a chance to get them on board. Also, it can help to give employees the opportunity to voice their opinions. We forget that a 50-year-old executive can still learn something from a 25-year-old entry-level employee. If you give people the opportunity to talk back with you, in a positive sense, they have the opportunity to voice their concerns and get the physical part of the stress out.

Once in place, how can a CEO or business leader measure the effectiveness of the organizational change?
Imagine that we’re playing a football game and, before the game started, we didn’t know that a touchdown was six points, an extra point was one point and a field goal was three points. Then we got in the game, somebody crosses the goal line and we all huddle around and ask, ‘How many points was this worth?’ It’s not effective and we can’t use this approach in business, either.

Metrics have to be set in advance of the change. Before you start the process, you have to identify what you want out of the change and how you know if you’re getting that. The metrics can be anything: improved customer-satisfaction indexes, improved profitability, lower costs, and so on. If you don’t know what you’re looking for, you won’t know if you’re getting it.

DON ST. CLAIR, vice president for enrollment management and marketing at Woodbury University, teaches in Woodbury’s Innovative Masters in Organizational Leadership program. Reach him at

The basic focus of the Federal Trade Commission’s franchise rule is to provide prospective franchisees with pre-sale disclosure about the contract they would be entering into, and about the company that’s franchising the concept.

Proposed changes to the FTC rule, which have been in the works for more than a decade now, aim to benefit franchisees and franchisors alike. Franchisees will receive more information during the disclosure process, while franchisors will face less of a burden in navigating through a tangle of complicated laws.

“Over the years, we’ve gone from a situation where it was very difficult for a franchisor to comply with the federal law and with the laws of the various states,” says Susan Grueneberg, a partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department. “The FTC and the states have really made strong efforts to increase the ability to comply with these laws in a meaningful and uniform manner for franchise companies.”

Smart Business spoke with Grueneberg about proposed amendments to the rule, how both franchisees and franchisors can take advantage of the changes, and what some of the common legal disputes between the two parties are.

When will the new FTC franchise rule become effective?
That’s a question we’ve all been asking for quite some time now. The rule-making process began in 1995 — the original rule was actually first effective in 1979 — and for the past 10 years, there have been a series of comment periods, drafts of changes to the rule and hearings. It culminated with the Staff Report to the FTC in August, 2004. Since then, we’ve been waiting for the final rule to be issued.

What are some of the rule’s proposed amendments?
The one that jumps out at people is a change to the disclosure format. The current FTC rule has its own format for disclosure to franchisees, but the states — through a group called NASAA (North American Securities Administrators Association) — had adopted a format called Uniform Franchise Offering Circular (UFOC) Guidelines. The FTC had previously decided that this format would be acceptable as well, so the new rule adopts many of the elements of the UFOC format.

The new rule also would provide some additional exemptions from the disclosure requirements, and it takes the element of business opportunities out of the franchise rule. The FTC will be promulgating a separate rule to cover business opportunities.

In regard to disclosure requirements, what are some of the additional proposed changes?
One of the exciting things that the new rule would provide for is electronic disclosure. Since the early 1980s, there have been extremely dramatic developments in the way that people communicate information, and the new rule would provide for that. It also would eliminate the requirement that disclosure be provided at the first personal meeting. Then there are some specific disclosure additions, including franchisor-initiated litigation and, under certain circumstances, disclosure about franchisee associations.

What were some of the old rules that caused a point of contention between franchisors and franchisees?
There is some tension in the area of earnings claims and whether or not information about how much a franchisee will be able to earn from a franchise opportunity should be mandated. The FTC does not require that this information be disclosed. Another point of contention is whether the FTC should regulate the relationship itself. In other words, when and under what circumstances a franchisor can terminate or refuse to renew a franchisee’s contract.

What are some of the legal disputes that can arise between franchisors and franchisees?
Termination and nonrenewal often cause disputes between the two. The concepts of the market area in which the franchisee is operating and territorial protection are other areas where franchisor and franchisee disputes tend to arise.

How can both a franchisor and franchisee take advantage of the looming revisions?
From a prospective franchisee’s perspective, the changes are positive, because prospective franchisees like to have electronic access to documents, and this would make that possible. There is also more information in the disclosure that they will be receiving, which is a positive development for them.

Franchisors, meanwhile, will have the advantage of additional exemptions available when dealing with sophisticated or experienced franchisees. Also, the changes tend to promote uniformity, although the states will have to make some changes along the way, too, in order to increase the uniformity once the changes to the FTC rule are adopted.

SUSAN GRUENEBERG is a partner in Alschuler Grossman Stein & Kahan LLP’s Transactional Department. Reach her at

Friday, 31 March 2006 04:33

Talking up a storm?

Having a functional voice is like having an operable computer. That is, you take it for granted until it’s taken away. Our thoughts, views and ambitions are all communicated to others via the power of language.

And in Los Angeles, Hollywood types aren’t the only people who are deeply impacted by voice problems or disorders.

“It isn’t just singers, actors and high-level businessmen, but also teachers and lawyers,” says Dr. Gerald Berke, chief of the Division of Head and Neck Surgery at the UCLA Medical Center. “These are people who rely day in and day out on their ability to communicate.”

Smart Business spoke with Berke about the UCLA Voice Center (which was established under his direction) about the causes of voice disorders and how you can keep your keep voice healthy.

How common are diseases or disorders of the voice?

The larynx is a very robust organ, so we kind of take it for granted. It’s really only when we lose our ability to communicate that we realize how much of our self-identity is built around the way that we present our voice and our language to the external world. The problems that occur are fairly frequent, especially in people who use their voices in their profession.

What are some of the causes of voice disorders?

They range from rare to common. Some patients have neurological voice disorders that can accompany strokes or other degenerative diseases. Others have mass lesions on the vocal cords. There are people who just start using their voice improperly because they develop bad habits. There are people who abuse their voices and abuse their intake.

A very common [problem] is acid coming up in the back of the throat and bathing the vocal cords for a length of time. Oftentimes, this is silent, and patients don’t even recognize that it’s happening. That is probably the most common cause of voice disorders, and it can lead to a lot of problems in individuals if it’s not recognized and taken care of.

For many business executives, public speaking is a vital function. How can they keep their voices healthy?

Steps to take include getting enough rest, eating the proper diet, not drinking wine late at night and avoiding smoking. Also, rest your voice when you’re not giving a public presentation so that you’re not over-using it.

What steps do patients go through when they visit the Voice Center?

Most patients are either referred by a singing coach, a voice therapist or a physician. But, certainly, we’re willing to see anybody.

When patients come in, they first get a complete history and physical examination of their head and neck area. Then we usually perform an analysis of what their voices are like and how they sound. Then we take photographs with high-speed cameras or stroboscopy. These are analyzed, and we come up with diagnoses and treatment plans.

The Voice Center is composed of a multidisciplinary team of experts. How do team members work as a cohesive unit to provide expert care?

[An examination] usually involves an evaluation by at least one physician, a speech therapist and possibly a vocal coach as well. We have the most modern analysis equipment available, and we see things that other doctors have failed to recognize just because our ability to capture the anatomy of the larynx is so much better than other places.

What challenges have you faced in getting funding for the center?

The center was created by the generosity of two UCLA donors who recognized the importance of having a place like this on the West Coast and in Los Angeles. Through their generosity and philanthropy, we have been able to bring this center into fruition. We always had a small voice center, but we’ve never had it in a localized area where everybody could be with the most modern equipment.

In addition to analysis equipment, we’ve been able to purchase some of the most up-to-date treatment equipment, which allows us to do many things right in the office. Heretofore, patients had to go to sleep with general anesthesia in a hospital setting. Oftentimes, we can now just treat them in the clinic, and they can go home immediately. This has really changed the way that we’re able to take care of a lot of patients.

DR. GERALD BERKE is chief of the Division of Head and Neck Surgery at the UCLA Medical Center. Reach him at

Friday, 24 March 2006 07:58

Exit strategies

Regardless of a company’s size, structure, financial conditions or longevity, it is crucial to have a viable exit strategy in place. Without one, the true value of a business can be diminished when it comes time to sell. The reasons for selling a business, of course, vary greatly from individual to individual. So it only makes sense that the right exit strategy depends on an owner’s needs and wants.

“An exit strategy is a process that begins with a vision of what the owner would like,” says Royce Stutzman, chairman of Vicenti, Lloyd & Stutzman LLP and president of Exit Transition Strategies LLC. “It’s setting goals and then checking out the reality of the vision and goals.”

Smart Business spoke with Stutzman about the importance of implementing an exit strategy, key aspects to consider when determining the value of a business, and what tax considerations should be taken into account before finalizing a deal.

Why is it important to have a written exit strategy in place?

Everyone will eventually exit their business — either voluntarily or involuntarily. Without considering and planning for an exit transition, the risk to family, customers, employees and others connected to the business can be significant. Most owners would like to leave in style, and a well thought-through strategy will help make it happen.

When determining the value of a business, what are key considerations?

If the owner wants to sell or gift to a family member, there may be a very different approach than if the goal is to sell to management or an outsider. Family and management many times will not have the cash, so the exit will frequently result in the owner carrying back a note over a period of time. In the case of a gift to a family, or even a sale, the owner wants to minimize the value so the deal can be done. A goal to sell to an outsider might be very different.

In any exit scenario, knowing the value of the business as determined by an independent qualified business valuation expert is the basis for developing the rest of the process. It is a reality check for the owner’s financial goals and development of the tactics that will help assure realizing the vision and goals.

How can business owners best preserve the value of their businesses?

During the whole process, especially the valuation, there will be the opportunity to see how the business performs related to peers. Many times, we see businesses where some performance measure is below peer groups. That may be a sign of weakness. It’s much better for the owner to know that and fix it before soliciting a potential buyer. It’s critical to clean up the balance sheet before going to the market. There is no greater turn-off to a prospective buyer than to find under-performance and sloppy management. Anything and everything that can be done to clean up the financial performance should be done prior to putting the business up for sale.

What information should be included in the financial documents that are shared with prospective buyers?

The best approach when selling to an outsider is to develop what I refer to as an executive summary on the business. It’s an overview of the business, financial statements, customers, industry trends, employees and more, which will tell prospective buyers about the business.

How should the selling process work?

Marketing the business becomes a plan to create a sort of silent auction [with] multiple prospective buyers. The goal is to create multiple interests in which several will hopefully bid the offer higher. The process will usually result in a letter of intent in which the buyer will set forth the price, terms, etc. — all subject to doing (his or her) own due diligence. Then, if everything is as presented, a definitive legal agreement is developed and negotiated. Prior to this process, the business will have already done its own due diligence and will be assured that all the books and records are complete and in order.

What tax considerations should be taken into account?

The structure of the deal can make a significant difference in the ultimate amount of cash in the bank. Tax structure of a corporation can make a difference in excess of 35 percent of the price. A ‘C’ corporation pays a tax, and then — upon its liquidation — the shareholder pays another tax. On the other hand, an ‘S’ corporate structure eliminates the double tax. Given enough lead time, a ‘C’ corporation can convert to an ‘S’ corporation and eliminate the double tax. Several techniques can be used to minimize estate taxes. One we sometimes use is a grantor retained annuity trust. This is especially useful when an owner wishes to transfer to family without using his or her lifetime gift exemption.

ROYCE STUTZMAN is chairman of Vicenti, Lloyd & Stutzman LLP and president of Exit Transition Strategies LLC. Reach him at (626) 857-7300 or

Tuesday, 28 February 2006 12:14

Cash management

Managing cash-flow effectively is a crucial component to the success of any business. Not only does the monitoring of profits pave the way for meeting normal cash obligations, but effective management of receivables, payables and inventory also can safeguard against unanticipated problems.

The goal, of course, is to achieve a positive cash flow, which requires a sound strategy. For instance, cash reserves can be increased by accelerating the collection of accounts receivable. The fact that cash availability decreases when balances are past due underscores the need to actively manage accounts receivable, says Pete Gautreau, a partner at accounting firm Vicenti, Lloyd & Stutzman LLP.

“Managing receivables is critical to cash-flow management — it might be the single most important thing,” he says.

Smart Business spoke with Gautreau about how cash flow should be measured, what steps should be taken if an unexpected shortfall occurs and why rapidly expanding sales doesn’t necessarily correlate to instant riches.

How can a business most effectively manage its cash flow?
By understanding how cash relates to a variety of factors in a business, not just the bottom line. It’s operational and financial efficiencies that are the keys — management of inventory and receivables and payables directly effect cash flow.

How should cash flow be measured?
Measuring implies looking back at a point in time. When we talk about the importance of cash flow management, we emphasize the need to project cash flows. When relationships are properly understood, one can develop a model which will quantify the future affects on cash under a variety of scenarios. Such a model can illustrate how cash flow is actually influenced, giving managers the opportunity to recognize keys, even if they don’t necessarily understand the math.

How far in advance should cash flow projections be made?
They should be made for the purpose of both short-term and long-term planning. Depending on the severity of current cash shortages, weekly rolling cash flow schedules might be very beneficial — if nothing else to ensure that payroll can be covered. But even healthy companies need to look forward, at least a year. Those in the growth mode should project beyond that knowing that it won’t be business as usual in the future.

If an unexpected shortfall occurs, what steps should a business take?
Once an unexpected shortfall occurs, damage control becomes the priority. Relationships with vendors and lenders are at stake, and it’s best to be upfront with these partners. Bad news doesn’t get better with age.

Again, the key is to project and expect these things. Contingency plans can be developed to elude shortfalls before they become imminent.

How can a business improve its cash flow by effectively managing receivables?
Most businesses need to tighten up their credit practices with both existing and new customers. I always advise a business to put a manager in charge to be personally responsible for cash collections. Many businesses will allow customers 45 days to pay before they even start sending out statements and past due notices. Get on the phone and talk to your problem customers frequently.

What are some tips for managing payables?
With payables you have a bit more control. Pay invoices when they’re due and not before. Don’t necessarily jump on early-pay purchase discounts. Businesses should understand the cost savings associated with discounts and weigh that against the advantage of holding on to cash as long as possible.

Also, strengthen supplier relationships. They can be a great source of financing, especially for businesses that are cyclical in nature.

For a fast-growing company, how does expansion affect cash flow?
Fast-growing companies can be the most susceptible to cash flow problems. As sales grow, so do expenses. They need to be monitored closely and kept in check.

Capital acquisitions and maintenance requirements might outpace profitability. Inventories and receivables will grow and tie up cash. Income taxes will be coming due. Again, it gets back to anticipating these dynamics. Work with your CPA, lending partners and insurance providers. Use their expertise to develop future expectations and formulate remedies for potential shortfalls.

Pete Gautreau is a partner at accounting firm Vicenti, Lloyd & Stutzman LLP. Reach Gautreau at (626) 857-7300 or

Tuesday, 28 February 2006 12:06

Board protection

Spurred by the stunning collapses of Enron, Tyco and WorldCom, the Sarbanes-Oxley Act was signed into law in 2002. Among other reforms, this act expanded the responsibilities as well as the potential liabilities of corporate officers and directors.

As a result, says Bruce Friedman, a partner in Alschuler Grossman Stein & Kahan LLP’s Insurance & Reinsurance Practice Group, the environment in which officers and directors operate has changed considerably.

“There is a much more agressive enforcement environment where people are concerned that not only might they be exposed to liability as a director or officer in terms of damages, but they might also be exposed to the SEC regulators,” he says.

Smart Business spoke with Friedman about the types of lawsuits that a company’s officers and directors can be exposed to, how to protect against them and the importance of keeping abreast on current legislation.

What kinds of lawsuits are officers and directors exposed to?
In publicly traded companies, directors and officers can be exposed to lawsuits arising out of the trading of securities. Generally, these are cases that fall under Section 10 of the Securities and Exchange Act. In essence they are fraud and misrepresentation claims where someone sues the company and its directors and officers, claiming that they have misrepresented the financial condition of the company. A claim that commonly goes alongside this is insider training, where a director or officer is accused of trading on material nonpublic information.

There are also potential claims for breach of fiduciary duty that are usually brought in the form of derivative actions. In privately owned companies, you don’t have the public securities exposure that you have when you’re on the board of a publicly traded company, but you still have potential claims by minority shareholders. And in both publicly and privately held companies, there is a possibility of employee-related claims such as discrimination and harassment.

If not prepared, what costs can be associated with defending lawsuits?
Lawsuits in the securities area can cost millions of dollars to defend. That’s also true of significant breach of fiduciary duty claims and derivative actions. Even in the employment area, you’re looking at hundreds of thousands of dollars, if not a million dollars, to defend a serious claim of harassment or discrimination.

How has the Sarbanes-Oxley Act expanded potential liabilities for company leaders?
Sarbanes-Oxley put the directors and officers on the line with respect to representations concerning the company’s financial statements. Sarbanes-Oxley now requires that the top leadership of a company actually sign the financial statements, stating that to the best of their knowledge this is the true and correct picture of the company’s financial condition. So it really exposes the executives to a class-action suit if there is anything wrong. They can be prosecuted by the Securities and Exchange Commission as well.

Has it become tougher for public companies to keep quality members of their board in place due to this act?
I think it is harder to attract board members these days in light of Sarbanes-Oxley and the role of the independent director — the one who’s not employed by the company, (and) is sometimes referred to as the outside director. The independent director plays a very important role now because they have more of a watchdog role with respect to the insiders and that adds to their responsibility and to their exposure.

What advice would you give to a CEO or business leader about keeping current on legislation that might affect officers and directors?
The best advice for a large business entity would be to have the general counsel charged with the responsibility to keep the officers and directors apprised of any changes in the law that would expose them to any new claims. And also they should do some risk-management counseling in the securities, Sarbanes-Oxley and employment areas so that people know where the boundaries are. In a smaller company, that obligation is something that should be assigned to outside counsel.

How important is it to have proper protection in place when trying to attract officers and directors?
Most people will not serve on a publicly traded company’s board or take an officer position unless there is adequate directors’ and officers’ and employment practices liability insurance. One of the first things that people ask after they find out about the company is, ‘Do you have insurance, and how much?’

Bruce Friedman is a partner in Alschuler Grossman Stein & Kahan LLP’s Insurance & Reinsurance Practice Group. Reach him at

Tuesday, 31 January 2006 09:02

What’s it worth?

A business valuation is akin to a publicly traded stock in at least one sense. Both, to some extent, are measured by estimated future cash flows in an effort to arrive at a meaningful valuation.

A private business owner, however, doesn’t have the luxury that an investor has of browsing a stock table to appraise worth. Instead, owners must assess the value of their business by providing accurate financial information and identifying risk factors.

Understanding the factors that determine the value of a business can help a business owner focus on ways to increase both short and long-term profits. Carl Pon, co-managing partner of Vicenti, Lloyd & Stutzman LLP, believes that all business owners should know the worth of the companies that they operate.

“It is critically important to understand what the value of the business is so that the owner or owners can determine where they are in the path towards financial independence,” he says.

Smart Business spoke with Pon about some of the primary drivers behind the value of a business, how companies can avoid mistakes when compiling a valuation report and how a business should go about conducting the search for a qualified valuation professional.

Why should a company conduct a business valuation?
The main reason is because the business is probably the largest single asset in the portfolio of a business owner, so it is very important for them to know what that key asset is actually worth. The second reason is because knowing the value is a critical step in helping a business owner develop a strategy for exiting their business and harvesting the wealth that they have accumulated in the business.

How should a business owner go about determining the value of their business?
There are a lot of Web sites out there and software programs that can do the mechanics of a valuation calculation. But my suggestion is that the business owner contact an accredited business valuation specialist to make sure that those tools are being applied properly.

What are some of the main drivers behind the value of a business?
The two main drivers are the expected cash flows that the business can generate and the risk factors at play in the particular business. When you know the cash flows, the timing of the cash flows, and you know the proper rate to capitalize those cash flows at, you know the value of the business.

The theory of it is fairly simple. From a practical standpoint, the drivers of the value can get down into things such as how much depth or breadth is there in the management team and what are the mechanisms in place to keep that management team with that business.

Does a business valuation produce an exact value?
Most reports state a single value, but when you look at the detail of the reports they often present a range of values that are based on different models and different assumptions. In the sense of a specific value, that’s like a best-guess type value. It’s often more meaningful to see what the reasonable range of values would be.

How can a company avoid common errors when compiling a valuation report?
One of the ways to avoid errors is by selecting a qualified professional to help create the report. Above and beyond that, it is critical to make sure that the underlying information and assumptions that are being used are correct. Because with business valuation models the “garbage in, garbage out” metaphor applies. [It is] the one that we use so much for computer systems — the end numbers are really no better than the assumptions they are built upon.

How should a business conduct a search for a good valuation professional?
My suggestion would be to talk with your business attorney or banker in terms of who they know. In addition to that, you can consult with the three major accrediting organizations for business valuation experts. Those are the National Association of Certified Valuation Analysts, the American Institute of Certified Public Accountants and the American Society of Appraisers.

How important is it to hire a valuation professional that is independent and objective?
It is critical that the valuation analyst be independent in mind and as well as in appearance. Because part of the valuation analyst’s job is to challenge the assumptions that management or ownership often make when they provide information to the analyst.

Carl Pon is co-managing partner of Vicenti, Lloyd & Stutzman LLP. Reach him at

Tuesday, 31 January 2006 08:16

Disabled benefits

For more than a decade, California businesses were stung by the high costs of workers’ compensation. However, several recent reforms have lightened the costs of workers’ comp premiums.

It is crucial, says Kimaili Davis, senior workers’ compensation claims analyst for Sander A. Kessler & Associates Inc., for companies to be current on changes to workers’ compensation. “Informed employers will gain the full benefit of the reform and the end result will be that they will save money on their claims costs,” he says.

Smart Business spoke with Davis about new workers’ compensation legislation, how the reform has affected business operating in California and how a business can minimize claims.

What are some of the recent legislative changes in regard to workers’ compensation?

The biggest change that we’ve seen recently is SB899 that was signed into law on April 19, 2004. The major points that it allowed for were greater employer medical control, a cap of temporary disability payments and treatment to be authorized only within the ACOEM guidelines, which is the American College of Occupational and Environmental Medicine.

There is also a new permanent disability rating system that became effective on Jan 1, 2005.

Why were these changes enacted?

The environment in California has been unfriendly to employers for at least the last 13 to 14 years. There have been some minor reforms that did help, but ultimately the employer was paying a lot of costs.

Before the recent reforms, there was a lot of fraud and abuse by injured workers, and employers had very little ammunition to fight with. One big example that I like to bring up is that a doctor can provide a prophylactic work restriction for an injured worker, which means that the work may hurt the employee, but it’s not an actual work restriction. The doctor would give a rating based on this and ultimately the carrier and employer would pay based on this work restriction.

When the carrier would try to dispute the claim, the doctor would say “Well, it was only prophylactic work restriction, I never said they couldn’t do it.” The average cost of a lost-time claim went from approximately $20,000 in 1991 to $55,000 in 2003 because of benefit increases, larger permanent disability awards and escalating medical costs.

How have workers’ compensation reforms affected California businesses?

[They’ve] made it a more friendly environment for employers. Some businesses that were thinking about going out of state are now staying here. They’ve continued to experience a reduction in workers’ compensation premiums.

For example, the insurance commissioner has recently approved a 15.3 percent decrease in pure premium rates. Since 2003, when the first reforms took place, there has been a 46.2 percent reduction in rates.

How important is it for a business to be up-to-date in regard to workers’ compensation reform?

It’s extremely important. The new legislation encourages return-to-work programs. For example, if you have a return-to-work program and if you can offer regular, modified or alternate work that lasts 12 months within 60 days of the permanent stationary date, then each subsequent disability payment will be decreased by 15 percent.

If the employer is not able to provide this type of work then the payment to the employee will be increased by 15 percent. So it’s a 30 percent swing if an employer knows that it exists and does something to ensure that there is a return-to-work program.

What are some steps that a business can take to minimize workers’ compensation claims?

The best claim is the claim that never happens. The best thing they can do is, No. 1, make sure that they have established hiring practices and that they investigate the potential employee, making sure that the applicants have a good, solid work history.

The other one is loss control, which will prevent accidents and perhaps prevent the accident from being so severe. Of course, things are going to happen. People are going to have claims. But if they do have a claim, then they need to do a thorough and prompt investigation, promptly report to the insurance carrier and provide a full disclosure of facts including witness statements.

Also, they need to keep the line of communication open. There is a three-pronged level of communication that they need to keep going between the employer, the medical clinic and the carrier.

What is your forecast for workers’ compensation rates over the next several years?

I think there is going to be a continued decrease because the rates were so high for so many years, and also there are going to be more players in the business. However, I do expect that the rate decreases will slow as the reforms are implemented and the premiums have been adjusted.

Kimaili Davis is a senior workers’ compensation claims analyst for Sander A. Kessler & Associates Inc. For more information, visit