Chelan David

Wednesday, 26 March 2008 20:00

The U.S. dollar

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

Sunday, 24 February 2008 19:00

Improved reporting

Financial Accounting Standards Board Interpretation 48 (FIN 48) is a new tax initiative that significantly alters how companies account for uncertain tax positions. The new rules — intended to increase the comparability of financial statements — also expand documentation requirements.

“New disclosure requirements provide for companies to set forth in their tax footnotes a complete discussion of the impact of FIN 48, including the impact of potential interest and penalties on potential tax deficiencies,” says Gil Greene, vice president of Gumbiner Savett Inc.

While meeting FIN 48 requirements may prove to be challenging, companies can benefit from implementation of the initiative. FIN 48 provides the opportunity to enlighten a firm’s management and shareholders about historical business and tax operations.

Smart Business spoke with Greene about FIN 48, why the initiative was adopted, and how it is expected to improve financial reporting and increase transparency.

What is FIN 48?

Financial Accounting Standards Board Interpretation 48, Accounting for Uncertainty in Income Taxes, was issued in July 2006 as an interpretation of FASB 109, which sets forth the standards for accounting for income taxes under GAAP (Generally Accepted Accounting Principles). FIN 48 was first effective for financial statements of public companies issued in fiscal years beginning after Dec. 16, 2006, and is scheduled to become effective for private companies, beginning after Dec. 15, 2007. Thus, privately held companies do not have to implement FIN 48 in their 2007 financial statements but, nevertheless, should be looking ahead in order to be ready when the date for implementation arrives.

Why was this initiative adopted?

FIN 48 was adopted in order to clarify accounting for uncertain tax positions in financial statements. Tax laws, in some cases, are subject to varied interpretation, and whether a tax position will be ultimately sustained may be uncertain. As a result, diverse accounting practices have developed leading to inconsistency in accounting for such positions. This diversity in practice has resulted in noncomparability in financial statement reporting of income tax assets and liabilities.

How is FIN 48 expected to improve financial reporting and increase transparency with respect to tax matters?

FIN 48 introduces new standards for identification and measurement of tax benefits associated with uncertain tax purposes. A tax position refers to a position taken in a previously filed return or a return to be filed in connection with a current reporting period and also includes, for example, decisions to not file returns, shifts of income between jurisdictions and decisions to exclude certain types of income from returns. Issuers of financial statements are required to inventory all uncertain tax positions for all jurisdictions for all open years. A ‘more likely than not’ threshold is required in order to record a tax benefit in the financial statements with respect to an uncertain tax position. Positions satisfying this ‘more likely than not’ standard must be further analyzed to determine the percentage likelihood (i.e. between 51 percent and 100 percent) of being sustained, assuming an audit by the income tax authority having full knowledge of all relevant facts.

How might the implementation of FIN 48 result in disagreements between company management and external auditors?

Because the implementation of FIN 48 requires that judgment be applied in areas subject to varying interpretations, it is reasonable to expect that disagreements may arise between management and auditors. Public companies are often sensitive to items impacting their reported earnings, and therefore, may resist acknowledging an uncertain tax position that might give rise to a higher than anticipated tax expense. Private company shareholders may be more focused on tax savings than public company shareholders and may take more aggressive tax positions, leading to disagreement with auditors.

Does FIN 48 heighten the risk of being audited by the IRS or by a state or international tax authority?

It is too soon to know for sure what the impact of FIN 48 will be on the audit process, but certainly the disclosure requirements will provide a road map for tax authorities to follow in requesting information about tax issues. On the bright side, FIN 48 will require companies to take a fresh look at their tax positions and may enlighten management and shareholders about the importance of managing tax risk.

GIL GREENE is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or

Wednesday, 26 December 2007 19:00

Mortgages and the economy

Burdened by weaknesses in the real estate sector, the economic outlook for the first half of 2008 is sluggish.

The housing sector, however, is expected to rebound later in the year, providing a boost to the economy as a whole.

One of the factors behind the recent real estate slump was the widespread availability of subprime mortgages. These types of loans will be harder and harder to come by in the future, says Comerica’s chief economist Dana Johnson.

“We’re not going to go back to a sub-prime mortgage market that was as wide open and that allowed a lot of reckless behavior on the part of both borrowers and lenders,” he explains. “There is going to be more of a continuing restraint on the purchases of homes.”

Smart Business spoke with Johnson about his economic outlook for 2008, the impact of the subprime mortgage industry and the overall strength of California’s economy.

What is your economic forecast for 2008?

I’m expecting the economy to grow sluggishly this winter and then accelerate over the course of 2008. I’m projecting growth over this winter — the fourth quarter of 2007 and the first quarter of 2008 — to be around 1.5 percent at an annual rate and then accelerate by the end of the year to about a 2.5 percent rate of growth.

The credit crunch has already extended and intensified the recession in housing, and housing is going to be a big drag this winter. All of the turmoil in the credit market will also be a constraint on the economy. For these reasons I think we’re going to have a pretty sluggish pace of growth for a while.

The drag from housing, however, will slow, and we’ll find a bottom sometime in the spring or early summer, and then things will level off or perhaps gradually improve a bit.

How will the meltdown of the subprime mortgage industry affect the economy?

It’s had a very clear and direct impact already in reducing the ability for people to buy houses, which has intensified the pullback in homebuilding and accelerated the decline in home prices. The key issue beyond that is whether the decline in home prices is going to cause consumers to spend more cautiously. So far, there is not much evidence of a big spillover to consumer spending. With consumer spending holding up OK, it looks like the spillover effect has been limited, and this is one of the reasons that I think the overall economy is going to avoid recession.

Foreclosure rates have been especially high in California. Do you believe the housing market will rebound in the upcoming year?

No, I don’t. House prices in California have begun to fall but are still far higher relative to income than anywhere else in the country. It looks to me like there are a lot more adjustments that have to be made in the price of houses in California relative to incomes in California relative to houses elsewhere. California has relied more than any other state on the subprime mortgage market, which is not going to fully recover for years. The adjustments in home sales and prices are going to continue to be very difficult in California all through 2008. We’re talking multiyear adjustments where house prices will not hold up as well in California as they do in other states.

In what ways does the California economy differ from other regions of the country?

The California economy is in many ways a microcosm of the U.S. economy. The distribution of jobs by industry in California looks very similar to the national averages in many respects. There are two areas, however, that look different: It has a leading position in various knowledge-based sectors as well as the life sciences industry.

How important is the health of California’s economy to the United States’ as a whole?

California’s economy makes up approximately one-eighth of the overall U.S. economy, so its health is vital. The California economy is intimately integrated into the rest of the economy; we don’t tend to see the sharp regional differences that we once had. The U.S. economy’s performance is going to look like California’s, and California’s performance will look like that of the U.S. California doesn’t move in lockstep with the U.S. economy but, given its size, its diversity and the fact that the distribution of jobs is so similar to the distribution of jobs by industry in the rest of the economy, what happens in California tends to happen nationally and vice versa.

DANA JOHNSON is chief economist for Comerica Bank. Reach him at (214) 828-5970 or through the bank’s Web site,

Wednesday, 26 December 2007 19:00

Controlling legal expenditures

The cost of litigation can be prohibitively expensive. One way to curb legal expenditures is by using a process called litigation management. This process includes proactively identifying critical legal and factual issues, identifying key personnel that will be involved with a case and determining a budget. Also, it is important to set benchmarks so, as the case progresses, a decision can be made as to whether it should be tried or settled.

While no business person likes to be sued, if it happens, he or she needs to know — and is entitled to know — at the outset what to expect from his or her attorney.

“It’s all about communication between a lawyer and a client,” says Mark Morley, co-chairman, executive committee of Secrest Wardle.

Smart Business spoke with Morley about litigation management, how to prepare a litigation budget and how to determine whether to litigate or settle.

How should a company go about developing an action plan with its legal team?

Good litigators work backwards, so to speak, to determine what they need to have, at the end of the day, in order to flat out win the case or to minimize the plaintiff’s claims so it is manageable from a monetary standpoint. In order to do that, it is important to have a frank and open discussion with the client to get the necessary facts; identify documents and determine if these documents are readily accessible; identify the key witnesses, including company employees, and their accessibility; and identify which defenses are available. It is important to set up your action plan and then proceed to the point where you’re going to start to implement the plan in order to position the case for either settlement or eventual trial.

How should a litigation budget be prepared?

This involves the action plan being translated into specific required activities and related ‘real world’ dollars and cents. Lawyers have a pretty good feel for what it takes to accomplish certain activities. You can’t predict these things with absolute precision because, in all cases, you have at least one other party involved who knows what it wants to accomplish in the case, and if it is a complex piece of litigation, you’re going to have other defendants who are initiating their own action plans over which you have no control. That being said, a lawyer can flesh out a projected budget for the particular time frame in question. There is no need to budget the case in its entirety upfront. It is better to work in a time frame of 90 to 120 days. Then you measure yourself as you reach the 90- to 120-day benchmark by asking such questions as: Have we been able to accomplish what we set out to do? If we didn’t accomplish these goals, then why not? What adjustments do we need to make? If you do that on a regular basis, every 90 to 120 days throughout the course of the case, then you’re staying proactive and in control of the litigation rather than letting the litigation control you.

How should a business determine whether to litigate or settle?

This decision will be the product of having prepared, implemented and followed a proper action plan. In some instances, the case may be simple enough that your attorney can give an evaluation almost at the outset of what the potential of the case is. In most cases, however, the attorney will have to engage in some level of discovery to obtain the facts necessary to provide a sensible evaluation. Once the attorney can project for the client the so-called ‘worst case’ and ‘best case’ scenarios and where a reasonable resolution of the case should fall in monetary terms, then they can determine together how the litigation could conceivably impact the business and whether settlement or trial is the better choice to resolve the matter. The election between the two then becomes an informed business decision.

If it is a case to settle, why is it so important to develop negotiation strategies?

As with any business plan, if there is no strategy in place, then events control you and you do not control events. The client needs to know what the claim is all about and what are the strengths and weaknesses of the claim or defense. It is the job of the lawyer to provide this information as soon as he or she possibly can and to project what it is going to cost to achieve the desired end result. Once you have this information, there are several different types of alternative dispute resolution (ADR) available. Today, both facilitation and mediation are commonly used as vehicles to bring closure to litigation without having to invest any more dollars. Facilitation and mediation allow the parties to have the discussion that is frequently necessary, in a semi-public forum using the services of an independent facilitator or mediator. In many instances, litigation is about parties feeling that they have been wronged in some way. They are looking for the opportunity to tell somebody their side of the story. Achieving that objective can frequently lead to a reasonable resolution of their grievances without having the case go all the way through trial.

MARK MORLEY is co-chairman, executive committee of Secrest Wardle. Reach him at (248) 539-2840 or

Sunday, 25 November 2007 19:00

Green benefits

In recent years the real estate industryhas made great strides in bringing sustainable development practices into the mainstream. And investors areincreasingly embracing the environmentally friendly approach. After all, greenbuildings have the potential to maximizeboth economic and environmental performance.

Economic advantages include reducedoperating costs and savings on utilities,maintenance and capital expenditures.Environmental benefits include the useof recycled building materials andimproved air and water quality.

“Green construction methods in multi-housing can dramatically reduce operating costs and extend the useful life ofhousing,” says Dave Lockard, first vicepresident of CB Richard Ellis’ Multi-Housing Group.

Smart Business spoke with Lockardabout green buildings, the benefits thatthey can provide and why investors aresupporting the concept.

What specific characteristics make a building green?

The U. S. Green Building Council hasestablished benchmarks for certificationof new construction and renovation ofexisting properties for Leadership inEnergy and Environmental Design(LEED). The criteria are designed tomeasure a whole-building approach tosustainability within five specific areas:sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

What types of benefits can be achievedfrom constructing a green multi-housingbuilding?

Savings may be realized in utilityusage, maintenance, unit turnover andcapital expenditures. Recycled and engineered building materials are demonstrating superior performance over an extended life span. The secondary benefit of green construction is an appeal toenvironmentally conscious renters whomay specifically select green buildingsfor housing as a lifestyle choice.

How can green buildings leverage the useof efficient systems to save on utilities?

Apartment owners and operators havebeen implementing green building technologies for a long time. They were notnecessarily making a conscious decisionto act green, but they were motivated bythe economic benefits of conservationon their bottom lines. For example,apartment owners were on the forefrontof implementing water-saving shower-heads and low-flow toilets. Exteriorlighting systems were upgraded fromincandescent bulbs to high-pressuresodium or halogen for better efficiencyand longer life. Also, when the city ofCincinnati eliminated free trash pickupfor apartments in the early 1990s, owners were quick to embrace recycling.

Landlords in Greater Cincinnati whosupply heat to their renters have workedhard to reduce natural gas usage by replacing inefficient boilers, upgradingwindows and adding insulation. Much ofthe insulation being used today is created from recycled wood pulp.

Once constructed, what cost savings can berealized by operating an efficient building?

Cost savings will be heaviest in theaforementioned utility areas: Water,sewer, gas, electric and waste removalcosts will all be significantly reduced.Emphasis on healthy living spaces mayresult in property and casualty insurancebenefits, as well. Environmental issuessuch as asbestos, lead paint and PCBsare nonissues.

How can real estate investors benefit frommulti-housing units that are green?

LEED buildings are just beginning tocome up for sale, and investors are paying a premium to acquire green buildingsversus traditional buildings. Investors onthe sell side have been quick to recognize these benefits and are acceleratingthe green building process for both newconstruction and renovation.

How will the marketplace for green buildings evolve over the next several years?

The demand to acquire green buildingswill expand in the future. Apartmentproperties historically classified ‘institutional-grade’ with high-grade amenitiesand high-quality construction will soonbe required to ‘go green’ in order toattract institutional capital. The primarymotivation will be the superior economic performance of a sustainable buildingversus one without green characteristics. In fact, green buildings are likely tobecome a standard versus an extravagant option.

DAVE LOCKARD is first vice president of CB Richard Ellis’Multi-Housing Group. Reach him at (513) 369-1347

Tuesday, 25 September 2007 20:00

Investment options

Aleveraged recapitalization of one’s business provides liquidity for owners while retaining ownership and management control.

Typically, the three key elements in obtaining financing for a leveraged recapitalization are consistent cash flow, a strong business plan and a solid management team. With these components in place, it is often in an owner’s best interest to do a recapitalization rather than sell the business outright.

“Leveraged recapitalization offers business owners looking for personal liquidity some significant, distinct advantages over the sale of their business to a private equity firm or to a strategic buyer,” says Mike Silva, senior vice president and group manager of Comerica Bank.

Smart Business spoke with Silva about leveraged recapitalization, how companies can benefit from such a transaction, and why more and more companies are taking advantage of recapitalizations.

What is leveraged recapitalization?

A leveraged recapitalization involves a bank or other financing source lending money to a company to finance a distribution to owners so they can diversify their net worth. If you look at the typical business owner who owns a $40 million revenue business, the bulk of his or her assets are tied up in the company. He or she typically has the company and a house, but no other significant liquidity. Leveraged recapitalization allows owners to take cash — often a significant amount — out of their business and put it in the market and have it professionally managed.

Who are the best candidates for leveraged recapitalization?

The best candidates are companies that are established and have consistent, stable cash flows demonstrated over a period of three to five years. Generally, they have in excess of $20 million in annual revenue and/or an EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) greater than $5 million. Also, it helps if there exists some level of assets that can be used as collateral within the business.

How can a company benefit from leveraged recapitalization?

Leveraged recapitalization allows owners to take some money off the table without selling the business in its entirety or losing an interest in the business to a private equity firm. In many scenarios, private equity is a good avenue for obtaining liquidity. However, owners will end up with just a fraction, or possibly none, of their company, which will be controlled by outsiders.

Leveraged recapitalization is a way for a business owner to realize liquidity while still retaining 100 percent control of the business. Also, the financing process is quick: typically six to eight weeks. Finally, this type of financing can be done discreetly and with confidentiality, which means that day-to-day operations will not be impacted and morale will not be affected.

In what ways does leveraged recapitalization differ from private equity financing?

Typically, if a company were going to explore an outright sale to a private equity firm or a strategic buyer, it would hire an investment banker who would put together a book. The investment banker would then market the book to get as many potentially interested parties as possible. Soup to nuts, the auction process would take a minimum of six months. And over this time, there is a book on the street. Competitors and employees know that the business is for sale, which can negatively impact client relationships of the company and potentially demoralize the employee base. Doing a leveraged recapitalization provides liquidity to the owner, but is much more discreet. In all likelihood, the business owner, his or her financial advisers and the bank are the only parties that will be aware that financing took place.

What risks are involved in leveraged recapitalization and how can they be mitigated?

Any time you put additional debt on a business, its cash flows are stressed. After the recapitalization there will be requirements on the cash flow that weren’t there before. This can cause liquidity problems as well as hamper a company’s ability to grow. Everyone involved with the transaction needs to feel comfortable that the amount of debt put on the company is workable, both in a best-case scenario and a downside scenario.

Why has the use of leveraged recapitalization increased over the past decade or so?

Historically, leveraged recapitalization was frowned upon by commercial bankers and institutional investors. The concept of a business owner taking a considerable dividend out of a company’s holdings generated concerns that there would be a loss of interest in day-to-day operations.

Lately, however, the fears associated with leveraged recapitalization have largely dissipated. Banks have become more comfortable with cash-flow lending: lending without underlying asset support. Recapitalization transactions have increased more than 1,000 percent over the last nine years, from $4 billion in 1997 to $49 billion in 2006. In the past, the only way for a mid-sized business owner to get liquidity was to sell the business to someone else. Leveraged recapitalization allows a business owner to leverage the company while retaining management control.

MIKE SILVA is senior vice president and group manager of Comerica Bank. Reach him at or (415) 477-3274.

Tuesday, 25 September 2007 20:00

Rate hikes

There is growing concern about interest rate volatility — and with good reason. A number of factors, including housing concerns, subprime issues and inflationary pressures, are pointing towards a period of volatility for interest rates.

Interest rate risk is the monetary exposure companies are faced with due to fluctuations in interest rates. When interest rates change a company’s floating rate debt is impacted, which can lead to unexpected increases in interest expenses.

“Since interest rate volatility is a certainty, companies should be concerned with managing this risk because of the effect on future cash flows,” says Chris Ramos, corporate banking officer of Comerica’s Western Market.

Smart Business spoke with Ramos about interest rate risk, how it can best be managed and the benefits that interest rate swaps provide.

How can a company best manage interest rate risk?

First, companies need to assess the impact on cash flow if interest rates were to rise and their tolerance to this risk. For example, a large company with significant cash flow relative to the amount of debt it has may be able to absorb, to a larger extent, the impact of rising interest rates. However, a highly leveraged company is going to be extremely sensitive to even a slight increase in interest rates.

Regardless of the level of risk tolerance, companies should evaluate which financial tool may be best suited to limit this risk and not only minimize the impact on cash flow, but also maximize the predictability of future interest expense.

What specific kinds of mechanisms are available?

Three commonly used mechanisms, aside from the traditional fixed rate loans, are interest rate caps, interest rate collars and interest rate swaps. Interest rate caps limit the cost of floating rate debt for an upfront fee while maintaining the benefit of a drop in interest rates. Interest rate collars combine a cap and a floor on interest rates for potentially zero cost, depending on where the maximum and minimum levels are set. Interest rate swaps essentially provide a fixed rate of interest on floating rate debt.

What benefit does an interest rate swap provide?

The primary benefit of an interest rate swap is that there is no cost to establish it, and it provides a fixed interest rate, eliminating the impact of rising cost of funds and enabling companies to better forecast their interest expense. Additionally, interest rate swaps are extremely flexible and can be structured to match any portion of the underlying floating rate debt.

How does this differ from a fixed rate loan?

It is, in fact, very similar to a fixed rate loan except that it is actually a combination of two separate agreements: a floating rate loan contract and an interest rate swap contract. As the interest rate on the floating rate loan fluctuates, the nominal cost or benefit associated with those fluctuations is offset by the nominal cost or benefit that results from having the interest rate swap contract.

Since the floating rate loan is a separate contract, there is no prepayment penalty for paying off the loan early. The interest rate swap contract can then either be used to hedge other outstanding debt or be cancelled.

What happens if the interest rate swap contract is cancelled?

If interest rates have fallen, then the contract is considered to be ‘out of the money,’ and the cost to unwind the contract is the market value loss, which is typically significantly less than a prepayment penalty on a traditional fixed rate loan. If interest rates have risen, then the contract is considered to be ‘in the money,’ and the owner of the contract may actually receive money for unwinding the interest rate swap. In this scenario, the borrower is actually paid for paying off the loan early.

CHRIS RAMOS is corporate banking officer of Comerica’s Western Market. Reach him at

Tuesday, 25 September 2007 20:00

Fiscal and physical health

As the cost of providing health care coverage continues to rise, many businesses have had to scale back the benefits that they offer. One way that companies are coping with escalating health care costs is by utilizing wellness plans.

“A wellness plan is a campaign designed to engage employees in taking preventive action to improve their health status,” explains Phil Gordon, area vice president of Arthur J. Gallagher & Co.

Smart Business spoke with Gordon about wellness plans and the benefits that they can provide.

What types of wellness plans are available?

The simplest types of wellness plans are basic communications. This may include a regular newsletter or flyer on eating better or exercising regularly. Along with information, a simple wellness plan may also include negotiated discounts at health clubs. An annual health fair where various stations are set up to educate employees about taking better care of their health is also a cornerstone to a simple wellness plan. This type of wellness plan can be organized at a very low cost and many of the elements are already integrated in the standard offering of most medical carriers. The employer's burden is communicating with the employees and utilizing the resources already available to them.

The most aggressive wellness plans may actually mandate participation and follow-up as a condition of participation in the health plan. Such programs identify employees with elevated risk and require that they take certain action, such as a comprehensive physical with a physician. Some large employers have set up health and wellness centers staffed by nurses and physicians to implement the process.

Of what specific components do wellness plans consist?

Typically, wellness plans will include health risk assessments (HRAs), which are detailed questionnaires designed to establish a baseline risk level for each employee. The questions cover areas such as height, weight, alcohol consumption, smoking, health of parents, cholesterol levels, blood pressure levels, etc. The results of the HRA are used to target specific education and coaching to employees with elevated risk. Sometimes a ‘health coach’ is assigned to the employee to help answer questions and hold the employee accountable to changes in his or her lifestyle.

Typically, financial incentives (usually around $50) are in place to promote utilization of the HRA and the follow-up programs. Other programs may include use of pedometers to measure baseline physical activity and set goals for improvement.

What types of savings and/or return on investment can a company expect by implementing a wellness plan?

The general objective of a wellness plan is to increase the productivity of the organization and lower health care costs. If these goals are met to a greater extent than the cost of implementing the program, then it will be beneficial to the bottom line of the employer. Most wellness programs have a projected ROI associated with them. It is important to note that not all employers will be able to generate a positive ROI, so arguably not all employers should look to implement a wellness program. If staff turnover is high and the average age is young, the odds of achieving ROI are greatly reduced. Employers who have stable, aging work forces, however, stand a much greater chance of achieving positive ROI.

How should a company go about implementing a wellness plan?

Companies should speak to an employee benefit consultant familiar with wellness plans before taking action. The consultant will be able to assess the potential ROI by looking at the size, turnover and demographics of the employer. If available, the benefit consultant can also review utilization statistics to further refine potential savings.

How should the benefits of a wellness plan be communicated to employees?

It will vary widely from organization to organization. A number of factors must be considered, such as the education level of the work force, its geographic distribution and its access to and familiarity with using the Internet. When communicating to employees about wellness, one certainty is that it must be done through multiple channels on multiple occasions in a simple, understandable way. If a company is committed to wellness, the philosophy should show itself throughout the organization’s culture. Managers and supervisors should set a good example by utilizing the programs and promoting them.

Once in place, how should a wellness program be evaluated?

One obvious measurement is simply participation. The more employees who actively participate in a wellness program, the more likely it is to achieve positive results. Other measurements could include comparing year-over-year aggregated results of HRA campaigns, comparing utilization of sick time and medical services. Realistically, it may take years for enough data to be available in order to measure a statistically valid ROI. In the meantime, much of the perceived success will lie in stories such as, ‘Joe found out he had a blockage in his artery and avoided a sure stroke.’ These stories will inevitably arise if the wellness plan is working.

PHIL GORDON is area vice president of Arthur J. Gallagher & Co. Reach him at (818) 539-1343 or

Tuesday, 25 September 2007 20:00

M&A real estate value

Corporate merger and acquisition (M&A) activity has risen dramatically in the U.S. over the past three years. According to, U.S. and U.S. cross-border M&A transactions have increased 37 percent from just over 24,000 transactions in 2001 to 2003 to over 33,000 transactions in 2004 to 2006. The value of the transactions more than doubled, from $1.6 billion in 2001 to 2003 to $3.5 billion in 2004 to 2006.

“In Cincinnati, our leading locally headquartered companies have not been sitting on the sidelines,” says Brad Meyer, director of CB Richard Ellis Global Corporate Services. “Those companies participating in significant acquisition activities in the past three years include Federated with their acquisition of May Department Stores, Fifth Third Bank with their acquisitions of First National Bank of Florida and R-G Crown Bank, and Procter & Gamble’s recent acquisition of Gillette.”

Smart Business spoke with Meyer about M&A activities as they relate to the management of corporate real estate.

What is driving the increase in corporate M&A activity, and how does real estate enter the picture?

The primary driver is the efficiency and speed of acquiring/integrating competition versus the more expensive and longer time frame associated with growing organically.

Many critical activities are necessary to ensure successful integration of companies acquired, including transition/retention of leadership and key employees, efficient communications with customers, and sharing of a joint culture and vision. Equally important is realizing the efficiencies and value of the newly combined real estate portfolio, which was a key value driver for several acquisitions, including Federated/May and SuperValu’s acquisition of Albertson’s Inc.

How should a company rationalize a newly combined property portfolio?

First, it is important to mention that the corporate real estate (CRE) function should be part of the process to provide advice and expertise as early in the evaluation phase as possible. With active CRE involvement throughout the M&A analysis and transaction, maximum value can be realized in post-acquisition integration.

The process is fairly simple, but two common mistakes we witness are companies skipping steps or taking them out of order and not involving outside advisers, both of which tend to result in value left in the newly combined portfolio.

Portfolio rationalization can be broken down as follows: 1) thorough collection and documentation of all significant properties; 2) assessment of facilities’ market values, highest-best-use, redundancy in the portfolio, and individual efficiencies or lack thereof; 3) external value rationalization of each integration opportunity; 4) internal strategy development in sync with growth and operations plans; and 5) execution of the integration plan.

What are the easiest ways to realize portfolio integration savings?

First, it is important to identify redundant operations — back office, retail stores or supply chain inefficiencies. With careful analysis and execution, consolidation and disposition of nonessential assets can be fairly quick sources of significant savings.

Secondly, identify all owned properties that will not be occupied long term and execute a sale/leaseback transaction coterminous with the anticipated date to vacate. As long as qualified properties are validated with input from senior corporate management, this strategy can generate immediate significant capital to fund growth initiatives with very low risk.

The third step involves ‘right sizing’ rental expenses of existing properties that may not have received the regular attention they deserve. In most corporate portfolios, our experience has proven that an average rental gap of 10 to 15 percent exists between contract commitments and current market rents. Without proactive evaluation, leases will naturally be renewed near the end of the term at the weakest point of leverage and just continue to ride the over-valued wave of the market.

How can more value be revealed by digging a bit deeper?

By engaging in a disposition of special purpose assets. While this can be more challenging as compared to disposal of a corporate office or distribution center, there is a tremendous upside if resources, both advisory and capital, are employed to uncover the maximum value of each asset.

In some cases, a highest and best-use study will validate that the current special purpose use will maximize value without significant property modifications, but in many cases, outlining alternative higher value uses based on market-achievable uses, legally permissible and politically feasible uses are the value creation catalyst.

Ultimately, the valuation only indicates a theoretical value of a special purpose property, so care must be taken to engage brokerage resources with access to the wide range of potential buyers to ensure projected values are achieved or exceeded.

BRAD MEYER is director of CB Richard Ellis Global Corporate Services. Reach him at or (513) 369-1333.

Sunday, 26 August 2007 20:00

Family business

The one maxim that holds true for all business owners is that eventually they will be forced to exit their business. For many, the next best thing to perpetual ownership is having a child assume control.

When preparing to transfer a family business, it is critical to expose children to all aspects of a business early on, so they will be aware of the myriad challenges involved.

“Bring the kids into the business as they’re growing up, so it becomes part of them,” says David Rose, executive vice president of Gumbiner Savett Inc. “Let them work evenings, weekends and summers in their teens, so they can get to know the business and learn what the challenges are.”

Smart Business spoke with Rose about the challenges that multigenerational businesses face, the importance of delegation and how to avoid excessive inheritance tax costs.

What is the most common mistake parents make when passing along a business to a younger generation, and how can this mistake be avoided?

One of the most common mistakes parents make is dividing their assets equally among their children. This can be a problem since not all of the children may be involved in the business. The active participants will have different business objectives than the inactive owners. Inactive owners want to receive dividends and cash from the company while active owners want to retain cash and use it to grow the company.

One business owner, whom I served for a number of years, not only founded his own company, but he also invested in real estate. What he did was give the company to his son, who was co-managing it, and gave the real estate to his daughter who was not actively involved with the business. Not only did he take care of each of his kids, but he also put each of them in positions where they were not in conflict. Avoiding this kind of conflict is key to a business remaining a successful, viable entity of its own.

How can a founder’s inability to delegate adversely impact the business?

Founding owners are risk-takers with an entrepreneurial spirit who are willing to put in 80 hours a week to make their business successful. Often, not only do they know every supplier, every employee and every customer, but they also handle marketing and administrative functions. When the business takes off, the founder may become the force that limits the growth of the business because he or she is used to doing everything him- or herself.

Ultimately, the founder has to make the choice to allow other people to assume responsibility and do the best they can, knowing that mistakes will be made. Learning to delegate and trust so the company can continue to grow is one of the most difficult tasks that founders will eventually face.

What inheritance tax considerations should be taken into account with multigenerational businesses?

One way to avoid inheritance tax costs is to gift ownership to the next generation during the organization’s growth years and before mature valuation is achieved. For example, if you have a company currently worth $1 million and you give away a percentage of the company now, there will be far less tax to be paid than if they inherit the business later on when it is worth $10 million. It is important to start the succession phase of the planning early on in your company’s growth pattern.

What advice would you give to a multigenerational business about establishing a philanthropic commitment?

I believe it is very important for people who succeed in their business goals to try and give something back to the community that fostered their success. We don’t have a caste system here, where if you’re born poor, you’re going to die poor. The world we live in, here in America, gives us the opportunity to be successful. At some point, it’s important to say thank you, and there are many ways this can be accomplished. For example, donor-advised funds allow you to place money with a charity and make suggestions on how the money should be used.

Many wealthy families like to start their own foundation with the goal of ultimately having their children run it. Not only does a family foundation serve the community, but it also serves as a money-management tool for the younger generation as they learn how to research and select charities, as well as manage the foundation’s assets.

How important is it to get outside help with succession planning?

It’s very important. A family’s accountant generally knows more about its asset structure than any other outside person. When the accountant teams up with an estate-planning attorney and a life insurance broker, they can work together to help the family define a plan, pick a proper trustee or executor, and work with him or her when the time arrives to make sure everything is done efficiently.

DAVID ROSE is executive vice president of Gumbiner Savett Inc. He has worked with many multigenerational family businesses and has advised them in their transitional phases. Reach him at (310) 828-9798 or