If you happen to be wandering the aisles of one of Dixieline Lumber Co.’s 11 home center stores, don’t be surprised if the person who offers to help you is Joe Lawrence, president of the company.
When Lawrence says that he likes to lead by example, he can point to numerous instances of doing just that. That’s because at one time, he’s held most of the positions in the firm since starting as a lumber handler 23 years ago. “I have personally worked a lot of the positions, so I have a great understanding of the business,” says Lawrence. “Our management team has an open-door policy with our people and our customers. We expect each other to be in the field interacting with our people and exchanging ideas and gathering feedback. I see myself as one of the guys.”
His affinity for people makes him a likeable leader, but it’s Lawrence’s skill in managing employees, his hands-on involvement in their growth and development, and his passion for customer service excellence that have been the underlying reasons for his success in helping to guide the organization even before assuming his current role in March 2005.
Lawrence says that much of the credit for his success lies in his management structure, and his style of management transparency and empowerment that has enabled his team to stay focused and productive, and to grow.
Command and control doesn’t live here
Lawrence involves seven of his key executives in a management committee that authors and executes the business plan for the company. He considers one of the additional benefits of the system to be staff development. “I’m not a micromanager,” says Lawrence. “I prefer an open-forum style of management, so we meet as an executive leadership group formally once a month and then individually on an informal basis throughout the work week.”
The agenda typically includes a review of the financial results and projections, as well as preparing the annual presentation of the business plan to the rest of the management team. The most significant outcome from the committee has been much of the strategy for expansion and diversification of the business model, but it’s Lawrence’s leadership that sets the tone.
“The plus of having an open discussion is that we can reach a general consensus,” says Lawrence. “We have a debate if need be, but there are ground rules. The comments have to be professional, not personal, and I don’t allow generalities for comments; they have to be specific.”
Lawrence also acts as referee, and in the case of an impasse, final arbiter.
“I will let the debate go on, because first of all, I want them to own the result, and second, I want them to come to a consensus,” says Lawrence. “I think that some disagreement is healthy. For example, I don’t expect the sales folks and credit [department] to always agree as to what is an appropriate level of risk. The group has to be trusting and a bit thick-skinned at times and sometimes opinions are expressed that may not be consistent with the thoughts or expectations of others.”
With a major corporate goal of expansion of the firm’s footprint outside of San Diego, the committee reviews the demographics of the expansion, identifies the targeted customer base and sets the sales strategy. That formula resulted in success when Dixieline initially broke into the San Bernardino market by expanding into Colton. Later in 2006, Lawrence took advantage of his weekly one-on-one meetings to provide some staff development related to the expansion. “I like to teach my managers that they have to be adaptable,” says Lawrence. “Many people want things in black and white, but that’s not the way things in leadership usually are. I try to get my managers to play out the ‘what ifs’ in advance. As an example, after our Colton expansion, there was a downturn in the local housing market, and the business slowed. “Some members of the committee wanted to diversify the business model. In one-on-one sessions with them, I asked what message that move might send to our customers or competitors. We have since found other business to bolster that location.”
Success through people
Dixieline has more than 1,100 employees, and historically, most of the talent needed for the firm’s expansion has come through internal promotions and a highly structured employee development system. That strategy is still a large part of the culture, and because it is so important to the human capital plan, it is overseen by Lawrence. “I like to be able to dangle the opportunity for upward mobility in front of new hires and, of course, I use myself as an example,” says Lawrence.
All employees have a formal development plan, and the pipeline of internal candidates is reviewed each month at the management committee meetings. Each location has a separate turnover target based on the line of business and each position.
Turnover for the lumber and home center industry for 2005 was 35.7 percent, while Dixieline had a turnover rate of 23.5 percent. For just the retail side of the business, the industry average in 2005 was 57.2 percent, while Dixieline posted 32.3 percent turnover.
The goal is to achieve less than 30 percent turnover in the business centers and to average no more than 30 to 35 percent turnover on the retail side. By doing so, the company keeps a consistent employee base that is more knowledgeable and spends less money on recruiting and development.
Lawrence says a command-and-control environment hampers people’s growth, and continuing to develop good people means letting them learn and think on their own without overseeing their every move. He says his deliberate choice of management style enables internal promotion and the people development system that has gotten Dixieline to its present status. “I believe people want to be involved in building the business and contribute to the overall success,” says Lawrence. “If we are always told what to do, not only will we not grow the business, but we will stagnate the growth of individuals.”
Shopping for attitude
“Today’s builder wants a one-stop shop,” says Lawrence. “That has necessitated the need to make acquisitions outside of our core competency, so now we are looking at and evaluating building materials distributors, and shops that manufacture doors and trim.”
In addition to looking at the numbers, Lawrence visits every prospective acquisition to assess its philosophy on customer service and quality, because it is here where he finds the true fit. “I look for acquisitions where their business has a synergy with our core business and their executives share our core beliefs about customer service,” says Lawrence. “We want to retain many of their people, and I often find that if they don’t have a strong sense of customer service ingrained as a philosophy, it’s hard to teach.”
Success for Dixieline on the consumer side of the business has come through positioning the firm as an alternative to big-box retailers such as Lowe’s and Home Depot, something Lawrence also credits to strong customer service. “Having roots as a family-run company helped to create our culture of customer service,” says Lawrence. “I believe that consumers like to have choices. We have more people out on the floor so we run a more expensive model, but we also run at a higher margin. I believe in the ‘Moments of truth’ philosophy in customer service because every transaction is important to us.”
Lawrence is referring to the popular customer service mantra that espouses that each interaction between a customer and the company’s frontline personnel creates an opportunity for the customer to leave with either a negative or positive perception of the company’s service, based on his or her experience.
To begin the process of dedication to excellence, all new staff members begin customer-service training on their first day of employment, followed by product-knowledge training accomplished through vendor presentations.
The results speak for themselves.
“Since 1980, there have probably been close to 20 big-box locations that have opened in San Diego,” says Lawrence. “In spite of their growth, we’ve been able to more than triple our business during that same time. I think it’s a misnomer that you can’t run at higher cost and be successful just based on the financials. It’s all about the throughput analysis.” On the retail side, Lawrence measures transactions per labor hour, using a different target for each location, as well as staff turnover, because that affects a customer’s experience. And the firm has achieved a reputation as a preferred employer with dedicated employees who have been promoted through the ranks.
While many firms have gotten out of the retail hardware business, Lawrence has jumped in, adding the consumer market to counterbalance homebuilding, as well as adding solutions for the remodeling, custom homebuilding and repair markets. In 2005, the firm had record sales of just over $400 million, led by the home-building segment.
Lawrence was a visionary and an initiator of a diversified business model long before he became president of the organization. Initially, Dixieline was solely dedicated to supplying lumber and materials to builders. As he moved up in the organization, Lawrence watched the economic cycles take a toll on the company, its customers and employees.
In convincing the owners to diversify, Lawrence established himself as a future leader and set the company on a course of economic stability. His takeaway from those experiences includes lessons in persuasion and persistence. “I was persistent about my beliefs,” says Lawrence. “I found others internally who shared my vision, and together, we created a nucleus of the same vision to diversify and grow outside of San Diego and become a regional player in the entire Southwest area.”
Dixieline’s success attracted attention, and the company was bought in 2003 by Lanoga Corp., which was, in turn, bought last year by Pro-Build Holdings Inc., a subsidiary of Fidelity Capital.
The experience of being acquired twice after so many years as a family-owned company has had its advantages and its learning moments. While there is additional support for the vision of becoming a regional player, Lawrence sees the education process as having benefits for both sides. “What I have learned from this is to be open to listening to new ideas and new ways of doing things,” says Lawrence. “However, what we bring is knowledge of the local marketplace and how to be successful here, and that’s a competitive advantage. I think we will thrive by learning from each other. “Day-to-day, we are still a local company, and the burden is on us to grow our strategic plan. I am always an optimist. There is always a way to make something work; you just have to work harder than the next guy.”
HOW TO REACH: Dixieline Lumber Co., www.dixieline.com
Corporate mergers and acquisitions occurred at a frantic pace in 2006. In a report issued Nov. 6, outplacement firm Challenger, Gray and Christmas stated that deals for the year had totaled 9,461 and were valued at $967 billion. Though final figures were not available at presstime, the number of mergers and acquisitions in 2006 almost surely surpassed the 2005 year-end total of 10,309 deals valued at $1 trillion.
M&A activity has been fueled by a large influx of private equity, and many mergers are undertaken for larger profits through increased operating efficiencies or the addition of complementary product or service lines. While many plans look good on paper, success often starts in the technology trenches. “After the investment bankers and lawyers have gone home with their money, the ‘sexy’ part of the deal is over and people have to roll up their sleeves and make this work,” says Blake Sellers, president and CEO of Avvantica Consulting LLC.
Smart Business spoke with Sellers about what CEOs should understand regarding technology’s role in post-acquisition success.
What differentiates the pre-acquisition and post-acquisition periods?
Usually when you hear about M&A activity, it’s the ‘pre-deal’ goings-on that get all the press. In most cases, CEOs pay a premium for what they are getting because it’s required to close the deal and they believe the acquisition is worth it. After the transaction occurs, you start to hear phrases like ‘merger integration’ and ‘synergy capture.’ These phrases describe the expected financial gains resulting from the two entities coming together. This is where the rubber starts to meet the road, because technology integration is vital to gaining the operating efficiencies or market synergies that were contemplated before the deal started.
As an example, we’ve recently worked on merger integration issues for a health care company that provides diagnostic imaging services. In this situation, the integration approach that we took for ‘customer-facing’ processes and systems (e.g. patient services) was very different from the approach for ‘back-office’ processes and systems such as finance, accounting and payroll.
What’s the role of technology during post-merger integration?
There are four key components to creating a successful post-acquisition integration plan: people, process, data and technology. And technology usually serves as the foundation of this plan.
From the back-office perspective, the key goals are usually centered on reduced operating costs and/or increased control. So issues like centralization and shared services often come into play for functions like finance and accounting, HR and procurement. For public companies, Sarbanes-Oxley requirements must also be considered.
For ‘front-office’ or customer-facing processes, the objectives are more typically focused on increasing market share and/or improving the customer’s experience. Once again, the integration projects will have to address issues that include people, processes, data and technology; while shared services or centralization are less likely to be considered. For these areas, defining and implementing a set of common processes and systems on a decentralized basis is often the more appropriate approach. Without these types of changes, it’s almost impossible to manage the combined company on a consistent basis.
What are the best practices for executing a technology integration plan?
We can learn a great deal from companies like Cisco and GE because they do this all the time. However, they have the luxury of having M&A teams that are dedicated to merger integration. They also are usually acquiring much smaller firms. When you don’t have an experienced team, or the merger involves two companies that are more equal in size, I recommend setting up an integration steering committee and a program management office (PMO).
The integration steering committee should be composed of company executives such as the CFO, the VP of HR, VP Operations, etc. This group provides the overall governance function, establishes the vision, and makes most of the strategic decisions. Once this group is established, you are set to lead from the top down, so the next step is to set-up the PMO.
What role does the PMO serve?
The PMO does all of the master planning, organization and provides hands-on expertise to the individual projects that make up the overall integration program. It defines the scope of work, the time lines, work plans, organizational charts and the sequence of the projects. Ideally, many of the firm’s own managers will participate in the PMO or manage individual projects that are overseen by the PMO. If the company does not have the internal expertise to create a PMO, this function can be outsourced to experienced contractors or consultants.
BLAKE SELLERS is president and CEO of Avvantica Consulting LLC. Reach him at firstname.lastname@example.org or (214) 751-2820.
Beginning in 2007, CEOs of private companies will begin to feel the effects of the Sarbanes-Oxley Act (SOX), as new audit standards and practices are imposed that will interject business owners into the middle of the process.
The accounting failures of companies like WorldCom and Enron have had a substantial impact on the accounting and governance practices of public companies. In 2006, eight new audit (aka “risk assessment”) standards were issued. Designed to improve the quality of audits and make the process more effective, the new standards require greater involvement and personal accountability on the part of the CEO for information provided to auditors, even when the company’s stock is not traded on Wall Street.
“The change applies to private companies of all sizes,” says Rick Smetanka, partner with Haskell & White LLP. “This is an example of audit reform going through the public-company veil and piercing the private-company world.”
Smart Business spoke with Smetanka about what private-company CEOs can expect from the changes and how they can prepare to comply.
What do CEOs need to know about the changes in audit standards for 2007?
Accompanying the enactment of Sarbanes-Oxley in 2002, the authority for issuing audit standards for public-company audits was taken away from the American Institute of Certified Public Accountants (AICPA) and ultimately given to the Securities and Exchange Commission (SEC).
The recent changes in private-company audit standards reflect many concepts already adopted in public-company audits. They were conceived with the goal of improving the quality and effectiveness of private company audits. CEOs need to understand that prospective audits likely will be more focused on internal control, business risks and specifically tailored audit tests.
How will this change the way audits are conducted?
One impacted area is risk assessment. Now it will be necessary for the auditor to spend more time with the CEO and understand the key processes and controls the company has in place, in order to review and assess the effectiveness of the internal control system.
As an example, a controller at a small company may handle the complete flow of financial transactions, such as entering vendors in the system for payment, cutting checks, creating general ledger entries and performing bank statement reconciliations. As this is not ideal from a control perspective, we might recommend introduction of a key control to separate certain of these incompatible functions.
Further, in order to complete the balance of the risk assessment, the auditor will need to have a more thorough understanding of the business and the environment in which it operates. With this deeper understanding, the auditor will be better able to design specific audit tests that address identified external or internal business risks, such as competitive market forces, pressure from investors or lenders to satisfy financial benchmarks, or product obsolescence risks.
How can CEOs make certain their company is in compliance?
That responsibility falls principally to the auditor. After the CEO contracts with the audit firm, it is up to the financial professionals to know and execute the standards and to educate their clients with respect to changes in the audit process.
At the conclusion of the audit, the CEO should expect the auditor to present a letter summarizing deficiencies in the company’s internal control. Implementation of the new audit standards will require more time on the part of the CEO in order to share his/her perspective of the business and related risks, and more time on the part of the auditor to gather such information and assess it. While this might mean that audits will be lengthier and incur more billable hours, the private-company CEO will benefit from the opportunity to strengthen and streamline internal controls and business processes.
What actions can CEOs take now to be ready for these changes?
First, they can conduct an internal review of key processes and controls with the purpose of assessing the strengths and weaknesses of their system, and as a way to become familiar with the key controls they rely on and areas where the organization may have gaps in controls.
Second, they should adjust their expectations of the audit process, knowing that it will take more time and more involvement and commitment from both the CEO and the company’s accounting team.
Third, they should understand the spirit in which the recommendations are given. The accounting profession certainly has taken its lumps in recent years, but our goal is to improve our clients’ businesses and make them more effective and efficient.
RICK SMETANKA is the partner-in-charge of Audit and Business Advisory Services with Haskell & White LLP. Reach him at (949) 450-6313 or email@example.com.
With corporate contributions to 401(k) plans diminished to about 1 percent of payroll, an unforeseen problem has incubated over the past 30 years. Now faced with inadequate savings, rising health care costs and a decade of poor stock market returns, baby boomers are delaying retirement. The current situation will ultimately drive up payroll and benefit costs and curtail productivity unless private sector employers change course and get involved.
“Employers need to realize they can’t get out of the pension business; they’re in it whether they like it or not,” says Lee Morgan, consulting actuary with the Retirement Consulting Practice at Towers Watson. “They must take steps to help aging employees retire with dignity or suffer the financial consequences.”
Smart Business spoke with Morgan about the situation facing baby boomers and how employers can influence the bottom line by helping veteran employees plan for retirement.
Why are baby boomers delaying retirement?
The problem is that 401(k) plans were designed to augment not replace traditional retirement plans, and now a perfect storm of events has created financial conditions that the average employee just can’t navigate. And at some point, the Keynesian-style government spending that is propping up the economy and retiree savings, as well, has to end. This will cause aging workers to stay on the job even longer. Consider these facts:
- A 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, according to Fidelity Investments.
- Two-thirds of people aged 65 and over will need some level of long-term care in their lifetime, which runs around $75,000 to $80,000 per year. For couples aged 65, there’s a 50 percent chance that one will live beyond 92.
- The average net worth for those in their 60s in the U.S. is under $200,000. Our savings rate pales in comparison to Japan, where citizens had traditionally saved up to 20 percent of their income, or China, where the traditional savings rate averages around 40 percent. Even though current Japanese savings rates have dropped considerably due to the financial crisis, U.S. savings rates have historically been far below those of most industrialized countries. At this point, it is clear most U.S. employees are ill equipped for anything close to the traditional retirement lifestyle they may have envisioned.
Why should employers get involved?
In their quest to reduce costs, employers relinquished control over the timing and pace of employee retirements. Our statistics show that at least 3 percent to 5 percent of the current work force is unproductive and not engaged, yet firing underperforming veteran workers can be problematic. Age bias charges filed with the EEOC during 2009 were the second highest on record as monetary relief for victims totaled more than $376 million. To make matters worse, a reduction in boomer spending is partially responsible for the current economic malaise, as only those covered by traditional pension plans will feel free to spend their paychecks. In fact, consumer spending had reached more than 70 percent of GDP before the financial crisis, which is very high by historical standards, in part caused by Keynesian-style government spending and home equity lines of credit, which have dried up. As people live longer, only countries with financially secure retirees will be able to sustain economic growth.
In brief, it seems likely employers will either have ‘retirees’ on the payroll (not able to retire) or receiving a traditional pension. Those ‘retired on the payroll’ will have implications for productivity and ability to retain younger employees.
How can employers assist baby boomers?
First, offer financial planning services and education so employees can estimate how much they need to retire and save accordingly. Planning must be personalized and include a range of scenarios that contemplates a reduction in Medicare benefits and a realistic return on investments. Remember, the return on the S&P 500 has been roughly zero over the last decade and turns negative when you account for inflation. Second, review your company’s benefit plans and investment options. Employees may be able to address some of the risks of retirement by purchasing long-term care insurance or annuities.
What’s the best way to keep aging workers engaged and energized?
Employers need to bolster their engagement by continuously investing in their growth and development and offering them new and exciting challenges. Sometimes older workers have ample institutional knowledge but lack the technical or strategic skills to be fully productive. Japanese companies continually refresh their work force because they’ve learned that recycled workers are less expensive and more productive than new hires. Embracing that notion requires a cultural shift by U.S. employers.
Are employers considering a return to defined benefit pension plans?
The only viable long-term solution, if you want to allow employees the option of retiring at 65, is to bring back defined benefit pension plans. Also, younger workers may start considering careers in public service rather than the private sector, which may preclude businesses from hiring the best and the brightest. While CFOs worry about meeting future funding needs, the current pension shortfalls were created by investing in ways inconsistent with eliminating pension risk. Employers have the liberty of structuring a plan they can afford, but investing properly. Investing pension assets in bonds, which is more common in the U.K., can eliminate stock market volatility and facilitate long-term affordability. The data suggests that employees are struggling with self-directed retirement plans, so employers will be in the retirement business whether they like it or not.
Lee Morgan is a consulting actuary with the Retirement Consulting Practice at Towers Watson. Reach him at (858) 523-5553 or Lee.Morgan@towerswatson.com.
Facing a severe and protracted economic downturn, chief financial officers are worried about controlling costs, sales executives are worried about retaining and motivating sales staff, and everyone is worried about declining revenues, customer defections and eroding market share.
To alleviate the concerns, seasoned sales executives dipped into their stash of proven recessionary tactics to set interim sales goals and revise compensation plans before hunkering down for the duration. Now that the economy is stabilizing, those recession-induced plans may yield unintended consequences such as over-rewarding lower-tier performers while shortchanging their hard-charging counterparts. Employers must take steps to recalibrate sales compensation programs and revise performance expectations to comport with 2010 market conditions.
“Companies don’t want to be stuck with a 2008 sales compensation program in 2010,” says Matthew Lucy, senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. “Companies are realizing it’s time to reassess their incentive plans in light of the new economy and build for growth.”
Smart Business spoke with Lucy about the hazards of latent sales compensation plans and the best ways to motivate and reward top performers in a recovering economy.
What should employers consider when reassessing sales compensation programs?
Start by reviewing your company’s revised go-to-market strategy and ensure sales rewards and compensation plans are aligned with the company’s current goals (as opposed to the goals of a few years ago). For example, companies may choose to scale back heavy discounting practices in order to bolster margins, after bowing to market pressures for nearly two years. Include profit elements in revised sales compensation plans to encourage representatives to raise prices and sell value over cost. And though there’s rarely a shortage of opportunities for competent business developers, expect increased competition for their talents in 2010. It will be critical to compare your company’s compensation plan against competitors to ensure you can stave off turnover or acquire additional sales talent to meet post-recession business objectives.
Which additional design elements drive performance?
Employers need to ensure that their plan mechanics (for example, thresholds and targets) are set appropriately for the new economy. Companies often lower bonus thresholds during a recession to motivate employees, or they link sales bonuses to company results in order to control costs. But those tactics may simply increase total compensation without increasing revenues and, worse yet, they may benefit poor performers at the expense of top performers. Additionally, payouts for meeting team goals or MBOs can fail to encourage personal performance, which is fundamental to healthy revenue growth. Consider modifying quotas or individual performance goals to benefit sales representatives at all performance levels without compromising plan integrity; use contests and spiffs to help fill the gaps if the recovery sputters.
How can sales managers establish realistic measures and quotas in an uneven economy?
Accurate quota setting is the most overlooked way to reduce costs. Simply setting accurate quotas may reduce overall compensation costs by 10 percent to 20 percent without altering plan designs. Use these tactics as part of a comprehensive quota development methodology.
- Shorten time horizons. Setting quarterly quotas or allowing midterm adjustments on annual goals will enable more accuracy in a shifting economy.
- Bottom-up quota development. Individual sales goals are often apportioned from full company objectives, which can lead to unrealistic targets. Quotas need to be a collaboration of top-down and bottom-up quota development. This process should uncover territories that can shoulder more of the growth burden as well as those that may be tapped out.
What’s the best way to use contests and spiffs?
Competitions are the perfect tool to launch new products and services, bolster eroding margins or ease the sting from a temporary setback in the economy. Contests should last three to six months and offer winners a modest reward, because they should not be used as a substitute for effective sales compensation plans and quota setting practices. In fact, set aside no more than 5 percent of the total incentive budget for contests and spiffs at the beginning of the year and consider limiting awards to representatives achieving most of their sales quotas or exceeding performance thresholds to reinforce the importance of meeting goals. Drive the point home by centralizing contests to keep renegade managers from offering rewards that deviate from the company’s core strategy or diminish fundamental sales achievement.
What other tactics drive sales performance?
This is the perfect time to revisit the productivity of your sales force. Finding ways to force sales personnel to decrease administrative tasks and increase face-to-face selling time and other revenue-generating activities is a sure method of driving sales. Companies may have eliminated sales support personnel during the downturn or delayed investments in tools like CRM software, mobile devices or lead databases, but it’s easy to assure the return on these investments as long as sales quotas are increased proportionally.
Matthew Lucy is a senior consultant with the Sales Effectiveness and Rewards practice at Towers Watson. Reach him at (310) 551-5603 or firstname.lastname@example.org.
As the sponsor of a retirement plan, CEOs are helping their employees achieve a secure financial future. Sponsoring a plan, however, also means that you, or someone you appoint, will be responsible for making important decisions about the plan’s management.
The Employee Retirement Income Security Act (ERISA) requires that those responsible for managing retirement plans, referred to as fiduciaries, carry out their responsibilities prudently and solely in the interest of the plan’s participants and beneficiaries. Among other duties, fiduciaries have a responsibility to ensure that the services provided to their plan are necessary and that the cost of those services is reasonable.
“With more companies offering defined contribution plans rather than the traditional pension plans and given that the future of Social Security is hazy, there’s both a legal and moral obligation to make certain that the company’s 401(k) plan is managed prudently,” says Roy Rader, manager for audit and business advisory services for Haskell & White LLP.
Smart Business spoke with Rader about what CEOs should know concerning the responsibilities of 401(k) plan sponsorship.
What steps can CEOs take to evaluate plan fees and expenses?
Oversight of the plan’s costs is getting harder to do because many of the plan administration fees are not fully visible to the plan participants. Many CEOs, especially in smaller companies, also serve as trustees or fiduciaries of the 401(k) plans. Therefore, in that capacity, you should first ask for full disclosure of all plan fees and administrative costs.
Second, monitor what you are charged via monthly statements and audits to make certain that the plan is compliant. You can certainly shop various firms to see if what you are being charged is in line with market comparables. Before you seek bids or estimates, establish your requirements. You will need to know how much of the work will be done in-house and what duties will be required of an outside administrator. This will help you compare service plans and the proposed fees.
In addition, ask each prospective provider to be specific about which services are covered for the estimated fees and which are not. To help in gathering information and making comparisons, you may want to use the same format to review the pricing for each prospective provider. The U.S. Department of Labor Web site is a very good reference tool that can help you know what fees will be charged and what is reasonable and customary.
What other responsibilities rest with the plan fiduciary?
The fiduciary is held to certain standards of conduct and certain responsibilities including:
- Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them
- Carrying out all duties prudently
- Following the plan documents (unless inconsistent with ERISA)
- Diversifying plan investments
The bottom line is that, following Enron, plan administrators have greater responsibility to educate their employees about how to manage a defined contribution plan and to make certain that they provide a wide array of investment choices for their employees. Also, if company stock is offered as an investment option in the plan, make sure to stress the importance of diversification through educating the employees about how to choose investments that will fit their risk tolerance and future financial and retirement needs.
What education should fiduciaries provide to plan participants?
Many firms are hiring outside consultants to conduct seminars, and they are providing employees with access to Web sites that offer plan information and help employees figure out how much they’ll need to retire. These same sites provide a long-term forecasting tool that can show expected returns by investment type as well as historical trends. Employees can become more comfortable with their own risk tolerance and how to plan for their financial needs at retirement.
Are 401(k) plan audits required?
All 401(k) plans are required to file a form 5500 annual return/report with the federal government. An audit is required once a plan elects to file as a ‘large plan’ after reaching 100 participants at the beginning of the year. A copy of the auditor’s report must be attached to the form 5500 filing. The information reported under the 5500 is distributed to all of the various governmental agencies that oversee pension plans, including the Department of Labor and the IRS, as well as the public and the plan participants. There are penalties for failing to file required reports and provide required information to participants.
What penalties can be levied against a fiduciary for failing to meet the administrative responsibilities of 401(k) plan management?
Fiduciaries who do not follow these principles of conduct may be personally liable to restore any losses to the plan or to restore any profits made through improper use of plan assets. With so much riding on the success of these plans, it behooves all executives to make certain that their firms are fully compliant with their fiduciary responsibilities.
ROY RADER is the manager for audit and business advisory services for Haskell & White LLP. Reach him at email@example.com or (949) 450-6315.
The pace of layoffs has slowed and, in a recent study conducted by Watson Wyatt Worldwide, 55 percent of employers said major job cuts were over. Although news of a stabilizing economy is good, it may heighten the challenge of motivating and retaining employees, because more than half of surveyed employers said they intend to increase cost-cutting measures through 2009 and beyond. The recession has necessitated short-term savings tactics like reduced bonuses and salaries or wage freezes, yet it has done little to allay experts’ predictions of long-term labor shortages. The answer is to make sure that every penny spent enhances the company’s employment value proposition.
“A company entices and retains employees through its value proposition,” says Yana Plotkin, CCP, senior compensation consultant for Watson Wyatt Worldwide. “Historically, turnover has increased during periods of recovery, so now’s the perfect time to look at everything that contributes to the employee work experience to make sure it is creating the ultimate value.”
Smart Business spoke with Plotkin about the best ways to motivate and retain employees by recalibrating your company’s employment value proposition and redesigning incentive programs.
What is an employment value proposition and how can it be rebalanced to achieve maximum return?
Every company has an employment value proposition, but few know what it is, how to customize it or how to communicate it to employees. Compensation, benefits, the company’s work environment, brand and culture all contribute to the total experience of working for a company, and its value is determined by the company’s employees. First, employers should assess the desires of their critical work force — those employees they must keep — then customize programs and align funding so expenditures deliver their intended impact. For example, a younger work force might be willing to get by on 10 percent less salary because they value investments in training and development, whereas a more mature work force might affix greater value to continued pension contributions and 401(k) matches. One size does not fit all when it comes to value creation. The key is to focus on what is most valuable to the most critical people that a company needs to retain in order to survive and succeed.
How can employers motivate and retain employees with reduced salary budgets?
Our survey shows that companies have budgeted only 1.5 percent for salary increases in 2009, yet as late as May of last year, executives said that retention of key employees was still their No. 1 concern. Rather than mandating no salary increases or small merit increases across the board, top performers or those in critical jobs should receive larger raises. Scarce engineers or rainmakers in professional firms are much harder to replace, and differentiation in rewards and recognition is a key principal to retaining high performers in difficult times by communicating to the most talented workers that the company values them.
How should incentive programs be recalibrated?
This area is particularly challenging because companies with pay-for-performance plans may find that those goals currently are unattainable, which will only demotivate employees. Consider these
? Review your company’s long-term goals and projections to make sure you continue rewarding employees for the right behaviors during the downturn, but perhaps with smaller awards. Now may be a good time to lower performance thresholds to energize and motivate employees, while raising the performance levels leading to maximum payouts in order to protect shareholders and owners from paying windfall bonuses resulting from a recovering economy.
? If your company needs to preserve cash, consider paying bonuses in stock or a combination of cash and deferred stock or stock options. This tactic increases retention and takes advantage of the depressed stock values while aligning employees’ interests with the company’s long-term strategies, ultimately creating a return for shareholders.
Might other incentives also enhance value for employees?
Many companies budget as much as 1 percent of annual salaries for employee recognition, yet few managers even know the funds exist, what to reward for, or that they have the discretion to use those tools to motivate and retain key employees. Look for unutilized funding sources to grant top performers spot bonuses, gift certificates or other recognition so they know they are appreciated during difficult times, and continue funding training and development programs so your company is positioned to optimize business opportunities during the rebound. Keep in mind that, at some point, the market will change and employees will once again be in the driver’s seat. How they are treated now may make all the difference in whether they choose to stay or go once the economy turns.
Yana Plotkin, CCP, is a senior compensation consultant for Watson Wyatt Worldwide. Reach her at Yana.Plotkin@watsonwyatt.com or (415) 733-4212.
They say one man’s trash is another man’s treasure. So as big players in the orthopedics device industry, such as Johnson & Johnson, migrated away from rehabilitation and regeneration products, like knee braces, in favor of higher margin surgical implants, Les Cross, president and CEO of DJO Inc., swooped in and acquired the unwanted divisions.
Don’t look now, but Cross has built a pretty substantial business from the accumulated discards. In the past few years, DJO, which had 2007 sales of $492 million, has more than doubled its size and product offerings, primarily through picking through those unwanted pieces via mergers and acquisitions.
“A lot of the big companies view these products as low end,” Cross says. “The industry has been highly fragmented, with many entrepreneurial inventors choosing to move on after developing a couple of products. It’s not a very exciting industry, growing about 3 to 5 percent a year. All of these factors have made M&A a desirable growth strategy.”
But quick expansion by a midtier company through acquisitions can be risky, especially when you factor in DJO’s major merger in November 2007 with $450 million ReAble Therapeutics Inc. After all, without effective assimilation of newly acquired businesses, CEOs can quickly accumulate corporate debt while losing customers, revenue and sometimes even their jobs. But with five transactions under his belt, Cross has learned how to buy companies without breaking them by executing effective M&A assimilation plans that capitalize on all the possible synergies resulting from the deal. His process begins with figuring out what his company can do with the acquisition, handling the personnel transition and then maximizing the cost reductions that can come from bringing businesses together.
Understand what you’re getting into
Before making an acquisition, Cross says it’s critical for CEOs to honestly evaluate their management team’s ability to handle an acquisition and take on the extra work. Few companies have the luxury of a dedicated assimilation team, similar to the one at General Electric, and inexperienced, overtaxed managers will often neglect their day-to-day business responsibilities and fall victim to Cross’ assimilation failure scenario.
“Honestly evaluate your team because most CEOs don’t have capable managers just waiting on the bench,” he says. “Either strengthen your team or find consultants you trust to help with the assimilation.”
Next, CEOs should set a straightforward assimilation plan and timetable and then monitor the results. Cross writes a one-page strategic plan, because brevity makes it easier to communicate the plan’s goals and track the results. Then, he meets with his executive team each Monday to keep his finger on the pulse of DJO. He also spends a great deal of time communicating.
“The CEO’s job is to structure and consistently deliver the message outlining the priorities and the goals during the assimilation period,” he says. “Also remember that you need to communicate with all the stakeholders. Good communication creates line-of-sight between the CEO’s goals and the employees, which keeps everyone focused on the outcome.”
No matter how much experience and expertise a CEO might possess in executing post-M&A assimilation plans, even the most finely crafted strategies don’t always go as expected. Since the merger with ReAble, both DJO’s president and vice president of sales have resigned, causing Cross to wear multiple hats while searching for replacements. He says honesty is the best way for CEOs to deal with bumps in the assimilation road before setting a course correction.
“We wouldn’t buy a company unless we could see a clear path of what we were going to do with it, but we also make some assumptions in the process that may not be correct,” Cross says. “When that happens, face the truth, because you’ve got to know what’s truly happening. If you’re falling behind your timetable and there’s a flaw in the assimilation plan, admit it and then set a course correction with urgency. Do it today.”
Take charge of the personnel transition
“Assuming the due diligence has been done correctly, I believe most mergers fail for one of two reasons: either the cultures of the merging companies fight each other, or everyone focuses on systems integration and they forget how to run the business,” Cross says. “Beginning with day one following an acquisition, you have to protect the quality of the product and the service first.”
Cross breaks out post-M&A synergistic opportunities into two categories: cost-saving opportunities and increased revenue opportunities. He uses different strategies to exploit each opportunity, while simultaneously minimizing the top two perils he credits with producing assimilation failures. In some cases, he gets a bonus, because the strategy results in long-term cost savings and market share gains.
Take his post-acquisition human capital strategy as an example. Cross favors terminating most of the people in the acquired company because downsizing achieves cost reductions and eliminates the risk of clashing cultures. But he doesn’t release the staff immediately, so customer relationships and revenue streams are not only preserved but also expanded through sales of enhanced product lines.
“The key is to protect the customer base, so aside from the sales force, everything else pretty much goes away,” Cross says. “When you try to bring the cultures together, everyone ends up working in silos, and there’s a lot of resistance and internal competition. The risk to the strategy is in the planning, because the business must continue during the transition period.”
Many CEOs fear telling acquired employees they’re going to be laid off because productivity, morale and customer relationships may suffer during the critical transition period. Cross advocates open dialogues with the soon-to-be released workers and gives them plenty of notice about when their positions will be eliminated.
“I use an open, honest and fair approach with the people who are part of the acquired company,” Cross says. “They normally remain on the payroll for one year and know that at the end of that time their positions will be eliminated. My experience is that people respond well when they are treated fairly. While they may be sad that they’re leaving, they have plenty of time to adjust.”
Cross offers retention bonuses to workers who stay through the transition period as well as severance packages, because the incentive plans assure that most of the staff will remain in their roles and the business will run smoothly. In addition, retaining the work force of the acquired company for a year gives DJO’s management team the necessary time to transition operational functions so they don’t get derailed by Cross’ second reason for assimilation failure: focusing on systems integration and forgetting how to run the business.
Cross advocates one exception to his policy of terminating all acquired workers: He keeps the acquired company’s sales force. Building increased revenue through cross-selling opportunities and driving sales force productivity is the goal behind every DJO acquisition. To optimize the marketplace synergies and retain market share and customers, Cross says it’s vital to retain the sales force. But leading salespeople is often like herding cats, so Cross creates a marketing and retention strategy aimed at the sales team as part of his assimilation plan.
“You have to quickly win the hearts and minds of the inherited sales force, so they stay focused on the customers,” Cross says. “It can be tricky because sometimes the merger results in reduced sales territories, since you’re adding more sales staff. To get them on board with the changes, it’s important to emphasize the upside. For example, we’ve given our salespeople a continuous flow of new products, so they have a lot more stuff to sell. This industry is only growing 3 to 5 percent per year, but we’ve been able to translate that into double-digit compounded growth, and that’s a reason to stay.”
Cross counts on his VP of sales to do most of the heavy lifting when it comes to winning the hearts and minds of the salespeople, but he also crafts and delivers personal messages to the group because their retention and performance dramatically impact the return from the acquisition investment.
“In the past, I don’t think I personally invested myself enough in the process from the beginning,” Cross says. “As a result, I think our sales force and our customers were more confused about the transition than they needed to be.”
Take advantage of cost reductions
Besides the savings from a reduction in head count, Cross assumes he will find manufacturing cost-saving synergies because he relocates the acquired company’s manufacturing process to DJO’s plant in Mexico. But he doesn’t necessarily assume that DJO’s manufacturing process is superior. The goal is to improve or maintain product quality by adopting the best manufacturing process, even if the decision doesn’t result in immediate cost savings.
“We are Toyota junkies, so we believe in lean manufacturing, and we have one of the top 10 manufacturing plants in North America,” Cross says. “If we believe we have a better way to manufacture the acquired product, we’ll shut down the other plant and begin manufacturing the product in Mexico immediately. If we find the other company has a unique manufacturing method, we’ll build up inventory while the DJO operations team works to transition the process. Our goal is better, cheaper and faster — but it has to be better.”
Cross allows his operations team to make the manufacturing process assessment and the recommendation, and even if he can’t garner all the anticipated savings immediately, he says DJO’s continuous improvement process will eventually ferret out manufacturing process savings.
Manufacturing synergies are easy to spot according to Cross, while savings from cost of goods synergies are harder to predict. Often supplies are secured through long-term fixed price contracts, and current inventories must be depleted before new pricing can be secured using greater expenditures as a negotiating tool.
“Cost of goods synergies are tricky to forecast,” Cross says. “I would discount your estimates. In other words, if you planned on $10 million in savings, I’d expect more like $7 million to $8 million.”
The result of this careful process at DJO has brought substantial growth. After the company charged to $492 million in sales in 2007, its recent merger helped grow it again in ’08, as it pushed past $733 million in its first three quarters, with a realistic shot at $1 billion. That success makes DJO an industry leader within the orthopedic device marketplace, a $6.7 billion industry based on 2006 estimates.
Going through all the steps can be a bit tedious at times, but Cross has learned that sticking with it is worth it — and a successful destination requires that you take measured paces.
“I think, in some cases, I pushed change too quickly with the ReAble merger, and I’ve learned from that and taken responsibility for the mistakes,” Cross says. “But I’ve learned that being a CEO is a marathon, not a sprint. So I remain calm and take a long-term view to get through the assimilation process.”
HOW TO REACH: DJO Inc., (760) 727-1280 or www.DJOglobal.com
When George W. Haligowski was offeredthe opportunity to serve as CEO ofImperial Capital Bancorp Inc. in 1992, itcame with a catch: The board wanted a 100percent return on its investment.
There was also the slight problem of thecompany having $100 million of its $400million in assets impaired, potential FDICaction was looming, and it was in the middle of the savings and loan crisis.
Haligowski knew he couldn’t control themacro events going on at the time, so theasking price seemed too high. He countered by offering a 50 percent return inthree years. If he failed to hit the numbers,the board could fire him. The board agreed.Haligowski was a crafty risk-taker, as thatgamble with the board paid off for bothparties. Following an IPO in 1996, hebought out the owners, giving them the 100percent return they originally requested,and then he set to work to turn the organization around.
To move forward, the chairman, president and CEO identified a niche opportunity, supported that niche and maintained patience throughout the process.
“The company was trying to be a lot ofthings to a lot of different people,”Haligowski says. “I think it just took afresh assessment from an outsider, andmy first thought was, ‘There’s no way wecan do all these things well. It’s a gambleto put all your eggs in one basket, butsometimes you just have to do it.’”
Find a niche
Haligowski says he had a competitiveadvantage entering the CEO role as abusiness manager with significant salesexperience, because he viewed opportunities through the eyes of a marketer,not a banker. After making initial overhead reductions of 35 to 40 percent andeliminating the thrift’s commercialbanking services, resources weresparse. Generating new revenue was theonly road to growth and profitability,but the larger competition was formidable. After assessing the competition,Haligowski found a weakness in theenemy’s front line, and simultaneously,the bank’s niche market and a newgrowth strategy were born.
“Nobody has a crystal ball,” Haligowskisays. “I completed a thorough opportunity analysis by being involved in the marketplace and not sitting behind the desk.The bank had limited resources, and wecouldn’t really compete against the bigger commercial banks. It was a classicDavid versus Goliath situation.”
He identified an underserved market inthe commercial lending space, writingloans for real estate entrepreneurs, andhe saw an opportunity to exploit theniche through better sales techniques.
Haligowski concluded that many banking industry lending officers were reallyorder takers in disguise, and they wereleaving midsized commercial loanopportunities on the table. He took a riskand dedicated 25 percent of the bank’sresources toward the niche lending market composed of entrepreneurial ventures, such as multifamily real estate andconstruction loans ranging from$250,000 to $7 million. He attacked themarket with financially motivated salesrepresentatives, who outmuscled andouthustled the competition.
“To exploit a niche, you survey theadvancing army and look for breachesin the line,” Haligowski says. “Thenyou test the market to see if it’s receptive to your pricing and service. Whenyou see that it’s yielding, you want topower into the market and run as fastas you can. Timing is critical when youhave limited resources. We’re a smallcommercial bank; our advantage isthat we can move quickly. We’re like aPT boat: We can zig and zag becausewe are nimble and we can turn on adime, but we’re not an aircraft carrier,so we can’t survive the Battle ofMidway.”
Support the niche
With a new niche focus, Haligowskithen worked to change the company’sstructure and culture in order to support loan origination activities, loanservicing and the unique lending needsof the entrepreneurial borrower.
As part of the cultural shift,Haligowski made the bank’s managersowners by giving them stock in thecompany. He also empowered thecompany’s loan officers by givingthem creative license to structureloans in nontraditional ways to meetthe needs of borrowers who are oftenrepositioning a property. The notion ofentrepreneurs working with entrepreneurs was a hit in the market, and thebank grabbed market share from itslarger, less flexible competitors.
“I consider my managers to be mypartners, not my subordinates,”Haligowski says. “I think an ownershipstructure is preferable for an entrepreneurial culture because you can pushpeople differently when they have astake in the outcome.”
Giving key managers ownership andproviding the bank’s sales staff withincentives has enabled ICB to achievehigh rates of organic growth whileavoiding the need to take on largeamounts of debt from acquisitions.Not only has this driven the company’sstock price and dividend, but it’s setthe bank apart from its larger commercial peers, who often rely on mergers and acquisitions as a growth strategy.
In 2000, ICB re-entered the commercial banking arena. The 2002 acquisition of Asahi Bank of California provided ICB with the operating systemsit needed to operate commercially, soit could subsequently offer commercial borrowers a complete package of banking services. Asahi didn’t have branches, so the acquisition gave ICB the opportunity to increase revenue, without adding brick-and-mortar overhead. Haligowski stayedwith his successful niche market strategy and expandedeastward, eventually opening 19 new loan originationoffices across the country.
ICB made another acquisition in 2002, launching itsentertainment finance division. The division providesbanking, advisory and collection services to the entertainment industry. The division follows suit with Haligowski’sniche market strategy, because its focus is financing independent films, some of which scored home runs at the boxoffice, like “My Big Fat Greek Wedding” and “Monster.”
Aside from their strategic value, Haligowski made theacquisitions when the price was right. When he shops foracquisitions, Haligowski is first and foremost a bargainhunter. He says it’s important to look at acquisitions carefully before moving forward, and he always asks if he personally would pay two to three times the book value for abusiness.
“There has to be a really compelling reason to make anacquisition, like you’re getting a really good deal or you’readding to your core competencies,” he says. “Otherwise,you’re just diluting shareholder value. I’ve never reallyunderstood paying for good will. I don’t understand how itworks.”
Given the recent trends in the banking industry,Haligowski and his team may need those Midway-like battle survival skills. Over the last four years, other banks followed ICB into the midsize commercial lending space,some offering lower rates and less stringent lending qualifications. Then the bottom fell out of the market completely, and demand dropped by nearly 75 percent. Whencompetitors launch a niche market invasion, Haligowskisays the best survival tactic is often to hunker downbecause competitors aren’t often dedicated to the spacelong term, and then commence a hybrid marketing strategy to protect some of your market share.
“It’s a misnomer that being a niche player limits growth,”Haligowski says. “You select a niche market because it’ssignificantly underpenetrated and because you have a limited share of the available market. So you can mitigate riskand continue to grow by expanding your share.”
Despite having opport unities to increase market sharethrough better execution, Haligowski says that the last 12months have been challenging and that the underservedcommercial loan market all but evaporated during 2007.He says that just as timing is vital when gaining an initialfoothold in a niche market, it’s equally important whenwaiting out a down period.
“You don’t want to go surfing when the surf isn’t up,”Haligowski says. “You have to right-size your resourcesand wait for the next wave of opportunity. The otherchoice you have is to meet the price competition head-onby writing some loans at lower rates, and then outsourcethe risk to a third party. I think a hybrid solution is thebest answer, because you’ve got your entire structurededicated to the niche market, and it will eventuallyreturn.”
Under his hybrid solution, Haligowski has continued topush his sales team toward increased market share in thecommercial loan market, and then selectively meets pricing competition while carefully scrutinizing the split of thebank’s loan portfolio. In addition, he incentivizes his salesteam toward cross-selling by selling existing borrowersancillary banking services.
During the recent difficult times, Haligowski hasremained close to the bank’s employees. He provides thema monthly status report, and he personally visits customers to thank them for their business and also visitstroubled properties the bank has financed. Haligowskicautions CEOs not to overreact to market changes and tostay the course if they want to be successful in niche markets.
“We have our entire company and the culture set to support the commercial loan market,” Haligowski says. “It’s ahighly fragile system built on trust, so to undermine thatwould destroy the very underpinnings that make the entirething work. You have to spend more time in the field during difficult times and let people know you are committedto staying the course. You have to support people andmanage their perceptions when things are tough becausethat’s when they need reassurance the most.”
Although the bank has suspended its dividend for theremainder of 2008, it has remained profitable thus far. Asa demonstration of his confidence and his penchant for risk-taking, Haligowski purchased more than 100,000 ICBshares on the open market so far this year, making him thebank’s largest individual, noninstitutional shareholder.Since buying the company and repositioning it as an entrepreneurial niche player, he has grown the bank’s assets to$3.6 billion last year, up from $3.4 billion in 2006.
“I think you just have to make a judgment about the bestway to go,” Haligowski says. “You can get everybodyinvolved in the decision, but the only way the employeeswill follow a leader is if you are clear in your position.Sometimes, you just have to take a gamble and set a strategy, but don’t take it lightly, because if you’re wrong, youcan lose your job.”
HOW TO REACH: Imperial Capital Bancorp Inc., (888) 551-4852 or www.icbancorp.com
Half of all business mergers and acquisitions fail because things just don’t turn out as executives planned.
Acquisition value is often based upon a business’s past performance, and many executives rely on in-house personnel to conduct historical financial analysis only to be surprised later because the past isn’t always indicative of future earnings. An acquired company may not sustain growth if market conditions change, key employees leave or the company’s expense levels are too high compared to industry norms. An external financial due diligence review will uncover many of these hidden risks so executives can appropriately determine the acquired company’s true value.
“In M&A transactions, often what is not discovered through due diligence or unknown items are what really come back to bite you after the deal is done,” says Pat Ross, audit partner with Haskell & White LLP. “While earn outs or other contingency payments are designed to mitigate this risk, they can’t remedy the distraction of executives who have to deal with post-acquisition problems. Why not have a clear picture upfront, so you know exactly what you are buying?”
Smart Business spoke with Ross about the value of professional due diligence and the areas that produce the most frequent post-M&A surprises.
How can financial due diligence project future earnings quality?
It’s vital to understand how the target company earns its profit to know if that will continue. Sometimes a highly profitable division may have been sold or a competitor may have gained the upper hand in the marketplace with new technology. If margins or revenues will be impacted in the future, you won’t know that by looking at past or current financial statements, which are typically backward looking. Executives also need to know if the target has a consistent, stable customer base or if there have been one-time large orders that will not repeat, or non-operational gains. It’s important for the due diligence team to assess the marketplace and the target’s position to know if the acquisition price is right.
What are potential SG&A surprises?
Perhaps the owner of the target company didn’t take a salary for a year while he readied the company for a potential sale, or maybe the current staff is paid above or below the going market rate. These are situations that can cause big problems when new owners need to hire additional staff or are forced to offer substantial salary increases to mitigate turnover. You also want to know if there have been any extraordinary expenses, like lawsuit settlements, and whether those are likely to recur and how the target company’s expenses compare against industry benchmarks. How the company performs against its peers in all categories is an important predictor of future success.
How can human capital influence M&A success?
It’s important to understand if the target company’s financial performance is driven by a few key personnel. If so, they will need to be retained, and the due diligence team can assess current management in order to understand the relationship between it and the company’s future profit prospects. For example, items assessed can include: When and how are commissions paid to the sales staff members? Is the bonus schedule competitive? Might they woo away key customers if they go to work for a competitor? These are some of the questions that should be asked and understood before making an offer.
What are some hidden risks?
Back taxes, IRS liens and EEO lawsuits can be disruptive or even catastrophic if CEOs have to deal with them after the acquisition; a solid external due diligence review can uncover the potential of any of these events occurring. Also, be certain that you’re getting clear title to the assets you’ll be buying, the company has effective accounting controls and processes in place and the business has been adequately insured. The likelihood of a lawsuit or claim surfacing after the acquisition increases if the business hasn’t practiced sound management or risk management fundamentals in the past.
What constitutes an external financial due diligence review?
The due diligence professional will sit down with management in the preliminary stages to gain an understanding of the proposed deal, including the upside and potential downside, then he or she can calibrate the due diligence procedures to assess the potential risks in a variety of financial and nonfinancial areas. A customized plan will be prepared to perform investigative procedures around those risks and determine if there are real or perceived risks and any potential mitigating factors. The key here is to understand if the deal is likely to look just as attractive in a few years as it does today.
PAT ROSS is an audit partner for Haskell & White LLP. Reach him at (949) 450-6362 or PRoss@hwcpa.com.