John Burnell

Wednesday, 25 October 2006 08:58

Alignment aids IT projects

Business leaders recognize that networking, databases, data storage and communication are essential to running the organization, but are often hard-pressed to understand just how the IT infrastructure adds specific value to the business.

Information technology projects are less likely than other business initiatives to have strong executive-level sponsorship, are performed out of sight of business users, and are more likely to rely on external resources. These are just a few factors that illustrate why IT projects need to be managed slightly differently than other business programs.

“It’s much easier to manage an IT project successfully when people throughout the organization understand how the project relates directly to the business,” says Mike Amerson, director of the project management office at Systems Evolution, a leading IT consulting and solutions provider headquartered in Houston.

Smart Business asked Amerson how companies can improve their IT project management.

How do IT projects need to be managed differently than other business projects?
It’s not always obvious how IT project goals support business strategy, so companies really need to focus on the project scope to be sure the project will give them what they need. IT project management doesn’t usually have direct access to C-level managers, which often means more communication is needed, especially to identify and manage the expectations of all stakeholders.

It’s also not always clear just how many people and departments the IT project will impact, so an organizational readiness assessment should be performed to make sure there are no surprises or unintended consequences. The more systems are integrated, the greater the risk of causing unintended business process problems. This can lead to surprises for the business user.

External experts are often used in IT projects, both to supplement and extend the expertise of the internal IT team. This is a result of the rapid change in technologies and increasing integration of systems. When they are, it’s very important to manage the transfer of knowledge from the external resource into the organization.

How can external project management assistance help?
IT project management professionals can be very helpful in adapting project management processes, standards and metrics appropriate for an organization’s management culture and project needs. They can also often recommend tools and resources to help, or identify skills that need to be developed internally to support the system after the project is completed. IT organizations that are overloaded with initiatives can also utilize external project management professionals to extend their leadership team.

Departmental collaboration and representation are important, but just how large and broad should a project team be?
The team needs to be big enough to complete the project, without being too large to manage effectively. One rule of thumb is that a project manager can oversee four to six teams, and teams should be no larger than four to six people so that team leaders are still able to contribute technically. When teams are larger, there’s a risk the project manager and/or team leads will be swamped with keeping in touch with the team and won’t be able to do much else. Since most IT project managers and leaders are also the most skilled technically, this can substantially improve the quality of the system.

What are your top tips for IT project management?

  • Conduct inernal IT projects as if you were doing it for a company client: assign a manager, prepare a plan, get executive buy-in and assign resources accordingly.

  • Actively manage the risks.

  • Manage change. This includes not only changes to the company’s business operations and systems, but also changes to project scope, which can creep in and cause problems with schedule, cost and quality.

  • Communicate, communicate and communicate — among project teams, stakeholders and the larger business community itself. Good communication isn’t just informing people what’s going on; it includes getting feedback that can be used to make the system better.

  • Reserve time to periodically review the project. Don’t wait until the end to review how it’s meeting its plans and goals.

  • Empower the team. Involve all the team members, challenge them and commit them to the success of the project.

IT projects should be treated as true projects, not as action items on the IT department’s to-do list. IT projects shouldn’t be prioritized just among other IT projects, they should be prioritized alongside all business initiatives.

MIKE AMERSON is director of Systems Evolution’s project management office. Reach him at Systems Evolution is a professional services organization that provides software development solutions, Enterprise Project Management consulting, managed network support and permanent placement. For more information visit

Thursday, 26 July 2007 20:00

Financing options

Stringent disclosure requirements and rising interest rates have many businesses looking for alternatives to traditional securities and bank loan funding options. Mezzanine financing is helping fill the gap, especially for transactions under $50 million. Buyout and mezzanine funds raised $102.9 billion in 2006, their highest year ever, according to tracking firm Thomson Venture Economics.

Mezzanine financing offers more flexibility than bank loans and has less regulation than securities. These advantages come at a price, including the possible transfer of some equity.

Smart Business spoke with Mike Revord of mezzanine investment firm Aldine Capital Partners to learn about mezzanine financing and when it is a good option for businesses. Aldine Capital has partnered with MB Financial Bank to provide mezza-nine financing to its middle-market customers.

What sets mezzanine financing apart from other capital options?

It’s really a hybrid between debt and equity financing. There is debt — the company issues a note with a coupon, but the investor typically wants to take an equity position or some other form of upside. It’s a great source of low-cost capital when compared to common equity.

Mezzanine financing is almost always used with a bank loan and is typically used in leveraged buyouts or any other type of ownership change where the amount of debt the company needs to take on is more than it can get a bank loan for. Banks typically will lend a company two to three times its Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA), while mezzanine can go for three to four-and-a-half times EBITDA, sometimes even higher, depending on the business.

What types and sizes of businesses are suited for mezzanine financing?

Companies with less than $10 million in sales and less than $1.5 million in EBITDA are less attractive to mezzanine lenders, and once deal sizes get into the $60 million range and higher, mezzanine tends to be more like a private placement. Company type is more important. There are several types of businesses where mezzanine financing doesn’t work well, such as fad companies or those in very cyclical industries. Fad companies include toy companies and software companies where the product might be very hot for a short time. Highly seasonal and cyclical businesses don’t appeal to mezzanine finance companies because of the requirement for a consistent earnings performance. In fact, to get mezzanine financing, a company has to show consistent performance for a fairly long time, usually at least three years.

What are some key terms and negotiating points?

One thing that is commonly misconstrued in mezzanine financing is the role the coupon rate plays in the cost of capital. In deals where warrants are included, the coupon is not the only cost to the borrower. Warrants are typically for common stock and dilute the borrower’s ownership in the company. It’s important to understand the overall yield. I recommend that companies focus on the overall cost of their capital, not just the coupon rate.

The coupon rate is negotiable, and so is the length of the deal and other terms. Mezzanine deals are typically no shorter than five years, and five to eight years is standard. The investor looks at it as a long-term opportunity.

How does the financing process compare to traditional bank loans?

There are many similarities, and a few differences, with the commercial lending process. The timing of the processes is very similar. So is a lot of the information the lenders want, but that’s where bank and mezzanine financing start to diverge. Mezzanine financiers tend to look more long term than banks. They’ll look more at the company’s value-creation capabilities and more in depth at the market and the competition. They’ll also spend more time on strategic and board-level issues. In that regard, they’re more like a buyer than a lender. After the deal is complete, the mezzanine financier won’t be involved in the day-to-day operations but will have board-level involvement, which can continue for years.

Mezzanine financing is a lower-cost source of capital than issuing equity but is more expensive than borrowing from a bank. Mezzanine is more patient than a bank because it doesn’t demand regular principal payments.

Mezzanine financing is a young market, and it’s maturing quickly. There’s a lot more competition than there used to be, which has made more capital available. It’s also led to the development of a more standardized approach for getting mezzanine financing, which is another positive development for borrowers.

MIKE REVORD is managing partner of mezzanine investment firm Aldine Capital Partners. Reach him at (312) 346-3950 or

Monday, 26 March 2007 20:00

Information is the key to credit

Banks are looking for more than financial data when they make credit decisions. What they’re really looking for is information about the business: its operations, competitive climate and how the credit would help the business grow. Improving the quality of this information improves the chance of success and expedites the credit process.


“If the business has all the information together that the bank needs, it can get a credit decision in one to two weeks,” says Tom Marvinac, group regional president for commercial banking at MB Financial Bank. “As long as the business is able to provide the information and have key people available to answer questions, it should expect a prompt decision. One way to evaluate lenders is to consider their decision-making time and whether the business can get quick access to senior managers.”

Smart Business spoke with Marvinac to learn what information businesses need and how they can present it to increase their chances of getting commercial credit.

What are the main steps in the commercial credit application process?

For new customers with no prior relationship with the bank, it begins with a discussion so the banker can get an understanding of the business and industry. The banker will want to learn about trends affecting the business, the competitive situation and get to know some of the key people in the company, such as the head of sales or the controller, if these people aren’t the owners or principals.

Often the banker will visit the business to get a better feel for the operations and people. After that, the bank will want to see financial information.

What can businesses do to expedite the process?

The most important thing is to have information ready and qualified personnel available to answer questions and discuss business issues. The financial information doesn’t always tell the whole story. Maybe a company has just had a record year, but it included a large contract that won’t be recurring or the company gave a substantial discount to keep a key customer from going to a competitor, but the margins should rebound the next year. This is the type of information that goes into the commercial credit decision, and it shows why it is important for the banker to understand the customer’s business and industry.

What specific information should businesses provide?

A company with no previous relationship with the bank should present two or three years of financial information, such as income statements, balance sheets or perhaps tax returns, depending on how the business is organized and the complexity of its financials. Companies should be prepared to discuss anything unusual that’s occurred in the business — good or bad — to help frame the financials and put the numbers into some context.

Companies may need to get their outside accountants involved. It is very helpful and saves time in the lending process if they give their accountants permission to speak to the bank directly. From a banker’s point of view, it would be very difficult for a business to over prepare. Err on the side of preparation.

What information is typically most difficult for companies to provide?

To issue commercial credit, the bank wants to know how the money will help the company. Businesses usually know the answer, but often have a hard time expressing it. Something a bank would love to get is a projection or pro forma showing what the capital would do for the business. The bank should have the business knowledge to help the customer develop these projections, and outside accountants may be involved, too.

Aside from credit risk, what are the leading reasons commercial credit requests are rejected?

Companies can overestimate the impact of getting bigger. For example, they may want to borrow to get a bigger, better machine that will significantly improve their output capacity. But realistically, they might not have steady demand for the excess capacity, which makes the machine a very expensive piece of capital equipment. Another example is borrowing to expand a facility or add new locations; sometimes expansion will make a company larger, but no more profitable.

The big issue is that companies may not have enough equity capital to grow. It is very difficult to grow a business solely on debt. Young companies often want to expand, but they may need to develop more equity in the business before expansion makes sense.

TOM MARVINAC is group regional president for commercial banking at MB Financial Bank and has more than 25 years of industry experience. MB Financial Bank offers a wide range of commercial banking, business banking, treasury management, personal banking and wealth management services. Reach Marvinac at or (708) 210-5143.

Wednesday, 30 August 2006 09:43

Define the problem

Business managers face a never-ending array of potential information technology (IT) projects competing for their attention and budget. Making wise investments requires hitting a moving target, because technologies and the business value they provide are constantly changing. Once an organization decides to go forward, it faces a whole new set of details to manage.

Executing a successful IT project requires choosing the right project in the first place and knowing just how far to take it, according to Brad Wealand, vice president of Systems Evolution’s Consulting Division.

Smart Business asked Wealand how companies can improve their IT success rates.

What are the fundamentals of a good IT project?
More than anything, in today’s environment where business competition and technology are changing all the time, companies have to decide if an IT solution will either solve a problem or help the company take advantage of a new business opportunity.

There’s also a place for projects that help reduce maintenance and support, but even those projects should solve a problem or create opportunities by shifting operational expense money over to the capital expenditure side where it can return an ROI. If an IT solution is not doing one of those things, chances are companies are better off doing something else with that money to drive competitive advantage.

What project management aspects tend to get overlooked?
Most people minimize the importance of up-front requirements analysis to determine exactly what they really need.

With IT, it is easy to spend a little money and come up short on important features, or to spend a lot and get something much different than what you really need. Both scenarios waste cash, and may not improve a company’s capabilities much at all.

A good project is set to deliver a system that will meet your business expectations. The key is to appropriately define the problem before attempting to define the solution. Do not start defining what the solution needs to be (screen shots, data requirements, etc.) until agreeing on desired business outcomes and activities that need to be supported.

How can companies determine if a project should be done in house or by an outside IT provider?
It all depends on a company’s circumstances and priorities. If something is mission-critical to operations and also complex or unique to one’s business, it might be good to keep the project in house so the expertise stays there. However, in-house people may not have the skills or time to build it effectively, so some kind of hybrid team may be most appropriate.

If a project is relatively simple and not mission-critical, outsourcing, third-party commercial-off-the-shelf (COTS) software purchases or hosting by an MSP (managed service provider) may be adequate solutions that leave your organization free to tackle other more important challenges.

A lot of solutions are touted as ‘complete’ or ‘integrated,’ yet no one will say they want an incomplete solution or a nonintegrated system. What do companies really need?

There’s no checklist or definition of what makes a complete solution. We consider a complete solution one that gives the customer everything he needs. A large percentage of IT projects fail, but it’s not always due to mismanagement or poor execution. It’s often a case of a project not meeting expectations, which may have been unrealistic or undocumented in the first place. It really goes back to understanding the true requirements.

The integration issue is similar to the constant challenge with school finance: no one will say they are in favor of bad schools or poor performance, but that doesn’t find the best model for how to derive the desired outcome. Similarly, no one wants a nonintegrated solution, but how integrated does it need to be? Within a given division? Through all departments? Across the company? Sometimes the case for integration doesn’t support the cost of getting there.

There is a lot of mistrust and resistance to IT projects today. To some degree, vendors brought it on themselves during the past decade by hyping and selling a lot of things customers didn’t necessarily need. In response, companies are often hesitant to move forward with projects they do need. The resulting technology stagnation can be very disruptive and harmful to the bottom line, but can be effectively countered by simply taking back control.

Companies need to invest the time to understand what they need today, and to find partners they can trust to sell them only what they need, and only what can be delivered.

BRAD WEALAND is vice president of the Consulting Division at Systems Evolution, which provides software development solutions, EPM consulting, managed network support and permanent placement. Reach Wealand at or visit the Web site

Tuesday, 29 August 2006 12:01

Getting connected cuts time, costs

Emerging technologies make it not only possible, but practical, to slash telecommunications expenses by using existing data networks to carry voice calls; eliminate paperwork and its storage and handling expenses through digital imaging; and make more business information available to employees, customers and colleagues around the world.

Skoda, Minotti & Co. helps clients do the same.

Smart Business spoke with James P. Sacher, CPA, who leads Skoda Minotti’s Information Technology (IT) Group, for guidance about technology trends and to learn which proven technologies hold strong efficiency and cost-saving potential for businesses.

What are some promising new technologies available to business?
There are three that can help many businesses: voice-over-IP (VoIP) communications; Microsoft’s SharePoint Services; and wireless data — beyond using a laptop at an Internet caf.

VoIP blurs the line between telecommunications and network infrastructure because voice and data share the same network. Companies can take advantage by using their existing networks to carry phone calls — including long distance calls — without any drop in service quality. VoIP also makes it easier to video conference.

Adopting VoIP will help lower overall telecommunications expenses, especially for companies with multiple offices. One of our clients will save almost $200,000 over three years. That’s a pretty dramatic example, but many businesses can find significant savings.

SharePoint is a new way for people to share and collaborate. It includes a desktop portal application for users, plus a server that accesses information from different enterprise and external systems.

What sets SharePoint apart from other collaboration tools is its ability to integrate data from multiple sources, and to automatically push information or alerts out to people. It also has great internal search capabilities. If I’m working on a project and need a document but I’m not sure where it is, SharePoint will search all my company’s systems and can show me all the documents, e-mails, customer records and other resources related to the project.

The third big opportunity is wireless data. Now it’s easy for people to get e-mail and attachments on their cell phones. What will surprise a lot of people is how affordable these systems are. You get unlimited use for $35 or $40 a month, and can do much more than e-mail. Microsoft Windows Pocket PC handheld computers and ‘smart’ phones can connect wirelessly and create a lot of opportunities to eliminate paperwork.

What is remote access, and how can companies benefit from it?
Remote access is a related concept. It’s about making employees as functional anywhere as they are when working from their desktop. When I’m at home or at a client site, I can connect to our systems and access all the same information as I can at the office.

How can companies keep their data safe while improving access?
Wireless and remote access are becoming mainstream technologies, but implementing isn’t easy because of all the details. Security is one of the biggest considerations. If you’re opening up another door to your enterprise, you’d better be sure you can put a lock on it. Firewalls are essential.

The best thing companies can do is develop sound security policies and actively enforce them. Laptops, PDAs and memory cards get lost all the time, so good policy options include not allowing employees to store customer information on these devices, or to require encryption of all stored data.

Companies also need to set and enforce policies to prevent the use of unlicensed software. Managers can be amazed at how much unlicensed software is running within their company. There is software available to automatically inventory what is in use and match it against what is licensed.

What is paperless digital technology, and what are some of its benefits?
A lot of companies already scan and index forms for easy retrieval. Why not go to the next level, which is to start with electronic forms and go completely paperless? That makes it much faster to search for specific documents and to find content within a document. One of the other benefits is helping companies follow their own document management policies.

What is data integration?
Data integration unifies information from multiple sources — such as customer relationship management (CRM), billing and inventory systems — to give a total view of the customer or the operation. It’s similar to the SharePoint concept. The goal is that data is only entered one time and becomes available to any user or application that needs it.

JAMES P. SACHER, CPA, leads the Information Technology Group at Skoda, Minotti & Co. The company, located in Mayfield Heights, provides accounting, consulting, financial, health care and tax services. Visit or e-mail Sacher at

Sunday, 30 July 2006 10:50

Customer service -- not lip service

Customer service is universally regarded as key. Yet it’s in decline in many industries as a frequent casualty of initiatives to cut costs and become leaner. A new generation of MBA students under Dr. Len Berry, distinguished professor, M.B. Zale Chair in retailing and marketing leadership at Texas A&M University, is learning why good service is good business.

Smart Business spoke with Berry, a published author of books on business success, who explained how service can create a competitive advantage, how to avoid common service management mistakes and how to beat Wal-Mart.

What fundamentals of good service tend to get overlooked?
First is showing basic fundamental respect for the customer. This includes respecting the customer’s time and showing respect for common courtesy.

For instance, what if a bank only has two of its seven teller windows open at noon, which is the only chance a lot of us have to go into the bank? That’s a basic failure to respect the customer’s time.

The second is basic fairness. Berry’s Law is that if customers hate a policy that is designed to save the company money, the policy will end up costing the company money.

The airlines are a great example. Frequent fliers routinely become enraged because of what they consider unfair policies about pricing and reservation changes. The airlines’ perfection of Berry’s Law is a primary reason so many of them are in bankruptcy or on the edge of it.

Do executives have common misperceptions about service?
Again, there are two. The first is that improving service will cost a lot of money -- which is a very damaging misperception because it discourages investment.

Excellent service contributes to profitability in many ways. Better service improves the top line, but it increases efficiency because you’re doing things right the first time. It also strengthens loyalty and builds good word-of-mouth, which is like free promotion.

The second widespread misperception is that customers only care about low price. What customers really care about is getting a good value. Price is a component of value, but not the equivalent.

If companies think customers only care about price, they concentrate on cutting costs. Focusing on price takes the focus off the value part of the equation.

Unfortunately, the trend is for lower price and less service. I call this the ‘Wal-Mart Effect.’ But it’s been proven that the absolute best way to compete against Wal-Mart, regardless of your business, is to give the customer a better shopping experience.

Is there a correlation between quality of service and profitability?
Absolutely. A lot of research in the past five years from multiple sources clearly shows that service leaders are more profitable than average performers.

There are only three ways to increase market share: get more customers, get more business from existing customers, and/or reduce customer attrition. Many initiatives focus on one of these areas. Improving service is very powerful because it addresses all three.

How difficult is it to go from being average to making service a competitive advantage?
It’s a series of large steps. Companies shouldn’t think in terms of making quantum leaps, they should focus on getting better every day.

To excel at service, companies need service-centric values, and values don’t change overnight. Service excellence needs to be more than a top-level initiative. The key is having mid-level leaders in the organization who want to provide good service.

Companies also need to take a long look at all their HR practices: hiring, pay and recognition. True service excellence requires treating employees well, so they will want to serve customers well.

How should organizations measure their service effectiveness?
Whether the company is large, small or somewhere in the middle, it needs to create a customer listening system, including multiple listening posts. These can be formal, such as regular customer surveys, or informal, such as a store manager walking the store with a customer every day. If done daily, that can be incredibly powerful.

There are three types of customers to listen to regularly: current customers, because they’ve actually experienced the service; competitor’s customers, to know what they want; and internal customers -- the employees who have, in effect, ‘purchased’ a job or career from the organization.

Have you seen any new methods organizations can use to differentiate their service?
There is a lot that’s new, but nothing that particularly excites me. We don’t need a lot of new. We need to better execute the old.

LEN BERRY is Distinguished Professor, M.B. Zale Chair in retailing and marketing leadership at Texas A&M University. Reach him at (979) 846-1007 or

Thursday, 26 July 2007 20:00

New patent law

The U.S. Patent and Trademark office has launched several initiatives to streamline patent processes, including a pilot program that guarantees resolution of new patent filings within one year. Despite its intentions, the current patent climate has been decidedly unclear since April when the U.S. Supreme Court issued its KSR International v. Teleflex decision, which struck down a long-held standard regarding the obviousness of patents. The decision may make it harder to win patent approval and could put some existing patents at risk to challenges.

Smart Business spoke with John Brannon, Ph.D., an intellectual property attorney with Sommer Barnard PC, author of more than 200 patents, to learn the implications of the changes and appropriate strategies businesses can pursue.

Why is the KSR ruling significant?

The Supreme Court decision threw out the teaching, suggestion and motivation (TSM) standard that was used to decide the obviousness of patents, saying it was too rigid. The decision won’t have much of an affect on patent filings, but will impact prosecution. The decision makes it easier for patent examiners to take prior art patents from different areas and combine them to make the case for obviousness of new claims. Prior to KSR, to reject a patent because of obviousness, the patent examiner had to show some teaching or motivation to combine two or more prior art references under the TSM standard. Now, the examiner can pull prior art references from anywhere — they don’t have to be as closely related to the area of the patent application. Examiners could theoretically deny claims based on obviousness, as long as the combination of references includes all of the elements of the claim being examined.

Does the decision put existing patent protections at risk?

The decision will change the way patent applications are evaluated going forward. Existing patents may be subject to attack and scrutiny if the patent was granted by overcoming an obviousness objection solely based on the TSM argument. However, TSM by itself is rarely a winning argument, so not too many patents are at risk.

What else is impacting patent processes and litigation?

The Patent and Trademark Office has proposed several changes that are supposed to make it quicker and easier to get a nice, solid patent. They’re also trying to tighten up perceived abuses of the system. There is some well-founded criticism about the process, especially that it takes too long.

The most important proposed changes are the Accelerated Prosecution Route, which is a pilot program to expedite patents, limits on continuations for filings, claim reform that limits the number of claims filed for a given patent application, and information disclosure statement reform, which proposes limits for the number of prior art references filed with patent applications.

How does the Accelerated Prosecution Route make the patent application process faster?

The Accelerated Prosecution Route was a pilot program that started in June 2006 and guaranteed resolution of patent requests within one year. The first patents applied for under this program were recently awarded, and the Patent Office would like to expand the program. The program shifts a tremendous amount of responsibility from the patent office to the patent applicant, and it also increases the applicant’s risk.

Under the normal process, patent applicants do not have to search for and include prior art references with their applications, unless they know of related patents. The Accelerated Prosecution Route requires applicants to search for prior art references and document for the patent examiner how the references relate to the new application. It shifts the research responsibility from the examiner to the applicant. It also shifts a lot of risk. Any statements made to the patent office in the submission could come up in litigation, so applicants have to choose their words carefully.

The Accelerated Prosecution Route could be very useful for a company that needs a patent quickly because they’re at a competitive disadvantage without it. The process is faster, but it’s also expensive and requires more work, so it may not be worth it if there is time to be patient.

Are there new strategies patent filers should take in light of these and other developments?

The other proposals are intended to streamline the process and prevent abuses of the system. Some would limit the number of references submitted with patent applications, so key references don’t get hidden in a large filing. Others would limit the number of claims and extensions available for applications. Some sweeping changes have been proposed that won’t be applicable to the average applicant. These reforms may have the opposite effect as intended.

JOHN BRANNON, Ph.D., is an intellectual property attorney with Sommer Barnard PC and has a background in Ceramic Engineering. Reach him at (317) 713-3500.

Monday, 25 June 2007 20:00

The importance of an appeal

According to the official Indiana court system Web site, the Indiana Court of Appeals issues more than 2,500 opinions annually and had a record number of cases before it at the start of 2007. By contrast, the Indiana Supreme Court hears only about 100 cases a year, which means the intermediate appellate court effectively has final jurisdiction over thousands of cases. Therefore, it’s prudent to strategize about potential appellate issues even before the original proceeding is decided.

Smart Business spoke with Geoffrey Slaughter, an attorney with Indianapolis law firm Sommer Barnard PC, to learn what role appellate practitioners play on a legal team, when they should be engaged, and the skills and perspective they should provide.

What are the main differences between appellate practitioners and the corporate counsel that businesses usually have represent them?

Even first-rate trial lawyers often do not have experience in appellate courts. Effective advocacy to a finder of fact — whether to a judge, jury, administrative agency or arbitration panel — often involves a different skill set than is required before an appellate tribunal. The appellate lawyer’s principal tools are analytical ability, including knowing how to identify and frame the key legal issues, and writing skills, so that even the most complex legal and factual questions are presented clearly and simply to busy, generalist appellate judges.

Should the appellate practitioner be involved in the original litigation?

The need for appellate counsel can arise even before the trial court is through with the case. Appellate proceedings sometimes occur on an interlocutory (or interim) basis, while the trial court’s proceedings are still under way. The trial court may have granted an injunction compelling one party to take (or refrain from taking) certain action, requiring immediate appellate review. Or the trial court may have issued a discovery order that, if not promptly appealed, would impose an onerous burden in time and money that could not be meaningfully challenged after the trial court has finished with the case.

Given their research and writing skills, appellate lawyers can also be valuable in various proceedings before the trial court, such as preparing (or opposing) motions to dismiss, motions for summary judgment, motions for class-action certification and other potentially dispositive matters.

Appellate lawyers understand the importance of taking the long view of a case, rather than obtaining a short-term win in the trial court that may not withstand rigorous appellate scrutiny. The flip side is that appellate lawyers also can ensure that important legal and factual questions are identified, developed and preserved at trial, so they are available on appeal as a basis for overturning an unfavorable ruling below.

Why is it helpful to involve an appellate lawyer to assist with an appeal rather than to rely only on trial court counsel?

Once the trial court’s judgment is final, appellate counsel are useful in analyzing whether, and how, the court’s decision is vulnerable on appeal. And, of course, appellate practicioners are seasoned in prosecuting (or defending) appeals, both in the written briefs filed with the court and in delivering oral arguments.

Appellate practitioners also understand how to present an argument to a state or federal appellate court of last resort, which typically exercises discretionary jurisdiction over its cases. These courts usually hear very few appeals as of right, where the losing party is entitled to automatic review. In the overwhelming majority of their cases, these courts decide which appeals they’ll hear and which they won’t. Appellate practitioners with experience litigating in these courts, and who understand what issues are likely to interest the justices, represent the client’s best shot for maximizing (or minimizing) the likelihood of obtaining discretionary review. If review is granted, experienced counsel also know how to present arguments in the way most likely to prevail on the merits.

How should appellate counsel be evaluated and selected?

There is no substitute for experience and a track record. The most effective appellate counsel are experienced in appellate matters generally and in the rules and procedures of the relevant appellate court specifically.

The client should do its homework. Ask around. How many cases has the lawyer litigated in that court? Is the lawyer a novice or a battle-scarred veteran? Inquire whether any colleagues or competitors have hired, or been opposite, the lawyer. Meet with the lawyer. Is the lawyer articulate and well-spoken? Read the lawyer’s written work-product from other cases. Do the briefs read well? The client needn’t be trained in the law or in the nuances of appellate practice to know whether a piece of legal writing is persuasive. If it doesn’t persuade you, it’s not likely to persuade a court. If it confuses you, or is so boring you can’t get past the first page, a judge is likely to have the same reaction.

GEOFFREY SLAUGHTER is an attorney with Indianapolis law firm Sommer Barnard PC. Reach him at (317) 713-3606 or

Monday, 26 March 2007 20:00

A family affair

United States business ownership is starting a dramatic and long-term transition. The amount of owners who will try to sell their businesses will grow 500 percent from 2007 to 2011, according to one study; another found that 40 percent of CEOs of family-owned businesses expect to retire in the next five years. It’s clear that family businesses will soon pass from one generation to the next.

But will outgoing owners also pass down a large tax bill and debt burden with the sale? Not necessarily, depending on how the transaction is structured. There are four strategies commonly used to transfer the family business: Installment Sale to a Defective Grantor Trust (see our Article in Smart Business, March 2007), Self-canceling Installment Note (SCIN), Private Annuity, and Grantor Retained Annuity Trust (GRAT).

Self-canceling installment notes, or SCINs, provide a way to transfer a family business that can protect the buyer from burdensome payment schedules and protect the seller from estate taxes.

In Part 1 of a two-part series, Smart Business spoke with Rick Appel of Advanced Strategies Group to learn more about how to use SCINs and structure them for maximum advantage.

What is a SCIN?

A self-canceling installment note is a structured payment plan with special provisions if the seller dies. SCINs are used to transfer family businesses from one generation to the next. The seller (who is referred to as the senior family member) sells the business to the junior family member (buyer), who agrees to make regular payments until the full price is paid or the seller dies, whichever comes first. The transaction is considered a contingent sale because it is based on the contingency that the seller will die before the note matures.

There are some legal restrictions on the terms of a SCIN. An IRS regulation states the period specified for the junior family member to make payments must be less than the senior family member’s life expectancy. Otherwise the transaction may be treated as a private annuity.

How is life expectancy determined?

The IRS has life expectancy tables. However, in situations where death may be imminent, the tables don’t apply and the IRS makes a judgment as to the reasonableness of the deal and the appropriate taxation. The IRS judgment takes into consideration the seller’s health, length of the payment contract and the down payment amount. If the payment schedule is longer than the seller’s life expectancy, the IRS treats the transaction as a private annuity.

Can the seller use a SCIN to give the buyer a ‘sweetheart deal’ or ‘family discount’ on the sale?

There are IRS requirements in place to prevent that. If the value of the self-canceling note that the seller receives from the junior family member is less than the fair market value of the business, the difference is considered a taxable gift and subject to the gift tax. The gift tax can be easily avoided by valuing the business fairly and structuring the payment terms accordingly. The IRS will take the seller’s health into consideration when determining the reasonableness of the transaction.

What are the income tax consequences of a SCIN?

For qualified SCINs, the seller reports income from the sale as a gain, which is calculated as the maximum sales price. It assumes the transaction will be paid in full before the seller dies. The seller’s reported gain includes return of basis, capital gain and interest income. If the seller dies before all payments are received, the gains are accelerated and reported as income for the deceased’s estate tax. The buyer can deduct interest from SCIN payments from his or her personal income tax. Various events can also trigger a stepped-up basis for the buyer.

How else do SCINs impact estate tax?

Remember, the ‘SC’ in SCIN stands for ‘self-canceling.’ The debt can be canceled by the seller’s death. SCINs can be structured so the value of the canceled payment obligation is not counted as part of the estate for estate tax purposes. This exclusion is available if the buyer paid an adequate premium. However, any SCIN payments that were received but not spent before the seller died are a taxable part of the estate. In short, income from past payments is taxable, future payment obligations don’t have to be.

Watch for Part 2 next month with information on the new rules for the Private Annuity as well as information on Grantor Retained Annuity Trusts (GRATs).

RICK APPEL is a CPA and senior vice president at The Advanced Strategies Group, which specializes in wealth preservation and transfer. Reach him at (248) 359-2480 or

Monday, 30 October 2006 06:53

The essential plan

Many new business ventures are launched with more enthusiasm than direction. Entrepreneurs who have figured out how to build a better widget or provide a superior service are so eager to bring their product to market they may overlook important aspects of running and growing the business. They may also be reluctant to take time away from starting the business to write a plan that outlines what the business will do and what will make it great.

The business world is full of anecdotes about great ideas that started on the back of a napkin. “Writing something down at all puts you ahead of the game for business planning,” says accountant Patrick T. Carney, a partner at Cleveland accounting firm Skoda Minotti & Co. “Getting people to write a plan down at all is a big step.”

Smart Business talked to Carney about how to develop effective business plans without bogging down company leadership with excessive writing and revision requirements. He also explains how business plans play a major role in helping successful startups transition into sustainable businesses.

If it isn’t required to secure funding, why should companies or entrepreneurs write a business plan?
A plan helps you identify and minimize the risks involved with starting a business. When you write a plan, you have to think about all the resources, facilities, operations and staff you’ll need to be successful.

When people think of a business plan, they think it’s a book. It’s not — it’s a road map. It can be an outline. It doesn’t have to be long or flowery. Things change, and the map can change with it. When you’re busy dealing with change, it’s good to have a plan you can go back to and review to see what you were trying to accomplish when you were so excited about starting the business in the first place.

What’s your response to those who say, ‘I don’t need to write it down, I know exactly what I want to do?’
You know what you want to do today. Six months from now, conditions may be different, and you may wonder how to deal with it. You can get so caught up in managing the business — especially a successful, growing business — that you can forget some of the small things you intended to do. I find it’s often the small things that differentiate businesses and make them successful. So it’s important to have a plan to look back at to see if you’re doing the things that will make you successful.

What are the essential elements of a business plan?
A lot of people think the plan is the financial projections, but those are really just a by-product of an overall plan. The plan should describe the market, which includes identifying the strengths and weaknesses of the competition and describing the potential customers and how you will reach them. The plan also needs to outline operational aspects, including what resources are needed to deliver the product or service to customers and what staff is needed to perform these operations. When these items have been determined, then you’re ready for your scorecard, which is the financial projection.

Where are most plans commonly lacking?
Entrepreneurs often fail to write a plan at all. Or they just prepare the financial projections, but that’s only one element of a business plan.

Does a business plan have an ongoing role in the business after startup?
Yes; reviewing the business plan helps a startup transition into a successful, sustainable business. It’s important to sit down and go through the plan when market conditions change, and even when things are going as expected.

Most new businesses expect to grow. Going back and periodically reviewing the plan can remind companies what is needed to accomplish this growth. Many businesses end up failing because they’ve been too successful. They may not have enough financing or be set up to manage a larger, growing business. Since most businesses start out undercapitalized, growth can kill them if they’re not prepared to pay for more material, inventory, labor, etc. If they have explored the possibility that they may need to increase their lines of credit or follow through with planned hiring, for example, they will be better equipped to handle what the economy throws at them.

PATRICK T. CARNEY, CPA, is a partner at Skoda, Minotti & Co. The Cleveland company provides accounting, tax, IT consulting, financial, health care and business advisory services. Reach him at or (440) 449-6800.

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