Companies are getting away from the old IT model of purchasing an on-site solution and having an internal staff working to solve problems. Instead, many companies are utilizing a professional service provider to handle tasks that are not directly related to core company business.
“That allows staff IT to focus exclusively on their lines of business — specific applications and training programs rather than a phone not working, a locked password, or more extreme, the data center/network being down,” says Karl Seiler, president of DataServ.
Smart Business spoke with Seiler about why companies are taking this approach and how professional IT service providers work as partners with businesses.
What IT services should be contracted to service providers outside of a company?
Things that are common to every organization: support, infrastructure, network, wireless, smart devices, collaboration architecture, security, help desk and inventory.
These needs are common across almost any organization and can be done from a professional service provider perspective rather than at an internal level. It allows for higher efficiencies and lets your team focus on its core business rather than solving remedial issues.
How does partnering for IT differ from building IT?
Building IT is the old approach. It’s slow to move and internal people may not have the skills to do a proper evaluation of return on investment or assess the real business fit within the environment. IT is often based on a person with a single mindset who provides the only view. And because CEOs and CFOs are often not the technology experts, that leaves critical decisions to one person who might not always have the knowledge or passionate team around them to proceed down the best path.
With IT as a service, a team of experts complete a comprehensive assessment for the organization. There are engineers who specifically understand infrastructure, applications, networks or collaboration. All that information is reviewed and analyzed to determine the best solution.
A professional IT provider knows how to partner with an organization and learns and develops an understanding of the company’s objectives, allowing them to build appropriate solutions. They become a trusted partner — not a vendor.
How can you tell if an IT service provider would make a good partner?
That’s part of the due diligence process. Vet companies and get a sense of how they work. Talk to references. Visit their workplace, talk with the leadership and see how they utilize the collaboration tools and other technology in their environment to grow their business.
Studies show huge challenges for businesses in terms of collaboration tools in the workplace. Millennials coming into the workforce are naturally collaborative and organizations are not structured effectively for that. Webconferencing, video technology and other services allow you to conduct business in real time. We provide a dashboard interface that shows who is available in our organization so we can connect with that person, see them on video, and effectively share information and data.
The workplace is everywhere now and technology needs to allow for collaboration whether someone’s at home, school, work or Starbucks. You have to build the architecture for your organization so that team members can collaborate from anywhere. Most businesses don’t understand how to architect a network — it’s just not their area of expertise. They have obsolete phone systems that do not work efficiently and are not connected to other company communication tools.
Another area of importance is your data. How do you organize the data (analytics) and build business intelligence tools in real time so you can make informed decisions and implement them faster? Applications have to allow for that level of integration.
Everything starts with finding a trusted partner and beginning the journey of unifying your technology. Effectively building a collaboration architecture begins with equal parts of culture, process and technology. That’s the most important area to address when growing your organization and business. ●
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The Internal Revenue Service defines the depreciable life of a building as 27.5 to 39 years. But that doesn’t mean that all assets grouped with the building have to be on the same depreciation schedule.
A cost segregation study can identify personal property assets that can be reclassified to allow for a shorter depreciable life.
“By accelerating depreciation deductions, you’re deferring taxes, which creates a cash flow benefit.” says Robert W. Haggerty, CPA, Partner, Tax Services at Brown Smith Wallace.
Smart Business spoke with Haggerty about what assets might qualify and the potential benefit to businesses.
How does a cost segregation study work?
Typically, blueprints or architectural drawings are used to identify what went into the building. Engineers analyze the drawings and perform site visits to identify qualifying property. Information from the general contractor or estimating manuals is used to determine the cost. A tax analysis is performed, which involves reviewing court cases and rulings that address which particular assets qualify for a shorter life.
Cost segregation studies can be performed anytime you build, acquire or expand. If the cost is $1 million or more, it is worth looking at.
The IRS also allows you to do a ‘catch-up adjustment.’ For example, if you bought or built a building five years ago and didn’t do a cost segregation study, you could still do one today and take the benefit on your current tax return.
With certain income tax rates rising, it’s a nice time to consider a catch-up adjustment.
What types of assets typically qualify for shorter depreciation?
Generally, property that is unique to a particular trade or business qualifies for a shorter life. An example I often use is the lights used to showcase merchandise in a retail store. Those lights are considered five-year property even though, by definition, lighting is part of the building. Not only do the light fixtures qualify, but so does the wiring and the portion of the electrical system supporting the fixtures.
Manufacturing facilities benefit the most from cost segregation studies because they typically have a lot of specialty systems or design inherent in the building that function as part of the manufacturing process. A large portion of the plumbing, electrical and HVAC systems qualify for a shorter life. Even the concrete floors can qualify. Hospitals and medical facilities are another industry with big benefits from cost segregation. Think about all of the specialty systems in a medical setting.
What are the tax benefits?
The benefit is the deferral of income taxes by accelerating depreciation expense. Moving costs from a 39 year building life to a five or seven year life can significantly increase depreciation expense for the building. Cost segregation studies can provide a permanent, time-value-of-money benefit of 10 to 50 times the cost of the study, which typically runs $5,000 to $10,000. Studies for larger projects can be much more costly, but the benefit usually increases with the cost of the project.
Any new developments of interest to businesses?
Yes, businesses can also take advantage of new final ‘Repair Regulations’ and proposed ‘Partial Disposition Regulations,’ which were issued in September 2013.
Under the old rules, you could not retire a portion of a building, so taxpayers who had a roof replaced, for example, could have two layers of roofs depreciating on their books. The new rules allow you to write-off the old roof.
In situations where it may be difficult to quantify the portion of the building that relates to the old roof — there might be only one asset on the books called ‘building’ — we are helping clients quantify the amount of the partial disposition.
Windows, interior build-outs and elevator replacements are other examples of items that may be eligible for partial disposition.
The Repair Regulations offer some safe harbors for small businesses and include de minimis rules that can apply to all taxpayers. So, there are even opportunities for businesses to take some tax deductions with very little effort. ●
Insights Accounting is brought to you by Brown Smith Wallace
It’s important to know the desired outcome before entering into a marketing program, says Ryan Barringer, senior vice president of marketing and brand strategy at Bridge Bank.
“Too often a manager invests in a campaign without having first identified the appropriate criteria to evaluate its performance. The output might be obvious — a TV spot, a sponsorship, or a viral video aimed at delivering impressions. The question then becomes, ‘What is the outcome of those impressions and how will they affect revenue, if at all?’” Barringer says.
Smart Business spoke with Barringer about ways to determine if marketing campaigns meet goals and the differences in marketing to businesses as opposed to consumers.
What are the desired outcomes of typical marketing programs?
With any campaign, the ultimate goal is to somehow match the benefits of your product or service with an interested buyer who is willing to pay for those benefits. But there are different paths toward that goal. The marketing effort could be about educating the audience about a product feature, or simply to build awareness of a new or unknown brand. Or maybe the goal is to enhance the credibility of a brand by association with another well-known brand, thereby leveraging the equity of a complementary brand.
These goals all help enable an eventual sale, but the ultimate measurement of them is not necessarily the sale itself — it could be an increase in awareness or trust in the brand, or visits to your website.
Do you determine what would increase sales, and design a campaign to reach that goal?
The marketer or business owner should put themselves in the buyer’s shoes, maybe sit down with a customer and learn about the journey they took in making a purchase. Tracing the steps to a sale helps in figuring out where you can have an influence.
Also, there are nuances depending on your sector; business to business marketing is a bit different than consumer marketing in that purchases are usually at higher price points — you’re selling servers, buildings or vehicles as opposed to meals or sundries, so the risks of a poor buying decision are different — and there is usually more than one buyer that needs to be educated. It’s not just me making a purchase on behalf of my company, my manager is also involved.
That makes the role of brand more important — the old adage that no one was ever fired for buying IBM computer equipment. IBM had done great work building trust and credibility in its brand, thereby making it easier (and safer) to buy their products.
So how is the effectiveness of a marketing program measured?
It depends. Some say that sales might be the ultimate metric, but that obscures other important drivers like corporate reputation or convenience. It’s up to the buyer of a campaign to decide the metrics, which may or may not come at a cost. Marketing research can reveal answers to goals, such as whether the audience has a better understanding of your product, or increased awareness or perceived value of your brand. An initial survey can create a baseline to measure against to determine if the campaign had an impact. Digital campaigns are far easier to analyze, and can offer many different opportunities to sustain engagement with a potential customer.
Where do businesses make mistakes with marketing efforts?
One is not understanding what a campaign will deliver. As mentioned, it’s not always about revenue; it could be awareness or increasing the attractiveness of the brand, or even correcting a misconception.
Business owners often overlook the importance of things such as the use of modern graphic design. If you’re presenting an outdated visual representation of your company or offering, that could actually create suspicion among buyers that your business might be outdated or irrelevant.
Buyers consume information differently and it’s important to reach them through the proper channel, whether it’s a video, website or social media. Technologies are changing ways consumers enter into that buyer’s journey. If you’re not attuned to those changes, you’re going to miss out on an opportunity because your competitors will beat you to the punch. ●
Insights Banking & Finance is brought to you by Bridge Bank
Many businesses assume that employment at-will means the employer can terminate the relationship at any time. While the default assumption is that employment is at-will, some actions taken by employers can create an implied-in-fact contract.
“That’s where employers can often get into trouble with a disgruntled employee. At-will employment allows the employer to fire an employee at any time without having to show good cause, as long as it’s not for a discriminatory or punitive reason. But an employee, if they’re upset about getting fired, can claim they had an implied-in-fact contract and can only be dismissed for good cause,” says Stacy Monahan Tucker, a partner at Ropers Majeski Kohn & Bentley PC.
Smart Business spoke with Tucker about what at-will employment means and how businesses unknowingly create an implied-in-fact contract.
What types of interactions can be interpreted as an implied-in-fact contract?
Courts will look at the totality of an employer’s relationship with its employee when determining if an implied-in-fact contract exists. The key question is whether an employee had a reasonable expectation of an implied-in-fact employment contract. A court will consider many factors, including the written and verbal policies and procedures used by the company, the employment manuals, any employment-related agreements such as confidentiality agreements or noncompete agreements, and the interactions between the employer and the employee, as well as the employer and other employees. While many factors will not create an implied-in-fact contract alone, combined they can weigh heavily in favor of such a finding.
Factors considered by courts include the length of employment, the use of progressive discipline to make its termination decisions, statements made to an employee that he or she doesn’t have to worry about losing his job unless a mistake is made, and a requirement of signing a noncompete agreement or confidentiality agreement as part of the employment arrangement.
An employer might have written policies or employment documents in place that it thinks make it clear employment is at-will. Many handbooks state the employment arrangement is at-will. But frequently those handbooks also state that nothing in them is intended to create a contractual relationship. That can inadvertently invalidate all previous statements supporting the at-will relationship, as the document specifically states it does not define the contractual relationship. Moreover, the requirement that an employee sign a noncompete or confidentiality agreement can support the argument that the employee paid consideration by signing such an agreement and thus entered into an implied-in-fact contract. Many employers do not realize the importance of having employment documents reviewed for consistency.
How should companies approach handbooks and policies?
Companies should have their employment documents drafted by an employment attorney rather than just a human resources person, who often has cobbled together information from previous handbooks without fully understanding the legal ramifications. An employment attorney can ensure that the documents are clear and work well together.
A best practice is to have a written employment agreement that every employee signs. It should clearly state that the arrangement is at-will employment and the agreement is integrated, which means that if a provision is found to be ambiguous or unenforceable, the rest remains in full force. That reduces the chance of an employer being able to invalidate the entire agreement.
Many of these employment issues can be avoided by careful review of internal policies and documents before problems arise. That’s why it’s important to develop an employment contract and a cohesive body of employment documents that work as a unit. Then you can cover issues you want to address and minimize any surprises down the line. ●
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Barney Pell, CEO of QuickPay Corp., envisions a future in which parking facilities utilize tiered rate structures similar to ones the hotel and airline industries have established.
“You used to buy an airline ticket and it was all one type of seat,” he says. “Now, there are different prices for everyone depending on when you purchased the ticket, and whether it’s economy, business or first class.
“With parking, there really aren’t ways for you to pay more for a better parking space, or less for something that’s a little less convenient. If that can be done, it would provide more convenience and options for customers, and money for parking facility owners.”
QuickPay, which recently completed a $5.5 million round of additional funding, was founded in 2010 with the concept of leveraging mobile technology to make it easier to find, access and pay for parking.
“It wasn’t my idea originally,” Pell says. “I met an entrepreneur in a parking lot. He was promoting a new app — it was at the prototype level — that would let you pay for parking using your iPhone.
“I was coming off three years working at Microsoft, and the last year of that I was leading Bing’s local and mobile search teams. I was looking at the trends in what mobile devices would mean for location-based activities and thought parking presented a really interesting opportunity.”
Using QuickPay, you can find a parking space and pay from your phone. Drivers can even use the platform to raise gates at parking facilities.
Parking represents the gateway to local commerce, Pell says, and has been a neglected area that could help fuel economic growth.
Developing the technology
A challenge QuickPay faced in creating an app was addressing the security required within the parking industry.
“Ultimately, you’re paying money for the privilege of parking legally and not being towed,” Pell says. “If there’s any weak link in the system, someone will be stealing and cheating. So the industry has all kinds of controls and systems in place. That sets the bar very high for a new technology to come in.”
QuickPay took an approach to work in parallel with existing systems, recognizing that not all customers will use mobile devices. Instead of removing old systems, the app simply affords customers another option.
“But when you have two systems running at the same time, those systems have to work together and not get in the way of each other, introducing a new set of loopholes,” Pell says.
The app was tested through working with local and regional parking operators in the Bay Area. Pell advised them to be patient as the platform was being developed to address the myriad issues that were identified.
“We had to scale up before starting to work with the really big guys, the national parking operators with very complex and mature systems,” he says. “We had to do a huge investment in reporting systems so that every single transaction gets reported the way they need to integrate with existing banking and credit card reconciliation processes.”
The platform also needed to account for various rate structures that included parking meters with rates of $1 an hour and garages with incremental rates that are dependent on when customers enter and exit.
“Some places might even have 40 different rate structures that depend on time of entry. In order to go live in each location, we’ve had to match the structures and complexity they have with existing equipment,” Pell says.
Ramping up for growth
ABM Parking Services & Operations Services, with 14,000 locations, was the first large-scale operator to come onboard.
“They needed to make sure that a solution was working across all their different environments and existing systems,” Pell says. “That’s what required us to level up our entire business.”
With the knowledge and experienced gained from working with ABM, QuickPay plans to use the latest funding to achieve the next level of scale with other national operators that have not been announced.
“We’ve built this product and the platform and features that are required,” Pell says. “We’re doing a lot of investment in automating our processes so we can be onboarding and tracking facilities quickly. If that process is manually-driven, it will not be able to scale.”
Growth also will mean expanding slightly from the current 20 employees.
“We have a really good core group. This is the kind of company that can serve a large base of users in different communities without that much additional head count,” Pell says. “We’ll be looking to expand in some key areas by five to 10 people in the next year, but we don’t see a need to be a 100-person company.”
Beating the competition
QuickPay’s success stems from addressing two areas that other apps have not covered — off-street parking and gated facilities.
“A lot of companies involved in mobile payments are European-based and handle mobile payments in parking meters, pushing data to the people doing the enforcement,” Pell says. “Meter readers see the meter hasn’t been paid, then look up the license plate to see if it has been paid for by the mobile service. Most are variations of that approach.”
A problem with off-street parking is finding a way to enable a customer to lift a gate. QuickPay solved that by developing its own gate kit.
“The hardware plugs into any existing gated equipment and can detect when cars are present to lift the gate,” Pell says. “It talks to our system running in the cloud. The experience you have as a QuickPay user is that you drive up, scan a quick response (QR) code that’s really just a sticker attached to the entry gate, and then the gate magically opens as if you had a garage door opener on your phone.”
The same process is followed when leaving the parking facility, and the customer is charged and sent an electronic receipt.
“It’s a beautiful experience that allows you to skip cash machines,” Pell says.
QuickPay’s other main business differentiator has been developing a system that accommodates a complex variety of rates.
“We can support any number of rates at the same time, and even add personalized features that can take it ultimately down to different rates for each individual person who parks there,” Pell says.
That’s where the future of the platform gets exciting, according to Pell, because it will help fill empty parking spaces by enabling better inventory management.
“Parking in the United States is estimated to be a $26 billion a year industry. If we are, as I believe, in the early days of optimizing yield for parking, then there’s a lot of value that can be captured for owners of parking facilities,” Pell says.
Although QuickPay was created as a customer convenience, convincing parking facility operators and owners of potential benefits has been a critical part of the company’s success.
“You have to really think about each group of stakeholders and the ideal experiences for them,” Pell said. “That’s your guideposts to build the best products and the best business.” ●
Learn more about QuickPay at:
How to reach: QuickPay Corp., (650) 290-7763 or www.qpme.com
Business became more personal for Neil Grimmer when his first daughter was born. After seven years working as a design leader at IDEO and coming up with health and wellness innovations for food products, he saw a need to take the same approach to make better baby food.
“I starting taking that innovation methodology and coming up with concoctions in our own kitchen,” says Grimmer, president, co-founder and “chief daddy-O” at Plum Organics. “That was really the impetus for starting the company.”
The company’s early days consisted of a small group of parents who wanted what they couldn’t find — healthy and convenient food choices for their children.
“We started out doing a line of healthy lunchbox snacks, and very quickly moved into the baby food space with the spouted pouch,” Grimmer says.
Here’s how Grimmer capitalized on his personal experiences as a parent to drive Plum Organics to see significant growth year after year.
Designing an identity
Once Grimmer launched the flexible spouted pouch with its large cap, it helped Plum Organics stand out in the grocery aisles with packaging that was different, eco-friendly, portable and convenient.
Inside the packaging, parents discovered an eclectic mix of ingredients that were relatively new to the baby food marketplace.
“We brought culinary-inspired recipes that weren’t commonly found in baby food — putting things together like raspberry, spinach and Greek yogurt, using ingredients like purple carrots, quinoa and amaranth,” Grimmer says. “We took the superfoods that are out there and brought them into the baby food category.”
One final element that set the stage for success was the mindset the company’s founders brought to the brand as young parents themselves.
“It’s by parents, for parents,” Grimmer says. “It had a sense of humor, but we also took the job of feeding our little ones the very best food very seriously. So it was a very approachable brand which deeply connected with parents around the country.”
Whether they had children or not, company leaders developed a personal connection with parents through a shared focus to bring better food to kids.
“That was one thing that really drove us through some of those tough early years to success in our later years. We catalyzed a movement. The idea of making it a mission to get better food to children took it outside the core objective of running a business and gave us a higher order of purpose and passion,” Grimmer says.
Finding a purpose
At the heart of the company’s mission was a belief that you should “walk in the shoes of those you serve.”
“That’s at the heart of our innovation process,” Grimmer says. “In the early days, we were all young parents. Living through those moments from zero to 1, from 1 to 3, you understand those phases deeply. As your little one grows through all of these different stages, their needs, wants and desires change pretty dramatically.”
The business was organized around the unique needs and requirements of each age phase, addressing solutions to help parents by understanding their concerns and needs. Grimmer says adopting a similar philosophical approach would serve companies well, no matter the industry.
“Give purpose and passion to the work that can deeply connect with you,” he says. “People who work for companies are hungry for that sense of purpose and passion. For companies, and CEOs specifically, to focus on that makes a lot of sense.”
Plum Organics has expanded that sense of purpose to help needy families with the creation of a program called Full Effect.
“Now that we’ve reached a certain scale and have a good, solid foundation, we’re able to expand the work we do beyond just getting better food to kids in their homes to starting to address the nutritional needs of little ones around the country who go hungry,” Grimmer says. “We had the privilege of working with the filmmakers who released ‘A Place at the Table,’ which really articulated the issue of hunger in America.”
About 16 million children in the United States go hungry every day and chronically miss meals.
“As a company that’s in the business of bringing better food to kids, we felt we had to play a role in helping ease that pain,” Grimmer says.
With Full Effect, Plum Organics worked with nonprofit partners Conscious Alliance, Convoy of Hope, Homeless Prenatal Program and Baby Buggy to supply families with 500,000 Super Smoothies in 2013. The goal for 2014 is to up the donation to 1 million.
“Our employees are really excited about being engaged in the program,” Grimmer says. “It’s a way we can start to help really expand the impact we have in the world.”
The past year saw another significant development for Plum Organics in a June 2013 partnership with Campbell’s, which will allow the company to continue to operate as a standalone entity.
Setting the table for growth
With its acquisition by Campbell’s, the company heads toward a new phase with a powerful food industry player able to support its growth.
“But we are continuing to run the company around the values and beliefs that we created in the early days,” Grimmer says. “They are quite frankly one of the few partners we’ve found that would give us that kind of operating freedom.”
Keeping up with product demand has been a problem from the beginning. In 2013, the company grew more than 50 percent. Plum Organics had a four-year compound annual growth rate of 99 percent.
“That kind of year-over-year growth is difficult for any business to keep up with,” Grimmer says. “That is one of our key challenges, like it is for any business going through scale and growth.”
Three growth levers have led the way, the first one being the consumers served by Plum Organics. By segmenting products into three different portfolios, the company centered offerings on the needs of babies, toddlers and children. Moms can find healthy foods that grow with their families as children progress from birth all the way to age 10.
“We wanted to be a solution for her and her family,” Grimmer says.
A second growth lever was derived within each of those three consumer segments by looking at the various eating occasions in which the availability of healthier options would make parents’ lives easier.
The final area of growth was geographical — expanding into Canada, opening a business in the United Kingdom and creating a distributor-based business in Asia.
“We realized that this idea of healthy food for little ones isn’t an exclusive concept to the United States,” Grimmer says. “Parents around the world are time starved, but want the best for their babies and kids.”
Keeping up with demand has meant entering into partnerships with manufacturers and bringing in Italian machinery to increase production capacity.
“The machinery would sputter and hiccup, but we became very experienced in how to modify and tune those machines to be very reliable workhorses,” Grimmer says. “We’ve also put a lot of focus on securing an organic supply of our fruits and vegetables, which obviously fluctuates with the seasons.”
Growth has not only created challenges from a production standpoint, but from a staffing perspective as well. Plum Organics expects to add about 20 more employees to reach a total of 90.
Despite the pressure to add personnel quickly, Plum Organics is cautious about ensuring new hires are a good fit.
“One of the pitfalls that any fast-growing company runs into is wanting to fill the seats that are available and fill roles as quickly as they can,” Grimmer says. “If you become impatient with your hiring process, you can end up filling a role with someone who fits the box on talent, but not on culture.
“What we’ve found is that spending the time to hire the right people, giving time to do the process effectively, has allowed us to find people who not only fit the technical requirements but also added to the culture.”
Part of that culture means being willing to do whatever it takes to get the job done.
“That’s one of our core truths. As CEO of the company, if I need to wash windows or take out the trash I’ll do it at a moment’s notice if that’s what it takes to move the needle on our business. We require everyone at all levels to have that same attitude,” Grimmer says.
A winning culture has been a critical part of the Plum Organics success story, according to Grimmer, and one that has set the business apart from its competition.
“What made us different as a brand was that first we made it personal, the idea that it is a brand and company by parents, for parents,” he says. “It’s a fun, stylish brand that also brought health to the home. It’s not just about making healthier products that are ho-hum. It’s about bringing those two things together — engagement and health.” ●
- Walk in the shoes of those you serve.
- Find your purpose and passion.
- Hire for culture as well as talent.
The Grimmer File:
Name: Neil Grimmer
Title: President, co-founder and “chief daddy-O”
Company: Plum Organics
Born: Ipswich, Mass.
Education: He received a master’s of fine arts in product design from Stanford University, and a bachelor’s of fine arts in conceptual art/sculpture from the California College of the Arts.
What was your first job and what did you learn from it? I worked flipping burgers in a fast food restaurant for a summer. I became a vegetarian by the end of the summer.
Who is someone you admire in business? Jed Smith, the founder of Drugstore.com and executive director of Catamount Ventures. He funded my company based on our mission to bring better food to kids from the very first bite. I admire his vision to see the possibilities of a business at its earliest stage and his entrepreneurial spirit to weather the storms of a startup.
Do you have a favorite Plum product? What products do your children enjoy? I personally love our organic baby food pouches, which are purees of superfoods like organic fruits and veggies mixed together with ingredients like ancient grains such as quinoa, amaranth, Greek yogurt, beans, and herbs and spices. My favorite variety is our Raspberry, Spinach & Greek Yogurt.
My girls love our Mashups organic squeezable purees for kids, as well as the organic Fruit & Veggie Shredz.
If you weren’t president of Plum Organics, what would you like to be doing instead? There is nothing I’d rather be doing. If I weren’t president of Plum, I’d be trying to get a shot at running Plum Organics.
Learn more about Plum Organics at:
How to reach: Plum Organics, (877) 914-7586 or www.plumorganics.com
Results of the Skoda Minotti annual survey of the construction and real estate industries looked good in 2012, indicating the most positive response since the initial poll in 2007. The 2013 numbers, however, reflect that the local market hasn’t completely recovered from the recession.
“Things started to look positive, but it appears we’ve taken a step backward,” says Roger T. Gingerich, CPA/ABV, CVA, CCA, partner in charge of the Real Estate Construction Group at Skoda Minotti. “Business owners are sitting on cash and holding off on capital investments because they’re uncertain whether we’re in a long, slow cycle of recovery or if we’re dipping back into a recession.”
Smart Business spoke with Gingerich about the 2013 survey results and the status of the Cleveland-area construction and real estate marketplaces.
What is construction reform and how has it impacted contractors?
Under a 2012 Ohio law, rules for government contracts changed and there is no longer multi-prime bidding — breaking a project into different packages for mechanical, electrical, etc. Instead, the process went to single prime construction, with one general contractor responsible for hiring any subcontractors.
Reform has made it more difficult for smaller contractors to bid for work because they don’t have the bonding capacity; they don’t have the net worth or capital that a bonding company prefers. They may be able to get a bond for a $3 million project, but not for a larger project, even if they have subcontractors doing the majority of the work.
The concern is that subcontractors have another company — the general contractor — between them and the customer and it takes two or three weeks longer to get paid. There also could be more out-of-state competition because larger contractors see opportunity when there are only so many companies that can bid.
Despite problems, construction companies surveyed were positive about opportunities in the next three years — 43 percent expect more opportunities, 41 percent said the same amount and 16 expect to have less business. Although that’s the second best result since the survey started, it is somewhat discouraging that 49 percent of respondents in the 2012 survey saw more opportunities. So we took a small step backward.
Why is securing credit continuing to be a problem with commercial real estate?
When asked about which obstacles prevent closing a deal, credit was the top response and is tied to property valuations. Banks tightened up in 2007 and 2008 and exited the real estate market. As a result, there was more supply than demand for real estate. Properties that were worth $1 million, for example, might now be valued at $750,000, and the owner still owes $800,000.
Loans are still available for businesses that operate out of their buildings; it’s the investment real estate that is not being financed. Retail businesses have struggled and companies were going out of business or couldn’t pay rent and, if leases were up, wanted to renegotiate for significantly less than what had been paid. As a result, developers are having problems securing loans to get projects off the ground. We’ve seen some improvement, but there still are challenges when it comes to credit.
Overall, what do the survey results suggest for 2014?
The results weren’t surprising. Respondents said healthcare reform would have a negative impact; however, healthcare is going to be a challenge for everyone. The survey also indicated that while everyone seems concerned about green construction and sustainability, it’s not changing many developers’ minds about how they build.
The fact that we took a step back from 2012 in terms of optimism shows that it’s still an uncertain market. That wasn’t surprising, although lending restrictions appeared to be lessening.
However, interest rates remain low and it’s a great market for business owners with cash. Those people will see opportunities. If you don’t have access to capital, you will continue to face challenges and that will slow the area’s recovery. ●
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When the recession set in a few years ago, companies saw their valuations decline as the money supply tightened and the acquisition market dried up. Business owners who put exit strategies on hold might find that now is a good time to revisit that option.
“Having worked in the private equity space, I’ve noticed that deal making has picked up. Owners should be looking at the values of their companies because they could be back at or even above previous levels,” says Bryan Graiff, CPA, CGMA, principal, Financial Advisory Services at Brown Smith Wallace and a specialist in transactions and business advisory services.
“The expectation from many experts is that 2014 should be a busy year for acquisitions, which makes it a good time to plan an exit strategy,” says Graiff.
Smart Business spoke with Graiff about exit strategies and the first step toward selling a business — a professional valuation.
What is the first thing a business owner should do to ensure a successful exit?
The first step would be to have a professional valuation report done to provide a measuring stick of what the business is worth. For an owner looking to exit in a few years, the valuation analysis is still worth doing since it can help identify value drivers you can focus on to improve the business and increase its future value.
Does that mean owners should have already done this if they want to sell now?
It’s not too late to start the process, have a valuation done and see if you want to sell your company. If the valuation is a number you’re willing to exit for, then you can take the next steps. But you may also find 2014 is a good year to reassess where you’re at and look at what can be improved in the next few years.
What if a company is in need of restructuring or on the verge of bankruptcy?
Some companies used resources to weather the storm, adding debt to survive, and could be headed toward restructuring or bankruptcy if sales continue to lag. It’s time to make improvements and bring in an expert adviser to develop a new growth or cost reduction strategy before it’s too late. The right strategy and execution plan will not only add value and increase investment options, but will comfort creditors and banks, showing that the company is serious about making improvements.
Will some owners sell now because values are back to pre-recession levels?
The future is always uncertain and every owner has different goals, but if an owner’s business is back to its pre-recession value or at a valuation level he or she is comfortable exiting at now, they should certainly consider the next steps.
What are the next steps if you decide to sell?
Plan and prepare before moving to market. Sit down with tax and estate planning professionals to discuss the effect a sale could have on the estate, and most importantly, fully understand what your goal is in considering an exit strategy. If your goal is to exit for a certain amount of money and retire on a beach, that’s one thing. If it’s to sell a portion of your business, but still be involved in some capacity, that’s another. Regardless, if an exit strategy of some sort is desired, have a quality of earnings analysis performed on the historical financial statements that covers the last three years. Although a buyer will conduct its own due diligence, having a reputable firm do a quality of earnings analysis will add credibility and provide more substantiation to the valuation report, which will help support the basis for the asking price. It also might uncover issues that can be addressed before a buyer comes in. If a buyer discovers issues with financial information, it could kill the entire deal. Quality financial statements may not necessarily increase the sale price, but poor quality or inadequate information is almost sure to have a negative impact.
Once your financials are in order, find a reputable broker to market the business — they’ll promote a more competitive bidding process, which will drive up the sale price.
The next year will be pivotal. Business owners will better position themselves for whatever occurs by understanding the value of their company, conducting sound strategic planning and making business improvements. ●
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Trade secret cases are considerably different from other legal disputes, and not being properly prepared could prove costly.
“A trade secrets complaint is not like other complaints that can be fixed later if there’s something missing,” says Christian E. Picone, a partner at Berliner Cohen. “Later” comes fast in trade secrets litigation. “A seasoned trade secrets defense attorney will take action right away, essentially freezing discovery until they get an articulated definition of the trade secret.”
That can be done because of a special statutory requirement under California law that mandates the plaintiff identify the trade secret prior to the discovery process. “That statutory provision can be useful as a shield or a sword, depending on which side you are on,” says Picone.
Smart Business spoke with Picone and Kathleen F. Sherman, an associate at Berliner Cohen, about how to address that provision and other issues to consider in trade secret litigation.
What’s the best way to handle the trade secret definition?
A plaintiff should spend some time with its attorney preparing the case before the complaint is drafted and filed. In particular, the plaintiff should be ready to articulate its trade secret as soon as the case is filed because the defense could immediately serve a special interrogatory demanding identification of the trade secret, and the plaintiff would have only 30 days to respond. If the plaintiff is not prepared, the defense could seize control of the case at that point.
The trade secrets identification requirement is perceived differently by plaintiffs and defendants. Typically, a plaintiff will want to keep the trade secret definition as broad as possible to keep options open as the case progresses, while the defense will challenge the plaintiff to narrow the definition. On the other hand, a plaintiff can show the strength of its case early on — and perhaps force a settlement — by clearly and confidently articulating its trade secret.
What makes something a trade secret?
A trade secret is information that:
- Derives independent economic value by virtue of not being known by the general public or persons who could obtain economic value from its disclosure or use, and
- Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
A plaintiff must establish both prongs in order to establish a trade secrets claim.
Taking the example of a trade secret within software, the entire piece of software would not be a trade secret because common functions, such as a print function, are well known in the industry. The trade secret is the particular aspect of the software that is unique and not known to others in the industry.
Even if a plaintiff establishes the first prong, it also must establish that, prior to litigation, it took steps to prevent competitors from knowing the trade secret, such as limiting access to source code to those with a need to know, using passwords, and marking code with the appropriate designations.
Cases involving customer lists can be particularly tricky. Not only must the trade secret have been properly protected, the customer information can’t be something that can be discovered by independent means, from public information such as directories, for example. In addition, a trade secrets claim based only on the identities of customers can be extremely difficult to prove. The fact that a former employee is doing business with the plaintiff’s customers does not, by itself, establish a violation of law. Noncompete clauses are invalid in California. An employer can require an employee to sign a nonsolicitation agreement, but the law is clear that an employee may make an announcement that he or she is leaving and supply new contact information to customers; such an announcement does not constitute solicitation.
Is proper protection of trade secrets a standard practice?
Most companies try to take steps to protect their trade secrets, but not all are properly advised or do not take the time to think about the potential consequences down the road of inadequate trade secrets protection, especially in the heat of trying to get a start-up company off the ground or a new product to market.
Best practices include having every new employee sign a confidentiality agreement including a provision that they understand their obligation not to disseminate the company’s confidential, proprietary information, which includes trade secrets.
We have had clients that didn’t properly protect trade secrets. Then their challenge was to determine whether confidential information used by others to compete with their clients could be the basis of an intentional interference with contract claim or another tort claim.
Trade secret claims are often preferred by plaintiffs because trade secrets law allows a plaintiff to request attorneys’ fees if it prevails, an option that isn’t available for tort claims. However, the attorneys’ fees provision cuts both ways. If a plaintiff files a trade secrets claim without a reasonable basis for doing so, the judge could order the plaintiff to pay defense attorney fees. That’s why it’s so important to vet trade secrets cases carefully prior to filing. ●
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Although the employer mandate of the Affordable Care Act has been delayed until 2015, now’s the time to consider your company’s strategy regarding health insurance benefits for employees.
“Regardless of the mandate, you have an opportunity now to change what you’re doing in terms of employee benefits,” says Joseph R. Popp, J.D., LLM, tax manager at Rea & Associates.
Smart Business spoke with Popp about what he refers to as the SHOP, drop, roll or self-insure approaches employers can take regarding benefits.
What companies are good candidates for the Small Business Health Options Program (SHOP)?
In Ohio, SHOP is only available to companies with fewer than 50 employees; in a few years, it will be extended to 100 and under. SHOP is the business portal to the health insurance exchange. Businesses can contribute as much as they want toward premiums, including a zero contribution. Employees can then use pretax deductions to pay for premiums. Under SHOP, individuals cannot get federal subsides to help pay for premiums.
SHOP is exchange insurance, so it differs from traditional plans insurance companies offer. For example, Anthem traditional plans include the Cleveland Clinic as a network hospital, but it is not a network hospital with Anthem exchange coverage.
This option is best for companies with employee groups that would not generally get premium subsides and may save money compared to a traditional insurance product.
When does it make sense to drop health insurance benefits?
Drop, which means you’re not offering any health benefits to employees, can be a good option when you have an employee group that is largely entitled to subsidies.
For example, one company provided $400 a month for family coverage, with the employee paying an additional $1,250. Most employees were single-breadwinner type families and would be entitled to premium subsides on the exchange. If the company dropped insurance, the family would go from paying $1,250 to about $700 a month on the exchange for an equivalent level of coverage, even without premium subsides that could take it down further to about $250 a month.
Dropping was the most attractive option for the company because it would save $400 a month per family employee, and most employees would save money on premiums. In addition, the company can use the money it paid toward benefits to provide wage increases for those individuals who would be paying more for insurance.
Even though companies with 50 employees or more that drop insurance will have to pay a $166 a month penalty per employee starting in 2015, the penalty and some wage increases for people harmed by going to the exchange may be less. Both the business and individuals could have a large net financial benefit, and the employer could save more since it won’t have to use resources to address benefits questions.
What is the ‘roll’ option?
That refers to rolling with your current insurance. Many companies are waiting to see how the exchanges work and are taking the roll approach to wait another year.
To manage increasing premiums, companies are raising deductibles, co-pays and/or the share employees pay. Others are instituting wellness programs. Premiums might increase, but discounts are offered if employees participate in the wellness program, which is usually tied to some activity that might promote health. Employees can lessen or eliminate the increase if they participate.
When does self-insurance make sense?
If you have a relatively healthy employee group, it may be a good option. Unlike the exchange products, stop-loss policies are still medically underwritten (and the relative health of the group matters). You may pay the first $25,000 in claims per employee and purchase stop-loss coverage from an insurance company to pay claims above that amount. Savings can be substantial, but the drawback is that as you get deeper into the insurance industry — you’re taking on risk and functioning like an insurance company.
Companies should sit down with an insurance adviser and review all four options, because one may offer great cost savings or better benefits for employees. ●
Joseph R. Popp, J.D., LLM, is a tax Manager at Rea & Associates. Reach him at (614) 923-6577 or email@example.com.
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