In business, as in life, there’s a benefit to having guidance that’s tried and true. Most successful business owners can cite mentors who have directed their paths along the way. As companies grow, those informal relationships are usually replaced by formal boards of directors. A board of directors is a very useful method for allowing significant shareholders to feel they have a say in the strategic planning for the company.
It’s my opinion that all companies – regardless of size – need to have a board. In this two-part series, I will explore the benefits that a small company can gain from having a corporate board and how a small business owner can establish a board.
First, let’s examine the benefits:
1) A good board of directors will do what employees often are afraid to do: challenge the leader. Most employees don’t feel empowered to speak up when they think a strategy is misguided or out of sync with customers or a target market. Board directors should be willing to openly question ideas and the assumptions that guide strategic planning to help the president or CEO suss out their soundness.
2) A board can provide accountability – particularly in family-run businesses where it can be hard for an unbiased assessment of the business without familial issues clouding judgment.
3) Boards can help with recruiting, evaluating and selecting top job candidates, as well as setting compensation criteria that are fair and transparent. Since directors are removed from the daily running of the business, they can help with succession planning.
4) For companies considering a public offering, setting up a board early can help acclimate the owners to the enhance scrutiny that they will face once the company is publicly traded.
5) A board of directors is legally required for registered corporations.
Next column: How to create your own board.
Patricia Adams is the CEO of Zeitgeist Expressions and the author of “ABCs of Change: Three Building Blocks to Happy Relationships.” In 2011, she was named one of Ernst & Young LLP’s Entrepreneurial Winning Women, one of Enterprising Women Magazine’s Enterprising Women of the Year Award and the SBA’s Small Business Person of the Year for Region VI. Her company, Zeitgeist Wellness Group, offers a full-service Employee Assistance Program to businesses in the San Antonio region. For more information, visit www.zwgroup.net.
When Andrew Dorn, Industry Leader, Information Intensive Business, Acxiom Corporation, was recently researching the top manufacturers in the United States, one topic kept coming up — the strong growth expectations focused on the world's emerging markets. With the economies of the U.S. and Europe in flux, Dorn felt that, now more than ever, manufacturers need to be attentive to those emerging markets.
"The world is now flat," says Dorn. "Competition comes from everywhere, so manufacturers need to be everywhere."
Because of that, Acxiom has partnered with Smart Business to present a special one-hour webinar: "Driving Global Sales for Manufacturers: Why global growth for manufacturers is more important than ever."
During the webinar — on Wednesday, September 19 at 1:00pm EST — we will discuss why global sales for manufacturers is critical, what factors should be considered in developing or refining the international strategy, and, finally, present a roadmap that can be employed to optimize chances for success.
Featured panelists will be Zia Daniell Wigder, Vice President and Research Director, Forrester Research; Jennifer Barrett Glasgow, Global Privacy and Public Policy Executive, Acxiom; and Michael Biwer, Managing Director, Acxiom.
"As you enter the global market, it is imperative you understand the privacy laws in each country as they are quite complex and some are very stringent, for example, having criminal penalties for some violations," says Barrett Glasgow.
Other topics to be discussed include:
- How to determine which countries to enter and what data to gather to understand regional customer requirements
- Recommended approaches to building country-specific strategies that can help facilitate smooth transitions, lowest possible cost-of-entry, and consistent performance
- Considerations for navigating the complex web of country-specific data protection and privacy laws companies must adhere to in their efforts to connect with customers and prospects
- Best practices used by leading companies that have successfully entered new markets
"The U.S. and European economies are still recovering and the balance of growth is constantly shifting," says Dorn. "For example, China and Brazil have been experiencing strong growth. They are encountering a maturity curve, but that doesn't lessen the importance of the issue — manufacturers need to be diversified and have a presence in all major world markets."
The webinar, "Driving Global Sales for Manufacturers: Why global growth for manufacturers is more important than ever" will be held at 1:00 pm EST on Wednesday, September 19.
When people are looking at business ownership, they are in one of two positions. Like my story, I’d say about 15 percent are just coming out of college and are full of a “taking on the world” attitude.
But that segment is certainly the minority. The substantially larger group, from my experience, does so because they were forced to. Most people say they would like to own a business, but the truth is that most people never start one. It’s only because of a layoff or downsizing that they ultimately say they don’t want another J-O-B.
Like me, most entrepreneurs have found starting out in business to be much harder than originally thought. However, reaching this stage of business ownership, it’s much more rewarding — both financially and emotionally.
Whether it is adding a new brand to your holdings, adapting an existing operating model, or making leadership changes in your organization, I want to share four strategies that have helped me over the past three decades:
- Have a plan. You don’t know if you’re achieving success unless you have a written plan. This allows you to organize your vision and outline strategies to achieve your desired results. Secondly, the act of planning helps to make you accountable to tracking your progress against your goals. Remember, it is not uncommon for plans to require updates as conditions change. I was asked recently if my career looks the way I predicted it would when I began at 24 years old. It’s entirely different, but that’s OK!
- Be determined. An unbelievable amount of determination is required to be successful in business. There are unimaginable road blocks that creep up, whether you’re starting a new business or you’ve been established for many years. The ability to have a goal and adjust to conditions such as competition, the economy and technical advancements showcases your positive mindset on achieving your set goals – even if the pathway to get there has to change.
- Recruit a board of advisors. Having a group of professionals whose judgments and recommendations I trust and treasure has been crucial to my business success. Look at the areas where you struggle and look for skill sets you need help with in finance, insurance or marketing. Go after high-level experience in the areas you need help with. It’s amazing to me that when I started in business, by just asking someone a question, they were willing to help. I have asked people at the top of their industries to give me an hour a month and they happily agreed. I’d tell them what was going on in my business and then listen to their advice. Share your written plan from step one with those who are willing to hold you accountable.
- Amass enough working capital. Having enough money, from launch to break-even, is important for a new venture or strategic investment in your business. I’ve learned that whatever number you have in mind, you should double it. I like to compare working capital in business to the space shuttle. In business, it’s money and with the space shuttle, it’s fuel. If you only put three quarters of fuel in shuttle’s tank, it will only go three quarters of the way to orbit, which would have a horrific ending. The same is true in business. You must have enough working capital to get the business into orbit. In business, orbit equates to cash flow, breakeven and producing a profit so the business becomes self-sustaining, and in space, it means free travel in zero gravity. Enjoy the ride!
David McKinnon is the co-founder and chairman of Ann Arbor, Mich.-based Service Brands International, an umbrella organization that oversees home services brands, including Molly Maid, Mr. Handyman, 1-800-DryClean and ProTect Painters. To contact him, email firstname.lastname@example.org
Frank Venegas Jr.’s company, The Ideal Group Inc., was facing what you would call, well, not an ideal situation.
The year was 2008. Even if your company didn’t file for bankruptcy or face an existential threat, you probably had a bottoming-out point about that time or thereafter. At some point, your company probably reached a nadir, and you knew the only place to go was up.
The Ideal Group’s low point came when the company had to slash nearly 14 percent of its workforce. For founder, chairman and CEO Venegas, the staff reduction was a fork in the road. He could have chipped away at his staff little by little, reducing the short-term trauma level, but potentially forcing his company to go through multiple rounds of demoralizing cuts.
Or he could take the lump-sum approach, get it all the cuts over with at once, causing more short-term trauma, but beginning the healing process sooner.
Venegas chose the latter approach.
“At that point, we were probably operating the company at 30 percent larger than what it needed to be,” Venegas says. “What we told everyone was ‘Here is where we are at, we are going to cut it really hard and heavy, and we are going to do it one time, instead of doing it every month.’ And we were fortunate because we were able to hold true to that. We did it once, and we held on.”
As the saying goes, laws are like sausages; you really don’t want to know how they are made — you really don’t want to know how staff cuts are made. It’s a stomach-turning process for just about every business leader to decide why one group should remain employed and other group members should lose their jobs.
But in uncertain times, information is your company’s lifeblood. Venegas quickly realized that if his industrial manufacturing, distribution and solutions company was to recover and emerge stronger, he’d have to lead the way.
That meant keeping his remaining employees in the loop regarding the company’s status, why the cuts were happening and, perhaps most importantly, the reasons to get excited about the future.
“You can’t do much about the short-term morale of the remaining people,” Venegas says. “The only thing you can do is keep them up on what you’re doing as a company, and be honest and forthright. You try to give them new opportunities whenever possible, and really establish an entrepreneurial culture where people have the ability to try new things and make some mistakes along the way.”
Create a culture
Employees do come to work for a paycheck. They rely on your company for the money that provides food, shelter and other basic life necessities. So to say money has nothing to do with fulfillment of employees is flat-out wrong. Money is a factor.
However, it’s a basic factor. If you can’t provide competitive wages, the discussion regarding talent retention ends there. But if you can satisfy an employee’s financial requirements, employment does become about something else.
In short, once the money matter is settled, fulfillment is a matter of engagement. Employees want opportunities to think, create and innovate. They want a leadership group that is responsive to their input.
Employee engagement is increasingly critical when a company has to do more with less.
Ideal’s staff cuts were the product of a customer base that was about 70 percent automotive. When the U.S. auto industry took a historic nosedive during the depths of the recession, the ripple effect hit Ideal. While the company was able to endure the shock better than some of its competitors, sales slipped to under $100 million in 2009, making cuts necessary.
While those left behind had to deal with the collective morale damage and other fallout, Venegas saw an opportunity. Ideal had to do more with less, but the opportunity was there for his remaining staff to flex its entrepreneurial muscles and demonstrate their versatility.
Entrepreneurship is something that has always been a part of Ideal’s culture, but Venegas realized the time was right to embrace the concept anew.
“When you walk in here, and see the way the company looks, the way we run the company, it doesn’t take you a long time to realize that we are a highly entrepreneurial and change-oriented company,” Venegas says. “We’re like a Silicon Valley company in that we do things far differently than anybody else.”
The key to developing and maintaining a focus on innovation within a company is to educate employees, which is as simple — and as complicated — as communicating with them. You have to reveal your vision, your strategy, your methods and, when possible, your financial numbers, to your people.
If you can paint a detailed picture regarding where the company stands, and where each person fits into the larger picture, you stand a much better chance of motivating employees and keeping the idea stream flowing.
Venegas likes to keep his employees apprised of where the company stands financially, whether the numbers show a profit or a loss. Though some leaders might look at a financial loss and see something that would damage employee motivation, Venegas believes the act of informing employees is a motivator in and of itself.
“You get people to buy into an entrepreneurial culture by making money,” he says. “So for our purposes, we want our people to know whether we are making money or not. We run a monthly financial statement for each of the six companies that we have, and those are reviewed not only by senior management but also by the people who lead those companies — which we call BUMs, or business unit managers. They are in charge of their balance sheet, P&L and the whole deal.
“You just make it really clear for everyone to see whether you are doing well or not so well. Everybody should be able to hold their eyes open and take a look.”
Informed employees have a better idea of how to formulate new ideas that walk in step with what the company needs. They feel more empowered to take calculated risks, live with the consequences, and if the plan fails, to turn it into a learning experience for next time.
“We don’t box many people into any particular role,” Venegas says. “My brother and I own the company, and I guess we were taught how to take things apart and put them back together. A lot of times, if we didn’t need this part or that part for a given project, we didn’t get it.
“So we were always looking at how we could build things faster, less expensive and more reliable. That is a concept we’re always trying to pass on to our people here.”
Feed their careers
Venegas believes employees want four things out of an employer, apart from financial compensation: consistency, opportunities to express their ideas, opportunities for promotion and the chance for longevity.
“My CFO just celebrated her 15th anniversary here,” Venegas says. “When she initially came to work for me, she was a graduate intern from the University of Michigan. Obviously, she wasn’t the CFO when she first started, but she grew into that position, she demonstrated great learning habits, and it has been a real blessing to have her here.”
To Venegas, the long tenure of his CFO reinforces the importance of career development as an employee motivator. In particular, Venegas values hands-on employee development that coaches his team to think, create and innovate in a real-world setting, formulating ideas that will be relevant to the company moving forward.
“Our career development operates every single day,” he says. “We are a very well-managed company. The key, I believe, is to set your missions in a very clear way, establish performance metrics and go through them frequently. We go through them not only on a monthly basis, but on a weekly basis.”
Venegas also has his team conduct frequent meetings. Though many business heads view meetings as one of the biggest time-wasters on the company schedule, Venegas still sees value in getting a group of people together in a room to exchange ideas, and share what is working and not working in the company’s operations.
“People say meetings are a waste of time, and that is their opinion,” he says. “But here, it really gives us time to open up and talk. Here, our meetings are pretty open, and you can say what you want. When someone proposes an idea for a new project, we start out with a white board, and begin listing the pros and cons. There is no particular recipe regarding the how and why of the projects we pick, the things we are going to go after.
“But I do find that it is pretty apparent over the course of the meeting whether it makes sense or not. We can generally see whether we’re filling the white board with reasons why we should do something, or reasons why we shouldn’t do it.”
As long as the conversation remains respectful and all viewpoints are considered, Venegas says his team will come to a consensus on how to proceed. If there are any disagreements or conflicts, those have to be addressed in order to get everyone back on the same page.
Motivating employees means respecting them — their work, their opinions, their careers, their ideas. Venegas has promoted that viewpoint at Ideal, and it has helped lead the company out of the recession to $201 million in revenue last year.
“We look at our company values during our meetings, and our mission statement, and from there it’s really not that hard to put together what we have to do in order to be a success. I remind our people — and sometimes, I have to remind myself — that we went through this whole recession, and we’re still here. We remain strong, and we didn’t have the problems of some of our competitors and other companies.”
How to reach: The Ideal Group Inc., (313) 849-0000 or www.weareideal.com
The Venegas file
Frank Venegas Jr.
Founder, chairman and CEO
The Ideal Group Inc.
History: I started the business 33 years ago because I won a Cadillac in a card draw. I sold it a few days later, took the money, put it in my banking account and started Ideal.
What is the best business lesson you’ve learned?
My grandfather always told me that if you do what the boss doesn’t want to do, you’ll have a job every time. Also, you need to create a reason why you’re in business. Do what someone else in the market isn’t doing. You could be in the window-washing business, but it might be how you present yourself. Maybe it’s how you let customers inspect the final product. But you do something a little different, and that draws the customers back to you.
What traits or skills are essential for a business leader?
Have integrity and don’t lie. I’d say that’s the most important thing by far. Once you’re not honest, no one wants to work for you.
What is your definition of success?
Being happy in anything and everything you do and seeing everybody around me fulfilled. I lost $18 million on a business deal in 1998. I did something that I should have thought harder about. The company made it back, not because I was a great leader, but because of the people who work for me. It takes a whole bunch of effort from a whole lot of people to keep a company happy.
Years ago, conversations about keeping employees safe meant providing them with technical advice about the use of hard hats, goggles and other safety equipment, or training in safe lifting techniques, parking lot safety and sexual harassment policies.
“Today, physical safety ranks at the top the list of required training in most companies as our workplaces become ever more dangerous,” says Laurie Bradley, president of ASG Renaissance and Blue Force Services.
Recent active shooter events in Colorado, Wisconsin and Alabama, for example, bring attention to the complexities of physical safety.
“This leads us to the question of whether or not we are doing all that is possible to mitigate unwanted physical intrusion into our workspace,” she says.
Smart Business spoke with Bradley about how a company can protect itself against physical threats.
How does a company establish a physical safety program?
Safety programs are not one size fits all. They need to be tailored to reflect the presumed risks of a business in a given industry. For example, banks and financial institutions need a different safety program than a car rental business. However, generically, the process is typically initiated by performing a risk assessment. This entails mapping the physical facility and identifying the areas and entry points that may need different rules of access.
As you map your facility, determine and highlight the exit and escape routes, and define areas that would be sensitive to catastrophes such as fires, floods, earthquakes, bombings and utility failure. Review your procedure for the identification of authorized personnel and critique the systems used to do so, such as key card readers, biometric devices and cameras, to determine the possible vulnerabilities.
Consider the environment around your business, local crime rates, the interior and exterior of your building, and the perimeter of your space where public access is permitted. Develop a checklist as you examine poorly lit areas, trash areas that may present arson opportunities, the condition of walls and fences, and what tools or supplies that, left unattended, could be used to access the facility.
Who should be involved in the assessment?
Internal personnel, such as your security staff, may be utilized to determine and detail a current state report. Third-party security experts are often used to identify weakness or vulnerability to your operation and may be engaged to attempt to breach the security to illuminate risk areas.
Generally, annual third-party audits with corresponding training programs help ensure physical safety programs reflect the risks brought on because of current business and political environments. Security consultants can also make certain you are aware of the latest technology developments that may enhance physical security.
Companies wanting to launch and monitor a more robust program can access information through the Federal Emergency Management Agency. Additionally, the Private Sector Preparedness Council has select program standards leading to certification. The process provides a framework for businesses to assess whether they comply with voluntary preparedness standards. Many of the program’s components align with the Support Anti-Terrorism by Fostering Effective Technologies Act, which mitigates legal and liability concerns for users of anti-terrorist technologies and products.
Can we ever really be safe?
No system or security program can guarantee absolute safety. Consider that HVAC systems are not normally equipped with detection devices and can be easily accessed — a fast way to hinder a worksite would be through the air ventilation system. Preparedness is the best defense and mitigation tactic. Focus on removing the temptation to commit a crime and monitor, enforce, educate and train your staff in the procedures necessary to reduce the possibility of a physical threat.
What if a business doesn’t have a robust physical safety program already in place?
Begin the discussion on safety during general staff meetings to help raise awareness within your employee population. Walk your employees through situations and the best responses to them, such as what to do when gunshots are fired, who should call 911, what the alternate routes out of the office are, etc.
Establish a crisis management team to involve key business leaders in evaluating risk, designing and conducting on-site training, coordinating public communications, assuming command roles in an emergency and providing assistance post incident. Security programs need to be holistic and embedded in all operations of a company, not assigned to a security department.
Safety and security should begin in an employee onboarding process and carry through the lifecycle of employment as part of the corporate identity. When safety and security are closely aligned with your corporate identity, it removes some of the anxiety that can be associated with safety training. Your goal is to have informed, alert and confident employees who willingly participate in the program.
What liability might a company face for not having procedures to deal with a physical threat?
Following the Sept. 11 terrorist attacks, property managers, security firms and security and safety device manufacturers all faced lawsuits. However, there are no defining standards to evaluate disaster recovery and business continuity programs.
In a litigious environment, we create an economic disincentive to expand safety- and security-focused services. The SAFETY Act was passed to give some protection and guidelines to mitigate these concerns for providers of products or services that are used to detect, identify and defend against terrorism. Companies developing security programs should consider adopting products that follow these voluntary guidelines, demonstrating ‘best efforts’ to implement a safety program that represents ‘best in class’ as defined by the act.
Laurie Bradley is president of ASG Renaissance and Blue Force Services. Reach her at (248) 477-5321 or email@example.com.
Insights Staffing is brought to you by ASG Renaissance
As the country’s population ages, a growing number of people will, unfortunately, suffer from diminished capacity, which can arise from conditions such as Alzheimer’s disease and dementia. “This is occurring more as businessmen and women work into their later years, and they become more susceptible to these conditions that affect their ability to make business decisions,” says Suzanne Fanning, an attorney with Garan Lucow Miller PC and co-chair of the Washtenaw County Bar Association Probate Section.
If someone with diminished capacity to make decisions enters into a transaction, that decision may be later subject to challenge in court.
“If it is established that the person did not have the requisite legal capacity to enter into the contract, the court may set the contract aside, to the detriment of the other party that entered into the contract,” she says.
Smart Business spoke with Fanning about how to take the legal precautions necessary to protect your business when concerns arise about another party’s possible diminished capacity.
What is diminished capacity, and who does it affect?
Diminished capacity is essentially an impairment of daily cognitive functioning, which can impact memory, reasoning, language and insights, all of which are skills critical to good business decision making. While the majority of businesspeople will not suffer from diminished capacity, as the population ages, there is a greater likelihood that it will become an issue.
Diminished capacity can also impact younger businesspeople who have been injured or who suffer from serious illness. This could be temporary, such as when medical treatments impair mental capacity, or permanent, such as when a person is in a serious accident.
What are the signs of diminished capacity?
There are no standard set of criteria, but there are red flags to consider if you are engaged in business transactions with someone who appears to have diminished capacity. These can include memory loss or forgetfulness, problems with the ability to communicate, loss of mental acuity, calculation problems, diminished comprehension, disorientation, inflexibility during negotiations, susceptibility to manipulation or even fraud by third parties.
Are there different standards of capacity for different business transactions?
Yes. Legal capacity has different legal definitions depending on the transaction and the applicable case law and statutes in the state in which you are operating. In Michigan, for example, the legal standard for the capacity to contract is whether the person in question possesses sufficient mental capacity to reasonably understand the nature and effect of the contract.
The more complicated the contract, the higher the level of understanding that is necessary to have the legal capacity to make that contract. In a real estate transaction, such as signing a deed, the standard is whether a person has sufficient mental capacity to understand the business in which he or she is engaged, to know and understand the extent of the value of the property and how to dispose of it.
It is important that businesspeople be aware that a transaction can be set aside by a court if the other party is later found to have lacked the requisite legal capacity at the time the transaction was undertaken. Therefore, it is important to take appropriate steps to protect yourself and your business when concerns arise that the other party may lack the legal capacity to enter into a transaction.
How can you protect your business in the event that your business partner is showing signs of diminished capacity?
One way to address this concern is to create a durable power of attorney, in which you and your partner name each other as the agent to transact business in the event the other suffers from a diminished capacity. You can also name a trusted employee or adviser to this position.
Having a durable power of attorney will also prevent a spouse or family member of the incapacitated person from gaining the authority to transact business matters on that person’s behalf. This is especially important when those family members have little or no experience in business.
What can be done if a client or third party to a transaction appears to have diminished capacity?
One option is to ask for a capacity evaluation by a doctor to ensure that the person has the capacity to enter into that particular transaction. Of course, this topic must be approached with great care. Another option is to make the transaction contingent on a court guardianship or conservatorship in which the court will grant authority to a third party to act on the person’s behalf.
For example, while a person with diminished capacity might not be capable of signing a deed necessary to a business deal, his or her court-appointed guardian or conservator could be granted authority to sign the deed on behalf of that person and proceed with the transaction.
Clearly, such a scenario can be extremely difficult. It may be a client with whom you have worked over many years. It can be difficult to extricate yourself from the relationship, but it may be necessary to protect yourself legally because these transactions can be set aside. It may be a matter of approaching the client’s partner or spouse, explaining that you are having concerns and bringing in a third party to make sure the transaction is protected.
Suzanne Fanning is an attorney with Garan Lucow Miller PC and concentrates her practice in probate and trust litigation and planning. She is co-chair of the Washtenaw County Bar Association Probate Section. Reach her at (734) 930-5600 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Garan Lucow Miller PC
As a company weighs its options between signing a short-term and a long-term commercial lease, there are many things it must consider.
“Organizations need to weigh the benefits of locking in historically low lease rates long-term (seven to 10 years) or having the flexibility of a short-term lease,” says Steve Kim, a senior associate, Transaction Management, with Plante Moran CRESA. “Each comes with benefits and risks.”
Low real estate costs can help increase your competitive advantage. However, there are potential downsides to entering into a longer contract that need to be realized and hedged against to create maximum flexibility for your company.
Smart Business spoke with Kim about lease terms and how to negotiate the right conditions to suit your business needs, both today and in the future.
What crucial areas should a lessee consider when choosing real estate for a long-term lease?
When considering a long-term lease, a business should first determine whether the real estate is aligned with its strategic business plan. For example, does the space have room to accommodate your long-term growth plans? Does the building fit with your company’s image and brand? Conducting a space program is essential versus adding a percentage to your current square footage. This exercise will categorize and assign a square footage to all of your space, including conference rooms, executive offices, staff work spaces, common areas and storage, as well as account for future growth.
In addition, with building values at historic lows, purchasing real estate may be a viable option to consider, giving you the ability to lease out space until you need it.
What conditions would signal to a business whether a short- or long-term commercial lease is a more favorable option for a business?
Short-term leases offer a company the most flexibility, but they do have a downside. Lessees often don’t have as much room to negotiate terms and conditions in a short-term agreement as they do in a longer-term one. Also, landlords know all too well the cost of moving a business and could raise your rent at renewal, betting that you will not want to relocate. In addition to potential rate increases, there is no guarantee that you will be able to renew a short-term lease, especially if a large or long-term tenant needs your space.
Long-term leases will typically offer higher tenant improvement allowances, while short-term leases may require out-of-pocket costs by the tenant. But long-term leases also carry risks. Business conditions may change while you are locked into a long-term agreement, making it difficult to expand or contract your business based on a change in your strategic direction. However, an early termination option can be negotiated into a long-term lease to offer some flexibility while maintaining the security and extended savings.
What is an early termination option?
An early termination option allows you to opt out of your lease at a certain point in the contract, which reduces some of the risks that can come with being locked into a long-term agreement. It also offers an opportunity to renegotiate with your landlord midway through your agreement.
A company could work out an option to extend a short-term lease to hedge against losing the space or being hit with a rent increase, but the protections are not guaranteed, as those that accompany a long-term agreement would be.
When trying to negotiate a termination right in a lease, it is helpful to understand the landlord’s potential challenges in providing this option. The situation varies from building to building in regard to ownership structure and the debt situation, for example, and investigating these facts prior to the request is mission critical. Furthermore, the ability to terminate a lease may also be less advantageous if the termination fee is equaled to an amount that is perceivably unlikely to be paid.
Termination option fees requested by landlords are typically for the unamortized portion of the costs based on the market value of the transaction made when the lease was signed, along with an interest rate factor and a penalty equal to the value of rent for a few months. However, if the landlord receives adequate notice that a tenant is leaving, it should allow that tenant to lease the space and head off any loss of income. Termination fees require time to negotiate and ultimately should reward the landlord for offering additional concessions in exchange for extending the term.
What else can a company do to mitigate risk and reduce costs in a lease situation?
Another option to consider is subleasing, which can help a company recoup a portion of its rental expenses. However, expect to invest time and money on the front end to find a tenant and adapt the space.
If the necessary tenant improvements are financially viable for a company to pay upfront, the landlord has a greater ability to accept the termination option because the initial investment in the transaction has been reduced. Furthermore, a lease rate associated with an ‘as-is’ deal is usually below market and can protect tenants with renewal options going forward. Finally, some of the tenant improvements may be depreciated, ultimately lowering some of the company’s potential tax liability for a given year.
Steve Kim is a senior associate, Transaction Management, with Plante Moran CRESA. Reach him at (248) 223-3494 or email@example.com.
Insights Real Estate is brought to you by Plante Moran CRESA
Many businesses, at one time or another, have cash flow deficiencies. These can stem from a large account falling behind in payments to a seasonal increase/decrease in sales, among other reasons.
Even if a company manages its cash flow appropriately today, no one can predict the circumstances the company may find itself in a few months from now. The best thing to do is to conserve capital for these unexpected events, but the second best thing is to obtain working capital line of credit.
“A company does not need to anticipate cash flow issues to apply for a line of credit,” says Al DeFlaviis, chief lending officer at First State Bank. “Instead, think of it as an insurance policy that doesn’t need to be paid until you need it. But the time to talk to your bank about a line of credit is before you experience a working capital deficiency.”
A line of credit gives a company the opportunity to borrow on a short-term basis for payroll, to take advantage of inventory discounts and to pay other fixed overhead expenses that are due prior to accounts receivable collections.
Smart Business spoke with DeFlaviis about how to use a line of credit to meet your company’s needs for working capital.
How does a line of credit work?
Interest is charged on the outstanding balance, not on the unused portion of the line. Interest rates are almost always variable and are tied to an index such as the prime rate or LIBOR indices. Once you have established a line of credit, your company can usually advance and repay the line as often as necessary. Lines of credit are usually renewed annually at a time when the your company’s annual financial statements have been completed.
How can a business determine what its line of credit should be?
To begin the process, you should first meet with your financial adviser or CPA before arranging a meeting with your banker. Preparing beforehand and gathering your information will allow the banker to better understand your business and determine your capital needs. If those needs are short term, a line of credit may be the appropriate solution, as a line of credit should not be any more than an amount that can be repaid through revenue production within 30 to 90 days.
However, if those needs are longer term, another type of loan may provide a better solution. Term loans are used primarily for long-term capital expenditures such as purchasing equipment, buildings, building improvements, etc., and are made for periods of three to 10 years.
How do banks determine what credit line they’re willing to extend?
With a line of credit, the way funds are used is left to the discretion of the borrower, so the bank carries more risk. As a result, a company must have a good business credit rating and a solid company financial history; it is unlikely a lender will approve lines of credit for start-ups or businesses without a track record of financial success.
Lenders generally also require collateral to secure a line of credit, which is nearly always asset-based, with equipment and facilities backing the line. However, credit lines can also be secured by receivables, inventory and by the owner’s personal assets, and it is not unusual for the bank to require a business owner to personally guarantee repayment of the line of credit.
When entering credit discussions with your bank, be as open as possible about the financial picture of your company. Be prepared to provide financial documentation including profit and loss statements, balance sheets and company tax returns.
Having an inside look at the business not only provides your banker with the confidence to recommend the loan package, but he or she is more likely to lobby on your behalf when the line comes up for approval.
How can a business identify a suitable bank to partner with?
Ultimately, you want to be able to lean on your banking relationship to help your business in good times and in bad, so begin by examining your existing relationship. Has your bank been responsive to your needs, acting not just as a lender but as a partner? If not, it may be time to find another bank.
Look for a banking partner that is the right size and complexity for your needs. For example, a national bank may use an automated scoring system to determine credit. Regional banks are often compartmentalized by market share and industry, and when a business changes or evolves, a different banker is assigned.
Community banks, on the other hand, usually have one person, a commercial relationship manager, who coordinates products and services. That person will understand the needs of your business and create a package of products and services that meets those needs.
Select a banker who understands your industry, as well as your marketplace. You will not only benefit from a line of credit but from your banker’s experience, industry insight and solutions to your company’s financing needs.
Alfred DeFlaviis is chief lending officer and senior vice president of First State Bank. Reach him at (586) 445-6615 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by First State Bank
There’s an old saying that the best way to get yourself out of a hole is to stop digging.
The problem is that, too many times, you think there’s a treasure lurking just a few more shovelfuls down, so the digging continues. As the hole gets deeper, you keep at it because you’ve already put so much effort into it that it would be a waste to stop now.
There are many examples in business of these ever-deepening holes that eat up manpower, time and money. Sometimes, the elusive treasure is a product that’s sputtering along but just can’t quite get going like you had hoped. Other times, it is a person who has all the promise in the world but doesn’t have much to show for it other than a warm chair and a lot of frustration on your part. The “hole” might even be an entire division that is underperforming or a vendor that just isn’t meeting your needs.
Corporate America is littered with decisions that seemed like a good idea at the time but that just didn’t work out. Remember New Coke? It was meant to replace the Coca-Cola that everyone grew up with, but it lasted only 77 days before the classic formula was reintroduced to the market.
The Coca-Cola Co. wisely made the tough decision that its reformulation didn’t pan out the way it had hoped and brought back the old formula. The result was that while New Coke may have failed, the company retained its top spot. It realized the hole was getting too deep with no return in sight, so it got out.
If you’re going to be successful, then you will have to make tough decisions. No matter how close to the buried treasure you think you are, at some point, you have to take your shovel and climb out of the hole and move on.
It’s called cutting your losses. Coke executives could have stuck to their decision because every bit of market research showed that people liked the taste of the new formula better, but it just wasn’t showing up in the sales figures. Maybe you’ve invested a lot of time and money into a product or a person, but there comes a point where you have to give up and focus your resources on more productive areas.
You can’t be afraid to make these tough decisions. It might be easier to justify further expense to keep going, but don’t wait any longer. Pull the plug.
Ending a project that’s bleeding money is an easy decision. The really tough choices come with the marginal performers — people included. To know when enough is enough, you need to set up accountability for projects and people so you can measure how well things are going compared to the standards you’ve set.
If something isn’t measuring up, get rid of it. In today’s business world, profit margins are too thin to waste money on unproductive portions of your business. You can’t afford to have a nonproductive anything — be it a person, division or product — weighing you down. Do everything you can to help the people affected move on, but make the decision and stick with it. These types of decisions are never easy. You never know how they will affect your business. It will always be easier to keep going after that elusive return on your investment, but you have to hold yourself accountable, as well. If it’s not working, it’s time to make a change.
So stop digging now before the hole gets so deep that you are unable to climb back out of it.
If you are interested in learning more about publishing a book, please contact our publisher, Dustin Klein, at email@example.com or (440) 250-7026.
Fred Koury is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or firstname.lastname@example.org.
In developing a strategy, creating a new business or launching a product line, intensive preplanning is what can make the difference between success and failure. This same principle applies to negotiating just about anything. No matter what you want to achieve, be it selling a new customer, buying a competitor or hiring a superstar, you must determine what is the end result you want before you put pen to paper or make that first introductory call.
We’ve all heard hundreds of time about the importance of “putting yourself in the other guy’s shoes” or showing some empathy. Good basic advice, but do you really follow these suggestions?
In many business relationships, if it becomes a win/lose transaction, at the end of the day, one side is going to be very unhappy and the other side, albeit temporarily satisfied, could ultimately lose, too. In most instances, both sides have alternatives. Unless you have found the Holy Grail that no one can live without, the other side always has choices. One of which can be to do nothing and take a hike.
Most negotiations begin with the thought, “What’s in it for me?” Instead, the first question should always be, “How can we enable the other side to win (or feel as though they have won)?” It’s all about looking at the objective through the other person’s eyes. This simply translates into giving the “opposition” something that they must have, even if they’ve yet to realize it, while meeting your own needs. Rather than start with figuring out how much can you make on the deal or the positive result that will accrue to you if you hire a particular superstar, ask yourself, “What can I do to make the other side feel like the winner?”
For your next initiative, start at the end and work toward the beginning. You might just be pleasantly surprised with the road map you construct using this technique. Here are a few examples.
You want to buy a competitor because it has a product that will enhance your offering, but you don’t need all of the other widgets that this target manufactures. The traditional strategy would be to make an offer knowing that, if you succeed, you’ll scuttle all of the company’s other operations, cherry-picking what you want from the carcass. This could work and might be the easiest way to achieve your goal, but this Machiavellian method of taking no prisoners likely won’t play well with the target company owner, who has spent years building it and is emotionally invested in the business and the organization’s employees. When you look at the situation through the lens of the founder, you determine that a different approach, such as paying a good price for the entire business, plucking the item you want from the company, and then selling the rest of the company back to the employees could be the ticket to getting discussions started. This way the owner gets his money, he is a hero with his employees, and you acquire the product you need to grow.
Let’s say you want to hire the best salesperson in your industry who, unfortunately, works for your competitor. Instead of just going in and offering a big salary and bonus, which he or she most likely has already been offered by someone else, try to determine, after doing your homework, what this superstar’s hot buttons are. Maybe he has made it known that he would like to work remotely from a desert island while continuing to build his book of business. Looking at it from his perspective, you figure out that you can buy him his piece of sand somewhere with a beautiful view, obtain highspeed Internet connectivity to his paradise and allow him to work six months per year in his dream location. Rather than just making a cash-rich offer, start the negotiations by providing a solution to your target’s fondest expectations.
Putting yourself in the other guy’s shoes is far from a new idea. However, too many executives forget that creating a win-win is preferable to having it only your way. Remember, many times, instead of just knowing the answers, you first have to figure out what questions to ask to ensure success.
Michael Feuer co-founded OfficeMax in 1988, starting with one store and $20,000 of his own money. During a 16-year span, Feuer, as CEO, grew the company to almost 1,000 stores worldwide with annual sales of approximately $5 billion before selling this retail giant for almost $1.5 billion in December 2003. In 2010, Feuer launched another retail concept, Max-Wellness, a first of its kind chain featuring more than 7,000 products for head-to-toe care. Feuer serves on a number of corporate and philanthropic boards and is a frequent speaker on business, marketing and building entrepreneurial enterprises. Reach him with comments at email@example.com.
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Also available wherever books and eBooks are sold, and from Smart Business Magazine and www.SBNOnline.com. Contact Dustin S. Klein of Smart Business at (800) 988-4726 for bulk order special pricing.