When you’re considering buying a company, it’s not just a matter of locating a target and writing a check. There’s a lot that goes into doing proper due diligence, and if you fail to do it right, the transaction could be disastrous, says Thomas Vaughn, member, Dykema Gossett PLLC.
“From the purchaser’s perspective, conducting an effective due diligence process is critical to maximizing value from your acquisitions,” says Vaughn.
Smart Business spoke with Vaughn about why due diligence is critical to ensure a successful acquisition.
When considering purchasing a business, what is the first step?
Start by assembling a team of in-house and outside lawyers, inside and outside financial professionals, and possibly experts in various areas impacting the target. In the due diligence process, it is the job of the buyer to learn and understand everything it possibly can about the prospective target, and that requires a very deep dive by the due diligence team.
What is the next step?
The team should develop a due diligence strategy, and one of the most important components of that is to agree on the purpose of the due diligence effort.
From a buyer’s perspective, due diligence can be a very expensive process, so it is typically done in stages to keep costs down until the buyer is certain it is going to complete the transaction. As a result, in the preliminary due diligence, you are trying to determine the target company meets your investment parameters. You’re looking for ‘go, no go factors.’
The early stages of due diligence are very financial and operations oriented. For instance, making sure the financial statements and projections accurately represent the company’s business prospects and that there aren’t any major customer problems or potential defections are critical elements of due diligence.
From a legal standpoint, you look for high-dollar legal issues, like pending litigation or claims, or legal impediments to completing a deal, such as regulatory issues.
Also determine that the value you see in the company is an accurate perception of its true value. As part of that, identify and confirm synergies. All of these efforts will help you negotiate the purchase price and other deal terms.
Once you are satisfied with value and have signed a letter of intent, you can conduct the detailed part of the due diligence process.
How do you proceed with the detailed due diligence?
This is when the process starts in earnest. Have your team divide up responsibilities so that you’re not duplicating efforts and you are conducting the process as efficiently as possible. You want to make the process as smooth as possible for the seller. Due diligence is burdensome and time consuming for the seller. Don’t have multiple people asking the same questions or asking for the same documents.
One of the best ways to help this run smoothly is to present the seller with a detailed checklist. Often there is information listed on there that the company doesn’t have, but you can use the list to trigger the seller to think through the information documents the seller has and should be providing to you. Then keep the list updated to reflect documents received and make the list available to all team members
How is the due diligence information delivered?
Determine up front the deliverable to come out of the due diligence process. Is the expectation a written report from the accounting and legal staff? That is the most typical result, but there is an expense involved, so you have to determine if you want to incur that. You can also start with an oral report or short written report that notes red flags and items that are potentially problematic as a precursor to the full report.
That report should come with recommendations as to which problems can be potentially fixed and how to fix them, or whether the problem is so significant that it should have an impact on the purchase price or the decision to move ahead. Another outcome when due diligence identifies problems or uncertainties might be to have part of the purchase price paid as an earn-out. If certain things represented by the seller happen, you’ll pay the full price, but if they don’t, you won’t have to.
What are some red flags?
The biggest one is a very disorganized seller. In this case, the buyer needs to do very thorough due diligence. Lack of documents where you expect to see them, or poorly drafted documents or contracts, are also an issue.
Another red flag is a seller who provides you with certain due diligence but is slow providing other information. This may be an indication the seller is holding back bad news.
How does due diligence help in preparing schedules used in the typical acquisition agreement
The seller makes representations and warranties in the acquisition agreement and puts exceptions in the schedules. Then the buyer reviews them to get comfortable that nothing new has appeared in the schedules that was not disclosed in the due diligence process. It’s not unusual for new information to appear in the schedules, which can be a big problem.
If the buyer feels the seller intentionally didn’t disclose information until the last minute, it can have a very negative impact on completing the transaction and the ongoing relationship between the retained members of the management team and the buyer.
What kinds of things can show up at the last minute?
Usually it is a problem the seller was trying to solve before he or she has to disclose it, but can’t. The seller discloses it in the schedules just before the acquisition agreement is signed to avoid later indemnity claims. But doing so at the last minute is a problem in itself.
Thomas Vaughn is a member at Dykema Gossett PLLC. Reach him at (313) 568-6524 or TVaughn@dykema.com.
If your company is selling through distribution, it's well aware of the common challenges and issues that distributors will pose, such as continual price pressures, not comprehending nor selling the value of your company's products (or services) and demand for lucrative volume discount programs to name a few.
As a result, it can be a daunting effort to keep your price discounting in check, while trying to persuade distributors to sell the value of your product. In order to more effectively handle these types of challenges, there are several factors that should be taken in to consideration, such as distributors' performance, behaviors, and alternative pricing techniques.
When pricing through distribution, you know that one needs to price accordingly to motivate distributors to sell your products or services. However, one also needs to keep in mind whether you're adhering to your company's objective. Is it to increase market-share? Profitability? Whatever your company's objective is, in your pricing to distributors, you want to allow them some room to make a profit. Therefore, selling through distribution requires looking at a host of typical pricing factors. But one area that should be included and given close attention to in your analysis is a distributors' performance. For example, when evaluating this, you should carefully review:
- The product mix that your distributors are selling.
- The distributor’s incentive programs. They may be too rich and disproportionately reward more low-value vs. high-value product sales.
The overall relationship your company and its distributor have with each other is key. This can be a challenge depending on the distributor itself. Some will use "street-bully" or devious tactics to get what they want. It's not uncommon that some distributors will be difficult to work with. Are they concerned about, or do they understand, the value of your product? Some will make unreasonable demands, such as asking for continual deep discounts or allowances. Working with distributors is a team-effort for the pricing group and the sales force, which is usually at the forefront of these encounters. To work effectively with distributors, you also need to understand not only their challenges and issues, but also the behaviors they may exhibit to obtain the best pricing. They may impose unreasonable timetables. For example, a distributor might claim "I need a price now!" threatening to take the business elsewhere.
They may demand lower prices or claim your company's pricing practices lack flexibility, just to name a few antics. To more effectively handle these common types of behaviors you should determine:
- What is fact or fiction. Get to know your distributors well. Make an effort to better understand the distributor’s challenges, issues and concerns.
- Is your distributor is loyal and a true ally or a hindrance to your business? Is the distributor generating significant and profitable sales revenue for your company or not?
Though the onus is primarily on the sales force to develop and maintain a good working relationship with distributors, it's also important that the pricing group is able to implement strategic pricing tactics through distribution. We know distributors usually do not pay list price. However, it's important to control price discounting to distributors, as the pricing waterfall chart below shows.
The chart illustrates (concepts developed by McKinsey & Co.) how the difference between list price and "pocket-price" can result in a significant reduction to bottom-line profit. It's important to understand this concept in order to help manage these discounts effectively.
Educating the sales force about the pricing waterfall concept is an important factor in helping them more effectively manage the discounts they may offer a distributor. It can also encourage more thoughtful judgment as to how the sales force's decisions will affect the company's profitability. However, a few ways a company can attempt to minimize these revenue leakages are as follows:
- Leverage your company's advantage. Is it the incumbent supplier? Try to capitalize on that by selling or reminding distributors of your company's excellent customer service and/or inventory supply. Offer additional value-added services, such as priority scheduling and delivery, but do it at a premium.
- Discount on incremental sales volume only. Entertain earned discounts not negotiated.
- Obtain something in return for price concessions. Reward a change in distributor behavior, i.e., offer discounts for using EDI or telephone service support, thereby reducing or eliminating on-site sales visits. Or, modified payment terms. Has the distributor asked for continual price reductions? If so, consider adjusting their lengthy payment terms.
These are some pricing tactics and strategies one can implement when pricing through distribution. Distributors are in business to make a profit just as your firm is. However, it doesn't mean you have to give your product away at ridiculous prices. In working with distributors, developing an effective relationship is important, as is any successful relationship. Your pricing team should take the time to truly understand your distribution channels. Have them join your company's sales force on account calls to understand the distributor's challenges, issues and concerns. Ensure that your sales team has a good understanding of your products and pricing tactics and remember:
- Control your discounting
- Obtain something in return for price concessions.
- Leverage your company's advantage.
- Evaluate distributors performance.
Peter Maniscalco is a contract senior pricing consultant for the Strategic Pricing Management Group, an international pricing management consulting firm. He is based in the greater Philadelphia area. His specialty is B2B and B2C product and services pricing for multi-industries. He can be reached at firstname.lastname@example.org or (484) 947-6450, as well as on LinkedIn.
Researchers at Eastman Kodak Co. invented the first digital camera in 1976. In January 2012, it filed for bankruptcy protection.
How could a company that had one of the most well-known brands in the world, dominated the film industry and had the means to keep itself from becoming obsolete have fallen so far? Simple: No one transformed the company.
Kodak’s old model was fairly basic: You sold cheap cameras and made a fortune on the disposable supplies that were used in them. It was the old razor blade model — give away the razors and make your money on the blades. This model worked exceptionally well for a long time and made the company the envy of many.
What brought the company down was digital photography. Film became obsolete as more people switched to the conveniences of digital photos taken with either digital cameras or, increasingly, mobile phones. It has to be incredibly frustrating to the leadership of Kodak to look back at what might have been. The company was already the No. 1 player in the market and invented the digital camera, the very device that could spell its doom if developed by a competitor.
But the leadership of Kodak couldn’t envision a world where film didn’t exist. When profits are rolling in, it can be difficult to see changes in the marketplace that can adversely affect your business. Why transform to digital when film is what is making everyone money?
While Kodak was clutching onto its old business model, the digital market took off, leaving film manufacturers behind. Kodak failed to transform itself to face a new reality and is a shell of its former self. It is now left to the mercy of bankruptcy proceedings.
Don’t be like Kodak.
Here are four things that need to happen to transform your business to reflect the reality of the marketplace.
• Have a clear vision of what direction your company is going and communicate that to your management team and employees.
• Get everyone to buy in. Start with your managers and have them help you get buy-in from everyone else. You can’t afford a disconnect between management and staff. Provide as many facts as possible to win over skeptics. Many people don’t like change, so it may take some time to get everyone on board.
• Make sure you have the right people. Do your people have the ability to execute the plan to transform your business? You don’t need to maintain the status quo anymore; you need to become something completely different. That may require difficult personnel decisions.
• Persevere. You are not going to transform your business overnight. You need to create benchmarks and measure your progress toward your goals. It’s not glamorous. As CEO, you can never stop believing, because people are watching you for cues. If you aren’t a true believer, how can you expect them to be?
Some of you are already working your way through this process or may have even finished it. If that’s the case, then I congratulate you on having the foresight to make the changes you need to survive.
For those of you who haven’t started, as you work through your transformation, expect there to be pain and a lot of hard work. There will be times when you feel like you are not making any progress. But there cannot be growth without pain.
In today’s economy, every company has to transform itself, because everything is changing. In the end, there are only two types of companies: those that transform themselves into market leaders and survivors that are just getting by.
Which one are you?
Fred Koury is president and CEO of Smart Business Network Inc. Reach him with your comments at (800) 988-4726 or email@example.com.
There are hands-on executives who get down and dirty in just about every aspect of a business and then there are leaders who manage from 50,000 feet, rarely calling anything but the big shots. Seldom does a single style or technique always fit every situation. Much depends on the size and maturity of a business and simply how many hands are available on deck to fight a specific fight.
In a start-up or younger organization, initially the entrepreneur probably has to do just about everything merely to survive. In a midsize or Fortune 500 operation, a good boss, depending on the quality of the team, can pick and choose the level of involvement in a project based upon the complexity, significance and sometimes just the boss’s gut feeling or inclination.
Periodically, at one time or another, most leaders miss the forest for the trees, either by not getting involved enough or by delegating too much responsibility. Then, when something goes south, the boss nitpicks his or her way into the company’s every twist and turn, driving subordinates nearly to the brink.
Either too much or too little attention is usually well intended, but unfortunately, it can cause more bad than good. Instead, as a boss, one must have a sixth sense of when and, much more importantly, how to get involved and with whom depending how near the undertaking is to getting in big trouble. This is preferable to a blanket mandate that requires an “I must see everything first before going to the next step” policy.
Like it or not, today we’re doing business in a 24/7 world and, to accomplish objectives, speed counts. We must be wary of potential bottlenecks that impede process and progress.
One of the biggest obstacles in moving from point A to B is that too many leaders are lousy delegators. Sure, they talk a good game about empowering their people and letting them run with it, but in reality, they hinder progress because they have an insatiable need to function much like an automobile engine air filter. Unfortunately, instead of helping to clean the air, they suck all of the air out of the project.
The “air filter” executive mandates that every preliminary plan, e-mail or even a simple new idea must first be passed by him or her before the undertaking can go to the next step. In a perfect world, this type of filtering might be good. However, at the speed of business today, this type of management style bogs things down or brings them to a screeching halt, as everyone waits for the “air filter” executive to get around to reviewing the latest step. The results include losing productivity, squelching creativity and derailing the initiative of those encumbered by unnecessary oversight.
When this occurs, everybody is negatively affected, including the filterer. Soon the boss who must touch everything gets overwhelmed by what has to be reviewed and, instead of maintaining control, winds up losing it.
There are simple solutions that an effective executive can employ to speed up the work. First, the boss has to be comfortable in his or her own skin about knowing how and when to follow up, intervene or let others keep the ball moving toward the goal line. It’s not just about blindly delegating, but instead knowing the skill sets of those to whom the boss delegates and everyone involved having a clear understanding of the parameters of who does what when.
Having explicit ground rules in place, the boss can give subordinates much more rope, not to hang themselves, but instead to throw the lasso much further to snag the bigger prize. This also enables the leader to have many more balls in the air, exponentially increasing the opportunities for success on many fronts and, quite simply, improving the overseer’s quality of life by providing more time for the executive to function as an executive. The subordinates win, too, because they have the authority, within prescribed boundaries, to get the job done.
Remember, good intentions aside, it gets down to the fundamentals of how an internal combustion engine functions. If an air-filtering management style clogs the workflow, it can suck the power out of your company’s engine, causing it to shut down abruptly.
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 firstname.lastname@example.org.
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Industrial site selection involves so much more than just the cost of real estate. Brandon Podolski, partner and industrial sector leader at Plante Moran CRESA, stresses the importance of taking many factors into account before considering a real estate transaction, regardless of whether it involves entering a new state or moving to a neighboring city.
“Too often, when companies are expanding or consolidating locally, they spend 90 percent of the time looking at the lease rate or real estate costs and don’t account for the impact on operations, labor, cost of goods sold, expenses, taxes and supply chain, or investigate all available incentives,” says Podolski. “These are just some of the components we analyze in a national site search, and they also make an impact on a local scale. Whether leasing, buying, or building, this is more than a real estate deal; it is a business decision that requires due diligence and thoughtful analysis. An experienced adviser can identify and evaluate all of your options and develop a real estate strategy that is closely aligned with your business plans and goals.”
Smart Business spoke with Podolski about creating a competitive advantage through an informed and professional approach to site selection.
How should a business approach site selection?
Companies with multistate operations will commonly analyze the cost benefits of prospective locations in terms of labor, logistics, taxes, incentives, utilities, real estate and other location specific factors. Each of these variables can impact the true cost of conducting business at a selected location. Being proactive can make a sizeable difference.
Can you expand on the critical factors of national site selection?
Logistics plays a key role in selecting the best location. When you think logistics, the first thing that comes to mind is transportation; however, that is just one component. Logistics is the planning and execution of efficient and effective flow and storage of all goods, services and related information to meet customer requirements. Analyzing your existing customer and supplier base and how it ties into a location decision and impacts operations, cost and timing can be a prominent factor in where to locate. Businesses should also examine where they procure raw materials in determining the best location for expansion or new investment.
Transportation costs remain an important consideration in location strategy. It’s important to understand freight requirements before deciding on a specific site to ensure necessary access to interstates, rail and airports, as appropriate, as a location many miles from the main interstate is not conducive to an operation heavily reliant on truck shipping. Modeling how these costs will change based on proximity to suppliers, warehouses and customers is an important consideration.
How can taxes and incentives influence decisions?
State tax structures and incentives are one of the primary items in national site selection. Rates for franchise, and real and personal property taxes can differ significantly from location to location. Corporate income tax structures vary greatly, as well, and some cities have an additional payroll or inventory tax. Some states are more willing than others to offer tax abatement programs, sometimes specific to an industry such as advanced or high-tech manufacturing.
It’s important to conduct detailed due diligence to determine what the tax impact will be on your business and leverage any applicable state and local incentive programs. Many states have an economic development staff that can offer creative programs to help make locating in their state more affordable. Having a trusted adviser in your corner, one who is committed to your success, can be very valuable in this regard.
What part do labor costs play?
Labor costs and availability are significant factors in site selection, and they vary widely across the country. A great incentive package does not necessarily mean the best business decision if it leads you to an area where the pool of employees does not match the skill sets your organization needs or its projected growth. Industrial organizations need to look at their requirements for engineers, highly skilled employees and general labor compared with salary rates and availability for each prospective location. Also, if you are a large user of energy or water, compare the cost of utilities across markets. Water rates are significantly higher in certain states and need to be factored in the analysis. Negotiating utility costs is an often-overlooked strategy.
How does this strategy apply to businesses looking to relocate or expand locally?
Understanding the best practices of national site selection allows companies to look at local real estate transactions differently. The more factors about potential sites you arm yourself with, the more information you have to make a smart business decision and gain a competitive advantage. Working with an adviser when you have a new project or are in the quoting stages can give you the time necessary to conduct a thorough analysis of all options.
Comparing variables not specific to the buildings can tell you the true cost of a location beyond the price of real estate. Analyzing local property tax rates and location-specific incentives provides another perspective to a local real estate transaction. Comparing logistics costs and the proximity to customers and suppliers are also key components. While utility rates may not significantly differ in a local transaction, the energy usage and efficiency of facilities can be estimated based on roofing, windows, lighting and HVAC equipment.
The bottom line is that choosing a location based solely on where real estate costs are the lowest can cause other factors to become unaligned. That’s when market knowledge and a disciplined approach to the selection process become critical, even when assessing locations within a small radius.
Brandon M. Podolski, JD, is a partner and industrial sector leader at Plante Moran CRESA. Reach him at (248) 223-3245 or Brandon.Podolski@PlanteMoran.com.
Just because there’s a dotted line on a contract does not mean a party is required to sign there, says Karen Ludden, a commercial and business attorney with Garan Lucow Miller.
“Many business owners feel they have to agree to certain terms because they are already printed on the page, but a contract is just a written version of an agreement between parties,” says Ludden. “The terms of a contract are meant to be negotiated.”
Contracts can be intimidating. The format is formal. The terminology is precise. And a deadline could be looming. There’s that line where you are expected to pen your signature.
But before you do, consider whether the contract contains all the necessary terms and contingencies. Will it protect your business if the contract doesn’t play out as expected? Or will you end up footing a hefty bill if a dispute arises later?
Smart Business spoke with Ludden about common trouble spots in contracts and what measures a business owner should take before entering into any agreement.
Is it ever alright to sign a contract without consulting an attorney?
Law is a lot like medicine in this way. You don’t need a doctor to treat every common ailment, but you do need to know the difference between a common ailment you can treat yourself and a serious one that requires professional help. And like medicine, an ounce of prevention is worth a pound of cure, and it is certainly less expensive.
Along those lines, you might sign a contract without an attorney if the stakes aren’t high, if you understand and agree with everything in the contract, and if the contract considers all likely outcomes, not just the one everyone hopes will take place. It also helps to have a strong working relationship and history with the other party.
Conversely, you should never sign a contract without legal counsel if the stakes are high, if you don’t understand all of the terms of the contract, or if the contract does not address the possible complications that could arise.
What contractual issues commonly cause problems for businesses?
One costly element of many business contracts is a defense and indemnification clause. This clause essentially holds one party harmless and the other responsible for paying damages, attorneys fees and other costs in the event of a dispute. Often, this clause is boilerplate language or ‘fine print’ that parties, intent on closing a deal, skim over. If a dispute arises, the party that agreed to defend and indemnify can be faced with stiff legal fees and judgments that they never really considered.
Another common trouble spot is an agreement to litigate a case in another state. For example, a company in Michigan might sign a contract with a New York supplier that states that all disputes will be litigated in New York under New York law. Litigation in New York tends to be expensive compared to the Midwest, and it is rarely advantageous to lose the home court advantage, unless the law of another state is more favorable.
Also make sure that there are adequate contingencies. A contract should address what happens if the desired outcome does not occur, or if some, but not all, of the intended outcome falls short.
How can a business owner effectively read a contract?
The law assumes that you both read and understood every part of any contract that you sign. With very few exceptions, you are not excused because you did not have the time to read it, you read only the key parts, or you did not understand all of it.
The most important thing a business owner can do, then, is to sit down and take the time to read the contract carefully, line by line. Flag areas of concern. Even if the contract is 100 pages or longer, do not be tempted to skim it. That’s when you open the door to trouble.
How can you ensure that a contract is tight, and that it considers all of the what-ifs?
First, consider your goals for the contract. What do you hope to accomplish, and how? Is there a time frame that is important to you? Who is involved, and why? Can substitutions of services, labor, parts or equipment be made?
Then consider what could possibly go wrong. Do you want to scratch the whole agreement if every aspect is not performed, or can you agree upon a contingency plan?
While this seems like a negative approach, reviewing your contract with a critical eye is essential for creating a contract that performs. It’s a good idea to enlist the expertise of an experienced commercial attorney to troubleshoot your contract because, ultimately, if the contract does not consider these issues, you might end up in costly litigation.
And when there is a clause that you do not want to agree to, a skilled attorney can negotiate on your behalf so that you and the other party can constructively address the issue without costing you the deal.
How can you write a contract that is thorough, yet concise?
Contracts have come a long way since the early days, when it seemed like lawyers were deliberately using language that no one else could understand. Today’s contracts should be clear and concise, but they should still be comprehensive.
Stick to the keep-it-simple language rule and be smart about including contingencies to ensure the contract offers you adequate protection.
Karen Ludden is an attorney specializing in commercial and business law at Garan Lucow Miller. Reach her at (248) 641-7600 or email@example.com.
Chalk it up to simple economic realities, but a capital expenditure requires quite a bit of forethought these days. Should you buy the equipment you need with cash, or should you take out a loan or lease the equipment you need?
These are the questions business owners are asking now that the economy is showing signs of improvement.
“If you are a business having difficulty raising capital, one consideration may be an SBA equipment loan, as it provides 100 percent financing with terms up to 10 years, whereas banks typically require a 20 percent down payment for a conventional loan,” says Gabe Makhlouf, first vice president in commercial lending at First State Bank. “Another option would be to tap into the equity in existing equipment to obtain 100 percent financing. There are types of equipment, such as computer hardware, software, restaurant equipment and office furniture, that are difficult to finance, and leasing may be the best alternative. In these cases, the leasing company is the owner of the equipment and assumes the risk of obsolescence or later marketability in a limited market.”
Smart Business spoke with Makhlouf about what you should consider before your next equipment purchase.
What should business owners consider when determining how to finance equipment purchases?
Many factors come into play, such as types of equipment and its useful life, economic conditions, tax consequences or advantages, and the company’s current financial condition. Questions to ask include, how long are you keeping the equipment? Can you utilize the tax benefits? If cash flow is an issue, is 100 percent financing more attractive via a lease or SBA loan than a conventional term loan where a 20 percent down payment may be required?
What are the advantages of purchasing equipment rather than leasing?
Although there are many individual advantages to purchasing equipment with cash or a loan versus leasing, these advantages can be placed into the following categories.
- Long equipment life. Companies tend to keep equipment around longer than they have in the past. When you get that initial piece of equipment and make your decision on financing, think long term and make sure you understand its value to your business. If the equipment you are purchasing does not have an obsolescence risk, has a lifespan of 15 to 20 years and you want to keep the machine, you are better off purchasing, as you will own the equipment long beyond its depreciable life.
- Tax benefits. There are tax benefits associated with new equipment acquisition and ownership. If your business has seen production and profitability increase, you could take optimum advantage of those benefits. In the past few years, government programs have been created to help jumpstart the economy, which allowed 50 to 100 percent depreciation for equipment in the year that equipment was placed into service. If you lease, it may be possible to pass bonus depreciation on to the lessor and do a true lease because you could receive a lower payment structure. The lessor would take the depreciation benefits and then pass those back to you in the form of a lower rate. Make sure you understand the tax ramifications of your equipment financing by consulting your CPA.
- Payments based on current cash flow. With a loan, you know exactly what your monthly payments will be and they usually remain the same throughout the term of the loan. Your loan payment is based on your current cash flow. With leasing, you need to be careful not to fall in the trap of initial lower payments that progressively increase. Oftentimes, this method is factoring in future performance that may not materialize to step up payments. With conventional financing, payments are based on current cash flow and rarely factor in future performance.
- Refinancing available. If your lease rates were set during a time when your company wasn’t performing as well as it is now, your rates may be higher than what you could obtain today. Most leases implement prepayment penalties that can render prepaying the lease almost impossible, as they require that all future full lease payments be made in order to fully pay the lease. When compared to conventional financing, companies can prepay equipment loans that are variable rate-based without incurring a prepayment penalty; even fixed rate loans have a preset and predetermined prepayment penalty that decreases with the life of the loan.
Should business owners consider purchasing used equipment?
In this recovering economy, many companies that have delayed equipment purchases may think they can easily purchase used equipment. However, that has proven difficult, as inventory is limited and, consequently, prices have risen. As a result, many companies are shifting toward buying new equipment as the cost and benefits outweigh buying used.
Should businesses purchase equipment with cash?
You may believe that if you have the cash available to acquire necessary new equipment, you should pay with cash, because it is less expensive than financing the equipment through a bank or equipment finance company. But it is important to ensure that your business remains liquid and has plenty of cash available to manage through any setbacks. A business can fail because of a shortage of cash, even while showing accounting profit. Also, the greatest opportunities to grow and expand often appear in times of market turmoil, and it takes cash to take advantage of those opportunities.
Where can a business turn for help?
Talk to your banker about a financing solution that optimizes your cash flow while meeting your accounting and tax objectives and your business needs. Interest rates are low and lenders are eager to help in this area.
Gabe Makhlouf is first vice president, commercial lending, First State Bank. Reach him at (586) 445-4856 or firstname.lastname@example.org.
At the Risk and Insurance Management Society (RIMS) annual Conference and Exposition, risk professionals including CEOs, CFOs and risk managers come together with brokers, insurers, thought leaders and industry experts to learn about new products and services, share ideas and gather information about the evolution of risk and risk management.
“Our goal is to create an environment for clients of all sizes to learn about our breadth of expertise and unmatched ability to support their businesses,” says Kathleen Delaney, a senior vice president with Aon Risk Solutions. “Often, CEOs are not aware of the different liabilities they carry as an officer for the company and the emerging exposures facing their business as a whole. RIMS presents a wonderful opportunity to share the solutions available to manage these risks and help decision makers sleep at night.”
Smart Business spoke with Delaney and Carol A. Williams, managing director and COO of Aon Risk Solutions, Detroit, about why business leaders should consider attending the RIMS conference.
What is RIMS, and who are its members?
RIMS is a nonprofit organization that focuses on advancing the practice of risk management. The majority of its members are risk managers or intermediaries for corporations and other organizations, insurers and other service providers. Financial officers, general counsel and executives overseeing risk management with corporations and other organizations are also members.
Why is continuing education important in risk management?
Risk management is a combination of art and science. As the world becomes more risky, tools used to understand, forecast and manage risk are constantly evolving. It is vital for risk professionals to grow with this evolution so they are best equipped to serve their organizations.
From preparing for insurance renewals to analyzing total cost of risk to managing risk enterprisewide, risk professionals as well as business executives must be diligent about continuing education and professional development. Without knowledge and awareness, businesses become much more vulnerable to the risks they face.
In addition to the RIMS international conference, Aon provides numerous educational opportunities for its clients each year. It produces white papers, develops fact-based benchmarking and industry reports, and provides educational forums at the local office level. Aon also participates in educational programs at the RIMS national and local chapter level. Our goal is to share information about current and emerging risk management issues and trends impacting various industry sectors.
What issues will be tackled at RIMS 2012?
The agenda is robust and comprehensive. The biggest and most current issues facing businesses today will be tackled. Because risk management is so specific to each business, the hot issues are different for every risk professional. Eleven of Aon’s thought leaders will participate in panel discussions about acute and emerging risk management issues, including mergers and acquisitions and cyber liability.
Professionals from across the globe will come to the conference and meet with clients and prospects to discuss risk management needs and share insights and ideas.
For more specialized topics than are covered in the panels, attendees can visit Aon’s Clientopia. It is set up in a nearby offsite area but done in conjunction with the conference. There, you can get very personalized attention to your business needs and set up meetings with insurers to discuss issues and receive a more detailed overview of what a risk manager can bring to the picture for your business.
What kind of business is done at the conference?
The relationship-building and transfer of knowledge that occurs is strategic and lasting. The conference allows business leaders from many industries to discuss their approach with industry-leading risk advisers and brokers, meet with insurance carriers, talk about current issues and prepare for the future. The conference can be an eye opener for those who do not understand their company’s risk profile. They may blindly approach a booth and leave with ideas and tools to support the growth of their organization.
How can someone who is interested get involved with RIMS?
There are great opportunities for professionals of all levels who deal with issues of risk to learn more. There are Risk Management 101-esque sessions at the annual RIMS conference for everyone from general counsel to chief financial officers to get familiar with the issues facing their businesses so they can make intelligent decisions that will have a direct impact on their balance sheets. In addition, several cities have very robust local chapters.
You mentioned local RIMS chapters. What other types of local opportunities are available for education?
RIMS and Aon alike present sessions and forums in cities around the country. The basic issues covered can be valuable, especially for busy executives who may not be able to attend the three-day annual conference. These programs are designed to speak to the different aspects of risk and target general counsel or CEOs who may not be risk professionals but need to have a grasp of the issues. The programs are especially useful for CFOs of firms that may not have dedicated risk managers and for someone who is wearing many hats in an organization, including risk management.
For information on Aon at RIMS in Philadelphia April 15-18, visit rims.aon.com.
Kathleen Delaney is a senior vice president with Aon Risk Solutions. Reach her at (212) 441-1662 or Kathleen.Delaney@aon.com. Carol A. Williams is managing director and COO of Aon Risk Solutions, Detroit. Reach her at (248) 936-5291 or email@example.com.
Becoming an employer of choice can help a company attract and retain the brightest employees, best its competitors and build a reputation as an excellent employer.
But it takes more than just saying it. Instead, employers have to prove every day that they value their employees, says Brendan Prebo, executive director at ASG Renaissance.
“An employer of choice is a company that has practices in place that promote a healthy, forward-looking and encouraging environment for its employees,” says Prebo. “Employees are looking for employers that allow them to think outside the box, that present a clear vision of where they want to take the company and provide employees with proper training for the job to hire and retain the best people. As a result, workers choose that employer when presented with other choices of employment, self-employment or retirement.”
Smart Business spoke with Prebo about how to become an employer of choice.
How can a company begin to develop its brand to become an employer of choice?
First, it’s important to realize that becoming an employer of choice is a strategy, not a tactic, and it needs to be a strategic imperative. The traditional view of HR is that it is a support function. But really good, really progressive companies — the ones that highly skilled, talented workers want to work for — have taken a new view of HR. At these companies, the head of HR sits at the table and is part of developing the strategic direction for the company.
Becoming recognized as an employer of choice requires a companywide effort, and companies must start internally. This means recognizing that their employees are their most valuable resources. Therefore, employers should take a close look at what is not working within their company before beginning to do any external marketing. At the same time, employers can’t be all things to all people, so it’s important to focus on the things that are important to your top performers.
It’s also important to communicate to employees the company’s goal of becoming recognized as an employer of choice so they understand the importance of this designation to the overall success of the company, and they can support the company in its efforts.
Employers also need to be consistent in their message and how they present it. Potential employees will be looking at an employer’s website, and its Facebook and LinkedIn pages. They perform online searches, so if you have a statement on your website that says you value diversity, you need to make sure that is represented in your brand.
What kinds of things help an employer attract and retain the best employees?
Employees are looking for exciting and challenging work; career growth, learning and development; great people to work with; a good relationship with their supervisors and peers; and a company that values its employees. Compensation is an important factor, as well, but money as a motivator only creates short-term results. You may be able to attract a great employee by offering that person a large salary, or keep an employee who might otherwise leave by offering that person a raise. But money is a short-term solution.
For lasting results, you need to look elsewhere. That means providing employees with meaningful work, encouraging them to take risks and think outside the box, having a clear vision of where the company is headed, providing employees with proper training for their jobs and setting and clearly communicating performance expectations that align with the company’s goals. It also means encouraging employees to continue to learn and develop their job skills, providing good leadership at every level and taking the personal needs of employees into account by offering flexible work schedules.
What are the benefits of doing these things to become an employer of choice?
Companies that are recognized as being employers of choice have an advantage in attracting and retaining the best talent. They have a more productive, motivated and committed work force, which directly benefits their customers and their brand, enhancing their competitive position and helping to build a sustainable business.
Highly skilled talent is very much in demand, and jobs in areas such as engineering, software development and project management are tough to fill. Employers need to become an employer of choice to attract that highly skilled talent, not just someone to fill a seat.
What would you say to employers who say they don’t need to worry about this, and their employees should just be happy to have a job?
The days of command and control are over. If you have an aging work force, you may still be able to function that way, but younger workers are not going to stay with that kind of employer. Also, employers can’t afford to have unhappy employees anymore. In today’s world of social media, word travels fast, and potential employees are more knowledgeable than ever about which companies are the best ones to work for.
In addition to the loss of benefits the companies can realize by becoming an employer of choice, companies can also harm themselves by letting dysfunctional work environments go unchecked. Uncooperative, unmotivated and unresponsive employees harm companies in two ways. First is the poor performance that results, but more important is the fact that they affect everyone around them, causing your best employees to leave for better-run and better-managed companies.
By becoming an employer of choice, you will create an environment where your best employees will thrive and that will attract the best and brightest in the market.
Brendan Prebo is executive director at ASG Renaissance. Reach him at (313) 565-4700 or firstname.lastname@example.org.
Mike Duggan always found it offensive that hospitals profit more when a patient’s health problems are more severe.
“It’s really true: Hospitals make more money the sicker you are,” says the president and CEO of the Detroit Medical Center. “If we recycle the same sick people through hospitals over and over, the doctors and hospitals make more money from that. The fact is, the worse off patients are, the better the doctors and hospitals are, which never made any sense to me.”
Last May, Duggan and his leadership team at DMC decided to do something about it by applying to become one of 32 medical systems nationwide that will participate in the Medicare-operated Pioneer Accountable Care Organization Model program. DMC was officially named a program participant in December. As part of the program, DMC will receive money from the federal government based on its preventative-care track record moving forward.
“It started off as a moral question, and most of the DMC physicians agreed with it,” Duggan says. “Doctors went into this business to keep people well, and the idea that you succeeded more if you keep patients well appealed to a lot of doctors, it appealed to us, but you are going to find that most hospitals in the country didn’t apply for the Pioneer ACO, and really are resisting that direction.”
One possible reason for resistance is the fundamental changes required at the operational level. The ACO model requires a high level of coordination between doctors and hospitals to ensure that patients receive adequate preventative care and are maintaining follow-up doctor appointments after a hospital discharge. For doctors used to running their own practices, Duggan says they can experience some culture shock when placed in an environment where they and hospital administrators have to hold each other mutually accountable for a patient’s care.
That is the challenge that Duggan has faced, and will continue to face throughout the year. With 14,000 direct employees, and more than 1,000 physicians positioned as 50 percent stakeholders through DMC’s physician hospital organization, Duggan has to keep 15,000 people focused on a new approach to health care by emphasizing the reasons for change, and keeping everyone plugged into the organization’s progress.
Give them the paintbrush
When outlining any rationale for change, you have to spell out the reasons behind the change if you want to get buy-in throughout your organization. In DMC’s case, however, Duggan tried to put the change in the hands of his doctors and employees as much as possible. He outlined the resources at DMC’s disposal, the business model, and how the resources and model, if properly implemented and utilized, would make the ACO model a success. From there, he wanted the 1,000 stakeholder doctors to put two and two together, and come to the conclusion that this was the right way for DMC to operate.
Duggan wanted the stakeholder physicians to see that DMC had a highly integrated electronic medical records platform, a doctor-driven operational structure and a constructive relationship between doctors and administrative staff.
“We were the first system in Michigan to become 100 percent electronic, and that system is now being rolled out to the doctors’ offices,” Duggan says. “That means we’ll have someone in a central control capacity that will be able to see that Mrs. Jones was discharged on Dec. 7, she has a follow-up appointment with her doctor on Dec. 11, and then we can see if she showed up to her appointment. If she didn’t, we’ll be on the phone asking if she needs a ride or needs a nurse to come to her house.”
The real-time electronic updates have fostered a positive working relationship that is essential when implementing a system that requires coordinated movement from many different parts within an organization. Ultimately, no matter how you accomplish it, in order to develop the strong working relationships that can help smooth a large transition, the right hand has to know what left is doing. If there is a sense of disconnect, communication has broken down and problems can arise in your plan’s implementation.
“The great thing about this is I have been providing administrative support, but this has been a doctor-driven process,” Duggan says. “The doctors are driving the medical side, and we have been working together seamlessly. If you talk to doctors at a lot of other hospitals, there is a contentious relationship with them and the hospitals. When you have people that want to be a part of a big change like this, you have to keep them close and connected. I think we’ve been effective in doing that.”
Another factor working in favor of Duggan’s plan is the fact that doctors have, in a very real sense, bought into DMC’s future. In December 2010, the health system became a physician hospital organization. The 1,000 doctors that paid $1,000 to join the organization represent nearly half of DMC’s 2,500 affiliated physicians. By literally buying in to DMC’s future, the doctors who joined the PHO have become advocates to their peers for the switchover to an ACO-based operating model.
With that level of engagement, Duggan has had a great deal of help in aligning the organization.
“I don’t spend a lot of time with skeptics,” he says. “I just say, ‘Here is the reason why I think it makes sense to sign up; if you don’t want to sign up this year, you could sign up a year from now after you see how it all works. It’s your own choice.’ But so many doctors have gone and persuaded their colleagues that this is the right thing to do. And it’s because we’ve taken that approach. The key is to be totally honest and direct, and don’t twist anybody’s arm. If you believe this is the direction to go, it’s going to be a lot of fun. If you don’t believe in this direction, nobody is going to criticize you, and you can reevaluate a year from now.”
Build on the momentum
When you’re trying to build support for a large-scale organizational change, it’s nice to have people take up the cause and advocate to their peers, even if you don’t ask for the help. But as the leader, you often can’t just wait for that support to sprout on its own. You have to cultivate it. And the way you cultivate it is by searching for the dreamers and the complainers in your company.
The dreamers are the people who still have a sense of idealism about their work. They still want to change the company, the industry and the world for the better. The complainers might seem like a destructive force on the surface, calling your decisions into question, but Duggan sees something else.
“The person who is always calling you, complaining that you aren’t doing enough, that is normally where I start looking for my change agents,” he says. “The person who doesn’t care enough to call up with a company probably isn’t your guy. But I’ve always relied heavily on the people who care enough to call up. I engage those people, because while some complainers are just complainers, a lot of complainers are problem solvers who just want a shot to make things better. Your most vocal critics are often your best change agents when you’re trying to promote a change like this.”
Duggan points to one of the other administrators at DMC, who has been a highly antagonistic critic ever since Duggan was hired as CEO. Duggan has repeatedly sought his critical colleague out for service on panels, knowing that he’ll bring a different perspective to the table. When you’re trying to facilitate a major change, it might seem counterintuitive to give a voice to your harshest critics. But bringing them to the discussion can accomplish two things — it can bring a fresh outlook to the proceedings, and it can win over not just the critical person alone, but also like-minded skeptics who see you accepting a differing viewpoint.
Duggan got his dreamers on board during a trip to a seminar in Minnesota last June.
“We had a couple of private doctors who have had a drive their entire life to change the way medicine is practiced,” Duggan says. “When the feds had the seminar in Minnesota, I got those doctors to go along with me. After three days, they were very excited, and we came back to Detroit with that attitude. I’m picking people who are leaders and change agents by their nature. If you engage them and allow them to take an active role in the direction you’re headed, you don’t have to do anything. They’ll just take over and embrace what’s happening.”
Duggan placed his dreamers and complainers in influential positions, leveraged their passion to improve, and allowed their attitude to become contagious to the rest of the DMC organization. Once the doctors bought in, administrators and staff members followed the example and started to believe in Duggan’s plan.
“I think once the hospital staff and administrators heard the doctors talking with more enthusiasm, we started to see more interest in our meetings,” he says. “Now, I think you’ll find the leadership at all of our hospitals deeply involved in the planning. But it’s like any new idea. It takes awhile to catch on.”
Any major change is going to challenge your ability as a communicator. Even after the initial rollout of your plan, you’ll need to keep your message in front of your people, and continually give them opportunities to offer their opinions and ask questions.
Like many leaders of large organizations, Duggan has created numerous touch points between himself, doctors and hospital staffers, in an effort to ensure that their engagement level doesn’t wane as the ACO model moves from a novel concept to an everyday way of life. Duggan says communication is still a work in progress.
“If the doctors have one criticism, it’s that we have not communicated frequently enough,” he says. “There is a whole series of steps involved, and we’ve been putting more rigor around it. I wanted a monthly newsletter, but it didn’t go out every month. We were busy, so we stopped and said ‘You know what? This is going to be a priority from now on. This is going out every month.’ I think we’ve improved, but there are a lot of grind-it-out details that you have to keep executing on. There hasn’t been any magic to it.”
To an extent, the challenges Duggan faces are not unlike a franchisor. The leader of a franchise-concept company might have more control over the customer experience, but Duggan still has to get independently owned businesses under the same corporate umbrella to adhere to a uniform set of standards and practices, as DMC forges ahead into uncharted waters in the U.S. medical field. So far, Duggan believes the results have been good, but it will be an ongoing process for quite awhile.
“That’s what is going to be fascinating about all of this,” Duggan says. “The doctors have agreed to the standards and protocol, they’ve agreed to be on electronic records and be measured, and now we watching all these different businesses find a way to implement new standards in a way that works for their practice. It’s going to be fascinating to watch.”
How to reach: Detroit Medical Center, (888) 362-2500 or www.dmc.org
The Duggan file
Education: B.A. and juris doctor, University of Michigan
What is the best business lesson you’ve learned?
I don’t tolerate feuds among the management team. That is a guiding principle in business, for everyone to see the team as unified. You can’t drive change with people bickering with one another. You can disagree, but you can’t allow people to hold grudges.
What traits or skills are essential for a leader?
Honesty. Really, beyond that, anything else is secondary.
What is your definition of success?
Essentially, it is succeeding in making the world a better place than how you found it.