Jerry Roche

Wednesday, 26 December 2007 19:00

Lease vs. buy

Buying a commercial property for your company is a substantial investment that is influenced by a variety of factors and projections.

“Purchasing a building requires a significant outlay of capital,” says Scot Farber, Senior Vice President, Southwest Region, for Grubb & Ellis Company’s Institutional Investment Group. “Depending upon a company’s financial strength, it may be more advantageous to reinvest capital and grow the business, rather than purchase a building that might not suit your long-term requirements.”

Within the Dallas office market, the options are plentiful for companies looking to buy or lease. Smart Business talked to Farber about those options.

What are the potential benefits of owning versus leasing a commercial property?

The greatest benefit of owning is potential appreciation. Real estate can be a tremendous long-term investment, with a huge upside. Other benefits of owning property include: the realization of secondary income if part of your building is leased to a third party, avoiding fluctuations in the leasing market that may affect your lease rate and, finally, potential tax benefits from mortgage interest deductions.

A less measurable benefit of owning your own building is avoiding and really eliminating control issues that might arise with a landlord. One of the sometimes overlooked conveniences of owning a building is that you don’t have to limit your hours of operation to the owner’s specifications. If you want to keep the office open until 10 p.m., or if you want to work weekends, you can.

The primary benefit of leasing is flexibility, both financial and operational. Buying a property requires a significant investment of capital in the form of a down payment, in addition to any out-of-pocket costs that may be necessary to prepare the building for your use.

Leasing space allows you to reinvest your capital to grow your core business. Additionally, a lease commits you to a building for a set period of time, while a purchase could potentially tie you to the real estate for a long run and expose you to valuation losses.

Both leasing and buying carry tax benefits. In a commercial lease, the tenant can write off lease expenses but will not receive any long-term appreciation. If you own, you can write off interest and depreciation expenses but are fully responsible for property taxes, insurance and operating expenses.

Where do the better deals exist, given the current real estate market in Dallas?

Real estate is drive by a core ‘mantra’ — location, location, location. The best locations in Dallas command premium pricing. However, the hottest submarket may not be the right location for your business.

Typically, the high-profile locations offer greater possibilities for leasing. Downtown, Las Colinas, Far North Dallas and LBJ Freeway are a few sub-markets where the options for building purchases are limited. However, if you can operate your business from a secondary location, there could be solid options to lease or buy that make sound financial sense. In other words, there may be opportunities to buy a building in or near your desired location that can save you money when compared to leasing space in the same area.

As one of the country’s largest office markets, Dallas offers tenants properties in all ranges and sizes. Buying or leasing, large or small, there is most likely a property available to accommodate your needs.

How do you, as a commercial real estate consultant, advise potential clients?

The recommendations of a real estate agent or consultant are going to depend on your objectives and long-term business plan. Five-, 10- and even 15-year business plans will greatly impact his or her recommendations.

A real estate consultant would take into consideration what’s happening in the leasing market currently and in the long run. Most tenants sign leases for three to 10 years [five- to seven-year leases are the norm], and so there is a great deal of planning required to ensure that long-term requirements are met by today’s decisions. Base rental rate, building operating costs, market and submarket growth, proximity to employment pools, and leasing incentives are just a few of the factors that go into a considered recommendation from a real estate professional.

SCOT FARBER is Senior Vice President, Southwest Region for Grubb & Ellis Company’s Institutional Investment Group. Reach him at (972) 450-3251 or

Sunday, 25 November 2007 19:00

Avoiding payback

According to Craig Snethen, a senior associate in the Pittsburgh office of Jackson Lewis, retaliation claims are not uncommon in the business world.

“We’re seeing them with some regularity, both independently as well as accompanying discrimination charges,” he says. And, because retaliation claims can be brought even where there is no discrimination, “they’re potentially more difficult to defend than the discrimination charges themselves.”

Snethen offered Smart Business readers some tips on understanding and avoiding retaliation claims.

What types of employee conduct do the anti-retaliation provisions of the civil rights statutes protect?

The scope of protection is very broad. The anti-retaliation provision of the major federal civil rights statutes protects those who participate in certain proceedings, the ‘participation clause,’ and those who oppose unlawful discrimination, the ‘opposition clause.’

What if an employee is mistaken in the belief that he or she has been discriminated against?

A retaliation claim can exist even when a discrimination claim has no merit.

The anti-discrimination provisions were designed to protect an employee based on who he or she is. The anti-retaliation provisions, on the other hand, were designed to protect an employee based on what he or she does. An employee doesn’t necessarily have to be right about the existence of discrimination. He or she must only believe, in good faith, that the activity is unlawful.

Can an employee cite discrimination against another employee as a reason for retaliation?

Yes. If an employee has an objectively reasonable good-faith belief that he or she has suffered a ‘materially adverse’ employment action by opposing the alleged discriminatory conduct or by participating in a formal investigation, he or she may maintain a claim for retaliation.

What types of employer conduct can support a claim of retaliation?

The types of conduct that can give rise to a retaliation claim have broadened considerably in recent years. Obviously, conduct that directly affects the terms and conditions of one’s employment — like discipline, demotion and/or discharge — can support a claim of retaliation in some cases. The anti-retaliation provisions now also include conduct outside the confines of the employment relationship that a reasonable employee would find to be materially adverse. So any action that might dissuade an employee from making or supporting a charge of discrimination may support a claim of retaliation.

In one instance, the Supreme Court ruled that an employee’s 37-day unpaid suspension and her reassignment from forklift operator to much dirtier, tougher duties were adverse or harmful. If these changes were caused by reporting unlawful discrimination in the workplace, it would support a viable claim for retaliation under Title VII.

Are there limits on the definition of retaliatory conduct?

The anti-retaliation provisions protect an employee only from conduct that produces an injury or harm. The Supreme Court speaks in terms of conduct that a reasonable employee would find ‘materially adverse.’ Therefore, claims based on petty slights, minor annoyances and simple lack of good manners generally are considered insufficient for charging discrimination.

However, there are few absolutes. Each case must be examined in context. In one decision, the court noted that a supervisor’s refusal to invite an employee to lunch is normally a nonactionable petty slight, but excluding an employee from a weekly training lunch that contributes to his or her professional advancement might be actionable.

What are some examples of a ‘trivial harm’?

In one case, a plaintiff was a route manager selling frozen food products door to door. She contended that her supervisor had punished her for reporting alleged discrimination by: criticizing her with a written warning notice for not soliciting enough potential new customers, denying her a route builder [a person who would cold-call noncustomers along her route], and failing to consider her claims of harassment and discrimination in a performance appraisal. The court of appeals found that each of the alleged punishments — even if they were true — would not give rise to a viable retaliation claim.

The United States Court of Appeals for the Third Circuit — the federal appeals court that covers Pennsylvania, New Jersey, Delaware and the Virgin Islands — has not yet addressed the ‘trivial harm’ exception.

However, two Pennsylvania district courts have. One found that failing to delegate an employee’s work to a temporary employee and failing to celebrate an employee’s birthday are minor and trivial and therefore do not support a charge of discrimination. Another found that the summary dismissal of the plaintiff’s allegations of discrimination does not support retaliation. It also found that dismissal of a complaint is not the type of ‘materially adverse’ action that would dissuade a reasonable worker from complaining in the first place.

CRAIG SNETHEN is a senior associate in the Pittsburgh office of Jackson Lewis. Reach him at or (412) 232-0196.

Sunday, 25 November 2007 19:00

Looking forward

Though strategic planning for your 2008 corporate real estate needs should already be completed, now’s the time to consider retaining a professional consultant year-round.

“Because there is so much to know about commercial real estate, many companies just do not have the expertise internally,” says Kevin McGovern, Senior Vice President for Grubb & Ellis Company. “Utilizing a broker throughout the year will provide a company an outsourced consultant and, in most cases, for no additional cost to the company because the transactional fees alone are usually enough to provide ongoing services.”

Smart Business talked to McGovern about advanced planning for real estate needs.

When is the best time to evaluate real estate needs?

The simple answer is all the time, but it’s not a very practical answer. Companies should examine where they have been and then determine the best way to get where they are going. The easiest time to do this is during the fourth quarter or when planning next year’s budget.

Who is in charge of real estate decisions?

Typically, it is the CEO or CFO for local or regional firms. Fortune 1000 companies, or companies of similar size, are large enough to absorb the salary for a director of real estate or even an entire real estate department. In any case, a company will want to have a real estate professional, either internally or outsourced, adhering to the company’s needs year-round — even outside of the planning period.

What specific services can a real estate consultant offer?

It really makes no sense for a company to use a real estate broker for a specific transaction only, whereas the company can use the same broker to advise them on a much broader level. For example, most tenants don’t know that a broker can help them analyze the operating expense reconciliation reports that come from their landlord every March or April. The broker can help you determine if something needs further investigating and then guide you through an audit of the landlord’s books. This, of course, is possible only if you negotiated within your lease for the right to do so — which is what a good consultant would ensure.

A real estate broker typically gets paid a commission based on results, and it is primarily the result of a transaction closing. A better and more intelligent path is for a company to utilize this broker year-round as part of the services that come from representing the client during the transaction.

Can a company really include an outsider in its strategic planning meetings?

You shouldn’t release your most valuable trade secrets to an outsourced team member; you still have to use common sense. But you should involve a real estate professional frequently and consistently.

If your current adviser is not capable of this kind of service, then start taking the phone calls from the dozens who call you every week. Interview them and decide on the right fit for your company. It will ultimately increase your profit and provide you more time to focus on your core business.

What information should a company share with a new consultant?

A good consultant will have many different options and ideas, so take the time to explain the needs of your firm or business. By knowing a client’s strengths, weaknesses, opportunities and threats, a broker/consultant will be able to strategically position the company to function within all of your given parameters. And intelligent creativity during a lease negotiation will provide you flexibility when you need it most.

What might a real estate broker/consultant advise during strategic planning?

Real estate runs in cycles, yet many tenants continually sign their new lease at the top of the market. Though you will not always transact a lease at the absolute bottom, you still want to have a consultant monitor the market on your behalf. When the time is right, the consultant will advise the appropriate action, even if it was not on your current agenda.

Opportunity does not always wait. If a building’s rental rates are at or near an all-time high, chances are there will be better days ahead for you to do a long-term lease. But don’t be afraid to do a long-term lease when the market dips down, as long as your long-term business is sound.

Also, a good consultant can help analyze whether it is better to own or lease real property. Many data components given to the consultant from the client and from the market are plugged into a financial model that addresses objective and subjective concerns.

KEVIN MCGOVERN, SIOR, CCIM, is a Senior Vice President, Transaction Services Group with Grubb & Ellis Company in Dallas. Reach him at or (972) 450-3239.

Friday, 26 October 2007 20:00

For the asking

Your local university campus — a little-known business resource — offers counseling, consulting and training services, often at no cost to clients.

“The economic impact of the hundreds of jobs created and retained annually and the cost savings to area businesses are important to the future of the region and our local economy,” says Betsy Boze, dean of the Kent State University Stark Campus. “Local universities like ours serve hundreds of businesses a year in customized executive training and research, including LEAN/Six Sigma training and certification, strategic planning and market research.”

Additionally, universities like Kent State Stark sometimes cooperate with SCORE, a nonprofit association that locally boasts more than 30 experienced, retired business owners and executives who provide entrepreneurs and small business owners with confidential, free business advice.

Smart Business talked to Boze about the services available to businesses at local university campuses.

What kind of meeting and conference facilities are available?

Many universities, including the Kent State Stark Campus, offer state-of-the-art technology, free parking and quality in-house food service. These facilities and conference centers can be used for board meetings, training sessions, corporate retreats, high-end social events, fundraisers and weddings. Our Professional Education and Conference Center is one of only two accredited International Association of Conference Centers in Northeast Ohio.

What small business development services are available through local campuses?

Small Business Development Centers like ours offer counseling, consulting, training and referrals. The Kent State Stark SBDC is a cooperative effort of the state of Ohio, the federal government and Kent State University Stark Campus. Certified business analysts provide management assistance to pre-venture individuals and current small business owners at little or no cost. Some small businesses can work with business and management faculty, using students to assist with their research and planning needs through supervised classroom projects. In some instances, students volunteer in areas related to what they are studying to reinforce learning and help them appreciate the community and the industry. Our 5,300 students volunteered more than 25,000 hours last year.

What training programs work in conjunction with certain private businesses?

Many exciting partnerships can be created, especially with manufacturing, health care and service organizations. Customized professional training and organization development are popular programs. These include management development for mid-level managers, retreats with organization leaders to develop their mission and vision statements, and strategic plan and team-building with cross-functional work groups.

How do student internships work?

Internships are a great way for an employer to provide a bridge during expansion or bring in a fresh perspective. Sometimes internships are so successful that they turn into permanent positions, but there is no expectation or commitment on the part of the employer. Students may participate in paid or unpaid internships that carry course credit. Some degrees require an internship for graduation. Some students work with an employer to expand on the typical work experience and participate in management or decision-making activities.

How do degree-completion programs work, and what kind of cooperation is expected from employers?

With the rapid rate of change in information and technology, employers recognize the value of a liberal arts education. Some courses that may not seem directly related actually benefit the employee and the work force by improving critical thinking as well as communication, technology and reasoning skills. While high school or an associate degree may have been enough to get ahead just a few years ago, today’s high-paying jobs and the jobs of the future require a bachelor’s degree.

Degree-completion programs build on existing course work or associate degrees leading to bachelor’s or master’s degrees. Our hope is that employers support their employees’ education with flexible scheduling and/or tuition assistance. In some cases, students can design a customized major.

We are launching our Business Flex program, where a student can earn a bachelor’s degree in business administration (BBA) by attending classes only two nights a week.

BETSY BOZE is dean of Kent State University Stark in Canton. Reach her at (330) 535-3377 or For free management consulting, call SCORE at (330) 244-3280 or e-mail Chris Paveloi is responsible for student internships and can be reached at (330) 244-5043 or The Office of Corporate and Community Services, (330) 244-3508 or, offers training and research. The Small Business Development Center, (330) 244-3295 or, has small business development, counseling and training services. To inquire about special events or meetings, contact the Professional Education and Conference Center at (330) 244-3300 or

Tuesday, 25 September 2007 20:00

C corp., S corp. or partnership?

You have three basic choices when selecting the tax structure of a start-up business: C corporation, S corporation or an entity taxed as a partnership.

“Don’t be a C corporation unless you absolutely have to,” says John Ransom, a partner and head of the Corporate Practice Group and Tax Section at Porter & Hedges, LLP. “To maximize your after-tax value, you need to be a flow-through entity.”

Smart Business spoke with Ransom about the all-important tax issues that affect the choice of entity.

What is the process for selecting your new business entity?

The first thing I ask is, ‘What’s your exit strategy?’ This will in large part drive your choice of entity for tax purposes. Becoming a corporation is a one-way street; its easy to get in but getting out can be very expensive. Think about your exit strategy when you start a business, because the choices you make today are very difficult to reverse or have a high price tag if you change course in the future.

Knowing your exit strategy will likely drive you to an entity that is a flow-through for federal tax purposes, such as an S corporation or an entity that is taxed as a partnership, which generally includes a limited liability company (LLC), limited partnership (LP) and limited liability partnership (LLP).

Why not a C corporation?

A lot of small businesses default to a C corporation because there is a reduced tax rate on the first $100,000 or so of taxable income, some other ancillary tax benefits, and it’s easy.

For a C corporation, the entity pays a tax on its earnings and the shareholders are also taxed when they receive a distribution. This is a terrible choice when you get ready to sell the business. In addition to the double layer of tax, you leave a huge amount of value on the table because you cannot effectively deliver certain tax attributes to the buyer, mainly a step-up in tax basis of the assets of the business.

What are the advantages of choosing a flow-through entity?

In the sale of a flow-through entity you can deliver future tax benefits to a buyer with little or no increased tax cost to you, the seller. Specifically, you can provide the buyer an increased cost basis in the underlying assets of the business equal to the premium paid. This generates higher future tax deductions for the buyer which provides it future tax savings – which means the buyer can pay more for your business. This feature is one of the things that fuels the success of master limited partnerships.

For example, if a buyer is looking at the purchase of stock of two identical companies, one a C corporation and one an S corporation, a deemed sale of the assets of an S corporation will yield more tax benefits to the buyer in the future, so the buyer is willing to pay more for the stock of the S corporation than for that of the C corporation. The net present value of the tax benefit to the buyer can exceed 20 percent of the premium paid, which can be a big number.

A seller may have slightly higher taxes in this situation due to depreciation recapture and the like, but I typically find that buyers are willing to compensate sellers for such incremental taxes as the future tax benefit to the buyer is so substantial.

What’s the difference between S corporations and partnerships?

S corporations work fine in certain simple situations, but they have limitations on the classes of stock and types of shareholders you can have. They are not very flexible, but they’re easy to understand. For a real simple deal where there are no back-in or carried interests, where all the owners are U.S. citizens and individuals and they don’t ever expect to have any kind of investment by funds, an S corporation works well.

Partnerships are much more flexible, but they are often more complicated and harder to understand. If you think you may have some kind of funds or other types of entities investing in you, or you want to have back-in interests for certain people, you probably want to use an LLC or LP.

Partnerships can also provide significant tax benefits to a buyer of a partial interest in the business, where at least eighty percent of an S corporation must be purchased to generate the tax basis step-up benefits discussed above. Also, a partnership can provide similar tax benefits if an owner or his or her spouse dies. If you think you might sell to a master limited partnership, you almost certainly need to be an LLC or LP.

What’s the different between LLCs and LPs?

An LLC operates similar to a corporation with corporate authority and management control centered in a board of managers. In LPs, the general partner – who typically owns a pretty small interest – has most of the management authority. The limited partners have a financial and economic stake but not much management say-so.

If it’s a deal where all the investors can participate proportionally in management choices and decisions, an LLC works great. If you have a situation where you want to focus management in a single person or a small group, an LP works well.

JOHN RANSOM is a partner and head of the Corporate Practice Group and Tax Section at Porter & Hedges LLP, Houston. Reach him at (713) 226-6696 or

Monday, 25 June 2007 20:00

Selling to employees

One way the owner of a privately held business can successfully exit the marketplace is to sell out to a family member (see last month’s Smart Business). Another is to sell to a key employee or a group of employees.

Either way, the process can be difficult. “There is always a sense of loss because the business has been the owner’s baby for so long,” says Joel J. Guth, an advisor in the Citigroup Family Office at Smith Barney, a division of Citigroup Global Markets. “Former owners who are ultimately happy have a common thread. They took the time to perform a thorough exit-planning strategy; they set their objectives; they understood what they were trying to accomplish; they found the most efficient way to transfer ownership of the business to someone else; and they had a mission for what they were going to do — and be — after the sale.”

Smart Business talked with Guth about how to successfully sell a business to employees.

Why sell a company to a key employee or a group of employees?

In some cases, the owner truly feels the employees have been critical to the growth of the business and therefore owes them the opportunity to buy the company. Sometimes, the owner feels he has had a fantastic opportunity to accumulate wealth and wants to pass it on to people who are near and dear to him. Thirdly, an agreement with key employees could exist from when they were first hired. It could be that there is no other market for the business — that the only true buyers are employees of the company. Lastly, the owner might believe that if he sells to a key employee he may have a higher probability that the culture or mission of the company will remain intact.

What are the risks?

Selling to one, two or a group of key employees has many of the same risks or disadvantages as selling to a family member.

First, are the key employees qualified enough to continue to run the business in the owner’s absence? Sometimes the business has outgrown the management group. It might have been a great management group when it was a $10 million company, but now it is a $40 million company, and management is not as well equipped to handle the larger size. The owner has to be willing to perform an honest appraisal of that management group.

The second risk is that normally, the employee group does not have the ability to write a check for the purchase, which means the owner’s payout has to be based on the future success of the business. The owner has to be very comfortable that this group can continue to run the company profitably.

Finally, there is always the risk that this type of sale may require the former owner to transition the responsibilities or nurture key relationships or employees after the sale is complete.

If you are selling to key employees, what are your options?

The owner could sell the stock outright, which is not probable, because most employees will not have enough money to buy the company.

The owner could establish an Employee Stock Ownership Plan (ESOP), which is a leveraged transaction enabling the company to borrow on the cash flow of the business. The company uses the loan to purchase stock.

An owner can choose an installment sale where employees are going to buy the business over time, primarily using the cash flow of the business to purchase stock.

Which is the most popular?

ESOPs are getting a lot of press right now due to some real advantages. For instance, if the ESOP is structured correctly, the former owner can avoid paying capital gains on the stock if he reinvests the proceeds in qualified investments like stocks and bonds. For other types of transactions, he’d be required to pay taxes on that amount. Another benefit of using an ESOP is that the owner gets cash up front, unlike many other mechanisms. This means he may be able to leave the business immediately due to the fact that he is not tied to the future success or failure of the business. Lastly, he does accomplish the objective of giving the company back to the employee group.

Of course, setting up an ESOP can be complex, expensive and may involve disadvantages such as significant debt financing and various requirements that are related to the special tax treatment. It is important to evaluate whether an ESOP structure makes sense for each specific situation.

Citigroup Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and non-bank products and services through various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC. Joel Guth is a registered representative of Smith Barney, a division of Citigroup Global Markets Inc., that has qualified to service Citigroup Family Office clients.

Citigroup, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matters(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

JOEL J. GUTH is an advisor in the Citigroup Family Office at Smith Barney, a division of Citigroup Global Markets. Reach him at (614) 460-2633.

Monday, 26 March 2007 20:00

Going global

The pace of globalization has increased over the past decades, and it will accelerate in the future. Ohio is helping fuel this growth. It is the seventh-largest exporting state in the union, and it’s the only state whose exports have grown every year since 1998.


“International business is both a threat and an opportunity,” says John Gajewski, executive director in the Workforce and Economic Development Division of Cuyahoga Community College’s Corporate College. “Ohio lost 71,000 jobs to imports from December 1999 to December 2006, but we have 261,000 jobs tied to exports. So, on balance, we have a job gain.”

Smart Business talked to Gajewski about the opportunities that exist in the global market for Ohio businesses.

Where do opportunities exist for U.S. companies not yet involved in imports and exports?

The opportunity for Ohio companies in exports is very good, especially in the automotive, rubber, iron and steel industries. Ohio has a good tradition of exporting products internationally, and we can continue to capitalize on it.

Also, a study of 100,000 companies by an independent research organization determined that Ohio ranks No. 1 in the U.S. in productivity. When considering the state’s tradition of exporting and its productivity, there exists a great opportunity to become a larger exporter of products.

In what areas of the world do the most opportunities exist?

Our largest export regions, in order, are Canada, Mexico, the European Union and the Asia-Pacific region. American exports to China have increased 400 percent since 1999. Based on its huge economy and economic growth, China clearly has to become one of our top priorities.

At the most basic level, what do businesses need to know to start?

At an elementary level, companies just beginning an import/export business need to remain current on regulations and compliance. This is most important for managers and administration staff who oversee this part of the business on a daily basis. For example, the U.S. has regulations on where companies may export and the type of technology that can be exported. The list of countries changes periodically. It is important for employees to know what types of technologies and products are appropriate for trade and where they can be traded.

Doesn’t the decision to take business overseas require a major change in the corporate business plan?

If your business plan has been essentially one of selling domestically, the owner/-manager needs to evaluate whether expansion outside the U.S. is justified. You have to take into consideration factors like sales channels and sales force. Is your product acceptable to the international community? Does it require approval by foreign regulatory agencies?

If you’ve decided that doing foreign business would be an opportunity for your company, you have to decide on strategies. That means examining and modifying current operations and learning how to integrate an international component as it relates to the supply chain, sales and marketing, low-cost engineering and manufacturing.

What about cultural differences?

As you develop your international strategy, you want to be aware of business practices and business etiquette in your target market. That could range from regulatory affairs to common business courtesies like how to effectively negotiate. For example, in South America, it’s not unusual to begin a negotiation by establishing a personal relationship. That discussion could be over breakfast, sharing personal information, family history and establishing a relationship — and then moving on to business.

Our institution uses a unique online training program that allows participants in a business etiquette/practices seminar to map their own personality traits and compare them with the cultural norms of the country they currently or hope to do business with. This quickly illuminates where an executive or manager needs to make modifications in his or her approach. It is most appropriate for sales professionals, marketing executives and program managers who may be starting to travel internationally or teleconference with peers and program teams around the world.

To optimize success, it is best to know the cultural norms that you are dealing with. Blended training tools that consist of instructor-led discussion and online learning, like ours, provide the necessary information and data for a highly successful training experience.

What other resources exist for those seeking to expand their business internationally?

The Ohio Department of Development (800-848-1300 or is a good place to start. You can also get more information at colleges and community colleges, such as Tri-C’s Corporate College Division.

JOHN GAJEWSKI is executive director in the Workforce and Economic Development Division at Tri-C’s Corporate College. Reach him at (216) 987-3048 or The Web site is

Sunday, 31 December 2006 19:00

SOX and nonaccelerated filers

This is the first year in which nonaccelerated filers (companies with market caps below $75 million) will need to comply with Sarbanes-Oxley (SOX) legislation, specifically Section 404. An added weight is that implementation costs are disproportionately larger for smaller companies, according to the Security and Exchange Commission (SEC).

“Some accelerated filers thought they would handle this thing easier than they did,” says John Gutierrez, a founding principal of Avvantica Consulting LLC in Dallas and the company’s SOX Practice leader. “They thought they had good controls for financial reporting already in place. The thing that is new about SOX is that it now holds management responsible for testing and making an assertion as to the effectiveness of their system of internal controls. Before SOX, they simply needed to sign off on their responsibility to define and maintain them.”

Smart Business discussed how nonaccelerated filers should approach compliance.

Has any progress been made in giving nonaccelerated filers an extension on their exemptions from Section 404?

Although there has been much discussion about the possibility of creating an exemption for nonaccelerated filers, it does not seem likely that the SEC will give in to this pressure.

Time heals many wounds, but while some may be tempted to forget the financial meltdowns that prompted SOX legislation, SOX has been widely recognized for helping boost investor confidence. It has also improved transparency in financial reporting and general accountability within public corporations.

In addition, public accounting firms are now being inspected by an independent Public Company Accounting Oversight Board (PCAOB) to make sure they are doing the right thing and are not being overzealous in implementing Section 404 requirements.

How can technology make compliance easier and less expensive for a nonaccelerated filer?

There are good technology solutions available to help companies comply with SOX compliance requirements. The right process-based solution will pay for itself many times over and can dramatically make compliance more efficient and sustainable — particularly for controls maintenance, testing and remediation processes.

However, some of the true process-based solutions are cost-prohibitive to smaller companies. I think smaller companies should consider using a pragmatic SOX process solution through the Software as a Service (SaaS) model that some companies offer. This model will allow them to realize the benefits of the best solution without expensive traditional software and maintenance costs. In addition, the SaaS model affords them the ability to always have the latest version of the software without additional upgrade charges.

Do nonaccelerated filers realize how much more Section 404 will cost, or how long compliance will take?

Certainly, many executives of these smaller companies have learned from watching their bigger counterparts.

However, some companies may be counting too much on the SEC’s promise to provide a revised version of Auditing Standard No. 2 as somewhat of a SOX ‘silver-bullet.’ Although such a revision should help rein in the scope and related costs of their external audit in future years, it will not likely reduce the underlying requirement to maintain an effective system of internal controls over financial reporting. Overall, even though nonaccelerated filers have much experience to learn from, it will still be very much uncharted territory for them. That’s why the earlier they start, the better off they will be.

How long is too long to wait to begin preparation for compliance?

Nonaccelerated filers will need to be compliant at the end of their first fiscal year on or after Dec. 15, 2007. But, well in advance of that, they have to define their control environment and test it to prove its effectiveness in order to support management’s year-end 404 assertion.

Some companies may be tempted to wait until the second or even third quarter to start focusing on SOX. That’s too late. They have to start working on compliance during the first quarter or they will get themselves into a jam.

Are there other ways that CEOs and CIOs can make Section 404 compliance smoother, less expensive and less intrusive?

Small companies would save a lot of time and money by doing what many accelerated filers have done. That is, outsource or co-source most of their compliance process to a reputable firm that specializes in SOX compliance.

We recommend considering a holistic, result-based solution with an expert adviser that offers a predictable outcome at a cost-effective price. We believe such cost predictability and overall reliability is more important for a smaller company than an open-book rate-per-hour approach through staff augmentation.

JOHN GUTIERREZ is a founding principal of Avvantica Consulting LLC in Dallas and the company's SOX Practice leader. Reach him at (214) 379-7904.

Friday, 24 November 2006 19:00

Optimizing the value of IT

Make no mistake: many business units are less than satisfied with the value produced from their Information Technology departments.

The solution? Better alignment of IT assets with business objectives.

“That’s something that most business executives want to believe their company is doing,” says Richard Mitschke, a project manager with Avvantica Consulting LLC. “In reality, many organizations simply do not have the right structures and/or strategies in place to optimize IT value.”

Project portfolio management (PPM) can improve the business value delivered by IT, Mitschke claims. “A strong PPM approach will help align your IT portfolio such that it supports your business strategy.”

Smart Business talked to Mitschke about how to get the most out of IT assets through PPM disciplines.

What exactly is IT PPM?

It is the art and science of optimizing all IT resources — people, capital and knowledge, among others — to support and enable your business strategy. PPM entails prioritizing and executing new initiatives as well as managing all existing IT assets and processes.

A lot of people think of PPM as a set of processes surrounding the evaluation of potential new projects. Although it starts during strategic planning and idea inception, it doesn’t stop there. It also includes managing current IT projects as well as normal support operations.

The key to a strategic PPM approach is a holistic evaluation of your IT portfolio and alignment of its assets with business objectives. IT PPM aims to maximize return by understanding investment opportunities, selecting investments with the highest potential value, and managing those investments throughout their lifecycle.

What does an organization gain from IT PPM?

By managing projects and operational support as a portfolio — as opposed to separate efforts — organizations are better able to focus their limited resources on the most value-added initiatives.

This is achieved by defining and executing standard processes for project selection and execution, as well as ‘keep-the-lights-burning’ operational support.

Once you select the right projects and support operations, you must manage them in a systematic and holistic manner, and adding a central program management office can help assure quality.

With IT PPM, organizations can expect greater return on investment; enhanced ability to manage distributed resources; ability to quickly adapt to change; improved quality of execution; and greater capability to manage expenses.

Don’t IT departments already do this?

While most executives nod their head at the need to align business strategy and IT, many organizations do not have mature processes, structures and tools in place. That includes implementation methodologies, project budgets and a program management office.

In fact, in the average company many IT operational processes are broken. For example, META Group estimates more than 80 percent of companies do not develop and review business cases for technology projects. These and other companies tend to evaluate IT projects individually when they should be managing the portfolio more holistically. If they plan and manage at the individual project level, they will continue to be reactive and remain a step behind the business.

What processes and tools are needed?

Several focused software packages enable project evaluation, project lifecycle management, resource management and finance/budget management.

These tools automate the process of collecting, evaluating and approving project proposals; capturing and reporting real-time status of initiatives; and monitoring project performance against objectives.

What are the critical success factors in implementing project portfolio management?

  • Establish governance and clear accountabilities.

  • Allocate sufficient resources with the necessary skills to support the ongoing PPM process.

  • Ensure that the process is disciplined and sustained.

  • Develop an objective prioritization framework.

  • Maintain communication and cross-functional awareness.

  • Support decision making with tools.

A strong IT project portfolio management approach will help ensure an IT portfolio is properly aligned with business strategies to deliver optimal value.

RICHARD MITSCHKE is a manager in Avvantica Consulting LLC’s Consulting Practice. Reach him at (214) 379-7925 or

Friday, 24 November 2006 19:00

Just the facts

Getting a business loan is as easy as one-two-three. One, have good information. Two, be well prepared.

Three, make sure you understand exactly what your credit request is.

But wait. It’s not that cut-and-dried. Several subjective judgments factor into a banking institution’s final loan decision.

“We don’t put the numbers into a black box, turn the crank and spit out yes or no,” says David Janus, president of FirstMerit Bank’s Cleveland Region. “I can take three bankers, put them in a room and give them the same set of financial statements, and they won’t identify exactly the same things. So it is subject to interpretation.”

Smart Business asked Janus how our readers can improve their chances of getting a bank loan.

What determines the fate of a typical loan request?

The first thing the bank asks is what the loan is for, and it’s not always crystal clear or readily apparent. If somebody says they need the money for a new machine, that’s pretty obvious.

Where it gets tricky is when a company says it’s growing rapidly and needs more working capital or an increase in its line of credit. The bank will study the balance sheet to understand changes in the accounts receivable, inventory and accounts payable, because that’s really what the line of credit is financing. The bank also looks at sales, earnings and cash flow. Are receivable turns slowing down? Has the company had some credit losses? Has a customer filed for bankruptcy? Are collections poor?

I’ve seen instances where customers wanted money because they were growing fast, but they had too much money tied up in receivables and inventory and were starving for cash. Once the request is understood, the financial analysis begins.

What are the important financial considerations?

Think of the basic approach as the sides of a triangle where the sides are represented by cash flow, collateral and equity capital/leverage.

Cash flow is what repays the loan. Banks have minimum policy guidelines for debt service coverage ratio, and basic acceptance is often at least 1.2x coverage, as a cushion provides for the unexpected. The bank looks at the cash flow leverage, too, using a measure of debt/cash flow.

Next is collateral, which generally means receivables, inventory, machinery and equipment, and real estate. The bank discounts the stated values of the collateral to better align the total with what the bank would realize in a default, and then makes sure that amount would cover the loan. This all gets tricky in the brave new world of less manufacturing, because many companies — especially service businesses — don’t have machinery and equipment, and fewer have inventory.

Finally, there’s equity capital and leverage. Bankers ask what the company’s net worth is relative to debt. Is it well capitalized or thinly capitalized? Does the company leave money in the business or distribute it?

Capital structure dictates overall strength of company and what kind of shock it can take. If it has a couple quarters or years of poor earnings, is the company strong enough to weather the storm? Does it have enough borrowing capacity? Is it financially strong, or is it leveraged too high? If it’s over-leveraged, it could collapse like a house of cards.

What’s the subjective part of processing a loan request?

It’s the interpretation of the numbers and an assessment of what’s going on in the business, the industry, management’s skills, and other characteristics.

If somebody needs a very minor increase in their line of credit and they’re doing well, it’s a pretty easy loan request. If somebody’s buying another company and they’re tripling the amount of the debt while tripling the size of the company, banks have to determine if management has the skills to handle it as well as the viability of their business plan.

How can a loan be structured?

The output of the financial analysis determines how a bank structures a transaction in regard to personal guarantee support, pricing and fees, term of loan, repayment schedule, reporting requirements, additional collateral needs and covenant structure — just to name a few components.

Are any other factors important in securing a bank loan?

It helps to have a good relationship with the banker.

Applicants should also have good quality information, be knowledgeable about what’s going on in the business and knowledgeable about the numbers. They should have a financial plan, a projection for why they need the money and supporting information. They need a good understanding of what’s happened in the past, and be able to clearly explain risks and how they mitigate those risks. We’re in the risk business, and if the borrower can help us mitigate the risks, so much the better.

DAVID JANUS is president of FirstMerit Bank's Cleveland Region. Reach him at or (216) 694-5658.