The recession no longer seems to be affecting the technology market, as growth opportunities abound for tech companies.
“We’re seeing a very healthy environment for technology,” says Dick Sweeney, senior vice president and manager of the Northeast Market Technology Banking Division at Bridge Bank. “Within our portfolio of clients, we’ve had a number that in the past six to 12 months were acquired or are in the process of getting letters of intent, with transactions being done at pretty healthy multiples of income.”
Smart Business spoke with Sweeney about the technology sector’s status and what small tech companies are doing to foster growth.
Are funds readily available for growth?
There’s a healthy ecosystem now, especially on the growth capital side. Companies that are a little more mature than a startup — they have decent revenue traction and customer adoption of products and services — are looking for additional resources to expand sales and marketing, or open up international operations. There’s no shortage of funding sources for them on the equity side. They are attracting money from strategic investors and doing so on favorable terms with multiple proposals.
On the debt financing side, there’s also a good deal of competition. Banks are supplying funds, as well as partnering with equity and mezzanine lenders. Mezzanine financing is a hybrid of debt and equity financing where the lender has rights to convert debt to ownership if the company doesn’t pay the loan back in time.
Right now is an ideal time for companies looking into executing a growth strategy by putting more capital to work or exploring exit opportunities.
Do any tech sectors particularly stand out?
There are premium valuations in the customer relationship management space. For example, ExactTarget was recently acquired, and Neolane sold for a revenue multiple of more than 10.
Reoccurring revenue is currently the focus of management teams and investors, and these companies are receiving valuations, whether that means their private equity or exit value. From an investor side, the company has a stable base that is predictable. From a company perspective, reoccurring revenue is attractive because it helps avoid white-knuckle situations where you’re waiting for a very large, one-time deal to go through at the end of a quarter. Whether it makes it in that quarter or happens a day later can really impact your financial performance.
Why is the environment so healthy?
It’s a combination of things. There are some large corporate buyers with a lot of cash on their balance sheets that are looking to fill product holes through acquisition rather than trying to build. The stock market is also pretty healthy — it’s near all-time highs — and that is translating into high valuations on the private side as well.
Companies are being rewarded particularly for building reoccurring revenue streams into their business models. That certainly shows in the public markets that are getting premium valuations. Also, banks are offering different types of financing structures based on multiples of reoccurring revenue. This rewards companies that get away from perpetual license sales and toward monthly reoccurring revenue. It’s an ongoing trend that’s not slowing down anytime soon.
Is there growth outside of companies with reoccurring revenue streams?
There has been explosive growth in mobile advertising, with rates not seen in other sectors. A big land grab is taking place, and some companies are growing rapidly as a result. There are no 800-pound gorillas nor is there a single, dominant incumbent, so that presents opportunity for new entrants. These are mobile ad targeting technologies, mobile ad exchanges and business intelligence that will target ads based on a consumer’s location or other attributes.
Are there any problem areas of the market?
Clean technology continues to be a difficult sector. A lot of investors have looked to exit after some high-profile collapses in solar panels and biofuels. Companies received significant amounts of capital and were not able to deliver. It’s made it very difficult for others in that sector to raise financing, but overall we’re seeing a lot of great companies that are growing rapidly.
Dick Sweeney is a senior vice president and the manager of the Northeast Market Technology Banking Division at Bridge Bank. Reach him at (617) 995-1310 or firstname.lastname@example.org.
Learn more about startups and the technology sector on Bridge Bank's website.
Insights Banking & Finance is brought to you by Bridge Bank
Banking is all about relationships, and the right partner can carry a business from inception through growth and into an industry leader.
“Growing a business is really about having a team of professionals working together. From a banker’s perspective, the most important thing is building a relationship with the business owner,” says Olie Williams, senior vice president and director of Business Banking at ViewPoint Bank.
Smart Business spoke with Williams about how banks work with businesses throughout various phases of their development.
How can start-ups secure bank financing?
It is important to come prepared to discuss four key elements related to financing. The first critical element is a good, solid business plan. This is important for all business owners, but especially small businesses that are just getting started. At a minimum, the plan should be a road map for the first three to five years of your business. What does your company plan to sell, and what is your anticipated annual net profit from those goods or services? It is also important to show how you plan to market your company. Banks love to see the thought and planning that has been put into the business.
The second critical element is to define your capital needs. What capital resources do you have presently to build the business, and what are your projected needs as the business grows? There needs to be some capital investment on the owner’s part. One mistake small business owners frequently make is underestimating capital needs when starting a business. Many times, they don’t account for money they’ll need to support their family’s day-to-day living expenses.
The third critical element is a strong personal credit history.
Finally, you will want to consider what assets you own that could support the loan request in the form of collateral.
Is bank financing the right route for start-ups?
It depends on the answers regarding those four key areas — business plan, capital needs, personal credit and collateral. If you have no capital to invest in your business, it’s going to be a challenge to get bank financing. That’s why many small business owners finance with credit cards or home equity lines of credit.
Of course, start-up businesses also can be financed through banks using U.S. Small Business Administration (SBA) loans. An SBA loan is a good vehicle to use when a company doesn’t have the necessary financial history.
How can banks help companies once they reach the growth phase?
When a business is growing, it’s very important to assemble a ‘go-to’ team of experts that includes an accountant, attorney, insurance agent and banker. These four professionals will get to know and understand the business and work together to support the company.
The more your banker gets involved in your company’s strategic conversations, the better he or she can provide products and services to build on your plans.
Businesses often grow too fast, without the capital base to support the growth. Banks want to see growth, but in a balanced way. Best practices would suggest that your outside team of professionals meet quarterly, or at least annually, and review the business plan and future needs with you.
Does that relationship translate into financial support that might not otherwise have been provided?
Absolutely. When a bank has a relationship and understands the business, there is a comfort level that helps when things don’t go exactly as planned. The banker has confidence in the owner’s ability to operate the business in good and bad times.
The time to get to know your banker is not necessarily when you have a need. If you have a good relationship, your banker understands your business and can address needs that arise, which could be treasury management or other aspects of banking — it’s not just lending.
Growing a business is all about having a good team behind you. An owner needs to make sure he or she has bankers and other key professionals who communicate with each other and understand the business.
Olie Williams is senior vice president and director of Business Banking at ViewPoint Bank. Reach him at (972) 801-5889 or email@example.com.
Insights Banking & Finance is brought to you by ViewPoint Bank
At least in the San Francisco Bay Area, it’s as if the nation’s real estate crisis never occurred.
“It’s an anomaly. Primarily, it’s due to the location. This corridor is unique because of the jobs in Silicon Valley, the biotech companies and the job base in San Francisco. Salaries are competitive and that increases values in the housing and commercial real estate markets,” says John Dooling, a partner at Ropers Majeski Kohn & Bentley PC.
“Also, there’s no place to build. There’s little vacant land, and it sells at a premium. The real estate market has bounced back with a vengeance,” he says.
Smart Business spoke with Dooling about the state of the commercial real estate market and what that means for businesses looking to buy, sell or lease properties.
How are investors affecting real estate?
There aren’t many good places to invest money at the moment, so real estate is attractive. It’s not only smaller investors but also larger ones that are buying properties.
Investment properties are being bought up by hedge funds and large players, whereas there used to be more local buyers. Now, national players are coming in and buying what were considered smaller properties.
For leases, rental rates are approaching the highs of the dot-com boom. It’s very difficult for businesses trying to find a space, or if their lease is expiring, it’s becoming an expensive proposition.
Midsize clients are taking advantage of industrial space. If they can occupy the space, financing rates are attractive and U.S. Small Business Administration loans can help. So, there are some opportunities in the right sectors.
The large demand for commercial properties, especially apartment buildings, has driven capitalization rates down to historically low rates below 5 percent; they’re usually around 7 or 8 percent. But as interest rates go up, as anticipated, it’s going to be difficult for these buyers to get value out of their properties. Inflated prices and low cap rates reduce ROI.
What are some important considerations when buying or selling?
Obviously, location and price are important, as is creating a separate entity, often a single purpose LLC, to purchase the property.
From a legal perspective, you also need to do your due diligence. There is no standard transfer disclosure statement for commercial properties. If the building has one to four units, there is a statutory requirement that a transfer disclosure statement be completed, which does not apply if there are more than four units. So, a buyer must have a good property inspection; investigate the title, not just put the title report in a drawer; conduct an environmental study; and research the permit history of the building. Buyers could have an issue with a property years down the road that leads to litigation with not only the seller, but also involving a contractor in a construction defect lawsuit.
From the seller’s perspective, it’s important to disclose any material issues related to the property. Another concern is the contract. Preprinted contracts are more commonplace but still require careful consideration, including whether you want to arbitrate a dispute and liquidated damages.
Agreeing to the arbitration clause waives the right to a jury trial. That’s not necessarily the wrong thing to do, but it has implications. The arbitration process can sometimes be more expensive than court. Also, other parties involved in the transaction, such as a real estate broker or contractor, may end up being defendants and would not be bound by the arbitration clause, causing duplicate lawsuits. The point is that there are provisions in a standard contract that shouldn’t uniformly be agreed to and initialed.
Are any problems arising in commercial leasing because of the robust market?
Tenant improvements are always a big issue on the front end, and landlords are less likely to shoulder the costs now. Tenant costs are increasing, not only in terms of effective lease rates but also the cost of getting into a space. It’s important to have a good tenant build work letter that sets forth rights and obligations of the tenant and landlord relative to the build out.
Finally, as with any large transaction, it is prudent to consult with the appropriate professionals to assist you in your real estate transaction.
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
The U.S. Department of Health and Human Services (HHS) released a final Omnibus Rule this year creating higher standards concerning protected health information (PHI) under the Health Insurance Portability and Accountability Act (HIPAA).
As a result, hospitals and other health care providers are asking businesses working with them to sign business associate agreements, even in situations where they may not be applicable, says Rebecca Price, an associate at Kegler, Brown, Hill & Ritter, Co., L.P.A.
“It becomes problematic for businesses if you are not a business associate as defined under HIPAA, and you are asked to sign a business associate agreement,” Price says. “There are some very specific compliance requirements you don’t want to endure the cost and hassle of unless it’s really necessary.”
Smart Business spoke with Price about business associate agreements and what to do if you’re asked to sign one.
What changed with the final Omnibus Rule?
One of the biggest differences is lower-tiered subcontractors have direct liability for HIPAA compliance. Also, the terms and definitions provide more clarity regarding what is expressly required of a business associate; prior rules had gray areas.
HIPAA was unveiled in 2003, and there was a major change in 2009 that dealt with business associates and electronic information. The final Omnibus Rule is a significant document expected to have sizable financial impact on the economy.
How do you determine if you’re a business associate?
It’s a matter of determining what work you’re doing with the covered entity — the health care provider, health care clearinghouse or insurance company. Generally, any time you might have access to PHI, you are a business associate, which can include companies that provide legal, accounting, consulting, administrative or financial services for a covered entity. Anyone who sees any type of PHI is subject to HIPAA, with very few exceptions.
Covered entities want to spread the risk, and as a matter of course some are including business associate agreements as part of their standard paperwork. But there are companies doing business with covered entities, like a custodial company, that do not need business associate agreements.
What is required of a business associate?
You need a HIPAA compliance program, including designating a security official and policies and procedures. You have to audit certain data, such as the use and disclosure of PHI. There’s a long list of administrative requirements. It’s a very involved process.
Companies wanting to do business with a covered entity need to give some thought about whether to sign a business associate agreement. It’s tempting to say you have to sign one to get the business, even if you’re not really a business associate. But be intentional about your decision. If you’re going to have access to PHI, figure in the cost of being HIPAA compliant because it’s going to come off of the profit.
The final Omnibus Rule extends HIPAA compliance requirements to subcontractors doing business with business associates, such as a copy service or a company providing document management services to a law firm. In certain situations, if PHI is copied, the law firm needs to have a business associate agreement with the copy service, because the copy service has had access to the PHI and even those copy machines now store data. It’s very complicated, and the requirements keep going downstream.
Can you hire someone to provide a compliance program?
Certainly there are attorneys that supply HIPAA compliance programs. There also are non-attorney programs, but be careful not to go with something that is just forms because the amount of scrutiny anticipated under the Omnibus Rule suggests you need to pay attention to details and create a program that fits your business.
The HHS Office of Civil Rights has said it will be auditing business associates, so there is a greater risk of operating any business dealing with PHI without a comprehensive HIPAA program. Penalties range between $100 and $50,000 for the first violation. If there is a second violation in the same calendar year, fines jump to $1.5 million. So, there is a lot at stake for health care providers and their business associates.
Rebecca Price is an associate at Kegler, Brown, Hill and Ritter, Co., L.P.A. Reach her at (614) 462-5411 or firstname.lastname@example.org.
To learn more about Kegler’s health care regulation practice, visit www.keglerbrown.com/practice-areas/health-care-regulation--hit.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter
Fraud costs companies about 5 percent of revenue, totaling about $3.5 trillion internationally, according to a 2012 report by the Association of Certified Fraud Examiners.
“It can have impact beyond the initial financial loss,” says Mark Van Benschoten, CPA, a principal at Rea & Associates. “Fraud damages the reputation of a business, which could lead to a loss of revenue and loss of jobs; there can be a spiral effect. Stopping fraud is about protection of the corporate entity.”
Smart Business spoke with Van Benschoten about fraud and how companies can protect themselves.
What are ways that employees commit fraud?
Some of the most common fraud happens because of inadequate segregation of duties, not communicating consequences, employee turnover, crisis conditions and poor communication. However, there are so many specific ways fraud is committed. Actually, employees who are determined to steal find new ways all the time to try and bypass a company’s systems.
What should a business tell its employees about fraud?
It’s important to set the tone about fraud from the top. Employees will react to the tone of the business owner. They may also read an owner not taking a stand on fraud as a signal that it’s OK. Business owners and management have to make it clear that they take fraud seriously and it will not be tolerated; they want to hear about what’s happening in the business. Consider putting an ethics hotline in place so your employees can anonymously report what they see.
A hotline sounds like Big Brother watching, is it?
An ethics hotline is one of the most cost-effective means of combatting fraud. In fraud cases where there is a hotline in place, the average loss is $100,000. Compare that to a company without a hotline and the amount rises to $180,000.
It’s not a matter of tattling on a co-worker. It’s about job creation. It’s about protecting the corporate image. The amount stolen from a company is one thing, but the potential losses that could happen from the negative impact on a business’ image could be devastating. This gives employees the opportunity to protect their jobs as well as those of the other honest people they work with.
There are other benefits, too. For example, if someone at a company uses a forklift in an unsafe manner, any employee that witnesses the situation can call the hotline to report it anonymously. Management can then rectify the situation and avoid a costly accident.
If a company has an audit, isn’t that enough to catch fraud?
Audits are not specifically designed to catch immaterial fraud. Audits do provide reasonable assurance about the presentation of the financial statements in coordination with Generally Accepted Accounting Principles. No auditor can, or will, guarantee that an audit will catch any case of fraud.
In most cases, someone has to speak up internally for fraud to be discovered. An outside auditor is only there once or twice a year, and his or her job is to ensure there is good financial reporting.
What other steps can companies take to prevent fraud?
It’s important that businesses have good internal controls in place. In situations where the owner is very involved with every aspect of the business, different checks and balances would be needed than in instances where the owner is hands off. With internal controls, you have to weigh costs versus benefits. It’s about how much you’re willing to pay to manage risk. You wouldn’t spend $11,000 to save $10,000.
It would be nice to say ‘do these three things and you’ll be protected,’ but there is no one-size-fits-all solution. Preventing fraud is about limiting opportunity, having good internal controls and making sure employees understand that fraud will not be tolerated by anyone — from the top down.
Mark Van Benschoten, CPA, is a principal at Rea & Associates. Reach him at (614) 889-8725 or email@example.com.
Learn more about implementing an ethics hotline at www.reacpa.com/red-flags.
Insights Accounting is brought to you by Rea & Associates
The Internal Revenue Service (IRS) requires companies to file a Form 5500 to provide information about their benefit plans. If the company has 100 or more eligible participants that also means the benefit plan has to be audited.
“The 5500 form is an informational return filed with the Department of Labor (DOL) on an annual basis. It includes not only plan-specific information but financial information, which is where the benefit audit comes in,” says Danielle B. Gisondo, CPA, a partner at Skoda Minotti.
Companies are required to have an independent accounting firm conduct the benefit plan audit. Smart Business spoke with Gisondo about the audit process and how to choose a firm for the work.
What should you look for in selecting an accounting firm?
Find a firm that has benefit plan experience. There are accounting firms that audit only one or two plans throughout the year, but you want someone with a wide variety of experience auditing plans. Some firms don’t have a specific department for these audits, doing them as part of the overall accounting and auditing practices. Firms that specialize in this arena have a separate department and dedicated professionals.
Ask how many plans the firm audits, and the size of those plans. Check for membership in the American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center. This ensures they have the required education and access to benchmarking and industry data that can be helpful for the audit work and throughout the audit process.
There are specific continuing professional education requirements from a benefit plan industry perspective, and the accounting is unique and definitely different than for a regular audit of a financial statement.
What do accountants look for in the audit?
They’re testing for contributions coming into the plan, making sure participants have proper amounts withheld from paychecks and money is deposited in a timely manner into the plan. Investment elections are reviewed; if contributions are to be deposited into five different mutual funds, accountants ensure money goes into the right funds.
Distributions also are tested, whether it’s money rolled over into a new plan or making sure a loan is repaid over the proper time period.
It’s really about testing samples of transactions into and out of the plan. Then financial statements are prepared for filing along with Form 5500.
Where do problems usually arise?
Many times it’s on the contributions side — a participant wanted 3 percent withheld but the plan sponsor or third-party administrator (TPA) withheld 5 percent. Some employers do not deposit employee withholdings on a timely basis with the trustee or custodian that handles the funds.
On the distribution side, there are situations where participants took out more money than they had vested in the plan and it didn’t get approved by the proper party at the TPA or plan sponsor.
What manpower commitment is required for the audit?
Depending on the company’s size, the firm will work with the human resources director or accounting department. If the accounting firm has a specific audit process, it should only require a few hours of pulling information together on the company’s part, while having someone available for questions when the audit work is being performed. Depending on the size of the plan, field work runs from one day to a week.
The entire process, starting with the request for information and ending with a completed financial statement, takes about four to six weeks.
Does the firm you use make a difference?
Both the IRS and DOL conduct independent plan checks, and could randomly look at completed 5500 filings and audits. If an accounting firm missed something — maybe the plan wasn’t compliant or didn’t have the proper amendments — those plans could be disqualified. Then all contributions going to the plan could be taxable, even though the plan is tax-exempt.
You definitely want a reputable accounting firm with experience doing benefit plan audit work; any mistakes could be costly.
Danielle B. Gisondo, CPA, is a partner at Skoda Minotti. Reach her at (440) 605-7132 or firstname.lastname@example.org.
Insights Accounting & Consulting is brought to you by Skoda Minotti
Companies can be held liable if they breach their fiduciary duties in managing employee benefit programs such as pensions, profit sharing, health care and 401(k) plans.
This risk remains even if you hire a third party to manage your plans.
“A lot of companies have hired these outside consultants to manage 401(k) and other pension plans in an attempt to mitigate exposure. In reality, they still have liability because they chose the consultant,” says Peter Bern, CEO of Leverity Insurance Group.
Smart Business spoke with Bern about what fiduciary liability insurance covers and how it fits with other business insurance policies.
Who is considered a fiduciary?
A fiduciary is the individual responsible for controlling the management of employee benefit plans, investment of funds, and controlling or disposing of plan assets. That includes consulting firms, attorneys, accountants and other entities that service pension plans.
A fiduciary is required to:
- Act solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them.
- Carry out their duties prudently.
- Follow plan documents.
- Diversify plan investments.
- Ensure plan expenses are reasonable.
The Department of Labor (DOL) was concerned about plan expenses in the 2012 issuance of a final regulation under the Employee Retirement Income Security Act of 1974 (ERISA). Workers lost significant amounts of retirement savings after the 2008 financial crisis, and the DOL sought to make fiduciaries more accountable for controlling fees and selecting appropriate investment options.
Companies can limit liability by giving plan participants control over investments in their accounts. However, they must be given a broad range of investment options and sufficient information to make informed decisions.
What is the company’s responsibility in hiring a third party to manage plans?
It’s important to have a documented process by which you rate and select a third-party service provider. Survey a number of potential providers, asking the same information and providing the same requirements. That will enable a meaningful comparison and give a sound basis for reaching your decision.
Whether you’re selecting the investments yourself or utilizing a third party, it’s important to provide employees with a sufficient number of options.
Does an ERISA bond protect you from liability?
An ERISA bond or employee dishonesty policy with ERISA compliance only protects you from theft, not from mismanagement of funds, programs, pensions or health plans — all of the major exposures that exist.
Business owners also might think they’re protected under directors and officers (D&O) insurance, but there are certain exclusions in those policies concerning fiduciary liability. D&O, employment practices and fiduciary liability insurance are often secured as an insurance package because if someone perceives that the business didn’t perform as well as it should and was mismanaged, you could potentially seek damages on the D&O and/or fiduciary line of coverage.
Of these aforementioned product lines, fiduciary liability insurance is the least expensive, and most cost-effective. Another line of coverage that should be secured in your insurance portfolio is employee benefit liability, which specifically protects benefits managers from mistakes and omissions made in the administration of various employee programs. These typically involve minor issues about proper filing and enrollment, but do not provide coverage against any problems related to investing.
In summary, some of the responsibilities of a fiduciary are vague — what does monitoring investments mean? Also, sudden swings in a turbulent stock market can bring risks to even the best of fiduciaries. Fiduciary liability insurance can help defend the reputation of the company and its management team.
Peter Bern is the CEO of Leverity Insurance Group. Reach him at (216) 861-2727 or email@example.com.
Insights Business Insurance is brought to you by Leverity Insurance Group
Missouri Senate Bill 287, which becomes effective Aug. 28, puts the state on equal footing with others that have been popular domiciles for captive insurance companies.
“It changes certain capital requirements for pre-existing types of captives, as well as provides additional flexibility by allowing segregated cells, also known as shared captives or rent-a-captives,” says Alan J. Fine, CPA, JD, member in charge, Captive Insurance Advisory Services practice at Brown Smith Wallace.
Smart Business spoke with Fine and William M. Goddard, CPCU, principal, Captive Insurance Advisory Services practice at Brown Smith Wallace, about the new law and why companies should consider captive programs to address insurance needs.
Is a captive program the same as self-insurance?
It’s a formalized program for self-insurance. Captives generally provide incentive to the insured — the captive owner — to pay more attention to safety and other matters that improve the results.
Captives can be used with health insurance as well as property and casualty. Companies should consider captives if their risk profile is such that they’re a better risk than others in their industry. When you’re in the commercial marketplace, companies with good risk profiles are used to fund risks of those that are not so good. There’s also a built-in profit for the insurance company, so self-insuring through a captive allows you to keep those profits.
What are the benefits of captives?
In addition to savings, which can be $200,000 to $400,000 annually for most midsize captives, you may be able to get types of coverage that are not available in the commercial marketplace. If structured properly, there also are potential tax benefits.
Learn about the benefits of starting a captive insurance company.
What does the new law change?
It allows for new types of captives. Prior law allowed companies to start a captive for their own company, known as a single-parent captive. You put up the capital, you are responsible for the audit and you reap all of the benefits.
The new law adds the option of going with the concept known as shared captive, rent-a-captive or sponsored captive. Generally speaking, someone else puts the captive together and you own a piece. There are certain efficiencies created with sponsored captives. For example, you have regulatory filings due quarterly and annually. With 10 standalone captives, they would each file separately with the Department of Insurance and be audited independently. The sponsored captive concept allows those 10 to band together for efficiency, while still providing the same asset protection of having your own captive.
The bill’s passage also affirms Missouri’s continued commitment to the captive industry.
Will more companies form captives?
There are more than 6,000 captives worldwide, so those companies have figured out that this can be a good alternative to the traditional insurance market. You can save money on insurance, obtain coverage that’s not available elsewhere and formalize your self-insurance program.
Health care had not been a big subject for captives; however, companies looking to save money on health insurance are now throwing captives into the mix of things they are considering. Companies have been insuring workers’ compensation in captives for years, but with medical insurance it takes some innovative thinking to figure the best advantage to you in forming a captive. You need someone that understands health care, as well as a tax expert to understand regulations from the tax perspective because health care reform is really a tax law.
When it comes to captives, it’s not always readily apparent how they can be utilized. Answers are not easy to determine, and no two situations are alike. You have to examine your individual case and analyze how a captive could benefit you. Fortune 500 companies have studied captives; companies that fall below that — middle market to small companies — have few advisers out there spending time to educate them about potential benefits.
If you have a good risk profile, are profitable and have good cash flow, it is worth exploring the available options.
Alan J. Fine, CPA, JD, is member in charge, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1292 or firstname.lastname@example.org.
William M. Goddard, CPCU, is a principal, Captive Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or email@example.com.
Insights Accounting is brought to you by Brown Smith Wallace
If your business has a loan, your lender might classify it as “troubled” without your knowledge.
“You may still be dealing with a credit officer, but that person is being coached by a workout specialist while you remain unaware,” says Suzana K. Koch, a partner at Brouse McDowell.
Smart Business spoke with Koch and Alan M. Koschik, a partner at Brouse McDowell, about how the business/lender relationship has changed.
How did lenders previously handle missed payments or other problems, and what has changed?
Prior to the Great Recession, lenders would contact borrowers that experienced trouble, such as missing a payment, being out of formula on covenants or experiencing decreased sales, to schedule a meeting to discuss the default. At that time, banks typically referred troubled loans to the special assets or workout department. The bank would assign a workout officer to maximize value by liquidating collateral or other means. The borrower might not always work out troubled loans to its satisfaction, but at least it knew that its banking relationship had changed.
This clear transition to workout is no longer as common. Traditional lenders now assign workout officers to shadow credit personnel on loans classified as troubled without the borrower’s knowledge. Participants in this process, such as accountants and bankers, report that they are frequently avoiding the borrower’s attorneys.
The borrower often is unaware that the banking relationship has changed. Previously, borrowers received a default letter and a workout officer was assigned to them when they were transferred to special assets. Now, borrowers find themselves talking to their original loan officers, who may cajole them by saying, ‘You’re a little out of formula, so let’s see what we can do to revise the loan documents.’ In this common scenario, the borrower negotiates without representation, unaware that the ground rules of the relationship have changed.
Why is this occurring?
Lenders prefer that borrowers not have counsel advising them of their rights. It is much cheaper for the bank, and it receives much better workout terms if the process does not involve the borrower’s legal counsel. A sophisticated attorney representing the borrower would know about the various options that are available and when the lender is asking for more than it should.
Frequently, lenders ask borrowers to waive rights, offer additional collateral and provide personal guaranties. In exchange for these concessions, borrowers often receive meager benefits such as short-term extensions of maturity or standstill periods. With counsel, borrowers would often be able to obtain more favorable terms in these workout negotiations.
Is this practice widespread?
This pattern appears to be happening with most of the region’s banks as a result of the Great Recession. In shoring up workout departments, banks enlisted bankers from other areas to help with troubled loans. As a result, more bankers are now familiar with the workout process. With the easing of the recession, workout departments are shrinking and those bankers are returning to their traditional jobs. However, the effect of this temporary reassignment is that front-end bankers are more comfortable doing the workouts themselves.
What can you do to protect your business?
Borrowers should be cognizant of their loan terms, including their loans’ financial covenants and reporting requirements, and any possible defaults of these provisions. Despite this vigilance, a default may become inevitable, even if they are only technical defaults.
If you are concerned that you are out of compliance on your covenants, or if you miss a loan payment, contact a workout attorney immediately. Communication with your bank is also important. However, if you are negotiating with your lender, you need representation, preferably from the beginning of the process.
Suzana K. Koch is a partner at Brouse McDowell. Reach her at (330) 434-4632 or firstname.lastname@example.org.
Alan M. Koschik is a partner at Brouse McDowell. Reach him at (216) 830-6804 or email@example.com.
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Only 30 percent of the 100 million Americans who work full time are actively engaged at work, according to a recent Gallup survey. Another 50 percent are uninspired, while 20 percent “simply roam the halls spreading discontent.”
Those uninspired and disengaged employees have significant negative impact on an organization, says Midge Streeter, a talent management consultant at Sequent.
“All of the information coming out of HR research is telling the same story, and there’s more attention being given to employee engagement now than at any time in the past 20 years,” Streeter says.
Smart Business spoke with Streeter about how having engaged employees boosts the bottom line, and why engagement is particularly important for midsize companies.
What does it mean to be an engaged employee?
Engaged employees are very passionate about their employer relationship and their job. They display a high sense of commitment and willingness to go the extra mile, which translates into the service they provide to customers. A disengaged employee has no commitment to the company, let alone its customers.
All employees have a certain amount of time to manage as they see fit. Employee engagement is about leveraging that discretionary time for the greater good of the organization.
How can a company improve engagement?
There is no magic bullet; leadership has many options available. If you want to move the needle, a good first step is to assess your starting point through an employee engagement or culture survey. Just creating the survey creates low-hanging fruit because engagement increases when employees see that leadership is asking for their feedback.
Using survey results, create an action plan to increase employee engagement. Depending on the results, you might focus on leadership development, or coaching and management training.
There are some common themes in survey results. One is related to a lack of meaningful training for employees to grow their careers. Another is a lack of respect, usually stemming from employees feeling that they’re being micromanaged by someone who doesn’t allow them to make decisions. There also can be a lack of connection to company goals — if employees understand those goals, they can better align actions to help meet them.
How do you measure the success of action plans?
Go back after six or 12 months and re-administer the survey to see if the action plan has been successful in increasing employee engagement.
At the same time, look at business indicators such as sales and customer satisfaction to see how you’re progressing because of increased engagement. Another indicator might be based on innovation and how long it takes to deploy a new product or service. There are various business indicators that can be used in relationship with employee engagement to see how they’re connected. If the indicators show you’re not getting the anticipated result, that tells you that the action plan needs to be reworked.
To get the most ROI from engagement efforts, validate the performance indicator results with an Employee Engagement certification audit. That can help brand your organization as an employer of choice.
Why is employee engagement particularly important for small and midsize companies?
As we come out of the recession and the job market improves, turnover is expected in the next 12 to 24 months. That can have a significant impact on a midsize business, especially when key stakeholders leave and take a lot of intellectual capital with them. Midsize companies need to focus on engagement to retain those key employees.
That can be a challenge because leaders in small and midsize organizations wear many hats, and may not have expertise in-house that can help.
Companies that get the most bang for their buck understand that employee engagement drives overall organizational performance. That’s why it’s critical to focus on business performance indicators — you will move the needle on them if you improve your employee engagement score.
Midge Streeter is a talent management consultant at Sequent. Reach her at (614) 652-9965 or firstname.lastname@example.org.
Book: Learn how to engage employees, download “The 7 Steps to Employee Engagement” e-Book: http://info.sequent.biz/download-the-7-steps-to-employee-engagement.
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