Sue Ostrowski

The big buzz in the insurance industry today is around Core Systems Modernization.

“Core Systems Modernization is the process of insurance companies adapting to the needs of customers by bringing their processes and technologies using the numerous possibilities available today,” says Vani Prasad, vice president of Insurance Technology for HTC Global Services.

There’s a big push toward modernization as companies continue expanding their web presence and establishing mobile solutions to make their products accessible to more customers. By using new technologies such as mobile, virtualization and cloud, companies are building bridges with their current core systems, creating new value from existing assets. Modernization is helping companies not just improve their bottom line but transform the way their core systems such as policy administration, underwriting, distribution, billing and receipts, and claims are functioning to enable businesses to grow. Some companies are going beyond operational or technology improvements and are reshaping their business models.

Many large and mid-sized insurance companies are in the process of executing modernization projects to keep up with technology and increase customer engagement through powerful analytics. The last two years have seen a big growth in modernization projects, and this wave is gaining intensity.

Smart Business spoke with Prasad about what insurance companies need to know when it comes to modernization and its effect on business.

What is driving modernization?

Modernization has come from many forces in the marketplace, such as innovation in new types of insurance products. Introduction of products poses new challenges to execute through the current operational and technology setup in an organization. This is one of the biggest drivers for core systems modernization.

From a technology standpoint, one of the prominent driving forces is popularizing the use of mobile technology for business purposes to improve customers’ ability to view and change products and their coverage. This also makes it easier to communicate with customers, for example, after an accident, getting them back on track faster. Customers today expect to get what they want, when and where they need it, making it critical for companies to connect smart devices to core insurance systems. CEOs want to address business growth and operational efficiency at the same time and are looking for smart ideas that fuse these two aspects.

Also driving modernization is analytics, the intelligent use of data stored by a company to target consumer-oriented marketing specific to customers’ needs and to develop new products. Previously, the agent was the key source of analytics. That person had contact with customers and could offer products as the need arose. But now, as customers are rarely present when deals are made, companies are using technology to do this.

What are the benefits of modernization?

Companies should modernize either to increase their top line through new sales that capture market share, or improve their bottom line through internal efficiencies. Those wanting to increase market share have to simplify processes and be able to adapt to changes and make improvements quickly. These days, customers relate to businesses differently, and the old ways of doing business aren’t as effective anymore. Businesses have to evolve and change to keep pace with the market to retain their market share. In today’s marketplace, it’s easy to take their foot off the gas pedal for just a brief moment and find themselves with lost sales or retention issues.

For example, customer inquiries need to be processed quickly. If a web page takes too long to load, the customer drifts off. If a phone call takes too long, the call is lost. If the number of pages, clicks or paths on the customer contact is too many, the customer moves away. By modernizing the technology systems, these seemingly simple adjustments are resolved. No one drops the ball on the customer and one can better capture those customers who are trying to engage and reach out to them a second time if the process was not finished quickly enough.

How does modernization differ from fixes or repairs?

Modernization goes beyond maintenance. Everybody feels they are contributing to improvements in their own way; every department has their own ‘quality circle.’ But going beyond semantics, look at modernizing from a leadership perspective and ask what will actually make a difference to the top and bottom lines. How does it help in reputation, reduce operating costs, enhance customer satisfaction, increase market share, increase earnings per share or maintain a healthy underwriting ratio? If the impacts are at that level, then that’s a modernization project.

Companies that perform maintenance work, such as keeping software up to date or fixing bugs, are still modernizing in that they use newer and better technology to better meet consumer needs. However, performing maintenance work on its own doesn’t allow companies to easily add new features or embrace new technologies. The main difference between maintenance work and the modernization described above is one of scale and adding business value: Rather than fixing and repairing smaller systems, everything is being fixed and repaired. This allows for future growth because the large-scale changes can be structured to make it easier to add features such as a mobile presence or a shift to cloud-based technology.

Some businesses put off modernization because it requires time, effort and new technology skills to execute. However, over time, the problems these companies face worsen. If a company is more than two or three generations behind in the use of technology, it is very difficult to fix even minor problems. While it is possible to sustain in the short-term, these companies are in danger of becoming obsolete in the long-term.

What are some tools used to modernize?

Insurance companies are struggling to deal with the massive amounts of information they collect. It is not enough to just add more hardware or network bandwidth if the processes are inefficient and are not yielding the desired outcomes. Sometimes, companies fear that it costs too much to modernize. However, there are numerous tools and approaches available in the market, depending on the scale of improvements intended, and the extent of modernization requirements can be taken up.

While everyone knows the power of mobile and cloud computing, companies are also looking into techniques such as crowd-sourcing to maximize their benefits. Cloud computing is not yet leveraged in many insurance companies, but it provides the ability for insurers to leverage large-scale technology with little or no investment up front. To insurers, this means easier storage of the huge amount of information coming to them, such as photographs, depositions and other documents. A lot of managers are being designated and groomed to help focus on using cloud technology and how it can reduce the bottom line. It also enables customers to access information anywhere, any time, with minimum fuss. Insurance companies can leverage the cloud to ease the transition to mobile devices, using them as vehicles for meeting the increasing amounts of data gathered and processed. It is not just technology tools alone that matter, it is the newer processes and approaches that make a big difference in modernizing.

It is also common for companies to wait for a silver bullet to remove inefficiencies. Is this the right time to modernize? Of course it is. Technology is never static, it is ever changing and driven by innovation. There are numerous options available, and these will only increase over time.

How can modernization be executed?

Strong leadership that focuses on building a solid approach to modernization is vital. Building a roadmap to modernizing with options and scenarios is a big step. Modernizing should bring a positive impact to everyone in the company for it to have lasting value.

Once an approach is chosen and an investment decided upon, it is important to dedicate specific people for the planning and implementation. Projects are initiated with the right scope based on the investment and professionally managed. Process engineers that have a broad understanding of company operational processes are vital ingredients to the modernizing journey. Sometimes, the changes to technology or a business process need to be tested on small groups to refine the approach, measure the benefits and then apply to the rest of the company.

Some companies have the aptitude and skill to modernize in house. There is a vast amount of information available online on how to approach and prioritize modernization projects. Consulting companies and third-party product and service providers can also help an organization reach its goals.

Vani Prasad is vice president of Insurance Technology with HTC Global Services. Reach him at (309) 287-0229 or

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When one company is acquiring another, the deal price is often the primary factor considered. Too many times, however, critical issues are overlooked, says Sean R. Saari, CPA/ABV, CVA, MBA, senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team.

“Deals get started and then take on a life of their own. During the acquisition process, the company is often focused on negotiating and finalizing the deal. However, there are a number of valuation-related issues that can be important to consider, but which are often overlooked,” says Saari. “Some companies try to address these issues after the fact, but the earlier you’re able to get the valuation and accounting issues handled on the front end, the easier things are going to be on the back end.”

Smart Business spoke with Saari about the five things you need to know regarding business valuation before making an acquisition.

What is the appropriate standard of value to consider in an acquisition scenario?

There are two different standards to keep in mind — fair market value and strategic value. Fair market value represents the value of the business if it were to be sold to an unrelated third party and it sets the floor value to what an acceptable purchase price may be.  Fair market value is typically most appropriate when financial buyers are involved because they don’t really have any synergies to squeeze out of the company, they simply want to purchase the business ‘as-is’ and continue its operation. However, if the potential acquirer is in the same industry as the target company and the deal is a strategic acquisition, it is important to consider the ‘strategic value’ of the business. Under this standard of value, the acquirer considers the impact of certain redundant expenses that may be eliminated. The elimination of certain expenses may allow a strategic acquirer to pay a price that is greater than fair market value while still receiving an appropriate return.

Can the structure of an acquisition impact the price paid for the target company?

There are competing benefits between structuring a deal as a stock or an asset deal, which can impact the purchase price of an acquisition. Generally, sellers prefer stock deals because their proceeds are taxed only once as capital gains. In stock deals, however, the buyer cannot pick the assets and liabilities that it would like to assume, all unknown and contingent liabilities must be assumed by the buyer and the buyer gets no step up in the basis of the assets purchased. Therefore, buyers typically prefer asset deals because they can pick the assets and liabilities they want and they get a step up in the basis of the assets acquired. This step up, typically for fixed assets and intangible assets, creates additional depreciation tax deductions for the buyer, which can allow them to pay more than they would under an asset deal. This is particularly true when fixed assets with little carrying value are purchased or when intangible assets make up a significant portion of the purchase price. Sellers can be averse to asset deals, however, because contingent and unknown liabilities existing as of the purchase date typically are retained and the sale proceeds can be subject to double taxation.

How are earnouts accounted for?

Earnouts can be an effective tool to bridge the gap if the owner and the seller can’t agree on price. In an earnout, the buyer and seller agree that, after the transaction has closed, there may be additional payments to the seller based upon company performance. It allows the buyer to compensate the seller if certain levels of activity are achieved or to keep the purchase price lower if the targets aren’t met.

However, while it is a great tool, there are some accounting issues that the acquirer is often not aware of.

When an earnout is present, generally accepted accounting principles require the buyer to record the fair value of the earnout as a liability on its books. This is based on the likelihood of the earnout being paid and how much the earnout payment might be. Buyers often don’t realize they have to carry that extra liability on their books and that the balance has to be adjusted every reporting period until the earnout is settled, with the changes in value being reported in the income statement.

What other accounting requirements must be addressed when an acquisition is made?

When making an acquisition, consider the post-acquisition purchase price allocation, in which the purchase price is allocated to the various assets acquired. In many cases, the purchase price exceeds the value of the tangible assets acquired. Accounting rules require that the purchase price in excess of the tangible asset value be allocated to the intangible assets purchased, such as trademarks, customer relationships, technology and non-competition agreements. Any unallocated purchase price left after the intangible assets have been valued is assigned to goodwill.

Determining the fair value of intangible assets acquired is a complex process and typically involves the use of a third-party valuation expert to develop a supportable valuation analysis that will withstand scrutiny from the acquiring company’s auditors.

What are the potential issues if you overpay for an acquisition?

If an acquirer overpays, it results in a lower return on their investment or possibly the loss of a portion of the investment.

From an accounting standpoint, if an overpayment has occurred, it’s likely that goodwill and certain intangible assets may need to be impaired, which can result in a significant charge to the company’s earnings in the period of impairment. Assistance from a third-party valuation expert is often necessary when goodwill or intangible asset impairment is present to determine an appropriate amount that satisfies the company’s auditors.

Sean R. Saari, CPA/ABV, CVA, MBA, is senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team. Reach him at (440) 449-6800 or

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Your employees may be using your business’s credit cards to make charges you haven’t authorized. And if you don’t discover it soon after the fact, you may be liable for those charges.

“A court’s rationale is pragmatic and straightforward. If the credit card bank sends you a monthly statement and you send payment in full for all charges, then the bank is entitled to rely on the fact that all of the charges on that statement are authorized and have been approved,” says Joe Hickey, a member at Dykema Gossett PLLC.

Smart Business spoke with Hickey about how to keep from becoming a victim of employee credit card fraud.

How is fraud perpetrated against individuals and businesses?

Unauthorized use is a use that is not authorized by express, apparent or implied authority. If someone uses your card with your express consent you are obviously liable for the charges. But cardholders can be liable for a fraudulent use of their card — one they likely view as unauthorized — when the cardholder’s conduct cloaks the perpetrator with the apparent authority to use the card.

Typically, fraud with a personal card involves a wealthy individual who hires an assistant and gives that person access to all of the security verification information needed to apply for and/or use a card. That person will also review and pay the monthly card statements received from the credit card bank. It’s this combination of complete and unfettered autonomy and access, coupled with the cardholder never reviewing the statements, that creates apparent authority.

Businesses that frequently issue business cards to individual employees in their own names and with their own credit card numbers may have someone in their accounting department who both reviews and pays all business card statements. If that person is dishonest, he or she might fraudulently apply for their own card, with no one the wiser because that same person pays the bills.

How can business owners try to avoid being defrauded?

That is up to the business owner. To ensure the card is not being used fraudulently, a good start is to separate the payment and review functions. The person monitoring incoming statements should be independent of the payment process, and the person making payments should probably not have the ability to incur charges on the card (unless, of course, someone else is auditing).

Courts are likely to hold you liable if you do not separate those functions. While this is undoubtedly a fraudulent use of the card, it will be considered an authorized use because the bank receiving the payments rightfully concludes (based on the actual cardholder’s conduct) that the charges were authorized. Otherwise, why would payments be made?

Why do businesses often overlook fraudulent charges?

Individuals and businesses erroneously believe it is their bank’s duty to monitor their accounts for fraud. That is not true. While credit card banks employ fraud detection technologies, those technologies are designed merely to try to detect fraudulent use of your card before you receive your statement. Banks in no way hold themselves as monitoring your account and being responsible for finding fraud. Frankly, this is an impossible task. The best fraud detection system is personally reviewing the monthly statements.

Businesses might also mistakenly believe that they have procedures in place that would expose fraud, but because the perpetrator employees are also given unfettered access to make payments and withdrawals from bank accounts, as well as having broad access to accounting books and records, they are perfectly situated to manipulate information to hide their fraud. For example, while the ledger may indicate that a check was issued to pay a vendor, it’s possible for a perpetrator to issue a check to pay off the credit card. If you or someone independent does not audit the credit card statements and bank records with the books, it’s likely no one will know for sure if a payment was actually made to the credit card bank rather than the vendor.

In addition, business owners might have an employee create summaries of charges from the credit card statements. The owner reviews this summary prepared by the same person committing the fraud, but never reviews the actual statement. This, too, is not the bank’s fault.

How can a company avoid finding itself in this situation?

Be diligent and employ reasonable audit and cross reference procedures. It’s important to regularly review the statements so you notice charges you didn’t approve. Alternatively, keep the review and payment functions separate. Either way, the quicker you take action to advise the credit card bank the charges are fraudulent, the less likely this use will be viewed as authorized. If, on the other hand, you do not look at statements for months — or even years — it’s possible the courts will show little sympathy if you seek to recoup the money from the credit card bank. While you could always go after the renegade employee, they likely lack the funds to pay you back.

Under the Fair Credit Billing Act, you generally have 60 days to contact the bank and say, ‘This charge isn’t mine.’ If 60 days is the appropriate time for reporting billing errors, it’s also appropriate for reporting fraudulent use of a credit card. After that, the bank has a better argument.

If, despite its best efforts, a company is the victim of credit card fraud, what is the next step?

Contact your credit card bank, report the fraud and ask it to investigate. If the bank concludes that this was your employee and this employee was authorized to use the card via apparent authority, it will likely say you are liable. True, the person forged your signature and the act is fraud; but if you’re not timely in uncovering the fraud, the courts will determine that you let it happen.

Joe Hickey is a member at Dykema Gossett PLLC. Reach him at (248) 203-0555 or

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Many people use the terms “consultant” and “coach” interchangeably, but the approach of each can be quite different, says Ricci M. Victorio, CSP®, managing partner and executive coach at Mosaic Family Business Center.

“A consultant may suggest ideas and offer solutions. However, if a subtle emotional shift signifying resistance or confusion occurs, the approach needs to shift into coaching to find out what’s going on,” Victorio says. “Once clarity is re-achieved, the conversation can return to strategies.”

Smart Business spoke with Victorio about how a multi-faceted adviser will know when to wear each hat and how you can take advantage of those skills.

What is the difference between consulting and coaching?

A consultant is focused on solving specific problems, bringing ideas, experience and solutions to help solve an issue. He or she will advise you of your best options and not get too personal. But when dealing with personal issues, such as in family businesses, it’s not so cut and dried. Standard ideas may not always provide the win/win solution. The discussion with the client and his or her family, where everyone is pulled together, will create a resonating plan for the future.

This is where coaching becomes a dynamic skill set for the adviser. A coach will not get caught up in solving problems, which can be outlying symptoms of a much bigger issue, and will focus on the deeper, big picture topics. A safe and collaborative dialogue will help business owners explore their ideas, vision and facilitate the dialogue with key family and managers. It is the coach’s job to guide this exploration, and then as a consultant help them move forward with confidence.

Where does coaching begin?

A coach will first help identify what is important to the client by asking questions that focus on what is going on right now with the business and family, and the impact they have upon one another. Then consulting comes into play with a deeper understanding of what is important to the client. Ideas turn into action steps and are more succinct and meaningful.

Finding an adviser who is trained to alternate between the role of consultant and coach allows the discovery process to focus on both sides of the decision — first identifying the vision and secondly developing a strategy to achieve it.

What are the dangers of using an inexperienced adviser?

Be careful when advisers use standardized solutions and rush to a conclusion without taking the time to dig a little deeper. The solution may be a really good one, but it also may not be creating a win/win for your business and family. And if the business owner is pushed into solutions that do not address what is actually causing the problem, the process will stall. It takes a different kind of approach, as well as a different presence and mood, to get people to open up and talk about what is really bothering them.

The coach needs to have an open, curious mind and keep pulling back the layers to look at what’s underneath. If the coach will take extra time to look beyond the surface, the answer will emerge. When it does, everyone recognizes it and it seems so simple. This takes patience and a willingness to be vulnerable while exploring many options.

How can utilizing someone trained as both a coach and consultant benefit a family business?

The strategic decisions that business leaders make affect their lives and those of their families and employees. It’s not the technical aspects of planning that jam people up; it’s these personal decisions and their impact upon everyone and ultimately the success of the business. An adviser trained in both capacities will facilitate deeper, more meaningful conversations that get to the truth and uncover emotional baggage, undermining fears and withheld concerns. Once the ‘elephant in the room’ has been recognized, an open dialogue can take place between all involved parties. As people begin speaking their truth, getting people unified in the decision-making process becomes much easier.

How can this relationship empower individuals to make choices?

People want to be respected, empowered and know they are capable. The consultant/coach should work with you from the perspective that you are creative and resourceful, which is different from, ‘You don’t know much about this situation and you need me. I can fix this.’ It creates a dynamic partnership between the client and adviser.

How can a multi-faceted adviser help integrate a business owner’s personal and business lives?

You can’t separate business decisions from your personal life, just as you can’t separate your personal self from your work self. If you find yourself feeling frustrated or unable to move yourself, family or company forward in planning for the future, a multi-faceted adviser can help you get to the core of what is holding you back from making progress. Once this is accomplished, the business or family issues that once seemed so overwhelming won’t look so daunting anymore.

Mosaic Financial Partners is a boutique, fee-only wealth advisory firm dedicated to improving its clients’ lives by providing financial solutions and customized advice to help its clients attain their lifetime goals and aspirations. Mosaic is comprised of 10 Certified Financial Planners™ who work with businesses, families and individuals. Mosaic Family Business Center is affiliated with MFP. Together they combine investment management and comprehensive, on-going financial planning and counseling by integrating the various pieces of the client’s lifestyles into a meaningful whole enabling its clients to make good personal financial decisions and achieve their dreams. For more information visit or, or call (415) 788-1952.

Ricci M. Victorio, CSP®, is managing partner and executive coach at Mosaic Family Business Center. Reach her at (415) 788-1952 or

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Lewis Landau, Senior counsel, Dykema Gossett PLLCYour business has been slapped with a lawsuit, and in a panic, you run to see a bankruptcy lawyer.

Is declaring bankruptcy really the best course of action? In some cases, this can be true. But in most instances, it may be time to step back and consider other options, says Lewis Landau, senior counsel at Dykema Gossett LLP.

“I have found that by the time the debtor arrives at a bankruptcy lawyer’s office, there is an extreme bias in favor of pulling the bankruptcy trigger,” Landau says. “It’s almost as if the gravity pull of just going to a bankruptcy lawyer means you’re ready to do it. However, bankruptcy is just one of several tools available to a debtor.”

Smart Business spoke with Landau about how to determine the difference between needing to declare bankruptcy and simply wanting to declare it.

What is the difference between needing to file and wanting to file?

Have-to-file cases are ones in which there is an immediate loss of control of something, such as a pending eviction, forthcoming foreclosure, or a bank account has been levied up and has already lost money. Control has been lost — or is imminently going to be lost — and the debtor needs to take action through the help of the bankruptcy process today to regain control. In those instances you generally will have to file.

Those are the easy calls. However, most cases are not have-to-files, they are want-to-files, when people feel the need to do something to cure their problems.

If there is nothing that elicits the immediate loss of assets, the attorney should ask what is creating the pressure, why are you here and why are you contemplating bankruptcy?

The answer is generally a lawsuit. The sheriff has come and scared the owner by handing over papers. They panic and wind up in a bankruptcy lawyer’s office the next day because, having been served, they feel that they have to do something immediately.

However, lawsuits take a very long time to resolve; in Los Angeles, it generally takes a year. So you have to measure the cost of allowing the lawsuit process to continue. Even though you ultimately may wind up with a bad judgment, it could be smarter to let that timeline string out. You eventually could settle that case, and the problem is resolved.

Some of the hardest advice a bankruptcy lawyer gives is to not file when someone wants to do so. Your first reaction upon hearing that may be that the lawyer doesn’t know what he or she is talking about, but there may be a better alternative.

How can cost deter you from declaring bankruptcy?

To go into bankruptcy, you have to be able to afford it. Chapter 11 bankruptcy is a very expensive process. Much like you wouldn’t want to drive to Las Vegas from Los Angeles on half a tank of gas because getting stuck in the desert is never good, you don’t want to get involved in a bankruptcy case and not be able to finish the process because of the cost. At a minimum, figure $50,000 to re-organize, and the sky is really the limit.

Another concern is that the moment you file, a whole host of new people and agencies are involved in your life who weren’t before, such as the U.S. Department of Justice’s Trustee Program and its trustee offices, the court and the creditors, who have a large stake and influence in a debtor’s future. There are degrees of loss of control that happen by filing that may not happen if you don’t file, and those need to be measured and balanced.

What else should a business owner be thinking about when considering filing?

A business cannot operate in the red in bankruptcy.

A company may go into bankruptcy and have a few months of losses before going back into the black, and that’s OK if a debtor can show the low point of a seasonal business or orders that will create a profit in the future.

The reason why accrual of losses in bankruptcy is especially treacherous is that post-bankruptcy debt — to the extent that it is unpaid — receives administrative expense priority, which means it’s the top priority at the same level as unpaid legal fees.

The day before bankruptcy, if credit is extended to a business without collateral, it is general unsecured debt. That same credit extended the day after bankruptcy is top priority and entitled to be repaid in full, immediately, in order to exit the bankruptcy. General unsecured debt, on the other hand, generally gets paid back over years, or not at all.

If too much post-bankruptcy debt is accrued and unpaid, the ship can’t sail to its goal. It gets top heavy and falls over because the organization can’t pay its debts to get out of bankruptcy.

The process is a partnership between the bankruptcy lawyer and the business. The lawyer can do a lot to make it work but can’t do anything without a profitable business. Bankruptcy attorneys fundamentally take that profit component, drop it to the bottom line and make deals with creditors to split that. And if there is no profit, the attorney has nothing to work with.

If you have a bias toward filing, you will always be able to find a bankruptcy attorney to file for you. However, if an experienced bankruptcy attorney who knows the system and who understands the adverse consequences advises against it, it may be prudent to heed that advice.

Lewis Landau is senior counsel at Dykema Gossett LLP. Reach him at (213) 457-1754 or

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When selling your business, you may be thinking about scoring a quick payout and retiring.

But many buyers today want the person who built the business to continue to play a key role after the sale, and, as a result, leave you with a stake in the company. If the arrangement works, everyone benefits. But many times, sellers have difficulty adjusting to a new role where they no longer are in charge.

If you’ve negotiated the deal correctly, you can exit the deal with relatively little pain. But if you haven’t, it may cost you, says Bill Finkelstein, an attorney in Dykema Gossett PLLC’s Corporate Finance Practice Group.

“In today’s market, the buyer, often financial as opposed to strategic, is frequently not looking to buy the entire company,” Finkelstein says. “The buyer wants the investment, and control of the company, but it wants to keep the management team in place for its expertise, knowledge of the market, reputation and key relationships, and it wants to incentivize management to grow the business.”

Smart Business spoke with Finkelstein about how a put and call agreement can offer options to a seller.

How are buyers approaching the market today?

Traditionally, the buyer buys 100 percent of the company and puts the former owner under a management contract. However, after ‘cashing in’ the former owner may exhibit less drive and interest in running the company.

Today, it’s not unusual for smart investors — or strategic buyers who are in different markets — to want to retain and incentivize the management that got the company to where it is, and partner with them going forward. As a result, they buy a majority interest, but the former owner is still invested.

This is a smart play for the acquirer, but it  makes the transaction more complicated. As the seller, you have concerns. Selling to a larger corporation gives you better access to capital markets, and funding sources should be better and less costly, allowing you to improve operations and grow your business. However, are you really going to be in control, or is corporate headquarters going to be pulling the strings?

It’s a difficult situation because the buyer is coming to the table with a lot money. The buyer is in control and ultimately will have the final say on major matters such as expansion, capital improvements, etc.

How can the seller plan for an appropriate exit strategy?

Oftentimes the solution is a buy/sell agreement, which might not be that attractive to the seller. Under a typical buy/sell, one party notifies the other that he or she will buy the other’s shares for a set amount, or under a formula or valuation process. The other side may elect to sell or, if the price is too low, buy. Frequently, the price is payable in cash, and as a seller, you don’t want to exercise the buy/sell agreement with the possibility you might be required to buy back your company.

The seller is often at an economic disadvantage. A buy/sell agreement is not going to scare a buyer that is a global company. It can say, ‘Fine, I’ll buy you out,’ and trigger a discounted price, knowing the seller took the money from the sale and used it. You worked your whole life to build a company turn it into cash and now you must sell your shares at a lower price or buy the company back.

What is the alternative?

From the seller’s perspective, you should try to negotiate an option, called a put and call, for the seller to require the other side to purchase your remaining shares, either all at once or staged out, or for the buyer to exercise the right to buy the remaining shares from the seller.

The put gives the seller an out if the situation becomes, ‘I tried, but I don’t like headquarters telling me what to do. We just don’t see eye-to-eye, so let’s part company.’ Moreover, the buyer can buy the rest of the seller’s shares if it wants total ownership later. An additional advantage is that a buyer who wants to retain management may think twice before vetoing management’s plans knowing you may exercise the put if disagreements or differences reach a certain level.

This is a very good tool if you can negotiate it. In order to ensure some degree of management stability or to allow the buyer to plan for the capital needed to buy the remainder of the shares, you may not be able to trigger the option for a reasonable period. A period of three to five years, beginning on the third anniversary of the sale, is not uncommon.

If you sell a majority interest in your company at a multiple of earnings or cash flow, you can say you want a put and called priced at the original sales price formula.

But if, at the time of the put, the company is more profitable, you don’t want to sell at today’s price, so you can negotiate the put and call price at the greater of today’s price or the same formula applied to the then trailing 12 months before the sale. Therefore, if the company is more profitable, the price of the buyout increases; this is fair because you could argue the additional value is due in large part to your efforts.

This formula also provides a guaranteed floor. You don’t want the put price to be lower than the original sales price because of the financial risk of a downturn in the economy or industry, or bad decisions by your new owner.

Having that exit strategy is crucial to ensure the reason you sold in the first place — to get liquidity — doesn’t vanish.

William B. Finkelstein is an attorney in Dykema Gossett PLLC’s Corporate Finance Practice Group. Reach him at (214) 462-6464 or

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When investors are seeking a financial adviser, they often make their decision based on price, figuring that everyone offers the same products. But that could be a mistake, says Frederick D. DiSanto, CEO of The Ancora Group.

“Instead of looking for the least expensive adviser, look for someone you can work with, with whom you feel comfortable and who has a real interest in helping you achieve your goals and objectives,” says DiSanto. “Pricing is always a concern and it should be commensurate with what is out there in the marketplace, but building that relationship with someone you trust is critical.”

Smart Business spoke with DiSanto about what to look for in a financial adviser and how to get the most out of the relationship.

What are some important traits of a good financial adviser?

The first thing to make sure of is that you are comfortable with that person, because it is all about the relationship. Is this someone with whom you feel that you can build a strong, solid working relationship — and friendship?

When looking for someone to manage your assets, that relationship is so important. You have to believe that once you set your goals and objectives and make that asset allocation, the adviser can execute. If issues arise, are you comfortable enough to call them in good times and bad? The stronger your relationship is, the better and the higher the probability will be that you will meet your goals and objectives.

The adviser should help you define your goals and risk tolerance, then provide solutions to meet your individual needs. There is no one-size-fits-all solution. An adviser should get to know you and your needs and not simply try to sell you products. Advisers should take the time to address a total risk management solution and take into consideration issues such as the riskiness of your career and your business and incorporate them into the risk profile of your investments.

This is not a five-minute conversation. It is an ongoing conversation in which the adviser helps you assess your goals, objectives and your stomach for risk to create an investment road map. Forming this type of relationship can really differentiate advisers.

The best advisers are not trying to push a product but are working to provide the best solutions to their clients. Your adviser needs to understand that not everyone is the same and that he or she has to mold, develop and create a total solution to accommodate your individual needs.

How would you define the adviser/client relationship today?

There is much more transparency because of the volatility we have seen in the market in the last few years, and there is much more communication between adviser and client.

Asset allocation is one of the most critical elements to understanding a client’s risk exposure. Throughout the past four years much more attention has been paid to a portfolio’s asset allocation. As the markets go up, people tend to be more aggressive and lose sight of their risk tolerance. Today, the focus is more on developing the right asset allocation, which will help investors weather any market conditions.

How often should investors meet with their advisers?

Every client is different, but an investor should meet with his or her adviser at least once a year, if not more, to review performance and determine if goals, needs or risk profiles have changed.

If there is going to be a life-changing event — for example, you want to retire in three years — you need to be communicating with your adviser about your goals and objectives so he or she can work to help you meet them.

How important is it for your financial adviser to work with your tax and legal advisers?

It is critical. Investors often have multiple investments, so having your financial, legal and tax advisers working together will help them better understand your total tax liability, gains and losses to create the most tax-efficient scenario. Your financial adviser should be providing your CPA with information about what your gains and losses have been on a quarterly basis to make sure nothing gets overlooked. And from an estate planning point of view, there is a lot of coordination to be done with legal advisers to ensure assets are held in the appropriate name, title, etc.

How should investors approach the issue of fees with their adviser?

The first thing an investor should look at is whether he or she can work with this adviser. Do you feel comfortable calling on Saturdays when you have a question or concern? If you believe you can work well together, then look at fees to determine how they compare to the marketplace and have a conversation about the discrepancies. If the adviser’s fees are slightly higher than the market that should not really dissuade somebody if the relationship fit feels right.

Is it fair for clients to ask their advisers for help with networking or other services for which the advisers don’t get paid?

Absolutely. Your adviser should go the extra mile to help you network. Having an adviser who can help clients build centers of influence and relationships outside their own network and help them grow professionally and personally is extremely important. It does not come out in the performance of your assets, but it comes out in your relationship. If you have a great relationship, your adviser will want to help you, whether it is with investments or business. It is not strictly what investments you make in your portfolio, it is also all those variables that you cannot put a hard number on.

Frederick D. DiSanto is CEO of The Ancora Group, as well as an investment advisor representative of Ancora Advisors LLC (an SEC Registered Investment Advisor).  Reach him at (216) 825-4000 or

Insights Wealth Management & Investments is brought to you by Ancora

When Billings Productions was looking for a new home for its dinosaurs, it found the ideal location in Allen, Texas.

The company got its start nearly a decade ago after Larry and Sandra Billings met in Jakarta, Indonesia, got married, and went to work at Dino-MAE, a company that built dinosaurs. When that company closed, Larry thought he could build more realistic dinosaurs and the couple decided to start their own animated dinosaur company.

In 2003, their first year in business, they built 60 animatronic dinosaurs. Larry passed away in 2007 after the company had started turning a profit, but the company continued to thrive under the leadership of Sandra and their son, Trey. Billings Productions is North America’s leading provider of life-size animatronic dinosaurs and is the only U.S. company that specializes in creating creatures that can withstand the outdoor elements.

Each dinosaur has an electronic brain to produce sound and create realistic movements via a pneumatic system. And its 200 robotic dinosaurs, which include more than 50 species, are in great demand in zoos, amusement parks and museums not only across the country but around the world, says Tim Brightman, director of business development at Billings Productions.

“We currently have shows going on in England, France and Spain, and next year we’ll have shows in New Zealand and Australia,” says Brightman.

Smart Business spoke with Brightman about the world of dinosaurs and why Allen will be the home of Billings Productions for years to come.

How does the business operate?

We lease out animatronic dinosaurs, mostly to zoos, but also to venues such as amusement parks and museums, for temporary exhibits that Larry Billings referred to as ‘edutainment.’ The goal is to encourage discovery and create an awareness of prehistoric life by making learning fun and entertaining. Every boy I’ve ever known, including myself, from about the age of four thinks that dinosaurs are the coolest thing in the world. It’s something you never get over, and Larry felt that way, as well.

We currently have 10 shows out and have more going out in the next few months. Our biggest dinosaur is the T-Rex, which is 45 feel long and 25 feet high. However, that collapses down so that several dinosaurs can fit in the trailers for transportation.

Exhibits generally go out for two to three months at a time. It is a fun and growing business. However, the industry is becoming more competitive and we have to keep moving forward with new ideas.

What precipitated the move to Allen?

When the business first started, it was operating in what was essentially a 20,000-square-foot old aluminum airplane hangar in Texas. We had just outgrown it. We had too many dinosaurs and too many projects we are building to remain in that space. When dinosaurs were coming back, the building was completely full and we needed more room.

Billings Productions has gone from a mom-and-pop business that was run in an ad hoc manner to being a real business. We are getting the business organized and structured, and as we continue to grow, we needed more space.

We scouted all over the place to find a location that was suitable and that had enough space, and we found what we were looking for in Allen. We looked at other locations, including a small town in Texas where fossils had been found, which seemed like a natural fit. But we were very concerned that if we moved 100 miles away, we would lose our core personnel, and we found everything that we needed in Allen. That allowed us to keep our talent and cost effectively locate in a bigger, nicer building. The new space is state of the art and doubles the amount of space we have, giving us more room to store our dinosaurs.

We moved in this spring, and so far, it’s been great. We’re still moving in, but as far as the facility goes, we’ve shipped out a couple of shows since moving there, and it’s so much easier. We have a good loading dock and other things that we didn’t have before, things that make it a whole lot easier to do business. Going forward, as we settle in to our new location, we’re looking into expanding our product lines, and eventually, we are going to set up tours so that people can come through and see how the dinosaurs are built.

In addition, the Allen Economic Development Corporation has made us feel very welcome and wanted. We’re starting to work with them on where the company is going over the next five years and some expansion plans. We plan to be in Allen for the long term and we’re excited about how that relationship will develop over time. Everyone has been amazingly helpful and generous with their time and support, and we really look forward to being here for a long time.

Tim Brightman is director of business development at Billings Productions. Reach him at Reach the Allen Economic Development Corporation at (972) 727-0250 or

If your company has a benefit plan such as a 401(k) with 100 or more eligible participants, each year you are required to have an audit performed on that plan that is filed with the IRS and the Department of Labor (DOL). Failing to do so could mean major penalties for your business, says Danielle B. Gisondo, CPA, a principal with Skoda Minotti.

“What often happens is that a company gets to that 100 employee mark and it is not aware of the requirement,” says Gisondo. “A few weeks before the deadline, the company that is preparing the required Form 5500 for all benefits plans for the company will send the company a letter that says, ‘You need to have an annual audit this year because your participant count has climbed to more than 100, so please forward us your auditor’s information.’ The company may read that and begin the search for an auditor or just ignore it. And ignorance of the requirement is no excuse.”

Smart Business spoke with Gisondo about what you need to know to stay on the right side of the law and avoid stiff penalties.

When is a benefit plan audit required?

ERISA requires that an audit be performed on most benefit plans with more than 100 eligible participants. The auditor is required to be an independent accounting firm, one that is independent not only of the client but of whomever is administering the plan and holding the investments.

Every plan has to come up with a standard plan document that outlines how the plan should operate relating to contributions, distributions and loans. The DOL wants to make sure companies are properly running their plans in accordance with what their plan document says.

What happens if a company does not have a benefit plan audit performed?

If a company fails to have an audit performed, it will be faced with penalties from the DOL and the IRS, which can get very steep. If you fail to file at all, the penalties can be up to $30,000 per year per plan. And a deficient filing can result in penalties of up to $50,000 per year per plan.

How long does the benefit plan audit process take?

If the auditors get everything they need, the process typically takes three to four weeks. If there’s a delay in getting information, either from the client or from one of the third parties involved, it may take six or seven weeks to complete.

The auditors will first compile a comprehensive request list with everything they need copies of and access to. Depending on the size of the plan, the auditors will be on site for one to three days and will typically work with someone in HR or accounting to get the necessary information. The rest of the work is done off site to minimize disruptions to the client’s business.

What are the deadlines?

For a calendar year-end plan, the initial due date for Form 5500 and the audit is July 31. If you can’t meet that deadline, you can file a two and a half month extension, which brings the due date to Oct. 15.

What steps can you take if you realize you should have had an audit performed but you didn’t?

If the IRS/DOL notifies you that you should have had an audit, it’s difficult to get out of paying the penalties by saying that you didn’t realize you needed one.

However, the DOL offers compliance programs that companies can go through if they failed to file. These programs allow you to pay a reduced fee that varies depending on the type of plan and the number of participants. Once you have paid that fee and file the necessary 5500 forms and audits as needed, you can be relieved of the penalties.

If you know you have a problem, don’t wait. Reach out to the IRS/DOL and let them know you have a problem. If they come to you and say, ‘We don’t have your 5500 form and the applicable audit,’ it’s too late to go through the compliance program and you will face major penalties.

What should companies consider when selecting a benefit plan auditor?

Ask if the firm has expertise in performing benefit plan audits. A lot of people assume that any accounting firm can do them, but it is a separate area of expertise and you should make sure the firm has it. Accountants undergo specialized training on an annual basis to ensure they are comfortable with all of the changes that continue to come from the IRS and the DOL.

Make sure the people you are working with are properly trained, that they know what they are doing and that they audit multiple plans, because a firm that audits just one or two plans doesn’t have the experience of a firm that is doing 20 or 30. Also ask about the audit process and ensure that whomever you are working with has the experience necessary to perform the work.






Danielle B. Gisondo, CPA is a principal with Skoda Minotti. Reach her at (440) 449-6800 or

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When purchasing property, there are a lot of details to track. Failing to hire an experienced real estate broker could cost you both time and money if just one of those details is overlooked, says Eliot Kijewski, a sales associate at CRESCO Real Estate. “By following a purchase agreement abstract, the buyer can help ensure that proper due diligence is done and that there aren’t any surprises after the deal has closed,” says Kijewski. Smart Business spoke with Kijewski about how an experienced real estate broker can help you avoid costly mistakes. What is the first step when considering purchasing property? A purchase agreement abstract provides a checklist of steps to follow. It breaks down the purchase process for both the buyer and the seller and ensures everything is done properly. Following this, the first step is for the potential buyer to provide earnest money to a quality title company. In addition, almost any transaction of more than $350,000 requires an environmental policy assessment. However, if it is a known hazard area, such as a gas station or a site that is otherwise suspect, that assessment will be required. In Phase 1 of the assessment, which costs $2,000 to $5,000 and averages three weeks, the history of the property and all its known prior uses are examined. If the buyer is going through a lender, this phase may not be optional, even with a low purchase price, as the lender will almost always require it. If Phase 1 comes back with suspect information — for example, if the site had heavy industrial use or hazardous chemicals have been used on site — there will be a Phase 2. Further testing will be conducted and samples are sent to a lab. This phase generally starts at about $9,000 and can become really expensive, and it averages six weeks. Neither side may want to pay for the study, but it’s critical to provide the buyer and the seller with peace of mind about the transaction. In some cases, the potential buyer and seller may choose to share the cost. If Phase 2 comes back inconclusive and the transaction is called off, each side has lost just a little, versus the entire cost of the purchase. How can surveys help ensure buyers know what they are getting? Surveys are an important tool used to identify the boundaries of a property and can be general and inexpensive. However, an American Land and Title Association survey can provide more in-depth information should you want to know more about what you are buying. An ALTA survey is very detailed and shows you exactly what you are purchasing, such as the utilities, the topography, etc. Having this survey done is always a good idea, but it can be very expensive depending on the size of the property and the complexity. Another advantage is that you may understand the potential of existing wetlands. What are the next steps? Hire a trained professional to do a building inspection. That person will check its structural soundness, the HVAC system, the roof and electrical system mechanicals. Also have the IT system inspected to gain an understanding of its capacity. At this stage, you should also arrange for phone and IT services because those can take a long time to install. If the sale doesn’t go through, you can cancel it. Also ask about warranties on the roof, the HVAC system and other items for which a warranty may transfer from the buyer to the seller, and find out how much time is left on those to understand potential future costs. How can incentives and zoning affect a sale? Check with the municipality to see if anything is available to help you with financing or if there are incentives that can make it a more attractive purchase. Also talk with the state and county to see if there is anything they can offer to sweeten the deal. You should also check the zoning to ensure that your intended use of the property is acceptable. If you’re going to need a variance, you need to know about it before you commit to the purchase. What does a potential purchaser need to understand about financing? Assuming that you are financeable, check with your lender to see how quickly it can complete the transaction. Otherwise you might find yourself in a situation in which the due diligence is done and you’re ready to move forward, but the bank can’t finance for another four weeks. Also consult with a broker to see who’s doing deals, as banks have SBA programs that can help. With these loans, the government accepts a large part of the responsibility for the project, allowing you to lock in rates. These loans are not the easiest to obtain, but they can provide a huge benefit. Once you have completed all of the steps, it’s time to close the deal and determine when everything will be in place so you can move in. Is this process something the average business owner can accomplish on his or her own? No. You definitely need help. Even experienced building owners still hire brokers, attorneys and other professionals to help them through the process. If you try to do it yourself, you will overlook some of these critical steps because you’re not used to doing them on a daily basis. Your broker can keep things moving along and hold the deal together.   Eliot Kijewski is a sales associate at CRESCO Real Estate. Reach him at (216) 906-2414 or Insights Real Estate is brought to you by CRESCO Real Estate