Semanoff Ormsby Greenberg & Torchia: How to negotiate with your bank when they don’t want you anymoreWritten by SBN Staff
It’s something every business owner fears — the phone rings or you get a letter or email from your bank. They don’t want you as a customer/borrower anymore. What do you do from that point?
The most important thing is not to panic, says Charles W. Ormsby, Jr., managing member at Semanoff Ormsby Greenberg & Torchia, LLC. The situation is often not as bad or bleak as the bank originally presents it.
“They make it seem awful, but it can actually turn out pretty well when it’s all done,” Ormsby says.
Smart Business spoke with Ormsby about how to handle this type of problem with your lender.
When might a business owner hear from the bank about a problem?
In many cases, the business owner has defaulted on his or her loan. Perhaps they haven’t made a payment or are in violation of financial covenants. But it could also be due to the internal machinations of the bank. Maybe they want to get out of lending to your particular industry. Let’s say a bank is skittish about chemical manufacturing. It might call you up and say, ‘Look, we have the right to discontinue this relationship and that’s what we’re doing.’
Other times, a bank may want to clean up its balance sheet. If the bank is trying to sell or merge, it could need to get certain loans off its books. In addition, a loan can be classified as troubled without a business owner’s knowledge. If you’re getting more attention than normal — more communication and requests for information — that’s a red flag they are concerned about something.
What is the first step after that initial phone call, email or letter?
Take a deep breath, and then immediately contact your attorney and your accountant, who are hopefully experienced in this area. Having advisers who are experienced in dealing with, and standing up to, banks will end up paying big dividends — but only if you follow their advice.
Where do business owners make mistakes when negotiating with the bank about a troubled loan?
Never sign or promise anything without your attorney and accountant being involved. The bank is going to demand things, and in the absence of somebody who is experienced at advising a borrower, the borrower or business owner may feel compelled to comply. They might try to get you to waive rights, contribute cash, provide additional collateral or give personal guarantees.
You need to evaluate where the bank stands, in terms of the collateral they already have, including personal guarantees. Don’t just accept what the bank is dictating to you. You may have considerably more leverage than you originally thought. As the saying goes, ‘Whoever has the money has the power,’ and you, as the borrower, have the money. Keep in mind banks ultimately don’t want your business, they want their money.
For example, I recently had a client whose bank called his loan and told him he had to put $1 million cash into his business. However, by the end of the negotiations the bank ended up loaning a multiple of that million dollars to my client. One of the things people find remarkable in these situations is how often banks will advance more money to keep you afloat.
One of the great fears for the bank is that you’re going to sit at the negotiating table — and I’ve done this on occasion — and slide the keys across the table and say, ‘Why don’t you run the business now.’ That’s the last thing they want. More often than not, their best chance of recovering as much money as possible is for the business owner, who has the relationship with his or her customers, employees and vendors, to stay involved.
Banks very rarely will precipitously shut you down. They will shut you down, however, if they start to feel you’re being deceitful. Its not a great strategy to play hide the ball with your bank. You want to be very clear and upfront with them. Banks don’t like surprises. If you are forthright with them, and get strong, you’ll get a better result. ●
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
Two years ago, multiple bidders for commercial property in Northeast Ohio would have been unheard of. Now, market power has shifted from the buyer/tenant to owner/landlord. Vacancy rates have dipped and the quality of the product on the market has significantly decreased, says George J. Pofok, CCIM, SIOR, senior vice president at CRESCO.
“As the market and the economy continue to improve, with the lack of quality product out in the market, I think we’re going to see more multiple-bid situations,” Pofok says.
Smart Business spoke with Pofok about what to do when you’re competing for commercial property.
What determines if a property might have multiple bidders? Is it the type of building or location?
Right now, multiple offers are happening more with industrial properties as opposed to office — and a lot of that has to do with the quality of the building. Class A Industrial buildings are in limited supply. So, a property’s cleanliness, building amenities and ceiling height make it more desirable and thus more likely to be competitive.
Location is important, including freeway accessibility, being near public transportation and your labor force, but amenities to a building sometimes outweigh location. If you were to build a new industrial building today versus purchasing another facility already equipped, there are cost savings in addition to being able to get widgets to the market quicker.
How does the bidding process typically work with more than one bidder?
Everything ends up being a one or two-step process, usually. The seller might give you a revised counter or just send you a letter saying, ‘We have multiple bids. Give us your highest and best offer.’ Then, you’ll have a couple of days to a week to respond. Obviously, getting your response in by the timeline the seller dictates is critical, but the terms of the offer are what drives everything.
There can be a lot of back and forth or the seller may end up picking a lead horse, and then try to fine-tune the economics with that bidder. They may like your offer but have one objection. They’ll come back to you about that objection.
So, how can you make your offer the most attractive one?
You’ll need to consult with your broker and your lawyer, and most importantly not play games. If you’re going to play games, you’re going to lose. Many buyers or tenants still think, ‘I’m going to get this great deal on this building.’ When in fact, the market has shifted in favor of an owner/landlord.
You want to be as highly competitive and flexible as possible. In addition to increasing your offer, some advantages a buyer or tenant can use are to pay cash or increase the amount of earnest money. Earnest money is put toward the down payment when the transaction is finalized but may be kept by the seller if the buyer defaults on the purchase.
It helps if you’re able to shorten the amount of days you have requested for due diligence or financing contingency, where you apply for lending. For example, 90 days may be too long under these circumstances; something in the 45-day range is better.
Also be flexible when negotiating reps and warranties. Buyers sometimes ask for the owner to warranty and represent various issues regarding the title or environmental concerns for an extended period of time. However, owners just want to sell, cut the cord and be done. Consult with your attorney when discussing these issues. Money talks. So, increasing your offer from a purchase price perspective is critical, but it’s not the ultimate factor. If an owner has two offers and one is for $50,000 less, but the terms in the lower offer are much more palatable with less due diligence and more earnest money, he or she may be willing to take the lower offer. Sellers and landlords are going to look at everything.
Are buyers assuming more risk under these circumstances?
At times, yes, it’s riskier. You may take a little more risk than you’d prefer. If the terms of the deal get too onerous, walk away. There will be other opportunities, but it needs to make sense. That’s why you definitely want to leave the emotional part out of it. Look at it from a business perspective, and put together the best offer you can. ●
Insights Real Estate is brought to you by CRESCO
Results of the Skoda Minotti annual survey of the construction and real estate industries looked good in 2012, indicating the most positive response since the initial poll in 2007. The 2013 numbers, however, reflect that the local market hasn’t completely recovered from the recession.
“Things started to look positive, but it appears we’ve taken a step backward,” says Roger T. Gingerich, CPA/ABV, CVA, CCA, partner in charge of the Real Estate Construction Group at Skoda Minotti. “Business owners are sitting on cash and holding off on capital investments because they’re uncertain whether we’re in a long, slow cycle of recovery or if we’re dipping back into a recession.”
Smart Business spoke with Gingerich about the 2013 survey results and the status of the Cleveland-area construction and real estate marketplaces.
What is construction reform and how has it impacted contractors?
Under a 2012 Ohio law, rules for government contracts changed and there is no longer multi-prime bidding — breaking a project into different packages for mechanical, electrical, etc. Instead, the process went to single prime construction, with one general contractor responsible for hiring any subcontractors.
Reform has made it more difficult for smaller contractors to bid for work because they don’t have the bonding capacity; they don’t have the net worth or capital that a bonding company prefers. They may be able to get a bond for a $3 million project, but not for a larger project, even if they have subcontractors doing the majority of the work.
The concern is that subcontractors have another company — the general contractor — between them and the customer and it takes two or three weeks longer to get paid. There also could be more out-of-state competition because larger contractors see opportunity when there are only so many companies that can bid.
Despite problems, construction companies surveyed were positive about opportunities in the next three years — 43 percent expect more opportunities, 41 percent said the same amount and 16 expect to have less business. Although that’s the second best result since the survey started, it is somewhat discouraging that 49 percent of respondents in the 2012 survey saw more opportunities. So we took a small step backward.
Why is securing credit continuing to be a problem with commercial real estate?
When asked about which obstacles prevent closing a deal, credit was the top response and is tied to property valuations. Banks tightened up in 2007 and 2008 and exited the real estate market. As a result, there was more supply than demand for real estate. Properties that were worth $1 million, for example, might now be valued at $750,000, and the owner still owes $800,000.
Loans are still available for businesses that operate out of their buildings; it’s the investment real estate that is not being financed. Retail businesses have struggled and companies were going out of business or couldn’t pay rent and, if leases were up, wanted to renegotiate for significantly less than what had been paid. As a result, developers are having problems securing loans to get projects off the ground. We’ve seen some improvement, but there still are challenges when it comes to credit.
Overall, what do the survey results suggest for 2014?
The results weren’t surprising. Respondents said healthcare reform would have a negative impact; however, healthcare is going to be a challenge for everyone. The survey also indicated that while everyone seems concerned about green construction and sustainability, it’s not changing many developers’ minds about how they build.
The fact that we took a step back from 2012 in terms of optimism shows that it’s still an uncertain market. That wasn’t surprising, although lending restrictions appeared to be lessening.
However, interest rates remain low and it’s a great market for business owners with cash. Those people will see opportunities. If you don’t have access to capital, you will continue to face challenges and that will slow the area’s recovery. ●
Insights Accounting & Consulting is brought to you by Skoda Minotti
The advantages of an electronic health record (EHR) for individuals are readily apparent to many physicians. According to the most recent survey by the Centers for Disease Control, 75 percent of physicians who have adopted EHR say the technology has led to better care.
But, for any number of reasons, that message has not quite gotten through to the general population. Privacy and security concerns are the major reasons cited by the public for its unease, and the main factors keeping many people from embracing the concept, even as the nation becomes more “digitized” in other areas.
“The general public doesn’t know much about electronic health records, and so there is some unease about the concept,” says Dr. Stephen Perkins, vice president of Medical Affairs for UPMC Health Plan. “It will take an educational effort to get more people to see what the positive impact of EHRs can be.”
Smart Business spoke with Perkins about the advantages of EHRs and the impact it can have on health care.
What are electronic health records?
EHRs are an electronic record of information that reflects all of the health care that was delivered to a specific patient in various locales over the years. The information can include patient demographics, progress notes, medications, vital signs, medical history, immunizations, laboratory data and radiology reports. Ideally, an EHR gives a physician a streamlined look at a patient’s complete health record and should make the delivery of health care more efficient and effective.
Why is there resistance to EHRs?
In a Harris Interactive survey taken in 2012, only about one quarter of the respondents said they wanted their records to be transferred from paper to an electronic version, and 85 percent of respondents expressed some kind of concern about EHRs. The survey also revealed that only 40 percent of people think that EHRs would help doctors deliver better, more efficient care, which is actually a slight decrease from previous years.
The reasons for the resistance include a fear of records being stolen by computer hackers, the potential for misuse of the personal information stored, and even the fact that physicians might not be able to access a patient’s record during a power or computer outage.
Even some physicians see a downside to EHRs. In a recent study by the American Medical Association, some physicians complained that EHRs increase their data entry responsibilities and requires them to perform added, time-consuming tasks.
What are the advantages of EHRs?
With EHRs, the chance of medical errors should be reduced because the accuracy and clarity of medical records is improved. When a vast amount of patient information is available in one place, it also should reduce test duplication, in turn reducing treatment delays and helping patients be better informed to make better decisions.
Other advantages of EHRs range from conservation of storage space to the fact that EHRs make patient information accessible from remote sites to many people at the same time. EHRs can make communication between health care providers easier and better, and the information is less likely to be lost or destroyed.
Are there any disadvantages to EHRs?
Disadvantages would include the initial expense, the unwillingness of employees to adapt to the new technology and the need for additional maintenance. The cost of starting an EHR system can be excessive, especially during a time when health care organizations are extremely concerned about higher prices. But it also can be argued that EHRs will ultimately reduce costs and improve quality by helping providers and patients be better informed, by eliminating costly and unnecessary duplicate tests and by helping to better coordinate care.
How can resistance be overcome?
Basically, patients need to be educated to the fact that EHRs will not replace their personal physician. EHRs just help their physician do a better job. Nothing can replace the critical thinking ability of a physician. What a well-designed EHR system can do is collect and disseminate information and assist in decision-making. ●
Insights Health Care is brought to you by UPMC Health Plan
Relocation can be a challenge, but careful planning can be the difference between a move that’s difficult and one that’s smooth.
“When managing an office move, a move consultant’s objective is to minimize disruption in the workplace and quickly return the office to a normal workflow,” says Patricia Meyers, marketing manager at SMC Consulting, LLC.
“No two moves are exactly the same. However, there are basic activities that need to take place to ensure an effortless transition,” she says.
Smart Business spoke with Meyers about how to effectively manage a move from one office to another.
What does a move management consultant do?
Whether you are moving an entire office, co-locating a cross-functional group or just reorganizing an office, a move management consultant can provide the appropriate plan and execution. An effective move management consultant will streamline the move process to ensure a successful relocation with minimal organizational disruptions, relieving the burden of coordination and implementation of the move while saving the customer time and money.
Move consultants simply enjoy the challenge of putting puzzles together. A move, like a puzzle, requires a process in order to execute the plan. You look at the whole picture — or in the case of a move, the old and new floor plans — then look at each small piece to find out where and how each needs placed to complete the picture.
What unique services can a move management consultant provide?
Experienced move consultants prioritize and manage a move by creating detailed plans and timelines for each of its phases, then communicate that plan to the customer and all associated vendors. Coordination, communication and scheduling all pre- and post-move activities will ensure a successful move.
Move management consultants might also be known as change managers. Change is not always viewed in a positive manner. Making the transition from an old, secure office space to a new, unfamiliar one is sometimes difficult and stressful for employees. The move management consultants will communicate on a regular basis to keep everyone informed as to progress and expectations. Employees who feel they are informed tend to embrace change, making the move less agonizing.
What do companies need to plan for when relocating?
There are many components to consider when relocating. Expect to have a solid and well thought-out plan of attack, and a move consultant who can execute that plan. Coordination and planning of movers, furniture, computers, phones, employee communication, office supplies and even the vending is critical to success.
As companies decide how they’ll execute a move, they should also consider:
- Consultant’s time vs. employees’ time — Put the move in the consultant’s hands leaving time for your employees to handle the day-to-day business.
- Experience — Productive processes and no loss of time.
- Programming — Collaborating with all involved to assemble the puzzle.
- Strategic planning — Making sure all parts fit together and knowing how to execute.
- Execution — Implementing the strategic plan and managing every detail to ensure a successful move.
- Attention to detail — Taking inventory of existing equipment, disposing of old and unused equipment, satisfying lease close out requirements.
A move consultant will help your company achieve cost savings by providing you with one point of contact who can reduce risk, time, cost and employee downtime. Ultimately, you want your employees to leave their old office on Friday and enter their new office on Monday ready to begin work with minimal disruption. ●
Insights Facilities is brought to you by SMC Consulting, LLC
The Patient Protection and Affordable Care Act (PPACA) made sweeping changes to the insurance industry landscape.
“Business owners and HR professionals will need to be in compliance with the rules and regulations set forth by PPACA. And, individuals will have increased questions about the health insurance marketplaces, individual mandate and underwriting,” says Michael Galardini, sales executive at JRG Advisors, the management arm of ChamberChoice. “As a result, employee benefits professionals will be asked to help guide both businesses and individuals through the changing marketplace.”
Smart Business spoke with Galardini about employee benefits trends small and large employers can expect to see in 2014.
What changes will small employers face?
Small employers, categorized as any employer with fewer than 50 full-time employees, will see a drastic change in 2014 in the way health insurance rates are developed for each group. Before PPACA, insurance companies could develop rates based on gender, industry, group size, health status and medical history. Post PPACA, small group rates are no longer rated, and small group insurers will only be able to vary premiums by family size, geography, tobacco use and age.
With the changes in underwriting, there also will be changes to the plan designs being offered to small employers. The establishment of Health Insurance Marketplaces and their product offerings has created a change in product design. The plan designs being offered are 90 percent, 80 percent, 70 percent and 60 percent coinsurance plans, which share the financial responsibility with the employees. These plans create larger out-of-pocket costs that most individuals are not accustomed to paying. Particularly in Western Pennsylvania, the population as a whole is most familiar with rich plan designs with no coinsurance, low deductibles and copays.
Explaining these product differences with a one-on-one approach is important to help each individual understand how his or her plan works. The business owner and/or HR professional as well as an outside advisor need to engage each employee to ensure everyone properly understands the available solutions.
What can large employers expect to see?
Large employers or those with 50 or more full-time employees also will notice significant changes in the future.
Beginning in 2015, large employers will be required to offer coverage to employees working 30 hours or more a week. There also are requirements to the type of plan that must be offered to these individuals as well as a contribution limit. The plan design must be at least a 60 percent coinsurance plan, and the employee’s contribution cannot be more than 9.5 percent of his or her household income. There are two fines an employer could receive:
- Penalty A: Employers that do not offer coverage to full-time employees (working 30 hours or more a week) will be subject to a penalty equal to $2,000 per full-time employee minus the first 30.
- Penalty B: Employers that offer coverage that is not of minimum value or not affordable (or both) will be subject to a penalty equal to $3,000 for every employee who receives subsidized coverage through the marketplace.
Large employers should be talking to their advisor in 2014 to determine if they will meet these guidelines.
Are there any other upcoming changes?
Lastly, and probably most significantly, is the individual mandate. Individuals are required by March 31, 2014, to have a qualified health insurance plan or pay a fine. The fine for 2014 is the greater of $95 or 1 percent of income. Individuals can purchase insurance through the marketplace or directly from an insurance company. The marketplace could offer a subsidy based on an individual’s income to help pay for premiums.
A qualified advisor will be well versed on the products available to individuals and business owners. The changes due to PPACA provide more options to purchase health insurance products, but the marketplace for health insurance is ever changing. Business owners and HR professionals need to be aware of when these changes occur and how they can impact their business. ●
Insights Employee Benefits is brought to you by ChamberChoice
Most business owners rely on their computer systems and technology to keep their companies humming. When technology stops working, the business stops working. Even a relatively “simple” problem or question could involve hours of troubleshooting, resulting in unplanned downtime and expenses.
Proper management of technology can not only minimize pesky tech issues that drag down productivity and drive up costs, it can maximize productivity and help a business grow. But the time and financial resources necessary to manage IT in-house are making outsourcing increasingly attractive and beneficial.
“Also known as a Managed Services Provider (MSP), an outside IT provider can take over the day-to-day management of your IT needs,” says Kevin Conmy, regional vice president of Business Services at Comcast Business. “A good provider can offer set-up, maintenance and proactive IT management, as well as troubleshooting for questions or problems whenever they arise.”
Smart Business spoke with Conmy about key questions to ask when choosing a MSP.
Do they understand your business and technology?
You want a provider who already works with businesses like yours — who knows the technology, software and hardware. Be specific about your set-up, and ask directly: Does the provider understand networked printing? Are they familiar with the programs you work with? Can they work with PCs, with Macs, with servers? What about mobile devices or combinations of printers, scanners and routers?
Can they support you remotely?
It may seem comforting to have a technician come to your office, but the convenience and speed of remote service and support is invaluable as it’s often faster and more efficient. For example, if you’re experiencing a problem and your provider can talk an employee through diagnostics, resets or other procedures on the spot, it often resolves issues without an in-person visit.
In other cases, a provider can use the Internet to access your systems and networks remotely, with permission, to reset routers, change network settings, scan systems for viruses and malware, or reinstall software and handle many other problems in far less time.
That said, there will be times when you need on-site support, such as when you’re setting up new equipment, resolving physical issues with networks or moving equipment. You need a provider who can deploy on-site technicians promptly, to any of your locations.
Do they work nights and weekends?
When do you most need service and help? If you are in retail, hospitality, transportation or any other industry where 9-to-5 doesn’t apply, you need a provider who is 24/7. Or, maybe the only time you can stop for service is outside of your working hours. A provider who is daylight-only may increase prices for after-hours and holiday support. They may provide limited services or slower response after regular business hours. That can hamper — and cost — you.
Do they offer preventive, proactive help?
It’s best to have a prior relationship with an IT provider. When your network crashes or computers go dark, that’s not the time to start hunting for help. You want a resource you know, and who knows you.
Second, ask what preventive services an IT provider has to help spot potential problems before something breaks. This can involve scanning your computers for rogue code, and troubleshooting and testing your network for performance issues.
How do they charge?
It may seem prudent to arrange for support on an a la carte basis, but when something breaks that practice can be unpredictable and costly. And it’s especially irritating when the problem could have been prevented.
A better option is an all-inclusive monthly subscription fee — either per user or for the entire business. This fee can include the immediate services that may be required, along with some combination of proactive and preventive services, data back up, hosting, etc. The costs are more predictable no matter what occurs, and it’s easier to predict the costs of adding more users, and computers. As your business grows, you need a solution that can scale with you. ●
Insights Telecommunications is brought to you by Comcast Business
E-risk. Data and network security. Cyber liability. There are as many names for insurance that covers privacy and Internet liability as there are insurance companies.
In general, “cyber” is a catchall phase referring to use of computers, the Internet, networks and electronic data, says Jan O’Rourke, CPCU, RPLU, ARM, assistant vice president and director of client services – specialty division at ECBM.
“I don’t know of any responsible business that would operate without standard insurance coverage — general liability, auto, workers’ compensation and property — to protect the business against financial loss, and possibly ruin,” O’Rourke says.
“With the evolution of computer usage, cyber exposures are growing rapidly. For many businesses, their chance of a loss occurring due to a ‘cyber’ type claim is greater than a loss covered by standard coverage,” she says. “Yet many executives don’t seem concerned about the risk, and still don’t think they need cyber coverage.”
Smart Business spoke with O’Rourke about cyber risks and how insurance has become necessary to cover this exposure.
Do general liability policies provide any kind of cyber coverage?
Years ago, some cyber coverage could be found under the general liability and property policies. Those days are gone. Most insurance companies have added specific exclusions to eliminate any chance of coverage for cyber claims. The exclusions wipe away any doubt about coverage.
Who and what is at risk?
Any business that uses computers, stores personally identifiable data (even if only for employees), communicates electronically and maintains a website or social sites, among other functions, has a risk exposure.
Risks include third-party liability arising from failing to safeguard confidential private information of others, damage to another party’s computer network, infringement or personal-injury-type offenses communicated electronically, regulatory fines and penalties — such as payment card industry compliance, HIPPA and other federal and state regulations — and the cost to defend any of these allegations.
Also, a company that has a cyber attack faces first-party losses, such as the costs to notify persons affected by a privacy breach, including notification, credit monitoring and other services; crisis management event expenses; the cost to restore the computer system and network; and the loss of money, securities or other property from the computer fraud or fraudulent funds transfers. Additional expenses could come from e-commerce extortion, the loss of income due to computer systems not operating, and the costs for experts, forensic, legal or others needed after a breach or other incident occurs.
A 2012 cost study of 137 cyber breaches by NetDiligence found that an average breach cost $3.7 million, ranging from $2,000 to $76 million. The average cost per record was $3.94, with an average of 1.4 million records exposed in a breach.
How can companies benefit from cyber coverage?
One of the most important benefits is not payment of the loss; it is access to the insurance company’s expertise, including assistance after a loss occurs. The carrier knows the laws in each state regarding how notification must be handled, such as whom to notify and in what time frame. It has access to cost-effective legal, forensic and other specialists.
The insurance company also offers access to specialized websites that provide tools, tips and resources to prevent a cyber loss in the first place. Just reading the questions while filling out the application for this insurance provides food for thought.
It’s important to note that the only standard thing about the insurance market for cyber coverage is the fact that every insurer offers a completely different product. Cyber insurance premiums vary more than any other insurance line — as low as a few hundred dollars for the most basic extension to a policy, up to more than several hundred thousand dollars for the largest companies in high-hazard industries, such as health care, education and financial institutions.
You’ll need to utilize the expertise of your risk manager and/or insurance broker to analyze your specific business exposures and recommend the appropriate, broadest coverage for you. ●
Insights Risk Management is brought to you by ECBM
By definition, the term “waste” is an act or instance of performing or spending carelessly, extravagantly or to no purpose. Despite the negative connotations surrounding waste, many businesses are seeing waste as an opportunity.
Successful businesses are actively engaged in the identification and reduction of waste in processes, says Robert S. Olszewski, a director at Kreischer Miller.
“Processes either add value or create waste to the production of a product or service,” says Olszewski. “Waste can account for up to 30 percent of the operating costs of an organization. Unfortunately, waste has become accepted by many as what normally happens. Most businesses put significant energy into increasing sales. However, pushing more business through an inefficient system makes no sense.”
Smart Business spoke with Olszewski about the process and enhancing the probability of reducing waste.
Are there common areas of waste in a business?
Waste reduction is one of the most effective ways to increase profitability in businesses. Prior to jumping into the issue identification process, it is important to comprehend what waste is and where it can be found. Toyota, after years of work to remove waste, identified the most prominent ones. The seven most common wastes identified by Toyota include overproduction, waiting, transporting, inappropriate processing, unnecessary inventory, motion and defects.
As we facilitate activities surrounding the waste reduction process, we often find that the key areas of waste are clear to all levels within the organizational structure. The elephant in the room needs to be addressed.
Is there a process businesses can use to reduce waste?
Conducting a waste assessment is the starting point, which generates a wide range of issues. With so many issues requiring attention, the project can be overwhelming. Therefore, ranking priorities enables the most important issues to be dealt with first; focus on the issues that have the greatest combination of economic benefit and ease of correction.
Start with the end in mind by establishing mutually agreed upon key performance indicators to monitor the effectiveness of the change being implemented or the impact of issues being addressed.
Who should be involved in waste reduction?
Waste reduction is not a task for a single individual; formation of teams is essential. Teams are not spontaneously generated, they require lots of hard work. It is unrealistic to believe your team will network and instantly reach peak performance.
Teams go through four distinct stages: honeymoon period, power struggle, working through frustrations and settling into a high performance mode. Don’t worry when the team enters into a power struggle, as conflict is normal; don’t take it personally. Change should be welcomed and the probability of success may be enhanced with an independent third party facilitator.
What are the most common issues you have observed in the process?
First is overcomplicating the process. We recommend isolating the significant few from the trivial many. You must be laser-focused on the issue and define where you are now, where you want to be, and form strategies on how you are going to get there. Do not get overly excited about where you are now and begin attempting to correct it. Be certain to define where you want to be in order to define and enjoy the success.
Second is accountability for results. Construct a one-page plan that highlights key action items, responsible parties and timelines. In addition, we recommend performing routine assessments for accomplishing mutually agreed upon goals and expectations. ●
Insights Accounting & Consulting is brought to you by Kreischer Miller
When the recession set in a few years ago, companies saw their valuations decline as the money supply tightened and the acquisition market dried up. Business owners who put exit strategies on hold might find that now is a good time to revisit that option.
“Having worked in the private equity space, I’ve noticed that deal making has picked up. Owners should be looking at the values of their companies because they could be back at or even above previous levels,” says Bryan Graiff, CPA, CGMA, principal, Financial Advisory Services at Brown Smith Wallace and a specialist in transactions and business advisory services.
“The expectation from many experts is that 2014 should be a busy year for acquisitions, which makes it a good time to plan an exit strategy,” says Graiff.
Smart Business spoke with Graiff about exit strategies and the first step toward selling a business — a professional valuation.
What is the first thing a business owner should do to ensure a successful exit?
The first step would be to have a professional valuation report done to provide a measuring stick of what the business is worth. For an owner looking to exit in a few years, the valuation analysis is still worth doing since it can help identify value drivers you can focus on to improve the business and increase its future value.
Does that mean owners should have already done this if they want to sell now?
It’s not too late to start the process, have a valuation done and see if you want to sell your company. If the valuation is a number you’re willing to exit for, then you can take the next steps. But you may also find 2014 is a good year to reassess where you’re at and look at what can be improved in the next few years.
What if a company is in need of restructuring or on the verge of bankruptcy?
Some companies used resources to weather the storm, adding debt to survive, and could be headed toward restructuring or bankruptcy if sales continue to lag. It’s time to make improvements and bring in an expert adviser to develop a new growth or cost reduction strategy before it’s too late. The right strategy and execution plan will not only add value and increase investment options, but will comfort creditors and banks, showing that the company is serious about making improvements.
Will some owners sell now because values are back to pre-recession levels?
The future is always uncertain and every owner has different goals, but if an owner’s business is back to its pre-recession value or at a valuation level he or she is comfortable exiting at now, they should certainly consider the next steps.
What are the next steps if you decide to sell?
Plan and prepare before moving to market. Sit down with tax and estate planning professionals to discuss the effect a sale could have on the estate, and most importantly, fully understand what your goal is in considering an exit strategy. If your goal is to exit for a certain amount of money and retire on a beach, that’s one thing. If it’s to sell a portion of your business, but still be involved in some capacity, that’s another. Regardless, if an exit strategy of some sort is desired, have a quality of earnings analysis performed on the historical financial statements that covers the last three years. Although a buyer will conduct its own due diligence, having a reputable firm do a quality of earnings analysis will add credibility and provide more substantiation to the valuation report, which will help support the basis for the asking price. It also might uncover issues that can be addressed before a buyer comes in. If a buyer discovers issues with financial information, it could kill the entire deal. Quality financial statements may not necessarily increase the sale price, but poor quality or inadequate information is almost sure to have a negative impact.
Once your financials are in order, find a reputable broker to market the business — they’ll promote a more competitive bidding process, which will drive up the sale price.
The next year will be pivotal. Business owners will better position themselves for whatever occurs by understanding the value of their company, conducting sound strategic planning and making business improvements. ●
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