Disasters, both manmade and natural, can strike at any time, at any place. And if you’re not prepared, your business might be forced to close — which, even if only temporarily, could lead to devastating consequences.
Ravi Sundara, partner and firm manager at The Stolar Partnership, says that a comprehensive disaster recovery and business continuity plan is key to ensuring a business’ survival in the wake of a catastrophe.
“With proper planning and preparation, a business can place itself in a better position to ensure that it will continue, even in the face of disaster, which is important to a business’s customers, employees, management, owners, business partners and markets,” says Sundara.
Smart Business spoke with Sundara about how to be proactive, the legal issues that may arise if you are unprepared and the importance of having off-site backup.
How can preparing for the worst-case scenario help a business re-emerge from a catastrophe?
Proactive planning and preparation are extremely important in helping to ensure business continuity when disasters or other major business interruptions occur. Everyone is familiar with fire, tornado and other disaster drills. The reason we go through those drills is so that we know in advance how to respond, rather than trying to figure it out on the fly in the middle of a disaster. A disaster recovery and business continuity plan serves the same purpose for the business.
What steps can business owners take to prepare for disaster?
It is important to have insurance coverage for loss of property, liability and business interruption. Also, you should have contracts and alternatives in place to deal with disasters that might happen elsewhere that can affect your supply chain. Take, for example, the recent tornado in Joplin, or the earthquake and tsunami in Japan. Your business may be dependent on other businesses to supply it.
Make sure you have alternative vendor arrangements, or have at least identified where you would turn if a current supplier is unable to deliver shipments. For disasters that directly affect the business, options should be in place for temporary office or plant locations, as well as alternative communication methods. If the phone systems go down or there is no cell phone coverage, how will you communicate? This is important not only for internal communications but external, as well.
What types of legal issues commonly surface for businesses that have been affected by a disaster?
There are a number of legal issues, including contractual issues, regulatory compliance and negligence claims. Contractual issues involve fulfilling obligations to customers in the aftermath of a disaster. If a business is unable to fulfill its goods or services obligations, does it have contracts that require it to come through regardless of the circumstances? If so, it could be in breach of its contract.
If there is a force majeure clause — commonly thought of as an Act of God clause, but broader — the business may be let out of the contract or given an extended period to perform. Even if there is a force majeure clause, however, the business might still be responsible for performing if it could have reasonably planned for foreseeable, yet uncontrollable, circumstances, such as a power outage.
Negligence is a failure to act as a reasonably prudent person would under similar circumstances. Failure to plan for reasonably foreseeable disasters could allow customers, employees or others to bring legal claims asserting negligence based upon the failure to undertake reasonable planning for disasters.
In addition, directors of a corporation have a fiduciary duty of care owed to the corporation, and the failure to undertake reasonable business continuity planning to address foreseeable disasters could be a breach of that duty for which the director may be held liable.
How important is it to back up computer data frequently and keep a backup tape off site?
It depends upon the nature of the business and the type of data that is being stored. In other words, how much data could the business stand to lose and still be able to function? It could be a day for some businesses, and it could be an hour or even just minutes for others.
Off-site backup is very important because if a disaster strikes and disrupts your main systems, and if the backup is located in the same location, the backup could very well be destroyed, as well. This is why many businesses that have good disaster recovery and business continuity plans often use data centers located in other regions of the country for their off-site backup needs.
How do disaster recovery plans and business continuity plans differ?
Disaster recovery — involving data, information and documents — is really one piece of a broader business continuity plan. A business continuity plan includes those essential functions that a business needs to perform in order to continue operating. It covers identifying items such as employees’ roles and responsibilities, systems and data recovery, temporary locations, alternative communications, alternative modes of transportation and funds management. Some companies, such as financial institutions, may be legally required to have both a disaster recovery and a business continuity plan.
How often should a disaster preparedness plan be reviewed?
At least once a year. Contracts change, needs change and technology changes. The last thing you want is to have a disaster occur and when you pull out your data recovery/business continuity plan, you find that most of the items are no longer relevant, making the plan useless when you need it the most. Finally, it should be tested periodically, even if that simply means walking through it with your top management and staff.
Ravi Sundara is partner and firm manager for The Stolar Partnership. Reach him at (314) 641-5143 or firstname.lastname@example.org.
Historically, employers have learned about potential hires through applications, questionnaires, interviews, references and background checks.
That is changing, however, as more companies are beginning to use social media outlets to vet candidates. But while such sites can provide a lot of information about a candidate, it is important to understand the legal ramifications of researching a candidate online, says Jennifer Raymond, a partner with The Stolar Partnership.
“Employers are reporting that they’re making all sorts of employment-related decisions based on social media,” says Raymond. “But most employers don’t have targeted, written policies addressing what they’re doing with, and how they’re collecting, social media information.”
Smart Business spoke with Raymond about what is permissible when using social networking sites and credit checks to screen applicants, how to keep up to date with hiring practices and how to minimize legal risks.
What are the pros and cons of using social networking sites during the hiring process?
The pro is that you get information that you wouldn’t otherwise get from an interview or a resume. The con is that you get information you wouldn’t otherwise get from an interview or a resume.
You can find inaccuracies in a resume and information regarding a candidate’s judgment by screening social networking sites. But you also might learn information that is protected and wouldn’t normally be accessible to you as an employer, such as a person’s religious beliefs or someone’s health conditions.
You might also find information about someone who drinks alcohol or smokes cigarettes. However, some states, such as Illinois, have laws protecting legal recreational activities, and you can’t make a hiring decision based on that type of information.
What steps should employers take to minimize the legal risks associated with using social networking sites to screen potential employees?
Employers should have written policies governing the screening process that include, among other things, exactly which sites will be searched and who will be doing the searching. It’s critical to develop policies that include examples of what is, and what is not, permissible hiring criteria, acceptable conduct and appropriate information to consider in making hiring determinations. All personnel who will be participating in interviews or participating in hiring decisions should be trained on these policies.
These guidelines must be applied to every candidate. Employers may want to avoid sites such as Facebook because of the risk of finding protected information that a candidate might say was used impermissibly in making a hiring determination. Employers may wish to limit their search to professional sites such as LinkedIn, where they can verify resume information, as opposed to finding out personal, and possibly protected, information about candidates. And whoever is conducting the screening should never misrepresent his or her identity to gain unauthorized access to a candidate’s social networking information, such as by ‘friending’ the candidate or creating a fictitious profile.
Can an employer also reference a candidate’s credit report when making hiring decisions?
This area is in flux due to the downturn in the economy. It has become more of an issue because, for example, the credit score of someone who was laid off could have changed because of unemployment.
The Equal Employment Opportunity Commission (EEOC) and a number of states have been cracking down on an employer’s use of credit reports to make hiring decisions. And while looking at a credit report itself is not discriminatory, it can have a disparate impact on specific categories of people that are protected, such as African-American or female candidates, who may have lower credit scores based on social circumstances.
Not only has the EEOC been increasing its enforcement, but four states have enacted laws to prohibit employers from using credit reports in making hiring decisions, except in certain situations. And Missouri is considering legislation that would curtail the use of credit screenings in hiring decisions. There is even federal legislation that’s been introduced that would amend the Fair Credit Reporting Act and prohibit the use of credit reports, except in certain situations. A good rule of thumb is that if the position requires the candidate to handle money or other financially sensitive information, or if it’s a managerial or executive level position that involves signatory power, then it may be permissible to look at credit report information and use it to make determinations. However, for rank-and-file employees, making decisions on the basis of credit information can be very risky. And it’s going to become even more risky as other states, and potentially the federal government, pass this type of legislation.
If a candidate claims discrimination during the hiring process, how can a company protect itself against a lawsuit?
You’re not going to be able to stop someone from suing you, but you can demonstrate to the courts that you have written policies, that you’ve trained supervisors and decision-makers to follow them and that you have a documented screening process for candidates. This preparation will go a long way toward defeating claims that may be brought by a disgruntled candidate who feels that he or she was treated unfairly.
How can employers make sure they stay up to date with legal hiring practices?
There are human resources publications and websites that post updated information, such as the EEOC and the Department of Labor. But the best way to stay up to date and protect your company is to conduct a regular audit of your written employment policies — including hiring policies — and use the services of a qualified employment lawyer who can make sure you are in compliance.
Jennifer Raymond is a partner with The Stolar Partnership. Reach her at (314) 231-2800 or email@example.com.
Ideas and closely held information, designs and processes are often a business’s most valuable assets, and the law provides companies with tools to protect those assets.
Patent, trademark and copyright laws are the most widely known ways to protect new ideas, but, while lesser known, the laws protecting trade secrets provide the better tool for companies to protect their confidential intellectual property.
“Protecting one’s valuable trade secrets is not only a good business practice, it is also often necessary to maintain the protections afforded by trade secret law,” says Donald Tarkington, the managing partner of Novack and Macey.
Smart Business spoke with Tarkington about how to protect trade secrets and how to make sure departing employees don’t walk out with valuable information.
What information is covered by trade secret protection?
Trade secrets can include technical or nontechnical data, compilations of information, marketing or financial data, manufacturing processes and lists of actual or potential customers. It covers virtually any information that is sufficiently secret that it derives economic value from the fact that it is not generally known and that the business makes a reasonable effort to keep confidential. Even information derived from public sources may be a trade secret if accumulating that information requires significant effort.
Courts look to six factors in evaluating whether information is a trade secret: the extent to which the information is known outside the employer’s business; the extent to which it is known by employees and others involved in the business; the extent of measures taken by the employer to guard the secrecy of the information; the value of the information to the employer and to its competitors; the amount of effort or money expended in developing the information; and the ease or difficulty with which the information could be properly acquired or duplicated.
Do trade secrets need to be registered?
Trade secrets are not registered like a trademark or copyright. Nor are they applied for as with a patent. Unlike ideas that are patented, trademarked or copyrighted — which are protected even though they are publicly known — trade secrets are protected because they are secret and because their secrecy makes the information valuable. As long as the information is secret, used in the business and valuable, it will be protected if the business takes reasonable steps to keep it confidential.
Why is it important for companies to protect their business practices, products, services or intellectual property?
Trade secrets are, by definition, confidential and valuable. They are assets and should be protected. Businesses should be no more tolerant of someone taking their trade secrets than they would be of someone walking out the door with a valuable piece of equipment.
Protecting trade secrets is also important to preserving a business’s legal rights. Under the Uniform Trade Secret Act, information is not a trade secret, regardless of how valuable it might be, if the business does not make reasonable efforts to protect its confidentiality. Businesses’s efforts to protect confidentiality don’t have to be perfect. What is reasonable will depend on the size and sophistication of the parties, as well as the relevant industry. But a business must take affirmative measures to protect the secrecy of its information.
How can businesses protect their trade secrets?
There are several measures a business can take, including marking information as confidential, keeping information in a secure place, restricting access to those who need to use it, password-protecting electronically stored information, developing policies that require employees to keep the information secret and requiring anyone with access to sign a confidentiality agreement. For particularly sensitive information, businesses should work with their data processing professionals to restrict offsite access to electronically stored information and limit the ability to download or copy information.
How can businesses ensure departing employees won’t take trade secrets with them?
As long as information qualifies as a trade secret, the law precludes employees from using that information after they leave. The best protection, however, is to require employees to sign confidentiality agreements in which they acknowledge that the information they were given is confidential and that they will not disclose it if they leave.
Confidentiality agreements can even protect information that does not meet the strict definition of a trade secret. When one employee with access to secret information leaves, disable his or her password and e-mail access and take back company issued laptops. It is also a good idea to review the usage logs on the employee’s laptop and the company’s computer network to see if there is any unusual copying or downloading activity.
If a nondisclosure agreement is violated, what steps should a company take?
If a business learns that someone is disclosing trade secrets to third parties, it should consider taking action against that individual and against the former employee’s new employer. Possible actions include a suit for damages resulting from improper use of information and/or an injunction action against the former employee and new employer prohibiting the use or disclosure of the information.
Knowingly allowing trade secrets to be disclosed to third parties risks damaging a business’s claim that the information is a trade secret. Deciding whether to take action against a former employee or a new employer should be considered on a case-by-case basis, but one thing that should be taken into account is that allowing the trade secret to be disclosed could destroy the value of the information and destroy the business’s ability to seek protection of the information in the future.
Donald Tarkington is the managing partner of Novack and Macey. Reach him at (312) 419-6900 or firstname.lastname@example.org.
Business ownership succession planning means different things to different business owners.
Succession generally involves the transfer of ownership to family members, to employees or to third parties. But, it also involves identifying and balancing the emotional and financial needs of the owner, the owner’s family and key executives with the needs of the business itself. It means developing a plan that satisfies everyone’s needs to the greatest degree possible.
When conducting business ownership succession planning, there are two key aspects the business owner must address, says Tom Venker, chair of the Business and Tax Department at The Stolar Partnership LLP.
“First, the plan must allow the business owner to exit the business at retirement, death or disability according to his or her plans,” he says. “Second, it must provide a means for the business to continue and prosper after the owner’s departure.”
Smart Business spoke with Venker about how to establish goals for a succession plan, the importance of addressing the issue now and not when you have an immediate need, and why you cannot just create a plan and put it on a shelf.
What elements should a succession plan include?
Depending on the needs and goals of the individuals involved and the complexity of the business, business ownership succession planning can be as simple as developing a plan to give voting and nonvoting ownership interests to family members. At the other end of the spectrum, it can be very complex, involving the business’s attorneys, accountants, appraisers, bankers, insurance agents, business brokers and psychologists, and resulting in various legal documents such as shareholders agreements, employment agreements and deferred compensation agreements.
Planning also involves identifying potential roadblocks, such as an inability to find capable management talent among the new owners, pay for new outside management, provide adequate cash to the departing owner, or split the business among family members.
What types of goals should business owners set when creating a succession plan?
Business ownership planning begins with the business owner setting goals. Personal goals may include retiring versus working for life, financial security in retirement, support of a spouse after the owner’s death, provisions for family members not in the business, a buildup of assets outside the business, preservation of the family business for family members who are in the business, purchasing the interests of other owners, establishing charitable goals and facilitating a family member taking over the business.
There are also business goals, including enhancing management capabilities, building financial capacity to implement the succession plan and establishing the business’s future growth goals.
What is the most common mistake that business owners make when it comes to succession planning?
The most common mistake that business owners make regarding succession planning is ignoring it altogether. Too often, business owners think they will control their businesses forever, and, because it can be a difficult topic to address, they defer the planning.
When tackling the planning process, it helps to have all of the advisers at the table, such as accountants, life insurance agents, investment advisers and attorneys. These advisers have the interests of the business owner at heart and can help the business owner understand the benefits of putting a plan in place.
The key is to get a plan started and then modify it over time.
Baby boomer business owners should take particular note and start business succession planning now if they do not yet have a plan in place. As boomers begin to reach retirement age, sales of businesses will likely pick up, which could, in turn, drive down business valuations. Baby boomers whose plan includes selling the business will want to monitor the business sale market to detect any potential downturns.
What estate tax considerations should be taken into account with multigenerational businesses?
If the business is going to be transferred down through the family, business owners need to focus on how to provide liquidity for estate taxes. If the business is going to be retained in the family, owners can use some estate tax deferral rules that are available under the Internal Revenue Code. Other times, if the business has enough cash, stock may be redeemed. Sometimes business owners must rely on life insurance to help provide liquidity. Another option is to sell some of the interests to employees or a third party to provide liquidity.
How often should a succession plan be reviewed or updated?
A plan should be reviewed every three years and updated as circumstances change — when there are changes within the business owner’s family, changes of employees in the company, or changes in the growth of the company.
With any major change, the plan should be reviewed and perhaps updated.
Recently, there have been some succession plans that were contingent upon new owners buying out the departing owner. They assumed that bank financing would be readily available. In today’s banking environment, however, loans are more difficult to secure, so some plans have had to be tweaked to provide flexibility on the financing side.
Tom Venker is chair of the Business and Tax Department at The Stolar Partnership LLP. Reach him at email@example.com or (314) 641-5151.
All businesses, regardless of size or sector, are vulnerable to fraud. And while the types of schemes used to misappropriate funds vary, they tend to share a common thread: They can be extremely costly to a business.
“Fraud can encompass any business, anytime, anywhere and in a vast number of ways,” says Nathan Edmonds, senior partner at Secrest Wardle. “It is estimated that fraud accounts for more than $100 billion per year of incurred losses in the insurance industry alone.”
Smart Business spoke with Edmonds about how to identify fraudulent claims and reduce your risk of them, and about the importance of working closely with your legal team.
What types of fraudulent claims are businesses most frequently exposed to?
Fraud has been defined as a deception deliberately practiced in order to secure unfair or unlawful gain. Some of the most common types of fraud businesses are exposed to include employees claiming benefits that they are not entitled to — whether it be workers’ compensation or additional compensation for time not worked — and personal injury claims by allegedly injured people on the business’s property or by someone working for the company.
Fraud usually increases as the economy declines and typically declines during prosperity.
How can a company identify its risk for fraudulent claims?
Businesses face many challenges when it comes to identifying, resolving, mitigating and preventing fraud. There is a tremendous amount of information that must be gathered and analyzed from internal and external sources.
Additionally, businesses must continually adapt detection techniques and processes to new and evolving fraud patterns. A business should identify its risk by using historical data regarding prior claims losses.
Training of personnel is key in identifying red flags or indicators of fraudulent activity. If you doubt the validity of a claim or any circumstances surrounding it, gather all information immediately and document it. Remember that proving fraud is difficult, and it is a problem that businesses constantly grapple with.
What steps can a company take to reduce its risk?
The best manner in which to combat fraud and reduce risk is to thoroughly investigate the claims where fraud is suspected and promptly and fairly pay meritorious claims and vigorously defend claims without merit.
If a clear and strong message is delivered to all individuals that fraud will not be tolerated, this can be the strongest reduction of risk. No matter how small, take the approach that all fraud will be dealt with seriously.
Additional suggestions for reduction of risk include adding surveillance cameras that record all events where suspected fraudulent events occur, such as hotspots, repeated claim sites and high-traffic areas; establish seminars to inform employees about fraud and how to deal with suspected fraudulent activities; screen employees before they are hired and use exit interviews; display fraud awareness and prevention posters or literature; and display the National Insurance Crime Bureau phone number, (800) TEL-NICB.
Also, ensure your initial response to any alleged fraudulent activity places you in a position of strength. Look for indicators of increased risk at every stage of a claim, such as aggressive behavior, suspicious circumstances such as a delayed claim or delayed medical treatment, and inconsistencies in reported events.
What can a company do if it believes it is the victim of a fraudulent claim?
If a business believes it has been the victim of a fraudulent crime, the most critical aspect is documentation. As time progresses, memories of events are lost, things are moved and items are replaced. Thus, it is imperative to collect as much information as close to the actual fraudulent event as possible.
Once you gather all the information, contact an attorney, and then law enforcement is critical. Law enforcement may not make the claim a high priority, and it will typically become a civil matter in which legal representation is required to attempt to recover or prevent a claim from being made.
Prepare a list of questions that will help you establish the details of the fraud. Ask for answers in writing so they can be used as evidence. Obtain the name, address and phone number of every witness. Request photographs and sketches to document the fraud and obtain medical records if it is an injury claim. As the old saying goes, ‘The devil is in the details.’
Why is it important for a company to develop an action plan with its legal team?
In dealing with fraud, the attorney is a critical part of the team. The attorney who has handled fraud either for a victim or in helping recover assets from fraud can alleviate many pitfalls and spot issues to avoid legal difficulties.
Counsel can also open avenues to law enforcement for potential prosecutions of individuals who committed fraud. The legal team is part of the entire position of any business’s approach that fraud will not be tolerated.
If a business tolerates fraud, it will only serve to be a target of more frequent activities, which will grow in scale. Typically, fraudsters will test out a business by small activities and, if undiscovered, will then grow bolder with no repercussions.
nathan edmonds is a senior partner at Secrest Wardle. Reach him at (586) 465-7180 or firstname.lastname@example.org.
In order to prosper in this challenging economic climate, it’s important to have a professional wealth manager who understands your goals and objectives. Such an adviser can help you build a long-term investment plan with diversification across multiple asset classes.
For optimal results, communicating regularly and directly is paramount.
“As an investor, don’t be afraid to ask questions. And don’t be afraid to say, ‘No, that’s not the strategy that I want,’” says Dennis Gilkerson, senior vice president and Western Market group manager for Comerica Bank. “A portfolio manager works for the client.”
Smart Business spoke with Gilkerson about how to recession-proof wealth, why it’s important to have ready lines of credit and what to look for in a portfolio manager.
What steps can individuals take to recession-proof their wealth?
In order to recession-proof one’s portfolio, it’s important to look at capital preservation and deleverage as much as possible. What I mean by this is paying off excess debt, such as home equity lines of credits, unsecured lines of credit and credit cards. It’s inevitable that we’re going to have mortgage debt and automobile debt, but as we work to recession-proof our portfolio, building liquidity is paramount.
Why is it so important to have ready lines of credit?
Having a line of credit available provides cash flow for emergencies. I tell my clients it’s like an insurance policy on your income or cash flow. It’s important to maintain some type of a line of credit so you can meet unanticipated expenses; however, you want to make sure that you have the ability to repay it within a relatively short period of time. In this recession, things are happening so quickly. It’s easy to find our income adversely impacted. A line of credit is a backstop.
Credit is currently tight; do you have any recommendations?
It’s critical to maintain one’s present obligations. A ready line of credit will not help someone if he or she suddenly stops making credit payments. In order to obtain or even retain credit, it’s also important to establish a relationship with a bank that is going to be there for the long run. We talk to a lot of clients that have multiple banking relationships. As one of the commercial banks currently lending money, we find that it’s helpful to consolidate banking relationships into one place. An individual’s balance sheet is composed of the liquidity, or cash piece, as well as the liabilities side: credit lines, mortgages, automobile loans, etc. By consolidating all of these pieces, your financial institution will be able to do more for you.
How should one go about evaluating one’s investment portfolio?
In this environment, it’s important to be actively involved with your portfolio manager. Even if your portfolio manager has discretionary authority — they can buy or sell based on their investment strategy — it’s important to communicate on at least a quarterly basis. Individuals who fail to communicate with their portfolio manager have greater exposure to volatility.
What advice would you give to someone who has available cash on hand?
First, ask yourself if you need the cash for short-term needs. Are there upcoming life events, such as paying college tuition, having a child get married or a business opportunity requiring an outlay of cash? If so, the advice is to hold on to that cash — keep it in relatively short-term, liquid instruments like a money market or CD.
On the other hand, if there isn’t an immediate need for cash, you need to evaluate your appetite for risk. If you’re comfortable owning equities for the next five years or so, there are some good equity strategies available to execute. If you’re not comfortable with the equity strategy, there are some solid short-term, fixed-income instruments that can match a life event and one’s level of risk tolerance. There are some great opportunities available for someone who has cash and a long-term outlook. That’s why it’s important to have an investment adviser or portfolio manager that you feel comfortable communicating with.
What qualities should an investor look for in a portfolio manager?
There are a number of attributes an investor should look for in a portfolio manager. One is longevity. For example, if a portfolio manager who has spent decades as a large-cap growth manager suddenly appears as a fixed-income or small-cap adviser, it should raise a red flag. The ability to communicate effectively is also important. Are you able to understand the strategy that the portfolio manager is executing? Are you comfortable with the portfolio manager? Do you trust the person?
Finally, there is performance. I put performance as the last on my list, not because it’s the least important but because portfolio managers need to have longevity in the particular discipline they’re focused on and experience in the industry, and you have to be able to communicate with them. These screening criteria can be helpful whether you’re evaluating your current portfolio manager or looking for a professional wealth manager.
Dennis Gilkerson is senior vice president and Western Market group manager for Comerica Bank. Reach him at (310) 712-6767 or email@example.com.
Against the backdrop of a gyrating equity market, it is important to have a professional wealth manager who understands your goals and objectives. Such an adviser can help you build a long-term investment plan with diversification across multiple asset classes.
“Liquidity and transparency of investments should be a priority,” says Sandro Rossini, senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. “Many managers have traditionally felt that there was no place for cash as an asset class. The recession has taught us the importance of cash.”
Smart Business spoke with Rossini about how to recession-proof wealth, the benefits of ready lines of credit and what to look for in a portfolio manager.
What steps can individuals take to recession-proof their wealth?
During this recession many families and businesses have witnessed their wealth evaporate in a relatively short period of time. While this is terrifying we do have to remember that recessions are followed by recoveries. The recession officially began in December 2007. The average recession lasts about 10 months, so we’ve already exceeded the average recession period by several months, but at some point, we will recover.
The first thing I would recommend is building up reserves of cash and credit to cover the risk of reduced income. Right now cash is king. No. 2, evaluate your investment portfolio in defense against any further drops. Thirdly, I would reduce costly debt. Rates are now at historic lows; refinancing or restructuring a loan or line of credit can save a lot of money. Finally, be cautious with expenditures. If your income level is good, you can quickly build up your reserves by tightening your budget.
Why is it so important to have ready lines of credit?
Credit permits individuals and businesses to continue to manage their expenses if income levels dip. Tapping in to credit in place of selling a depressed investment can allow you to recover losses or even generate a nice profit when market prices rebound. The DOW was down more than 30 percent for 2008. That means if you had invested $100,000 in the DOW index in January, your portfolio would be worth less than $70,000 by year-end. If you were unfortunate enough to need this cash and sold your positions you would have locked in these losses. However, beginning in March of this year we saw a nice rally in the markets. From March 9 through March 30 the DOW rose about 20 percent. If you had borrowed this money at, say, 5 percent, from December through March it would have cost you about $1,250. In this scenario, credit has just saved this investor a lot of money. The same investment scenario might also apply to real estate investments. Sometimes it makes sense to establish a line of credit rather than sell depressed investments.
Often, the most ready source of credit can be had by tapping in to the equity of your home. Many banks offer these with little or no upfront fees. They’re not as plentiful as they were in the past, but banks still prefer lending with collateral, and the house you occupy is still considered some of the best collateral. A home equity line of credit permits you to pay interest only when you use it, and in many cases, there are no annual fees for maintaining a line. It’s a nice insurance policy for emergencies.
How should one go about evaluating one’s investment portfolio?
The solvency of many organizations is in question right now. Many well-known companies are at risk of meeting obligations to their bondholders. Many stock prices have dropped by as much as 50 percent. If you haven’t had a professional evaluation of your portfolio, now is the time. You should work with a qualified investment adviser. Most of our clients feel more comfortable working with someone who is compensated by a fee versus a commission.
There are many ways to identify a skilled investment adviser. One of the most respected professional designations is something called a Chartered Financial Analyst, or CFA. This is a three-year program that requires one to study for and pass three levels of rigourous exams.
What advice would you give to someone who has available cash on hand?
Establish an investment account and devise a strategy. By this I don’t mean dump all of your cash in equities tomorrow. Rather, position yourself for a quick entry so that you can take advantage of a market recovery. Bear markets are generally followed by bull markets, which means at some point we will see a significant recovery and you want to be ready. You also want to have a sell strategy. It’s not enough to pick good investments and wait. Investors and their advisers need to constantly monitor the quality of their individual holdings as well as the surrounding economic conditions.
What qualities should an investor look for in a portfolio manager?
This is an excellent time to interview managers. Ask them to describe how they fared during this difficult market. Does the manager have a well-defined investment process? The traditional buy-and-hold strategy hurt many investors over the past couple of years. Managers who focus on evaluating asset classes — as well as the risk-reward profile of those asset classes — have fared much better.
Sandro Rossini is senior vice president, regional manager of Wealth and Institutional Management at Comerica Bank. Reach him at (415) 477-3212 or firstname.lastname@example.org.
If your current bank doesn’t understand your business, it may be time to find a new financial partner. In today’s challenging economic climate, it’s crucial that your bank is familiar with your market and understands the need for prudent long-term investments.
“When the customer and its bank are aligned on the fundamental questions, it’s possible to structure a banking solution that carries the business through tough times,” says Edmund Ozorio, senior vice president of Comerica Bank’s Western Market.
Smart Business spoke with Ozorio about selecting a bank in uncertain times, the importance of finding a good fit and how to go about evaluating a financial institution.
Why is the selection of a banking partner so important today?
It’s really a question of fit: How well does your bank fit your company and your banking needs? This fit has always been important, but in today’s environment, it’s doubly so. With the current stress on the economy, there may be stress on your company, on your industry and on your bank, as well. Because in times of stress, people and companies fall back on their basic values and philosophies, a bad fit is quickly exposed in uncertain times and can easily lead to difficulties in your banking relationship.
What do you mean by a good fit?
A good fit is where a bank’s core market and philosophy match those of its customer. A bank needs to understand your market, current business, specific business environment, your goals and your tolerance for risk. Your bank needs to be certain that its lending and credit philosophy can support your business and plan through not only likely deviations from the plan, but also unexpected setbacks. A good fit is when expectations are aligned before problems occur.
For example, a bank experienced in equipment distribution will understand that sales will be declining now. The more fundamental questions might be how to continue to invest in certain business lines that show long-term promise and how quickly inventory levels in less-promising segments should be brought in line with current sales.
How can a bad fit be avoided?
I believe that there are many examples of bad fits that have occurred over the past expansion and period of easy liquidity. Historically, when liquidity is easy to come by, it is deployed beyond the core business — by both the business and the bank.
Over the past decade, many banking customers sought the most credit availability along with the least expensive and least restrictive terms. Many banks sought to grow by increasing volume in noncore areas and by lowering price and loosening terms. When liquidity becomes more restricted, the banks want to exit the noncore businesses, but the company may find it impossible at that time to secure required financing on any terms.
So, avoiding a bad fit means looking beyond the immediate need and immediate offer from a bank — beyond the current pricing and terms. It means analyzing your bank just as a bank should analyze your business.
How should a business analyze a bank?
First, does the bank have the capacity to work with your business during tough times? Second, and more importantly, does the bank have the willingness to do so?
A good start is to evaluate a bank on the following five criteria: 1) Does the bank have the financial capacity to handle downturns? You should start with questions about capital adequacy — how much capital does the bank have in relation to its overall balance sheet? This is generally measured in terms of a percentage of risk-weighted loans. 2) Does the bank have a demonstrated long-term commitment to your industry and size of business? Ask what percentage of the bank’s assets are deployed in businesses similar to yours, and what is the breakdown between retail assets and business assets. 3) In discussions with your local banker and senior bank management, do you feel they have adequately identified the risks of your business? The bank needs to understand the business risks before you can feel comfortable that it has the ability and willingness to handle them. 4) Has the bank successfully negotiated downturns in your industry, and how many? Many banks that have not experienced a sufficiently difficult downturn have not had to make hard decisions about their banking philosophy and core markets. Ask about the longevity of banking relationships through several business cycles. 5) Evaluate the current relationship, which provides a good perspective on a bank’s overall portfolio. If all of the bank’s relationships are structured like yours, will it be willing and able to support your business in a downturn?
How should one start the process of finding a good banking fit?
Start with an evaluation of your current bank on the five criteria, but also build a relationship with several other bankers so you can evaluate them, as well. Ask your CPA or law firm for recommendations, if needed. Look for banks that are organizationally stable — not distracted by an acquisition, capital raising or other exercise that makes it harder to evaluate how a bank will react in the future. Finally, look beyond the current need to how things might look in a few years. Look for banking partners that can help your business now and in the future.
EDMUND OZORIO is senior vice president of Comerica Bank’s Western Market. Reach him at (619) 652-5775 or email@example.com.
Choosing the right bank is critical in today’s gloomy economic climate. As credit markets tighten, it is more important than ever to have a banking partner who can provide the financial resources necessary to help you grow your business.
This decision should not be made in haste, however. Switching financial institutions is one of the most important decisions that any company will make.
“Prior to making a banking change, a company should be absolutely certain that the relationship is over and that options are better elsewhere,” says William Phillips, senior vice president and group manager at Comerica Bank. “Careful consideration should be paid to a business’s current circumstances given the financial markets today and what the upside to making a change would be.”
Smart Business spoke with Phillips about selecting a bank in uncertain times, how to most effectively make a transition and the importance of communication.
What type of service and performance standards should businesses expect from banks?
Much has changed over the past three months. For banks today, there is a premium on liquidity, capitalization and balance sheet strength. Savvy business owners should know the financial health of their banking partners. Beyond that, businesses should expect their bank to offer comprehensive financial services, including cash management services, treasury management products and a wide array of lending products. Lending products can range from loans to finance a business and loans to finance asset purchases to loans to finance property purchases. You need to look further than whether the bank has basic lending capabilities; it should have all the products and services necessary to develop your business.
How can a company benefit from teaming up with a bank that offers a multitude of financial services under one roof?
Working with a bank that can meet all of your needs allows you to improve internal efficiencies. By leveraging one organization’s talent pool and the products and services it offers, you don’t need to seek out additional financial institutions. Having one bank and point person negates the need to retain additional staff to juggle multiple relationships, procedures and policies that can vary from one financial institution to another.
Why is it so important to look for a bank that has a history of supporting its customers through various business cycles?
It is essential to partner with a bank that is going to support its customers in both good times and bad. You want to find a bank that is consistent and reliable in all different business cycles. Avoid financial institutions that aggressively seek to build customer relationships with below market pricing and fees when times are good as they tend to indiscriminately dump customers when portfolios become risky and markets turn. The key is to find a stable institution that has proven itself through both prosperous and lean times.
How can a company most effectively transition from one financial institution to another?
First, companies need to seek out the advice of their financial advisers, whether they are attorneys, CPAs, neighbors, colleagues or friends, and familiarize themselves with the different financial institutions in their geographic area. Lending institutions have different tolerances for risk and size and have specialties and expertise that may be unique to a certain industry. Company leaders should find the time to meet with banking professionals that they know on a personal level or who have made inquiries about servicing their business. It is important to develop relationships and have a backup plan to avoid a costly and disruptive transition. Without a plan, financing options become very limited and expensive. In some cases, when businesses depend on outside financing for day-to-day cash flow, the result can be disastrous.
How important of a role does communication play in sustaining a positive working relationship?
Communication is everything. If you don’t have communication in the relationship, then it is more of a transaction than a partnership. Should a problem arise, you want to be sure that the people you count on to support the business are part of the team and are in the loop as far as key developments, changes and strategies go. Open, candid communication helps grow and foster relationships, which is extremely useful when issues arise, particularly during troubled times. Banks like Comerica that provide financing and cash management services play a critical role in the success of a business. There has to be trust, respect and honesty.
WILLIAM C. PHILLIPS is senior vice president, group manager at Comerica Bank. Reach him at firstname.lastname@example.org or (562) 590-2512.
When selecting a qualified CPA, industry experience always plays a crucial aspect of the determination process. Never is this need more pronounced than in the construction industry, where there are a number of accounting nuances.
“Since the public accountant is often the primary outside adviser to his or her clients, particularly in the case of smaller organizations, the industry experience factor is of considerable importance in the selection process,” says Michael Reiff, executive vice president of Gumbiner Savett Inc.
Smart Business spoke with Reiff about construction accounting, how construction progress and payment schedules should be monitored, and the importance of hiring a CPA firm with experience in the industry.
What is construction accounting?
Construction is the process of organizing materials, labor and capital resources in such a manner as to build roads, dams, buildings, bridges and the like. It is an industry different from all others as well as being diverse within itself. The types of work performed will range from the general contractor who oversees every phase of the project to the specialty subcontractors who perform a specific part of the project, such as the electrical, concrete or plumbing contractor. The size of a project can range from rehabilitating a house to the construction of a superhighway or an office building and shopping complex. Construction accounting is the financial method employed to track the revenue and costs of the project from inception to completion.
What are some accounting requirements specific to the construction industry?
Generally accepted financial reporting in the construction industry requires revenues to be recognized using the percentage-of-completion method, which attempts to match revenues earned in a particular accounting period with costs incurred in the same period. The completed-contract method of accounting, on the other hand, recognizes all the revenue at the completion of the project, which obviously could result in wild distortions in comparing income statements from period to period. The percentage-of-completion method requires the accountant to measure and make judgments concerning the reasonableness of estimates provided by the owner/contractor. Because of the reliance on estimates, the dependability of the estimates needs to be measurable with some precision. Throughout the duration of a project, modifications of the original contract are extremely common — these modifications are known as ‘change orders’ and each change order requires a recalculation of the percentage of completion.
How should construction progress and payment schedules be monitored?
Management of a construction project is key to completing it successfully and profitably. The goal in the industry is to get work by submitting a reasonable and profitable bid and then to complete the project within the parameters set by the original estimate. Each event that occurs during the course of a construction project affects the result of that project, and results affect profits. Each construction project is a separate profit center with its own cash cycle based upon the costs of the activities involved in that project and on payments from the owner, which are determined by contract terms. Typically, the subcontractors will bill the general contractor according to the percentage of completion calculated by costs incurred to the total contract, less a negotiated retainage percentage to be paid at a later date when the entire project is completed.
Why is it important for construction companies to hire auditors and accountants with experience in their industry?
In light of the requirements of the construction industry and its unique accounting principles, auditing requirements and tax regulations governing contractors, the selection of a CPA firm bears significant importance. Investors, credit grantors and surety companies frequently require annual independent audits for construction contractors. Even if they don’t require certified audits, there can be no question that such financial statements can enhance borrowing and bonding capacity. In many industries, the background and experience that an accounting firm has in a particular industry is a key factor in the selection process. With the financial reporting and tax regulations particular to the construction industry, this could not be more true.
How should one go about finding a qualified CPA firm?
Referrals from one’s peers is always the best place to start. Also, the contractor should ask the following questions:
- Does the CPA firm have experience in
the industry and with other contractor
- Are the partners and staff of the firm
knowledgeable about contracting?
- Does the firm have a good reputation
in the community and is it known by and
acceptable to lenders and surety companies?
- Is the CPA firm a good fit in terms of size, geographical location, etc.?
MICHAEL REIFF is executive vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.