Orange County (1091)

Sunday, 31 December 2006 19:00

Buy or lease?

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As businesses grow and seek additional space to house their expanding operations, a question they must frequently consider is whether to buy a building and enjoy the benefits of a rising real estate market or lease a structure and leave the chore of maintenance to someone else.

Business owners often make a default assumption that leasing is the best alternative, says Kenneth Dill, vice president at Cresa Partners Orange County, a corporate real estate advisory firm. But purchasing a building could be a wiser choice, and only a thorough financial analysis can reveal the risks and benefits of ownership.

“Most executives know the ins and outs of their business line extremely well, but are less skilled at making conclusions about the real estate market and developing strategies that help them get the best deal on a property,” Dill says.

Smart Business spoke to Dill about how companies should approach the decision of owning versus leasing commercial property.

Why would someone want to lease a property instead of purchasing it?
Basically, leasing seems attractive because you can execute a lease with no money down, you have no responsibility for the management of the building, and you often have the right to find a sub-tenant to absorb unused space. Also, there are some tax benefits to leasing, and the monthly payment — even with escalation clauses — is predictable.

However, more and more leases are created with increases of 3 percent to 4 percent a year, regardless of where inflation stands. Even under such a scenario, for someone who needs a new building right away, the whole approach just appears less cumbersome. In fact, a business owner who would never consider renting an apartment for his personal use will often consider leasing a building.

What are the benefits of ownership?
In some ways, it’s no different from you or me deciding to buy a house. But often the value is not readily apparent to a business. Among the most obvious benefits are that you can make renovations to the structure; the operating hours are flexible; the problem of complaining neighbors is eliminated; and the costs are better defined and static because your payments stay the same while the mortgage interest is tax deductible. Additionally, you can enjoy the benefits of depreciation, even if it is spread out over decades. And you never have to worry about the landlord not renewing your lease, an especially common problem in markets with strong demand. Remember that there might be someone who will be willing to pay more for your space.

If you believe that the market for real estate will increase, and you can project your company’s space needs for the next five to 10 years, it’s to your benefit to buy.

What are some of the barriers to buying?
The biggest hurdle is securing a down payment while the next-biggest challenge is managing the building. The first issue could be overcome with Small Business Administration loans and other financing mechanisms. However, the key determinant in the decision to buy or lease is the ability of a business to keep generating a good cash flow. What we do is make projections over a 10-year horizon based on market conditions and a firm’s cash flow to determine which option is the best.

How do you do that?
We look at a number of factors such as maintenance costs, the cost of servicing a loan versus a lease, and the net present value of future cash flows. In other words, by understanding all the risk parameters that we can, we’re able to break out in a spreadsheet the costs associated with each option.

Then, there’s the matter of ‘kicking the tires.’ After we personally identify a series of properties, we preview these alternatives to arrive at a short list. The next step is to send out an RFP to select building owners that asks a series of questions about the possible uses and condition of their building. This is valuable because we always want to have something in writing from them in which they assess the quality of their structure. Based on their answers to our questions, we narrow down the facilities to consider. We will tour the building jointly with our client, allowing him to ask the owner questions such as how to re-configure the building to house his operations while we then pinpoint the various real estate issues that could arise from the deal. We also get experts to evaluate the integrity of the buildings under consideration. In the process, we hope to identify areas of concern to a buyer, such as the state of the HVAC units or the electrical wiring.

KENNETH DILL is vice president at the Newport Beach offices of Cresa Partners Orange County. Reach him at (949) 706-6630 or KDill@cresapartners.com.

Sunday, 31 December 2006 19:00

Finding treatment for trauma

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At any time, CEOs and corporate employees may find themselves in need of a trauma center. On an annual basis, the three trauma centers in Orange County treat between 4,000 to 5,000 patients, mostly as a result of blunt traumas such as car accidents or falls.

The difference between life and death following a trauma is time. Survival often rests on how quickly the patient can be seen by a physician and receives the necessary specialized help. Enter the role of the trauma center, which differs greatly from the standard emergency room.

“You can’t go to just any hospital following an accident,” says Frank Nastanski, M.D., associate director of trauma at Western Medical Center Santa Ana. “Its general surgeon might need to be summoned from home, and an hour may be too long to wait for a patient with a bleeding spleen.”

“We are part of a community safety net, and we save lives,” says Humberto Sauri, M.D., medical director of trauma at Western Medical Center Santa Ana.

Smart Business spoke with Nastanski and Sauri about why access to a trauma center is vital and how it saves lives.

What makes a trauma center different from a standard emergency room?
Trauma centers have operating rooms that are set-up for immediate use. They are staffed with operating room teams, including an anesthesiologist and a trauma surgeon who are on duty 24 hours a day seven days a week. We also have specialists on call who can handle any type of emergency situation. These include plastic surgeons, neurosurgeons, replant specialists, pediatricians, urologists and pulmonary cardiologists. Our nursing staff is also certified for trauma, and we have the equipment and the necessary supplies available to treat for trauma, such as blood for transfusions.

In addition to trauma certification, as the professional staff treats more patients, they gain experience and the outcomes are better. Trauma centers have that experience because they are fully dedicated to trauma; they don’t dabble in it. In addition, they are required to take extra educational units every year in trauma treatment.

How are trauma centers certified?
Orange County was one of the first places in the country to have an organized trauma system. The accrediting body, the American College of Surgeons, which conducts an annual two-day site review, has certified Western Medical Center in Santa Ana as a Level II trauma center.

How can CEOs benefit from the trauma center?
The presence of a trauma center is great security for employees. Because we are centrally located in Santa Ana, we rarely need to airlift anyone to the trauma center, which saves time, money and lives.

Most paramedics treat patients and triage them at the scene, but they need to have somewhere to take them. We have a better than accepted survival rate, and prospective employees will take the presence of a trauma center into consideration when deciding to relocate to Orange County.

Recently, we treated a construction worker who had fallen 40 feet while working on a new supermarket. We were able to save his life. If that same accident had happened somewhere else in the country where the resources of a trauma center were not available, the outcome might not have been as positive. Workers who are injured on the job are also brought into the trauma center, and that contributes to great piece of mind for CEOs.

Even though trauma centers see critically injured people, we are able to save lives because we are trained and staffed to handle any type of injury. You never know when it could be you, a family member or an employee that requires the services of a trauma center.

FRANK NASTANSKI, M.D., is associate medical director of trauma at Western Medical Center Santa Ana.

HUMBERTO SAURI, M.D., is medical director of trauma at Western Medical Center Santa Ana. For more information visit www.westernmedicalcenter.com/HospitalServices/DesignatedTraumaCenter.

Sunday, 31 December 2006 19:00

Family incentive trusts

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As executives plan for their retirements and ways to secure their families’ futures, they have traditionally set up wills and trusts to pass along wealth to their children and to mitigate tax consequences.

These types of estate-planning documents can provide peace of mind for executives, along with financial security.

A relatively new way to pass along a sense of ethics and values that helped to create the family wealth is the Family Incentive Trust (FIT). The FIT provides more than just a vehicle to distribute assets; it establishes a framework that correlates to the beliefs of the grantor and helps reduce the worry that heirs will make errors or life choices that are not reversible.

Executives and CEOs who have worked hard and put a great deal of effort into building their wealth don’t want a child to become a less-than-productive member of society because of a significant inheritance, says Kerry-Michael Finn, vice president of financial planning for the Western Market of Comerica Bank.

Smart Business spoke with Finn about how FITs can help high-net-worth individuals assure the future for their families.

What is an FIT?
An FIT is a trust that passes along assets to the next generation, while trying to minimize potential negative effects. For example, the trust may specify that the inheritance be passed along through income matching or it can be distributed based upon clauses that require the heirs to achieve specific education levels or contribute community service time.

Income matching can be very valuable, because it may allow an heir to pursue a career in teaching or philanthropy that might not otherwise be an affordable option. It is also possible to tie monetary rewards to other achievements, such as refraining from drug or alcohol abuse or raising a family. Monetary awards can also provide the capital to make a down payment on a home or start a business.

How can CEOs benefit from having an FIT?
If the family business is privately held, it may be possible to pass along the ownership through the trust and preserve the same values that built the business. Even if the wealth has been built through a career in public companies, the concept of transferring values as well as cash can still be achieved.

How can I make certain that an FIT is a positive motivation for my heirs?
This can be accomplished by making certain that the document is flexible enough to accommodate a variety of circumstances while allowing each heir to become successful in his or her own way. For example, placing a requirement of obtaining a four-year university degree might not be achievable for everyone, but receiving a certificate through a trade or technical college as a substitute might be the type of incentive that will transfer the value without placing an unreasonable restriction on the heir.

If I currently have an existing trust, can it be amended to include an FIT?
In some cases, yes. Incentive language can be added or incorporated into an existing trust document. It may be best to review the existing trust as some tax laws may have changed since it was originally drafted, so it might be more efficient to draft a new document.

What measures can I take to make certain the FIT is flexible enough to handle unforeseen circumstances?
When an FIT is created as an irrevocable trust, it has a safety net built in, because the assets in the trust are not considered as assets of the beneficiary and generally cannot be attached by creditors or subject to division through a divorce decree.

The standard provisions of an FIT allow for additional distributions based upon the need for health, education or maintenance and support by the heirs. In addition, the FIT allows for additional distributions at the discretion of the trustee.

I normally recommend that the trustee be a family friend, attorney or accountant along with an institution. In these cases, having a family friend and an institution serving as co-trustees can be beneficial, because the institution will outlive the individual trustee. It is always good to start the process well in advance, so that the staff at the institution can get to know you and your values and thus make decisions and interpretations that they believe are in line with your core beliefs. I also recommend that grantors draft a letter or statement that very specifically states their beliefs and wishes for this trust.

KERRY-MICHAEL FINN is vice president of financial planning for Comerica Bank. Reach him at kfinn@comerica.com or (714) 424-3823.

Sunday, 31 December 2006 19:00

The Flanders file

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Birthplace: Indianapolis

Education:

University of Colorado, bachelor’s degree, economics; Indiana University, law degree

First job:

Worked in the family concession business as a popcorn vendor at age 12

Whom do you admire most in business and why?
Larry Bossidy [chairman and CEO of Honeywell] for his pragmatic orientation toward execution and his emphasis on the importance of human capital.

What’s the most important business lesson you’ve learned?
I worked for an entrepreneur at a small computer book publishing company. He taught me that employees who are imperfectly and passionately pursuing an objective will accomplish more than that same person executing what they’ve been told to do.

What’s been your toughest business challenge?
Cultural change at Columbia House. [Flanders was CEO there before coming to Freedom Communications.] The entrenched management team had developed a point of view and concluded that the online business model could never be profitable.

How would you describe your leadership style?
I believe that business is two things: It’s people and it’s numbers. You have to quantify everything that you do, but at the same time, you have to be soft on people and hard on the issues.

Wednesday, 20 December 2006 16:03

M&A considerations

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The past several years have been good to middle-market business owners looking to sell their companies. The confluence of private equity funds and businesses looking for a strategic edge, both bidding on the same entities, has caused prices to spike.

Dan Shea, managing director of W.Y. Campbell & Co., a subsidiary of Comerica Inc., says that banks have also played a role in the active market, given their willingness to fund deals.

Smart Business spoke with Shea about the current climate for selling businesses, the types of buyers who are driving the market and how valuations should be handled.

What’s the current environment like for selling a business?
It’s one of the best markets since the late ‘90s. Buyers are aggressive because they have cash and feel good about the economy, while banks are helping by providing acquisition debt. At the same time, sellers see what a good time it is to sell, given the activity levels of buyers and historically high prices. It’s a liquid market, which isn’t always the case.

Toward the end of 2005 and on into 2006, it appears that the growth in the number of deals has started to level off. We don’t believe that transaction volumes are going to go down, we just see them leveling.

What types of buyers are driving the market?
The strategic buyer has been more active in recent periods and is looking to benefit from the synergies that can accompany a purchase, such as with a target’s customers, products, channels and geographic locations. Both public and private acquirers are aggressively seeking growth through acquisition to complement internal growth initiatives.

There are also private equity firms that go out and raise capital for the purpose of buying and holding companies. They look to grow sales and profits before selling anywhere from one to seven years down the road for a nice return. According to Private Equity Intelligence, through September of 2005, private equity capital fundraising surpassed the level achieved in all of 2004, so there is a tremendous amount of capital waiting to be invested.

When contemplating selling or acquiring a business, what should a CEO or business owner consider?
If they’re a seller, they need to be mindful of making a market for their business. Most middle-market companies are privately held so the process is not as easy as selling stock on the open market. With private companies, there is no established market for the business; you have to make the market.

Hire someone who can prepare and provide the appropriate information in a compelling manner under confidentiality agreements to qualified prospective buyers and then assist in establishing a price, a structure, and terms and conditions acceptable to both parties. A seller wants multiple buyers bidding for their business to ensure they can drive a good deal — too many lose value (and time) by engaging in what we call one-off transactions.

Buyers, both strategic and financial, need to make sure the perceived benefits of the acquisition are for real. Strategic buyers in particular need to have a realistic integration plan and a realistic forecast of expectations for the combined entity, because studies show that the majority of transactions fail to meet objectives. The way to fix this problem is to set realistic objectives and then don’t overpay — you can pay at most for the value the acquisition creates and, ideally, less would be better.

How should the valuation be handled?
The market will decide the eventual price but it behooves sellers to have a good idea of the likely outcome before initiating the sale process. Realistic expectations are critical or else a lot of time and money will be wasted.

Sellers should have their investment banker develop an estimate prior to engagement. This estimate should triangulate the results of a variety of valuation techniques including guideline public company and recent transaction analyses.

We rely on discounted cash flow analysis as well because this technique provides for more granularity. It is where you take a look at the expected future cash flows of the business and value the business based on what those cash flows are worth today.

People talk about multiples of various accounting measures such as sales or earnings to arrive at initial value estimates or as rules of thumb, but discounted cash flow analysis is the predominant technique employed for estimating value at a more thoughtful level.

Daniel S. Shea is a managing director of W. Y. Campbell & Co., a subsidiary of Comerica Inc., and head of the firm’s Los Angeles Office. His responsibilities include relationship management and client representation in sell-side, buy-side and private placement transactions. Reach Shea at dshea@wycampbell.com or (310) 297.2894.

Friday, 24 November 2006 19:00

Don’t go it alone

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Forming a strategic alliance with a few well-chosen vendors means having someone in your corner when you need it the most.

“When you plan to have multiple transactions with a company, signing a contract is a good place to start, but to really benefit from an association with that company, you should consider forming a strategic alliance,” says June Stein, president of Principal Technical Services. “When you sign a contract, you make an agreement; but when you form a strategic alliance, you build a relationship.”

Smart Business spoke with Stein about the benefits of forming strategic alliances and what to look for in a strategic alliance partner.

What’s the difference between a contract and a strategic alliance?

A contract or Master Service Agreement (MSA) is just a piece of paper that outlines terms and conditions under which a vendor sells something to a customer. A strategic alliance is so much more than that. It’s a living, breathing relationship that evolves over time as companies in the alliance work together for mutual benefit. A strategic alliance partner isn’t just interested in selling you something; a true ally is interested in understanding your business and helping you to achieve your business goals.

Not all business connections need to be strategic alliances. If you need a new copier, you simply call your vendor and order a copier at an agreed-upon price. But when you’re shopping for professional services, it’s not as simple as looking up a model number and placing an order. You’re in the market for people with specific qualifications who will be essential to the smooth operation of your company. A strategic alliance partner has a vested interest in your success and will make it a priority to provide exactly the type of personnel you need.

What are the key elements of a strategic alliance?

A truly beneficial strategic alliance requires communication and trust. You need to be willing to disclose specific information about your company to your strategic alliance partner, and to do that you need to be able to trust that the information you disclose will not be shared with your competitors.

You should invite your strategic alliance partners to your shareholder meetings and holiday parties. You should schedule regular meetings with upper management. The more information you communicate to them, the better they’ll be able to anticipate your needs and provide the right services in a timely fashion.

What should companies look for in a strategic alliance partner?

I’ll tell you what not to look for — the lowest price. I’m not saying that price isn’t important, but the lowest bidder isn’t necessarily going to get you the best products and services.

What you do want to look for are qualifications such as years of experience in your business niche, number of clients in your business niche and favorable recommendations from those clients. You want a partner who’s a real player in the industry — one with a history of providing a large volume of exactly the type of services you’re looking for.

When choosing a strategic alliance partner, you also need to consider qualifications that aren’t so easy to measure. Strong ethics are a must, since your partner will be entrusted with sensitive information. Also, think about the personnel you’ll be dealing with at the vendor. Will you talk to the same person all the time, or will your needs be handled by several individuals, each with only a partial understanding of your situation? Continuity is key.

What are the advantages of forming a strategic alliance?

The advantage of having a partner that can understand and even anticipate your needs is huge. Some strategic alliance partners may even be able to help you better define your needs. They often work in your industry on a broader scale and have useful (nonproprietary) information to share. You also need to remember that a strategic alliance is a relationship — not just between companies but between people working for those companies. Someone you have a relationship with is more likely to work hard on your behalf and put your needs on the top of his to-do list.

JUNE STEIN is president of Principal Technical Services in Irvine. Reach her at jstein@PTSstaffing.com or (888) 787-3711, ext. 21.

Friday, 24 November 2006 19:00

On the cutting edge

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California’s wealth of top research institutions and the talent they attract have given rise to scores of companies whose names have morphed into household words in just a few years.

In the life sciences and biotech industries, upstarts of a decade ago are now industry leaders, having cracked through a once-lofty barrier through product innovation, strong management skills and the backing of venture capitalists.

Unlike tech firms that moved from basement bedrooms and garages into high-rises, these scientific firms have less flexibility housing their operations. Zoning ordinances, community sentiment, plumbing, electrical and other infrastructure issues all influence where they can establish business. Because of their unique needs and the occasional obstructions that towns and cities may place in their paths, setting up shop can be harder for them. Needed are the skills of a seasoned commercial real estate pro if firms in these sectors are to take their business concepts and turn them into reality.

Smart Business spoke with Jonti Bacharach, vice president at CRESA Partners Orange County, a real estate advisory firm that represents tenants and space users, about the value that professionals bring to the “house-hunting” process for life sciences and biotech companies.

Why can’t life sciences and biotech companies just move into a high-rise or other available office space?

At the most basic level, life sciences companies do not consider high rises an option because their occupancy costs are so high. Also, because these are rather traditional office environments, a landlord likely will not allow them — because of unique space needs — to operate there.

Life sciences and biotech firms almost always require a significant build-out of raw space. Their biggest cost arises in constructing labs within an existing space. Here we need to adequately manage significant reconfiguration of standard building construction systems to accommodate the demands, unique to biotech/lab operations. Service or consulting firms, which typically occupy high rises, almost never face these challenges.

Because biotech companies work with material that area residents could feel would have an adverse effect on the environment, they must be housed in a community that accepts the nature of their work. Landlords, other tenants and civic leaders must be supportive of their business.

A good adviser can also point out the many benefits these firms bring to the community, including higher tax rolls and the prestige they have garnered as they sit on the cutting edge of their industries. A skilled real estate adviser and systems specialist can provide insight and leadership that will result in many hundreds of thousands of dollars in savings to the organization.

How do you find life sciences companies the structure they need?

It’s very rare for a life sciences company to move into a building without making some modifications. Generally, we’re looking at a ‘box,’ such as a warehouse or a flex building, which is a structure designed to accommodate businesses as disparate as light manufacturing companies and wet labs.

Several factors must be taken into consideration when determining the optimum facility solution, including geographical parameters of the requirement. Does the company need to be close to airports, research institutions or hospitals? Cost is always a consideration, as well as zoning restrictions and waste disposal, among myriad other issues.

How can life sciences companies reconfigure raw space?

First by asking the right questions, illuminating unforeseen cost considerations, and then creating a strategic plan designed to effectively address each issue. Most such companies have unique operational requirements that must be addressed in the context of their specific business. Our approach is to provide a broad base of highly specialized senior level specialists who will oversee and manage this process in order to reduce facility and operational-related expenses, while also ensuring that maximum efficiencies are realized. This also ensures that the project will come in on time — and, often, under budget.

JONTI BACHARACH is vice president in the Newport Beach offices of CRESA Partners. Reach him at (949) 706-6600 or at jbacharach@cresapartners.com.

Friday, 24 November 2006 19:00

Surgical weight reduction

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Grabbing a quick bite at the airport, dinner meetings and long work days can leave little time for executives to practice a healthy lifestyle. However, even the U.S. Surgeon General is quick to point out that obesity is preventable.

Diabetes, high blood pressure, high cholesterol, asthma, headaches and sleep apnea are just a few of the medical problems associated with obesity. But David Oliak, M.D., medical director of the Chapman Center for Obesity, says that he frequently hears overweight executives complain about fatigue and shortness of breath, and those types of problems can eventually affect job performance.

“I treated one executive who weighed close to 400 pounds and just couldn’t get through his days. Now it has been two years since his surgery, and his life has been transformed,” says Oliak.

While bariatric surgery itself is not new, the procedure has evolved — along with the knowledge of what helps a patient achieve long-term weight reduction.

Smart Business spoke with Oliak about what executives should know before considering bariatric surgery.

Who is a candidate for bariatric surgery?

Every day for the last 20 years, more than 4,000 people in the U.S. have become obese. Accompanying this trend, we have seen an increase in the number of patients for whom traditional weight-loss methods have not been effective. While maintaining a proper diet and exercise are still the preferred methods of treating obesity, when those methods are not successful, sometimes the medical conditions caused by obesity can pose greater health risks to the patient than the surgery itself.

Originally, when gastric bypass surgery was first introduced, the standard was that people 100 or more pounds overweight were considered obese and surgical candidates.

Now, we use a combination of factors and a total evaluation of the patient’s health in order to see if surgery might be the right choice. This risk profile — which was developed by the National Institute of Health — takes into account the patient’s body mass index (BMI) and any personal medical problems. Surgery sometimes is recommended when a patient’s BMI is lower but other conditions are present.

Are bariatric surgeries becoming more common?

Yes. With both increased demand and the change to laparoscopic procedures, more facilities have started to offer both gastric bypass surgery and the lap-band operation.

However, the increased surgical frequency has not always produced positive results. In some cases, patients have not been able to sustain their weight loss, and there is a learning curve for surgeons that accompany the change to the laparoscopic procedure.

What should I consider when choosing a surgeon?

It is important to ask how much experience the surgeon has performing the operation. It is a difficult procedure that requires the work of two surgeons and has an extensive learning curve. A surgeon is not proficient until he or she has completed 75 to 100 operations.

A recent study examined cases where the mortality rate was four times the norm for the procedure. It found that all of the excess mortality occurred when the surgeon had performed fewer than 20 operations.

All physicians should be benchmarking their results and demonstrating their outcomes, such as the types of complications and frequency. You should ask for these numbers and review them before making a decision.

What are the other program elements that correlate to success?

The American Society for Bariatric Surgery has set the criteria for a surgical center to qualify as a Center of Excellence. Because the surgery is a tool for weight loss — not a cure — it is important to have a program that includes patient education and support, so that weight loss can be maintained over time. Approximately one year after surgery, the body adapts. Then, only good habits will maintain the weight loss. That is why a Center of Excellence must offer a comprehensive program that includes both pre-operative and post-operative counseling.

What are some of the reasons to consider the surgery?

After gastric bypass surgery, 80 percent to 85 percent of the patients with Type 2 diabetes no longer require insulin; in fact, losing weight often eliminates the need for certain medications altogether. The laparoscopic procedures are less invasive and easier to recover from, and the average patient loses approximately 70 percent to 75 percent of his or her excess weight within one to two years after surgery.

Losing weight is not only good for your physical health, it is good for your emotional health as well. I performed surgery on one executive, and — a year-and-a-half later — not only had she lost almost 150 pounds, she felt so much better that she actually walked an entire marathon.

DAVID OLIAK, M.D., is medical director of the Chapman Center for Obesity. Reach him at (800) 554-9544. Web site contact info is www.chapmanmedicalcenter.com/Weightloss and www.droliak.com.

Friday, 24 November 2006 19:00

Diagnosis: Turnaround

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When Paul Viviano was named chairman and CEO at Alliance Imaging Inc. in 2003, he faced the challenge of reversing a slide resulting from a reliance on a single service — providing mobile magnetic resonance imaging units, mainly to hospitals.

In the 1980s, mobile MRI units allowed even small hospitals to offer the advanced diagnostic imaging service. But as hospitals built their volumes of MRI tests, they found it more profitable to acquire their own units. Fixed-site clinics also started popping up, further softening the demand for Alliance’s mobile unit services.

If Alliance was going to survive, Viviano had to make it into a company that provided a wider range of emerging health care services. “When I arrived at the company, we had a single product that we were offering to our customers, and it was a product, unfortunately, that was in decline after 15 to 20 years of growth,” says Viviano.

In 2002, the company posted net income of $35.9 million. The next year, it posted a net loss of $31.6 million.

Something had to change.

Viviano didn’t take the approach of simply slashing costs to revive the ailing company. Instead, he took a multipronged approach to put it on a new strategic path.

He put together a new management team, evaluated existing and potential lines of business, and realigned how the company operates across its geographic footprint. “While you have to be efficient — that much is clearly true — it’s the investment of your capital into product lines and new businesses that will lead you to success,” says Viviano. “So for us, it was all those things — new investments, new management teams — and we’re going to invest our capital differently.”

Building a new team
Alliance Imaging would have to enter new lines of business and re-evaluate the way it did everything, so Viviano went about building a management team that could carry out the plan. A new COO was recruited along with three of four regional executives, and a new CFO was identified from within the company’s ranks.

Viviano says a turnaround requires a different type of person than would be needed at a company at another stage in its development, say in a rapid-growth period. “It was looking for the right person who wanted to work in a turnaround set of circumstances,” says Viviano. “A lot of executives love turnaround circumstances, a lot love a growing business in a different cycle. You really have to be especially focused on these turnaround efforts, and it requires the right kind of team member.”

Viviano says identifying those team members was mostly a matter of looking at track records. “The best predictor of how people will perform tomorrow is how they’ve performed historically, so it’s looking at footprints, looking at the performance results of a candidate,” he says. “Most of it’s evaluating and really drilling down on results and performance. Equally as important, the next step down the path is the behavior of how they’ve done it, outcomes that they contributed to, not just they worked at a good place or for a good company, but that they contributed, they headed up teams, they were responsible for projects, they got things done.”

Viviano says even with a strong team, the leader must set the tone to get its members to perform at their optimal level by setting clear expectations and delegating authority. “There’s only so much you can do as an individual,” he says. “You have to empower a team and you have to delegate and you have to hold people accountable, and they, in turn, need to do the same thing. That’s the only way to turn around a national company with businesses in 45 states. I could work 24 hours a day, and it wouldn’t make a difference. “But if you have a team that holds their team members accountable and they have the resources to get things done, then you can leverage that.”

Finding new business
Viviano’s new team set about determining what specific new business lines the company should enter, based on its core competencies and experience.

Alliance Imaging opted to offer the new positron emission tomography, or PET scan technology, in mobile units, to open fixed-site MRI centers and to invest in radiation therapy facilities, all businesses related to its core competencies. “From a strategic perspective, we developed a mini business plan for each new possible discipline, so for fixed sites, we developed a strategic plan, we looked at the market, we looked at the return, the growth possibilities,” says Viviano. “We looked at our strategy, how we would do it, the team it would require, the capital it would require, and built a business plan around it. Then we’d discuss the implications of going into the business. “We’ve done that for all the new businesses we’ve entered, and we’ve done it for a lot of businesses we decided not to enter but still went through the process of planning. That was driven by the executive team and just a lot of input from our regional executives.”

When it comes to decisions about which businesses to pursue or other major choices, Viviano and his team make them only after a broad discussion that includes the entire management team. “We make decisions by including the entire team in the discussion and the decision-making process about what it is we do,” says Viviano. “My sense is that our team works well because their opinions are valued, and there’s an opportunity for everyone at the table at the same time to weigh in on whether we should offer this benefit plan, should we sell that enterprise, should we go into this business, whatever the big question of the day is. And there is no right or wrong, or, ‘I’m going to defer to the old man because he’s the CEO, or to the finance guy because he knows all the answers.’ “We’re not deferring to anybody. We’re all at the table, we all have something to learn, say, contribute, and we’re going to shape the answer that’s best for our organization, that’s best for us. That’s motivating.”

Viviano says a good example of that is when his company decided to enter the cancer therapy business. “We did a lot of work and analysis of our public competitors, analysis of our site visits, talking to the manufacturers, talking to doctors, talking to hospitals, a whole collection of information, and then everybody brings what they have to the table. We lay out the implications, the pros and cons, here’s what it means if we go into the business, here’s the upside, here’s the downside, here’s the capital, here’s our management bandwidth,” says Viviano. “At the end of a long, well-orchestrated session, the answer came in thumbs up. It could have come in thumbs down, and that would have been the end of the discussion. “It wasn’t me saying, ‘Hey, I’ve got a great idea, we’re going to go into the cancer therapy business, you guys go figure out how to do it, and I’m not going to take “no” for an answer.’”

Realigned geography
As if a single-product approach was not enough of a challenge for Alliance Imaging, Viviano found that it had acquired more than a dozen companies but had never fully integrated them into a single, cohesive, efficient corporate structure. “Our company was a roll-up,” says Viviano. “We had done about 13 acquisitions from the mid-’90s to 2000, so a lot of those companies were never fully integrated. A lot of them were still independent and autonomous in a lot of ways. They just became regions of our company. So we focused on a single strategy, but with a lot of autonomy in each, so the strategy became unified, not 10 strategies.”

Viviano saw an opportunity to not only reduce costs but to restructure the company into a more efficient management structure by reducing the number of territories from 10 to four, three of them with new vice presidents heading them. “We wanted teams with broader responsibility, with a span of control we thought was reasonable,” says Viviano. “Each region has roughly $125 million in revenue and enough size to have a strong team to feel like it has a significant amount of responsibility.

So we save some money. Think of a regional team with 10 guys sitting around the table. Think of a team with four people. It’s much more efficient in terms of dialogue and decision-making capabilities.”

Viviano says Alliance Imaging is still in a turnaround phase, but there are some key indicators that suggest that its strategy is working. “The results aren’t just in the financials,” says Viviano. “The results are customers calling us, our sales are improving. We’re recognized by customers, patient satisfaction, customer satisfaction surveys, we’re certified by a number of accrediting bodies, and the feedback from them is really positive.”

And on the financial front, the measures that shareholders watch the closest, the curve is on the upswing. Revenue for 2004 and 2005 was more than $430 million, and net income in 2005 was nearly $20 million after two years of losses. And the performance of its new businesses is already rivaling that of its MRI business on a revenue basis.

Says Viviano: “After about three-and-a-half years of this, our revenue from our two new businesses, fixed site MRI and PET ... the revenue for these two businesses will be greater than it was for our exclusive business four years ago.”

HOW TO REACH: Alliance Imaging Inc., www.allianceimaging.com

Thursday, 26 October 2006 02:14

Leveraging your power

Written by
Experts agree that a company’s physical facilities have a dramatic impact on the efficiency, productivity, culture, image and desirability of the firm. Furthermore, behind labor and perhaps IT, facility costs impose the highest burden on a company’s bottom line.

If you play an integral role in your company’s real estate decisions, why delay the process when there is so much at stake? Why begin negotiations without clearly defined business objectives so that by the time due diligence is completed, leverage has diminished in relation to a foreseeable lease expiration date?

“Far too often, companies employ a reactive approach to their real estate needs because of the temptation to focus on day-to-day activities or because they find it challenging to identify the right service provider,” says Kevin Mitchell, a vice president at Cresa Partners LLC. “By being pro-active about your facility requirements and beginning the process early, you can ensure that your next lease operates as an asset rather than a liability — at a reduced cost.”

Smart Business talked to Mitchell about leveraging your real estate decisions.

When making commercial real estate decisions, what is actually at stake?
A company’s real estate impacts its efficiency, productivity, flexibility, culture, image and ability to recruit and retain employees. To the extent that your business objectives drive your company’s real estate and the two are properly aligned, your lease is an asset. If, on the other hand, your business must adapt to your real estate, your lease is a liability.

Numerous steps can and should be taken, in advance of negotiations, to ensure that your next lease is an asset.

  • Define your company’s culture.
  • Engage an architect to help establish space standards and conduct a programmatic analysis of your space needs.
  • Benchmark your space standards against the rest of your industry.

The savings associated with these exercises often dwarfs the savings associated with even a properly timed negotiation.

Consider an example. Based on your preliminary work with an architect, you determine that you can increase the productivity among a subset of employees by as much as 5 percent by restacking your space. It may cost $300 to $500 per employee to conduct a boxed move, but assuming an average annual salary of $40,000, this exercise and minimal investment can generate a benefit of $2,000 per employee.

What are the benefits of starting early?
Because of the impact that your real estate has on your company’s overall objectives, the decision-making process needs to be initiated prior to the negotiating period, so that you have a more specific understanding of what you need.

Once your business objectives are established and you understand how your real estate can impact them, negotiations can begin. In the context of the negotiation process, the benefit of starting early is leverage.

A good real estate decision requires time for internal investigation and to investigate the market. One of the most common mistakes is that the market due diligence phase is not started early enough. By the time a company is poised to make a decision, its leverage has been compromised and less favorable economic terms result.

In the context of a renewal, the landlord faces significant costs to re-let your space in the event that you move. If you renew your lease, the landlord avoids the costs associated with marketing downtime and a new-tenant improvement allowance. However, this cost reduction will not be reflected in your new lease unless you have maintained your leverage by starting the process early and keeping the threat of moving credible.

Starting early has other benefits. You have time to engage in other leverage-generating activities such as lease auditing. To the extent billings have been miscalculated in the past, there is a strong basis for concessions in the future. You can also use this time to increase competition by enticing additional landlords onto the landscape of your negotiations. When you are poised to strike early, your credibility in the marketplace is bolstered, perhaps enticing other landlords to submit unsolicited offers.

Finally, you can impose your leverage on a broader scope of issues. For example, when you have the ability to integrate the project/construction management side of your facility into the upfront negotiations, you can impose your leverage in the context of the work letter.

While it is easy to become focused on day-to-day tasks and often challenging to identify the right service provider, the decision to start early will have a real profound impact on your next lease.

KEVIN MITCHELL, Esq., is vice president for Cresa Partners LLC. Reach him at (949) 706-6656 or kmitchell@cresapartners.com.