Documents written by lawyers are often hard to understand. They’re chock-full of arcane terms, and they systematically violate every precept of the “plain language” movement.
Lawyers have only themselves to blame. Most of them can, and occasionally do, write clearly. But should you insist that your lawyer always use plain English? No, says William Maffucci, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Maffucci about when to insist that your lawyer speak clearly and when, instead, to leave legalese alone.
What is plain language?
Plain language is language that a listener or reader is likely to understand.
Lawyers in the plain-language movement reject the assumptions that legalese is indispensable, that every fact recited at the beginning of an agreement must begin with ‘whereas,’ and that every affidavit must end with ‘further affiant sayeth naught.’ They begin sentences with ‘and’ and ‘but’ rather than ‘moreover’ and ‘notwithstanding the aforesaid.’ They use contractions. Even sentence fragments.
Advocates of plain language prefer small words (provided they do not compromise meaning), short sentences (but not to the point of monotony), short paragraphs (ditto), and the active tense (except when the passive tense serves a purpose). They strive to ‘omit needless words,’ but they recognize that sometimes repetition itself serves a need.
Is plain language always preferable to legalese?
In a perfect world, everyone — lawyers included — would always use plain language. Even in our imperfect world, lawyers should use plain language rather than legalese when all other things are equal. But rarely are all other things equal.
Writing an original document in plain language is hard, and excising legalese from an existing document is harder. Both take time.
Sometimes you should insist that your lawyer take that time. Clarity is critical in some documents, such as employee handbooks. Plain language is sometimes mandatory in consumer contracts. And the ability to enforce a waiver of a constitutional right often depends upon proving that the other party actually understood the waiver.
But sometimes it makes no sense to require a lawyer to spend the time necessary to express a concept with plainer language or greater concision. Common commercial documents that conform to centuries of custom in an industry are likely to be understood by people in the industry. What would requiring your lawyer to rewrite them in plain English achieve, other than a higher legal fee?
Other times, a lawyer may be unwilling to buck tradition. Every term traditionally used in deeds, for example, has at some time been interpreted by the courts. The fact that the term still appears in modern forms leads lawyers to assume that the term serves some (often unknown) purpose.
Have the courts concluded that the traditional terms always serve a purpose?
No. Occasionally the courts have declared that some of traditional conveyancing words can be omitted without consequence. So have the legislatures.
By statute in Pennsylvania, the words ‘grant and convey’ are sufficient to convey real estate, so conveyancers no longer need include the other terms traditionally used for that purpose — ‘bargain and sell, release and confirm.’ But here’s a dirty little secret of the legal profession: Very few lawyers have memorized all of the authorized shortcuts. And I don’t think any court or legislature has ever handed down an opinion or enacted a statute specifying that the continued use of a term that has been deemed to be surplusage makes the instrument ineffective.
At the same time, there have been court decisions and statutes establishing that certain boilerplate phrases (think ‘small print’) are indispensable. One statute makes it important to include in certain contracts a provision specifying that, by signing the contracts, the parties ‘intend to be legally bound.’
And court decisions have turned on the distinction in construction subcontracts between the words ‘if’ and ‘when’ in the phrases ‘pay if paid’ and ‘pay when paid.’ Lawyers share horror stories of fortunes lost in court decisions interpreting such seemingly inconsequential terms. Naturally, the lawyers develop a reluctance to change words that have been used since time immemorial.
Is there a rule of thumb for deciding when to tell you lawyer to use plain English and when to leave legalese alone?
Never stop considering the context in which a lawyer is being asked to communicate. If the lawyer is drafting a loan-participation agreement that will bind only long-established financial institutions conducting business as usual, the lawyer should not be faulted for pulling a tried-and-true template off the shelf and making no effort to clarify it. If the lawyer is drafting workplace rules for a glass factory, the lawyer should be faulted for not using the vernacular of that trade. If the lawyer is drafting an agreement by which the client’s neighbor would grant the client an easement over the neighbor’s property, the lawyer should use language that is likely to be understood not just by the client but also by the neighbor — and by future owners of the properties, if the original parties intend that the easement last in perpetuity.
Consider the additional time that your lawyer would spend to communicate more clearly to be an investment, and always ask yourself whether the investment makes sense.
When is the last time you reviewed your company’s buy-sell agreement? If you’re like the owners of many private companies, that document is sitting in a file collecting dust. The stagnant legal document is often viewed as something that you create and then put away, only looking at if a business partner dies, retires, gets sick or decides to leave.
But that is a big mistake, says Mario O. Vicari, director at Kreischer Miller in Horsham, Pa.
“The buy-sell agreement is a critical roadmap that outlines the economic terms and conditions of transactions between a company and its shareholders in case of a triggering event in a private company’s stock,” says Vicari. ”It essentially determines the market for the company’s stock among shareholders.”
The buy-sell agreement is a highly customized document that a company’s shareholders should intimately understand and should play an active role in crafting so that it reflects their collective intent.
Smart Business spoke with Vicari about how to execute an effective buy-sell agreement.
What is the purpose of a buy-sell agreement?
First, when structured properly, a buy-sell agreement reflects the intent and the bargain of shareholders relative to transactions in a private company’s stock. For this to occur, shareholders should participate in the crafting of the document and its provisions, and review it at least annually.
Second, the agreement protects the company by ensuring that its provisions do not present a set of economic circumstances that could jeopardize the company’s liquidity by requiring it to fund a transaction that was not planned for or properly structured. Important elements to consider are reasonable valuation and payment provisions.
Third, it protects the shareholders and their families by providing funding mechanisms through proper insurance coverage in the event of an untimely death of a shareholder. Finally, a properly structured and monitored agreement helps avoid shareholder disputes and litigation because the economic provisions are well understood and agreed to by all parties in advance of any triggering events, and the valuation is monitored annually.
What are the important triggering events that should be addressed in a buy-sell agreement?
There are five major triggering events that are normally addressed in a buy-sell agreement: death, disability, separation from employment, retirement and sale. It is important to note that each trigger could cause different terms and conditions in the agreement, such as length of payout or discount on valuation. For instance, a company can protect itself from an unanticipated liquidity event caused by an unplanned separation from the company by placing a discount on the valuation and/or longer payment terms on that transaction trigger.
There are two other common triggers — divorce and bankruptcy of a shareholder. In each of these cases, company stock could become part of a divorce or credit estate and the holder of those shares would have the same rights as the other shareholders. In order to avoid this type of situation, a well-designed agreement can prevent a shareholder from allowing shares to fall into someone else’s hands by requiring the shareholder to ‘put,’ or sell their shares back to the company in exchange for a note before the divorce or credit action is settled.
What are common mistakes that business owners make in these agreements?
The most common mistake is having a provision that the company’s value is to be determined by an outside appraiser in case of a triggering event. This causes problems on several fronts. First, when shareholders don’t understand the value of their shares within the agreement, they are often surprised when a trigger occurs. This sometimes leads to bad feelings, disputes or litigation. It also does not allow shareholders to properly plan their personal affairs.
Second, when an important variable in the agreement such as the value of the shares is not known, it is impossible to know whether other elements of the agreement are properly structured, such as the amount of life insurance to carry or whether the company can afford the payout provisions. A better strategy is for the shareholders, with the help of a valuation adviser, to develop a formula that is contained in the agreement that can be measured and quantified each year after the company’s financial statements are complete.
This allows shareholders to monitor the value for their sake, as well as the company’s, and to make sure that the valuation and payment provisions are reasonable in light of the company’s current financial position and cash flows.
Who should be involved in drafting a buy-sell agreement?
We think that balanced advice is very important. Certainly, all the shareholders should be active participants, as it is their company and their stock. We also think it is a good idea to include the company’s financial officer.
Outside advisers should include the company’s CPA, attorney and insurance counsel. If the company’s CPA does not have valuation expertise or credentials such as a CVA, then a valuation adviser may also be needed.
Mario O. Vicari is a director at Kreischer Miller, Horsham, Pa. Reach him at email@example.com or (215) 441-4600. Follow him on Twitter @mariovicari.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Succession planning may be in the back of your mind, and you may actually have a plan defined, but many business owners don’t put a lot of time into thinking about what makes the plan effective. Instead, they’re too busy focusing on the day-to-day tasks to keep operations running smoothly.
But if a company is going to survive into the next generation, it is critical for the owner to be planning how that’s going to happen, says Cheryl A. Parzych, executive vice president of wealth services, First Commonwealth Financial Corp.
“If your business is to succeed after your succession, you must consider the very fundamental questions of who and when,” Parzych says. “You must understand what has made your business success possible in the first place and assess the competencies of future owners, then develop those key players in the plan.”
Smart Business spoke with Parzych about how businesses can successfully transition by tapping talent and grooming leaders to take the organization into the future.
What do you need to ask to set the tone for a succession plan?
‘Who?’ and ‘When?’ are the core questions that set the direction for business succession plans. Who do you prefer to succeed you, and when do you see this happening?
While many owners do not formalize a succession plan, they instinctively know the answers to these questions. For example, you might say that after you die, your son or daughter will take over the business.
If you have clarity on these fundamentals, there are many specialists who can help you to design the most effective plans to execute the legal transfer. What becomes vital is whether your chosen successor is or will be capable of taking over at that time when you plan for your transition. You can bring more certainty to your plan by gaining objective insight and assessing the talent of your successor.
Then, you can move on to closing the gaps.
Why is gaining objective insight so important to the succession process?
Transitioning your business to the next leader is a very emotional step. If your business is to get what it needs to thrive, you need to identify the managerial, leadership skills and other characteristics that enabled the business to succeed in the first place.
Are you the owner of those traits? In other words, does the business succeed because of your skills and your characteristics? Or have you developed a complementary or symbiotic leadership team that can carry the company mission forward?
If you are having trouble stepping back for an objective look, advisors close to your business may prove invaluable to you at this time. They can help identify which owner characteristics drive the business and where your personal qualities might, in fact, get in the way. Also, executive coaches are well equipped to work with you to identify the natural talents you have relied on for years, perhaps, without realizing it. These characteristics and strengths will be lost during transition unless you take deliberate steps to develop key talent.
How can an owner identify key talent?
Who is your preferred successor? Assess the abilities of all prospective successors. Do the potential owners have the skills and characteristics to continue the business successfully and grow it moving forward — or are they emotional selections? At what point do these prospects fall in terms of readiness of skills and characteristics? Are there others who have been critical to your success and should play an important role in the succession plan? Don’t forget those who might have skills essential to the transition itself such as project management, communications, etc.
How should an owner develop planned successors?
It’s important to create a customized development plan for future leaders, and this is possible now that you know who you want to transfer the business to and the current competencies of the successor and important team members. Focus on talent development and make it one of your top-three business priorities. In fact, your business cannot have a successful year if it fails in talent development. To create and execute effective talent development plans, you may need to engage specialist resources to help you while you remain the visionary and executive sponsor.
How does an owner know if the talent will be ready to take over when he or she wants to transition the business?
Though parents hoping to hand off to their own children often have a hard time with this, you may objectively find that your future owner is already close to or ready for succession. Continue to engage your ready successor and position him or her for the coming transition, as this will encourage acceptance by employees, customers, vendors and advisors.
You also have to honestly acknowledge if your intended future owner is not ready or if he or she lacks the core leadership and/or interest to carry the business forward. If this is the case, again, your advisors can lend support. Open discussions with advisors can help identify and plan for realistic alternatives. Advisors can also support difficult conversations with concerned family members and employees.
Give your successor the opportunity to succeed. Tune in to his or her talent, skills and characteristics, and watch how that person interacts with employees, advisors and other stakeholders. It’s a critical mistake to allow a budding future leader of the business to go unnoticed. Seek guidance as needed. Commit to talent development and customize a succession plan with your advisor, who will hold you accountable and help you synchronize talent development with your transition timetable. This will make your succession plan viable and bring you great peace of mind so that you can enjoy the process and look forward to the next chapter in your life.
Cheryl Parzych is executive vice president of wealth services at First Commonwealth Financial Corp. Reach her at (724) 778-3973 or firstname.lastname@example.org.
Insights Wealth Management is brought to you by First Commonwealth Bank
Here’s a litmus test to determine whether your accounting firm is providing the level of service and expertise your business needs to grow and succeed. Ask yourself: Are you a better company today than you were a year ago?
“The right accounting firm will provide your business with proactive solutions, including tax saving, performance improvement and financing ideas,” says Stephen W. Christian, CPA, managing director, Kreischer Miller, Horsham, Pa. “When you partner with a true adviser, accounting services become an investment in your business’s future success.”
However, all firms are not the same, and you must choose wisely.
Smart Business spoke with Christian about how selecting the right firm can bring tangible results to your organization.
What is the significance of working with the right accounting firm?
The right accounting firm will support your business as a trusted adviser and serve as much more than a provider of tax services and financial statements. All firms can prepare financial statements and tax returns, but what else are you getting for your money?
Your accounting, tax and advisory services should be viewed as an investment rather than the cost of a commodity. The reality is that many organizations that have not utilized a sophisticated accounting firm do not realize what they are missing: business advice and strategy based on company goals. The right accounting firm visits your place of business, gets to know the operation inside and out and can provide you with valuable insight to make your organization stronger.
What should a business consider when looking for an accounting firm?
That depends on what you’re looking for in an accounting firm. If you want to hire a transactional provider focused on preparing tax returns and financial statements, and cost is a key factor in your decision, you’ll find plenty of firms that perform these basic services.
But if you’re looking for more — a relationship with an adviser who gets to know your organization and can advise you on critical business decisions — then you’ll need a high-value firm that focuses on comprehensive client service. You’ll benefit from a firm with a consultative approach.
So first, identify your needs: audit, tax, consulting, low-cost and value-added. Then, interview firms and select one based on your priorities.
How can a business identify potential firms?
Talk to your advisers and professionals who know your business, including lenders, lawyers and colleagues in trade associations. Ask them for referrals. Review accounting firms’ websites to see how the companies are represented. Do their priorities match with yours? Personally interview the team of professionals you are considering and not just the partners.
What type of value can a business realize when partnering with the right firm?
Your business will be stronger and in a better position to succeed by engaging the right firm. A good accounting firm can provide an outside perspective that will sharpen the performance of your organization.
An accounting firm works with many diverse companies, and experiences what works and what doesn’t. Communicating mistakes to avoid can steer your company toward success. And it can share best practices from successful companies and help you execute those ideas at your organization.
Also, a good accounting firm is proactive and solution based, providing an abundance of advice on such matters as financing, compensation and benefits strategies, and risk mitigation. In addition, the firm can provide meaningful benchmarks against other similar companies and share ideas on optimal tax structures, beneficial technology initiatives and succession issues.
What are the keys to selecting the right firm?
Now that you have determined your priorities, be sure the firm’s service offerings are compatible with your needs. The team of accountants should be passionate about serving you — and team is the operative word.
Many businesses are disappointed when they select a firm based on one individual who works there, then later learn that they will be working with other associates that are not comparable. Find out who will service your needs, and make sure you meet the other players serving you. And be sure you can gain access to the firm’s leadership and decision makers. This is a common complaint among businesses that are unhappy with their accounting firm relationships.
You want a firm that recognizes the importance of your time and a firm that is respected in the community and has a philosophy of personal development. The right firm is forward thinking, not just a score keeper. This firm will spend the time to get to know all aspects of your business and your industry.
What if a business is reluctant to cut ties with its current accounting firm?
First, ask yourself why you might be looking to make a change. Do you feel you are not getting the personal service you deserve? Is it difficult to reach the firm’s management? Do you want more from the firm that it is capable of providing?
Next, determine in an unemotional way which firm best fits your needs. Remember, this is an important business decision for your organization. You could consider maintaining your current firm for personal tax work while hiring a new firm for corporate work. And there are other creative ways to maintain the relationship if you must.
A firm that truly has your best interests at heart will partner with you to find a solution.
Stephen W. Christian, CPA, is the managing director of Kreischer Miller. Reach him at (215) 441-4600 or email@example.com.
Insights Accounting & Consulting is brought to you by Kreischer Miller
When your business parts ways with an employee, is your company —and those who work there — protected from a lawsuit? Without an employee separation agreement and release in place, an employee can make a variety of claims, including pursuing a civil action in court or administrative action through the Equal Employment Opportunity Commission or similar state agency. An employee can walk out the door with your trade secrets and key customers, taking them to a competitor — and even solicit valuable employees to join the other company.
“Every employer should consider an employee separation agreement and release, as no employer is immune from lawsuits and other employee claims,” says Michael J. Torchia, a member of Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Torchia about how employee separation agreements can protect employers and individuals, and what components these legal documents should include.
What is an employee separation agreement and release, and who needs one?
An employee separation agreement and release ensures that a company and its individuals — including officers, directors, shareholders and employees — are not liable should an employee file suit after leaving the company, whether through termination, layoff or resignation. This legal document always contains a release of all of the employee’s claims and may include noncompete, nonsolicitation, trade secret and confidentiality, and ‘return of company materials’ provisions to protect the employer from such damage.
An employer needs the peace of mind of knowing that a former employee cannot cause damage to the business or instigate lawsuits that could harm the business. Every business should consider putting an employee separation agreement and release in place.
Why is it critical to put an employee separation agreement and release in place?
Think of all employees as potential plaintiffs. Are you offering them severance pay or other benefits on the way out the door without asking for anything in return? Businesses could instead require that employees sign a separation and release agreement in return.
Some employers are hesitant to propose an employee separation agreement and release because they are concerned that asking employees to sign the document will be an admission that the company has done something wrong or that the company is trying to hide something. But this is rarely true. These agreements are common business practice, and most employees are not surprised if requested to sign a separation and release.
What key components should be included in an employee separation agreement and release?
First, the employer must give some sort of ‘consideration’ when asking an employee to sign a separation agreement and release. In other words, what will you give the employee in return for signing it? Many times, this consideration is severance pay.
For example, in Pennsylvania, employers are not required to pay severance unless they have already agreed to do so, such as in an employment agreement, established company policy or collective bargaining agreement. Therefore, if your company has not committed to paying severance, you can offer some amount of severance in exchange for the employee signing the agreement. Or, if you offer two weeks of severance, for example, you may extend that to six weeks if an employee signs the agreement.
Confidentiality is also important. You don’t want employees telling others in the company what they are receiving in return for signing.
It’s also a good idea to include an attorneys’ fees provision. Should a former employee violate the agreement and file a lawsuit against your organization, the agreement would require that employee to compensate you for attorneys’ fees to defend the action. This is an important component that also deters employees from breaching the agreement, and makes the employer whole if employee does breach.
Other key points of the employee separation agreement and release include noncompete, nonsolicitation, confidentiality and trade secret provisions. Also, an employer will want to include provisions that:
* Employees must return all company property and materials upon their departure.
* Designate jurisdiction and venue so that a lawsuit will be brought, if at all, in a place convenient to the company.
* The employees acknowledge that the employer may provide the agreement to prospective employers to enforce it.
Also, note there are different requirements depending on an employee’s age in terms of time frames for reviewing the agreement. The Age Discrimination in Employment Act gives employees ages 40 and older 21 days to review an employee separation agreement and release, and after signing, seven days to revoke it and change their minds. And if more than one employee is laid off, that timeline extends to 45 days, with a seven day revocation period. Additionally, there are laws that vary by state concerning how the agreements need to be drafted and what provisions they may contain.
What next steps should an employer take to protect the business and the interest of individuals who work there?
There is much more to include in an employee separation agreement and release. These are not cookie-cutter documents, which is why enlisting an experienced employment law attorney is critical.
Avoid using agreements downloaded from the Internet, and do not borrow an agreement from a fellow business owner. It’s also a bad idea to use an old agreement of your own because laws, statutes and court opinions interpreting these laws regularly change. Speak with an attorney about whether the agreement you are currently using is up to date and contains all the necessary provisions to protect the interests of the organization and its people.
Michael J. Torchia is a member of Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-2042 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
Letting employees go is never easy. But it can become even more difficult if you fail to do it right.
When an employee feels that he or she was unfairly terminated, choices for the employee are often few and emotions can fuel the fire, resulting in a lawsuit against the employer. To protect yourself, you must ensure that your records and the way they are kept are extremely tight. Any holes in the process could present an opportunity for an employee to sue, says Thomas Paxton, shareholder at Garan Lucow Miller PC.
“State and federal legislation over the years has actually increased the ways that employees can sue their employers,” says Paxton.
Whistleblower acts, Family and Medical Leave Act, the Americans with Disabilities Act and Title VII all present opportunities for disgruntled employees to sue. The result can be costly lawsuits that can severely impact a business’s bottom line and reputation.
“An employee could get a verdict that includes years of lost wages that can reach into the millions,” says Paxton. “And even if you win, it is very costly to defend these suits.”
Smart Business spoke with Paxton about how maintaining solid records can protect you in the case of an employee lawsuit.
What key documents should a company maintain to protect itself against employee lawsuits?
The two most important documents a company can have are a solid job application and updated, accurate job descriptions. The job application should not ask for irrelevant information, which requests a candidate to reveal discriminatory data. Never ask for an applicant’s photo. Do not request a birth date. Do not request information for factors that identify someone’s membership in a protected class, including age, gender or race.
The application should also include a statement that the applicant signs to agree to comply with the company’s rules and regulations. This component can go a long way at trial if you can take out an employee-plaintiff’s job application and show a signed statement that he or she agreed to follow the rules.
Second, maintaining updated, accurate job descriptions is critical for defining employees’ roles when a worker claims he or she cannot perform a certain duty. A good job description gives employers and employees a foundation to objectively determine the employee’s actual performance. Further documentation of incidents in which job duties were not performed can help support the employer’s case that any decision was made because of legitimate, nondiscriminatory reasons.
These two documents, along with wage and hour information, rate or basis of pay and terms of compensation should be kept in a personnel file separate from any employee medical records.
How should employees’ health records be maintained?
The U.S. Equal Employment Opportunity Commission mandates that employers file employees’ medical records separately from personnel records to protect against making employment decisions based on protected criteria, as medical conditions are irrelevant to job requirements.
Some occupations require keeping certain medical records on file. Medical records may also be on file if an employee applies for a disability benefit, such as FMLA. Separating personnel and medical files will help protect an employer in case an employee claims that he or she was wrongfully terminated or was demoted because of the employer’s perception of a disability or an actual disability that is unrelated to someone’s employment or that person’s ability to do the job. If you keep medical and personnel records in the same file, it would be difficult to make a defense in a lawsuit that you did not know about the employee’s medical condition when you made the business decision.
What processes can an employer implement to minimize its liability in the event of a lawsuit?
Consistently review and document the performance you expect from your employees. Hold employees accountable for performing duties outlined in their job descriptions. File this information. Most important, train supervisors and other managers in the company to immediately and objectively document any and all performance issues.
It goes back to the old saying, ‘Get it on paper.’ Adding to that, get it on paper, on time. Always document performance issues as soon as they occur. This can be as simple as placing a note in the employee’s file. Document what happened and when, and the results of the situation. If you wait to document a reason for terminating an employee based on performance until after a lawsuit is filed and after you talk to your attorney, the documentation won’t hold any clout in court.
Further, when job descriptions or duties change, always update those documents so that they remain current to the requirements of the position.
Where can a company get started to ensure proper documentation?
The first step is to conduct a review of your records and record-keeping processes. It’s a good idea to enlist a professional with experience in employment law who can identify any gaps in your record-keeping process. It’s a far better investment to protect your business by instituting a record-keeping process than it is to defend your company in a costly employee lawsuit.
Your lawyer should be readily willing and capable of reviewing your processes and records so as to minimize the possibility of litigation and to maximize the successful defense of a filed lawsuit. Also know that maintaining well-documented processes is a cultural commitment. It requires the cooperation of all leaders in your organization, from the CEO to the managers. Once you institute a solid system, you need to train everyone on your policies and procedures so that there are no surprises down the road.
Thomas Paxton is a shareholder at Garan Lucow Miller PC in Detroit, Mich. Reach him at (313) 446-5518 or email@example.com.
Insights Legal Affairs is brought to you by Garan Lucow Miller PC
Insurance is purchased in a confusing marketplace. There’s no sticker price on property and casualty (P&C) insurance and the cost structure can be difficult to comprehend. P&C insurance prices are based on complex market fluctuations and numbers that make it difficult for many to understand.
That can be frustrating to those used to having control over the costs in a business, says Bill Goddard, director of insurance consulting at Brown Smith Wallace LLC, St. Louis, Mo.
“Insurance pricing is cyclical and difficult to predict, causing unexpected budget surprises,” says Goddard.
Over the last several years, the cost of property and casualty insurance has been decreasing. With this gradual decline in cost, companies have gotten comfortable with their insurance premiums and, as a result, may be paying less attention to loss claims and best practices that can help mitigate insurance costs.
This is about to change because 2012 is bringing price increases to property and casualty insurance — another reason why CFOs will now hate this unpredictable cost.
Smart Business spoke with Goddard about why insurance pricing is difficult to understand and how businesses can better prepare to manage the cost.
Why is insurance a difficult area?
First, insurance has its own language. Who has time to learn it? Second, it’s not a logical marketplace in terms of pricing. You can’t simply compare costs apples-to-apples and choose a plan. There are variables because of the actuarial pros working behind the scenes. Third, you get calls from salespeople all the time, which can be overwhelming.
Also, the insurance world is very short on ideas about how to control costs. If your insurance prices are going up, you need innovative ideas to help you control the cost. That’s why bringing in a professional consultant with insurance experience is so valuable.
Finally, there is a lack of good benchmarking data in property and casualty insurance. You can’t compare the cost of insurance at one business to another and can’t determine if what you are paying is higher or lower than average because there are so many factors involved.
What is causing prices to increase this year?
Insurance is cyclical in nature, and the cost is impacted by many factors, one of which is the availability of capital. When the stock market is an unappealing place to invest, investors instead may choose to infuse capital into the insurance industry, where they could potentially see a better risk-reward result.
For example, those who invested in writing earthquake insurance would have earned sizable profit in the last seven years or so because there have not been any major earthquake events in the United States. These investments in insurance increase the supply, which decreases the price for businesses that need policies.
The dynamic behind rising property and casualty insurance pricing is that, with the stock market loosening up and investors making other choices besides insurance for their capital, there is less supply in the insurance market, resulting in a greater cost for those who demand the product.
What kinds of companies are going to feel the most pain from increased insurance prices, and what can they do about it?
Businesses with a bad loss history will be the first to feel the insurance cost increases. For example, take a company that pays $300,000 for workers’ compensation insurance and maintained that premium for years despite losses of $320,000. Because the insurance market was soft, the insurer didn’t want to lose that company’s business, and the company continued paying the same premium despite losses that exceeded this dollar amount.
Now, that company could hear differently from its insurance company, which may increase costs to $390,000 to make up for past years’ losses and net a profit this year. The key is to watch your losses: Does your history make you a risky business for an insurer?
If the answer is yes, you should work to position your company to earn a better premium by putting in place safety programs or improving claims procedures.
A consultant who specializes in insurance can help you identify ways to work with your broker to reduce your premium despite industrywide price increases.
What will the impact be on companies that have a good loss history?
There is an opportunity for these companies to save money on insurance rather than absorb cost increases if they choose to take on more risk. This could be accomplished by increasing their deductible and, as a result, paying a lower premium.
This can be risky for companies that do not have a firm grasp on their loss history — you must know your numbers before you take on more risk. Otherwise, you’ll watch more money go out the door, because if you increase your deductible, pay less premium, but have several loss claims, you’ll cancel out any savings. Perform a risk analysis and then determine whether your company can afford to take on more risk.
How can CFOs get a handle on their companies’ insurance?
The best solution is to bring in an independent adviser who has deep experience in the insurance industry and who can carefully analyze your risk, benchmark your business, help choose the best insurance provider based on your size and scope, and act as a consultant working with your broker to protect your bottom line.
Many companies do not have in-house insurance experts. An independent consultant with insurance industry expertise can provide real value on an as-needed basis. The consultant can act as your part-time risk manager, representing you in this difficult marketplace.
Bill Goddard, CPCU, is director of insurance consulting at Brown Smith Wallace in St. Louis, Mo. Reach him at (314) 983-1253 or firstname.lastname@example.org.
Insights Accounting is brought to you by Brown Smith Wallace LLC
Your top sales producer left the company and took a job at the competitor down the street. He’s got your client list memorized and knows your product line and pricing by heart.
A staff engineer jumped ship and left the state for another opportunity. It’s not in the same industry, but there is a potential overlap in customers.
Because of a tough financial year, you made the difficult decision to let go of several key staff members holding positions where company information was put into their trust. Now they’re gone, but what did they take with them that could affect your future success?
Non-competition agreements are critical for any business with trade secrets, specialized information that must be protected, and any business with a sales component. “Non-competition agreements, either on their own or as part of an employment contract, can help control the use, dissemination and destruction of trade secret and other confidential information,” says Mark Craig, partner, Litigation Practice Group, Brouse McDowell in Akron, Ohio.
Smart Business spoke with Craig about how to develop and enforce a non-compete agreement.
What businesses should implement a non-compete agreement?
Even information obtained by memory can be the basis for a trade secret violation. Considering that, what information could any of your employees memorize or take with them that could harm your business if they left today? Consider customer lists, manufacturing processes, special operations/systems, trade secrets, pricing, product development and industry knowledge. If you don’t have a non-compete agreement in place, you run the risk of one of your employees using company information to a competitor’s benefit if they take a job elsewhere or start their own business.
On the other hand, you may reconsider a non-compete if such an agreement would hamper the hiring process. Will a potential star employee turn down a job at your business if they’re required to sign a non-compete? Do your competitors have non-compete agreements in place? And, is the position one that entails obtaining company information that is not common knowledge? For example, if you own a local fast food franchise and expect managers to enter in a non-compete agreement that prevents them from working at any other fast-food restaurant in town, you probably won’t attract many managers for the position. So before implementing a non-compete agreement, consider the specificity of the information, and what would happen if an employee left your business and took that information along.
What are the key steps to developing a non-compete agreement?
First, identify the company information you want to protect. Then, gather a solid understanding of your market. What is your target market today, and what are your plans for expansion? It’s important to detail the geography your non-compete agreement will cover. Who is your competition, and, considering your short- and long-term business goals, how could this evolve? Also consider your existing employment agreement. How are employees compensated? Are workers ‘at-will’ employees? What information will they be exposed to while working at your company? As you develop the agreement, research competitors’ non-compete agreements, and consider what is reasonable concerning time-frame. In other words, is it really fair to prevent an employee from working at any competitor in the whole country forever? What’s more reasonable is a two-year non-compete with specifically defined geographic boundaries.
How can an employer effectively enforce a non-compete agreement?
When an employee resigns — or when a worker is terminated — be sure to remind the person that he or she signed a non-compete agreement and the terms will be enforced. Spell out those terms: the geography, time limit and other specifics. Remind the employee that information cannot be taken in any form: written, electronic or from memory. That means no pulling sales contact lists from their heads, their company cell phones or using information transmitted in e-mails or other electronic forms (text messages, etc.). Emphasize that the non-compete agreement exists and they must abide by it.
If you suspect that a former employee has violated a non-compete agreement, there are several steps you can take. You can send them a demand to immediately cease and desist. Or, you can go to court and get an order to stop engaging in the suspected activity. A judge can make a decision as to whether or not there is an imminent threat and issue a temporary restraining order. A hearing will then be conducted to decide if the restraining order will continue by issuing a preliminary injunction. Ultimately, a permanent restraining order may be granted or denied once all evidence has been presented and all arguments heard.
What terms are often overlooked and should be included in a non-compete agreement?
Make sure there are clear policies regarding access to electronic information, including scope of authorization for access and use of the information during and after employment. Aside from the non-compete, be sure to include a policy for use of e-mail and transmission of documents outside of the organization and what happens to these documents upon termination of the employment relationship. You might want to include a provision that entitles your company to compensation for legal expenses and attorneys’ fees for enforcement of the non-compete agreement. It’s a good idea to agree to set a nominal bond for temporary restraining orders so enforcing a non-compete agreement does not become cost-prohibitive. Finally, remember — preparations to compete are not violations of a non-compete agreement. Consult with an attorney as you develop and enforce a non-compete agreement to ensure you’re covered legally.
Mark Craig is a partner with the Litigation Practice Group at Brouse McDowell in Akron, Ohio. Contact him at MCraig@Brouse.com or (330) 535-5711.
Insights Legal Affairs is brought to you by Brouse McDowell
The recession caused businesses of all sizes to take stock of their organizations and find ways to run leaner, work smarter and maintain profits.
For many family businesses, this has meant asking whether their businesses could continue to support their lifestyle. Change isn’t easy, but those who took serious measures to improve efficiencies are now positioned to leave a successful legacy to the next owners, whether by succession or sale.
“By changing the way their businesses govern operations, many family owners have become more nimble and re-energized because they understand smarter ways to work,” says Tony Caleca, member in charge, audit services, Brown Smith Wallace LLC.
And that’s essential because businesses must embrace change and remain flexible to continue to compete in a global economy.
“The international flavor of business today is having a growing impact on all organizations,” says Bill Willbrand, member in charge, industry services, Brown Smith Wallace.
Smart Business spoke with Caleca and Willbrand about how successful family businesses are managing in an age of uncertainty.
Coming out of the recession, how can businesses regain the value they lost in the last few years?
The good news is that much of the money lost was value-based; its value depended on the desire of the marketplace to acquire businesses and on the ability of businesses to drive profits for buyers. As a response to the recession, businesses made their organizations leaner, resulting in a much lower overhead burden than they previously had. The result: a greater ability to generate cash flow and profitability.
The recession forced businesses to operate differently, to take a hard look at every component of their organizations and determine how each working part drives value to the overall business. It’s been a time of self assessment and retooling, and those coming out of the recession with a stronger organizational structure are poised to attack the market, both locally and globally.
Will banks finance expansion in this rebound era?
Banks are absolutely financing expansion for businesses today, but there is a caveat: Financial institutions are lending growth capital to businesses that are truly qualified. Those that are qualified are the ones that have worked closely with their banks through the good times and bad. These businesses have improved efficiencies in their organizations and done what’s necessary to improve cash flow and profitability.
Businesses positioned to get financing have close relationships with their bankers. They’ve enabled the bank to understand how their debt will be repaid and to fully understand how those loaned funds will be utilized to improve the long-term financial position of the business.
Banks are still willing and able to lend when they are confident in the business borrower. Banks typically gain this confidence by reviewing the history of how a business dealt with the recession and what strategies it used to reduce costs and expand products and services.
Preparation is critical for presenting appropriate materials to the bank and telling your story. Businesses should approach any financial discussion with the bank as if they were meeting with their largest potential customer. Flat out, businesses seeking financing must be that prepared.
What is the upside to the current situation?
Businesses that survived the recession are running more efficiently. They have reduced waste and addressed issues that may have been lingering for some time. The recession jumpstarted change at many organizations, and although it may have been uncomfortable, there’s nothing bad about that. They’ve survived.
For the next generation to lead the business, or, in the event of a sale, the next owners, this means many of the tough decisions have already been made. Businesses are positioned for success; they’re prepared to grow. The fat is off; the challenge for the next owners will be keeping it off.
When is the right time to start transitioning to the next generation, or to prepare a business for sale?
The transition process should always be ongoing, but a formal process should be initiated at least five years prior to an exit. It is critical to identify who will drive the business going forward. Who is the ‘A’ team? The future management team must be prepared for the exit. You don’t want to walk in one day to find you’ve got a new job; the owner is checking out.
Five years — or more — gives an owner the opportunity to determine what skills are needed in management. Where are the holes, and how can those be filled with talent? Time allows the family to work through the nonfinancial issues that are inherent in a family business, primarily, what’s next after the business is transitioned? During the transition period, family members and key advisers should be involved in planning the future as a team effort.
For example, a business might appoint a transition team consisting of key advisers, an outside board of directors, attorneys, bankers and accountants. The earlier that goals, strategies and ground rules are developed, the smoother the transition will be.
What key attributes will define success for the next-generation business?
It’s critical today to focus on creating a sales culture. As we move out of this recessionary period, many businesses are identifying a need to develop qualified salespeople who can expand the business as quickly as prudently possible.
Many organizations are running lean effectively in terms of cost structure, but they still must increase their market share. To do that, they need talented, dedicated sales professionals to drive business. Adopting a sales culture while remaining nimble will position a business to succeed far into the future.
Tony Caleca is member in charge, audit services, Brown Smith Wallace LLC. Reach him at email@example.com or (314) 983-1267.
Bill Willbrand is member in charge, industry services, Brown Smith Wallace LLC. Reach him at firstname.lastname@example.org or (636) 754-0200.
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The burden of administrating benefits can be overwhelming to a company’s already taxed human resources staff. Someone has to manage benefits enrollment, ensure that employees receive plan information, deal with billing and claims, and keep up with legislative changes and adapt the company’s processes to comply.
It’s a big job, and not all businesses can afford to employ a full-time benefits coordinator who is dedicated to these duties. That’s why benefits technology can be valuable to businesses of all sizes, making all of these administrative processes much simpler.
“Benefits technology can mean anything from a customized benefits portal for a human resource staff to online enrollment capabilities or an internal website for your company,” says Michael Bartolini, vice president, business practice manager, at First Commonwealth Advisors. “There are many ways that companies can use technology to help manage all of the administrative tasks associated with implementing and managing benefits programs.”
Smart Business spoke with Bartolini about how benefits technology can help keep your business efficient, competitive and compliant with the law.
How can benefits technology streamline processes to save a company’s HR staff time?
Many times, the person administrating the company’s benefits might also be handling other functions for the business. As a result, there simply isn’t enough time to properly focus on effectively managing the company’s benefits enrollment, billing, claims management and communications.
Online benefits portal systems can reduce the amount of paperwork and save time through the utilization of ready-made forms and materials. This type of advanced platform can help the company disseminate important information to its employees that drastically improves employee communication.
From the perspective of compliance, legislative updates can be received on a daily or weekly basis so the company stays informed and on top of all of the changes. And enrollments and billing can be processed more efficiently.
Customized portal systems can make the process less burdensome and free up staff to allow them to focus on activities that drive the bottom line.
How can benefits-driven technology keep employers up to date on legislative changes that may impact them?
With health care reform fast approaching, the proposed changes being phased in over the next several years can be overwhelming. Unless a business has someone to diligently follow the requirements of health care reform, it can be very difficult to stay on top of it all. The same goes for changes to retirement benefits, Family and Medical Leave Act, OSHA standards and other federal and state regulations. Sifting through the dense quantity of information on the Department of Labor website and other online sources is an arduous task that takes time away from the business.
Solutions provided through advanced online capabilities can eliminate the difficulties of this research by delivering critical legislative updates to you on a regular basis so your company can ensure compliance and communicate news with employees. It’s critical to have this information at your fingertips to mitigate that risk and prevent information gaps.
What enrollment efficiencies can be gained with an online solution?
Whenever an organization can reduce paperwork, efficiencies are gained. The value of online enrollment functionality is that it virtually eliminates paperwork from the process. This is a big deal, considering that many companies offer four or more benefits plans, such as medical, vision, dental and life insurance. Online enrollment makes it easier for a company to facilitate benefits.
Most important, it changes the mentality of enrolling in benefits because the sheer act of completing online forms causes employees to think more carefully about their coverage and choices. It empowers employees to act more responsibly as health care consumers, which is good thing for all parties involved.
Online enrollment isn’t complicated. User-friendly formats make this technology accessible for people with all levels of expertise. In addition, employees can enroll at home while consulting with family members.
How can a company use technology to communicate benefits more effectively?
Employees have much to gain from benefits technology because they can access information about their plans 24/7 through a company intranet. Beyond enrollment forms and plan information, an intranet site can include wellness education and announcements about health-related events, such as a companywide walking program or a healthy eating seminar.
How can technology simplify billing and claims management?
When managing benefits costs, it’s helpful to have breakdowns by state, location and department to identify trends in claims or premiums that can help you save money down the road. Customized reporting systems capable of providing common billing and expense management data give you the big picture of how benefits are being utilized in your company. Are there specific areas or locations that drive claims and expenses more than others? Is your funding strategy appropriate and is it in line with your expense budget? Are you being properly billed by your insurance carriers?
Taking advantage of such technology can help you make wise choices in the development and management of your benefits program. A tech-savvy benefits consultant can best advise you on how benefits technology can be implemented at your business to improve efficiency and make your company more competitive.
Michael Bartolini is vice president, business practice manager at First Commonwealth Advisors. Reach him at (724) 349-6028 or Michael.Bartolini@fcfins.com.
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