Kristen Hampshire

Thursday, 26 July 2007 20:00

Count your assets

Wealth management is important to every business owner because, the fact is, most of us plan on funding our retirement from the sale of our greatest asset. Because this is so often the case, we must plan how much wealth we need to maintain a comfortable lifestyle and determine whether our businesses are capable of “earning” this wealth so we can retire at a targeted date.

“Wealth management isn’t a process that takes a few weeks or even just a couple of years — it should be an ongoing strategic plan that involves your key advisers early on,” says Craig Johnson, president and CEO of Franklin Bank, Southfield, Mich.

The last few months, we covered how to set retirement goals, value and then sell your business with Mero Capo, president of APB Financial Group Ltd., the wealth management arm of Franklin Bank. Now comes the last step in your exit strategy: wealth management.

Smart Business asked Capo to provide insight on how to make the most of your assets and time during the ongoing process of wealth planning.

Even though wealth management is the last process of an exit strategy, when should owners begin planning?

Often, business owners think about wealth management as, ‘What do I do with this money now that I have it?’ While this is the case, you should be considering this question before you sell the business or even think of selling. How much wealth do you need? If you don’t have this wealth now, how will you achieve it before you exit your business? An investment adviser will help you address these issues while you can still do something about them. By waiting to manage wealth until after you’ve already ‘cashed out,’ so to speak, you may find out that you didn’t realize necessary gains — and this introduces a whole different management issue. Enlist in a professional, early on, who can help you determine objectives and evaluate your current situation. Once you know what your goals are, you reach them by developing your business and making sure you can boost sales, revenue or expand your customer base.

What should an owner consider when determining wealth management objectives?

Assets and time are the key variables in wealth management. First, you must figure out what lump sum of money you need to retire. You must know how much wealth you will require to sustain your lifestyle after you exit the business. The next question you should answer is, when will you exit the business? Some owners retire at 60, others plan to work until they can no longer do so. Establish these two goals as early as possible — time and needed assets. The same rules apply if you are an executive participating in a 401(k) or similar program.

Once you set these asset and time goals, what’s next?

This is when having an investment adviser is especially helpful. He or she will evaluate your current situation because you must understand where you stand now before you can figure out if your assets are at the level you expect for your retirement target date. You’ll tally the current worth of your business, your assets, outside investments and their returns. What will those investments look like on your retirement date goal? Will the assets of your business increase by that point? What assets can you rely on that are not generated by the sale of your business? Depending on your situation, you’ll identify that there is a shortfall or an overage in what you have versus what you need to retire. The next question becomes, how can you boost your assets, personal and business, to reach your goal? Now you are starting to create a pathway to meet your goals.

How should owners invest outside the business?

It’s difficult for owners to take money out of their net pay to put in investments, and many of us don’t fully explore all of the options available in the qualified retirement world. We view profit-sharing plans, 401(k)s and other benefit programs as something good we are doing for our employees. It’s a good idea to accumulate assets in a tax-deferred plan, so if you don’t get the value out of your business that you anticipated, you’ll still have a secondary nest egg to fall back on. And these days, there are many creative plans out there that are combination profit-sharing/defined benefit plans. Talk to an adviser about the options. You don’t want to count on the sale of your business alone to fund your retirement.

MERO CAPO is president of APB Financial Group Ltd., the wealth planning and advisory arm of Franklin Bank. Reach him at meroc@apbfinancial.com. Reach Craig Johnson, president and CEO of Franklin Bank, at clj@franklinbank.com or (248)386-9860.

Monday, 25 June 2007 20:00

Building value

Brentwood Bank client David C. Stoehr is a perfect example of how proper planning and market intelligence can pave the way for a successful commercial real estate venture. Stoehr is founder and president of Chem-Trade International, which designs and builds pollution control equipment. Like most entrepreneurs who built their businesses from the ground up, Stoehr eventually expanded to the point that he needed more square footage.

The problem? He couldn’t find what he wanted, so he decided to construct a new warehouse/office building — one larger than just his business would fill. “His conversations with other local business owners indicated that there was a need in his area for this type of flex-space facility. Additionally, the construction of a larger facility would present an investment opportunity in which he could supplement cash flow and build wealth through equity over time,” says Jeff Skocik, vice president and manager of commercial lending at Brentwood Bank.

Skocik sees more and more business owners/principals contemplating similar commercial investment opportunities — both out of short-term necessity and for their long-term equity and revenue potential. Before taking a leap into the commercial real estate market, he advises business owners/principals to consider three things:

  1. your current and future needs versus corresponding market opportunities

  2. ultimate project objectives versus your return-on-investment strategy

  3. your financing options relative to the requirements of the specific project type you want to undertake (since those requirements will vary depending on the scope and scale of each project).

Smart Business asked Skocik to address the commercial real estate investment and financing process, in the first of a series.

Why might a business owner decide to invest in real estate?

For many of the same reasons you might decide to buy a home rather than continuing pay rent. Generally, we find that business owners simply realize they are at ‘that point.’

‘That point’ may be when you finally get comfortable with the idea of making a real estate investment and feel it’s time to take it on. Maybe it’s when you realize that you cannot grow unless you acquire additional space. It could be when you need to meet special needs or operating requirements — for example, adding loading docks, refrigeration equipment, the capacity to handle large cranes, etc. Or maybe it’s strictly a personal or business investment decision.

What financing options are available for business owners and individuals who decide to invest in real estate?

The key thing to understand about any such investment is that different banks and financing entities will have different levels of expertise with these kinds of transactions. In order to expedite matters and minimize headaches, it is critical for the business owner/principal to seek out core competencies in areas such as real estate-based lending, construction financing and large-scale project development, if any of these are your intentions.

By ‘intentions,’ do you mean the same thing as your ‘ultimate project objectives’?

Yes, exactly. Your project objectives ultimately follow from the way you decide to approach both your needs and the corresponding market opportunities: you might-pursue and purchase an existing facility or renovate or expand to satisfy additional requirements. Or, if a facility is not available from the commercial stock in the area, you may decide to purchase land on which to design and construct a new facility.

David Stoehr went one step beyond his own needs and decided to also fill a need he found others shared in the marketplace. In doing so, his objective, ultimately, could have involved anything from making a simple real estate investment to undertaking a full-blown development project. It’s important to understand that all of these scenarios involve and require different things, from a financing perspective.

What lessons can we all take from Stoehr’s experience?

Doing your homework is critical. In Stoehr’s case, he did his due diligence on the investment before jumping in. He built a strong case. For instance, he knew that he wanted to lease a portion of the building to tenants. So to gauge interest in his construction project, he pre-leased the property, advertising the building so he could weigh the support of the business community. Also, he researched how many other types of buildings were exactly like the one he wanted to build. He found out there was none, which further justified his desire to invest in a ground-up project.

The question, ‘Should I lease or buy property?’ is difficult for many business owners/principals. By researching the market, predicting income on his investment and estimating long-term returns, Stoehr realized that he had an opportunity to both build-to-suit and benefit financially over time. When that’s the case, the opportunity you have to invest in real estate may simply present too many up-sides to ignore.

Look for more on “Building Value” in future editions of the magazine.

JEFF SKOCIK is vice president and manager of commercial lending for Brentwood Bank in the South Hills. Reach him at (412) 409-9000 or jskocik@brentwoodbank.com.

Monday, 25 June 2007 20:00

IT as a strategic strength

Technology in business has evolved from being a tool to help master tasks, such as basic communications and

record keeping, to serving as a critical success factor in a company’s productivity, customer satisfaction, processes and profitability. Owners invest large dollar amounts in information technology (IT), and they expect a sizeable return-on-investment (ROI).

While companies spend considerable amounts on IT, their ROI depends on whether the owner has integrated technology into the business plan, rather than making it an afterthought. “Business owners should ask how technology will impact the company,” says Sassan Hejazi, director of Technology Solutions at Kreischer Miller. “Will it enforce their goals? What value will IT generate both quantitatively and qualitatively?

“Technology projects are really business improvement projects,” he says.

Obviously, investing in must-haves like billing or e-mail systems is critical. These rudimentary “cost of doing business” technologies are baseline components that must be upgraded. But innovative technologies that help a business become more “lean” will separate a company from its competition, Hejazi says.

Smart Business spoke to Hejazi about how to align your IT investment with your business strategy to realize a return through improved profitability.

Explain the difference between ‘must-have’ and innovative IT.

There are certain technologies that are essential to doing business, which should be world-class in terms of uptime, reliability and accuracy. Without them, it’s comparable to not having power. A Web site that isn’t functioning or e-mail that is down will inhibit customer service and your ability to communicate with vendors, customers and employees. Outages and security breaches are serious disruptions to your business. You have to make sure this technology is updated, and doing so is a serious investment for most companies. Still, this ‘must have’ IT won’t set you apart from your competition. That’s where innovative IT comes in. This is technology that will help you improve processes and profitability, and it should be closely linked with your strategic business plan.

How can IT increase a company’s competitive advantage?

First, it’s important to recognize that no two businesses are alike. When you consider ways to integrate IT into your business, you should evaluate the following categories: customers, suppliers, competition, employees and processes. What type of technology will enable your customers to do business with you more easily? Can you attract new customers by offering a certain technology, such as a customer service function on your Web site? What is important to your suppliers? Supplier transactions, shipping, receiving, accounting and other activities can be modified for convenience and ease. What is the competition doing? Also think about your employees and what technology capabilities they require to work productively. From there, review all of your processes and your operation. Are there areas where you could eliminate paper, waste, downtime, etc.? Finally, what ROI do you expect from this technology?

How do you measure a technology ROI?

Before you invest in any technology, you need to take a look at the current state of your business. Figure out how long it takes your company to complete a certain process. Survey customers and employees. Learn where the weak points are in your business so you can decide how technology can provide an advantage. If, for example, your current technology enables you to ship orders in two days, how much time and money could you save by cutting this shipping time in half to just one day? From a customer service perspective, perhaps an average service call takes one hour. Can you provide an online tool for customers so they can solve their own problems? And, if so, how much labor, time and money will that save you? This measurement process is tedious, but important to determine the true ROI of technology.

What is the biggest mistake business owners make when investing in technology that prevents them from realizing a substantial ROI?

Often, we forget to include people who understand technology early on in the business-planning process. As I mentioned before, technology projects are business projects. Management has to be aware of technology and include it in their strategies. If you devise a business plan and technology isn’t a part of it, you will put yourself at a disadvantage. Technology sets the stage for your success.

SASSAN HEJAZI is director of Technology Solutions for Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or shejazi@kmco.com

Monday, 25 June 2007 20:00

Smooth ‘sale’-ing

Selling a business is similar to listing real estate in many ways. You can sell it yourself by passing word to competitors or peers in trade associations, or you can work with a broker or investment banker, who will serve as an “agent” that represents your business and finds the best buyers. There are “showings” — in a business’s case, these are portfolios that demonstrate a company’s success — and there are sometimes economic issues that can hinder your ability to sell. Pricing is important, and timing is of the essence.

“Preparing to sell your business begins months or years before you make the decision to sell,” says Craig Johnson, president and CEO of Franklin Bank, Southfield. “As you get to that point, be sure to align yourself with professionals who can steer you in the right direction.”

Smart Business asked Mero Capo, president of APB Financial Group Ltd., the wealth planning and advisory arm of Franklin Bank, to provide insight on who might buy your business, how to reach these prospects and how to position your company for a smooth sale.

When should an owner begin planning for a sale?

When selling your business, you want to plan your exit so you can get the return you expect. There are a number of factors to manage before you can sell your business, from taxes to mitigating the impact of economic shortfalls. High gas prices may have a negative impact on your business, so you’ll want to plan early so you can time your exit around these fluctuations or make up for any profit hit in other departments. Regarding taxes, you should consider the way your business is structured and the tax implications that could have following a sale. This brings to light the importance of timing your sale well in advance — as much as 10 years ahead of time, if possible.

Once an owner decides to sell, what are steps to position the business as an attractive ‘buy’ to prospectives?

Everyone who is interested in your business will want to know whether what they are buying will produce a return on investment, so put together a portfolio of your business that can serve as a mini commercial to prospective buyers. Include several years of financial statements, including a year-to-date statement. Pull together your best marketing materials — brochures, sales slicks, testimonials, etc. The point is to show prospective buyers that you have run your business well.

Who are potential buyers for businesses? Where do owners find these prospects?

A lot of businesses are bought and sold by word of mouth. When you finally decide to sell, you have a number of options. Your first instinct will be to discuss this with your certified public accountant (CPA) or attorney. While these professionals can lend insight on the sales process and review any of the financial and legal details with you, the chances are slim that they can find a buyer for you. They have a role to fill in the sales process, but finding buyers is not one of them. Instead, look at your marketplace. Check out the competition. They are often the best prospects to buy your business. They know the industry, they can value your company very well, and you can usually count on a fair deal. They may want the assets of your business, the customer list, the whole package. It’s a win-win for both parties.

What about business brokers and investment bankers?

Business brokers are well-connected in the business community and maintain lists of prospective buyers. They help determine the value of your business, and they will help you negotiate with buyers. Their compensation structure is similar to that of real estate agents. They may charge a certain percentage on the first million and a reduced fee for additional millions. For example, 10 percent to 11 percent on the first million dollars. It is beneficial to call a business broker when the value of your business is $5 million or less. For larger-scale sales, you may turn to an investment banker. You may also align with an investment banker if your industry is rapidly changing or you use proprietary technology. An investment banker will prepare a detailed analysis of your financials and the future value of your business, based on technology and your industry. Investment bankers may charge an hourly fee or a commission based on the sales price. They may ask for some equity or participation, or their fee structure may include a combination of these options.

MERO CAPO is president of APB Financial Group, Ltd., the wealth planning and advisory arm of Franklin Bank. Reach him via meroc@apbfinancial.com. Reach Craig Johnson, president and CEO of Franklin Bank at clj@franklinbank.com or (248) 386-9860.

Saturday, 26 May 2007 20:00

Value your business

To business owners, the value of the companies they created, nourished with capital, energy and time, and grew despite personal risks and inevitable market ups and downs, is immeasurable. The businesses and their assets are everything, and they are priceless — to the owners.

What is your business really worth? This is important to understand whether you are in the position to sell or not. “Periodically during your business lifecycle, you should get a business valuation so you have an estimate of the worth of your business,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich.

Johnson turns business valuation, the second step for successful exit planning, over to Franklin Bank’s wealth planning and advisory arm: APB Financial Group Ltd. and its president Mero Capo. “Valuing your business properly enables you to transition out effectively,” Capo says.

Smart Business discussed with Capo what buyers look for and how a seller can properly value a business to maximize gains when it comes time to exit.

When should owners value their businesses?

The key is to start early — well before you anticipate exiting the business. Valuation is a fluid process, and you need to take the time to do it right. So begin as you start your succession plan, at least five years before you want to exit your business.

Before you begin the valuation process, consider your personal finances. How much do you need to get out of your business to maintain your standard of living? Determine this early because the business’s value may not allow you to live as you choose after exiting. In that case, you will go back to the drawing board and increase overall value through growth, by trimming fat or increasing sales.

What are some preparatory measures to maximize the value of a business?

Before you sell your business, you don’t want to be running it out of your home and tracking financials on scrap paper. You need solid records, good, clean profit-and-loss statements and a set of operating systems that are productive, efficient and can be transferred to a new owner. A buyer will need a very clear picture of how your business operates and what kind of return he or she can expect from his or her investment. Your house needs to be in order, and your cash flow must be healthy.

What else will a third-party buyer look for in a business?

Put yourself in the buyer’s shoes and consider what aspects of a company make it attractive. For one, what is the economic outlook for the industry and in what financial condition is the company?

As a seller, you should be able to effectively communicate the nature of your business and its history. Is the company one that can live on without you? Are key managers in place, and will they stay onboard following the transition to new ownership? This is especially important if a buyer from another industry is considering your business. People are a strong asset.

Finally, you’ll provide the buyer with the net assets of your company. This is where a business valuation expert comes in. He or she will present the buyer’s point of view and the true market value for your business.

What happens when owners overvalue their businesses?

Basically, the business sits on the shelf. But keep in mind, depending on your succession plan, you may not want the business to be valued at its highest. For example, if family will purchase the business from you, you’ll want to mitigate tax costs (gift tax and corporate gains tax) and also ensure that the operation is within reach for this person. If it is priced too high, family may not be able to afford the business, and even so, the taxes may be prohibitive. On the other hand, if you will sell your business to a third party, you want to maximize your gains.

Once owners place a value on their businesses, what variables determine whether they will get this value from buyers?

First, consider the economy during the point in time you want to sell. Is your industry in a downturn? This will impact the value of your business to a buyer. Also take a look at interest rates — the availability of money. If interest rates are high, your cash flow should be able to pay the buyer’s debt service.

If you value your business several years before you plan to sell, you can exit at the most advantageous time and maximize the value of your life’s work.

MERO CAPO is president of APB Financial Group, Ltd., the wealth planning and advisory arm of Franklin Bank. Reach him via meroc@apbfinancial.com. Reach Craig Johnson, president and CEO of Franklin Bank, at clj@franklinbank.com or (248) 386-9860.

Wednesday, 25 April 2007 20:00

Reduce compliance costs

Sarbanes-Oxley turns five this year, marking a zero-tolerance response to corporate scandals like Enron, and a new era in auditing and internal controls reporting designed to protect investors and help companies establish more effective systems.

But complying with Sarbanes-Oxley, more casually known as SOX, is costly and redundant when you figure that outside auditing firms must perform double audits, first on managements’ assessment of internal controls, then again by testing the controls and forming a conclusion about the effectiveness of internal controls.

“New guidance from the SEC and Public Company Accounting Oversight Board (PCAOB) is the first major step toward addressing excessive compliance costs,” says Chris Meshginpoosh, director of Management Advisory Services for Kreischer Miller, Horsham, Pa.

Indeed, cost-prohibitive assessment and auditing procedures have driven some smaller companies to avoid an initial public offering, or to go public in overseas markets instead. Large public companies spend hundreds of thousands of dollars complying with SOX, and companies with market capitalization of less than $70 million confront similar costs — a disproportionate burden.

Smart Business spoke to Meshginpoosh about ways companies can mitigate SOX compliance costs even before final guidance is expected to be passed in mid-2007.

What exactly does the proposed guidance mean by a ‘top-down, risk-based’ approach to internal controls assessment?

Basically, this approach involves starting at the financial statement level and working your way backward through internal control processes as opposed to beginning from the ground up. During their first year of compliance, many large companies started by asking process owners to document every process, with almost complete disregard to the size or risk profile of the related account balances or disclosures. In other words, even if the controls in these processes failed, it would be of no concern to investors and, ultimately, would have very little impact on the company’s bottom line. Given the size and geographic dispersion of many large companies, this type of an approach was exhausting.

Instead, the SEC and PCAOB are once again stressing the importance of a top-down risk-based approach. Which account balances are material? Which accounts involve a high degree of risk? Are there high-level controls such as detailed variance analyses that address the risk, or do I need to rely on lower-level process controls?

Where might relying on entity-level controls might be appropriate?

Let’s take payroll. Most companies rely heavily on employees to conduct operations and, as a result, payroll balances are generally material to financial statements. But let’s take an example where a company primarily employs salaried workers and experiences very little employee turnover. Because payroll balances would be relatively predictable, detailed budget versus actual comparisons performed by management that require investigation of variances in excess of defined thresholds might represent a highly effective entity-level control associated with certain payroll assertions.

However, if the company employs a large number of hourly employees, has a high rate of turnover as well as substantial cyclicality, a budget-to-actual comparison might not be as effective. Therefore, the company might need to rely on lower-level controls such as supervisory reviews of timesheets.

Are there areas where companies need to spend more time?

One of my biggest concerns is that companies have spent a considerable amount of time on low-risk areas, but have not focused closely enough on areas that require an understanding of complex accounting issues. However, if you look at the nature of material weaknesses disclosed by public companies, a substantial majority involve errors associated with the application of complex accounting pronouncements.

If companies employ effective top-down, risk-based approaches, they should identify these types of potential issues in the planning process. Once identified, companies should think long and hard about the qualifications of their personnel and decide whether augmenting internal resources with outside accounting expertise is warranted.

What resources can companies refer to as they consider ways to implement the proposed guidance now?

The Committee of Sponsoring Organizations (COSO) of the Treadway Commission established a framework a decade ago that still serves as the de facto standard for internal control assessments. Also, the SEC's proposed guidance is available on its website, www.sec.gov. Finally, companies can always consult third party advisors to assist them in their evaluation efforts.

CHRIS MESHGINPOOSH is director of Management Advisory Services for Kreischer Miller in Horsham, Pa. Reach him at cmeshginpoosh@kmco.com or (215) 441-4600.

Wednesday, 25 April 2007 20:00

After retirement, what’s next?

After dedicating years to growing and nurturing your business — more than half of your lifetime, in many cases — how do you step away from the 24/7 role of chief executive officer and back into just being “you”? Many business owners struggle to reclaim their identities after retirement.

“There is a very odd feeling when you wake up in the morning and you do not have anywhere to go for the first time,” says Joel Guth, an advisor with Citigroup Global Markets Inc.’s Family Office in Columbus.

“When you think about why you created the business and accumulated wealth, it probably was so you could live your lifestyle, support your family and have an impact on organizations that are important to you,” Guth says. “It’s important to consider what the next 20 to 30 years after retirement will be like without the business.”

While you’d probably shudder at the thought of running your business without a mission statement, have you adopted a family or personal mission statement? Have you already articulated what you want to accomplish separately from your business?

Smart Business discussed with Guth why planning the personal side of retirement is critical to a successful exit strategy.

What is the first issue you address with business owners who are planning retirement?

First, we address lifestyle. What kind of lifestyle do you want to have in terms of income? So much of your personal life is wrapped up in the financial side of the business: cars, travel and entertainment. When you recast your financial statements, both personal and for the business, how much income do you need to support your chosen lifestyle? Then, create a personal budget. What do you need to be happy, and do you already have adequate savings to sustain that level?

Does this affect how soon a business owner can retire?

Yes, if you are currently at a level that can sustain the lifestyle you prefer, you have decisions to make. Would you like to maintain some involvement with the business, or do you want to sell it and walk away?

Your timeline for exiting the business dictates when you will need to begin the succession or merger and acquisition process. Ideally, you should plan three to five years in advance. Meaning that if you want to retire in 2009, you need to begin the succession/exit process now. Because the reality is that you’ll need at least 6 to 18 months to identify a new owner (if you sell), and this candidate will likely want you to stay in the business for 6 to 12 months while he or she transitions into your role. If you plan to pass the business to a family member, you must start developing a succession plan in terms of who will take over your daily responsibilities along with the most efficient manner to transfer ownership.

During this planning time, what should an owner be thinking about personally?

Everyone’s ideas for the perfect retirement are different. Maybe you will start a new venture, perhaps turning a passion into a new business. For example, one of our clients left his primary business to purchase and run an art gallery. Or perhaps you’ll act as a mentor to younger business-people. Many retired executives get involved in charities.

We challenge clients to think about the next 5 to 10 years and outline their top two goals in each of the following areas: family, health, charity and community. Ultimately, you will experience a successful, fulfilling retirement if you get involved in a passion or pursuit after you exit the business.

Think about how much free time you have today, and what you choose to do with that time. Now, imagine that you have triple the amount of that time. Could you occupy it with what you do today? If not, how will you spend that time?

It’s not unusual for business owners to learn that they haven’t cultivated interests outside of their companies. The business is all-consuming and other outside interests go by the wayside. If this describes you, an important part of your retirement planning is to devise a strategic plan for what you want to accomplish outside of your business. And what are the initial steps to realize this vision?

Statistics have shown that without a motivating vision, when people quit working, their life expectancy decreases. We are living longer, and we are living healthier. After exiting a business, you must have fulfillment in the rest of your life, and you will need a plan to accomplish that.

Unless you are otherwise advised in writing, Citigroup Global Markets Inc. is acting as a broker-dealer and not as an investment advisor.

Citigroup Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and non-bank products and services through various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC. Joel Guth is a registered representative of Smith Barney, a division of Citigroup Global Markets Inc., and has qualified to service Citi-group Family Office clients.

JOEL J. GUTH is an advisor with Citigroup Global Markets Inc.’s Citigroup Family Office in Columbus, Ohio. Reach him at (866) 464-2750.

Wednesday, 25 April 2007 20:00

Ready to buy in?

Contrary to the home real estate market today, sellers have the upper hand in commercial investment property transactions. Attractive capitalization rates are encouraging investors to present developers with competitive offers. Meanwhile, current owners are being pursued by buyers who sold a previous property to avoid capital gains taxes and must reinvest in a new real estate project before their escrow deadlines. Both factors drive up property value.

“You are competing in a scenario where there are a lot of dollars chasing different projects,” says Steve Nielsen, senior vice president of commercial real estate at Sky Bank in Northeast Ohio. “If a property is in a good location with a stable occupancy, a decent tenant mix and longer-term leases, it is definitely a seller’s market.”

A number of creative lease-to-own programs allow business owners to settle into a purchase arrangement over time. And the Midwest’s historically stable real estate market, along with overall low interest rates, sweeten the deal for those who decide now is the time to invest.

Smart Business asked Nielsen to discuss strategies for investing in commercial real estate and the state of today’s market.

What market factors will buyers of commercial property face today?

Northeast Ohio is not considered a growth market for real estate, but it has always been a solid market. The Midwest avoids the roller-coaster ride and fluctuations of highs and lows that some markets face. This area is more of a steady road, and it is a dependable region to invest in commercial real estate. But what buyers must consider is the phrase you always hear in real estate: location, location, location. Wherever you invest, how attractive is that location to other potential suitors? And is it a building that has a stable tenant history?

What investment opportunities do you see in the retail and office space sectors?

Currently, retail property is saturated in Northeast Ohio, with the exception of small pockets of growth. Development tends to follow the job market. Vacancy rates in Class A buildings are stable, but you don’t see a lot of new building projects because there is sufficient space out there to satisfy tenant demand. Meanwhile, capitalization rates are lower than five years ago, which drives up the value of property. So you’ll find investment properties for sale because owners want to see if they can reap the profits of this attractive market. This means buyers may have some competition at the dealing table.

What does a business owner who is interested in buying office space need to bring to the table?

Typically, banks will require about 20 percent down for a commercial real estate loan. So, if you are considering a property that is $5 million, you’ll need $1 million for a down payment. And with the way leases are structured these days, the tenant pays operating expenses. Is it in your best interest to buy or lease? The first question you must consider is whether you have the capital to lay out for a down payment to purchase a building. Second, are you prepared to assume the responsibility of covering the expense to maintain and repair the facility?

Are there creative options for business owners who can’t lay down that kind of capital but still want to invest in commercial property?

There are various ways to structure a lease, and many lease-to-buy arrangements can help you defray the cost of the down payment. For example, a lease may offer you the option to buy at a certain point in time during the lease term. Lease payments may be structured so that a percentage each month goes toward the purchase price. Other leases offer first right of refusal. This type of agreement does not bind you into an eventual purchase agreement, but instead says that you have the first chance to buy the property if the owner decides to sell it during your lease term. These are a couple of lease-to-own options, and there are many more. Essentially, you could enter an agreement where you earn that $1 million down payment over a 10-year lease period.

Is it better for business owners to buy or lease these days?

It depends. The interest rate environment has been attractive for some time. But you must decide whether you want to put this asset (investment real estate) on your balance sheet. It will affect your debt ratio, and there are some accounting pros and cons to purchasing a building. So you should consult with an accountant to determine if this is truly a suitable investment for your business.

STEVE NIELSEN is senior vice president of commercial real estate for Sky Bank in Northeast Ohio. Reach him at Steven.Nielsen@skyfi.com or (330) 628-8709.

Monday, 26 March 2007 20:00

What’s the plan?

You have probably been setting and reaching business goals for some time, marking your progress by market share, sales or percentage growth. Regardless of your stage in business, you set targets for performance and reaching them assures your success.

But what about setting goals with the business? How will you exit the business five to seven years from now? Your immediate goals for your business should align with these plans for the future.

“If you want to pass the business to family or key management, do they have the skills or will you need to train them?” asks Joel Guth, an advisor with Citigroup Global Markets Inc.’s Citigroup Family Office in Columbus. “Or do you want to sell the business, and if so, what is your strategy to grow it over the next three to five years so you can get a premium for it?”

Because answering these questions requires internal analyses, financial projections and a well-laid plan, Smart Business talked to Guth to determine exercises to help you determine if you are on track to reach your goals with the business.

How does a business’s life cycle affect an owner’s future business plans?

Businesses go through various stages. The first stage is start-up, when you work toward profitability. The middle stage is profitability, when you ramp up growth. The third stage is maturity. By then, your business is much more stable, it is paying dividends and the growth rate has slowed down. Before this stage, you must ask yourself if you want to take the business to the next level, to grow and become an industry player — and if not, what are you going to do with the business?

Understanding your position in the business life cycle is critical before developing a strategic plan for growth so you can eventually sell, or for training so you can pass the business to family or employees. You always want to time the sale or succession to your advantage.

How does performance during the mature stage of a business, even if an owner doesn’t plan to exit for several years, affect the future value of the business?

If you allow the business growth to slow to a 5- or 6-percent rate during the mature stage, you could reduce the value of the business. You get a better premium for a business that grows at 20 percent versus 5 percent.

Timing the sale at a high point for your business is critical. If growth has slowed, you may need to consider ways to ramp up growth before selling. That may mean taking on debt to expand the business, developing a new product line or reaching out to new customers.

When the goal is to sell the business, you must sell at the best time, meaning the best profit margins and the best point in the industry’s economic cycle.

What if an owner wants to pass the business to family or key employees?

Then, ramping up growth is not necessarily the best approach. For example, if you grow your business from $50 to $100 million and you want your son to buy it, you have to fund a $100-million purchase. So if the business is growing rapidly and you want to pass it on, you should enter an arrangement that allows you to give shares to the heir at today’s value, before you pass the baton. When growth occurs in the successor’s name, it is much easier for this person to purchase the business down the road.

Regardless of whether you sell or pass on the business, you should do a S.W.O.T. (strengths, weaknesses, opportunities, threats) analysis. This is a standard exercise designed to get you thinking about what areas of the business you need to improve. This analysis also serves as a springboard for developing a strategic plan for the next five to seven years.

What projections should owners figure as they develop a goal for their business?

You may need to make operational adjustments and invest in growth if you plan to sell. For example, you may need to expand your sales force or hire a manager. You’ll need to plan for these expenses and determine whether the investment of time and money you put into the business to make it more saleable is worthwhile.

Meanwhile, it is equally important to project financials if you are planning to pass the business to family or employees. This way if you foresee rapid growth, you can discuss options with your financial advisor to ensure the business will be within reach for your successor.

Unless you are otherwise advised in writing, Citigroup Global Markets Inc. is acting as a broker-dealer and not as an investment advisor.

Citigroup Family Office is a business of Citigroup Inc., and it provides clients with access to a broad array of bank and non-bank products and services through various subsidiaries of Citigroup, Inc.

Citigroup Family Office is not registered as a broker-dealer nor as an investment advisor. Brokerage services and/or investment advice are available to Citigroup Family Office clients through Citigroup Global Markets Inc., member SIPC. Joel Guth is a registered representative of Smith Barney, a division of Citigroup Global Markets Inc., and has qualified to service Citigroup Family Office clients.

JOEL GUTH is an advisor with Citigroup Global Markets Inc.’s Citigroup Family Office in Columbus. Reach him at (866) 464-2750.

Monday, 26 March 2007 20:00

License to succeed

You’ve purchased software and read the licensing agreement that pops up on the screen. The lengthy notification asks you to check a box to indicate that you “agree” with the terms.

“Virtually no one reads and they click ‘next,’” says Ron Herd, Microsoft Practice director for Pomeroy IT Solutions in Hebron, Ky. Herd meets with many clients who struggle with understanding their options related to Microsoft licensing and how to maximize their investment in Microsoft technologies. “A lot of people think licensing is mundane and tactical. But when you evaluate your business goals and the technology you will need over the next three to five years, you will maximize your Microsoft investment by licensing it under a program that makes the most sense for your business.”

Smart Business asked Herd to discuss Microsoft licensing options and why it is critical that business owners choose the appropriate agreement for their business needs.

What is a license exactly?

You don’t actually buy software — you buy a license to run the software. For the vast majority of software publishers, including Microsoft, that license is governed by an End-User License Agreement (EULA). That is the statement that pops up when you install a program and says ‘Read this first and check the box before continuing.’ So, you are actually not purchasing software, but rather, a license that says what you can and cannot do with the programs.

What are the risks of not licensing software appropriately?

First and foremost, the risk is not being in compliance. Most businesses are in compliance, or want to be, but sometimes the complexity of understanding all the options can be daunting. The second major business risk is not being in the right licensing program. Entering into the right program based on your business goals and objectives will ensure that you are receiving the greatest discount as well as maximizing your investment in Microsoft technologies.

When do most business owners confront licensing issues?

A lot of times, customers don’t think about licensing until they are ready to buy new software or upgrade versions, or as needed. It’s strategic if they focus on it from a programmatic perspective and map their business goals and objectives over the long run to the right licensing program to help them achieve those goals and objectives.

How do you outfit a business with the best licensing option?

We sit down and try to understand what Microsoft programs the company currently runs. What version are they on? Does the business have a migration plan in place for those products? We help make sure that each account understands the features and functionality of the software they own, and how they may be able to take better advantage of it to increase revenues, decrease costs and enhance communications.

For example, a lot of our customers today are looking for ways for their field-based service employees and salespeople to have access to information anytime, anywhere. These salespeople need the ability to connect with customers quickly with the right information. They may just have cell phone coverage today but they want to take a look at enhancements to improve their messaging and mobility. This may sound like it has nothing to do with software licensing, but it is vital information to help ensure we match the right licensing vehicle to each customers’ business needs, especially over a longer period of time.

What are some licensing agreement options?

Agreements depend on the size of the business and its goals, as well as its need for flexibility. Without going into tremendous detail here, Microsoft has several different types of licensing agreements. It’s a double-edged sword for them because, on the one hand, these options provide a lot of flexibility to meet each customer’s needs, but the increased flexibility tends to create confusion as well.

Do business owners realize that there is much more to licensing than agreeing to terms during software installation?

It really helps to sit down with someone who can match a business’s goals with its software needs and then help understand the options. The cost savings of making the right choice are significant. For example, we helped one of our larger clients avoid $5 million in unnecessary expenses. In a small business situation, the impact can be just as great.

RON HERD is Microsoft Practice director for Pomeroy IT Solutions in Hebron, Ky. Reach him at (800) 846-8727 or rherd1@pomeroy.com.