How sustainable companies focus on the long term to build success

In light of the sheer volume of short-term challenges businesses face, it can be easy to forget to focus on activities that lead to long-term success.

“Companies generally don’t demonstrate success over decades by accident,” says Christopher Meshginpoosh, Director, at Kreischer Miller.

“When you analyze the traits of those that are successful over the long-term — that is, those with sustainable businesses — many common themes emerge.”

Smart Business spoke with Meshginpoosh about the common traits of sustainable businesses.

What do executives at sustainable businesses do differently than others?

One of the obvious things is that they do a better job of focusing on long-term objectives. This is an area where family businesses often outperform others. Because of their sense of obligation to the family, owners tend to make decisions based on the potential impact on future generations rather than on near-term results.

Are sustainable businesses often more frugal than others?

There are times when all businesses tend to be more frugal, such as during economic downturns. However, one factor that contributes to long-term success is managing costs with the same degree of urgency in both good and bad times. This is another area where family businesses tend to do a much better job. They often avoid committing to unnecessary fixed costs during good times, which reduces the risk of losses during economic contractions.

Another benefit of lower fixed cost levels is that it reduces the need for layoffs during a downturn, which can foster employee loyalty and reduce long-term turnover rates.

How do sustainable companies measure their performance?

They tend to focus on traditional profitability and leverage metrics even when others no longer think they are important. Remember the dot com bubble? There were plenty of companies, investors and analysts that said profitability and cash flow did not matter.

While it’s possible to trade profits for revenue growth while capital and credit markets are open, it can be a recipe for disaster when the economy tightens. Closely-held businesses often thrive in this regard because the higher cost of capital requires that they monitor profitability, cash flow and leverage.

Are there aspects of long-term success where public companies have the upper hand?

Public company boards often do a much better job focusing on management succession plans. Additionally, incentives offered by public companies — like stock options or stock awards — can help them lure top talent. However, private companies also have a variety of financial incentives at their disposal, such as phantom stock programs or deferred compensation programs.

How do sustainable companies keep employees engaged?

They don’t rely solely on economic incentives. Many studies have shown that employee satisfaction is highly correlated with the level of control or autonomy granted to employees. This is where family businesses often struggle, because granting an outsider a seat at the table can be difficult.

However, unless there is an unlimited bench of talented family members, a family-owned business may not be successful in the long-run without granting some form of managerial control to outsiders.

What approach do these businesses take toward mergers and acquisitions?

These companies tend not to bet-the-farm on risky acquisitions, such as those involving large targets or those that require a substantial amount of debt financing. Avoid those two, and your odds of thriving in the long-term will dramatically increase even if a particular acquisition doesn’t turn out as planned.

While there will always be risk in business, adopting some of these techniques can reduce risk and increase the odds that your business will outlast you.

Insights Accounting & Consulting is brought to you by Kreischer Miller

 

Understanding your options in a commercial lease to create flexibility in an ever-changing economy

Steve Kim, Senior Associate, Transaction Management, Plante Moran CRESA

As a company weighs its options between signing a short-term and a long-term commercial lease, there are many things it must consider.

“Organizations need to weigh the benefits of locking in historically low lease rates long-term (seven to 10 years) or having the flexibility of a short-term lease,” says Steve Kim, a senior associate, Transaction Management, with Plante Moran CRESA. “Each comes with benefits and risks.”

Low real estate costs can help increase your competitive advantage. However, there are potential downsides to entering into a longer contract that need to be realized and hedged against to create maximum flexibility for your company.

Smart Business spoke with Kim about lease terms and how to negotiate the right conditions to suit your business needs, both today and in the future.

What crucial areas should a lessee consider when choosing real estate for a long-term lease? 

When considering a long-term lease, a business should first determine whether the real estate is aligned with its strategic business plan. For example, does the space have room to accommodate your long-term growth plans? Does the building fit with your company’s image and brand? Conducting a space program is essential versus adding a percentage to your current square footage. This exercise will categorize and assign a square footage to all of your space, including conference rooms, executive offices, staff work spaces, common areas and storage, as well as account for future growth.

In addition, with building values at historic lows, purchasing real estate may be a viable option to consider, giving you the ability to lease out space until you need it.

What conditions would signal to a business whether a short- or long-term commercial lease is a more favorable option for a business?

Short-term leases offer a company the most flexibility, but they do have a downside. Lessees often don’t have as much room to negotiate terms and conditions in a short-term agreement as they do in a longer-term one. Also, landlords know all too well the cost of moving a business and could raise your rent at renewal, betting that you will not want to relocate. In addition to potential rate increases, there is no guarantee that you will be able to renew a short-term lease, especially if a large or long-term tenant needs your space.

Long-term leases will typically offer higher tenant improvement allowances, while short-term leases may require out-of-pocket costs by the tenant. But long-term leases also carry risks. Business conditions may change while you are locked into a long-term agreement, making it difficult to expand or contract your business based on a change in your strategic direction. However, an early termination option can be negotiated into a long-term lease to offer some flexibility while maintaining the security and extended savings.

What is an early termination option?

An early termination option allows you to opt out of your lease at a certain point in the contract, which reduces some of the risks that can come with being locked into a long-term agreement. It also offers an opportunity to renegotiate with your landlord midway through your agreement.

A company could work out an option to extend a short-term lease to hedge against losing the space or being hit with a rent increase, but the protections are not guaranteed, as those that accompany a long-term agreement would be.

When trying to negotiate a termination right in a lease, it is helpful to understand the landlord’s potential challenges in providing this option. The situation varies from building to building in regard to ownership structure and the debt situation, for example, and investigating these facts prior to the request is mission critical. Furthermore, the ability to terminate a lease may also be less advantageous if the termination fee is equaled to an amount that is perceivably unlikely to be paid.

Termination option fees requested by landlords are typically for the unamortized portion of the costs based on the market value of the transaction made when the lease was signed, along with an interest rate factor and a penalty equal to the value of rent for a few months. However, if the landlord receives adequate notice that a tenant is leaving, it should allow that tenant to lease the space and head off any loss of income. Termination fees require time to negotiate and ultimately should reward the landlord for offering additional concessions in exchange for extending the term.

What else can a company do to mitigate risk and reduce costs in a lease situation?

Another option to consider is subleasing, which can help a company recoup a portion of its rental expenses. However, expect to invest time and money on the front end to find a tenant and adapt the space.

If the necessary tenant improvements are financially viable for a company to pay upfront, the landlord has a greater ability to accept the termination option because the initial investment in the transaction has been reduced. Furthermore, a lease rate associated with an ‘as-is’ deal is usually below market and can protect tenants with renewal options going forward. Finally, some of the tenant improvements may be depreciated, ultimately lowering some of the company’s potential tax
liability for a given year.

Steve Kim is a senior associate, Transaction Management, with Plante Moran CRESA. Reach him at (248) 223-3494 or [email protected]

Insights Real Estate is brought to you by Plante Moran CRESA

Understanding your options in a commercial lease to create flexibility in an ever-changing economy

Steve Kim, Senior Associate, Transaction Management, Plante Moran CRESA

As a company weighs its options between signing a short-term and a long-term commercial lease, there are many things it must consider.

“Organizations need to weigh the benefits of locking in historically low lease rates long-term (seven to 10 years) or having the flexibility of a short-term lease,” says Steve Kim, a senior associate, Transaction Management, with Plante Moran CRESA. “Each comes with benefits and risks.”

Low real estate costs can help increase your competitive advantage. However, there are potential downsides to entering into a longer contract that need to be realized and hedged against to create maximum flexibility for your company.

Smart Business spoke with Kim about lease terms and how to negotiate the right conditions to suit your business needs, both today and in the future.

What crucial areas should a lessee consider when choosing real estate for a long-term lease?

When considering a long-term lease, a business should first determine whether the real estate is aligned with its strategic business plan. For example, does the space have room to accommodate your long-term growth plans? Does the building fit with your company’s image and brand? Conducting a space program is essential versus adding a percentage to your current square footage. This exercise will categorize and assign a square footage to all of your space, including conference rooms, executive offices, staff work spaces, common areas and storage, as well as account for future growth.

In addition, with building values at historic lows, purchasing real estate may be a viable option to consider, giving you the ability to lease out space until you need it.

What conditions would signal to a business whether a short- or long-term commercial lease is a more favorable option for a business?

Short-term leases offer a company the most flexibility, but they do have a downside. Lessees often don’t have as much room to negotiate terms and conditions in a short-term agreement as they do in a longer-term one. Also, landlords know all too well the cost of moving a business and could raise your rent at renewal, betting that you will not want to relocate. In addition to potential rate increases, there is no guarantee that you will be able to renew a short-term lease, especially if a large or long-term tenant needs your space.

Long-term leases will typically offer higher tenant improvement allowances, while short-term leases may require out-of-pocket costs by the tenant. But long-term leases also carry risks. Business conditions may change while you are locked into a long-term agreement, making it difficult to expand or contract your business based on a change in your strategic direction. However, an early termination option can be negotiated into a long-term lease to offer some flexibility while maintaining the security and extended savings.

What is an early termination option?

An early termination option allows you to opt out of your lease at a certain point in the contract, which reduces some of the risks that can come with being locked into a long-term agreement. It also offers an opportunity to renegotiate with your landlord midway through your agreement.

A company could work out an option to extend a short-term lease to hedge against losing the space or being hit with a rent increase, but the protections are not guaranteed, as those that accompany a long-term agreement would be.

When trying to negotiate a termination right in a lease, it is helpful to understand the landlord’s potential challenges in providing this option. The situation varies from building to building in regard to ownership structure and the debt situation, for example, and investigating these facts prior to the request is mission critical. Furthermore, the ability to terminate a lease may also be less advantageous if the termination fee is equaled to an amount that is perceivably unlikely to be paid.

Termination option fees requested by landlords are typically for the unamortized portion of the costs based on the market value of the transaction made when the lease was signed, along with an interest rate factor and a penalty equal to the value of rent for a few months. However, if the landlord receives adequate notice that a tenant is leaving, it should allow that tenant to lease the space and head off any loss of income. Termination fees require time to negotiate and ultimately should reward the landlord for offering additional concessions in exchange for extending the term.

What else can a company do to mitigate risk and reduce costs in a lease situation?

Another option to consider is subleasing, which can help a company recoup a portion of its rental expenses. However, expect to invest time and money on the front end to find a tenant and adapt the space.

If the necessary tenant improvements are financially viable for a company to pay upfront, the landlord has a greater ability to accept the termination option because the initial investment in the transaction has been reduced. Furthermore, a lease rate associated with an ‘as-is’ deal is usually below market and can protect tenants with renewal options going forward. Finally, some of the tenant improvements may be depreciated, ultimately lowering some of the company’s potential tax liability for a given year.

Steve Kim is a senior associate, Transaction Management, with Plante Moran CRESA. Reach him at (248) 223-3494 or [email protected]

Insights Real Estate is brought to you by Plante Moran CRESA

Foreigners trim long-term U.S. security buys in April

NEW YORK, Fri Jun 15, 2012 – Overseas investors cut back on purchases of long-term U.S. securities in April, the U.S. Treasury said on Friday, as both public and private accounts unloaded mortgage-backed debt.

The United States attracted a net long-term capital inflow of $25.6 billion in April after drawing $36 billion in March.

Foreigners stepped up Treasury purchases to $37.3 billion from $20.1 billion in March but were net sellers of securities guaranteed by the biggest U.S. mortgage financing agencies to the tune of $14.1 billion. That was more than double the outflow seen from that sector in March.

As for Treasuries, private investors were more avid buyers in April, accounting for 23.4 billion of the total inflow.

China, the largest foreign U.S. creditor, raised its Treasury holdings slightly to $1.146 trillion from $1.144 trillion, while No. 2 Treasury holder Japan cut holdings by $10.2 billion to $1.066 trillion.

Including short-dated assets such as bills, foreigners sold a net $20.5 billion in April, compared with March’s downwardly revised net outflow of $48.6 billion.