Bottom Line Business Insights : Maryland Business Lawyer & Attorney : Wagonheim Law Firm : Mergers & Acquisitions & Contractual Negotiation

“So, what’s your 5 year target?”

My client responded quickly: “$7,000,000 gross revenue in 5 years.”

“OK, so let’s drill down. What is your average salesperson generating now and what kind of inside staff do you need to support each outside salesperson?”

The answer was sobering. Eight new sales people, five new inside people, two more warehouse people and one administrative person – 16 new hires overall -- would be needed to reach the company’s 5 year goal. This would come close to doubling the size of my client’s company. The answer was sobering not because it couldn’t be done; but rather because he’d never actually sat down and done the math. 

Having arrived at a picture of what the company would look like in 2016, we then began to trace the steps we would need to get there. In other words, we had to figure out what 2012 would look like:

• How many people she would need to hire;
• What kind of business would have to be brought in to support them; and
• The sales and marketing effort necessary to bring in the requisite business.

This is a subject near and dear to my heart, and to explain why, I have to give you a little window into the business of practicing law.

Ask any business lawyer (any lawyer, really, other than a personal injury, bankruptcy, or tax relief attorney) and he or she will tell you that business comes in by referral. “We don’t advertise,” is the typical refrain. 

Well, that’s true. Neither do we. But at the end of 2008, I realized something. I realized that when I point to referrals as my marketing strategy, I was really doing nothing other than crossing my fingers and hoping that the phone rang the next day with the right person at the other end of the line. I had no plan. And when I asked myself how I was going to make the next year better than the one that was just ending, I had no plan other than…well…prayer.

So I changed things. I made marketing a priority and, more importantly, made a number of significant improvements to how we do things and what we offer so that we could tell the story I wanted to be able to tell. After all, what good is it to stand on a soapbox and broadcast the same, tired message? In my view, if you’re going to invest in a bullhorn, you damn well better have something to say. 

For our part, we:

• Introduced the blog you’re reading now (now in our second year) to focus on exactly what our name says – Bottom Line Business Insights;
• Started an e-mail series offering insights into business philosophy, best practices, and legal issues that now reaches over 1,200 business owners per week;
• Introduced the non-billable hour Empty Hourglass® Program to make client communications effortless, without limit, and free of charge;
• Produced the Business Owner’s Pocket Guide and the new Commercial Real Estate Pocket Guide for clients and friends of the firm…free of charge;
• Developed our first-of-its-kind interactive business diagnostic, BizRX for download on PC, iTunes, Blackberry and Android; and,
• Beginning last week, began sending weekly interactive mind map pdfs to each of our clients offering status updates and highlighting priority issues…at no charge.

While there are more changes to come, we have traveled a long road in the past 3 years to get beyond hope as our primary growth strategy. We have a plan, target numbers to hit, and initiatives we can point to as a basis for projecting growth. 

Over the next few weeks, in our e-mail series, I will be delving into key business building insights from some of the best business growth consultants in the region and in the country.  I will also be discussing this in more depth in our free upcoming webinar. If you have not yet signed up for one (or both), now’s the time. 

I’m hoping that blog posts like this one and our newest e-mail series may inspire you to do more than just jot down projections. I’m hoping that they inspire you to commit on paper to a way of attaining them. And of course, if I can be of any help, please contact me. That’s what I’m here for.

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I was sad when I learned Farrah Fawcett had died. In my youth, she was a symbol borne of an iconic poster, great hair, and a really bad TV show. Princess Diana had that smile. The death of each (and many other notables) make you pause. If you’re a business owner, the death of Steve Jobs made you think.

The difference is akin to the divide between a good movie and a great one. A good movie will make you think back on great scenes and smile. A great move stays with you. It may even alter your perspective.

The business life of Steve Jobs was a great movie.

I’ll leave the litany of achievements to others. I want to focus on the lessons. There are others, but I’ll mention three that every entrepreneur should adopt as a mantra:

1. Clarity of purpose. Why do you do what you do? What makes you…you? If someone could take your logo from your restaurant, law firm, or landscaping company, slide someone else’s in there and there would be no difference, you’re doing something wrong. 
   
   
2. Discipline of how you do it. Once you figure out who you are, it must permeate everything you do in a way that’s true to your vision. I mean everything from your office space to how you advertise job openings.
   
   
3. Consistency. Your brand must transcend your products or current offerings. Can anyone doubt that Apple achieved this?

You see, his passing notwithstanding, the last thing Steve Jobs would want an entrepreneur, innovator, brand manager or business owner to do is rest.

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Tim Robbins opined that there were two types of people: Those who, upon hearing that a storm is coming, simply pray that it passes them by, and those who prepare for it. The Shawshank Redemption

It’s no secret what the smart Maryland businesses should be doing.

A recent Baltimore Sun article expresses the view that it’s no time to panic, that Maryland enjoyed a surge of federal spending of late and that the cuts explored thus far are just returning us to 2007 levels – hardly a wholesale slaughter. However, I think that’s a small consolation to businesses who’ve hired over the past 4+ years to keep up with the workload. It sure isn’t any consolation to the families of employees who may be on the chopping block.

I think businesses need to do more than just console themselves.

Businesses need to retool – position themselves for work in the private sector or even overseas and it must be the business of the State of Maryland and our own community of entrepreneurs and educational institutions to help them.

And in contemplating that, my mind naturally turns to…healthcare.

We all know that healthcare costs have soared out of control; technology, an endless line of specialists for any given ailment, medication, malpractice insurance…all of it. But in all of this, there has been one radical change of perspective that has been dramatically successful in reducing costs – wellness visits; the thought that the medical profession should emphasize prevention rather than just react to problems.

I’d write the same prescription for Maryland businesses. Now is the time for the City, State, and Maryland’s private businesses to implement programs to help businesses reposition themselves for a different kind of competition, for a different kind of customer. 

I’m not urging the State or City to come out with financial incentives – the businesses already have a big one. But, I am urging the State and City to play a leadership role. The risk of doing nothing, in the path of the oncoming storm, is that we’ll look around at the wreckage of higher unemployment and a diminishing tax base and wonder why we didn’t better prepare.

How should we prepare?

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My father died on April 1, 2007. He was a lawyer and ran his one-man law firm in the town of Gambrills, MD for forty some-odd years. We spoke many times of his wish to retire, travel some, and relax with his wife.

In going through his papers soon after his death, I ran across an engagement letter dated March 1, 2007. It seemed that my father signed up a new client exactly one month before he died, and some six months after having been diagnosed with leukemia. He had requested and received a retainer of $750.

Other than the very fact of my father’s passing, nothing made me sadder than that one piece of paper. He was dying. And all those who weren’t in the most active of active denial knew it. I’m certain he did, even if he didn’t want to acknowledge it. But there he was, still making the sale one month before he died.

I don’t want to do that. My wife doesn’t want me to do that.

And I know a lot of business owners who don’t want to do that either.

The question – which my father struggled to answer literally to his dying day – is “How can I avoid that fate?”

I think the answer lies in the advice given to trial lawyers.

When I started out as a trial lawyer, I was taught by some of the masters in the field to write my closing argument first. Decide what I wanted to be able to tell the jury at the end of the case, and then work backwards to ensure that the facts and law I presented would support the story I wanted to tell at the end.

The same goes with avoiding my father’s fate. My father wished to retire, but he never made it a priority. 

Now, I sit down with clients every day and start writing their closing argument. When do they want to retire? Do they envision selling their companies to a third party, to their employees, or just winding it down? Will they stay involved or leave to run a flip flop shack on the beach? How much money will they need?

Then, we work backwards. For example, in my business, if I figure that I have to build the law firm to a $5MM enterprise in 5 years, I’ll need 20 lawyers to do it.   That means adding the infrastructure (administrative staff, office space, equipment and the like) to support them. And I better get moving. 

For a long time, I was content to watch for opportunities and even grab one or two as they came along. Now, I know what I need to achieve and I’ve come to grips with the fact that I not only have to look actively, but I also have to broadcast my goals to other people … in the hope that they’ll help me find the missing pieces. More importantly, I have to get specific as to what pieces I need to add, as opposed to hoping that what catches my eye happens to be a missing piece.

In other words I have to plan.

For too many enterprises, a business plan is something they prepare for a bank or because they think they should have it. Once finished, it is marveled over for a week or two and then shoved in a drawer – never to see the light of day against. 

The right business plan, however, is a GPS system. Constantly on. Constantly with you. Reminding you when to turn and how far you have to go.

Next year will mark my firm’s 10^th year in business and my 25^th year engaged in the practice of law. I’m not close to my father’s 40, but I have something he never developed…I have a GPS.

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There is perhaps no facet of business management that is more critical, yet more intimidating, than financial management. Most business owners would sooner spend a day playing in traffic than trying to read and interpret the confusing array of numbers that make up their company’s balance sheet or income statement. Yet the fact of the matter is that playing in traffic is probably less risky than ignoring the company’s numbers. Being able to interpret a financial statement will enable your company to better plan for its future and efficiently allocate valuable resources. It is also essential because your company should never enter into a major transaction with another company (say, a vendor or a customer) without confirming the other company’s ability to fulfill the contract. That means reviewing and understanding the other entity’s financial statements.

So, what’s the best way to make quick work of financial statements while taking the intimidation factor out of the picture? Simply put, it is understanding certain basic Financial Ratios. Most people have heard of “Earnings per Share” or “Price to Earnings,” which are two of the more common financial ratios regularly discussed on networks such as CNBC and other financial programming. But fewer business owners are familiar with the more obscure (and for most privately held companies, infinitely more useful) financial ratios which measure the four basic attributes of any business:

1. Liquidity: a short-term view of the ability of the company to satisfy its currently maturing obligations
2. Leverage: a longer term view of the use of debt by the company and its ability to service that debt
3. Activity: a measure of the efficiency of the utilization of the company’s resources, such as measures of inventory turnover
4. Profitability: as compared with investment, or profit margins based on sales

What are acceptable ratios in each of these four categories of measurement? Generally, there are no hard and fast rules. Ratios are valuable because of what they can tell you about the current state of your company and the direction it is moving, rather than whether a company is in imminent danger of failure or can coast without another sale for the next two years. In that sense, it is useful to compare ratios over time.

What constitutes an acceptable ratio also depends on a number of outside factors, including (1) the company’s industry, (2) its accounting practices, (3) its goals, and (4) quite simply, what the company’s owners feel are acceptable ratios in light of those goals. Most business owners should have a discussion with their financial advisor or accountant in order to set acceptable ratios within the four attributes described above, and then formulate a plan to adhere to those ratios.  

While many business owners simply slough these matters off onto their accountant, the savvy business owner will understand (and should want to understand) the numbers that make his or her business work. Additionally, and no less important, not understanding the numbers is an invitation to corporate fraud and embezzlement by less than scrupulous company officers, directors and accountants (and believe it or not, these folks are out there).

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It’s every business owner’s worst nightmare: the company bookkeeper, who has been a loyal employee for eight years, has suddenly disappeared – along with $250,000 of the company’s money. Unless the company has the resources and know-how of the FBI, there is little that the company can do in such a situation. For the year, the company will end up taking a charge against earnings (which will affect its bottom line), and may have some explaining to do to agitated shareholders (who will wonder where their annual dividend is) and upset employees (who will not be receiving Christmas bonuses).

Yet as bad as this situation may be, it could be worse. In fact, having a one-time fraud committed by an employee or officer who then disappears will at least provide the business owner with a finite loss and a red flag with respect to gaps in company procedures that need to be remedied. Infinitely worse is a “creeping fraud,” a situation where your company’s Chief Financial Officer has been quietly diverting $5,000 each month into an out-of-state bank account which he controls, and after 10 years retires and buys himself a villa in Italy. In a creeping fraud, a dishonest employee exploits a continuing company weakness over an extended period of time; which is a bigger violation of the company’s trust, not to mention its financial position.

However, it is not only a company’s employees who may have the impetus and wherewithal to commit fraud or embezzlement. Often, fraud is committed by other entities with whom the company does business, including the company’s contractual or transactional partners, vendors, and even customers and clients.

It doesn’t have to be this way. In fact, it should never be this way. With proper planning and certain simple and easy-to-implement procedures, a business can make itself virtually “fraud-proof.”

Here are 5 ways to Protect your company from Fraud and Embezzlement:

1)      Ensure that all disbursements over a certain amount (say, $1,000) require the signature of more than one company officer

2)      Check (and re-check) your company’s numbers every month with your accountant to ensure there is no “creeping” fraud or unexplained irregularities

3)      When signing a material contract with a contractual counter-party, consider using an escrow arrangement for any sums to be advanced prior to completion of work or services

4)      Resist attempts by contractual counter-parties to be paid in advance for work to be performed or products to be provided – instead, set benchmarks for performance and pay in installments once benchmarks are achieved

5)      Do some basic due diligence on your contractual counterparts. Do they have any judgments against them? What do other companies who do business with them say about them? Does your customer have an in-state bank account? Have you done a credit bureau check on your counter-party?

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A Business Plan is a living, breathing document that is assembled by a skillful business owner or manager with input from all sectors of his or her business. Correctly assembled, the Plan serves as a yardstick of progress in the short, medium, and long term. 

The most effective strategic business plans drill down from Vision to Mission to Goals to Tasks to Deadlines. For internal planning purposes, the Plan should project out no more than 18 months, should be examined every six months, and should be rewritten annually.

The best plans are often developed during a specifically scheduled and planned Strategic Planning Session. Depending upon the nature of the company’s management team, an independent and experienced facilitator can be invaluable in developing an effective strategic business plan that pays for itself many times over.

Despite many thoughts to the contrary, it is the small business (i.e. those with fewer than 500 employees) that can reap the most rewards from effective strategic planning. Unfortunately, too many business owners feel that strategic planning is either too expensive or a necessity only for larger enterprises. Nothing could be farther from the truth.

Bottom Line: Whether hand written at the kitchen table or developed using word processing and rich media, a Strategic Business Plan can be a business owner’s most valuable tool. What’s more, it works in the real world, not just in business school theory.

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This past weekend, I found myself building three raised garden beds for my son’s elementary school. One could easily tell that the project was as low-tech and unsophisticated as construction could possibly be by the simple fact that I was doing it. But there I was, tucked by the side of the school while remainder of the school population was out back enjoying the annual May Day carnival.

The project provided a good opportunity for me to work with my sons, 12 and 8, on some basic woodwork and construction techniques. You can have absolute faith that the word “basic” comes fairly into play because, again, I was doing it. As the morning wore on, it became apparent that the piece of advice I most often doled out was “measure twice, cut once.” I began to reflect on how important this homily is and how often it is ignored in most every walk of life…including business.

Projects are usually entered into with a sense of urgency. It may be because of the need to get started, the rush to beat a deadline or the imperative to show something productive. Whatever it is, the desire to produce something seems often to produce something… well… mediocre. Over the weekend, I couldn’t help but reflect on the fact that so many of the problems crossing my desk can trace their origins to this dynamic.

A few cases in point:

1. Plans and specifications are issued half-baked, kicking significant issues down the road because of the need to get started. The result? Change Order after Change Order after Change Order.
2. Parties to a transaction refuse to spend the time drafting a clear Letter of Intent spelling out their agreement on material terms, only to waste money down the road as attorneys exchange draft after contractual draft attempting to negotiate what should already have been resolved.
3. Banks fail to spend adequate time on commitment letters, preferring to present their borrowers with full loan documentation at the last minute, containing never-before-negotiated terms, severely straining their relationship with the customer
4. Web designers and business owners fail to take adequate time in the planning stages before coming up with the first mock-ups. (Because, as we all know, the design unveiling is the fun part.) The result is almost inevitably less than a perfect match with the client’s hopes, vision, and expectations.

In How Did that Happen?: Holding People Accountable for Results, coauthor Roger Connors submits that successful outcomes hinge upon “effective formation, communication, and alignment.” He explains that success hinges upon:

• Formation of the full plan;
• The investment of time to communicate that plan to all necessary participants; and,
• The need to receive assurance that the plan is aligned with the owner’s vision and the available resources.

Too many short-sighted organizations give in to the temptation of showing results before investing in the planning stage. Banks do it; so do developers, constructions companies, graphic designers, and (in a frightening realization) doctors. 

Instead: On your next project, fight against this temptation. Pay heed to deadline and client expectations, to be sure, but put off the instant gratification of the unveiling for just a little while longer to do things well. 

Chances are you will have built not only a successful project, but a lasting relationship as well.

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Newt Gingrich has been a fixture in the news cycle for a while now.  It seems he’s doing that “will-he-or-won’t-he” run for President dance. One the news shows recently, he had to confront the issue of infidelity. The former Georgia Congressman has been married three times and has often been criticized for the less-than-clean transitions between those marriages.

The former Speaker’s latest round of Sunday morning interviews got me thinking about the cost of infidelity – not just in a presidential run, or even in divorce court, but rather as seen every day in my business practice.

You see, when a person commits to a company – as an officer, director, or even sometimes as an employee under contract, the law and various contracts impose duties; the higher the post in the company, the greater the duty. Chief among those duties is the duty of loyalty. Called different things in different states, the result is the same – you breach it at your own peril. 

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity.

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possibly.

Sometimes, to be sure.

But what of those left on the outside looking in?

Simply put, they can sue. They can go after, and often take, those appealing, better-than-expected profits.  In Maryland, one of the causes of action is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company. 

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation.  Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning.  DEF then snared the contract for itself.  In so doing, it wrongfully claimed one of ABC’s opportunities for itself.  In other words, it took money that ABC could have earned.  It is a safe bet that Susan’s former employer is not going to go quietly into that good night.  They will hold Susan accountable. 

In so doing, the law (as is not always the case) tracks ethics.

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence.  She owed ABC her loyalty.  When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery.

And in business, just like in marriage, there is usually a price to pay.

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Not long ago, I found myself sitting in our conference room across from a very interesting gentleman. He was in his upper fifties, maybe 60, and carried himself as a professional. He explained that he had been in business for upwards of 40 years – that he had made some big mistakes, learned from them, moved on, and built a fairly successful business. 

He told me that the business that he had started had run its course and he wanted to start a new one, having learned from the mistakes of the old. In order to start the company, he decided to bring in 3 additional people. These people were friends of his, experienced in his industry, and possessed of the skill sets necessary to make the new venture run. My visitor had decided to divide 40% of the stock among them, retaining 60% for himself – enough, he felt, to keep control of the company.

He was convinced that giving out shares of the company was the only way to keep the group motivated, absent money to pay each person’s going rate. My visitor was wrong.

Recently, I wrote a piece in our e-mail series discussing the mistake of offering partnership at the outset of a business relationship. And whether the discussion concerns true partnership or co-ownership of a corporation or LLC, the fact of the matter is that co-ownership is a business marriage. And make no mistake, just like the real thing, a business divorce can be expensive and emotionally draining. 

For his part, my prospective client was asking his friends to invest their time and skill in a new business for little or no compensation. What he wanted was a way to show his friends that they would reap the benefits of their investment.   We explored a number of possible solutions, but what we decided upon was offering stock options.

People, you see, are unpredictable. Some may be highly skilled and great friends, but start working together and it’s a train wreck. Different business philosophies, work ethic, or personalities can destroy a team that could not possibly look better on paper. Stock options and a vesting schedule are two ways to put together an arrangement now which takes effect later. 

In this case, we could commit to an option to purchase stock in the company beginning in 3 years, discounted for each year the person had been with the company. Moreover, as incentives, other discounts to the purchase price could also apply, provided we took care not to trigger any unwanted tax consequences.

In other words, my prospective client could date before he got married. And in my experience, that’s a pretty good plan.

This podcast is brought to you by WYPR and Eliot Wagonheim.

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By Guest Blogger: Michael J. Lentz, Esquire

In November, 1787, James Madison, writing under the shared pseudonym Publius in the New York Packet, published one of the watershed documents in the constitutional development of our nation. In the tenth essay, in a series that later became known as The Federalist Papers, Madison argued that political factions were vitally necessary in a republic, because: “Enlightened statesmen will not always be at the helm.” Madison was concerned that competing interests were vital in the absence of an ability to control the qualifications and interests of the elected decision makers. 

Not long ago, I was reminded of Federalist #10 by a question posed by a colleague on a listserv: 

“Can a minor serve as a director of a corporation?”

I think the answer to this admittedly-novel question is probably “Yes, but it probably isn’t such a good idea.” In the course of the discussion, though, I was struck by how little consideration is given to what “statesmen” will guide the helm at most corporations. 

The only qualifications that directors of a Maryland corporation must meet are those set forth in the corporation’s Charter. Many, if not most, Charters are completely silent on the issue, meaning that no one is statutorily prohibited from serving as a director. 

For many small business owners, the qualifications of their company’s board of directors may not seem immediately relevant, since the owner(s) and/or their family members are often the only directors. However, director qualifications can be an important consideration, either as part of a succession /contingency plan or when considering equity financing. 

If an owner-director were to become seriously ill, so as to be unable to discharge the duties of the office, the corporation would likely have to function without that person as a director until his term expired. Directors’ duties are generally non-delegable, so even someone otherwise authorized to manage the director’s financial affairs (such as through a power-of-attorney) would likely not be able to serve as a director. Absent a qualification in the Charter, there would be little the corporation could do to remove the director in the interim.

Perhaps a more common concern arises when a corporation chooses to consider equity financing. The decision to take on an equity investor is a significant one that should not be undertaken lightly . . . see our earlier piece on the risks of getting married without dating first.

If your company decides to take on an equity investor, most substantial investors will request, in addition to equity in the company, some measure of control over the company. This control will usually come in the form of preferred stock that gives its holders the right to elect a certain number of directors. Such directors usually can only be removed by a majority (or super-majority) of the votes cast by holders of the shares that elected the directors. So, equity investors will often request what are essentially unassailable, permanent directorships. 

While the investors own self-interest will usually lead him to elect competent, qualified individuals, there’s neither any guaranty nor any legal requirement that the investor do so. In such cases, the company’s easiest control over such board seats for the long term is a Charter provision setting out the qualifications that such individuals must possess.

Does this situation sound familiar?

Contact us for a free consultation! 

Raise this issue for discussion on Twitter, Facebook, or LinkedIn.

Michael graduated from Georgetown University Law Center in 1998. After spending five years with large Baltimore firms and three years as a solo and small firm practitioner, Michael joined Wagonheim Law in 2006, where he continues to utilize his extensive experience in commercial, bankruptcy, and appellate litigation to work with companies throughout the mid-Atlantic region.

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 Guest Blogger: Michael Lentz, Esquire

It’s that time of year again. The NCAA’s annual tournament to determine college basketball’s national champion, colloquially known as “March Madness®,” started last week. In one of Thursday’s games, tiny Morehead State upset traditional powerhouse Louisville, in a true David-vs.-Goliath outcome. Trailing by 2 with roughly twenty seconds left, Morehead State had the ball and called its final timeout.

            Morehead State’s coach told his team to deliver the ball to Demonte Harper and just wait. The plan was that Harper would hold the ball for one final three-point attempt, as time expired. The game would be decided then and there. At the time, Harper had made only two of his nine shots, none of his five three-point shots, and by all accounts was having a terrible game. Of course, Harper made his shot, and Morehead had its Hollywood ending. 

            In interviews after the game and the next day, Morehead’s coach said that he planned to use Harper in an all-or-nothing spot because he was generally an excellent shooter, and he was several inches taller than the players likely to be guarding him. As a result, he would likely have an easier time taking a shot. The coach knew his players’ respective strengths, put them in position to succeed, and trusted them to do their jobs.

            That’s great advice for any small business owner. Figure out what every member of your team does best, and put him or her in a position to do that, as often as possible. If you’ve got a genuinely wonderful “people person” who would be an excellent ambassador for your company, get him in a position to interact with the people that matter to your company. Similarly, a shy, quiet wallflower type is probably best not being your receptionist or leading a sales team. Let your speakers speak and your writers write. 

Of course, once you’ve identified each person’s strength, keep asking them to use it, even if they’re in a bit of a slump. This is true even when the outcome really matters – in fact, it’s especially true when the outcome really matters. That’s (probably) why you hired them in the first place.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

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In my post on February 1, 2011, I wrote about the benefits of dating before one gets married. I was writing specifically to warn against the danger of inviting someone into your company as shareholder or director based solely on hope or expectation. My strong recommendation was (and always has been) to work with the person, see how s/he:

• Reacts under pressure
• Interacts with company personnel
• Affects the general work environment
• Works on a day-to-day basis
• Actually performs the job you s/he has been brought on to do.

Only after “dating” can a business owner be even reasonably certain of the advisability of a long-term relationship. 

But that’s not the end of the company-as-marriage analogy. There is still infidelity to deal with.

When one participates in a company, as an owner, officer, director, or even some other variety of “managing agent,” the laws of most states impose certain duties on that person. Chief among them is the “duty of loyalty.” One would think, just as with marriage vows, that one would only breach the duty of loyalty at one’s own peril.

In life, there are always temptations. In business, that temptation takes the form of the desire to take more (or all) of a good deal for oneself rather than sharing the proceeds with others. Sometimes, the thought occurs with the possibility of landing a large, new contract or upon hearing of a tremendous sales opportunity. 

“Maybe,” the thought goes, “I could set this one up outside the company and triple what I would otherwise get in commission or draw.”

Possible. Sometimes, to be sure. But what of those left on the outside looking in? 

Maryland Law, like that of most other states, has made actionable what is known as a “breach of corporate opportunity.” This means, in effect, that one may be held liable to compensate the corporation for the improper taking (some would say “theft”) of a business opportunity that rightfully belonged to the company. 

Let’s assume that Susan Smith was a shareholder and vice president of ABC Janitorial Corporation. Upon seeing an opportunity for a large contract on the horizon, Susan set up a new company with her husband called DEF Cleaning. DEF then snared the contract for itself. In so doing, it wrongfully claimed one of ABC’s opportunities for itself. 

The long and short of it is that Susan, as a co-owner and officer of ABC, owed ABC something better than just her full-time, physical presence. She owed ABC her loyalty. When she decided to deprive ABC of an opportunity that rightfully belonged to it, she committed the corporate equivalent of adultery. 

 And in business, just like in marriage, there is usually a price to pay.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

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Guest Blogger: Terry Weller, CPA

Did you know that the typical 5-year-old asks 65 questions a day, while the typical 44-year-old asks only six?  Children are curious as they are developing. I believe that businesses should be curious as they continue to develop.  Unfortunately, over time many organizations settle into a ‘know-it-all’ mentality; they get stuck in the business models, processes and cultures typical to their industry.  Most organizations are not asking questions regularly to initiate true innovation, nor are they digging into the core of what makes them unique. As Tim Brown, CEO of IDEO and well known innovation speaker states, “organizations focus more on optimizing the business machine rather than creating value.” If you don’t innovate around your products and services then you aren’t optimizing your ability to successfully grow your organization and expand in the marketplace.

So, what does it take to spur innovation?

While not all inclusive, there are two common resources for leveraging your differences and establishing authentic innovation within your organization.  I focus on these two because they provide a substantial return on the effort expended:

• Drawing inspiration and learning from industries and markets that are tangential to or different from your own
• Hiring or selecting a “diverse” team of talent

Innovation is not about understanding your common ground, it’s about celebrating your differences. Take the Volkswagen Beetle for example; when first released in the United States in the mid-fifties, the car design was considered ugly and not functional. These failures only made the company consider upgrading and refining the car’s utilities. Mmm...they respectfully ignored the obvious criticism from consumers. Then, at the height of the criticism, their 1960s advertising campaign was launched. Each ad embraced and celebrated the car’s unique design and features.  The attributes of the Beetle were simple - it was a small, well-made car that was inexpensive. The ads created used these facts, but never used the words themselves; they simply used the concepts to illustrate (typically in a humorous way) the aesthetic differences and functionality. This “innovative” campaign made the brand stand out in a marketplace crowded with cookie-cutter ads showcasing stylish cars and the ideal lifestyle you can have by owning one. What is especially amazing is that even today, the success of the Volkswagen Beetle brand stems from its now iconic design.

How we view our opportunities and make decisions is largely based on the lens through which we view the world.  Taken on a grand scale this encompasses every observation we have amongst all the areas of our lives.  When we are in the mode of viewing things from a preset angle we can miss opportunities that are right in front of us.   Joel Arthur Barker was the first person to popularize the concept of paradigm shifts relative to organizational behavior. He began his work in 1975 and pioneered the concept to explain the importance of vision to drive change within organizations. His model suggested that the “outsider,” someone who really doesn’t understand the prevailing paradigm in an organization (sometimes they don’t understand at all!), is one of the individuals who can affect change and innovation within an organization. Barker goes on to explain, “The outsider has the advantage of asking the dumb questions...They don’t realize they shouldn’t challenge the present practices because they haven’t learned those prohibitions yet.”  Many business leaders throw deaf ears on suggestions from outsiders. Their experiences and teachings have trained them to think of these ideas as “absurd” or “too radical of a change.”  However, what may sound ridiculous could actually be the origin of a new business model, product or service.  Take for example KUKA Roboter GmbH. Since building its first industrial robot in 1977, KUKA has become one of the world´s largest manufacturers of industrial robots. KUKA robots are utilized in a diverse range of industries including the appliance, automotive, aerospace, consumer goods, logistics, food, pharmaceutical, medical, foundry and plastics industries among others. So, when your organization has saturated the marketplace – how do you keep growing? Where do you go next? The answer for KUKA was the amusement park. Yes, born out of demand for more interactive theme park rides, KUKA brought the “Robocoaster” to market in 2003.  This was the first robot in the world to be approved for carrying human passengers. The interactive ride can be designed to match customer’s requirements in theme, intensity and realism. It is more cost effective than a traditional ride since customers can change themes to adjust to rider appeal and create an infinite number of rides by using one programmable industrial robot. With large theme park corporations such as Walt Disney incorporating robotics into their stage entertainment since the early 70s, it’s amazing that someone did not combine the industries sooner. That’s why it’s important to continually observe and look outside your industry to see how other strategies, resources, and practices could be used within your organization to enhance or even differentiate products/ services.

Your innovation muse does not have to be externally driven either. As a business leader, you should also look internally. Hiring or selecting a “diverse” team when it comes to driving innovation means not following your organization’s or industry’s culture of defined technical talent.  You want to look for individuals who demonstrate strengths in other business areas and/or offer a different set of skills. For example, another interesting fact about the Volkswagen ads is the composition of the advertising agency team that put them together. The firm selected and used a diverse creative team of writers and art directors. In most agencies at this time these functions were separate. By bringing these functional areas together the firm was able to draw from the interdisciplinary perspective of the entire team. Along the same lines, in one of my endeavors I had the opportunity to hire a group of people whose primary goal was to provide the outside of the box thinking and fresh ideas that would lead to innovation within the organization I was working with. They were true “outsiders” with no industry knowledge, let alone any deep business experience.  The team was made up of recent college graduates. Since they were not limited by preconceived notions, they quickly solved the challenges provided to them. The observations they made and solutions they posited led to changes within the company’s business model and processes.  Many of these changes could be directly tied to increasing customer satisfaction and growing the company’s bottom line. When you get a chance, I recommend reading my full account, “skunk works.”

These examples go to show you that teams of exceptional and diverse talents can work together to create amazing, novel ideas.  So, to get you motivated today to start true innovation, I’ll ask the first questions: What areas of your organization could benefit from being reviewed through a new lens? What products or services can benefit from or be created by brainstorming with a strategic partner? What teammates can you cultivate within your organization to solve current business challenges?

Any new ideas or thoughts on innovation? Please share them in the comment section. I’d enjoy reading about them and who knows what fresh idea you may spark for someone else.

Terry W. Weller, CPA is a Partner of McLean, Koehler, Sparks & Hammond and a member of the firm’s Executive Committee. Terry Weller’s many years of experience have been devoted to assisting family and owner-managed businesses on sophisticated financial planning issues and providing comprehensive help with business and interpersonal issues. His clients cover a wide range of industries, including wholesale/distributors, contractors, professional practices and service-related businesses. Terry’s services include business planning and consulting, accounting and auditing, and the integration and dealing with owner and company concerns often prevalent in family/owner-managed businesses.

Terry is a graduate of the University of Maryland. He received his certification as a CPA in 1970 and was admitted to the partnership of McLean, Koehler, Sparks & Hammond in 1975. An accomplished public speaker, Terry is a member of the AICPA and the MACPA.

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“I got a phone call this morning from one of our oldest customers. He fired us. After 20 years, he fired us. Said he doesn’t know us anymore. I think I know why.” 

The speaker recounted his phone conversation to his account reps, saying “we used to do business with a handshake, face-to-face. Now it’s a phone call, a fax, ‘get back to you later,’ with another fax, probably.” 

This United Airlines commercial was originally aired before e-mail and the advent of social media. First aired twenty years ago, in 1990, it still resonates. So many businesses are started by an entrepreneur, skilled in the producing the product or service that spawned the company. Customers came because of the skill and stayed because of the attention. As the owner of a small business, the founder could track every project and knew every client. When someone was upset; he knew it.

Growth has a way of making that kind of personal attention obsolete. Time passes and a founder looks around to realize that whole projects are being performed for customers he never met.   And what about the ones he knew – the ones who built his business or who inspired him to go into business in the first place? Chances are, they’ve been delegated. Delegated to talented people, to be sure, but delegated just the same. 

Sooner or later, the thought has to occur to these customers – your old friends -- that if they mean little enough to your company that they can be delegated, your company means little enough to them that they can go elsewhere.  

Looking ahead to 2011, most business owners set targets for growth -- more revenue, more customers, bigger projects, better distribution. But how many set goals reflecting stronger relationships, customer retention, and expressions of gratitude? 

Many years ago, I read a book in which the author urged business owners to “pay attention to the ‘fine’s.’” He meant that people rarely voice their complaints. When asked about service or the particular product they purchased, even when dissatisfied, they’d normally respond that things were “fine.” Not every customer can be counted on for enthusiasm. After all, there isn’t an infinite amount of enthusiasm to go around. But the silence and the “fine’s” speak volumes to those with a keen enough ear and enough focus to notice. 

So what are you doing to focus on client retention, rather than just growth? Studies indicate that a new client is 7 times more expensive in terms of marketing and advertising dollars than existing clients. The point is that it is much cheaper and more efficient to keep the clients you have than spend every ounce of energy trying to bring new prospects in the door. 

If you do not already track trends in returning business, 2011 is an ideal time to start. After all, nothing speaks to customer satisfaction more than repeat business. Even more than tracking it, look for the things that increase the pace of returning business over time. 

Perhaps, like those executives in the United Airlines commercial, you can forgo e-mail, faxes and phone calls, and, just once in a while, put in the time to travel even great distances for a handshake.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

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My wife is a product of Oregon.   So is her favorite beer, Bridgeport Coho Pacific Extra Pale Ale. Years ago, when she first made the move to join me in Maryland, I tried to surprise her with a case of Oregon’s finest. Unfortunately, the brewery did not ship product farther east than Colorado. It was not willing to make an exception in my case. 

Maryland law required that I first obtain a distributor’s license to facilitate the transaction. I did not qualify for one. I tried to get a few of our retail stores interested in serving as my proxy, but no one would bite. And as much as I revere Baltimore’s Natty Boh roots and tradition, the two products were hardly interchangeable. 

My memory of this failed gift came flooding back to me yesterday when I read Scott Calvert’s article in the Baltimore Sun reporting on the possible loosening of Maryland’s prohibition against direct shipment of alcoholic beverages. The Sun cited Maryland’s wine industry lobbyists as basing their opposition to direct-shipping on two arguments: (1) that direct shipment to consumers would make it easier for minors to obtain wine; and (2) aggressive out-of-state competition would imperil Maryland’s own wine retailing industry. 

We’ll leave the first argument by the wayside, saying only that on its face it makes no sense, given that how alcohol gets into the dining room liquor cabinet is much less significant an issue than the parentally-imposed controls over how it gets out.

It’s the second argument that attracted my attention.  According to the Sun, the Maryland wine industry lobby favors the existing statutory environment because it limits competition.   Now, I completely understand why an industry lobbying group would want to insulate its members from competition. In fact, I’m certain that there are very few businesses in the country that wouldn’t benefit from a little statutorily-imposed exclusivity.  

But that’s hardly the point.

The point is that a business in our economic system should be constructed to beat the competition, rather than rely on the law to do it for them. If a company is not able to articulate to its prospective customers at least one (and ideally three) clear benefits to doing business with it as opposed to its competition, then it deserves to lose those potential customers. Price, service, selection, trust, relationships, knowledgeable sales staff, value-added services, an expanded product line…something. These are the elements of successful competition – regardless of industry.

Friend of the firm, Mitch Pressman of Chesapeake Wine Company was exactly on point when he was quoted in the Sun article as saying that he welcomed the competition. He welcomed anything that would bring about an increased interest in his product. And it is precisely his confidence in his business, staff, selection, knowledge, etc., rather than a reliance on antiquated statutory protections, that positions him to overcome the competition. 

And that’s the way it should be.

Questions? Comments? Concerns? Raise it for discussion on Facebook, Twitter, or LinkedIn.

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It’s not hard to find a relative or friend willing to offer a personal opinion on a professional problem. There is really no cheaper advice than that coming from your neighbor. But with the discounted price, one risks listening to uninformed advice from a possibly sophomoric source.

Every month, I consult with business owners who have received wrong, incomplete and sometimes catastrophic advice from friends or relatives who happen to be professionals, albeit with the wrong kind of experience. Often, such advice is simply unfit for the specific business or situation at hand. Advice that is irrelevant to you and your business, although well intended, is more harmful to you than harmless. 

For example, let’s say that you had a good fiscal year and need some additional accounting assistance. Your Uncle Joe has volunteered his services since he used to own his own small business and had to file tax forms for years. What your retired Uncle doesn’t know is that tax laws have changed drastically since he was last in business 20 years ago and filing these principle forms wrongly would result in damaging consequences. 

One of the great truths I have learned in my 20 years of experience counseling businesses is that paying for quality advice is never a mistake. Professional consultants are experts in their fields and have built their businesses and reputations on giving solid, experienced guidance in their areas of expertise. The time and expense it can potentially cost to correct any problems caused by misguided advice is an unnecessary one. Consulting with the right person from the beginning will save you time and money.

When you are sick, don’t you go to a doctor? When you have a toothache, don’t you go to a dentist? Reputable specialists are so for a reason. If you have a legal matter, consult a respectable attorney as you would consult a brain surgeon, if needed be. Your business is important and the counsel you seek to nurture it should reflect that worth. Consult with the right people: professionals with experience directly relating to your business.

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I may be a bit younger in years, but I can still recall when a “handshake and a promise” deal actually meant something. Perhaps some of my confidence in another’s word stems from my small-town Mississippi roots. Nonetheless, in today’s economy, your business will need a lot more than a handshake if you want to get paid. Luckily, only a few hours spent with a reputable attorney can present you with a sound contract based on solid terms and conditions, which will save you time, stress and money, should a client try and stiff you on down the line.

Without a mutually agreed upon legal contract in place, any terms agreed upon with a handshake are moot. Entering into a handshake agreement could put a business at risk for losing money not only in the original agreement but also in court fees for legal action against a deceitful client (unjust enrichment, quantum meruit, and the like).

Since we’re not in 1950’s southern Mississippi, and few millennials even know the meaning of such hospitality in business transactions, a good rule of thumb for any business is to ditch the handshake and ask for a signature acknowledging an ironclad contract, complete with terms and conditions. Those terms and conditions should include the most basic items such as:

• Compensation and payment terms
• Changes/ additional services
• Emergency services
• Reimbursable expenses
• Provisions of default
• Dispute resolution
• Governing law

Legal considerations, as stated above, are extremely important to help ensure appropriate compensation for hard work. Some businesses believe that something in writing, though not in legal contract form, is just as dependable. The reality of the situation is a lack of clearly stated legal terms and conditions could leave a business with a higher level of risk for a transaction.

While developing long-standing relationships with clients is important, don’t forget to protect yourself and your business in the process. Shake your client’s hand and exchange the promise to fulfill the contract, but also take a couple of hours with your attorney to put a “gentleman’s agreement” into writing. For the most part, your company’s terms and conditions can and should be standard with every contract, so this will not be an ongoing legal expense. Rather, it will ensure you peace of mind in knowing that should an agreement not go as planned, you have a contract to protect your business. 

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Last week, I found myself reading up on Chanukah -- the Jewish Festival of Lights -- as my family and I prepared for the holiday.  As I looked for a new way to talk about the meaning of the holiday with my children, I began to realize the business lessons to be drawn from the symbolism used in the celebration.

Each night, a new candle is lit on the menorah.  On the first night, only the shamas (literally "servant") or highest candle is lit, along with one other, symbolizing the first night.  On the second night, the shamas is used to light two candles, and so on.  

It is written that the celebration is really about overcoming darkness, whether it be physical or spiritual.  A parallel can be drawn to business condition.  Particularly in these economic times, every business -- successful or not -- must fight to overcome inertia, old/bad practices, routine, or complacency.  Every business leader has to work each day to embrace and master new challenges, sometimes radically altering the way his or her company had done business for years before.

Overcoming the weight...and yes darkness...that constitutes resistance to change is a very real and daunting challenge.   The first light on the menorah, therefore, symbolizes how one candle, representing even the smallest positive change, is enough to overcome a world of night and darkness.

The lighting of the second candle shows how the light represented by that one small prior act now spreads.  This is a reminder that a single act -- a single positive change -- while not sufficient to accomplish a significant goal, can lay the foundation for more change.  The second light shows that we must redouble our efforts, even after the success of the last initiative.  

The lesson of the third light is consistency.  As the saying goes: "We did it once because we were inspired and a second time because we were encouraged by the first. This third time, we push back at the darkness because we are committed."  It is this third effort that expresses persistence and commitment to dispel darkness with light.

Upon reaching the fourth light on the menorah, we would find that we are halfway to fulfillment of our purpose.  This is point at which many worthwhile efforts find themselves sidetracked by distractions.  It is here that a leader must help the organization maintain focus by constantly asking the question:  "Does this help me achieve my goal?"

On the fifth night, we have achieved a majority.  The balance has been shifted from the old (darkness) to the new (light).  This is the most dangerous point in any process -- when the goal is in sight and people can become complascent, knowing that the path is now downhill.  Should the team spend too much time reveling in its accomplishments, it will ultimately fall short of its goal.  So it is here that the leader must demonstrate the importance of bringing light (change) to even the most remote corners of the company.  It is not enough to achieve a majority -- the goal must be completely fulfilled.

It is the sixth and seventh nights that are the richest in symbolism.  The Judeo-Christian heritage teaches that the world was created in six days.  By reaching the symbolic sixth night of any initiative, the leader has maintained a path long enough to bring about monumental change.  This is the time to check benchmarks.

Traditionally, the seventh day is a time of reflection.  Consequently, even though we may be in view of the goal, we have not quite reached it.  Near (but not at) the endpoint is a time to take stock.   Enough has been accomplished for us to review progress and make course adjustments to continue on. 

Finally, we reach the eighth night -- the time at which we have accomplished our goal of bringing about significant change.  Over the years, I have learned that nearly every culture has a holiday or festival that revolves around lights, whether electric (Christmas), candles (Chanukah, Kwanzaa and the season of Advent) or even lanterns in certain Asian traditions.  These festivals almost always seem to take place at the darkest time of year and serve to remind us of hope and of our own ability to spread light where there is none.

In the tradition of Chanukah, the use of the menorah through the eight nights of the festival, the teaching is that miracles can happen even though the road is long and arduous. 

In the management of any business, it strikes me that the teaching is the same. 

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It is a simple lesson learned by those good at what they do.  The world's best software designers use it as their primary focus, as do diplomats, the nation's top deal-makers, and (believe it or not) legislators evaluating U.S. tax policy.  Whatever the path, there are many roads to a successful outcome, but they all start with Rule #1:  Make it easy for people to do what you want them to do. 

Allow me to illustrate.

Two weeks ago, my 10 year old came down with strep throat.  Once he spiked a fever, my wife took him to our neighborhood urgent care center.   To date, I've received three statements from my insurance carrier.  Three separate envelopes.  Three detailed statements.  I still don't know what I owe.  I presume these people want me to pay them.  (Why else would they send me the statements?)  I want to pay them.  But they're not making it easy.  Instead, they are making it almost inevitable that I will do one of three things:

1. Delay paying them until I can sort out their bill
2. Call  their customer service number and tie up a representative for a while, thereby raising their employment costs by making such people necessary in the first place
3. Pay the wrong amount, forcing their accounting people to deal with the discrepancy

Not one of these things is what the insurance company wants. They want their payment promptly; and they're not going to get it.  This company has failed to follow Rule #1. 

Every facet of your business, from employee policies to marketing and customer service, should be created from the ground up in service to Rule #1. In other words, for each part of your business, figure out what you want and then develop policies which make it easy for people to give it to you. 

• If you want people to pay you timely, make your bills easy to understand, stick religiously to a schedule when sending them out, make sure they do not contain unpleasant surprises,  give people a variety of ways to pay, and submit your invoices or requests for payment in a form readily acceptable by your customers.
   
• If you want your customers to use you as a resource, make it easy for them to find and contact you on at their convenience.   (If your business serves construction contractors, for example, you better be reachable at 7:00 a.m. because that's when they're on the job site.)
   
• If you want to know what your employees are thinking, create policies which incent them to provide their input and make it easy for them to do so. 
   
• If you want someone to keep sending work your way, figure out how you could make sending you work a no-brainer for them.   For example, see if you can send referral sources a quick reference which would serve the dual purpose of making their job easier while keeping your company's contact information front and center.  Another example would be to offer free services such as assessment or contract review to enable your referral sources to get the ball rolling on a project without cost.  After all, once you're in; you're in. 

Rule #1 applies equally to customers, employees, partners, and investors. Too many company policies exist simply because they always have.  As noted by despair.com

"Just because you've always done it that way doesn't mean it's not incredibly stupid." 

If that's where you are, change. The tough part, of course, is actually examining each facet of your business -- from HR policies to website design -- to figure out what response you want, and what kind of responses are counterproductive.  Once you have that figured out, discard the policies that do not serve Rule #1 and build on those that do.

Good luck.

Check out this Tip on our YouTube Channel!

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