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  1. 1. SOFTWARE: Taking the pain out of fixed assets page 26 SMBFINANCE SMALL & MIDSIZED BUSINESS JULY 2006 Don’t Sell Yourself Short To sell his company, Hugh Glidewell didn’t clean up his books — he made the business better. VoIP The bottom line on Internet telephony SMB Finance, PO BOX 530, Congers, NY 10920 Address Service Requested: Outsourcing Feel like farming out finance functions? Incentives Creative ways to lower turnover
  2. 2. I Am Expertise. I Am Spherion. – I am an accounting and finance recruiter with Spherion®. – Before joining Spherion, I spent five years as a senior accountant for a Fortune 500 company. – Once a month, I take a fishing excursion with some of my colleagues. – To date, I have helped more than 100 companies find the skilled finance and accounting professionals they need. Who are we? We are a network of talent experts able to rapidly source and deliver full-time financial analysts, CPAs, compliance officers, risk managers and corporate finance experts. Who are we? We’re Spherion: nearly 60 years of experience, excellence and exceptional talent. Contact us today at 888-223-6935 ©2005 Spherion Pacific Enterprises LLC All Rights Reserved.
  3. 3. contents 22 DEPARTMENTS 2 Editor’s Letter SMBFINANCE Our July lineup. July 2006 4 Eye on Operations Painless tax payments v New business credit cards from Discover FEATURES v CFOs own risk management 12 Preening Yourself for an Acquisition 6 Tech Briefs Forget “cleaning up the books” and slashing expenses: If you want to make Sage’s new Quantum v A network in your company an attractive sale prospect, you need to concentrate on strategy, a box v QuickBooks and Web stores timing and growth — things a good finance officer should focus on anyway. v Accounting software’s triumvirate 9 Benefits Focus 18 The Economics of VoIP Phone service over the Internet holds out the promise of rock-bottom prices. Show that you care, with a Find out if the promise holds true for you. care-management program. 11 Risk & Regulatory 22 Inside or Outside? Now’s the time to buy business Outsourcing financial functions is a hot topic these days — but is it right interruption insurance — not after for your company? disaster strikes. 24 Anything But Cash 30 Verticals The more innovative you are in rewarding and encouraging employees, the Inspecting the foundations of the more innovative they’ll be in their work — and the longer they’ll stay at it. homebuilding industry. 32 Parting Shot 26 Software Review: Fixed Assets Our reviewer surveys the field of fixed asset software to find the applications Manship Media CFO Ralph Bender on that can give you the most help with this often-painful process. Louisiana’s recovery, and the evolution of the CFO. JULY 2006 SMBFINANCE 1
  4. 4. fromtheeditors Editorial Phone (212) 803-8200 Fax (646) 264-6828 Group Editor Bill Carlino (212) 803-8855 Managing Editor Daniel Hood (212) 803-8858 Contributing Editors Paul Demery, Stuart Kahan, Melissa Klein The First Year Aguilar, Carolyn Hirschman, Ted Needleman, Gail Perry, Roger Russell, Jeff Stimpson, Richard Stolz, Howard Wolosky Design Is the Hardest Creative Director Justin Torrento Art Director Mike Vella Associate Art Director Gillian Reinhard Executive Director of For those of you whose responsibilities Creative Services Sharon Pollack I overlap with your company’s IT unit, you may already be considering a Voice over Production Production Manager Brooks Rice t’s hard to believe that almost a Internet Protocol system to get cheaper year has gone by since the launch of telephone service. In this issue, technology Executive Director of Manufacturing SMB Finance. We’re not big on fan- writer Lisa Spinelli helps you determine Stacy Ferrara fare, so we’ll celebrate the completion for yourself the feasibility and economics Advertising of our first year with the knowledge of transitioning from plain old telephone Group Publisher that we’re fulfilling our mission state- service to VoIP . Tim Murphy Advertising Sales Director ment of bringing you the stories and No matter what service line your busi- Jack Lynch (212) 803-8803 information you need to succeed ness provides, ratcheting down employee in today’s highly charged and turnover is a universal dilemma. Alicia Sales Managers Collene Ellenberger (212) 803-8802 competitive market. Korney documents a host of small and mid- In our humble opinion, the line- sized companies that have implemented Kurt Martin (212) 803-8801 up for our July issue does just that. creative, and often low-cost, employee Much like a first date, where the incentives with startlingly effective results. Patrick O’Leary (212) 803-8848 process for making a good impres- Find out how incentives can translate into Classified Sales Manager sion involves equal parts preening that elusive singe-digit percentage in Peter Sorice (212) 803-8804 and preparation, priming a business employee turnover. to become an acquisition candidate And last, but by no means least, writer Sales/Marketing Associate Susan Korcynski (212) 803-8810 involves a similar to-do checklist. and CPA Gail Perry offers up examples of In this month’s cover story, Rich SMBs that’ve mined efficiency and lowered Group Circulation Director Stolz examines various strategies for costs by outsourcing financial functions Michael O’Connor (212) 803-8324 making your business appealing to such as reporting, payroll and bank recon- Fulfillment Director Jessica Reid (212) 803-8246 those on the M&A prowl, while pre- ciliation to various providers. Customer Service senting some successful examples of As usual, we welcome your comments owners who made the decision to sell and suggestions at smbfinance@source- Phone (800) 221-1809 Fax (212) 803-1592 their businesses and how they went about it — and how their finance One year down — here’s hoping for executives were critical to the process. many more! James M. Malkin Chairman & CEO William Johnston Chief Financial Officer All editorial correspondence, manuscripts, etc., should be sent to SMBFinance, SourceMedia Inc., One State Street Plaza, Jeff Scott Chief Technology Officer 27th Floor, New York, NY 10004. While the utmost care will be given to material submitted, we cannot accept responsi- Bruce Morris Pres., Banking & Corp. Groups bility for unsolicited manuscripts. POSTMASTER: Send all address changes to SMBFinance/SourceMedia Inc., P.O. Frank Quigley Pres., Securities Group Box 530, Congers, NY 10920. To order, call: (800) 221-1809, or e-mail Publisher’s Copy Celie Baussan SVP, Operations Protection Clause: Advertisers and advertising agencies assume liability for all content (including text, representation and illustrations) of advertisements and responsibility for claims arising therefrom made against the publisher. © 2006 Robert DeNoia VP, Human Resources SMBFinance and SourceMedia Inc. All rights reserved. No part of this publication may be reproduced in any form by Richard Antoneck VP, Finance microfilm, xerography or otherwise, or incorporated into any information retrieval system without the written per- Anne O’Brien EVP, Marketing & Strategic Planning mission of the copyright owner. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in render- REPRINTS/WEB RIGHTS/PERMISSIONS ing legal, accounting or other professional services. If legal or accounting advice or other expert assistance is Godfrey R. Livermore required, the services of a competent professional should be sought. Director of Reprints & Alternative Media Sales Tel. (888) 909-6366 Fax (212) 843-9624 2 SMBFINANCE JULY 2006
  5. 5. Checkpoint ® Corporate Reporting & Compliance “We use Checkpoint® for critical financial reporting, SOX compliance and corporate governance answers from names we know and trust – like WG&L, RIA and now PPC. Best of all, everything on Checkpoint® is linked together, so now we can easily get from all our key source materials – SEC, GAAP, FASB, GASB, AICPA, IASB, even COSO – to the guidance and analysis we need to get the job done. Since everything is in one place, we find what we need right away. Even updates we can’t get anywhere else, like PCAOB Interim Standards and daily news e-mails. All the financial tools we need for our company are right here, on Checkpoint®.” NEW Resources for Corporate Reporting and Compliance Only on Checkpoint® from Over 85% of the Fortune 1000 rely on RIA and PPC. Checkpoint® for their research needs Checkpoint® is one of the leading accounting research platforms available – and relied on by over 90% of the Top 100 Accounting Firms “ “ The CPA Technology Advisor [2004, 2005, 2006] Research • Guidance • Workflow Tools • CPE 1.800.950.1216 ® 2006 RIA. RIA and Checkpoint are trademarks used herein under license. PPCRIA_CORP_ACCTTECH06/06
  6. 6. eyeonoperations IMAGE PUNCHSTOCK ness owners have a business credit card. series of challenges in its loan program, The new card has a feature allowing according to a report from the Government FASB, AICPA eye business owners to write special checks to Accountability Office. private co. reporting pay merchants and suppliers who don’t The report said that with respect to The Financial Accounting Standards Board accept credit cards. The card doesn’t carry using technology to monitor loans made by and the American Institute of CPAs have an annual fee and includes a cash-back 7(a) lenders between 1997 and 2002, the issued a proposal aimed at improving the rewards program on office supplies, gaso- SBA had been unsuccessful in developing financial reporting process for private com- line and other purchases. More information its own system to establish a risk manage- panies. The groups are asking for feedback is available at ment database, as required by law. on changes to FASB’s standard-setting pro- Meanwhile the GAO’s preliminary find- cedures, which would allow the board to ings from ongoing evaluations of the SBA’s consider differences in accounting stan- An owners’ retirement plan response to the 2005 Gulf Coast hurricanes dards for private companies within general- CCA Small Business Group, a provider of indicated that the SBA’s workforce and new ly accepted accounting principles. retirement plans for sole proprietors and loan-processing systems were overwhelmed Under the proposal, FASB would imple- small businesses, has unveiled its new by the volume of loan applications. ment certain improvements to enhance OurMax plan, a Web-enabled, high-deferral the transparency of its standard-setting retirement plan for small business owners. process for private companies and consid- A type of defined-benefit plan that allows Filthy accountants er input from private company con- business owners to save up to $200,000 Of the more than 600 cubicles in nine dif- stituents. The seven-page proposal is avail- annually for retirement, CCA’s OurMax can ferent professions examined by able at a joint Web site maintained by the work in addition to an existing 401(k) plan. researchers from the University of Arizona, two groups, The comment More information is available online at the bacteria levels found in accountants’ period, which is open to anyone, ends offices finished second only to the levels August 15. found in schoolteachers’ classrooms. Dr. Charles Gerba, a microbiologist at the SBA loans face challenges University of Arizona, said that the phones, Painless tax payments While the Small Business Administration desks and keyboards regularly used by Well, as painless as possible: Under new has improved oversight policies and con- teachers, accountants and bankers har- temporary and proposed Internal Revenue trols for its flagship 7(a) loan program since bored nearly two to 20 times more bacte- Service rule changes, nearly 950,000 small the 1990s, the organization still faces a ria per square inch than other professions’. businesses are eligible to file and pay taxes once a year using the new Form 944, rath- er than quarterly using Form 941. Eligible Because your plate Who owns the risk? businesses are those with an estimated wasn’t full enough employment tax liability of $1,000 or less. Corporate success has a thousand fathers, but corporate risk has to make do, at best, with one — CEO 20% Other and it’s often a company’s chief finance executive. Executive CFO 44% 9% Discover targets small biz According to a recent survey of 230 financial Discover Financial Services, a business unit executives by internal controls software vendor Chief of Morgan Stanley, is the latest company to Oversight Systems, if a company held a single Auditor try to secure a piece of the business credit executive explicitly responsible for overseeing 5% card action. It is targeting businesses with the management of all risk across the enter- Chief Risk Officer/ No Single VP of Risk 8% up to $1 million in annual revenues, esti- prise, CFOs were more than twice as likely to Executive 14% mating that only 35 percent of small-busi- be tapped for the task than CEOs. SOURCE: OVERSIGHT SYSTEMS 4 SMBFINANCE JULY 2006
  7. 7. Driving the Success of Small and Midsized Business Our readers buy your products and services and we've got the results to prove it! Within the next 2 years, SMB Finance readers intend to purchase the following products and services*: 45% Copiers/Scanners/General Office Equipment 33% Accounting/Finance Software 31% Accounting/Auditing Services 31% General Hardware/Software 31% Employee Benefits 28% Insurance 22% Bank Relations 20% 401k/Pensions/Defined Contribution Services 20% Phone Systems Reach 60,000 influential financial 86%of our readers either 60%of our readers say executives who look make or influence their company plans to to SMB Finance for final purchasing INCREASE technology information about decisions*. spending*. new products, services and solutions. *March 2006, Publisher survey results For more information, contact: Jack Lynch, Advertising Director Collene Ellenberger Patrick O’Leary (212) 803-8803 (212) 803-8802 (212) 803-8848
  8. 8. techbriefs up fee of $59.95; prices for Web store plans small and midsized accounting and enter- range from $7 a month up to $250, prise resource planning software markets. Sage rolls out depending on the provider. However, the Boston-based firm did Peachtree Quantum note that integrated business application In conjunction with the launch of the suites from NetSuite and SAP also gained Peachtree by Sage Accounting 2007 line, TaxWare certified for SSTP increased presence and penetration. Sage Software has announced the new Taxware, a provider of global transaction The report says that the market oppor- Peachtree by Sage Quantum, which can tax calculation and compliance solutions, tunity for vendors is growing. Many SMBs support up to 10 named users in delivering announced that its flagship products — still maintain and manage their financial additional performance, data security and Taxware Enterprise and TaxSolver — have data on Excel spreadsheets, which pro- larger transaction volumes. been certified by the states that are mem- vides vendors with opportunities to seize More than 150 small business owners bers of the Streamlined Sales Tax Govern- greater market share. Additionally, the participated in usability and design studies ing Board. Taxware is the first company to increasing need to electronically exchange conducted by Sage’s in-house Customer- gain both Certified Automated System and information with larger customers and Connected Design Center. Included in this Certified Service Provider status, providing partners adds to the demands to improve information gathering process were businesses with a choice in how they wish operational efficiency. Peachtree customers, small businesses to deploy certified sales tax compliance Within the market, the Yankee Group that utilize paper and pencil to manage technology. Both models protect business- said that Intuit’s QuickBooks and Quick- accounting, and customers of competing es from liability through the use of state- Books Online still dominate companies accounting software packages. supplied data and ongoing testing and re- with between two and 99 employees, fol- More information about Quantum is certification testing by state regulators. lowed by Sage Software. Microsoft leads available at the 100-to-999 employee midsized comp- Sage has also rolled out new versions of any market, followed by Oracle and Sage. its Peachtree software for the construc- Easy networking tion, manufacturing, distribution and non- Not everything in life or IT has to be hard. profit industries; information is available at Take Chili Systems’ ChiliBox, a network Warehouse Automation server appliance for small businesses that for MAS 500 makes setting up a network for a small Business software developer Sage office or even a home simple and painless. Software unveiled a new Warehouse Minding the e-store The ChiliBox server links from two to 20 Automation module for its Sage MAS 500 Just as QuickBooks makes accounting easi- computers, and acts as your router, e-mail ERP enterprise resource planning software. er for small businesses, Intuit’s new server, firewall, back-up server and more. Intended for distribution companies that QuickBooks Merchant Service for Web It even allows for secure remote access use wireless networking equipment, the Stores (www.quickbooksmerchantservice) over the Web, and now comes in a wire- module transfers data gathered from hand- should make e-commerce easier. Intuit has less version. held barcode scanners and radio frequency partnered with leading online store For more information, visit www.chilisys- communication devices and enters it auto- providers to create an end-to-end, or call (866) 532-4454. matically into the Sage MAS 500 ERP sys- QuickBooks-compatible solution that lets tem. Handheld devices supported by the businesses create a Web store, sell online, Warehouse Automation module include the accept credit card payments and link all Accounting software Intermec CN2 Series, the Intermec 700 IMAGE ARTVILLE the business data directly with their ruled by triumvirate Series, and the Intermec CK60 Series, plus QuickBooks accounting software. Market research firm the Yankee Group any handheld device utilizing Microsoft There’s a monthly fee of $17.95 for the announced that Intuit, Sage and Microsoft CE.Net or Windows Mobile 2003/2005 QB Merchant Service, plus a one-time set- have reconfirmed their dominance in the operating systems. 6 SMBFINANCE JULY 2006
  9. 9. benefitsfocus You’re Never Too Small to Care Care management’s not just for the big guys anymore. By Carolyn Hirschman It didn’t take a fancy claims analysis or premiums have forced many of them to much shopping around for John Keach to raise employees’ costs or to eliminate add a wellness program to the employee coverage. This cost pressure has prompt- benefits offered by his small bank. He ed some small employers to look for Many on when the bank’s health insur- signed small and midsized compa- long-term savings with care-manage- watch larger employers plow the field. anceare taking a measuredprogram. to nies company offered the approach ment programs. have decid1(k)s. Others, however, the“We just thought it made sense,” says buzz over consumer-drive approach Such programs aren’t as common at That’s what MMany small and mid- to the buzz over consumer-driven health the chairman and chief executive of 280- small companies areat large a measured sized companies as taking ones, but person Home Federal watchin Colum- benefits, preferring to Bank larger their use is growing. Among employers approach to the buzz over consumer- bus, Ind. “We thought it would behowev- employers plow the field. Others, a good with 10health benefits, preferring to driven to 499 employees, 41 percent er, have decid1(k)s. way to control [health] costs, and it was offered at least one disease management watch larger employers plow the field. That’s what MMany small and mid- a way to provide an additional benefit.” program last year, compared with 31 per- Others, however, have decid1(k)s. sized companies are takingjust for big Care management isn’t a measured cent in 2004, reports Mercer Health That’s what MMany small and mid- approach to the buzz over consumer- companies. An increasing number of Benefits. Nurse advice lines a measured sized companies are taking were offered driven health benefits, preferring to small employers are adding wellness, dis- by 41 percent in buzz over consumer- approach to the 2005, up from 35 per- watch larger employers plow the field. ease management and similar services, cent in healthThe proportion using driven 2004. benefits, preferring to IMAGE PHOTODISC even as however, have decid1(k)s. Others, some drop basic health coverage. health-risk assessmentsplow from 13 watch larger employers rose the field. That’s what MMany small and mid- percent however, have decid1(k)s. Others, to 18 percent. MAKING THE CASE sized companies are taking a measured Wellness programs strive to prevent That’s what MMany small and mid- When it comes to health benefits, small approach to the buzz over consumer- at-risk workers from developing diabetes sized companies are taking a measured employers have it rough. Their fast-rising driven health benefits, preferring to and other to the buzz over consumer- approach chronic diseases. Disease JULY 2006 SMBFINANCE 9
  10. 10. benefitsfocus management helps ill people better manage their conditions so they don’t get Not just for the big guys worse. Weight-loss programs and man- Percentage of employers offering wellness programs agement of complex and catastrophic cases are also part of the mix. ALL SIZES 62% Many employers offer these programs to save money, but saving money isn’t the only reason to offer care manage- SMALL (1-99 EMPLOYEES) 48% ment, especially since programs often don’t yield a return on investment for two years or more. Firms also want to MEDIUM (100-499 EMPLOYEES) 61% boost employee health and productivity and to create a caring culture. “We thought it was important to let LARGE (500 OR MORE EMPLOYEES) 76% our employee population know their health care was important to us,” says 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Valerie Witt, a benefits specialist at SOURCE: SOCIETY FOR HUMAN RESOURCE MANAGEMENT Johnson Memorial Hospital in Franklin, Ind. The 850-employee hospital added a aggregate data for the employer to guide SHOPPING AROUND wellness program last year to keep its future wellness efforts; and a health- Care-management programs historical- benefits competitive with those of other coaching program to motivate and guide ly haven’t been available to small firms, area hospitals, she adds. “We did a lot of lifestyle changes in workers at high risk but that’s starting to change, consult- communication at the beginning,” Witt for chronic conditions. ants say. Providers pool the business of says, because some employees were con- “We really don’t recommend just one small groups, making programs more cerned about confidentiality. of these,” says Chas LaPierre, director of affordable for small businesses and Principal Wellness Co. in Indianapolis. more profitable for vendors. Still, WHERE TO START “Without all those things, you’re really options may be limited. To pick a cost-effective program that’s just adding to the cost of health care.” Employers that buy health insurance best for your workforce, first determine For disease management, employers from Principal Life Insurance Co. get its your needs based on employee demo- can analyze medical and drug claims to wellness services for free if they reach 75 graphics and medical-cost drivers, figure out which programs to offer, but percent participation in the wellness experts say. Most small groups should the effort is justified only for groups of program, LaPierre says. Otherwise they focus on wellness for all workers, rather 500 and up, which are large enough to pay a variable rate. than disease management for a relative generate reliable numbers, says Joseph Self-insured companies generally buy few, says Jack Bastable, who heads the Marlowe, Aon Consulting’s vice president care-management services on a per- health and productivity management of health and welfare. member basis through a third-party practice at CBiz Inc., a Cleveland-based Most large national carriers offer dis- administrator, with disease management business-services administrator. ease-management services as part of costs varying by program. Johnson “The greatest savings long-term come their health plans, but “it may not be a Memorial Hospital pays Principal about from the opportunity to keep people comprehensive program. It may be limit- $12 per member per month for its well- who are healthy from getting sick,” ed to case management,” he adds. ness program, Witt says. Bastable explains. Consultants and brokers can help To judge a program’s success, com- At a minimum, companies can dis- small companies assess program quality pare participants’ average number and tribute or guide employees to free health before diving in, Marlowe says. Aon, for cost of medical claims before and after information and host seminars with local example, has negotiated a small-busi- the program began, Bastable says. health professionals. A full-fledged well- ness price for disease management with Vendors also regularly report participa- ness program typically includes on-site Matria, the vendor it has used and vetted tion rates, aggregate clinical data and clinical screenings for blood pressure, for large employers. other information for employers. cholesterol, body mass index and other Whatever the program, incentives — “We also want to see behavior change basic indicators of health-risk assess- usually, lower health premiums — help trend the right way. We can track that,” ments, in which people self-report smok- drive participation. Home Federal Bank LaPierre says. Did more people partici- ing, exercise and other habits; one-on- reduces workers’ premiums by $40 per pate in high-risk interventions, for exam- one consultations to explain results to month and gets 95 percent participation ple? He advises waiting at least two years individuals and suggest changes, such as in its program, plus a 3 percent lower to judge wellness results. “It’s not a quick weight loss or more exercise; a report of health insurance premium, Keach says. fix,” he says. SMB 10 SMBFINANCE JULY 2006
  11. 11. riskregulatory added to a property insurance policy or included in a business insurance policy as a rider or an endorsement. For smaller businesses it can be sold by itself, but it’s usually rolled in with a general business insurance or property insurance policy, explained Robert P . Hartwig, senior vice president and chief economist at the New York-based Insurance Information Institute. “You need to make sure that it’s part of the business or property policy,” he emphasized. “About 85 percent had it after 9/11, but many did not have enough. Their assumption was that they didn’t need more than two or three weeks’ worth of insurance, but they did not envision a terrorist attack that kept parts of the city cordoned off for weeks.” In practice, policies contain elements that make it difficult to determine whether a specific loss is covered. “A business interruption policy usually requires physical damage as a trigger, but in today’s world e-damage is often a trig- Business interruptus ger. There’s no coverage for it unless you have it endorsed,” said Chesler. He also noted the fine line between a partial Don’t wait for the big one to hit before buying business shutdown and a slowdown or productiv- interruption insurance. By Roger Russell ity loss. The partial shutdown is typically covered, while a productivity loss is not. Most businesses are ignorant of the activities due to a casualty, according to need for business interruption insurance Michael Levy, chair of, PICKING YOUR POLICY until it’s too late, according to experts. an Atlanta-based lead-generation service. It’s critical that businesses assess their “Many companies don’t pay attention “Water is one of the most common needs in the event of a business-sus- to business interruption insurance at causes of physical damage to businesses pending incident, said the III’s Hartwig. all,” said Robert D. Chesler, an attorney today,” he said. “A severe but rarely con- “Many businesses buy enough to repair and chair of the insurance law practice sidered cause is sprinkler discharge. or rebuild their buildings and restore group at the Roseland, N.J.-based firm of Sprinklers can go off easily. ... Gutters can inventory, but do not have enough cover- Lowenstein Sandler PC. “The basic cov- clog and cause an overflow. Computers age to tide them over the loss of income erage you get is very thin.” and other electronic devices such as and higher expenses,” he said. “Business interruption insurance is phone systems can suffer serious, irre- Among the factors to consider in critical to us because of our multiple versible damage.” selecting coverage is the financial sites,” explained Tiffany Hott, chief exec- strength of the insurer, the size of the utive of TestQuest, a tutoring and testing SCATTERED COVERAGE deductible and the amount of the premi- service with locations in New York, New Chesler, who advises companies on their um payments. Jersey and Florida. “Insurance costs have insurance programs, noted that not And now may be the time to buy. skyrocketed, but you can never foresee every contingency is covered in such “Nationally, business interruption insur- every unexpected possibility. You can policies. “The best advice is to go over a ance pricing is soft,” said Trey Hutt, never be over-insured, but you have to policy very carefully, and make sure it owner of the Hutt Insurance Agency in IMAGE PHOTODISC balance the cost against the risk.” matches potential injuries to the busi- Panama City, Fla. “It’s fairly soft now Business interruption insurance cov- ness. After 9/11, a lot of companies were nationwide, but it’s very different along ers the profits that would have been surprised they didn’t have it.” the coast, and that’s growing. The hurri- earned and operating expenses that con- Business interruption coverage is typ- cane issue is working its way up along tinue despite the absence of business ically not sold as a separate policy, but is the East Coast.” SMB JULY 2006 SMBFINANCE 11
  12. 12. coverfeature 12 SMBFINANCE JULY 2006
  13. 13. Caveat vendor: When it comes to selling a business, you have to do more to get your ducks in a row than just smooth out your ruffled financials — but knowing how to make your company an attractive prospect can be a real feather in your cap. By Rich Stolz Preening yourself for an acquisition Photography by James Warwick/Getty Images JULY 2006 SMBFINANCE 13
  14. 14. P icture the scene: Your chief exec- might like a little change of pace. “I had been struggling might- utive invites you into his office, ily at this business, and for whatever reasons, the business had shuts the door firmly behind you become more successful than I had ever really dreamed.” and asks you to take a seat. Although Glidewell didn’t relish the financial management You know something’s up. end of the business, his systems were in good shape — due in Then he lowers his voice and part to the fact that securing commercial landscaping con- says, “I’m thinking about selling tracts often requires posting performance bonds. “The bond- the business. Can you help me ing companies were very strict about getting the kind of through this process?” detailed financial information” that a prospective purchaser You swallow hard, think quickly about your future, then — (or broker) would demand, Glidewell says. possibly with manufactured self-confidence — reply, “Sure.” But when Glidewell began discussing the possible sale with Your ability to be useful will not only greatly influence the Harkins, he quickly learned what a strategic-minded and ana- success of the transaction, but perhaps determine whether lytical financial executive could do to help him fetch top dollar you land on your feet after the deal closes. for Pro Landscapes. “I was very tied up in the day-to-day oper- Indeed, the sale of a business may represent the ultimate ations of the business; the larger, macro things you tend to get opportunity for a financial executive to demonstrate his value to rather slowly” — if at all, he says. to the organization and its shareholders — not to mention future employers, including the new owners of the business. GO FOR THE TWO IN THE BUSH Conversations with business brokers and owners make one And yet those “macro things” tend to be the ones of greatest thing very clear about what’s required for a smooth business value to buyers. “People buy businesses because they feel they sale: It’s not really about having “clean” financials. can expand them pretty significantly. Otherwise, why not just “My belief is, you can’t ‘clean up’ the books,’” says Jeff Snell, buy a risk-free government bond?” Harkins asked. president of Enlign Business Brokers, in Raleigh, N.C. “The When he sought out the financial expertise of Harkins, whole notion is hokey to me. “If I’m looking at three years of Glidewell believed that he had “already done about as much as accounting data and the owner is saying, ‘We have this note I could to position the company” for a sale. And he had good here,’ or ‘We have this customer who pays cash,’ or ‘I use mul- reason to think so: Pro Landscapes had racked up a very tiple accounting systems that never get integrated into a final impressive financial track record. After its first year of opera- report,’ he’s really doing that because he’s washing something tion, the company grossed about $1 million. After a dozen out of the system.” years, its gross exceeded $12 million (with an average annual Odds are, a jury-rigged accounting system really can’t — or growth of about 23 percent). In addition, Glidewell’s operating won’t — be cleaned up. When Snell sees the telltale signs, “I’m margins remained consistent, so profit growth was as impres- not likely to work with them.” sive as the top-line picture. Adds Patrick Harkins, who spent over 20 years as a chief But Harkins wasn’t content to let Pro Landscapes rest on financial officer before launching Anchor Business Advisors those numbers: “As a CFO, you really have to help the CEO Inc., in Atlanta, clean books “are a given.” “You’d better hope think strategically.” you’re generating good financial information; otherwise you’ve When he served as CFO of a middle-market manufacturing got a whole set of other problems.” company in Chicago, Harkins helped to facilitate a leveraged buyout of the company by the management team. Before THE EARLY BIRD TAKES HIS TIME approving the loan needed to swing the deal, the lender The biggest requirement for a successful sale isn’t even finan- required managers to work with a business strategy consult- cial. It’s time. ant. In that process, Harkins and others analyzed the company “I like to start working with a company two or three years from top to bottom, clarifying which pieces of the business before the sale,” Harkins explains. And it is during that period were truly profitable and had growth potential. that financial executives (and perhaps others on the senior The ultimate result was a consolidation of divisions and the management team) can take the steps and perform the analy- curtailment of some operations. The loan was approved, the ses that will help the sale succeed. deal was consummated, “and we paid off the debt pretty One of Harkins’ clients is Hugh Glidewell, who came to him quickly,” Harkins recalled. two years ago with the notion of selling Pro Landscapes, a $12 Flash forward to 2004. million, 60-employee Atlanta-based regional commercial land- Harkins guided Glidewell to think about — and identify — scaping business that he had been building from the ground new growth opportunities for Pro Landscapes. One idea was up since 1993. “I had vaguely thought about selling the busi- landscaping new housing developments on military bases. ness for a year or two before I met Pat,” he recalls. Glidewell realized that he had several residential construction After some 30 years of working in the landscaping business, clients that were beginning to do a booming business on mili- and a dozen years in Atlanta, Glidewell concluded that he tary bases. “It was enough that we could realistically project 14 SMBFINANCE JULY 2006
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  16. 16. coverfeature that the company would double in size over the next two or enterprise. In Glidewell’s case, projecting rapid growth from three years with that new operation,” Glidewell says. landscaping military bases no doubt got the attention and Of course, a buyer needs some evidence that such a dream whetted the appetite of the entrepreneur who bought Pro is more than, well, a dream. But because Glidewell wasn’t hell- Landscaping last year. bent on an immediate sale of Pro Landscapes, he had the time “It’s a good selling tool,” he says. “But the price was to land a few military base contracts to demonstrate that this totally driven by EBITDA [earnings before interest, taxes, was indeed a serious growth opportunity. depreciation and amortization]. Without the EBITDA, you’re “If you want to get full value for cash flow from a new com- not going to get a buyer.” ponent of revenue, you need to do it for at least a year. One OK, but what is true EBITDA? On this matter, financial month is not ‘real,’” says Enlign’s Snell. executives can rely on basic number-crunching skills to help prospective buyers get an accurate (and, one hopes, attractive) DON’T FOUL YOUR OWN NEST picture of profitability. Just as buyers are looking for real growth opportunities, they Jandali helps that process along by recasting financials. “We also, of course, want to see real profitability. Thus the tempta- calculate what we call ‘seller-discretionary cash flow,’ basically tion arises when a sale is looming to hastily slash expenses. the free cash flow that a company has.” In addition to adding Doing so may seem like a quick-and-dirty recipe for higher such expense items as interest, depreciation and other items operating income, but if pursued too crudely, it can backfire, used for a standard EBITDA calculation back to the bottom brokers warn. line figures reported on tax returns, Jandali also cranks back in For one thing, you could spoil all the “fun” for the “discretionary” business expenses. new buyer. A company’s tax returns are used as the starting point Lou Phelps, of Phelps, Cutler Associates, in Savannah, because, as Pat Harkins points out, skeptical buyers under- Ga., who serves as a strategy and financial consultant to stand that “nobody’s ever reported more income on a tax media companies, points out that buyers “love to buy prop- return than they have earned.” erties where they can say, ‘Oh, gosh, we could cut this. We Discretionary expenses may be in the eye of the beholder, could cut that. We can make it much more profitable than he notes. Sellers will try to add back in as much as possible to [the current owners].’” raise reported cash flow, and buyers (and bankers) will scruti- “When you’re already running a totally Cadillac, pencil-sharpened operation, and therefore you want Top myths on selling a business top dollar, the buyer is going to ask himself, ‘Where do I take it from here to recoup the top dollar that you’re Jeff Snell, president of want to buy my business. A too-high listing price with asking me to pay you?’” Phelps says. Raleigh, N.C.-based Enlign Reality: For non-public an unsubstantiated valua- Phelps’ comments are echoed by Business Brokers, is on a companies, what a com- tion will either invite an Malek Jandali, CEO of VR Business mission to shatter what he petitor is buying is rarely offer from an uneducated Brokers in Atlanta. The issue isn’t so considers to be myths what the seller thinks he is buyer (which will likely ulti- much cutting costs, he says, as about selling a business. selling. He is generally look- mately fall apart), or con- knowing how to run a company with While several “myths” point ing for something specific, sume a lot of time and the optimum level of resources — to the need for a broker, such as additional geo- effort without eliciting a something that a financial executive their validity is not neces- graphic coverage or a key qualified offer. should be helping a company sarily undermined by their employee. ✱ Now is (or is not) the achieve with or without the self-serving nature. ✱ The more people that time to sell my business. prospect of a sale. Following are highlights know that my business is Reality: “Timing is every- “Cutting costs doesn’t mean firing from five of Snell’s Top 10 for sale, the better. Reality: thing,” but your business people or having crappy technology,” list, available in full on his Selling a business is not goals will dictate the right Jandali said. “It means working more web site, like selling a product or time to sell. The average efficiently. It is achieved with the ✱ I know what my busi- service. You can only time to properly value a right management, the right goals ness is worth. Reality: Such accommodate one buyer, business, market it, identify and working as a team. It’s not only “gut feelings” are often and bidding wars more a qualified buyer and per- about the figures. Most numbers based on incomplete or often result in both poten- form due diligence is longer come from behavior where people outdated information, and tial buyers walking. than most business owners have a stake in profitability.” don’t take into account the ✱ Throwing out an unre- think. A business is worth In the end, the key to a successful myriad differences alistically high price and the most when the owner sale will be the buyer’s sober assess- between businesses. seeing what happens is probably least likely to be ment of the basic profitability of the ✱ A competitor will sometimes works. Reality: considering selling. 16 SMBFINANCE JULY 2006
  17. 17. the company’s post-sale management team will have “the depth, breadth and Glidewell was able ability” required to keep the company to prove to buyers successful after the owner checks out or fulfills a post-sale employment contract. that a new line of The seller should be prepared to pro- business could duce an organizational chart, plus pro- files of key managers, noting their double the size tenure with the company and compen- of his company sation history. — because In some situations, it will be hard to put a good face on the management he had already bench-strength and finances of the landed a few company. Not everybody can point to contracts to the kind of stellar financials that Pro Landscapes was able to put out. demonstrate What then? its potential. Jeff L. Peskind, managing director of the New York-based JLP Credit Opportunity Fund, specializes in evalu- ating companies whose financial per- formance is lackluster — or worse. Peskind’s advice? “Investors know nobody’s perfect. They know people make mistakes. The best thing to do is lay out your plan [for improving finan- cial performance] as clearly as possible, to get people comfortable that, first, you have a plan, and second, that you are aware that you have problems.” LET A LITTLE BIRD TELL THEM ... With any luck, however, the CEO won’t chose a period of acute financial distress to ask you to lead the cheerleading squad for the sale of the company. Not surprisingly, that role, according to busi- ness brokers, should be left to them, in bad times or good. nize all add-backs, and possibly disregard them. “You just have In addition to all the expected (and often legitimate) why- to ask yourself if the expense was really necessary for the busi- you-need-a-broker arguments — access to buyers, market ness to generate revenue.” knowledge, negotiating skills, etc.— is the suggestion that a For example, the cost of sending an executive to a confer- broker can help you by running you down. Well, sort of. ence at a luxury hotel in Hawaii, or a limo service for the CEO, “Owners often will brag about how phenomenal their are good add-back candidates, he suggests. company is,” notes Phelps of Phelps Cutler. The ironic result is that they’ll get a lower price, she maintains. “The broker, PAY AND THE PECKING ORDER away from the seller’s management team, can say, ‘Yes, sales A bigger item, in the case of a company run by its principal have been good, but truthfully you could put in an even owner, is chief executive compensation. If he’s paying himself stronger team over time and really bump this thing up more. a $500,000 salary but a competent general manager could be And let me show you how.’” recruited by the new owners for half that amount, there’s a Which suggests that when you are asked, in that solemn legitimate $250,000 add-back. private meeting with the CEO, to help with the process of Which brings up another key issue in facilitating the sale: preparing the company for a sale, you place “golden parachute management structure. contract for the CFO” at the top of the list of ingredients Harkins points out that buyers will want assurances that required for a successful sale. SMB JULY 2006 SMBFINANCE 17
  18. 18. VoIP The Economics of VoIP GETTING CHEAP TELEPHONE SERVICE OVER THE INTERNET SOUNDS GREAT — EXCEPT WHEN IT DOESN’T. BY LISA SPINELLI T erry Rogers, CFO of Smith Newspapers using VoIP and predicted that 50 percent of all SMBs will sub- , in Fort Payne, Ala., heard Voice over scribe to a digital voice service by 2008. Research groups like Internet Protocol telephone services can the Boston-based Yankee Group, on the other hand, say that save companies thousands of dollars. only 5 percent of SMBs today use Internet phone services, and But after researching a switch from his the numbers are not likely to shoot up any time soon. company’s traditional phone service to VoIP he just could not find the savings. , INFORMATION, PLEASE “I’ve done some looking at it, and we’re Just as e-mail can be cheaper than a phone call, VoIP services getting such a cheap long-distance rate that it didn’t pay to give can bring significant cost savings. Offices that have multiple it up,” said Rogers, whose company pays $45 a month for their branches or a number of remote workers who constantly call telephone service. “There’s really no need to upgrade the hard- across different area codes may find thousands of dollars in ware and spend money on headsets to switch to VoIP .” savings when using VoIP . Many small and midsized businesses feel the same way But these benefits won’t necessarily materialize for all busi- ILLUSTRATION RYAN ETTER about the cost-efficiency of switching to VoIP according to a , nesses. SMBs that do not make many long-distance calls survey of 560 SMBs conducted by Boston-based technology between offices, or to clients, and yet try to use IP networks for concern Savatar. The study found that 85 percent of those all their calls, can find themselves with telephone calls of poor polled did not see a value in switching over to a VoIP network. quality, slower Internet connectivity and minimal savings. Statistics vary significantly on the penetration of VoIP in the “I don’t understand [major VoIP provider] Vonage’s business SMB space. In one study performed last year, Phoenix-based model, to tell you the truth,” said Gary Ritacco, president of InfoTech Research Group claimed that 23 percent of SMBs were Ecomm, a voice, video and data communications provider 18 SMBFINANCE JULY 2006
  19. 19. CHoICES, CHoICES A selection of VoIP providers’ plans for businesses. COMPANY/SERVICE FEATURES MONTHLY FEE OTHER COSTS NOTES CONTACT BroadVoice / Unlimited calls in the U.S. $29.95 $39.95 activation Other fees may apply. Unlimited or Canada. Users can add fee; $14.95 for ship- Additional lines cost the Business Plan up to two “remote” offices ping/handling of same as a new line. in other cities using alter- adapter. Alternate nate numbers. numbers $1.95 a month each. CableVision/ Unlimited calls in the U.S., $34.95 for one Available only to Optimum www.optimum- Optimum Voice for Canada and Puerto Rico. line; $29.95 for Online customers. Business four or more. (866) 482-0091 Covad VoIP/PBXi Unlimited nationwide call- Flat rate – Per-minute pricing – Designed for up to 100 ing up to 101,000 minutes. $36.95 to $26 to $32 per employees. (866) 365-2923 Interoffice calls are free. $59.95 per station and 3 to 5 phone (depend- cents per minute, ing on number depending on call of stations) volume. Net2Phone/VoiceLine Unlimited calls in the U.S. $29.99 U.S. or U.K. inbound U.S. Canada and Canada, and unlimited toll-free calls cost Unlimited inbound minutes. VoiceLine 4.9 cents a minute. to VoiceLine calls are free. Packet8/Virtual Unlimited in the U.S. and $39.99 per $99.99 equipment; Requires three exten- Office, Unlimited Canada, and free worldwide extension. $39.99 activation sions. Additional lines cost (866) TRY-VOIP Extension network calls for any sub- fee; $18.99 ship- the same as a new line. scriber. ping. Various other fees may apply. Packet8/Virtual 250 minutes of outbound $19.99 per $99.99 equipment; Requires three exten- Office Metered calls to the U.S. and extension. $39.99 activation sions. Additional lines cost (866) TRY-VOIP Extension Canada. fee; $18.99 ship- the same as a new line. ping. 3.9 cents per additional minute. Other fees may apply. Verizon/VoiceWing Unlimited local and long- $24.95 $19.95 set-up fee. No specific business plan Unlimited distance calls in U.S., Puerto offered. Requires one- (800) 270-5369 Rico and Canada. Unlimited year commitment. VoiceWing to VoiceWing calls. Vonage/Small Unlimited local and long- $49.99 Additional lines $12.99 Business Unlimited distance calls in the U.S., each, with 500 outgoing (800) 980-1455 Plan Puerto Rico, Canada and minutes in the U.S., Europe. Dedicated fax line. Puerto Rico and Canada. 3.9 cents for each addi- tional minute. Vonage/Small 1,500 free outgoing min- $39.99 3.9 cents for each Additional lines $12.99 Business Basic Plan utes a month to the U.S., additional minute. each, with 500 outgoing (800) 980-1455 Puerto Rico and Canada. minutes in the U.S., Dedicated fax line. Puerto Rico and Canada. JULY 2006 SMBFINANCE 19
  20. 20. VoIP headquartered in Lancaster, Pa. “Long-distance carriers like Verizon give you a $35 or so unlimited line with voicemail, The 411 on Internet telephony caller ID and all the same features. Vonage has technological VoIP, or digital voice, works in much the same way as e-mail, by challenges. On the business side, there is little, if any, advantage transmitting information over the Internet. A regular phone can be to switching over to a Vonage-type service.” plugged into a company’s Internet outlet and, after paying a month- ly service fee, the phone calls travel over the company’s bandwidth. CAN YOU HEAR ME NOW? There is more than one model for VoIP service, though, and The information is broken into packets of data, and when the per- prices vary depending on the service plan and provider (see son receiving the call picks up the phone, the packets are reassem- table, page 19). IP-only vendors, such as Vonage, run on any bled in the order they were transmitted. Ideally the voice comes Internet provider’s connection, making the service cheaper, but through on a digital voice line just as it would sound on a normal also less reliable. Other digital voice providers like BellSouth POTS, or “plain old telephone service,” line. and Verizon use normal “plain old telephone service,” or POTS, lines for calls outside the office and VoIP services for interoffice require weeks before the system is up and running. VoIP sup- calls. The quality therefore remains high with client calls, and porters point out that their system requires little capital to install interoffice calls are reduced significantly in price. beyond the cost of service, and can be done within a few hours. “VoIP is misunderstood in a couple of respects,” said “To invest in a regular phone system is very expensive,” said William Fleenor, chief financial officer and partner at business David Immethun, director of marketing at Packet8 Business and technology consulting group K2 Enterprises, based in Services, “and small businesses are looking at their total return Hammond, La. “One is that it saves a ton of money. Certainly, if on investment very closely. Phones don’t have a payback peri- you have multiple branches or remote workers, this can be a od, they’re a cost, but with virtual offices, the cost is paid for up huge savings, but the savings come because the calls between front and you don’t pay for any set-up.” the branch offices are running over the Internet. There are two Most companies find themselves looking seriously at VoIP major considerations when looking at VoIP services — cost and when they are moving from one office to another, need to quality. Vonage and the other pure IP networks, they beat replace an old phone system, or face expensive phone bills. everyone on price, but ... you can’t be assured to get as good When K2 moved its headquarters last April, Fleenor decided quality once it leaves the walls of your office.” that it was a perfect opportunity to look into cost savings for Pure-IP network VoIP providers also operate over the same their long-distance bill and switch to VoIP “We had a tradition- . lines as the company’s Internet access. Unless a company has al PBX system for the last 10 years that needed to be replaced, enough money to buy two separate channels — one for their but we could have moved it over to the new office,” he said. “It’s Internet and e-mail use, and another channel just for voice — a small office with four lines coming in. For one thing, [switch- the quality of the VoIP calls will be significantly compromised. ing to VoIP] eliminated the need for more outside phone lines.” E-mail and Internet usage will also be compromised. Now when K2 executive vice president Randy Johnston calls VoIP phones remain a bit cumbersome, and the most from Georgia, or chief executive officer Val Steed calls from expensive option for digital voice services. When purchasing Utah, their calls are interoffice and therefore don’t cost the com- the actual phone, the IP address is static, so it can be plugged pany long-distance fees. And calls from Johnston and Steed are into any existing Internet plug (though experts say that a DSL not tying up outside phone lines — leaving the channels open line or better helps the quality of the call), and the phone num- for customers to call. The ROI on that alone, said Fleenor, is ber will stay the same. However, the phones cost anywhere worth the switch, but the savings of not installing more expen- from a hundred to several thousand dollars. sive phone lines has proved a key attraction for SMBs. Donna Mackenzie, senior vice president and chief financial officer at Florida-based Channel Intelligence Inc., a marketer of THE PHUTURE OF PHONE SERVICE? online shopping solutions, is not worried so much about the “The [POTS] market leaders, who own most of the business, price of digital voice services as she is about losing communi- what they will do is try to slow the transition as much as possi- cation with clients or branch offices if the Internet goes down. ble to VoIP What that translates to is them dropping prices,” . “The biggest concern for us is if the Internet is down, the phone said Wes Rogers, vice president of marketing and sales at VoIP is then down — everything could come down at the same provider nexVortex, in Herndon, Va. “But VoIP tends to run 30 time,” said Mackenzie. to 50 percent lower than the regular phone bills, and the mar- ket leaders are not lowering their prices that far.” FASTER, CHEAPER INSTALLATION Even though POTS providers aren’t yet being replaced by VoIP proponents are quick to indicate a number of instances VoIP services just yet, some, like Ecomm’s Ritacco, feel it is only where the economics of VoIP make sense. a matter of time. He believes that VoIP will become so cheap Installing a private branch exchange system — a system and of high enough quality that the global unrelated telephone found in many offices, where local extensions branch off a main networks will have to join together to create one backbone switchboard number — can run to thousands of dollars and phone system — a VoIP system spanning the world. SMB 20 SMBFINANCE JULY 2006
  21. 21. outsourcing finance Inside or Outside? SMBS MULL OUTSOURCING FINANCIAL FUNCTIONS. BY GAIL PERRY F or small and midsized businesses Barnes Motor and Parts owns and operates 17 NAPA auto that are looking for ways to cut costs, it parts stores in eastern North Carolina, and hires the profession- might seem like doing all the financial als at RSM McGladrey Financial Process Outsourcing to prepare work in-house would be a no-brainer. After financial statements, LIFO inventory pools and payroll. all, hiring a professional for work that you “It reduces the workload in our office, where we can either can muddle through on your own costs concentrate on any number of things that we have to do in- money. But many businesses are finding house, be it collections, accounts payable or whatever the case that the cost of hiring an outside profes- may be,” Walston said. ILLUSTRATION RYAN ETTER sional person or firm to perform various financial functions not “Outsourcing can be a very attractive option, because the only saves money but provides many other benefits as well. cost of maintaining a financial operation both in terms of “I think it’s a prudent business decision if you think you can technology and in terms of people can be disproportionately get a professional job done at hopefully a reduction in costs,” high,” said Mark Jones, chief business development officer at said Henry Walston, president of Winston, N.C.-based Barnes RSM McGladrey Financial Process Outsourcing. “For example, Motor and Parts Co. Inc. “It gives you another set of eyes to if you think about a business that might have five or six people review things.” in their accounting department, they’ve got a controller/CFO, 22 SMBFINANCE JULY 2006