FEATURE
PAPER
Making More
Informed Hiring Decisions
The
following paper was presented at the 2007 Allied Academies
International Conference - Jacksonville. It was written
by Gerald E. Calvasina of Southern Utah Universit,
Richard V. Calvasina of University of West Florida, and
Eugene J. Calvasina of Southern University.
Abstract
Making
an accurate hiring decision is extremely important for most
employers. The cost
associated with making a poor hiring decision from a productivity,
customer service, and liability
prospective have been widely studied and has been estimated
to be three times the annual salary of
the individual involved. Also, in recent years numerous studies
have reported that applicants for
employment have grown increasingly willing to misrepresent
their credentials in the application
process. This growing phenomenon has further complicated the
hiring decision for employers
attempting to hire the right individual for a position. The
purpose of this paper is to examine the
problems created by this increased willingness of job applicants
to misrepresent their credentials,
and to present policy and practice suggestions that employers
can utilize in order to reduce their
legal liability and the cost associated with making poor hiring
decisions.
Read
the Entire Paper...
TIP
OF THE WEEK
Financial Statement Veracity
Relying on a company’s financial statements is, of course,
critical to any sale. You, as a seller, will be asked to sign
a legal, binding document, with recourse, which says your financial
statements are true and correct. It’s a serious burden.
This may seem to be a no-brainer from the seller’s perspective.
(“Of
course my financials are correct!” shouts the seller.) But there are several
reasons why buyers view this seemingly obvious area as one fraught with risks.
First, every seasoned buyer has been screwed by bad financials at least once.
Sometimes, it is pure fraud---like the tile company owner who changed lables
on inventory to fool auditors before a sale. Other times, the finances have been
finessed thorough some creative bookkeeping. Of course, you would never do that,
but if the buyer sees some rough edges on your financials red flags will go up.
A second reason why financials are so important is that we
live in a Sarbanes-Oxley world. The massive financial meltdowns
of Enron, MCI, and Fannie Mae have only
heightened prior concerns. Sadly, now most buyers probably assume that financial
statements are wrong in their face, and it will take years to correct this skepticism.
Given this predisposition, you need to give them as little as possible to worry
about when they are looking over your company’s books.
Carefully
Track Add-Backs
A third reason why buyers are concerned is that the financials
of family-held companies have always been tricky. All seasoned
buyers are aware that private
companies often manage their financial statements to minimize taxes, not
to maximize profits. This is well known, fully legal,
and is
not an obstacle from the buyer’s
point of view. The natural consequence of this approach, however, is the famous “restated” financials
replete with the list of “add-backs.”
This is well-understood ground. Whenever buyers look at financials
from a family- held business, they fully expect to see a
healthy list of “add-backs,” which
are costs in the income statement. These add-backs will no longer exist once
the business is not owned by the family. These are traditionally in the area
of above-market compensation to the owner, owner’s perks such as a car
or club memberships, excess compensation to the family members who may or may
not be working full-time, and potential above-market real estate lease payments
to other family-held companies. In sum, these add-backs normally are of great
consequence to the financial statements, turning a marginally profitable statement
into a highly profitable statement.
The careful and consistent treatment of add-backs is essential.
The seller should
make sure all these “family-associated” expenses are tracked carefully
every year so the buyer can have comfort that once the business is transferred,
these costs will no longer exist. Everyone knows they are there. They just must
be disclosed in a consistent and documented manner.
You may also want to dispose of real estate owned by the company.
This is an essential discussion to have with your tax advisor,
but it nearly always makes
sense for business owners to spin off the company-owned real estate into a separate
entity prior to the sale. This is dictated by simple economics, moderated by
current economic times. With today’s low interest rates, real estate is
often valued at ten to fifteen times cash flow upon sale, which is normally much
more than the business will fetch. As such, it is usually more productive to
transfer the real estate to a separate entity prior to the sale. But when you
do this, you can do two things to smooth the way for the sale of your business:
make the lease at or close to market rates, and make the lease long enough (at
least five years) that the new business owners can make long-term plans for the
business and with their bakers.
Get Audited Financial Statements
The other critical way to bolster the credibility of your
financial statements is to get audits for three years
prior to the sale.
We’re talking about
audits here, folks, not just a review. As an aside, I have been shocked in my
many years of looking at family-held companies at how many owners do not get
audits. Forgoing an audit because of the extra $30,000 or $50,000 of expenses
and the associated hassle is the most penny-wise and pound-foolish decision I
have seen owners make. Do you expect the buyer to take your word for it that
your financials are accurate? Do you expect the buyer to check them all out?
You’ve just increased the buyer’s risk, and reduced your price---almost
by much more than the cost of the audit.
Audited statements are particularity important in this crazy
business world where nobody believes anything. Not only have
you reduced your price, but you’ve
also scared off some potential buyers who don’t want to be bothered with
the deal at all. There are too many business investors and buyers, the author
included who will not invest in or buy a company that does not have audited financials.
And this requirement will only grow more prevalent.
Further, just to make it an easier decision, realize that every
serious buyer will require that sellers go back at least
two years and get audits done on the
financials. The buyer usually bears the cost of this process, but it creates
a massive and time-consuming financial burden on the seller. Make It easy on
yourself and hire a well-known, highly respected auditing firm and bite the bullet.
You can pay now or pay later. Get your financials audited three years before
you sell, and ask the auditors to separately quantify the “family-held” business
expenses, or add-backs, each year. This will improve your quality of life dramatically
at the time of the sale.
One other financial statement element to avoid if possible
as you lead up to a sale is dramatic changes in your margins.
Slight annual improvement is always
good (and, of course, to a certain extent the margins are what they are), but
it’s always a big red warning flag for the buyer if profit margins have
magically doubled in the year before the sale. This hurts credibility. The buyer
immediately discounts those numbers and begins to worry that the business has
been so carefully groomed for the sale and that things will never be as good
as they are today. Some owners throw out ballast and adjust the business to boost
margins, thinking it will please buyers. It gets their attention, all right---like
a red cape waved in front of a bull.
Make Credible Financial Projections
All buyers base their diligence partly on validating the
past but also on looking to the future. Your future
projections
for the next two or three years are essential
to the buyer. There are a couple of key points about these projections. First,
they must be credible. If the business has grown at 5 percent annually for
the last three years, do not project 10 percent growth
in the future, unless you
have the orders in hand. This type of jump will only hurt your sales prospects.
Buyers like good news, but they don’t care much for fairy tales.
Second, your projections must be supported by facts. The
way you arrive at the numbers is as important as the final
answer. As your grade school math teacher
probably told you, be sure to show your work. Support your projections with
the key analytical metrics that drive sales and margins.
These projections will be
heavily scrubbed by the buyer. Do not just put your finger in the wind. Produce
robust, thoughtful, and supportable plans. The detailed planning you do up
front will pay you meaningful dividends on the sale.
Sell Your Business Your Way. By: Rick
Rickertsen with Robert Gunther. Pgs.48-51 Published 2006
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CONFERENCES
ATINER
|
| Who: |
Athens
Institute for Education and Research
|
| What: |
International City Break Conference
on Business and Economic Research
|
| Where: |
Athens, Greece |
| When: |
October 19-21, 2007 |
|
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ISBE
|
| Who: |
Institute for Small
Business and Entrepreneurship
|
| What: |
30th
Annual ISBE Conference
|
| Where: |
Heriot-Watt University, Glasgow,
Scotland |
| When: |
November 7-9, 2007 |
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SWAM
|
| Who: |
Southwest Academy of Management |
| What: |
2008 Annual Meeting and 50th Reunion
Southwest Acadmeny of Management
|
| Where: |
Hyatt Regency - Houston, TX |
| When: |
March 4-8, 2008 |
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SMA
|
| Who: |
Southern Management Association |
| What: |
Annual Meeting |
| Where: |
Nashville, Tennessee, USA |
| When: |
November 7-10, 2007 |
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FFI
|
| Who: |
Family
Firm Institute
|
| What: |
2007
Case Writers’ Workshop
|
| Where: |
Fairmont
Turnberry Isle Resort & Spa
in North Miami Beach |
| When: |
October 17-20, 2007 |
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CALLS FOR PAPERS
MEI
|
| Who: |
Management, Engineering
and Informatics
|
| What: |
The 4th International Symposium
on Management, Engineering and Informatics 2008
|
| Where: |
Orlando, Florida, USA |
| When: |
June 29-July 2, 2008 |
Submission
Deadline:
October 24, 2007
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WUF
|
| Who: |
|
| What: |
The
2008 World Universities Forum
|
| Where: |
Davos,
Switzerland
|
| When: |
Jan 31-Feb 2, 2008 |
Submission
Deadline:
October 13, 2007
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