Key Person Insurance

July 27th, 2010
Advance Agreement

Advance Agreement

The Forbes website has a great column on key person insurance, titled “The Corporate Equivalent of a Kevlar Vest”. Key life insurance is an inexpensive term life insurance policy that pays a benefit to the business upon the death of the owner or other manager critical to the business. We discussed key person insurance in Prepare for the Worst, Plan for the Best: Disaster Preparedness and Recovery for Small Businesses (Wiley, second edition paperback, 2009) in a more extreme context.

But the untimely death of a person who is critical to the continuity of the business can be disastrous if you have not planned for it. The proceeds of the policy may allow your business partner to buy out your heirs’ interests while providing operational continuity, which is critical to both your employees and your heirs. Banks often require such insurance coverage when extending business loans. But another benefit of key person insurance is that it imposes operational and financial discipline, as you must value the business annually to make certain your coverage is adequate. As the cost of such coverage is very low, all business owners should look into it.

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Helping the Gulf Coast Tourism Industry

July 26th, 2010
Importance of Leisure

Importance of Leisure

The U.S. Travel Association reports that as many as 400,000 travel industry jobs could be lost as a consequence of the oil spill in the Gulf Coast. The total potential cost of the spill to the Gulf Coast tourism industry is estimated at $22.7 billion with most of those losses, as much as $18 billion, likely to occur in Florida. “Travel is a perception business and the impact of disasters like the BP oil spill on the industry is actually predictable,” said Roger Dow, president and CEO of the U.S. Travel Association in a press release. “We know from this research that the oil spill will have long-term effects on businesses and jobs in the Gulf Coast region unless we counteract the usual course of events with an unprecedented response.” The U.S. Travel Association is calling for a $500 million marketing campaign to encourage tourists to return to the Gulf.

Although I oppose spending federal government money to market and promote any industry, I do agree that it makes sense for the U.S. Commerce Department to create travel-related trade missions to encourage international tourists to visit the Gulf. That could certainly be done at low cost. The risk of advocating for tax credits to promote Gulf Coast tourism is that the effort could take tourist business from other parts of the U.S., thereby undermining broad public support for Gulf Coast rebuilding. The high unemployment rate hurts the tourist industry everywhere; unfortunately, the oil spill exacerbates this weakness for the Gulf of Mexico.

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Protecting Children During Disasters

July 25th, 2010
Keeping Them Safe

Keeping Them Safe

Save The Children has just published a report, “A National Report Card on Protecting Children During Disasters”, which finds that five years after Hurricane Katrina displaced more than 160,000 children in the Gulf Coast, most states are not fully prepared to protect children in disasters. Fewer than one-quarter of the states have implemented the four basic safeguards to protect children who are in school or child care during disasters, which are:

  • A plan for evacuating children from childcare
  • A plan for protecting children with special needs
  • A plan for evacuating children from schools and
  • A plan for reunifying children with their parents after the disaster

Now is the time to follow up with your child’s school to make sure that they have plans in place and that you know what they are. Only twelve states, including Mississippi and Alabama, met all four requirements.

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“Rapid” Response is Not Fast Enough

July 23rd, 2010

ExxonMobil, Chevron, ConocoPhillips and Shell Oil Company pledged $1 billion to create a “rapid response system” to address any future oil spills in the Gulf of Mexico. The system is still under development, but preliminary plans calls for “capture vessels” to contain and store oil in the event of an underwater well rupture. The system will be operational at depths of up to 10,000 feet with containment capacity of 100,000 barrels daily. The Marine Well Containment Company, a non-profit organization, will operate and maintain the system. The four oil companies plan to begin immediately the engineering and design of the containment equipment and vessels for the system.

No doubt the announcement was welcome by Louisiana Governor Bobby Jindal who spoke at an “Economic Survival Rally” to call for an end to the ban on deep sea drilling for oil and natural gas. Jindal estimated that the ban could cause the loss of 20,000 jobs in Louisiana over the next year. The situation with Louisiana’s oil and gas industry is analogous, in some respects, to our own situation in New York City. An entire ecosystem of small businesses is built around the principal industries of oil and gas in Louisiana and financial services in New York. When that mainstay industry experiences a reversal of fortune, the consequences to the community small businesses are especially severe. The difference, of course, is that we need energy to fuel our economy. Arguably, reduced employment on Wall Street, while painful locally in New York, might not be bad for the rest of the country.

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Tropical Storm Bonnie On the Wrong Course

July 22nd, 2010

In Harm's Way

In Harm's Way

Tropical Storm Three is now officially Tropical Storm Bonnie; let’s hope it doesn’t escalate to “Hurricane Bonnie”. Based on the projected path of the storm, certain of the work on the relief well has been stopped as workers have been directed to leave the area. The forecast is for an above-average storm season in 2010; this is the year that we pray the forecasters get it wrong.

What can we do to help small businesses in the Gulf Coast at this difficult time? We can support their businesses. I am making a point to take my vacation this year in the Gulf Coast region and am trying to organize whatever procurement I have to do with businesses in those states.

This graphic is courtesy of the National Oceanic and Atmospheric Administration. NOAA updates its forecasts frequently; this update is as of the close of business today.

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Severe Floods in China

July 21st, 2010
China Daily

Source: China Daily

More than 700 people died and 347 more are missing following torrential rains and floods in China, the worst that country has experienced in a decade. The floods affected 110 million people in 27 provinces and municipalities; 8 million residents of those areas were evacuated. The Chinese government estimates direct economic losses from the flood to be $21 billion, which includes damages to more than 7 million agricultural hectares and the destruction of more than 600,000 homes. The government also reported that 287,000 military personnel had aided in the flood rescue operations. This year’s flood season, which begins in China in April, has been unusually severe. In more than 230 rivers across the country, water levels have risen above what is considered safe. Areas adjacent to the Yangtze River have experienced the worst flooding in 30 years but, according to the Chinese government, the Three Gorges Dam prevented even more severe flood damage by blocking more than 40% of the water.

I have not yet formed an opinion on whether global warming has induced permanent climate change. But it is undeniable that we are experiencing the most severe weather patterns in some time and it appears to be a global phenomenon. At a time when the recession has stretched resources thin, we are particularly vulnerable to external shocks, such as natural disasters. And public resources are inadequate to fund relief efforts. Many people will try to ease the pressure on their budgets by foregoing “non-essentials”, such as insurance, when times are tough. But that is when you need it the most. Sadly, for entrepreneurs in China, most small businesses don’t have access to adequate insurance coverage. We do, so there is no excuse for us.

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Made in America

July 20th, 2010
Must-Watch Television

Must-Watch Television

My TiVo is set to record the Travel Channel weekdays from 9:00 – 10:00 a.m., the broadcast slot for John Ratzenberger’s program “Made in America”. Most of us would recognize the program host as the actor who played Cliff Clavin in the television series “Cheers”. I was surprised to learn how many characters he voiced for Pixar animations. But we see a whole other side to John Ratzenberger when he welcomes viewers at the opening of this program: “Hi, I’m John Ratzenberger. If you want to know America, you’ve got to meet the folks who work in factories and workshops. People who make real things and take pride in what they do. And then, you have to go in there with them to see how it’s done. So, that’s what I did. I poked around every corner… More of this country — big cities, small towns, and whatever was in between — looking for the soul of America. And you know what? I found it everywhere. So sit back and relax, because we’ve got it made… in America.”

Over the course of the series, Ratzenberger criss-crosses the United States to visit factories and meet workers responsible for iconic American brands. It is a bit sentimental as you remember childhood favorites – like when he visits the Crayola Crayons factory or the factory where the Monopoly game boards are assembled. The segment taped in Arkansas, where Frye Boots are made, was a delight; those were the status symbol when I was in high school. My favorite segments were the tours of KitchenAid, Kohler, Viking Appliances, Hallmark Cards, Brooks Brothers, Hartmann Luggage, Yankee Candle, Pyrex, Tom’s of Maine, Maker’s Mark Distillery, Pendleton Woolen Mills, Steinway, Craftsman Tools, Stickley Audi Furntiture, Steuben Glass, Longaberger Basket Company. The series is an inspiration to all small business owners, even those of us who work in the service sector, as we can see the pride in workmanship and lasting quality that these companies represent. You can also check out Mr. Ratzenberger’s website where he makes the case for investment in domestic manufacturing. His program is part of my daily dose of inspiration.

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Another Blow to Louisiana

July 19th, 2010
New Orleans Streetcar Art

New Orleans Streetcar Art

There is never a good time to lose 5,000 jobs, but for Louisiana, the news that Northrop Grumman Corp. will close its Avondale shipyard (near New Orleans) could not have come at a worse time. Industries critical to the state’s economy – oil and gas, tourism, fishing – are devastated by the oil spill. Now with the closure of shipyards, the manufacturing industry comes under pressure as well. The 5,000 jobs to be eliminated include engineers, welders, pipefitters and other manufacturing positions that paid annual salaries of $62,000, on average. New Orleans is also facing hundreds of job eliminations at the Michoud Assembly Center, which employs workers from Lockheed Martin. The closures are the consequence of economic pressure for cost efficiency, unrelated to the oil spill. But the consequences are far-reaching as entire service industries support these facilities. In Lower Manhattan, we are all too familiar with this phenomenon: the financial crisis in the fall of 2008 resulted in substantial reductions in the New York banking workforce which, in turn, crippled small businesses that served those workers. You need only see the restaurant closings in the neighborhood to appreciate the ripple effect of the pain. And as we also know from our experience in New York, when a Fortune 500 company leaves, it typically transfers its financial support to other local charities in the communities where it maintains a presence. Reductions in the presence of Fortune 500 companies in New York impacted local charities that depended on those companies for grant support. What I find so upsetting about the experiences of communities facing disasters is that there appears to be no national learning taking place. We suffer needless pain, over and over again, as we experience the same losses from one community to the other. For a country with the diversity and richness of experience as ours, this is unacceptable.

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When Cash Isn’t King

July 18th, 2010
Not Always King

Not Always King

Businesses in the Gulf Coast states that cannot document their earned income are at a disadvantage in filing claims for losses arising from the oil spill. But for all business owners, there are other costs of running a cash business that may not be obvious until it comes time to think about the exit strategy. The value of a business is typically derived as a multiple of earnings, so any cash or phantom income reduces the perceived value of the business to the buyer. Indeed, the lack of good financial records is consistently identified as one of the top three reasons why businesses are not saleable or sell for far less than the owners believe the businesses to be worth.

I recently heard Andrew Bryan Burnett, managing director of the Cathedral Consulting Group, deliver a presentation “Running Your Business With the Exit Strategy in Mind”. He holds an MBA from Wharton and hosts his own radio show, “My Father’s Business”. Based on his experience in advising business owners, he identified six obstacles to maximizing value on the sale of the business:

  • Tax structure
  • Poor financial statements or lack of records
  • Complicated structures involving too many people
  • Minority interest without a buy-sell agreement
  • Inability to identify potential buyers
  • Asset structure that impairs the sale of the business

The value of the business is the future cash flow to the buyer which value must be identifiable and transferable. A major source of contention on disaster relief post-Katrina was the lack of transferable property deeds in New Orleans as some properties passed from one generation to the next in the family without an update of public records. A disaster is the worst time to put your records in order. Do it now – it will reduce your stress levels later.

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Band-Aids Don’t Help

July 17th, 2010
The Basic Problem

The Basic Problem

Do a Google search on small business promotion and you will be amazed at the incentives offered by local and state governments. They are partnering with the Kauffman Foundation to offer FastTrac® entrepreneurial training for new ventures and growth ventures. They are sponsoring business plan competitions to offer modest cash awards. They are investing in business incubators to make low-cost start-up space available. Why the sudden enthusiasm for entrepreneurs? Because we have a serious employment crisis in the United States. Our private sector has lost over 10 million jobs since 2007, even before the banking crisis. The average period of unemployment exceeds 35 weeks and many of the unemployed are no longer counted in the ranks, as they drop out of the market altogether when they lose benefits or become completely discouraged. The initiatives offered by state and local governments are too weak to address our root problem: uncertainty around rising taxes (both the magnitude and the timing of anticipated increases), the implementation of healthcare reform and other measures, including lack of access to capital, deter small businesses from hiring. Until the federal government gets serious about consistent, responsible long-term policies for economic growth, band-aids from local governments won’t address the unemployment crisis.

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