Employee Benefits 2001.

Health Care Costs, Retirement Dominate Employee Concerns

Rising health care costs were identified as a top priority of benefits specialists for 2001, while employees cited retirement issues as their top priority, according to "Top 5 Benefit Priorities for 2001," a survey of benefits specialists conducted by the International Society of Certified Employee Benefit Specialists, and the Human Capital Advisory Services practice of Deloitte & Touche. This annual, nationwide survey identified the top priorities of benefit specialists-across the country for the year 2001, both from their perspective as benefits specialists and as employees.

Clearly, benefits specialists are responding to double-digit health care cost increases experienced during 2000 with projections for similar increases this year. Consolidation in the health care industry is affecting the competitive market, prescription ding costs have risen dramatically, the elderly segment of the population is rapidly expanding, and pent-up cost increases in the managed care market are contributing to these significant price increases.

In the West region of the United States, the issue of controlling health and welfare costs dominated, with 76 percent of employee benefits specialists there identifying it as their top priority for 2001. Controlling health and welfare costs had also been identified as the number one benefit priority in 2000 (70.5% in the West region). This is the first time in the survey's history that the same issue has been named the top priority for two consecutive years, indicating the seriousness and depth of the challenge.

The remaining priorities for benefit specialists in the West region were expanding the use of employee selfservice technology for communications and/or administration (67.6%); evaluating/implementing/expanding use of Internet/intranet applications (64.9%); providing financial/retirement planning tools and information (40.5%); and emphasizing/improving quality of employee communication materials (32.4%).

While employers are concerned about costs of benefit programs, they are finding that those concerns must be weighed against the need to attract and retain talented individuals. Employers are in a war for talent today, and demographic projections suggest that future increases in the demand for talent are going to outstrip increases in the supply. With such a tight labor market, the need for talent is significantly shaping how benefits specialists tackle benefit issues from cost to delivery and administration. According to the survey, attraction and retention is the key objective driving the benefit program policy and design for 2001 (38%).

Because attraction and retention have become so critical to benefit program policy and design, many employers are reluctant to pass on health care cost increases directly to employees, given the market conditions for labor. Cost issues, however, continue to be a major consideration for benefit programs. In fact, the survey found that benefits specialists identified cost issues as the number two key objective (30%) in benefit. program policy and design. The remaining key objectives affecting benefit policy and design were increased use of technology (23%), and administrative requirements/alternatives (4%).

From an employee's perspective, retirement issues dominated their concerns for the third consecutive year, with four of the top five priorities identified directly related to retirement issues. More than three-fourths (86.5%) of the benefits specialists in the West region reported evaluating current investment options as their top priority for 2001.

Employee concerns over retirement planning continue to be important as the demographics of the workforce shifts and comes closer to retirement In addition, there has been significant discussion around the adequacy and future availability of Social Security funds for retirees. These factors may be creating heightened awareness and concern among the workforce as it becomes more cognizant of future retirement plans, and the need to plan ahead in anticipation of this time.

Other important priorities for employees in the West region were evaluating the adequacy of current levels of retirement savings (67.6%); identifying additional ways to save for retirement (64.9%); considering estate planning (48.6%); and learning more about health risks and how to control them (43.2%).

Recognizing these benefit priorities and incorporating them into benefit program design will not only allow benefits and human resources professionals to better respond to labor market demands, but also to become strategic partners in the management and operations of companies.

Dick Kleinert is a partner in the Human Capital Advisory Services practice of Deloitte & Touche.

New Technology Breeds Personal Success

Eight years ago, Janice Bryant Howroyd, founder of ACT*1 Personnel Services, and her senior management faced a critical decision affecting the direction of the company. Ms. Howroyd explains, "In our industry, growth was typically achieved by geographic expansion - opening new branch offices. We took a risk and invested in developing new technology instead." That decision helped advance ACT*1 from a woman minority-owned business leader to an industry leader with automated staffing competencies.

The staffing industry lends itself perfectly to automation and e-business solutions. Tracking clients, applicants and job assignments all require advanced technology to effectively manage. Effective end-to-end ebusiness solutions promote increased productivity and cost savings that result in greater client and employee satisfaction. Placement agencies rely upon complex databases to categorize and retrieve information on candidates as needed to fill positions. The ease and speed with which job assignments can be filled via the Web has given effective staffing companies a competitive edge.

While e-business staffing applications offer advantages, staffing automation is limited in its ability to account for the interpersonal dynamics of both client and applicant, which is critical in making successful placements. Managers are finding that their staffs, permanent or transitory, are more productive and have greater job. retention when they are satisfied with their work environment What does it take to reconcile the personal soft touch with cutting-edge staffing automation? Howroyd firmly believes that people are the priority.

Born in the small southern community of Tarbaro, North Carolina, Ms. Howroyd is ever mindful of her early experiences. As a girl growing up in the segregated South, she witnessed how people's lives were deeply impacted by employment situations that did not value their contribution. This lack of dignity inspired Ms. Howroyd's lifetime commitment to conducting business according to her values. She set out to create a company that is both profitable and respectful of employers and employees. Howroyd is quick to point out, "Never compromise who you are personally to become who you wish to be professionally. That means you only do business with a company you'd send a relative to; and you look to work with companies you can get repeat business from. That's howl measure success. One-night stands don't work in personal lives, and they don't work in business either,"

MICHAEL T. ANDERSON

BRIAN McGUIRE 

This article was provided by ACT*1.

401[k] Trend Continues

Over the last decade, there has been a tremendous growth in the number of Defined Contribution retirement plans offered by employers, especially plans qualified under section 401 (k) of the Internal Revenue Code of 1986. A 401 (k) plan allows employees to contribute (defer) part of their paycheck each pay period into the plan on a pre-tax basis. While employee participation is completely voluntary, these deferrals reduce the employee's W2 at the end of the year, and many employees find themselves paying less tax on their earnings. These plans are extremely popular and seem to be replacing the more traditional and expensive employer sponsored pension plan, i.e. Defined Benefits plans, which provide a fixed retirement benefit. U.S. Government reports indicate that the number of Defined Benefit plans has actually declined from 114,000 in 1985 to only 45,000 today.

While Defined Benefit plans are declining, employee participation in employer sponsored 401(k) plans is at an all time high. According to the 43rd Annual Survey of Profit Sharing and 401(k) plans, 82.5 percent of eligible employees have account balances in 401(k) plans. The survey reports that pretax salary deferrals averaged 5.4 percent of pay for lower paid employees in 1999 and 6.4 percent of pay for higher-paid employees.

Employers do have obligations under ERISA and the Internal Revenue Code, however. Naturally, issues of conflict of interest and providing appropriate investment choices head the list along with the flexibility to move assets among the various investment choices. What many employers forget, however, is a requirement to provide both plan features and plan investment educational services to their employee base. Employees need such services to optimize their investment return and enhance their retirement benefit. Often, the best way to deal with these requirements is to hire a comprehensive service provider.

While employers sponsoring Defined Contribution plans have the key challenge of designing a plan that incorporates comprehensive sponsor/participant services, flexibility, cost control, and full compliance...401(k) plans seem to offer one of the best alternatives.

Conversely, health and welfare plans have been traditionally more in the direction of defined benefit designs. Most plan sponsors have selected specific plan designs, and asked various vendors to provide proposals based upon these specific components. The vendors are then awarded the business based on a formula that is primarily focused on the lowest net cost

A new model is quickly replacing this buying behavior more closely resembling the defined contribution model found more often in retirement plans. The new model encourages health care purchasers, plan sponsors and individuals, to make their decisions based on budget and need. The premise being that all consumers can make better decisions when a decision making process includes all elements.

This concept is further enhanced by recent advancements with technology. Products and services that could not have been administered only a few years ago are now handled quite easily by a variety of third party administrators. This new breed of administrators utilizes online enrollment and eligibility systems that ensure accurate data management and benefit elections.

The underwriting of these programs remains under some scrutiny by industry experts. The conventional wisdom shared by most is that absolute choice produces adverse selection between various plans. In other words, those participants who predict they will need more insurance inevitably select the plans with the highest benefit levels, and in turn produce more claims than conventional pricing methods would produce. Proponents of these defined contribution plans believe that this adverse selection will only marginally impact the aggregate costs.

Regardless of which concept you support, it is generally agreed that employees will be presented with greater choice and more benefit options in the future, which means retirement and health & welfare plans will be operating under similar platforms.

Michael T. Anderson is Director of Retirement Services for S.L Reed & Company. Brian McGuire is Senior Vice President for Cassidy Employee Benefit Services.

Benefits for Employer, Employee

JOHN WORD

The days of an employer selecting health insurance solely on the basis of price are fast waning. The rules of the game are changing thanks to premiums escalating, doctors jumping in and out of networks and managed care dominating the California landscape. Smart employers are beginning to apply the same sort of good business logic in purchasing health care as they would in selecting a new computer or phone system.

It begins with setting a strategy. Ask yourself, what do you want to accomplish with your company's health plan and what do you want to avoid?

Price will come later and, surprisingly, in today's ultra-competitive health insurance market, you're likely to find almost no difference between the price of a health plan that helps you meet your strategic goals versus a health plan that backfires on you with your employees.

Here are six pointers to keep in mind as you shop.

Give your employees choice -- The single biggest gripe employees have with their health insurance is lack of choice. Recognize that one size doesn't fit all when it comes to health care needs and health care budgets. The more you can empower employees to choose among plans, benefit designs, physicians and hospitals, the happier they (and you) will be.

Demand cost predictability -- Some large car manufacturers spend more on employee health benefits than they do for the steel that goes into their product Small employers feel a similar pinch and know that health insurance is a big-ticket item. The last thing an employer wants is to be hit with a surprise. Be sure to pick a plan that allows you (and your employees) to budget what you want to spend and then guarantees that you can stick to it

Have contingencies in place should provider networks change - A relatively new phenomena finds employers selecting a health plan based on its hospitals and doctors...only to find that the network isn't there anymore mid-year.

Between the rising crisis of physician group insolvency and increasingly tough negotiations between health plans and providers, provider relationships just. aren't as stable as they once were: The last thing you. want is to be stuck with a health plan which no longer features the doctors and hospitals that attracted you in, the first place. Know going in what options will be available to you and your employees should this happen to your health plan.

Look for a program that's easy to administer - In a small business, the task of administering an, employee health plan usually falls. upon the shoulders of the owner. But it's just one of many things you need to juggle. Finding a plan that is simple to administer one easily-understood invoice, one contact, one person who is accountable -- will make your. life a whole lot' easier, especially at those times when problems occur:

View health insurance as a true employee benefit Make sure you choose a plan that doesn't leave your employees feeling shortchanged and disgruntled instead of appreciative of the dollars you are spending on them. The right health insurance program should be positioned as an important recruitment and retention tool, and that's especially important in today's tight job market Shop for a program that is a true employee benefit - and then: package and promote it as such; You're paying for it, so why not leverage it to your advantage?

Avoid reshapping every year Nobody wins when you reshop for health insurance every year; You lose time and your employees are apt to lose continuity in their coverage. Choose a program thatprovides enough flexibility that from year to year it will be adaptable to changes that mayoccur in your workforce.

Your insurance broker can be an important link in, helping you wade through these issues, establish your. strategy and implement a benefits plan that's right for you and your employees.

John M. Word Ill, CHU, RHU, is co-founder and managing partner of California Choice, a small group "health insurance mail" benefits program.

E-Benefits: An Introduction, Primer and Glossary

THOMAS M. MORRISON, JR.

Confused about e-benefits? Wondering if you should be getting involved yet? Read on for some perspective on this marketspace. Why are there so many Internet-related benefit companies? How is the sector changing? Where is it going?

To start with, here's a glossary of terms:

E-benefits refers to the Web-enabling of the processing, procurement and administration of employee benefits.

Marketspace is the selling of goods via the Internet.

Marketplace is the physical selling of goods.

Next, let's examine the service approaches possible. There are three types of companies currently involved in delivering e-benefits.

Employee benefit service providers -- These organizations do administration and provide some content. This means that they will help with such activities as eligibility determination and enrollment and will also provide information about a client's benefit plans.

Worksite marketers (also called voluntary benefit providers)-- These organizations offer insurance and other related products to the employee through payroll deduction. They are generally work/life service providers that may also offer a wide range of such nontraditional benefits as car and pet insurance. They often offer personal counseling and investment advice as additional services.

On-line purveyors -- These companies mostly sell benefits to small employers and act as conduits between the buyers and sellers and providers of benefits. On-line purveyors are primarily distribution channels for health care insurance brokers or providers.

Now, let's look at why there is so much activity in the e-benefits marketspace.

The health care market is a good place to look for trends. In this market, a huge amount of money is being spent on the purchase and administration of health coverage. E-benefits provides the opportunity for companies to realize savings in this area, so great opportunities open up for companies that can provide the technology for purchasing and administration via the Internet. For example, when employees go through the annual health care enrollment process, a large amount is spent on providing printed enrollment kits -- printing, packaging and distribution are all high cost for labor and materials. But if everything is done electronically, the cost can be substantially reduced. There is the added benefit for the sponsor of gathering immediate data on the outcome and process of the enrollment.

Another driver pushing e-benefits is the major shift in the way companies do business. Business technology has moved from mainframes to client servers (basically PCs) to the Internet. Companies now use e-mail to replace memos, voice mail to enhance productivity and even manage travel and employee relations through the Internet.

The employee benefit service providers have also moved quickly into the e-benefits marketspace by providing the same sort of services that had been provided through call centers via the Web with some interactive voice response added on. This is far less expensive than building and maintaining call centers.

Now, the e-benefits marketspace is filling up -- so fast, in fact, that every few weeks five to ten new providers appear. A good deal of this activity is geographically based; there are far more local providers in the space than there are national entities. Purchasers should look carefully at this because it is likely that not all of these local or regional players will survive.

The delivery of e-benefits services is changing even in its emerging stages. The focus had been around eligibility determination, enrollment and data management services, and now these services are becoming like commodities. As a result, pricing for these services wilt start falling as the providers look to offer additional services to compete and survive.

The large enterprise companies have now re-entered the marketspace through their own Internet-enabled systems, and substantial shifts will occur as they move into providing services and away from technology. These large players either have the necessary capital or have business partnerships with those that do and all have large client bases. As they move towards becoming application service providers (ASPs), the number of competitors will shrink as many of the smaller firms will be driven from the space. Also, the large insurance carriers should not be counted out. Several are investing in buying and building e-benefits services or have purchased the companies that have the technology and infrastructure.

E-benefits outsourcers will continue to evolve. They can grow either vertically or horizontally or they can combine with each other. How they choose to differentiate themselves from each other will be key to how the marketspace evolves. The flurry of federal and state regulation over the last year that is specifically directed to electronic data and plan enrollment and communications will also drive the changes.

A key question is how to determine which company will be here for the long term and will stay ahead of the technology curve. The answer lies in looking at these organizations' funding, their capitalization, affiliations, current clients, what they offer compared to the competition and the strength of their technology. The latter will be the final differentiator: technology that is custom built for each client is not going to be cost effective in the future.

Three years ago the concept of e-benefits was mere speculation. Today it is the way to do business. Although it is a very confusing time in the e-benefits marketspace, the options are quite amazing. Our advice to those wondering where thee-benefits marketspace will go? What we predict for the future today will certainly change when it actually materializes.

Thomas M. Morrison, Jr. is head of the Los Angeles Office of The Segal Company, an employee benefits, compensation and human resources consulting firm.

Overlooked Plans Can Benefit Key Employees

JESSE R. SLOME

Every thriving business has key employees, those individuals who affect the success of the organization. "These days, finding and retaining good people has become a critical challenge for Southern California business owners and managers," explains Leo Thomas, manager of the Los Angeles office of Price, Raffel & Browne, one of the nation's largest firms specializing in pension plans and retirement planning.

"Raises, bonuses and traditional benefit or retirement plans can only take you so far and they no longer create the long-term ties that bind key individuals to your company," Thomas notes. "Regrettably, few business owners and managers are aware of the array of affordable and flexible plans that offer substantial opportunity to financially reward and retain key employees as well as business owners."

"Traditional pension plans, 401(k) or Simplified Employee Pension (SEP) plans are technically referred to as qualified plans," Thomas explained. "While they offer significant tax advantages and retirement-savings benefits for employers and employees, these plans generally require that most or all full-time employees be eligible in order to qualify for their special tax treatment."

Thomas notes that creative pension plan design can still make it possible to selectively reward key personnel. There are limits however to what a qualified plan can accomplish. As a result, a growing number of businesses are taking advantage of several forms of nonqualified retirement plans, allowing top earners to set aside as much as they would like.

A Selective Employee Retirement Plan

One of the most attractive and little-known plans, according to Thomas, is the Selective Employee Retirement Plan or SERP. 'The SERF provides the ability to accumulate significant retirement benefits for selected employees according to the terms of a private agreement between the individual and the employer," he says. "With a SERP, the employer may make all contributions, the employee may defer compensation, or a combination of both may be utilized."

Also known as nonqualified deferred compensation plans, SERPs allow the individual to avoid current income taxation on the deferral or employer contribution amount. "A trust (often known as a 'rabbi' trust; so named after the retirement plan provided for a rabbi by his congregation) is sometimes used to own the contribution amount," Thomas explains. "This trust provides an additional layer of security for an individual who may be concerned about the impact of a future change of company ownership or management." Often a permanent individual life insurance policy is selected to fund SERP retirement benefits due to the unique combination of tax characteristics and guarantees offered.

A Golden Handcuff Bonus Plan

"The drawback of most employer-paid bonus plans commonly utilized by businesses is that once the money is paid, the key employee can take his or her money and move to a competitor," Thomas says. "For companies looking to reward workers and tie them to the company for a designated period of time, a 'golden handcuff or restrictive bonus plan offers an alternative that can be extremely effective."

One plan design utilized provides a current tax deduction to the employer and allows the employee to have access of the funds according to a vesting schedule determined by the employer. For example, the employee could be fully vested - able to receive 100 percent of the funds - after 15 years or upon reaching age 65. "To compensate for the employee's perceived loss of immediate access to the cash, the plan can contain a guarantee that the bonus arrangement will continue in the event of his or her death or disability," Thomas notes.

Supercharged Retirement Account

A third type of benefit plan that is increasing in popularity actually shares the cost and benefit of a tax-advantaged financial vehicle between both the business and the key employee. "Until recently, 'split-dollar' life insurance policies were utilized mainly by a handful of key executives - often those with multi-million dollar compensation packages," Thomas adds. "Now, more and smaller employers are offering the benefit below their top-management ranks to reward highly valued workers and keep them from going elsewhere."

While the death benefits provided by a spilt-dollar policy can be generous, that's not often the plan's main attraction. Essentially, a split-dollar plan may be designed to function as a supercharged retirement account without a cap on yearly contributions. The employer can pay the lion's share of the premium with after-tax dollars - the equivalent of what they would give as an annual bonus. When the plan is ultimately terminated, the company actually gets its contribution back. Meanwhile, much of the aggregate premium grows tax-deferred either in a permanent universal or whole life policy, offering a variable interest rate of return, or a variable life policy that uses equities as its investment vehicle.

Jesse Slome is a freelance writer.

"Unlike the cash buildup in a traditional qualified retirement plan, the buildup in a split-dollar policy can be tapped by the recipient without penalty before age 59 1/2," Thomas says. "What makes the split-dollar plan the equivalent of a supercharged retirement account is the ability to structure withdrawals as policy loans so there are no current income taxes." Many executives utilize split-dollar plans to create wealth for their family and heirs. Business owners also use the plan to cover estate taxes on their business or to fund a buy-sell agreement.

While the use of nonqualified plans does provide employers with the ability to reward key employees on a selective basis without the reporting required for most qualified plans, the rules governing these plans are continually reviewed and are subject to change. "Establishing a private agreement between a company and its key employees can be relatively simple if you understand the rules," Thomas states. "This is certainly one time when even a minor mistake could turn your good intentions to provide a reward into very costly results. It's always advisable to seek professional advisors who are knowledgeable, experienced and creative."

Benefit Your Employees With Effective Crisis Management

BARTON J. GOLDSMITH

"You don't know where you are going, you might wind up someplace else." Yogi Berra.

How do seasoned executives plan for a crisis? While each crisis may be different than the one before, they know another one is going to happen. They just don't know when. It's similar to having kids. Neither crises nor kids come with a manual. Although most people just go with their guts and follow their instincts, some tried and true rules apply.

Experience Is the Best Teacher

There are two types of businesses -- those that live through crisis and those that don't. The ones that continue to learn, continue to live. That means, even if the management team doesn't have all the answers from within, they seek it out. They hire expertise. There are many seasoned consultants and even interim CEOs who are available to lead organizations through crises and challenges. There are even government organizations like SCORE (Service Core of Retired Executives) that help CEOs and other top executives. Alternatively, top management can continue to learn by joining a CEO or peer group, preferably before a crisis occurs. Participating in a Mastermind Group can save executives from reinventing the wheel and spinning theirs as well.

Crisis Management Skills

While every crisis is different, practical executives who use these skills usually get through the challenge more quickly and easily than those who don't.

1. Remain cool

Behavior is an extremely important tool. Do you lose it in a crisis or do you, as Thomas Jefferson suggested, "Remain cool and unruffled in all circumstances?" Company personnel will reflect your behavior. Executives who are distant or anxious create that same demeanor in their employees. It's tough leading under pressure. That's why it's advantageous to have an Executive Coach or even a therapist for support. If you're telling tales of woe to a bartender, it may be time to sell out.

2. Become idea prone

Some leaders get great ideas in a crisis. Do you? If you don't, engage in brain storming tactics. Companies that use idea-generating techniques on a regular basis know the value of this practice. The more experience people have with creating ideas, the easier it will be to plan, avoid or get out of trouble. If you are an innovator, someone who is good at generating ideas, keep implementers (people who are good at dealing with the details) close at hand and visa-versa. Ideas and the ability to carry them out are two different things.

3. Learn to communicate

It's the most important element in a crisis. Ninety percent of serious controversies result from misunderstanding. When situations become problematic, choose your words and messages carefully. They can help mitigate the challenges that arise. If perception dictates reality, the management person involved must be perceived as in control and as having the ability to use this crisis as a springboard. Some quick but effective communication tips include banning bad attitudes, conducting team building activities and remaining available to the staff. Some executives think communication is a soft issue, but remember what a miscommunication did to Microsoft.

4. Understand the grieving process

After a significant change, every company needs an adjustment period. Companies that don't make room for this psychological necessity find it more difficult to move ahead. Encourage and support your people to recognize and experience loss, even if it's the loss that comes from giving up the "We've always done it this way" syndrome. Grief includes five key stages (denial, bargaining, anger, depression and acceptance) that can come in any order except for acceptance, which is always the final stage. Guide the team through the process, giving them room for their feelings to be expressed. Make sure to do the same for the leaders.

5. Express passion

It can make the difference between surviving and dying. It did for Holocaust survivors. It was their passion that allowed them to survive under the worst conditions imaginable. A company crisis cannot be nearly as bad, but the leader's passion has to be nearly as strong. Team members will look to their leader to guide them through the challenges ahead. If a leader momentarily loses his/her passion, he/she needs to reach down to the depths of their being and pull it up. It is their reason for being, their responsibility to their team and their drive to succeed. If leaders are unable to find it, they need to seek consultation. If they still can't find it -- they need to find someone who can and put them in charge.

6. Practice visualization

Good leaders hold their company's vision. Great leaders visualize their company's future. Imagine the power that could come when the entire team visualizes a successful outcome to its current crisis. That same power can propel your business to the next level of excellence. Use this time to reinforce this incredible and underutilized tool. If it can cure cancer, it can change a business.

7. Release your stress

Play golf, do yoga, run. Whatever it takes to release stress, do it. Don't keep frustration bottled up. Talk with someone about feelings and fears. As long as some steam is let off on a regular basis, pressure isn't a killer. Don't gloss over this point, as much as 80% of all terminal disease can be related to stress.

8. Create a sound strategic plan

A good strategic plan has a contingency clause. The team that creates the plan will have discussed possible challenges, everything from a major market downturn, to a competitor stealing a large account, or even the phones going out. Look at as many possibilities as you can. Then run simulation exercises and role-play a crisis. Team members will learn a lot about how they will react under pressure and about each other as well as the strengths and weaknesses of the organization, during these exercises. In addition, this type of training is a great confidence builder.

These tools are if a savers in a crisis. They are the best practices of the most successful business people on the planet. In graduate school they teach that if ideas are taken from one source, it's plagiarism. If they are taken from many--it's research. There are very few problems that others haven't experienced. Learn from them, be prepared and persist.

Barton Goldsmith, Ph.D., is a speaker and business consultant who presents to numerous companies, associations and leaders worldwide. Dr. Goldsmith is a contributing author to numerous books and trade journals.

The Exit Strategy: An Essential Benefit for CEOs

MARK LEFKO

For 95 percent of CEOs, their business represents the most significant asset in their personal estate. But while they check the value of their investments in publicly traded stock on a daily basis and closely monitor changes in value of their real estate investments, they pay little attention to the value of their closely held business. What if they're suddenly forced to sell for health reasons or someone makes them an offer that sounds too good to refuse? Taking the time now to begin planning ahead and positioning the business for maximum value will ensure that they won't be severely disappointed when they exit.

What's the Business Worth?

Public stocks can now be tracked at the click of a mouse. It's much harder to know the value of one's privately held corporation stock because there is no easy measure for it. The value also changes based on the economy, the business sector's performance, stock markets and interest rates.

There are a number of ways to gauge the value of a company. Professional appraisal firms, investment bankers or business brokers can give periodic valuations. An alternative is to go on line to keep tabs on transactions in the industry. Even the company's CPA may have a pretty good idea what the business is worth. The simplest way is to look at multiples of cash flow. As long as it's done consistently, it accurately reflects the change in value over a period of time. Knowing what the business is worth today is the necessary starting point for long-term succession/liquidity event planning.

Determining Desired Value at Exit

CEOs and business owners don't like to plan ahead because they're usually in a reactive mode. They continue to grow the business for growth's sake without having a target. But determining the desired results at exit is a prerequisite for realizing the most favorable valuation and terms. A common goal among many middle market owners is to take the business public. In most cases, that's not practical or even viable. Business owners often have no idea what's involved in going public, how complicated it is and how much it can restrict their freedom. Other key exit strategies include sale to a strategic or financial buyer, management buyout, or an employee stock ownership plan or family succession. In all cases, the owner needs to be clear on the desired outcome. Is it financial independence? How much does that require? Do they want to continue working in the business or pursue other interests? What are their objectives for the business itself? Is it maximum financial value? Or is it creating and leaving a legacy , retaining the name of the company? How will they create a strong brand that a successor will want to maintain?

Not being proactive and focusing on desired end results means losing options. It also makes it difficult to attract the right kind of buyer when the time comes to sell.

Closing the Gap

Having established the business' current value and the desired end value, it now becomes possible to take strategic steps to maximize its value to reach the ultimate goal. The reason for creating an exit strategy early is that it gives the owner time to manage and maximize value to close the gap between current and desired worth.

The owner who doesn't want to stay with the business needs to begin to think about it from a buyers perspective. The goal is to determine how to create the greatest amount of value with the business' current profile and configuration as a starting point. Some of the tasks involved in positioning a company for maximum value are addressing operational infrastructure issues, analyzing one's customers and concentrations of customers, clarifying the nature of one's products with respect to the marketplace and having financial statements audited. It's never too early to begin creating a management team that can continue to sustain the business once the owner is gone.

Another reason for tracking a business' value is investment strategy. The owner may want to sell the business at the top of the market and buy back into the industry when market values have declined. Of course, some business owners can't imagine doing something like that to their "baby." It requires a bit of emotional detachment.

Focus and Clarity

Why should an entrepreneur who has no intention of selling the business bother with this exercise? As always, it's better to be proactive. A major life event such as a family members illness or death may seriously disrupt business processes. In the worst-case scenario, the owner may suddenly die. Being prepared for the latter is simply a fiduciary responsibility to one's personal estate and family. Looking on the brighter side, a potential purchaser may come along and make an offer the owner can't refuse. How will the owner know what constitutes a good offer? And no amount of last minute scrambling will maximize its value.

But there is a much more important reason why CEOs should focus on the desired end result of their business venture. The process establishes the enterprise's direction with clarity and provides accountability to avoid going off on tangents. Having a roadmap for the future development of the company can make a dramatic difference in performance.

Paul Spiegelman, CEO of The Beryl Companies in Dallas, Texas, is in the process of creating an exit strategy. "Planning for an exit gives a CEO a whole new sense of direction," he explains. "Without it, we tend to make decisions for the short term. I feel much more comfortable with the decisions I make today, knowing that each one is connected to a long-term strategy."

Just going through the process of exit planning, in Spiegelman's experience, forces the CEO to define personal and professional goals and bring much needed balance between the two. "Carving out time from your day-to-day operations to look at long-term issues may be more important than the actual dollar figure and date of the exit," he says. "It puts your personal and professional life in perspective."

Spiegelman also reports that having set his goals for an exit has given his management team a greater sense of focus. "It makes me feel comfortable that they know the goal and the strategy and understand that everything they do has to be governed by that strategy," he says.

Avoiding Disappointment

Only ten to twenty percent of business owners have exit strategies. Others, who suddenly find themselves at the point where they want to or are forced to sell the business without having planned ahead, will be disappointed with the result of their life's work. More importantly, an exit strategy is about much more than exiting. It gives the CEO a sense of focus, calm and clarity. It brings the confidence to implement strategies decisively, resulting in the best valuation, terms and conditions on succession. It focuses energies on creating the business and staying on task. Taking the time to plan, position and maximize (or create) value brings much higher financial rewards and personal satisfaction in the results.

Mark Lefko is CEO of Tegra Executive Group, based in Westlake Village, California. In addition, Mark is a Chairman for TEC Worldwide, an international organization whose mission is to improve the effectiveness and enhance the lives of its over 7,500 CEOs members.

Caruso Tapped for Glendale Town Center Development

CHRISTOPHER KEOUGH

COMING one step closer to filling in the final piece of its downtown develop Glendale's Redevelopment Agency voted 4-0 last week to enter into negotiations with Caruso Affiliated Holdings for the coveted Glendale Town Center, shutting out the other remaining candidate, J.H. Snyder Co.

The redevelopment agency, on the recommendation of the Department of Development Services, gave Caruso exclusive negotiating rights for the 15-acre infill development, which has an estimated buildout value of more than $150 million.

Tucked adjacent to the Gallerias I and II and seen as the finishing touch on downtown Glendale, the property has been the subject of numerous failed development attempts, including a plan by Galleria developer Donahue Schriber.

The redevelopment agency wants a unique mixed-use project around public space that has a distinctive Glendale identity. The mixed uses are to include ground-level retail with residential above and, potentially, a layer of office space sandwiched between. The project area is bounded by the Galleria complex on the north, Colorado Street to the south, Central Avenue to the east and Brand Boulevard to the west.

Jeanne Armstrong, Glendale's director of development services, said Snyder and Caruso were the survivors of a pool of 15 developers that had lobbied for the job. A third finalist, a partnership of Atlanta-based real estate investment trusts Post Properties Inc. and Cousins Properties Inc., dropped out of the competition in January.

Caruso Affiliated Holdings' President Rick Caruso said the next step is hammering out a development agreement and holding at least a dozen public meetings to get community input on the direction of the project.

In a four-point recommendation, the city's evaluation team explained that Caruso and Snyder were both qualified to deliver the town center, but picked Caruso because of his experience with similar projects in Calabasas, Encino and Westlake Village. The team also liked Caruso's relationship with Boston architectural firm Elkus/Manfredi Architects Ltd., which had submitted a proposal to create open space first and build the other uses around it. Caruso and Elkus/Manfredi also have teamed up for Caruso's The Grove at Farmers Market project, as well as for a 23-acre town center at the monstrous Playa Vista development in West L.A.

Multifamily residential developer Legacy Partners Residential Inc. has been tapped to design and build the residential component of the Glendale town center.

Caruso said the project will cost more than $150 million and construction could start by fall 2002. Buildout would take at least another year, he said, meaning Glendale won't see its crown jewel until late 2003 at the earliest.

Leasing Activity

Torrance-based nonprofit Harbor Regional Center has renewed and expanded its lease at Del Amo Business Plaza at 21231 and 21307 Hawthorne Blvd.

The new, $29.6 million lease will keep Harbor Regional Center at the location for the next 15 years. Harbor Regional Center is a private corporation that provides services for people with developmental disabilities.

In downtown Los Angeles, Monterrey, Mexico-based furniture and electronics retailer FAMSA signed up for 15 years at the corner of Broadway and Washington Boulevard.

Sandy Sigal, president of NewMark Merrill Cos., which owns the building at 1810 S. Broadway, said the overall lease and improvements will total $11.4 million.

The retailer has agreed to take the entire 49,000-squarefoot building, which has been vacant since May 2000. NewMark Merrill began discussions with FAMSA, which had considered a handful of other downtown sites, in August.

The company has 250 stores and plans to open 14 stores around Southern California.

Investment Deals

Individual investor Mitchell Weiss has spent $5.2 million to buy 2.5 acres and the a 30,000-square-foot Office Depot store on which it sits, at Harbor Gateway Center.

Office Depot Inc. has a 15-year lease on the building, which is located at 19100 Harborgate Way in Los Angeles.

The seller is Vestar Development Co., the Phoenix-based developer that built the Harbor Gateway Center and has been selling it off in pieces. First to go was a 20-acre site bought by AutoNation USA, and a 2.5-acre parcel bought by Extended Stay America Inc.

Vestar is hanging on to portions of the Harbor Gateway Center that contain miscellaneous retail operations, according to Bill Bauman, a senior vice president with Colliers Seeley International Inc., which represented the developer in its sales. Stan McElroy of CB Richard Ellis represented Weiss.

In other sales action, Legacy Partners Commercial Inc., in partnership with ING Realty, purchased a 99,214-square-foot building in Universal City for an undisclosed price.

The partnership bought the fully leased building at 3330 Cahuenga Blvd. from the California Credit Union. The credit union will retain its 19,470-square-foot office space in the building. The building's other major tenant is Panasonic.

The deal was brokered by John Minervini of Cushman & Wakefield of California Inc.'s Los Angeles office.

Another sale, this one in West Hollywood, involved local investor Amiri Family Trust paying $1.5 million for a retail center at 7515-7533 Sunset Blvd.

The 11,957-square-foot shopping center, which is 100-percent leased, was sold by the Kojaian family on behalf of the Agopian Family Trust, also of West Hollywood.

The transaction was done through Grubb & Ellis Co.'s West L.A. office, with Tom Lagos representing the buyer and Ken McLeod representing the seller.

In development news, Sacramento-based Panatonni Development Co. has begun construction on a 101,255-square-foot building on a 4.5-acre parcel in the Valencia Commerce Center.

Including land costs, the project will cost Panatonni $6 million, according to Bryan Bowman, spokesman for CB Richard Ellis, which facilitated the land buy.

The new building on Avenue Williams in Gateway III of the Commerce Center is scheduled to open in October. Bowman said no leases have been signed. The project is designed for manufacturing and distribution uses and has 5,207 square feet of finished office space and 180 parking spaces.