Wayne Isaacks

Love your Banker

Your business banking relationship will become much more important over the next two to three years compared to the last five. How you handle it may mark the difference between success or failure, thriving or struggling.

Business has been great in Houston and the gulf coast as the oil/refining boom has fueled demand for services and kept our regional economy growing. Many businesses have doubled revenues and quadrupled profits from 2005-2007. From 2002-2005 most business, large and small, enjoyed healthy profits and growth. They became cash-fat with little need to borrow from banks. The bankers’ biggest problem was stirring up some business. They had herds of healthy businesses to lend to, but few takers as businesses had more than enough cash flow and balances to support operations – even growth. That was one of the major drivers of the private equity buyout boom and the sub-prime mortgage boom. Bankers turned from commercial lending to a huge and steady business making loans to buy up businesses and funding mortgages in an easy money cycle. The sub-prime bust has really hurt the banks, and financial markets worry about all those private equity leveraged buyout loans. Bankers will be more careful in the next 2-3 years. We have a real credit crunch now. It only shows where businesses borrow- and that has been little over the last five years, so it only shows up here and there. But it is showing up – first in residential and commercial real estate deals. Business lines come next.

Suddenly, “underwriting”, the financial discipline of evaluating the risk in a loan and pricing and limiting the loan accordingly, is back in full force, with a strong dose of conservative risk avoidance. Where 100% financing was available for residential and some commercial real estate, now banks want a big loan to value cushion. Real estate prices are coming down. Not because of the buyer/seller market, or comparable prices, or lack of demand. Bankers and their now nervous appraisers are valuing property 10%-20% less than before the bust. They may quote a 90%-80% loan to value ratio – but with the depressed appraisal, they end up with a more comfortable 70% loan to value ratio. They’re being careful – a good thing. But you have to be ready for it, or it will trip you up at a bad time.

When it comes to commercial lending, something a lot of younger bankers have not been doing much of. The underwriting department becomes critical – the final say in the terms of the loan. The underwriting department is not your banker. Your banker is a technical marketing person. The underwriting department and loan committee determines what lending relationships are a “go” and the terms. Where banks have competed vigorously for relationships (that didn’t borrow all that much), they will be viewing the future more skeptically, looking for the risk, worrying about a recession. Learn what the underwriting department is looking for. Make their job easy, and your borrowing becomes easier.

Your business will very likely need sound and regular commercial lending credit lines, increasingly, over the next 2-3 years as we enter an uncertain, perhaps “choppy” business environment – a recession. Many small businesses are running at capacity and growing. Cash flow will slow as financial markets tighten, and uncertainty about a recession looms. Great customers may pay a little slower, cancel or delay orders. You’ll need to use the credit lines. You need to focus now on keeping that open and flowing. And, you need to carefully evaluate (“underwrite”) the business you pursue. Taking on business that pays slow or doesn’t pay, and financing it with debt can wipe out a business in a tightening slump. It’s been a while since that has happened – the last recession was 8-10- years ago. But it will happen soon.

So, dust off and relight the banking relationship. Get your financial reporting and self-analysis in order. Know what the bank’s underwriting department is looking for, and give it to them. I’m not talking about window dressing. I’m talking about complete and consistent financial reporting and forward cash flow planning that lets you and a banker know what is going on. In uncertain times, a little certainty and clarity goes a long way to creating a comfort zone –a reliable risk assessment. Bankers like that. They react to uncertainty by not making the loan, or curtailing it, and placing tough loan covenants and financial monitoring in place – or calling a loan. That’s bad. Businesses that embrace the reporting and keep up with their own financial monitoring and reporting will have smoother access to needed commercial lending. It’s like mowing the grass. Does the banker see a well-kept landscape, or weeds that can hide all kinds of trouble? You will find the housekeeping helpful as well. Take your bearings. Where is you business heading in 3-6-12 months? Don’t be overextended. Have your credit lines in good working order.

Why does a lawyer/CPA talk about commercial lending? My clients are business-owners, and healthy businesses make good clients. More often than not, helping clients build, buy or sell businesses, bumps up against the lending need. Solving that is can be the deal-maker or the deal-killer in tougher credit times. That part has been easy the last five years. It will get harder – more important. We will have a recession sooner or later. It usually comes when most people are still hot on the current boom. Recessions weed out the risky, the fragile, the overextended, the unprepared. Recession rewards strong businesses who are prepared. Those with cash and sound banking access emerge through recession on their feet, with less competition for the next cycle.

Love you bankers – you are going to need them.

www.isaackslaw.com

Rich People Should Hide Out in 2010

The year 2010 could be deadly for rich US citizens because the 2001 Tax Act eliminated estate taxes only for one year - 2010. A real coup for Republicans, letting rich people die in 2010 tax-free. So, who wants to arrange that? If greedy relatives exist, 2010 may be a banner year for sudden rich elderly death syndrome. Maybe young, and healthy wealthy and well-insured should worry, as well.

Some estate planners and tax advisors seem to validate this thinking. Back 2001, as estate planners met for seminars on the Bush tax cut and estate tax repeal compromise, many of us noted that the one-year estate tax repeal for people dying during 2010 could be a worrisome incentive for mysterious deaths of rich people in 2010, predicting some people might guard the plug until midnight on December 2009, and pull it next morning. 2010 is looming, and I see a disturbing trend in some estate planning suggestions that tread close to, if not over, the line of encouraging death in 2010. Maybe I’m reading too much into this quote from a recent Houston Bar Association Section of Taxation memo to section members:

“ Tax Tip: Under current law, the estate tax exemption rises from $2,000,000 to $3,500,000 in 2009, is unlimited in 2010, and returns to $1,000,000 in 2011. Elderly clients with severe health problems and taxable estates, or their health care agents or POA’s, may want to consider discussing DNRs during 2010.” (italics emphasis added).

“DNR” - Do Not Resuscitate, is a Directive To Physicians that says “pull the plug” vs “extend my life”. Texas law now requires the Directive To Physicians form to set out both choices for a person to choose by initialing. It’s not a “DNR” unless one chooses DNR. Heath care agents and POA’s (health care power of attorney) are people a person appoints to make health care decisions for oneself if the person is unable to respond to a doctor. That may include “pulling the plug” vs. keeping the person alive in the hope of recovery. Heath care agents and POA’s are usually close family members who stand to inherit the person’s estate.

The wording of the Tax Tip seems to validate the idea that health care agents or POA’s can consider estate taxes in the health care decisions for the person who appointed them, or that beneficiaries have permission to prevail on rich elderly sick relatives to have a DNR in 2010 (but probably not in 2009). Hopefully, the Tax Tip author didn’t mean it that way, but the choice of words leaves it open. This bothers me, especially the “or their health care agents or POAs”. It inspires visions of  relatives perched on the hospital bed rails like buzzards with a deadline. Healthcare agents and POA’s should not be thinking about anything but the health and welfare of the sick person – not estate taxes. I’m a tax lawyer, but that’s how I fell about it.

In my personal experience, most clients do want to reduce estate taxes, and most pick the DNR clause in a Directive to Physicians, but I’ve never met one who wants to arrange their demise to eliminate estate taxes. I bet they don’t want anyone else to either.

I wonder if there will be a surge in deaths of wealthy US citizens in 2010? Will 2010 be the “Year of the Plug” or “accident”? What a crazy tax policy. For the concerned rich, here are some suggestions for making it to 2011.

• Pick heath care agents and POA’s who do not inherit the estate. Make sure they know this.
• Wills leaving most assets to charity if death occurs during 2010 should work, if the relatives know this.
• Hide out during 2010.

Like Y2K this may pass as a non-event. But, some wealthy people may want to take precautions.

Health care agents and POA’s also have reason to be concerned about 2010, as the “Slayer’s Rule” is another twist that may complicate life for them. The Texas version is that a person who intentionally and wrongfully causes the death of another person may not benefit from the death by receiving property as a result of the death. This applies to insurance policies and to inheritance. There has been plenty of messy litigation over the slayer’s rule in Texas courts, indicating the rule is not well known enough to prevent slaying for insurance or inheritance. It also comes up where it is not clear whether a death was intentional and wrongful.

When a large inheritance or insurance policy is involved, health care agents and POA’s who decide to “pull the plug” may face litigation from other beneficiaries to show they intentionally and wrongfully caused the death, especially in 2010. The intentional part is easy, and if it can be alleged that it was done in 2010 to increase the size of  the estate by eliminating estate taxes, that could be wrongful.

Congress made 2010 a slippery slope back in 2001. I wonder if they knew?

Wayne Isaacks is a Houston attorney-CPA who is board certified in Tax Law by the Texas Board of Legal Specialization. His practice is focused on the legal and tax needs of business owners, including estate planning and probate. He is a partner in Isaacks & Associates: 12777 Jones Rd., Suite 100, Houston, TX 77070. Ph 281-807-6172.   www.isaackslaw.com

Solving the Sub-Prime Mortgage Crisis and Helping Homeowners

What’s a Sub-Prime Mortgage? Low-Doc, then No-Doc loans at 100% of price, plus costs rolled in (including very profitable loan origination fees and buy-down points) , with deceptively low initial rates and an ARM rate linked to a high base index. Basically, bad loans with little or no responsible underwriting criteria. But, the calculated yields – now that looks good. And the profit pop from making the loans stimulated a frenzy of national and local lending networks that largely went “poof” in about two weeks when sub-prime became “sub-slime”.

Sub-prime mortgage woes afflict the financial industry and homeowners.
But the impact on them will be felt by all of us as the housing industry suffers from mortgage availability interruption; banks face liquidity and confidence issues; and homeowners and prospective homeowners face needless mortgage availability issues while the mortgage industry digests the problem.

Debate  among the banks, financial and stock market powers, the Fed and Congress roils with pressure to "do something", often tinted with attitude bias. Conservatives tend to blame the irresponsible homebuyer who got into a mortgage beyond their means, and the Fed postures to avoid “bailing out irresponsible lenders”.

Who’s to blame? Clearly, if anyone is to "blame", it is the lenders and market makers who have lunged into a frenzy of creating and selling sub-prime mortgages to make a killing regardless of the true value of the mortgage-backed securities used to make these loans available. Sold to homeowners unequipped to evaluate loan offerings of 100% financing with artificially attractive low initial rates, and all costs rolled into the loan, but bearing a heavy upside cost burden in an equally artificially high ARM rate, that astute borrowers would find unappealingly risky. Who’s astute? Hey, MBA’s were making this market. These loans were designed as a bad deal for the homeowner. Just an easy way in, but the way out is hard. The market makers pocketed their cash, and the not-astute homeowners, the greedy lenders and really asleep at the wheel pension fund managers are holding the bag. Along with our beleaguered home-building industry, our financial markets, the Fed, and really – all of us.

Why do the financial powers and guardians of our financial system let this happen? They are making lots of money doing it. That’s why.

Market-makers have sold hordes of mortgage-backed securities to banks, and pension funds - promising enormous calculated yields while ignoring the fundamental weakness - these loans were not made with prudent underwriting criteria.

And everybody that is supposed to make sound financial judgments (banks, market-makers and pension funds) knew it , or darn well should have. Only they were busy pocketing deal profits and stoking their résumés with artificial big returns.

Only now do we hear CNBC commentators boldly state that this whole frenzy of sub-prime lending was poorly, even irresponsibly, carried out by people who should and did know better. These people were lying to themselves, each other and us – to make a killing while they could. Not really different from drug pushers. They’ll do it until they have to stop. And they did.

My wife is a realtor, and I am an attorney-CPA working with business owners. We were here in Houston in the late 80's for the CRASH in mortgages and S&L’s - the RTC and the bank failures.

What was the big sign of doom back then? 100% mortgages with all costs rolled in, little appraisal judgment and low initial rates for ARM's. 20 years, and nobody remembered, or cared, that bad deals inevitably give bad results.

No surprise that I told my wife two years ago that "its happening again". And she agreed, noting the mortgage industry was again using the "mirror test" for underwriting many mortgages. That is, put a mirror under the borrower's nose. If it fogs, make the loan.

So, who is to blame? Not the borrowers who are victims of a predatory profit frenzy in the mortgage industry. Perhaps the banks and pension funds who invested heavily in mortgage-backed securities that never had a chance of making the calculated yields as significant percentages of the mortgages would surely "bust" when the rates rose on the bad loans. These loans did not turn bad. They were bad loans from the start. But the market makers sold them in both directions.

What of the homeowners who lose their homes? What of the homeowners who somehow struggle through?

Another Big Killing For the Market Makers.
Here is what the financial industry will do - make another killing off each other on the backs of the borrowers. As banks and holders of mortgage-backed securities sell off the loans at pennies on the dollar - either in bank failures or to raise liquidity - other financial interests will step up to buy those mortgages at huge discounts. And the market makers will facilitate these deals for huge profits. Why? because all of the loans won't go into foreclosure, but all of the securities will suffer huge market discounts. Maybe some banks will fold, or merge, and the Fed and Congress will step in for "relief". But, largely, those mortgages will be bought by vulture funds and other banks at deep discounts to reap huge profits by the same market makers who made this mess.

And, the homeowners will still be stuck with excessive rates as the ARMs adjust to inflated rates, with the original fees rolled in. Perhaps additional workout and refinancing fees rolled in - all in the guise of providing "relief" to the poor homeowner. Make no mistake, there will be “relief” to the financial industry – perhaps more “flexibility” in refinancing, perhaps some deferrals – to avoid a foreclosure collapse and all the hurt that puts on the financial interests holding this sub-prime paper.

Distressed Homeowners Should Get the Discounts In A Reduced Mortgage.
What is wrong with giving the poor homeowner the benefit of the deep discount on their mortgage? Why not have something like the RTC or a special federally backed agency sweep up the deeply discounted mortgage-backed securities and let the homeowners refinance at the discounted mortgage amount - or a pro-rata discount? This would penalize the market makers and lenders who goofed it up, and bail out the homeowners who should be the beneficiaries of the solution. A Freedom Day for homeowners who get the market inflamed discounts, and a lesson for market-makers and lenders who prey on homeowners and other lenders, and pension funds who ought to know better.

Congress should not let these irresponsible and predatory market makers make a second killing on the backs of the homeowners. It's no harder to pull off than other "solutions" that just keep the mess going, and lines the pockets of deal-makers who are producing no real value. Congress should bail out the Homeowners who have been duped into these bad mortgages.

That's my take.

Wayne Isaacks
12715 Secret Forest Ct.
Cypress, TX 77429-8310
713-299-3204

How Incentives Work - Part 5: Make Me An Owner! Paths to Equity

Equity incentives can be very powerful motivators for the right people, but this is a path covered with caution signs. Making a bad choice in ownership creates huge problems. Expensive problems. So pick your owners with care.

Some people are entrepreneurial by nature and have ownership as a life goal. These people may never be satisfied with a situation that does not provide ownership, and they will risk income interruption to achieve ownership. Bringing very motivated and capable people into the ownership circle can be an effective retention incentive, as long as these people are team players, give their best, and have the company’s best interests at heart.

Ownership has implications beyond how much someone is paid, and whether they get a share of the ultimate payoff on the sale of a business. Some people change when they have ownership, become less cooperative, act more “entitled”. I’ve seen people who were good employees, lose all sense of what is best for the business once they begin to “act like an owner” from a misguided view of what that means. Good candidates for ownership are peop0le you and the team can count on when things go wrong, when the going gets tough, or people you can count on not to lose their edge when prosperity makes them comfortable.

Sometimes the main incentive value of ownership is having a path to ownership -  stock options and stock appreciation rights. These incentives pay a person for the value they help create by paying them cash equal to the increase in stock value during the time they work for a company – whether they actually own the stock, or not. These incentives can provide the financial rewards of ownership without the drawback of having to buy out a bad candidate for ownership.

Management buyouts are another equity incentive for the right people. Business founders often eventually sell their interest in the business to the up-and-coming generation of managers. These buyouts or “buy-ins” are incentive paths to equity because the ownership transition occurs over time. Either shares are sold a little at a time, or paying off the buyout is what lets the new owner finally benefit from ownership free and clear.

Simply giving ownership to key employees is difficult because our income tax laws treat this as a paycheck equal to the value of the stock – its taxable! In addition, Congress gave the IRS a post-Enron wish, passing new code section 409A which makes nearly all “deferred compensation” subject to a 20% punitive tax penalty. This applies to most incentive compensation plans including ordinary commissions and bonuses, as well as more complicated stock options and stock appreciation rights. So, equity incentives and all incentive pay now requires a lot of careful tax design as well as legal safeguards.

If you have keepers and builders you want to weld to a business team, equity incentives can be the best approach. Choose people carefully, and do not skip the legal and tax part.
Having multiple owners in a business leads to issues that should be provided for in an owners agreement, often called a “buy-sell” agreement. A buy-sell agreement covers issues like death, divorce, disability, termination of employment by an owner, retirement, selling out, what should happen if a buyer shows up for the whole company, valuation formulas, financing arrangements and other things. I have learned over the years that an education into ins and outs of buy-sell agreements is not complete until you have had to actually enforce and apply the agreement in a tough situation. That’s when you find out if you have a useful buy-sell agreement. The same is true for non-competition and confidentiality agreements, which are equally important when you bring people into the ownership circle.

Next we’ll talk about confidentiality and non-competition agreements to separate facts from myths in this important area.

Isaacks & Associates  can help your company with management and employee incentives, compensation planning, employment and non-competition agreements, equity incentives, and related tax issues. Call Isaacks & Associates  281-807-6172.

Wayne Isaacks

How Incentives Work - Part 4: Show Me The Money!

Financial incentives are the lighting bolts of performance. If lighting hits a lightning rod and goes into the ground, it does not start a fire. But, when lightning hits  dry kindling, it starts a fire. We want to start a fire of performance. So remember, the emotional kindling of a mission and purpose, and a team of people who can and want to accomplish it have to be there to get a fire going.

Financial incentives are less powerful than emotional incentive, but no less important. How much money does it take to get someone to do what they do not want to do, or to stop doing what they want to do? Getting the emotional element in order costs less, and makes financial incentives work a lot better. Pouring money on a losing team won’t make it a winner. But financial rewards – sharing the winnings, keeps winners engaged, and lights the fires for sustained winning. The most important incentive element will always be the one that’s missing – right? Don’t let your winning team leave over money. 

What is a financial incentive?

Let’s start with what it is not. It is not basic competitive pay or even high base pay. First, basic compensation has to be competitive for the job market you are in. If others are generally paying more in base pay and benefits, they will eventually hire your good people away. Market competitive pay and benefits are not incentives. They make you even with other employers.

High base pay will attract employees, and even keep them from going away because they can’t make more somewhere else. But, high base pay will not fire up performance. People get used to the high base pay, and if nothing changes because if extraordinary performance, well nothing changes.

Incentives are extra. You cannot pay extra compared to the market, and remain competitive, or make money unless you are paying for added value – performance that adds value to the company by getting higher margins, or saving money, or adding business beyond the break-even to make profits. Performance that contributes to profits allows you to turn part of the profits into incentives as extra pay or part of the ownership. You cannot make it in the long run if what is intended as an incentive is an added cost. If it is structured as an incentive, it will not be an added cost. It will make the pie bigger, and using part of the bigger pie to make the pie bigger is not a cost. 

Incentives are extra money from profits as a reward for contributing to those profits.

Business owners I’ve seen get the most out of financial incentives all use these basics features. Their financial incentives are:

• Simple and easy to understand
• In excess of ordinary competitive base pay for the job
• Extend beyond management
• Based on company profits
• Generous by the standards of most business owners.

Generous by the standards of most business owners. This is about making the pie bigger, not dividing a small pie. I see the most success in companies that allocate a significant share of profits to incentives. These extraordinarily profitable companies pay 15%-50% of net profits as employee and management incentives. And the owners are smiling all the way to the bank.  Now, this only works if you have a winning team and a culture of added value. When you do, the incentives make the pie bigger. In good times there is growth and profits. In lean time, there is efficiency and profits.

Financial incentives come it two flavors:

• Immediate cash bonuses and commissions
• Long-term rewards like deferred compensation and ownership participation.

The immediate and long-term do different things, light up somewhat different motives, and have to be matched to the goal and the person you are trying to “incentivize”.  Both, however, compensate and motivate people according to the value they add. It does not always have to be precise (like a sales commission), but incentives should come for adding value.

Immediate Cash Bonuses
Annual (or more frequent) bonuses are a reward for meeting or exceeding financial goals of the company, or a profit center within a company. Naturally, the financial measuring and reporting system of the company or profit center has to effectively measure profits, margins and waste, or you can’t effectively tie incentives to performance. Incentive bonuses are effective when they are a significant portion of overall compensation like 20%-50%. Fitting this to an organization depends on margins, and the ratios of people costs to profits. The key is to identify opportunities to add value (increasing margins, eliminating waste) and be sure the bonuses are tied to the value produced.

Some very successful closely-held businesses I have worked with pay annual bonuses of 15% - 50% of pre-tax profits as profit sharing bonuses. That 50% example sounds rich, but it is the bonus plan in a family-owned construction business in a very competitive market with competitive bid tight margins, bonding and municipal or state agency contracts. How can they afford 50% of profits going to bonuses? The way they see it, it’s the only way to assure they get jobs bid right, completed on time and according to bid, with all change orders fully accounted for, negotiated and priced as they go, and completed on time – so there is a profit on each job. The bonus makes their company the best job in the county, and no one want’s off the team, even though it is a demanding job, all the way down to the guy with a shovel. The company is consistently profitable – more profitable as a percent of sales than most companies in its market.

The 15% example is from an electrical contractor that consistently maintains a bottom line pre-tax net more than 20% of sales. Double to triple the pre-tax net of  most similar-sized competitors. How can they pay such bonuses and win business and make such profits? Each has a winning team that is pulling harder than the owners could push - and winning means making better than usual profits. They do it right the first time, add value for the customer, and keep it going.

Next we’ll talk about long term equity incentives and the special cases where they work well.

Isaacks & Associates  can help your company with management and employee incentives, compensation planning, employment and non-competition agreements, equity incentives, and related tax issues. Call Isaacks & Associates  281-807-6172.

How Incentives Work – Part 3: The Team

Once your business vision and its mission is clearly linked to adding value, your people have to embrace that vision and mission as their own to make it happen. They do that by joining a team with a purpose. By setting an environment, a company culture, that enables and encourages ordinary people to add value as a team, beyond the hours worked, and the widgets built (and be appreciated, as well as being proud of their accomplishments), you enable ordinary people to form the emotional bonds of  being a part of a winning team with pride in the company, to promote a successful company that adds value to its customers – and itself.  This is a feeling and a reality of being a family – a team. What’s good for the team is good for each of the team members. We have our mutual best interests at heart, so we do what is best for the team every day.

Great, how do you create that? You don’t. You enable and guide and lead it, but the ordinary people buy into it, become a team and do extraordinary things when they know what they are ding and why they are doing it. You set the vision, make sure the mission is clear, and select people who will be good at the roles needed to accomplish the mission, and make sure they are rewarded emotionally and financially for winning.

One other emotional factor needs comment. Before we talk about financial incentives, there is one other important  part in the emotional incentives.

Weed Out Slackers and Abusers. These are people that just do not fit the team. They are not buying into the team mission and culture with a full effort and an honest willingness to integrate their efforts with the stream of activities and goals of the whole to make the team an “us”. An important part of developing a culture that enables your team members to help make things work well, and better, includes honest two-way communication of who is helping and who is hurting into the retention and advancement of the players, and allocation of rewards. Leadership that permits employees or management to abuse the spirit and goals of the team, and stay on the team to receive its rewards, will kill the dream. If you have someone on your team that you (and the other team embers) feel does not deserve a bonus, consider whether they should be on the team at all. These people drag down the spirit and morale of the whole team. They can perhaps do better somewhere else, doing something else. Send them to find it.

It is leadership that sets the vision and the standards, enables and requires a team approach to adding value. Select the right people, and give them what they need to do the job, and the team will emerge. Support them, and they will pull harder than you can push.

Establishing a team culture with a mission everyone believes in, appreciates, and is appreciated for their efforts, allows financial incentives to work. Financial incentives fire up the team by promising and a paying-off for putting points on the board. Super-Bowl rings are nice, but you can’t buy a truck or a ranch with one.  Financial incentives are the other element - the lightening bolts of performance.

Next we talk about types of financial incentives.

Wayne Isaacks

How Incentives Work - Part 2: The Secret to the Emotional Part.

The secret to Emotional Incentives. The key to the emotional element of business incentives is – you can’t “create” it. Instead, you enable and nurture what is already there in people who have the capacity to light up. Some don’t, and you have to attract one who do, and winnow out those who don’t have it. The good news is, emotional incentive is always present and abundant for those who can light up. People have “fire in the belly” or they don’t. There is no use trying to “incentivise” people with no fire, no furnace, no pilot light, no place to put the fuel. Most people will light up about something – what they like, and can do well. Get the right people who like what you have for them to do, and can do it well. If you have people who do not fit your business, send them out to find their fertile soil. This is good for both the company, and the person. Those who are good fits for the roles you need will respond to emotional incentives. Most people are looking for “it” to latch on to and fire up. It’s native to humans. When leadership recognizes this and assembles, enables and nurtures people doing what they like to do, and can do well – in a team spirit to satisfy the social “belonging” need in most people - emotional reward flows,  and we see ordinary people doing extraordinary things - together. Once you have the right people, the emotional recipe has two parts:

• The Quest – The Mission
• Family - Team

The Quest – The Mission
This is not necessarily the mission statement, but it can and should be embedded in any mission statement. Here is a simple “mission” element that I see in all highly profitable businesses with sustainable, growing profitability in their niches. The companies that do this, day in and day out, have higher margins, and higher net profits, in good times and bad, and attract and retain the best people. It is stated in different ways, depending on the market/customer niche each company serves, but all make it central to their business model and part of their culture. 

• Delivering Added Value To The Customer
• And, make sure the customer knows it.

This “delivering added value” mission core works for all businesses: commodity businesses, highly specialized service, process and manufacturing, and product sales and distribution. Delivering added value to your customer, beyond merely the basic product or service you are selling, is what sets apart the winners, the “go-to” companies from lesser alternatives. And, it garners relationships with better customers, for whom price is not the driving issue. It’s not about customers paying more because they “like” you. It’s about customers seeing you as an important part of their team, their ability to conduct their business in a winning way because you are on the team. On-time delivery is a basic example. Showing a customer how to streamline its supply-chain methods to save both of you money is a more sophisticated example. Exceeding their expectations.

Added value comes in many ways, often from your ordinary people. A driver for the trucking company that handles one of my client’s inbound and outbound steel deliveries showed my client how to cut loading time from over an hour to 10 minutes - for all the deliveries from now on. Steel rods came in big 20-40 foot long bundles. Usual loading by a sling-and-lift balancing-act took 30 minutes to an hour or more for each truckload. And, the bundles had to be moved again once off the truck -  more hours.  The driver explained how they could use two forklifts in tandem to easily lift the bundles, let the truck move away, then move the bundles to where they were needed driving the forklifts in tandem. In one truckload they had it down, and adopted the method. What used to take an hour for every inbound and outbound truckload, and every time they moved bundles in the steelyard, now takes 10 minutes. That driver and the company’s yard foreman and staff added value. The company gained over $300,000 a year in cost savings, and added production and throughput. My client passes it on to customers in better delivery times and competitive pricing, and rewards employees for making it happen.

An electrical contractor showed a big industrial customer how to set up their plant electrical distribution to take advantage of improved electricity pricing from higher-voltage initial distribution points from the electric company in the way they laid out, and bid a plant electrical project. The better way also saved on the construction cost, and shortened the project time. It boosted my client’s margin, while saving the customer many times that margin, annually, in electricity savings. Fifteen years later they are still the “go-to” company for all the plant’s electrical work. Added value from people thinking, caring and delivering beyond the basic requirements.

For more about adding value and getting extraordinary results from ordinary people, I highly recommend reading Peter Schutz’s book The Driving Force. Peter became CEO of Porsche in 1983, when Porsche was almost broke, and had lost its way to  re-established its winning edge and its automobiles as the epitome ride for fire-in-the-belly high-achievers. It is full of examples of learning to deliver added value, defining a culture that does this, and enabling and encouraging ordinary people to accomplish extraordinary results.

The point is, people need to know what they are engaged in besides pushing paper, taking customer orders, loading a truck, building a widget, a road or a building, or a part of it, so what they do matters (adds value), and they can be proud of it. By whose standard? The customer’s – and your peoples’ sense of purpose and accomplishment.  Read Peter’s book.

We are halfway there. Next, we’ll talk about the family-team component of emotional incentives. It’s where loyalty and doing what is best for the company comes from.

Isaacks & Associates  can help your company with management and employee incentives, compensation planning, employment and non-competition agreements, equity incentives, and related tax issues. Call Isaacks & Associates  281-807-6172.

How Incentives Work - Part 1: Two Indispensable Elements

Incentives are the lightening bolts that fire your business-building into effective action. Building a solid management infrastructure and execution team that is focused on the profit drivers in your business is the foundation for growing value. But without the lightening, all you have is a foundation and a building, but the lights are not on. Incentives weld your best people to your team, and keep them pulling – harder than you can push.  Effective, sustainable incentives have two indispensable elements –

• Emotional and
• Financial.

Two Indispensable Elements. Like atoms. You have to have a proton and an electron to have an atom. It doesn’t function as an atom, unless you have both, OK? People set up financial incentives all the time and they flop - fail to get the desired results. While fine-tuning issues can affect results, the absence of the emotional element is usually the reason well-intended financial incentive fail to work. Without the emotional “buy-in” financial incentives can be ineffective, or inspire behavior entirely different than you want. They can be expensive failures. For one, they do not retain the “keepers” - just pay them a lot before they leave. For another, financial incentives without the alignment of motives (the emotional part) does not stimulate the results you want. It can stimulate smart people to “game the system” - to bag a bonus. I can tell you stories, but you may have your own. These all-too-common failures are not a reason to avoid incentives. They are a reason to get it right. Incentives work if you get the two indispensable elements – Emotional and Financial – in play and aligned. Let’s start with the Emotional, because until you have an emotional hook and motive to align to, financial incentives are much less effective.

The Emotional Part is a Tapestry of Team and Purpose.
Emotional is the individual light that draws your inner moth, the thing that “flips your switch”, “floats your boat”, “turns your head”, “puts a spring in your step”, makes you glad to be alive, doing what you are doing. For some it’s a passion; for others it’s a comfort zone - the pursuit of happiness. Because we are social beings, emotional incentive is fundamentally entwined, arises out of, and is driven in the weaving of our social fabric. A business, our job, and our emotional stake in that job-business-vocation that takes most of our waking hours – our conscious life, is a social fabric. Is the company a team? A winning team, with a quest - common goals and shared rewards? Or, is it a place to pick up a paycheck for going through prescribed motions?

I’m not alone in thinking the emotional is the most powerful incentive element. Every very successful business is built on the emotional bond of a team in a shared goal/quest/adventure - more than the “business model”. Sure, a hot new business model is great. It may gain peoples’ confidence, inspire belief in the success prospects of the business, but it takes team motives, belonging and shared rewards to make everyone true believers, faithful to the cause – especially when the going gets tough. The very successful companies have this as well as a good business model. A fundamentally profitable business model is essential. Jazzy brands are great. But, those are dead in the water unless a winning team executes the basics well.  Lets make that a capable team motivated to win.

For every notorious rising-star business model and super-brand that breaks into the limelight, there are thousands of mundane, ordinary goods-and-service businesses with sound (profitable market niche) business models making great and successful small-to mid- market business success stories that are fantastically successful and profitable -outside of the limelight. The people who are the social fabric of these businesses are engaged in, believe in, and are living the pursuit of happiness in their arena. For some it’s the easiest, for others the hardest thing to bring about.

Next, we’ll reveal the secret to the emotional part and how to establish emotional incentives. Isaacks & Associates  can help your company with management and employee incentives, compensation planning, employment and non-competition agreements, and equity incentives like stock options, stock appreciation rights, and related tax issues. Call Isaacks & Associates  281-807-6172.

Incentives Are the Lightning Bolts of Performance – Part 1

Incentives are the lightening bolts that fire your team and business-building into effective action and results.

People Build Your Business

You hire good people, they know what to do and do it well, some better than others. You want to retain your best people, and motivate them to greater success.

The business starts to grow and then you get blind-sided by the departure of some of your best people to a competitor, or they decide to start their own business.

You lose a “keeper”, feel defensive, so you decide to implement non-competition agreements. That’s damage control for a battle you already lost. Why not use incentives to keep “keepers” on the team? So you give some raises and bonuses. And you still lose “keepers”. Where’s the “button”?

You Can Have Your Pie and Eat It Too

The real value in most businesses is in relationships, internal (the team) and external (customers, vendors, financing, contractors, labor pool). Good businesses often reach a success plateau and they start loosing good people, eroding capability, momentum, and value.

Winning business owners think of ways to keep the team together and winning - Incentives. There are really only two incentives that matter – the satisfaction of being on a winning team, and money. Emotional and Financial. It takes Both. One without the other is not a complete incentive. Giving a slice of the pie to make the pie bigger does not cost you, it makes you rich. The winning team part is all spiritual and priceless, and doesn’t cost anything either. Sounds too good to be true, but it’s not. It sounds too good to be easy, but it is. You have to see how it’s done and do what it takes.

Incentives weld your best people to your team, and charge them up to pull harder than you can push.

Find their lightening rod, and crank up the lightening.

When you want help designing, refining, defining management and employee incentives, employment agreements, stock options, bonus plans, we can help. Isaacks & Associates 281-807-6172.

Next week I’ll reveal the simple basic recipe for emotional incentives.

Wayne Isaacks

Winning the Exit Game - Step 4: Timing Your Exit Strategy

In the last article we discussed Step 3 – Available Alternatives

Step 4  –  When is the Right Time?

We can talk about a lot of issues that determine your timing. Emotional readiness, the financial condition of the company, your management team, valuation, growth strategy, profit history and prospects for this year and next. But the first business I ever helped a client sell crystallized the single most important thing about timing. One thing, and all the other factors make very little difference.

My client had owned and run a premier musical instrument business for 30 years. He was now over age 65 and was ready to sell it. He had a strategic buyer that wanted to expand into his city and region, and the buyer wanted the premier name as well as his desirable lines, some of them long-time exclusives. His business had no debt other than Winning the Exit Game - Step 4:  Timing Your Exit Strategy

inventory financing on a high quality, currently-marketable inventory. Goodwill was excellent. The buyer was getting a winning name in the marketplace.

Oddly, the price offered did not represent a big premium for the value of goodwill expected earnings, or the expected growth the buyer would enjoy moving into this market with a great name and market position. But, my client was willing to take the all-cash deal and long-term leases on his retained real estate locations.  “Why?”, I asked. “Wayne”, he told me, “I had a chance to sell this business three years ago for three times this price, but I wasn’t ready. Thought I wanted to stay in it longer, and I thought I could get more. I turned them down, and the market changed, and their fortunes changed. About a year later, I realized I was ready, but they weren’t buying by then. Iv’e looked for buyers since, had a couple of other potential deals that wanted me to finance everything long-term. Finally this cash deal came up and I think it’s the best I can do. I’ve been ready now for two years, and I’m not letting this one get away. I sure wish I’d sold three years ago, I’ve missed a lot of golf and money.

So, the time is right when the market, the buyers, the money is right. If those things are right, it’s time to get your emotional readiness in line, or you are likely to miss the boat. It’s that simple. If you turn down a great market, when buyers are trying to pay you a great price, by the time you get ready, the market cycle will likely turn. And, you will have to sell at a much lower price, or wait for the next cycle. For many niches the next cycle does not come.

The time is right when the money is good, and terms are favorable – The Market is never wrong.

Another thing is growth. It’s easy to see that you should hold on to a growing business, sell it after it grows bigger. That makes sense, and may be right. But you can’t get the best price at the top of your growth curve. Buyers pay the best prices when they can’t see the top, when it looks like all up from here. When others can see the top, they don’t buy, or pay prices based on the downside risk after the top.

To get the best deal you have to sell on the way up, not “at the top”, and when the market and prices are good. When you wait until you are ready to go, you are in a weaker bargaining position, and buyers can smell that.

Today’s market, with private equity wanting to buy into companies on the way up, wanting sellers to stay in the game after cashing out, is one of the best for strong exit strategies. This is also favoring strategic buyouts and management succession buyouts. A major demographic also fuels this. The leading edge of baby-boomer-business-owners are reaching the exit zone, and the 30-something-up-and-comers are aggressively buying and building. Buyers exceed sellers, and we have a robust exit market –for now. The time is coming when the flood of baby-boomer-business-owners ready to exit will outweigh the ready next-generation buyers, and prices and acquisition appetites will fall – bigtime. As a seller, you do not want to be in the middle or later in that trend. Now-ish is the time for an exit strategy.  Don’t buck the Boomer trend.  And, remember, The Market is never wrong.

Isaacks & Associates, Ltd., L.L.P.
12777 Jones Rd., Ste. 100
Houston, Texas 77070
Office: 281/807-6172  Fax: 281/807-6173