Get your business involved in a great cause, and have a blast!
PAGE 36
A PIECE OF THE PIE
How much money is disbursed for government contracting jobs in Hampton Roads, and how can small businesses
cash in?
PAGE 18
ALSO INSIDE How to Do Business With Your Banker PAGE 16
Mid-2010 Commercial Real Estate Outlook PAGE 15
SBI 900 Commonwealth Place, Ste. 215 Virginia Beach, VA 23455
PRESORTED STANDARD US POSTAGE PAID RICHMOND VA PERMIT 930
2 Small Business Insight | August 2010
Has your business hit the mark?
Hitting $1 million for the first time is a big deal, and we want to celebrate with you!
F
rom start up to maturity, companies pass through several developmental phases. We start with the classic napkin-on-the-kitchen -table phase where we hatch the entrepreneurial idea, to the company reaching maturity with a fully staffed professional management team in place. First, we enter the start-up phase where we initially fund the project and recruit our first clients. Shortly after that, if our concept is gaining traction, we begin to add employees. This adds to our ability to bring in additional work because of a gain in manpower and sometimes additional expertise. The company is growing, but it is still being driven by the abilities of the owner. The employees are mainly helping the owner do more, but not to operate independently. Traditionally, the business grows to the point of the owner’s span of control. Then growth slows or stops. The business is on the door step of being what is called a Stage Two business. A Stage Two business is when the business is bigger than what one person can manage, but is not big enough to support a fully functioning management team. The Edward Lowe Foundation reports on a study done by Eric Flamholtz and Yvonne Randle that indicate to a CEO that second stage is at hand when: 1. Many people are not aware of what others are doing. 2. People lack an understanding of the firm’s ultimate goals. 3. A precipitous drop in product quality occurs for unknown reasons.
4. Turnover increases sharply, just when the company needs more personnel. 5. You wake up worrying about operational tasks that someone else ought to be handling. 6. All your customers want to meet with you, but finding the time to do so seems impossible. This stage begins for most businesses when they build revenue to about $1 million and continue till revenue passes $50 million. At that point, the business enters the third phase of its life as a professionally managed mature company. Helping businesses to reach Stage Two and growing through to maturity is a major initiative of SBI. The reason is that the majority of job growth happens within stage two businesses leading not only strong companies, but strong communities and a healthier economy for all. To accomplish this, we have started two membership organizations, The SBI Owners Council and SBI Emerging Businesses. The Owners Council vision is two help owners of stage two businesses develop their companies to maturity The Emerging Businesses is to help businesses reach stage two for they can have rapid growth and impact the community. Source: Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm, by Eric Flamholtz and Yvonne Randle, revised ed. (Jossey-Bass, 2000), 9-10, 33. This paper makes heavy use of Chapter 2 of Growing Pains. Flamholtz and Randle identify seven stages: New venture, expansion, professionalization, consolidation, diversification, integration, and decline and revitalization. Here we compress their stages 2 and 3 into a single second stage, and treat their stages 4-7 as a single third stage.
If your business has hit $1 million in gross revenue for the first time, SBI magazine would like to recognize you in Million Dollar Milestone: It’s Just the Beginning. Submit a signed letter by your CPA stating that you’ve earned at least $1 million for the first time in at least three years no later than February 1 and you will be recognized in the class of 2010. For more information, visit www.smallbusinessinsight. com. The Million Dollar Milestone is sponsored by the following companies:
For sponsorship information, contact info@ smallbusinessinsight.com
smallbusinessinsight.com
3
Calendar of Events August
17 — SBI Owners Council Luncheon* Tripps Restaurant, Virginia Beach • 11:30 a.m.- 1 p.m. Meet fellow OC members on the Southside. A CPA from Cherry, Bekaert & Holland will speak about the new healthcare law’s effect on small businesses. RSVP to info@smallbusinessinsight.com. 17 — SBI Magazine Networking Event Tripps Restaurant, Virginia Beach • 4-6 p.m. Meet the SBI staff and readers and enjoy light hors d’oeurves. $6 online at sbivbaug.eventbrite.com or $10 at the door. Open to the public. 19 — SBI Appreciation Luncheon Tripps Restaurant, Virginia Beach • 11:30 a.m.-1 p.m. Businesses featured in the magazine will enjoy lunch and meet other featured companies. Invitation only. 24 — SBI Owners Council Luncheon* Schlesinger’s Chop House, Newport News • 11:30 a.m.-1 p.m. Meet fellow OC members on the Peninsula. A CPA from Cherry, Bekaert & Holland will speak about the new healthcare law’s effect on small businesses. RSVP to info@smallbusinessinsight.com.
24 — SBI Magazine Networking Event The Pub, Hampton • 4-6 p.m. Meet the SBI staff and readers on the Peninsula. $6 online at sbipeninsulaaug.eventbrite.com or $10 at the door. Open to the public. 25 — SBI Owners Council Golf Outing* Greenbriar Country Club • Noon lunch, 1 p.m. tee off. Bring your clubs and play a round with other members of the Owners Council. RSVP to info@smallbusinessinsight.com.
1
2
8 15 22 29
9 16 23 30
3
10 17 24 31
4
11 18 25
5
12 19 26
6
13 20 27
7
14 21 28
September 21 — SBI Owners Council Luncheon* Tripps Restaurant, Virginia Beach • 11:30 a.m.- 1 p.m. Meet fellow OC members on the Southside. Speaker TBA. RSVP to info@smallbusinessinsight.com. 21— SBI Magazine Networking Event Tripps Restaurant, Virginia Beach • 4-6 p.m. Meet the SBI staff and readers and enjoy light hors d’oeurves. $6 online at sbivbsept.eventbrite.com or $10 at the door. Open to the public. 23 — SBI Appreciation Luncheon Tripps Restaurant, Virginia Beach • 11:30 a.m.-1 p.m. Businesses featured in the magazine will enjoy lunch and meet other featured companies. Invitation only. 28 — SBI Owners Council Luncheon* Schlesinger’s Chop House, Newport News • 11:30 a.m.-1 p.m. Meet fellow OC members on the Peninsula. Speaker TBA. RSVP to info@smallbusinessinsight.com. 28 — SBI Magazine Networking Event The Pub, Hampton • 4-6 p.m. Meet the SBI staff and readers on the peninsula. $6 online at
sbipeninsulasept.eventbrite.com or $10 at the door. Open to the public. 29 — SBI Owners Council Golf Outing* Greenbriar Country Club • Noon lunch, 1 p.m. tee off. Bring your clubs and play a round with other members of the Owners Council. $60. RSVP to info@smallbusinessinsight. com.
5 12 19 26
6 13 20 27
7 14 21 28
1 8 15 22
29
2 9 16 23 30
3 10 17 24
4 11 18 25
* Guests who qualify for membership of the Owners Council can attend a Council event once for the member price of the event.
4 Small Business Insight | August 2010
CONTENTS
August 2010
THE FACES OF CONTRACTING IN HAMPTON ROADS | (From top left, going clockwise) Steve Ormsby, president and CEO of AOCE; Gary Lisota, president and CEO of Valkyrie Enterprises, LLC; Joseph May, CEO of Blue Force, LLP; Chuck Mitchell, senior ITSM Photos by Paul Chin, Jr. process architect at Zenetex.
INSIGHT Getting A Piece of the Pie: Government Contracting in Hampton Roads
p. 18
Featured Businesses Include: v AOCE v Blue Force, LLP v American Maritime Holdings, Inc. v Valkyrie Enterprises, LLC v Zenetex
Prospecting.
How to find the right government jobs for your business.
p. 20
Thinking Outside the Box.
Healthcare is a major cost for contractors. Find out how one company went straight to the source and found a win-win solution.
p. 22
Legal Concerns.
Williams Mullen shareholder discusses the top 10 legal concerns when considering contracting for your business.
p. 26
Money Matters.
A few interesting aspects of accounting government contractors should know.
p. 27
smallbusinessinsight.com
5
CONTENTS
Like pork is an alternative dinner option to chicken, company growth by acquisition is an excellent alternative to internal, organic growth. Leon Garber, CBI, takes a look at both the reasons for acquisitions and challenges along the way.
STRATEGY
11
The Other White Meat
16
A Match Made in Heaven
Learn how a small business banker can become an invaluable asset to your company, and how to find the one that fits you best.
12 14 CHARITY
COLUMNS
Compensation Strategies
To attract and retain quality employees, evaluation of your compensations through salary and other options is key.
Commercial Real Estate Outlook As 2010 presses forward, trends will create many new job opportunities for buyers and tenants in Hampton Roads.
The Bra-ha-ha
Break out the hot glue gun and a 38C bra. It’s time to get your business involved in a great cause!
36
COMMUNITY
38
Chesapeake Office Supply provides solutions for local businesses for all office needs. Owner Paul Levitt describes his journey from buying the business almost 20 years ago, to turning it into a (approximate) $5 million success.
40
Service with a Smile
u
Print lives on
Dominion Printers owner Steve Pahno reflects on challenges and success in his industry.
Cranes Reign
42
Crane Tech Solutions management discusses future plans for growth, including their latest product venture.
u
6 Small Business Insight | August 2010
44
u
37
From furniture to paper clips
Brothers Mark and Steve Hornsby use their father’s advice and go the extra mile when it comes to taking care of customers. Hornsby Tires becomes Hornsby Tire and Service Center this summer, and move into a new location with an official grand opening in August.
Happy Anniversary
Lee Telecom reintroduces itself as LTI and celebrates 15 years of service to the area.
GURUS WANTED
August 2010 Vol. 2, Issue 6 900 Commonwealth Place, Suite 212 Virginia Beach, VA 23464 757-742-3233 | smallbusinessinsight.com e-mail: info@smallbusinessinsight.com
PUBLISHER Art Radtke
editor
Jessica O. Swink
consulting editor Karen Miller
Copy Editor
Caroline Dozier
Art Director Paul Chin, Jr.
Contributing Writers
Peter Alfele, CPA Eric Brown Melanie Burgess, CPA Blake Dozier Leon Garber Thomas O. Mason Karen Miller Al Moore T.J. Prieur Jessica O. Swink Brittany Taylor
Contact Us Please e-mail info@smallbusinessinsight.com for information regarding: Advertising SBI Emerging Businesses Letters to the Editor SBI Owners Council Subscriptions
Are you an expert in any area of small business? SBI is looking for bloggers to provide small business owners of Hampton Roads with knowledge on how to grow their business. If you are interested, please e-mail editor@smallbusinessinsight.com.
Think You’re Too Busy? You May be Right!
Clear the Clutter! CASEY MOORE, CPO LIVING SIMPLY CONSULTING, INC.
FRED WEST ENTERPRISE SOLUTIONS INTERNATIONAL ... Now before you start pounding your chest in victory, take a moment to consider the actions (or lack there of) that put you in this position. It is no secret that many business owners come from an employee background, and due to this circumstance, directly associate being busy with being successful. As an employee, it was your job to find work to do to fill the time… and for the most part you based your compensation on the amount of hours you worked. That is not so true in the business world. We are all given the same 168 hours a week. Though we have different personal lives, there is still a broad spectrum in the amount of production that comes out of those 168 hours. There may be several reasons for these de differences, but for the most part, it comes down to how you are looking at your business. Do you see yourself as an employee to yourself, or an employer to others? In a conversation this week, a recent acquaintance simplified this concept. He said there is no position in a business called “The Business Owner,” so it is up to you to define the role appropriately. However, there are numerous actions you can take to ensure that you are no longer just “keeping busy”. I have listed some of the simplest strategies you can immediately implement to get you on your way...
For the rest of the article, visit smallbusinessinsight.com/blogs
One man’s clutter is another man’s comfort. Although some people think that piles on a desk are “disorganized” or “bad,” they are not. They can be part of an effective organizational system for some people. But not many. For most professionals, stacks of paper represent towers of deferred decisions, a physical hazard, and a place for opportunities to die. Is clutter hurting YOUR productivity? If you’re clutter-bound, you’re not alone. The “fix” is simple, but not easy. To clear the clutter for good, you have to clear some trash from your mind first. Clearing clutter is like losing weight. To make it last, you have to commit to a lifestyle change. Forgo extreme makeovers and focus on small, concrete changes that eventually add up to improved appearance, function, and attitude. Once you make that mental adjustment, you’re ready to begin making physical changes. Start small. Focus on one stack at a time, one drawer at a time, and so on. Start where it hurts the most, e.g., your desktop. Set a timer for 15 or 30 minutes, take a deep breath, and take these STEPS. Sort - Group like with like. Toss - Let go of items not liked or needed. Establish where to keep each item - Keep items where they’re used. Put Items Away - Once you’ve decided where items should go, place them there, using whatever containers, shelves, etc. you need. Support Your System Daily - Put items away when you’re finished. Don’t wait for a big cleaning. Getting and staying organized is not rocket science. Let this article guide you, ask a non-judgmental friend to assist, or hire a Certified Professional Organizer. Even chronically disorganized individuals can improve by following these STEPS.
For the entire article, visit smallbusinessinsight.com/blogs smallbusinessinsight.com
7
Editor’s Desk
New Kid on the Block In case you are wondering, the pie on the front cover was absolutely scrumptious. When working as managing editor of my college newspaper, I learned many valuable lessons — one of which was to never pass up an opportunity to use stock photos that you can later enjoy. Food props are always a major thumbs up. As I finished the last slice of my pie, I came to the proud realization that this magazine is the best looking edition we’ve had yet. When reviewing the articles, I realized are a lot of great resources packed in these 48 pages for business owners across many different industries. If you are ever interested in contracting, this magazine is a great resource. Even if you aren’t, there is a great deal of interesting takeaways about goverment contracting that could really raise your eyebrows. I know I learned quite a bit. For example, according to the Central Contractor Registration web site, there are only 559,150 active registrants for government contracting in the entire country. Compare that with the amount of money the government pays out (check out page 18), and it’s no wonder why some contracts are so sought after. Also, while talking with Tom Reid, senior manager of Certified Contracting Solutions, LLC in Denver, Colorado, I learned that trying to get government jobs to help with disasters like the oil spill in the Gulf is easier said than done with the amount of paperwork involved. By the way, did you know you can’t fire your customer if you are fulfilling a federal government contract? Like it or not, whatever curveballs you get thrown, you are contractually bound to finish out your contract with the federal government. Read: get yourself a lawyer that specializes in government contracts. To get a glimpse of what legal concerns you should consider, check out page 26. Unfortunately, there’s probably a lot we missed. Contracting is a massive topic to discuss, and there are plenty of rabbit holes to get yourself lost in when researching. Either way, I know you’ll enjoy this issue. Drop me a line at editor@smallbusinessinsight.com and let me know what you’d like to see in upcoming issues. In the meantime, connect with us online at our website, and on Twitter, Facebook and Linked In. We have a few networking events coming up that we’d love to meet you at as well. Until next month, friends.
Courier Services. Warehousing. Fulfillment. Distribution.
TM
Courier Services z On-Demand Delivery z Scheduled & Routed Solutions
Warehousing z Receiving & Storage z Inventory Management
Fulfillment z Pick, Pack & Ship z Kitting z Shopping Cart Integration
Distribution z Mission Critical Delivery 24/7 z Same-Day Routed & Supply Chain z Overnight & Ground Shipping
For more information, contact: Eric Brown Mobile: 757.449.5013 | Office: 757.622.9500 Email: eric.brown@mobileonecourier.com
w w w. m o b i l e o n e c o u r i e r. c o m smallbusinessinsight.com
9
10 Small Business Insight | August 2010
Columns | Mergers and Acquisitions LEON GARBER GAITHER, GARBER & ASSOCIATES
Growth by Acquisition: The Other White Meat A few years ago the pork industry coined “The Other White Meat” to sell more pork.
One could term growth by acquisition “the other white meat” of corporate growth when compared to the “chicken” that is internal, organic growth. Now is a great time for companies with strong performance and balance sheets to grow not just organically but through acquisition. With the marketplace divided between strong performers who weathered the downturn well and those who didn’t, it is a perfect time for the strong to absorb the weak, with both benefitting from the arrangement.
Though an acquisition can seem like the answer to growth challenges, there are issues to take into account:
Companies make acquisitions for a host of reasons including: Economies of scale: Cutting away your target’s infrastructure while keeping the revenue-generating portion of the business can yield significant increases in profits. Absorb a competitor: This reduces competition in the marketplace, allowing for higher gross margins and bigger market share. Add new markets: Easier than internal expansion and often faster. Rationalizing a vertical supply chain: By absorbing other levels of their supply chain, companies can retain more of the chain’s profit under one roof. Horizontal growth through “near strategics:” Is there a company out there that always sells to the same client as your company with non-competing products? They could be a perfect target as you can cut away overhead and leverage a single sales force to reach the same market both companies are serving. Synergies: Perhaps a company has products or services that complement or are even necessary for use
T
with your firm’s products or services. Under one roof, the integration of those products or services could be taken to a higher level. Arbitrage Strategy: Consider the “magic of multiples.” As a general rule of thumb, the larger the company, the higher the multiple of its earnings it will sell for. The firm with $50M in sales and $7M in earnings might sell for seven times those earnings. That same firm can grow through a handful of smaller, lowerpriced acquisitions bought for four times earnings, then as a $100M company with a $15M to $20M in earnings, it might now command a 10 times multiple of those earnings in the marketplace. Bottom line: initial valuation was approximately $70M comprised of the “platform” company and the “add ons” it would eventually snap up. As a consolidated company it would later command a valuation in the $150M to $200M realm depending on earnings.
•
•
•
•
•
Making an acquisition can be extremely time consuming for the both the acquirer and the target company. It’s critical that companies plan for the additional effort needed to work through the search, negotiation and due diligence phases of the deal. Ensure that you have the right talent sets represented in the company to manage the process, or have a plan to retain qualified consultants to fill the gaps. Ensure that your professional advisors are lined up prior to starting the search. While a Mergers & Acquisitions Intermediary is an excellent starting point, the company should also have the right bankers, accountants and attorneys ready to go, experienced in M&A transactions. The current lending environment is challenging, however, strong combined cash flows (acquirer and target) and a direct-industry match lessens the risk for both you and the lender. Having weathered the downturn well and emerged with a strong balance sheet, your company may be one of the few compelling cases for a lender today. Recent research has shown that over the last decade, 70 percent of the completed mergers and acquisitions were later considered to have failed to achieve all the desired goals. Having realistic goals is a start, but companies must also know themselves; strengths, weaknesses, and outside perceptions.
he opportunity to grow by acquisition has never been more attractive in recent years than right now. Will you seize the day and make a savvy addition to your company, or will you miss the opportunity only to face a newly energized competitor whose own recent deal puts them in a commanding position in the marketplace?
Leon D. Garber, CBI is the President of Gaither, Garber & Associates, Inc., and is a Certified Business Intermediary specializing in crafting and executing mergers, acquisitions and exit strategies for business owners. He can be reached at 615-7154 or e-mail leon@gaithergarber. com. smallbusinessinsight.com
11
Columns | Financial Planning T.J. PRIEUR SAGEMARK CONSULTING
T
Compensation Strategies for Executives and Entrepreneurs op talent commands top compensation, and superior performance deserves just rewards. These principles are reflected in today’s lucrative pay packages for executives at public and private companies. Whether you own a business and compete for these employees, or are an executive offering your services to a corporation, it’s important to understand the universe of compensation packages used in today’s competitive marketplace.
As any owner or general manager of a professional sports franchise can confirm, offering a competitive salary is only a starting point for attracting and keeping quality players. Supplemental perks, such as a signing bonus and luxury travel accommodations, are routine add-ons. In addition, superstar athletes generally receive bonuses tied to performance — such as number of hits in baseball, or number of yards gained for a running back in football. Similar principles apply in the world of business when companies compete for the services of highly valued executives or specialists. Most employers pay their key employees in three ways: It starts out with the salary, then a bonus that’s generally paid annually, and finally with one or more long-term incentives which are usually tied to specific metrics, such as value creation, or achieving some particular goal over a multi-year period of time. In both public and private companies, the trend over the past two decades has been to align the financial compensation of executives and key employees with the success of the overall business. One notable method to give executives a stake in the ownership of the business, such as through stock options grants. Even now that companies must account for these grants as an expense, they remain a major component of pay packages, particularly at public companies. But options grants are only one way of putting the interests of an executive in synch with the financial performance of a company. Several other compensation strategies may serve as superior alternatives or logical complements to granting options. Phantom Stock. Many owners of private companies may find it difficult or undesirable to issue stock because of the dilution of ownership and additional burdens of governance involved. In such cases, phantom stock may be a viable alternative. Phantom stock doesn’t dilute ownership, since the executive is not given actual equity in the company, but rather a future cash bonus based on the company’s value. The business owner and the executive need to agree on some way of valuing the business, such as book value or a predetermined multiple of discounted cash flow, operating earnings or EBITDA.
12 Small Business Insight | August 2010
(Earnings before income, taxes, depreciation and amortization.) Stock Appreciation Rights (SARs). While they’re similar to phantom stock, SARs differ in that they are sometimes paid out in actual company shares. A contractual arrangement between a company and an employee granting a value equal to the appreciation of a specific number of shares over a period of time, SARs are often issued in tandem with stock options to help employees fund the options purchase. Like phantom stock, SARs are treated as taxable income to the employee when payments are actually received. These are both great ways to provide performance incentives for employees, but the business owner needs to plan ahead to have the liquidity to redeem them at the end of the vesting period. Of course, these and other long-term incentive plans are treated as non-qualified deferred compensation plans and employers need to be mindful of following Section 409(a) of the Internal Revenue Code when using them. Another popular perk for executives is allotting money to pay for professional services, such as attorneys and financial planners. If your employer provides this perk, take advantage of this option. It’s one less thing for you to worry about. T.J. Prieur is a registered representative of Lincoln Financial Advisors Corp., a broker/dealer, member SIPC, and offers investment advisory service through Sagemark Consulting, a division of Lincoln Financial Advisors Corp., a registered investment advisor, One Columbus Center, Suite 800, Virginia Beach, VA 23462. (757) 777-3137. TJ.Prieur@LFG.com . Insurance offered through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients. CRN200804-2015931
www.paulchinjr.com paulchinjr@gmail.com | 757.630.2183
Commercial, Event & Por trait Photography
smallbusinessinsight.com
13
14 Small Business Insight | August 2010
Columns | Commercial Real Estate BLAKE DOZIER CB RICHARD ELLIS
W
Commercial Real Estate Outlook for Mid-2010 e are now half way through 2010 and many economists say that we are now experiencing the beginnings of a slow and long economic recovery—emphasis on the “slow” and “long,” especially in the commercial real estate markets.
Nationally, many challenges from 2009 persist today, including declining rents and equity challenges that are requiring owners to dig into their pockets to cover their loans. In addition, as 2010 rolls on, we will likely see a growing number of defaults on loans. With that being said, someone stands to benefit from every cycle of the commercial real estate market, and these trends will create new opportunities for buyers and tenants even here in Hampton Roads. Employment levels are a primary indicator of the health of office and industrial buildings markets — the lower the unemployment rate, the lower the amount of available office and industrial space. Hampton Roads office and industrial availability has tracked with unemployment very closely over the last three years. Though the unemployment rate declined slightly late in 2009 and has continued to level off, the office and industrial markets have not. There tends to be a lag between a declining unemployment rate and office and industrial market recovery in part because there often is a time delay of several months between announced layoffs and closures of facilities and the lease expirations or vacating of facilities affected by such decisions. Another reason for the lag is the reluctance by companies to hire new staff until the economic recovery is stronger and more sustained.
It is possible that in Hampton Roads, the industrial market will recover sooner than the office market. International trade through the Port of Virginia is another barometer of the health of the Hampton Roads Industrial Market. Container volume peaked during the Fourth Quarter of 2007 at the Port of Virginia, when industrial availability was 6.7 percent, close to the 3 year low of 6.5 percent attained as of the end of the Fourth Quarter 2006. Given expectations for modest GDP growth throughout the rest of 2010, international trade should continue the quarterly increases at the Port of Virginia. However, with nearly 11 million square feet of available industrial space in Hampton Roads, we anticipate continued rent compression during 2010 as landlords offer more rent concessions to those companies willing and able to commit to reasonable lease terms. The office market in Hampton Roads will require significant expansion in em-
ployment in order to absorb the plethora of available space, nearly 18 percent of the total market. Office rents also will likely stay flat or slightly decrease in the second half 2010. With a year of economic expansion, we anticipate office and industrial rents leveling off late in 2010. The recovery in the commercial real estate market in Hampton Roads and nationally will lag behind the overall economic recovery and create opportunities for buyers and tenants. Though there are signs that Hampton Roads is close to finding the “floor” in lease rates, we anticipate the remainder of 2010 being a tenant’s market as landlords compete more aggressively to renew tenants or convince tenants to relocate to their properties. Blake Dozier is a commercial real estate agent in the Norfolk, Virginia office of CB Richard Ellis. He can be reached at (757) 217-1878 or by e-mail at blake. dozier@cbre.com.
Though the unemployment rate declined slightly late in 2009 and has continued to level off, the office and industrial markets have not.
smallbusinessinsight.com
15
Columns | How I Worked With My Bank
Work Hard.
ERIC BROWN MOBILE ONE COURIER
A Great Relationship With Your Banker is Invaluable So you start a business. You go to the bank and open a business checking account and get your business license — probably your most exciting and scariest moments in your life.
As your business grows, your knowledge of dealing with the financial side of the business in many cases are limited and seeking help from the right universe of advisors such as your banker is probably the last thing on your mind. Sure, working with a CPA or an accountant is a natural progression: we all have to pay taxes. Occasionally, issues arise out the business and you may interact with a lawyer from time to time. Bankers? When do you need to work with them? As a business owner myself, I tried to find the path of least resistance to solve the financial issues. Good old credit cards helped me along the way. For years, I bought vehicles for my business in my personal name. Eventually, I had reached a point in my business where I had too many business assets in my name and could no longer secure any more financing. I needed another vehicle for my business, but didn’t know where to turn. At the same time I was moving offices and needed to secure a credit line to help with cash flow for the move. Fortunately, I had a good relationship with my branch manager, and was comfortable enough with her to communicate challenges in my business. For me, this was a turning point in how I interacted with my bank. If I had known about the resources that a bank could offer my business, I would have done these things sooner. Too often we are going through a financial maze but don’t know which way to turn. Utilizing the offerings of my bank allowed me the breathing room to continue to grow my business. That year, I had moved to a larger facility. We grew 63 percent and the line of credit helped us float cash. The value of a good banking relationship is continually evolving. Learning to work with a banker as a trusted advisor has helps business owners think about finance in business in a new way. But as the business grows, dealing with the challenges of cash flow on a larger scale, purchasing key large assets or just becoming a more complex operation involving the right business bank can be
16 Small Business Insight | August 2010
key to future success. A relationship with a branch manager may suffice in the earlier stages of your business, depending on your company’s size. In hindsight, as I was approaching the $1 million mark in annual sales, that was the time when I should have engaged sooner with a business banker at my bank. Each business may be different. The more capital intensive your business may be, utilizing financing for those long-term assets instead active cash is a better strategy. Usually when you get into lines of credit and larger commercial loans, interacting with a business banker who can bring additional resources in analysis of the overall health of your business. Getting a real pulse of where you are is vital. Are you over leveraged in debt? Is your receivable average aging 45 days and beyond? Speaking from my own experiences, there are three reasons I believe to be common why business owners don’t engage sooner with banks with more than just a checking account.
1. Lack of understanding what resources are available from your bank 2. Fear of rejection when applying for credit 3. Fear in sharing the true picture of where your business is After speaking with local business banker, Cecil Hobbs of TowneBank, I walked away with some good advice. He recommendations approaching your bank sooner, rather than later. and not letting your fear or lack of knowledge drive your decisions. He also says you should also work with a bank that you can have an open dialogue with, and one that understands business, and utilize your banker as an
Strategy | Working With Your Bank
advisor, not just for transactions. We run our respective businesses and have become experts in our area of what we do. As we grow, we can’t be experts in everything. Making decisions without the right information can be costly. Hobbs states, “Typically a small business owner is under served in the knowledge, information and financial side. That is critical to most small businesses and many fail because of it.” Working with a business banker that understands financials and cash flow is critical. Surround yourself with the right universe of people who can be your key advisors including your CPA and lawyer. When it comes to dealing with financial issues in business, many business owners are not sophisticated in dealing with them. Hobbs states, “Many business owners can’t afford to hire a CFO or financial manager, and that’s where a good banking business relationship can help.” We have all heard about experience vs. wisdom. Experience is learning from your mistakes, and wisdom is learning from others. Having the right information and dealing with right people are vital to my business. As I grow in my business, I have come to value that relationship and see it’s importance.
Q&A With a Business Banker SBI spoke with TowneBank banker Cecil Hobbs to discuss a few strategies for small business owners when working with their banks. Here, Hobbs gives a few pointers on how to better interact with your bank. SBI: What is the best way to find a business banker? CH: Just as you would with any other line of business, look for referrals from trusted sources that have prior experience with that banker. That way, you are getting a warm handoff from someone that has past experience with that person. Also, research the experience of your banker and make sure he or she appears to be knowledgeable. Finally, find out who handles your line of business within the bank. If you are in a specialized area, such as government contracting or real estate, find out which line of business fits you best. While your branch banker may be a nice person, he or she might not be the right person for more sophisticated transactions. What questions should you ask when searching for the right banker? Well, asking generic “interview” questions won’t get you where you want to go. I would look for referrals, then talk with those bankers conversationally to see if it is a good fit. You should already know if they are qualified at this point. “Is it a good fit for you and me?” Use the backdrop of your business, then ask yourself “How does that match up with me?” and “Does it look like this person is going to help me grow my business? When should you seek a business banker? Before you need it. Many small businesses may never need credit, others may need it down the road. Others might be getting ready to take on contracts, buy buildings, etc. Those businesses should be getting to know the banker long before they need that loan. Asking your banker to give you strategies on how to approach him or her when you are ready is a great plan. What can a business banker do for owners than a CPA or financial manager can’t? We have the money. We create your credit facility. While we are not a paid advisor, we bring to the table not only the credit you seek, but the array of financial products your company may need. Basic checking, merchant credit accounts, corporate lines of credit, commercial real estate investment are all sample products you may need. Many banks have mortgage investment, insurance and other financial service companies within their organization. Having a banker as a resource allows you to capture the strength of all of those affiliates for your business needs.
smallbusinessinsight.com
17
Insight | Government Contracting
What does government contracting mean to Hampton Roads? James City County
$24,990
In the fiscal year 2009, $893,423,615.33 federal dollars were procured for the Commonwealth of Virginia, not including grants.
York County
$1,438,742.25
Williamsburg
$78,878.50
Newport News
$103,333,249.22 Hampton
$39,962,361.15
Portsmouth
$48,712,276.82 Norfolk
Suffolk
Virginia Beach
$1,800
Within Hampton Roads...
$43,508,807.20
$42,784,085,33 Chesapeake
$10,745,234.82 Source: Federal Procurement Data System - Next Generation. http://fpds.gov/fpdsng_cms. Numbers not provided for Poquoson or Gloucester County.
18 Small Business Insight | August 2010
Insight | Government Contracting
uu
While there is a great number of certifications and distinctions available for federal contractors, here are some of the most common certifications small businesses receive. The Small Business Association (SBA) website (www.sba.gov) provides a plethora of information not only on the types of certifications available, but on workshops, SBA loans and other resources as well. More resources include Federal business Opportunities (www. fedbizopps.gov), Procurement Technical Assistance Centers (www.aptac-us.org), Office of Small and Disadvantaged Business Utilization (www.osdbu. gov), Central Contractor Registration (www.ccr. gov) and AcqNet (www. arnet.gov).
SBA Certification Programs The Historically Under-utilized Business Zone Program (HUBZone) This program stimulates economic development and creates jobs in urban and rural communities by providing federal contracting assistance to small businesses. These preferences are available to small firms that qualify because they are located in a HUBZone designated area and employ staff who live in such areas. To find out if you are located in a HUBZONE, visit www.sba.gov/hubzone. The 8(a) Business Development Program This program assists eligible socially and economically disadvantaged individuals develop and grow their small business. Businesses that usually have been in existence for at least two years may be eligible for the nine-year program that includes counseling and training, and potential federal procurement opportunities. To see if you qualify for the 8(a) business development program to go www.sba.gov/8abd. Small Disadvantaged Business This certification enables qualified firms to gain access to federal prime and sub-contracting opportunities. To qualify, a business must be at least 51 percent owned and controlled by one or more individuals who are socially and economically disadvantaged. Contracting officers and prime contractors may search the CCR/SBS for potential contractors to help fulfill their goals. For more information, go to www.sba.gov/sdb.
Self-Certification Programs Service-Disabled Veteran-Owned Small Business The federal government has established special procurement opportunities for servicedisabled veterans. Contracting officers may award a sole-source or set-aside contract to a small business owned and controlled by a service-disabled veteran under certain conditions. The federal government does not require any formal certification; the servicedisabled veteran can self certify. To determine eligibility, contact your local veterans business development officer in your nearest SBA district office at www.sba.gov/local resources or contact the SBA’s Office of Veterans Business Development at www.sba.gov/ vets.
Veteran-Owned Small Businesses A veteran-owned small business is defined as one which is at least 51 percent owned and controlled by one or more veterans or, in the case of any publicly owned business, at least 51 percent of the stock is owned by one or more veterans and whose management and daily business operations are controlled by one or more veterans. If your small business meets the definition of veteran-owned, you can self-certify on a proposal for a contract. The Department of Veterans Affairs has authority to conduct veteran-owned business set-asides for its own procurements. For information on VA programs, visit www.va.gov. Women-Owned Small Businesses The federal government has established a government-wide goal for participation by small businesses owned and controlled by women at not less than 5 percent of the total value for all prime contract and subcontract awards for each fiscal year. A woman-owned small business is defined as one which is at least 51 percent owned and controlled by one or more women, or, in the case of any publicly owned business, at least 51 percent of the stock is owned by one or more women, and whose management and daily business operations are controlled by one or more women. If you are submitting a proposal for a federal contract, you can self-certify that yours is a woman-owned small business. For information on SBA’s programs and services for women entrepreneurs, go to www.sba.gov/aboutsba/sbaprograms/onlinewbc. Source: http://www.sba.gov/openingdoors
smallbusinessinsight.com
19
Insight | Government Contracting
All businesses, regardless of size, location, service, or competitive landscape, face one universal challenge: generating new sales opportunities. Strategies and tactics designed to build a sales pipeline go back to the Egyptians. It’s been called everything, judging by the chapter titles of “How-To” books on store shelves: “lead generation,” “demand creation,” “farming,” “hunting” versus “gathering,” “rainmaking,” “pursuit development,” even “bird dogging.” Federal contractors and subcontractors are not immune from the need to identify viable business opportunities. Hampton Roads, as home for numerous DOD, NASA, and other government facilities, is a hotbed of federal procurement activity. For the small business owner, the thought of making one’s way through the Federal contracting maze and successfully competing with some of the largest companies in the world can be daunting. To provide some guidance on this challenge, we spoke with several leaders in the Federal contracting community. 20 Small Business Insight | August 2010
Prospecting:
Learn how to find jobs One universal theme stands out: the importance of networking. As Gary Lisota, President and CEO of Valkyrie Enterprises commented, “Networking is the big thing. The size of your Rolodex is an important as anything.” While commercial sales are known to be very relationship-dependent, sales to the federal government are not much different. The federal process is often more controlled, transparent, and subject to comment. However, Lisota stated, “It’s important to have a champion” inside the buying organization. “Those champions are built through strong relationships and a reputation as a high performance service provider.” Gary Brandt, chairman of American Maritime Holdings, Inc., also discussed the importance of relationship-driven connections. AMH subsidiaries deal with three types of buyers: federal, commercial, and private owners. While private and commercial business does place a higher emphasis on personal relationships, the federal
buyers also recognize the importance of a strong, trusting relationship. “That’s why all customer comments about quality come to me,” said Brandt. Marine Hydraulics International (MHI), an AMH subsidiary, holds several awards and certifications, including a Master Ship Repair Agreement with the U.S. Navy and certification by the American Bureau of Shipping (ABS). Both instruments allow MHI to compete for business that otherwise would go elsewhere. Seeking federal business is also impacted by the nature of a contract or potential contract. A key source of business for MHI is a multi-vessel contract that serves as a pre-competed, repetitive pipeline. Because the contract covers all vessels within a given class, all enhancements and repairs of those vessels are routed to MHI. They do not require an extensive Request for Proposal (RFP) and proposal submission process for each vessel. MHI participates in the planning of the repairs, enabling both MHI and the Navy to make
Insight | Government Contracting
Finding Federal Contracts worth your time and money
efficient use of the vessel’s downtime. Another technique that plays a major role in the federal prospecting cycle is the use of teaming arrangements with other service providers. Valkyrie Enterprises uses the teaming approach to great advantage. “We have over 60 teaming partners with whom we share business opportunities. This allows us to complement our services by filling gaps in our service profile,” Lisota said. “The majority of our business comes from teaming partners.” Valkyrie Enterprises presents a strong case for the effective use of teaming. Founded in 2007, the firm has grown to a revenue level between $17 and $20 million — a very unusual and enviable achievement. Brandt is also a believer in the teaming approach, because it allows MHI to present “a blend of specialties.” This demonstrates both breadth and depth in MHI’s service offerings and allows MHI to enhance their productivity, especially on the multi-vessel contracts. “Because we compete as a low cost, high quality provider, high productivity enables us to provide savings to the Navy,” said Brandt. Brandt also explained MHI’s use of formal joint ventures as a way to strengthen their competitive position through cost
containment. Brandt said, “In the typical prime-sub arrangement, each firm in the chain adds a markup. This results in a higher price. In a joint venture, a single profit pool is established and each member firm agrees to accept a percentage of the pool, if a profit results.” Joint ventures are not without risk. Gary Lisota said, “Some clients are leery of them. This can result from the new entity being perceived as weak.” Both leaders agreed on the nature and utility of the various websites and databases — some free, some not — that publish federal government solicitations and awards. “We do a great deal of data mining among several of these sources, including the Federal Register,” Lisota said. While many databases provide incomplete information, he identified two he considers the strongest: Centurion and Input.com. He commented on the completeness of their data, often including the history of certain procurements. Both sources require a subscription fee. Additional sources of potential business also can be found on the websites created and maintained by the individual military commands. These commands now have a vehicle — the Internet — that allows them to attain a higher level of outside awareness
BY AL MOORE PHOTO BY PAUL CHIN JR.
than they enjoyed in the past. Both also agreed on the futility of pursuing RFPs published by governmental entities in which your organization has no point of contact or track record. This is very similar to the commercial world, in which proposals from distant strangers are rarely given serious consideration by the purchaser. Lisota commented, “We probably have zero percent chance of winning one of those.” Therefore, he frequently lets those opportunities pass by. While prospecting in the Federal sector brings a certain level complexity, mainly in the understanding and execution of different types of procurement contracts, it also shares a number of characteristics with the private sector:
1.
Networking with individuals in both buying and selling communities is essential to success. There is no substitute for a strong reputation as a trustworthy, high value provider of services.
2. 3.
To be effective, you must utilize all of the information available to you.
4.
As the seeker of business, you have to exercise judgment when deciding which opportunities to pursue and which ones to pass up. smallbusinessinsight.com 21
Insight | Government Contracting
HEALTHCARE AT WORK
American Maritime Holidings, Inc. creates a win-win opportunity for company and employees
BY T.J. PRIEUR PHOTOS BY PAUL CHIN, JR.
“To succeed, you have to invest in your people. It wasn’t just a costcutting move. We’re improving their wellness and enhancing their lives.”
22 Small Business Insight | August 2010
Insight | Government Contracting
Y
ou would have to be lost at sea for the past two years to be unaware of the confusion surrounding healthcare reform. Even though a reform bill has passed, very few business owners know exactly how it will affect them over the long term. Many government contractors in Hampton Roads count direct labor and healthcare as two of their major cost components. Employee wellness and cost containment are sometimes conflicting goals, but that problem can be solved. One organization, American Maritime Holdings, Inc., parent company of Marine Hydraulics, Inc., Tecnico Corporation, and Ocean Marine Yacht Center, decided to go straight to the source. AMH provides a wide range of marine repair and fabrication services to federal, commercial, and individual customers. AMH delivers these services in multiple modes: at their own facilitated repair yards, or remotely by dispatching technical crews to perform on-board repairs wherever the vessel is located. In either case, the AMH business model is very labor intensive. Employee wellness is an important factor in their success. In order to improve employee health, while reducing costs, Gary Brandt, AMH Chairman and CEO, established an onsite clinic in an under-utilized building. He then staffed it with a physician and nurses. As of May, the clinic resides in a 2,800 square foot, purpose-built facility in Chesapeake. Gary was able to realize a vision that had been formulating for a while. “These things don’t happen overnight. It took seven years of thought and a lot of support to make it happen,” Brandt said. The most surprising aspect of the program: it provides free healthcare to employees. By acting on his belief that AMH employees are like a large family, Brandt backed up his belief
with funding. Brandt said simply, “To succeed, you have to invest in your people. It wasn’t just a cost-cutting move. We’re improving their wellness and enhancing their lives.” Brandt, a life-long engineer, has the metrics to backup his statements. “We’ve detected more undiagnosed cases of high blood pressure that I can count, but I can get those figures. I know we’ve caught two unknown cases of cancer and at least one stomach aneurism,” Brandt said. His measurements were instrumental in AMHs ability to institute a facility-wide ban on smoking. “Even the Navy doesn’t smoke on our property,” commented Brandt. The AMH healthcare plan is comprehensive as well. The clinic provides referrals to outside specialists, when such care is needed. An extensive employee training program has also been instituted, enabling employees and their families to increase their awareness of effective preventive measures. Gary Brandt and the entire leadership team of AMH and its subsidiaries are committed to the program. Having the beliefs and resources to set their own course enables them to meet their goals, despite the confusion that impacts so many other firms.
u
THE DOC IS IN Dr. Marc Gaines and his staff at the AMH health clinic treat AMH employees.
smallbusinessinsight.com
23
Insight | Government Contracting
Steven Ormsby, President, Chairman of the Board, Owner
Quick on Their Feet AOCE Adapts Well to Fast-Paced Environment, Unexpected Changes & Company Evolution BY T.J. PRIEUR PHOTOS BY PAUL CHIN, JR. 24 Small Business Insight | August 2010
Insight | Government Contracting
It’s all about change.
Jim E. Hartney, CEO and Owner
Richard M. Sayers, COO
Ken E. Terry, Secretary/Treasurer and Owner
That’s the business that AOCE (Alpha Omega Change Engineering) is in. The veteranowned small business specializes in management and professional services, engineering and technical services, training development and delivery; studies, analyses, and evaluations; and administrative support. But shortly after the company was founded in 1997, they had to undergo their own transformation. “When we first started up we were approached by SAIC (Strategic Air Command) to help go in and look at the organization,” explains the company’s president, Steve Ormsby. “It was a big contract and we were happy to have four slots out of about 30 total who were working on the project.” At the time, that was the entire staff of the fledging company. Unfortunately, Steve explains, “As often happens in projects like this, we got some surprises. The timeline was modified and the project was terminated quicker than we expected. Of course if you have everyone working full time on one project you aren’t out there marketing for the next one.” The company downsized and had begun to recover when the Florida “hanging chad” incident took place after the 200 presidential election. “The hanging chad incident put a stop to all government contracts for awhile and that almost killed us,” Steve relates. “That was the point where we decided we had to evolve.” Up to that time the company had focused strictly on organizational development, but they learned that moving into staff support, the day to day management and integration of tasks, gave them a broader marketing appeal and the flexibility they needed to “become sustainable,” Steve says. The big lesson he learned from his early experiences? “Don’t put all your eggs in one basket,” he says. AOCE is headquartered in Hampton, near
Langley Air Force Base and USAF Air Combat Command, and other major military facilities that are the core of their customer base. The company has grown over the years, also. They now have 99 employees located in 15 states and overseas and about 35 sub-contract employees, also. Most of the workforce is older, and with skills from a military background so managing employees in many locations is not a big issue, Steve says. Staff support is now the company’s broadest business category. The AOCE staff provides its customers with expertise in project development, acquisition and program planning, aviation and aircrew issues, logistics and civil engineering support, military and domestic intelligence applications, satellite and computer systems and a myriad of other areas. In training courses and courseware development, they also develop and provide computerbased, web-based, and traditional instructional materials. Their training course support aids include high resolution graphics and interactive animations which can be used in instructor-led or in virtual classrooms. Courses range from introductory to highly complex topics across both the academic and technical training spectrums. Within the consulting area, they provide assistance and training in a wide range of topics. One of the things Steve enjoys most about the broad focus at AOCE is the challenge of doing something different which each new contract. “I like going into new environments. I’m a troubleshooter,” he says. “I started in aircraft maintenance with the Air Force and kept moving into new areas. I enjoy going into new areas and looking at the processes; what works and what doesn’t.”
“The hanging-chad incident put a stop to all government conracts for a while, and that almost killed us. That was the point where we decided we had to evolve.” smallbusinessinsight.com
25
Insight | Government Contracting
Top 10 Legal Questions to Consider Before Becoming a Contractor We are often asked what a business owner or board of directors should know before seeking to work as a U.S. government contractor. All contractors should consider whether they have adequately addressed the following concerns. 10. Will your company be filling a legitimate government need? Is the company promoting its business plan?
Contractors must ensure that contract performance will address a bona fide need of the government. Moreover, the work should be a natural extension of your current business plan. Also, it is imperative that the government work is a natural extension of your current business plan. 9. Is your company dealing with a warranted government contracting officer that has actual authority to bind the United States?
It is imperative that you deal on contracts matters with a contracting officer who has been given actual authority to bind the government. A company should not agree to perform a new contract or change the terms of an existing contract without the express written approval of a warranted contracting officer who has actual authority to bind the United States. The burden is on the contractor to ascertain that the government official with whom one deals is so authorized. 8. Does your company understand the requirements of government’s solicitation or statement of work (SOW)?
A government contract is no different from any other contract. Contractors must understand contract performance requirements. It is a bidder’s duty to point out any ambiguity that exists on the face of a solicitation. Performing work not speci-
fied in the contract likely will not be compensated. 7. Does your company have the technical capability to provide the goods or services required by the government?
Prior to award of any contract, the Federal Acquisition Regulation (FAR) requires the contracting officer to make a determination that the designated awardee is technically and financially responsible to perform the work required by the contract. Bid only on jobs where you meet these criteria. 6. Will your company’s accounting system be adequate to account for work done under government contracts?
Financial responsibility depends on whether your accounting system is up to the task. Under the FAR, larger companies will be required to file a disclosure statement addressing the capability of its cost accounting system. Smaller companies must employ a system that will permit the capture of costs associated with each government contract and facilitate billing of labor and material costs. Professional counsel in this area is a necessity. 5. Does your company’s code of conduct and business ethics comply with requirements of the Federal Acquisition Regulations?
26 Small Business Insight | August 2010
This area requires due diligence. Un-
BY THOMAS O. MASON, SHAREHOLDER, WILLIAMS MULLEN PHOTO BY PAUL CHIN, JR.
der the FAR, Contractors are required to establish and maintain appropriate systems and procedures to ensure that the company operates ethically and in compliance with the requirements established by the FAR. A duty is imposed on government contractors to report certain violations of the FAR and other laws to the government. Counsel and training in this area are essential. 4. Will your company need any licenses or permits?
Your contract with the U.S. will not excuse the failure to obtain required licenses and permits. Most government contracts place the burden on the contractor to gain necessary licenses and permits needed to complete the work required by the contract. Consider whether export licenses or security clearances will be required. 3. What about teaming? Should your company engage the government as a prime contractor or become a subcontractor of an existing prime contractor?
Consideration as to whether to become a prime or subcontractor is essential. Case law and business principles guide our use of various contracting vehicles to accomplish the work. These vehicles include subcontracts, teaming agreements, joint ventures, strategic alliances, as well as covenants not to compete or disclose certain information. 2. Should our company become an 8(a) or other designated small, woman-owned or veteran-owned contractor in order to obtain a more competitive advantage?
Many owners focus on whether their company qualifies for entry into the Small Business Administration’s 8(a) program for small disadvantaged businesses or designation as a womanowned, veteran-owned or other qualified small business. The notion on the ‘street’ is that designation as a socially (continued on next page)
Insight | Government Contracting
and economic disadvantaged business pursuant to Section 8(a) of the Small Business Act will result in the award of many contracts. Besides an 8(a) designation, eligible contractors also can be designated as a disabled veteran-owned company, a women business enterprise, a HUBZone contractor, or receive one of the numerous other designations. The requirements for such designation are strict and the consequences for misdesignation can be great. Professional counsel is appropriate. A good place to start is the local office of the Small Business Administration. 1. Do you understand that your company cannot fire the government as a customer?
Unlike commercial contracts, a government contract contains clauses that require advance planning and preparation. The government retains the right to terminate or cancel the contract for almost any reason. Secondly, if a dispute arises, performance must continue while the dispute is resolved. Finally, as needs change, the government has the authority to order changes which the contractor will be required to perform. The implications of these clauses require a detailed level of understanding of contract requirements in order to correctly price performance and agree to a schedule. As business leaders, it is beneficial to consider these basic questions before undertaking a government contract. We must be prepared if we are to provide high quality service to the largest customer in this region. Tom Mason is chair of the Government Contracts Practice at Williams Mullen, a full service law firm serving businesses for more than a century. For more information, please contact Mr. Mason at 703.760.5200, tmason@williamsmullen.com. www. williamsmullen.com This article is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.
Aspects of Accounting G overnm
FOR
(from page 26)
s r o t c a Contr
ent
BY PETER ALFELE, CPA & MELANIE BURGESS, CPA CHERRY, BEKAERT & HOLLAND PHOTO BY PAUL CHIN, JR.
The recent economic downturn combined with the expansion of government stimulus spending has encouraged many small businesses to seek revenue streams from the federal government. Although government work typically yields lower profit margins and increased oversight, the reliability of a stable customer found in the federal government is often a safe haven for small businesses during tough economic times. The federal government enlists the private sector to provide a variety of goods and services ranging from off the shelf products and routine maintenance/support functions to specialized military equipment, highly technical research and development and information technology. Companies that choose to do business with the federal government face a complex web of regulation that reaches all aspects of business operations including marketing, pricing, procurement, billing and reporting. This article examines some of the effects that dealing with the federal government has on a company’s accounting practices. Methods of doing business The federal government typically transacts business with the private sector by contracting with an enterprise to perform a scope of work. The contract type is important because it determines the amount of risk each individual party is willing to accept. The federal procurement system is based on the premise that the greater the risk assumed by the contractor, the greater the earnings potential.
Therefore, selection of the appropriate contract type for a given procurement is important to achieve a proper balance between risk and profit. In general, federal contracts are generally classified as either fixed-price or cost-reimbursement. Fixed-price contracts provide for the contractor to be paid a predetermined fixed amount for a specified scope of work and have full responsibility for the performance costs and resulting profit or loss. This contract type is used primarily when the scope of work is known and a fair and reasonable price can be established based on competition or on reasonable price comparisons. Cost contracts permit the contractor to be reimbursed for allowable incurred costs with no provision to give the contractor any profit or fee. Cost contracts obligate the contractor only to use its best efforts to accomplish the scope of work within a specified time and stated dollar limitation; the contractor can legally stop work when all of the contract funds are spent. Many cost contracts include provisions for profit or fee as fixed amounts or dependant on performance (award or incentive). The government has also devised a variety of other contract methods to meet certain needs. Other common arrangements include: Time and materials (T&M) and labor hour contracts provide for the contractor to be paid fixed hourly rates for direct-labor hours expended under specified labor categories. The labor rates include direct-labor costs, indirect (continued on next page) smallbusinessinsight.com
27
Insight | Government Contracting (from page 27) expenses, and profit. Materials or other specified costs are usually reimbursed at actual costs plus allocable indirect costs. A labor hour contract is similar to a T&M contract except that materials are not supplied by the contractor. Indefinite delivery, indefinite quantity contracts (IDIQ) are used when the exact time of delivery or the quantities to be delivered are unknown at the time the contract is executed. This type of contract is used when the government does not know in advance the precise quantities it will need and enables the government to commit itself only for a minimum quantity. Financial accounting and reporting The primary objective of a company’s financial system is to allow the entity to report its financial position and results of operations in compliance with generally accepted accounting principles (GAAP). GAAP is a body of standards and rules accountants follow in recording and summarizing transactions in order to prepare an entity’s financial statements. These rules are issued by the Financial Accounting Standards Board (FASB) and include general concepts and specific guidelines for certain transactions and industries. An overriding principle in GAAP is to measure results by recognizing revenues in the period when they have earned and costs when they have been incurred. This principle has led to specific reporting standards that apply to the methods government contractors use to determine their earnings. Revenue recognition methods Accounting standard setters have long recognized that all contractors face challenges when reporting revenues. Recognizing that a contractor has not completed the earnings process by simply rendering an invoice or receiving a cash payment, the FASB developed methods to report revenues from long term contracts. For instance, invoicing methods followed by government contractors vary depending on the type of contract and the phase of completion. Most government contracts will provide for progress payments as a means to finance the contract. Progress payments under fixed price arrangements are typically based on costs incurred or the achievement of certain “milestones.” Under cost type contracts, billings are generally based on costs incurred plus a fee percentage. Time and material contracts are usually billed based on pre-established labor prices. In general, contracts that fall within the scope of these rules must be reported on the “percentage of completion method.” This method requires the contractor to essentially ignore the bills they have submitted to customers and determine their revenue as work on a contract progresses. Progress is typically linked to the amount of costs incurred and revenues are rec-
28 Small Business Insight | August 2010
ognized by grossing up project costs by the profit percentage expected to be earned over the course of the entire job. This method requires the contractor to be able to estimate both the contract amount and the estimated costs to complete the entire project. Balance sheet accounts commonly reported as “billings in excess of cost” or “costs in excess of earnings” are used to adjust sales recorded from invoices when a contractor has billed more or less than the revenue determined to be earned. Receivables and revenues from contracts with the federal government are stated separately from other lines of business and a distinction between billed and unbilled receivables is disclosed in order to provide users with information about the extent of a company’s federal contracting activities. Unbilled receivables may arise from retainages, unapproved change orders, differences in provisional rates on cost type contracts, or from the percentage of completion method describe above. Cost accumulation Businesses who work with the federal government must consider regulations beyond GAAP. Those businesses which choose to sell non-commercial services or products must adhere with the government’s cost principles as well. Cost pools and bases are established to determine indirect rates to allocate business costs to government contracts. A pool is a collection of like expenses that can be allocated over a base of related expenses resulting in a percentage known as an indirect rate. Indirect costs are all those costs which cannot be directly associated with one single contract. The typical pools include: Fringe benefits are those costs incurred to benefit the employees. The fringe pool often includes federal tax payments, holiday pay, vacation pay, health insurance, and education programs. The fringe expenses are thus allocated across all non-fringe labor. Overhead costs are incurred because a company holds government con-
Insight | Government Contracting tracts but cannot be directly associated with a single contract. Typically the overhead pool consists of rent, labor, travel, and training for contract employees. The overhead expenses are allocated to direct and bid and proposal labor as these costs drive the incurrence of overhead expenses. General & administrative costs are typical business expenses required to manage the company regardless of the type of work performed. Examples of G&A expenses include the rent associated with corporate employees, accounting and HR departments, business development, and corporate required travel and other business expenses. An added dimension to the creation of cost pools is the identification of unallowable costs. To be allowable for charging to the government, costs, whether direct or indirect, must be reasonable and allocable. Unallowable costs may not be billed to the government either directly or indirectly. This concept may be confusing since the majority of unallowable expenses are incurred in accordance with GAAP and prudent business practices. Procurement rules explain unallowable costs further and include those items that are expressly unallowable by regulation. Due to the need to record costs in a manner consistent with the cost principles and
by individual pools, a generic chart of accounts is not sufficient. Government contractors must customize their accounting software to clearly show costs by pools and allocate properly to direct projects. Disclosures In addition to the matters mentioned above, the financial statements of government contractors commonly include the following disclosures: Contingencies — Unlike commercial contracts, the federal government, either through contract clauses or as a sovereign, retains the right to terminate an agreement at its discretion. The government can terminate a contract for its own convenience if they deem it to be in the best interest of the public, or for cause if the contractor has failed to meet its obligations. The unusual nature of this contingency should be disclosed. Concentrations — Government contracting may represent a significant portion of a company’s business. Companies that derive more than 10 percent of their revenues from the federal government must disclose the relative percent of sales and receivables concentrated with the government. Business with all agencies of the federal government should be viewed in aggregate when
determining the concentration. Conclusion The complexities of doing business with the federal government impact a company’s financial reporting systems as well as other business operations. Understanding the unique aspects of government contracting will help small business owners capitalize on government stimulus programs and provide a stable customer during uncertain economic times. Peter R. Alfele, CPA, is a partner at Cherry, Bekaert & Holland, LLP, in Virginia Beach. He has more than 12 years of experience providing audit and accounting services to a variety of commercial enterprises and closely held, middle market businesses. Contact him at palfele@cbh.com or search and connect with him on LinkedIn. Melanie Burgess is a Senior Consultant with CB&H and a member of the Firm’s Government Contractor Services Group. Melanie specializes in government contract and subcontract administration, proposal preparation, indirect rate development, incurred cost proposal assistance, and compliance with the FAR and other federal procurement requirements. Contact her at mburgess@cbh.com.
smallbusinessinsight.com
29
Insight | Government Contracting
A Force to Reckon With Blue Force, LLP uses prior military backgrounds to excel in government work
BY T.J. PRIEUR PHOTO BY PAUL CHIN, JR.
“We’re two companies trying to become one,” says Joseph A. May, chairman of the board of Blue
Force. The Hampton-based consulting company, which was founded in 2003 by Joe and two partners, Walter Burns and Jeffrey Walker, consists of two divisions, Blue Force and Blue Law. “We started out as Blue Force in 2003,” May says, explaining how the company’s two divisions came into being, “and one of our partners, Jeff, had been a lawyer with the military. They wanted him back as a defense council for the first Al-Qaeda prisoners at Guantanamo.” To do the job as a civilian, Jeff needed to be a part of a law firm. “He did some research and found that no state allowed non-lawyers to be part of a law firm, but the District of Columbia did,” explains May. That’s how Blue Law, International, became a licensed limited partnership in Washington D.C. May mentions proudly that Jeff was one of the people who argued, successfully at the time, before the Supreme Court that the Guantanamo prisoners should be tried in a military tribunal. Calling themselves “sister companies,” Blue Force, LLP, and Blue Law International, LLP, now have seven partners and over 30 full and part time employees. Blue Force provides government, industry, and research and development clients with high quality expert assistance to enable the success of innovative and complex initiatives. The company specializes in “values-based, in-depth, strategic, operational and tactical subject matter expertise, emphasizing command and control, joint and coalition mission planning, exercise and experimentation, management and assessment, program and acquisition management support, stability operations, modeling and simulation support, and information warfare planning. The combined talent of the company’s two divisions, “make us the partner of choice to foster and further advance the common interests of the Department of Defense and the Department of State,” says May.
30 Small Business Insight | August 2010
NOTHING BUT BLUE SKIES | Walter Burns, managing partner for Blue Force, LLP served and retired as director of the Air Force Command & Control Transformation Center at Langley AFB. “The Department of Defense and the Department of State can be like two different worlds. They sit in the same room and talk past each other. It’s like they are speaking two different languages. We understand both sides. We are the nexus between the Defense and State,” he explains. As the wars in Afghanistan and Iraq wind down, May sees the biggest opportunities for the company in development areas such as rule of law and anti-corruption. “There will be fewer players at DOD, but they will still need our help,” he says. “As long as we offer high quality service at BY T.J. PRIEUR a competitive price we will get work.” PHOTOS BYthe PAUL JR must take deliver No matter what job, aCHIN, consultant what he says he’ll deliver. “We work hard to put the cus-
tomer’s needs high on the list and take care of that customer,” says May. “Of course you are contractually bound to comply with a statement of work but I’ve never seen a statement of work written that captures everything that needs to be done on a particular job. We do what the customer needs to get done. It’s kind of like the mission focus when you are on active duty.” He tells his consultants that their job is “to become an indispensible part of the company. We don’t say we don’t do that. If someone needs you to put a couple of extra hours in to get something done, the answer is ‘Yes, I can.’ It’s all about engaging with the customer to understand what they need and taking care of it.”
“The Department of Defense and the Department of State can be like two worlds. It’s like they are speaking two different languages. We understand both sides. We are the nexus between the Defense and State.” HOG HEAVEN | General smallbusinessinsight.com
31
Insight | Government Contracting
Good Connections Zenetex’s new management T makes great strides, sees nationwide growth
BY T.J. PRIEUR PHOTO BY PAUL CHIN, JR.
32 Small Business Insight | August 2010
his year, Zenetex, a small business specializing in IT service management, will celebrate two anniversaries: its 10th as a company and its second under new management.
It’s a small world for Zenetex’s IT specialists. Mark Gerasch, who joined the company last September as vice president of integrated training systems, says that during his 20 years in the industry, he’s never worked for anyone other than the executive management currently running Zenetex. “There’s a lineage there,” Gerasch says. Fresh out of college, he worked for Zenetex CEO Mark Green and later, Zenetex president and COO Dennis England. They’ve sold companies together and switched companies together. In fact, that’s how Zenetex’s new management took over this company in particular.
Insight | Government Contracting In the preceding years, there had been discussion among a number of IT professionals about starting a new company. While working for big businesses, they realized that they missed the small business atmosphere in which they had started their careers. “The constant connection to our customer,” Gerasch explains, “the constant connection to the people you work with, the family oriented environment, the ability to be flexible and agile, the ability to do some things that you hadn’t been able to do at a big company—we all missed that.” On Sept. 10, 2008, Mark Green put up the money for a group of executives to take over Zenetex, which was already established and profitable. We came in to give the company a different drive and perspective, Gerasch says. They wanted to diversify an already successful and well-respected company.
strategic and/or tactical opportunities to go after. We’ve been fairly successful doing that.” Before the new group of owners came in, Zenetex’s focus was on IT infrastructure, information and transformation, he says. They got their start with a Citicorp account and the renovation of the Pentagon following 9/11. What the new owners have since done, he explains, is bring in additional capabilities, like training, foreign military sales, program management and engineering services. “Our goal is, for the end of next year, that we have a good foundation in all of those core capabilities,” he says. Gerasch is wary of relying on any one capability to support the company’s business, and rightly so. “If that core capability goes out of favor in that particular marketplace, then the small business is going to fail. And that traditionally happens with some small businesses. They get a great niche and they do really well, and then all of a sudden, technology changes or there’s some sort of turnover, and something happens and then they don’t have some sort of future plan,” he says. Zenetex’s corporate cultural philosophy is one that nurtures organic growth by putting people, employees and customers, first. It’s about taking the best of big business—diversity—and the best of small business—service— and putting them together. It seems to be working. Zenetex has grown significantly, according to Gerasch, from roughly 40 employees and 1099 consultants to nearly 150 in less than nine months. Though the company is based in Virginia Beach, it has two other main offices in Herndon, Va., and California, Md., as well as field offices across the United States.
“You’ve seen companies that are an inch deep and a mile wide,” he explains, “and you see companies that are a mile deep and an inch wide. And that’s a struggle for any small company. “If you’re only this wide but you’re this deep”—he uses his hands to illustrate his point—“then you’re pretty well steeped in a niche. But if you’re this wide and this deep, then you don’t really have any core capability that you can really create success from.” Some small businesses, Gerasch explains, choose their capability like a tumbleweed, going wherever the wind takes them. And that’s fine, he says, because you’ll find success that way, but it won’t necessarily endure as the markets change. “We are trying to be as wide as we are deep,” Gerasch says, “and in order to do that, we have to pick certain, what we call
t
SOLID FOUNDATION | The team at Zenetex credits its success to successful new management.
smallbusinessinsight.com
33
Insight | Government Contracting
A Valkyrie on & off the Clock BY T.J. PRIEUR PHOTO BY PAUL CHIN, JR.
The first film Gary Lisota, president and CEO of Valkyrie Enterprises, remembers seeing with his father was Kirk Douglas’s 1958 action-adventure flick, “The Vikings.” “That movie captured my imagination,” says the Wisconsin native. Later, while Lisota served as an officer in the Navy during the Vietnam War, a piece of Nordic lore again caught his attention. He read about a turn-of-the-century sloop named Valkyrie that had won the America’s Cup regatta several times. He promised himself that if he ever owned a boat, he would christen it after the legendary warrior angels of Norse mythology, the valkyries. Lisota now sails Valkyrie IV and the image continues to follow him through his career. The vanity plates on his Ford Expedition bear the name, as does his threeyear-old company, Valkyrie Enterprises. Though he shied away from the name at first, reasoning that most people don’t know the myth or have trouble pronouncing the word, his No. 2 business associate suggested that it might be “a good branding thing.” “Best advice I ever got,” Lisota says. He has embraced the name and its asso-
ciated mythos ever since. The company’s Virginia Beach office is decorated with Viking swords and shields, and the “hold music” on the telephone is Richard Wagner’s “Ride of the Valkyries.” “Valkyrie” is a fitting namesake for a company that contracts engineering and technical services to the Department of Defense with a focus on the U.S. Navy and Army, and NATO. Lisota has been in the industry since the 1980s. Prior to launching Valkyrie in June 2007, he spent 25 years with AMSEC, which he joined at the ground level and rose through the ranks to become COO and CEO. Though he loved his work at AMSEC, as the company grew to nearly a half billion dollars in annual sales, he began to miss the feel it used to possess, the feel of a small business. He didn’t have the time to walk around and talk to his people or visit his clients
34 Small Business Insight | August 2010
EQUIPPING THE SOLDIERS | Gary Lisota, president and CEO of Valkyrie Enterprise attributes the success of his fairly new company to his employees.
unless an issue needed to be resolved, he explains. “My thought with Valkyrie,” Lisota says, “was that this was a chance to get back to basics, back to focusing on my employees and my customers.” The company has had a fast start. Three years after opening its doors, Valkyrie has 102 employees and a run-rate of $17 million a year. It became profitable last year—a rare early achievement for a small business, he says. Lisota attributes Valkyrie’s success to its employees. He hired colleagues from AMSEC who had witnessed the evolution of a small business into a much larger one. It is a pool of talent that is able to handle growth, he says. He emphasizes the high-end talent on every strata, from technicians to systems engineers. “My philosophy on day one with this
company,” Lisota says, “is ‘We hire the best to be the best’, and we have truly done that here.” But for Lisota, it’s not enough to just hire the best. “You have to stay interested in the people,” he says, “stay interested in their work, and show them that you care. Most people of course want reasonable compensation and benefits, but what excites people is when a company shows a strong interest in them personally, in their projects, in their growth.” Lisota mentions “the old MGWA—when the management goes walking around.” He accentuates the importance of all levels of management spending a portion of their workday or workweek getting to know the people with whom they work.
To foster interaction and motivation, Valkyrie hosts monthly birthday celebrations, luncheons and employee breakfasts for onand off-site employees. “At the end of the day,” he says, “I think that type of interest and involvement, and a thanks once in a while from the front office for a job well done, is more important to people than a pay raise. I mean, everyone wants more pay and better benefits, but people don’t stay at companies just because the pay is good. They stay at companies because they are motivated. They’re excited. They believe in the company’s overall vision.”
READY FOR ANY BATTLE | In ancient Norse mythology, the Valkyries were charged by the Viking gods to protect the Viking soldiers in battle. Lisota displays these Viking war helmets to remind his clients and employees of Valkyrie Enterprise’s mission. smallbusinessinsight.com
35
Create a bra...
Charity | The Bra-ha-ha
Give hope.
Business owners: Looking for a fun, creative way to support a great cause?
The 2010 Bra-ha-ha is coming up in October, so break out your glue guns, rally your associates, and throw an office party of epic proportions. At the Bra-ha-ha, individuals, companies and organizations decorate a 38C size bra and describe the bra’s inspiration in 50 words or less. All bras will be unveiled an opening gala at McArthur Center Oct. 3, and will remain on display there through Oct. 23. Proceeds from the event go to support the work at Chesapeake Regional’s Breast Center. Entry fees are $25, and include one ticket to the opening night gala. The grand prize is $1,000. Deadline for entry forms is Sept. 3, and bra and fees are due by Sept. 10. Last year, more than 150 bra artists from throughout Hampton Roads submitted bras in support of breast cancer awareness. Bras ranged from serious, whimsical, homages, to just outright hilarious. More than 500 breast cancer survivors, hospital employees and community members attended last year’s event. Sponsorship opportunities are still available. For more information, and a gallery of bras, visit www. brahaha.org.
POWER UP.
TOP: “Survivor” by Courtney and Ashley Branham, in honor of their mother. LEFT: “Sex in the City” lingerie designer COSABELLA designed the “Angel of Hope” bra to be auctioned at the gala. RIGHT: “Sunnyside Up” was created by Amy Fitchett and Linda Hitchings to focus on hope for a possible cure for breast cancer.
LOG IN. SPEAK OUT. Stay plugged in for info about upcoming issues, events and information about SBI Owners council and SBI Emerging Businesses.
www.smallbusinessinsight.com @SBI_HamptonRds facebook.com/SBI.HamptonRoads Find our group: Small Business Insight magazine
Community | Local Businesses
Not Just Another Office Store Chesapeake Office Supply offers competitive prices and set-apart customer service
BUY LOCAL Chesapeake Office Supply owner Paul Levitt encourages customers to enjoy friendly customer service when buying supplies.
BY T.J. PRIEUR PHOTO BY PAUL CHIN, JR. In the middle of a recession, Paul Levitt, the current CEO of Chesapeake Office Supply in Chesapeake, found himself unemployed. It was Sept. 1991, and his one-year contract as the head of Haynes Furniture had not been renewed. Though he chuckles now as he recalls how much he just didn’t get along with the then-CEO of Haynes, at the time, he was in a difficult position. “Here I am,” Levitt recalls, “just moved my family, nice big house, put in a pool and a fence and a play yard on a six-figure income that just disappeared.” “I thought, ‘What am I going to do? How am I going to replace this income?’” Levitt says. Eventually, he decided he would buy his own business. With the help of a business broker, he says, “I found this little office supply company that was kind of the right price, and I thought, you know, ‘What the heck?’” He sold the BMW he recently purchased, combined that with the rest of his capital, borrowed money from family and friends, and took out a home equity loan. The company he purchased? Chesapeake Office Supply. At the time, it had four employees, two sales people, a truck driver and an accounts receivable clerk. It was doing
about $70,000 in business a year. That was almost 20 years ago. Now, Levitt’s company makes between $4.5 million and $5.5 million a year and employs anywhere from 14 to 18 people. “It’s a very competitive business,” because of what they sell, he explains. “Our catalog has 38,000 items in it, everything from what you would expect—paper clips and scotch tape, rubber bands and paper and pens, to toilet bowl cleaners, picture frames, furniture, vacuum cleaners, microwaves— the gamut of whatever a business might use for its break room, for its janitorial supplies, for its IT supplies.” The problem with selling these particular consumables is that they are also sold in many different outlets in every community. “A lot of times,” according to Levitt, “the person responsible for making the choice of where to buy their supplies will show their good senses to their boss by proving how they’ve saved 13 cents on a dozen legal pads by switching to another supplier.” This practice, he says, “is really bad business all the way around, because the cost of acquisition of any consumable for a company is about 150 percent of what the consumables cost.” So, Levitt asks, how do small, independently owned companies such as Chesapeake Office Supply stay in business selling against billion-dollar companies such as
Office Depot and OfficeMax and Staples? “It’s not volume,” he answers. “This is what I tell my customers and my salespeople at the same time: We’re not in the business of supplying commodities. We’re in the business of supplying service.” Chesapeake Office Supply makes the unprofitable consumables acquisition as costeffective and painless as possible, Levitt explains, from ordering supplies, invoicing, shipping and receiving. “Are we always the least expensive for every item that you buy? No,” he says. “And the dirty secret that nobody wants to let out is neither is Staples and neither is Office Depot and neither is OfficeMax. Nobody is, because we all have to make a profit to operate. This stuff basically costs the same for everybody, give or take. It’s really the process that we provide that is most important for our customers.” In an industry that is oversupplied, Levitt asserts that his company’s value is as a resource for its customers. While big-box businesses may be cost effective, he says, their customer service departments aren’t user friendly. Levitt insists that turning to independent vendors is the only viable solution. “We’re a local, friendly, talk to the same person every time you want to for years resource that takes the problem off of your desk and puts it on ours,” he says. smallbusinessinsight.com
37
Community | Local Businesses
LONG LIVE PRINT Steve Pahno with his father, Pete.
LIKE FATHER, LIKE SON
Dominion Printers owner follows passion and evolves business with industry BY T.J. PRIEUR PHOTO BY PAUL CHIN, JR
Steve Pahno, owner of Dominion His father, Pete, has worked in the Printers in Virginia Beach, has been industry since the 50s. He remembers around the printing business since he setting type by hand and using hairdryers to set the ink on printing plates. was a youngster.
38 Small Business Insight | August 2010
A
Community | Local Businesses s the industry evolves from offset print to digital, the small retail space that encompasses Dominion Printers juxtaposes old and new.
A one-time retiree, Pete now works for his son. For the older gentleman, printing is not so much a career as a lifestyle. “I just like the atmosphere of printing— the machines, the folders, the copiers, the stitchers, anything pertaining to getting printing done, it’s what I like,” Pete asserts. “I come here every day and I love it.” It’s a sentiment that seems to be shared among Dominion’s 20-odd employees, many of whom have worked for Pahno during the majority of the company’s 26 years in business. Steve considers them to be family and does his best to make sure they’re taken care of. Dominion pays the majority of its employees’ health insurance and offers a 401K with the hope that they’ll be able to retire “and be ok,” Steve says. “That’s my goal, [to be] more than just the bottom line.” Though Steve laments that he hasn’t been able to give as many raises as he would have liked to these last few years because of the recession and the changing print market, he has yet to lay off any of his employees. The loyalty he feels to his employees makes Steve reluctant to make a speedy and perhaps more cost-effective transition to digital printing. Increased digitization makes a human workforce increasingly redundant. “I tend to take some jobs now that I wouldn’t have in the past,” Steve says, work that is more challenging and less profitable, “just to keep people busy.”
The printing business is in a difficult transition to digital right now, Steve explains. He cites the growth of personal and professional Web sites, increase in postage costs and decline in direct mail as factors affecting printers. Runs are becoming smaller, even among larger companies, he says. “Instead of somebody doing 5,000 brochures, they may do 500,” Steve observes. “And they’ll want them right away, and personalized, so I see a trend in that direction.” Clients are also “going green,” Steve adds, and while the printing industry is following suit by instituting environmentally friendly practices, customers are cutting out paper materials. He offers the example of newsletters. Instead of printing newsletters professionally, they do it on the Internet through e-mail. “The Internet’s tough,” Steve admits, especially as a growing number of customers turn to the Web to find the best prices for certain products. “You can go online and find 5,000 business cards for 20 bucks.” Even when people turn to local businesses for their printing needs, the competition “is tighter than it has ever been,” he says. Steve tells the story of a nearby printer’s advertising tactic. The man offered to take 10 percent off of any invoice a customer brought in with a guaranteed 25 percent off an additional order. “That’s a sales tactic, which I think you’ll get a lot of bottom feeders doing that type of thing,” Steve remarks. He refuses to resort to such devices. “We have a custom-manufactured product, you know, and it’s worth a certain amount of money,” he says. Though Steve admits that profits are
down, Dominion Printers is operating at near-capacity, as it has been for the last five years. “We don’t have a sales force, so a lot of our business is word of mouth,” Steve says. “I think people trust us.” Much of Dominion’s work is for local customers and non-profit organizations. The key to turning a good customer base into a sales force is front desk customer service, Steve confides. Dominion has four employees that take care of customers that e-mail, phone and walk in orders. The company tries to complete new orders quickly. They also archive every order they receive, which encourages return business for individuals who need to reprint or tweak old materials. In order to meet an increasing demand for digital work, Dominion is also continually upgrading its front-end and pre-press software. They are completing more ondemand work to serve customers accustomed to the Internet age of instant gratification. Steve uses the Alpha Graphics franchise to illustrate his point. The company has opened up around 200 stores and converted a number of offset printing companies. The newer stores have no offset printing capabilities. “They’re all digital,” he utters, a tone of finality in his voice. “Every one of them.” Steve’s prognosis for the printing business isn’t a positive one. To be perfectly honest, he says, he wouldn’t want to be starting a printing business right now. “Everything is moving toward digital,” he concludes, “so the offset printing end of it is a dying breed, in my opinion.”
— Pete Pahno, father of Dominion Printers owner Steve Pahno. smallbusinessinsight.com
39
GO THE EXTRA MILE Brothers Mark and David in their repair shop.
Community | Local Businesses
A Family Tradition
Hornsby brothers reap large profits from father’s advice
BY T.J. PRIEUR PHOTOS BY PAUL CHIN, JR.
Mark Hornsby, co-owner of Hornsby Tire and Service Center in Newport News, was almost born into the tire business, he says. Hornsby Tire has been serving the Tidewater region of eastern Virginia since 1935. The independent, familyowned tire dealership and automobile service center was started by Hornsby’s great uncle, purchased by his father, Bob, in 1960, and turned over to Mark, himself and his brother, David, in 1985. Mark Hornsby spent his summer breaks during high school and college working at the family business, like his father before him. Taking it over had always seemed like his destiny, he says. “I went to college knowing I was going to come back down here,” Mark says. “That was my goal.” He attended Radford University intending to graduate with a degree in business management. It would be something to fall back on, if Hornsby Tire went sour. That has yet to happen. “In 25 years of business,” Mark says of the time he’s co-owned the company, “we’ve never gone backwards. Never.” Revenue growth has been solid year after year. Today, he says, “We’re swamped. I don’t know why we’re so blessed.” Somehow, with the economy tanking these last three years and taking a number of companies with it, business has been booming at Hornsby Tire. “Is there a secret to it?” Mark asks. “I don’t know, except for maybe people are hurtin’ more, so they want more trust. They want more out of it.” Trust and fairness is at the hub of the Hornsby family business. “What my dad used to tell us all the time,” Mark explains, “was care about other people, treat them like you want to be treated and go that extra mile to help. In return, you’ll gain a faithful customer
for life. “That was the only philosophy he had. There was nothing else.” Because Hornsby Tire can’t compete price-wise with big-box stores and national chains that buy in bulk and sell with markdowns, they emphasize the importance of customer service and loyalty, especially when it comes to marketing. While they do some advertising, word of mouth brings in most of their business. “If there’s a problem with a customer, we want to take care of it,” he explains. “We don’t want that customer to go badmouthing us for any reason whatsoever. And there are situations where there are problems — anytime you have a business, there’s problems — but we try to adjust to it and we try to take care of it, because the last thing I want is somebody that’s just like a disease, spreading the word out there that [we’ve done something wrong].” Their reputation for quality work affects more than just their retail business. Half of Hornsby Tire’s business is commercial. While he admits that price is importance to their commercial accounts, Mark says that companies can’t micromanage the work being done on a 50-vehicle fleet. The bottom line? “If they can’t trust you, they’re not coming back,” he says. The model seems to be working. “We’re liable to have our best month
ever in sales, and the economy stinks right now,” he says. Mark, who handles the books and number crunching while his brother takes care of the majority of front-end service and sales, will be celebrating his 50th birthday this summer as Hornsby Tire adopts a new name — Hornsby Tire and Service Center — and a larger location. The expansion, he adds, isn’t a competitive effort, but rather an investment in his family’s future. “I just want to be comfortable with life,” Mark says of his ambitions. “I don’t need to be the king of the tire business, that’s not for me. But I want to make it work.” The move has been three years in the making. After the official grand opening on August 20, Mark hopes that he and his brother will be able to slow down and enjoy some free time. Both are avid sportsmen — David played professional baseball after college — with wives and children. Will the business stay in the family after the brothers retire? Mark laughs as he contemplates the future. If any of the children were to come back full circle, Mark points to David’s son, but he’s quick to offer a disclaimer: “I’m not saying that’s what he wants to do. If he heard me say that, he’d probably say, ‘No! I ain’t gonna do it!’ But he would be the one that I could see comin’ back and doing it.”
“What my dad used to tell us all the time was care about other people, treat them like you want to be treated and go that extra mile to help. In return, you’ll gain a faithful customer for life.” — Mark Hornsby, Co-Owner of Hornsby Tire and Service Center smallbusinessinsight.com
41
Community | Local Businesses
‘Everything Crane Tech
D
Frank Hegan, President
Robert Kohler, Vice President
42 Small Business Insight | August 2010
iversification is the key to long term growth and success, says Manfred Kohler and Frank Hegan of Crane Tech Solutions, in Portsmouth. The company sells, services, and repairs heavy equipment such as overhead and specialty cranes and marine and port equipment. “Everything we do is connected to cranes in some way,” explains Hegan, who as president of the company sees his main focus as “helping to guide the company into different product lines.” There latest venture is light bulbs. Not just any light bulbs, of course, these are LED bulbs, some specifically designed for much of the equipment they sell. The company was founded in the mid-1990’s by Koehler when he had the opportunity to buy out a German company which was closing its U.S. office. Hegan had also worked for the Germany company and while at the time he went on to work for another business, Koehler asked him to become a member of his board of directors at Crane. In 2009, as Koehler began to look forward to
Community | Local Businesses
we do is connected to cranes in some way.’
Solutions attributes success to Diversification BY T.J. PRIEUR PHOTOS BY PAUL CHIN, JR. retirement, Hegan stepped in as president of the firm, which also has two other partners, Koehler’s sons. It’s a challenge being a family business. “That’s why I have Frank here,” Koehler says of Hegan. “It’s hard to be both a dad and a boss. They report to Frank, not me.” Diversification has been especially important in the last few years as the construction industry hit a slow down. “That’s why we are always looking at other products with broader reach into different markets as well,” Hegan says. “I want the company to stand on multiple legs, not just one. It’s a balancing act from a management perspective. Hegan and Kohler balance not just their varied product line, but also about 25 employees in two different locations, in Portsmouth and in Harmony, Pa., near Pittsburgh. The Portsmouth facility consists of 21,000 Square feet of warehouse
Mike Kohler, VP of Parts and Service
and service center including an industrial paint booth. Cranes may have brought the company into the LED market – “our crane operators were complaining about wanting a better light,” says Hegan, but he and Kohler don’t plan to limit their LED business to the crane industry. “LED’s are the wave of the future,” Kohler says enthusiastically. “Where ever you see a light bulb there’s a problem that the LED is the potential solution for. The LED lasts longer, and look at the cold storage industry. The incandescent lights give off heat. The LED doesn’t. That means you pay less to keep things cool.” A small business must be opportunistic, says Hegan. It must be ready to change quickly as the market changes. “Construction is always cyclical. Eventually it will come back, in fact we’re already seeing the beginning of a turn around. But in the meantime, we need to have other ways
Crane Tech Solutions staff members.
to make money. We have a future in LED lights. The only question is just how the market share we can get.” “That’s the bottom line in business,” adds Kohler. “Market share and growth are the measures of success.”
Model cranes and trucks adorn the office. smallbusinessinsight.com
43
Community | Happy Anniversary
LTI Telecom Hosts Anniversary Event On June 17, Lee Telecom reintroduced itself to the community as LTI at it’s 15year anniversary event. Here, LTI unveiled a new logo and a great time was had by all attendees, including employees, vendors, associates and special guests.
1. LTI collected over 280 lbs. of food for the Foodbank of Virginia Peninsula, and continues to reach a goal of 1,500 lbs. by yearend. 2. Employees won prizes, for trade-related competitions, donated by attending manufacturers. Other guests won prizes, too. Martin Forbes from Sauer, Inc. of Newport News won an iPad. 3. LTI invited many of its vendors, including the City of Hampton, Foodbank of Virginia Peninsula, Northrop Grumman, Isle of Wight County Schools, BB&T, Hamilton Pacific and numerous other associates. 4. LTI extends a special thanks to AccuTech for providing lunch. 5. Owner Ronda Markus reflects: “It was a very successful event. We had a fantastic turnout.”
1.
44 Small Business Insight | August 2010
2.
Community | Happy Anniversary
TEAMWORK | The staff of LTI are all smiles at the anniversary event.
3.
4.
5. smallbusinessinsight.com
45
Most Franchisable Businesses Small Business Insight is recognizing local businesses that have what it takes to franchise their business. Some qualities include: • • • • •
Highly profitable business model Fully developed sales strategy Unparalleled organization and business leadership from owner Strategic, targeted marketing campaigns Proactive goal-setting and goal-reaching metrics
The top five businesses will be profiled in the September franchising edition of Small Business Insight, and winners will be announced in the October edition. (Nominated businesses do not need to have plans to franchise. We’re simply looking for noteworthy business models.) E-mail nominations to info@smallbusinessinsight.com. Businesses can be self-nominiated or can be nominated by other businesses. All nominations are due by July 5.
Do you want to reach the Million Dollar Milestone with your business? (SEE PAGE 3)
SBI wants to help small businesses in Hampton Roads increase their sales revenue. Small Business Insight is hosting a workshop is for business owners and professionals that want to achieve a substantial increase in the growth of their business. This is a two-hour strategy seminar that gives you the opportunity to explore what you can do to double your business income. We hope you will attend this fun, fast-paced and informative siminar, and that you will enjoy meeting all the other business owners and professionals that are interested in growing their businesses rapidly. Best of all, this workshop is free!
SAVE THE DATE
When: August 4, 9-11 a.m. Where: One Columbus Center. Town Center, Virginia Beach 4th Floor Conference Room RSVP: You must register for free online at doubleyourincomehr.eventbrite.com. Only 40 slots are available. Contact: For questions, please call 757-560-4640.
48 Small Business Insight | August 2010