3 Business Lessons I Learned in 2014

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2014For more than 22 years now, I end each year reflecting on what I learned from the past 12 months and how I can improve my business in the new calendar year.  In 2014, I cannot say that I learned anything new, but I was reminded of these important lessons-

#1-  YOUR PEOPLE ARE IMPORTANT

For my business, 2014 was full of issues caused by bad employees.  It took me nearly six months to flush the bad, reverse the damage and rebuild my team.  I was surprised by the degree of disloyalty and dishonesty displayed by a couple of my employees, and they had to go.  The transition from bad employees to a great staff was not easy, but we are better situated today to accomplish great things for our clients and our firm, having replaced bad staff with great staff.

These experiences tested my tendency to trust those closest to me and to treat my employees like extended family members.  While I decided that I am not going to stop treating my employees well. . .  truly like extended family- I am going to adjust some of my expectations and have contingencies in place to better address employee problems.  Here are some things that our firm is doing to make sure that we maintain a strong, dedicated team that is focused on our Mission to help clients solve problems, maximize opportunities and reduce business and legal risks-

  1. Mission Statement-   At least once yearly, each member of our team signs a pledge to live by our firm’s Mission Statement.  We talk about our Mission and Core Ideology.  We incorporate these important commitments into monthly training.  Our Mission Statement is an active component of our business operation, not just a stale document in an old business plan or a page on our website.
  2. Employee Manual-  At least once yearly, each member of our team signs a pledge to live by our firm’s Employee Manual.  The Manual sets expectations and gives clarity to how the employer-employee relationship will be managed.
  3. Team Driven-  My current staff is the best staff I have ever had.  They are dedicated, client-focused, smart, personable and focused.  I solicit their opinions and include them on certain decision-making processes, because we act as a team.  And, we are a better operation through this approach.  Although the “boss” has to make the final decision, the inclusion of employees in the decision-making process makes for better, more informed decisions.
  4. Nip It in the Bud-  We have a system in place to address employee challenges quicker.  Each time an employee performs in a manner inconsistent with our Mission, we have a meeting with the employee to address the issues.  Then, and this is the key to our new approach, we have the employee propose definitive ways the employee can correct the problems.  The employee completes a form we have created and signs the form as a pledge to correcting the problem.  This approach makes the employee the solution, not just the problem.

#2- SYSTEMS ARE ESSENTIAL

In 2014, we realized that we had become too dependent on the individual skills (or perceived skills) of employees.  A couple of our employees simply were not as talented as we had hoped.  Consequently, we had a gap between what our business required and what our employees could actually do to meet those requirements.  While we did upgrade our staff in big ways, the ultimate solution was to reinvent and reinforce the forms, systems and other operational processes that allow us to overcome the challenges caused when an employee is terminated or under-performs.

Also, those processes make it easier for staff to grow and develop new talents, because those processes make the daily, routine tasks easier.  More energy and time can now be devoted to personal and professional growth, which makes our business better, which ultimately helps our clients.  In the end, it’s all about helping more clients in better ways.

It takes time and effort to create these processes, but it takes even more time to solve problems in the absence of processes.  If you have not already, read books by Michael Gerber and Alan Weiss, Ph.D. and a book titled The Checklist Manifesto.  Then, build your processes.

#3-  MY WIFE IS AWESOME

Owning your own business or managing a business can be tough.  It can be stressful, fatiguing and frustrating.  Luckily for me, I am married to a very loving, strong and supportive woman.  It helps that she is a lawyer who once owned her own law firm.

The point here is that it helps to have a support system.  Everyone needs someone to listen and occasionally “push back” with helpful critiques, suggestions and advice.  I like to think that I can do it all alone.  The reality is that we all need help from time to time.  My suggestion is to have someone to talk to on a regular basis.  You can find a mentor, get a business partner, join a peer group, or meet regularly with an old college friend.  Whatever you do to improve your business in 2015, make sure you find someone to talk with on a regular basis.

Happy New Years!

Security Deposits & Carpet Cleaning Fees

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http://www.dreamstime.com/-image601928
Here’s a recent question from a property manager-

QUESTION-    We followed the 45-Day Letter Rules and deducted a $200 carpet cleaning and repainting fee that the lease clearly describes.  Yet, the tenant claims we owe her the entire security deposit back and that Indiana law does not allow us to keep from the security deposit anything other than damages, unpaid utilities and unpaid rent.  Is this tenant right?

MATT’S ANSWER-    No, the tenant is wrong for several reasons.  Your lease specifically states that you can withhold that $200 fee from the security deposit.  Secondly, the $200 fee is a form of damages called “liquidated damages.”  In essence, you and the tenant agreed to “liquidate” certain repairs costs – carpet and paint – at the set amount of $200.  Clearly, damages amounts can be withheld from the security deposit.

Additionally, the Indiana Court of Appeals and Supreme Court have held in prior landlord-tenant cases that a tenant is not owed a 45-Day Letter Notice for unpaid rent, because the tenant already knows that the tenant owes rent.  The purpose of the 45 Day Letter Rule is to give the tenant notice of what amounts and why the tenant is not getting all her security deposit back.  There is no point in sending a tenant notice to apprise her of her obligation to pay rent, as the tenant already knew about that obligation – it’s in the lease she signed.  So, the Courts have ruled against tenants in security deposit lawsuits where the deposit refund has been reduced by the amount of unpaid rent.  Here, the $200 fee is no different than the unpaid rent – in both matters, the tenant knew in advance that the tenant owed that amount to the landlord.  Accordingly, no notice in the form of a 45 Day Letter would be required.

Read more about Indiana’s Security Deposit Laws.

 

Can I Collect Rent and Charge a Late Fee?

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rent sign

Here’s a recent question from one of the members of INreia– the Indiana Real Estate Investor Association, which meets monthly- SECOND TUESDAY- in downtown Indianapolis.

 

Hi Matt,

QUESTION-    I am a friend of Amy Siewe’s and I have attended a couple of the INREIA meetings as well.  I was wondering if you could answer a quick question for me regarding collecting late rents from tenants.  I have a tenant who is late on rent and owes a $75 late fee.  If I accept the rent without the late fee, will I legally be unable to pursue the $75 late fee in Indiana?

ANSWER-    No, you can collect the rent and add the late fee to the unpaid balance owed.  Just communicate that intent to the tenant, and don’t accept any “paid in full” check.  Eventually, take the late fee out of the security deposit.

USING LLC’S TO OWN INVESTMENT REAL ESTATE

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QUESTION FROM ONE OF MATT’S READERS-

What is the best way to structure our real estate business in which we own multiple properties to maximize our protection but minimize the operational headache?

I know I have asked you this before, but this subject has become more pertinent. One of my partners thinks the best way is to do it like this: say we have $500K worth of properties. You should have 5 “children” LLC’s that each own the actual properties ($100K in each). Then you have a “mother” LLC that owns the 5 children LLC’s. The mother LLC is the only one directly owned by my partners and me.

I’ve heard of a “series” LLC option which accomplishes the same level of security with layers as with the “mother and children” approach but is much easier from an operational/accounting point of view because you don’t have to operate 6 different LLC’s-just one.

MATT’S ANSWER-

Generally, I recommend that you hold investment real estate in an LLC- a limited liability company. That is unless you buy and sell properties frequently and might be classified as a “dealer” of real estate, in which case I would analyze whether you should operate as an S-corporation. So, let me assume that you are buying and holding these properties as long-term investments.

A series-LLC is not neccesary and may do some damage. A series LLC connects multiple LLC’s and subjects the business to “Affiliate Liability” risks. Affiliate Liability is liability that crosses over from one entity to another, because the two entities are so closely affiliated that the courts view them as one, inseperable entity. You want to avoid affiliate liability. So, there is no good reason to form a series-LLC for rael estate investing, generally, but there are many reasons NOT to form one.

You probably want to consider multiple LLC’s onwing “bundles” of properties with a centralized management structure. I often form a seperate property management company in a structure that looks like this:

What You Must Know About Use Tax

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Have you ever heard of use tax? Did you know such a thing existed? If not, you may not be familiar with what it is and how it works. Actually, the majority of practice owners we talk with are not. Here’s what you need to know about use tax and what you should do to protect yourself from an expensive audit.

Let’s call use tax the brother of sales tax. Sales tax, as you are likely aware, is assessed on items you purchase for your practice — most of the time. Vendors who sell you product like supplies, furniture, and IT equipment may or may not be required to collect sales tax from you. If you are buying all of these items from an in-state provider, you are most likely in good shape. However, out-of-state vendors may not have a responsibility to collect sales tax from you. For instance, a vendor from whom you purchased a product over the internet or through a catalog may not collect sales tax on the sale. Contrary to some belief, this is not a built-in discount — this is where its brother, use tax, kicks in.

Most states have a use tax that is self-paid by the purchaser of products when sales tax is not collected. So when your dental practice purchases a new chair online and sales tax isn’t assessed, you are then responsible for reporting and paying use tax on this purchase. In addition, if you paid sales tax on the purchase but at a lower rate than your state’s sales tax rate, you may be liable for the difference. Say you purchased an order of cotton balls online and the supplier collects 5% sales tax on the order. If your state has a 7% sales tax rate, you should then report the 2% difference to them and pay it.

The most important thing to be aware of here is that someone is responsible for paying some tax on these purchases (unless they are specifically exempt, which varies by state and usually includes prescription drugs, etc., but more on this later). If a vendor forgets or didn’t know they were supposed to charge you sales tax, it’s your responsibility to pay it as use tax.

Why haven’t you heard of this before? Many dentists and small business owners just aren’t aware of the use tax. Historically, there haven’t been a lot of audits of small firms for owners to be concerned about it. But this is changing. With states seeing massive budget shortfalls, they are looking anywhere they can to find missed revenue. In many cases, they are able to go back 7 or more years to audit your purchases and identify purchases made where sales tax was not assessed. When an audit occurs, not only is there risk of a tax assessment but also penalties and interest.

As mentioned above, there are some items that are exempt from sales and use tax. These vary by state so I’m going to share with you a link to Iowa’s exempt items list which is specific for dentists. Indiana’s is much more vague in identifying specific exempt items; however, the rules for some states often have similarities and overlap in their definition.

So what should you do for your practice? Be aware of the purchases you make and if you are paying sales tax at the time of purchase. If you are buying products online primarily to save sales tax, know that this isn’t a legitimate savings strategy. If you feel you have made purchases where sales tax has not been paid, consult with your dental CPA or tax adviser to develop a plan to address the exposure. And by filing now, you will shorten the period of time with which an auditor can go back. Usually timely filing of returns starts a statute of limitations on how far back an audit can go – even if it’s a zero tax return.

 

– This article was submitted by our friends at Veros Dental | 5955 South Emerson Avenue, Suite 500 | Indianapolis, IN 46237 | 317-452-4580

Attorney’s Fees & the American Rule

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Generally, each party to a dispute must bear his, her or its own litigation expenses.  In other words, each party pays his or her own attorneys’ and expert witness fees, and the other costs of a lawsuit.  The winner does not get to recover those fees from the loser.  This system is known as the “American Rule.”  There are two exceptions to the American Rule.  A party can recover litigation expenses to the extent:
1.    Permitted by a contract signed by a party against whom litigation expenses might be awarded.
2.    Permitted by a statute.
To learn more, please visit our Law Library on my GRIFFITH LAW GROUP website-  http://www.indybizlaw.com/attorneys-fees-the-american-rule

DON’T AMEND YOUR LEASE FOR GHOSTS

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One of my old law partners and I wrote a great residential lease about 15 years ago. Over the years, I have made dozens and dozens of changes to that lease. For example, when a client calls me and reports a problem with a tenant that I had not previously experienced, I will consider the challenge faced by the landlord and will often address that situation by adding new language to my lease form. The lease grows each year by another sentence or two. Every year, I am surprised by the actions of irresponsible and reckless tenants who endanger themselves, their family, friends and property, not to mention the landlord’s property, by doing really dumb things. As long as tenants find new ways to pose risks to landlords, I will be adding new provisions to my lease form.

 

One of my favorite dumb-tenant activities involved the tenant placing a trampoline between the rental house and his unlawful above-ground pool. His children (young children) would climb a ladder onto the roof of the home, so that could jump off the roof, onto the trampoline and into the pool. Can you spell – L – I – A – B – I – L – I – T – Y?

 

It is impossible to predict or even react to every dumb thing that a tenant might do. So, it is impossible to guard against every liability risk in a good lease agreement. However, you should try to cover as many risks as are reasonable in a lease.

 

Last week, I received a call from a client about a risk that I do not think warrants a new provision in my lease form. Ghosts. Seriously, ghosts. The tenant called the landlord to complain about ghosts. I’m not talking about leaking noisy pipes or creaky floors. The tenant claims the rental home is haunted, and the tenant wants concessions from the landlord. And we don’t think the tenant is joking. It appears that the tenant is quite serious about the ghosts and the concessions.

 

While not every tenant demand, threat or crazy activity will warrant changes to your lease form, you should develop the practice of talking about such challenges with your lawyer and decide whether the threat warrants changes to your lease form or even to the rules promulgated under your lease form.

Would You Invest in this Company?

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REPRINTED HERE WITH PERMISSION FROM DAN LACY

Many of my clients are searching for financing and/or investors to fund growth. There are several criteria that we use to judge whether or not a company can get funding and from what source the funding will be sought. Here is a company that is in need of additional funding. Based on the information below, would you invest in this company?

Here are the financial facts for the year 2010:

Revenue of $2.2 million
Expenses of $3.5 million
Operating loss of $1.3 million
Balance sheet debt as of 12/31/2010 of $14 million

Additional facts: From a profit and loss perspective, revenue has not kept up with expenses. The company has been spending more money than it takes in each year for the last several years. To fund the operating losses the company in 2008 borrowed $459k, in 2009 they borrowed $1.4 million, in 2010 they borrowed $1.3M and for projected out into 2011, they will need to borrow an additional $1.6M. Total borrowings are now about 6X annual revenue. Management: a new CEO was elected by the board 24 months ago and he is taking a “hands off” approach to this funding problem and leaving it the management team who are split, ½ of them want to cut expenses and the other ½ want to continue the historic expense trend because the company will loose creditability in the market if they cut expenses; so they want to increase expenditures.

Currently the company has the $14 million borrowed from the following sources:

$6 million – Current customers
$2.6 million – The company’s employees retirement fund
$1.6 million – various vendors
$1.1 million – largest competitor
$ 900 thousand – second largest competitor who just had a plant wiped out
$ 857 thousand – local police and fire department
$ 485 thousand – foreign sister company
$ 300 thousand – domestic security force
$ 228 thousand – vendors who supply fuel for company
$ 185 thousand – vendor who supplies raw product

You probably have already figured it out that no shareholders, board of directors, CEO or management team could be this irresponsible in today’s economic climate. Nearly everybody knows that an organization cannot continue to borrow money to fund on-going losses without going out of business. This story is not about a small business, it is the current financial state of the U.S. Government, all you need to do is change millions to trillions and change thousands to billions.

The key: current customers = U.S. individuals and institutions, employee retirement fund = social security administration, various vendors = foreign nations, largest competitor = China, 2nd largest competitor = Japan, local police & fire departments = U.S. Civil Servants, domestic security force = U.S. Military Retirement Fund, etc.

The U.S. Government has outstanding debt of $14 trillion dollars. Here is picture of what $14 trillion dollars looks like. $1 million is 100 packets of $10,000 (a packet is 100 – $100 bills). $100 million is one 4X4X4 pallet of stacked $100 bills. A billion dollars $1,000,000,000 (9 zeros) is equal to 10 pallets a $100 million each. A Trillion dollars is $1,000,000,000,000 (12 zeros) or equal to 10,000 pallets of $100 million each. The U.S. Government has outstanding debt of 140,000 pallets of $100 million on each one.

SUMMARY AND CALL TO ACTION

Our government is being ran by a CEO/President with no management experience, of his hand picked management team of 12 (the Cabinet) only 3 have had outside corporate business management experience. Our Congress is made up of 435 elected representatives of which 162 have some type of business experience coupled with a Senate of 100 which 26 list any type of business experience.

We are the primary lenders and suppliers of funds to the U.S. Government, 1) take up pen and paper and write a letter (or email) to your elected representatives and tell them that the spending spree of the U.S. Government is irresponsible and must change, 2) forward this email to as many people you know and ask them to read it and take action. The tax payers who are financially responsible in American have been too silent for too many years. Our government leaders need accountability – make it your goal to communicate with your elected (state and federal) representatives monthly – that is the best thing we can do to get this country back on track. It is up to the silent majority – we have to become the LOUD MAJORITY.

To Your business Success:

Dan Lacy
dan@dynastybuilder.com
phone: 765-644-8887