Garry Goes to Washington
Q1 2009

To further Ephor Group’s commitment and mission to be a: “Small Business Advocate,”  Garry Meier, as part of a non-partisan advisory group, went to Washington D.C. to offer input on how-to best stimulate and support small businesses in the American Recovery and Investment Act of 2009 (“ARIA”).

The group was formed in response to the design of ARIA which for all of the monies spent, did not effectively address the requirements of small business in this difficult economic environment.

There are more than 25 million small businesses, which account for half of our GDP and recover faster than larger companies.  Small businesses create nearly 70% of the net new jobs in the economy and are in aggregate the most powerful driver of economic growth in the economy today. 

Despite the importance of small businesses to the economy, these companies are heavily burdened by the costs of government regulation and excessive regulatory paperwork. For example, advocacy research shows that small businesses annually spend 45%more per employee than larger firms do to comply with federal regulations. 

As owners and operators of small businesses Ephor Group has been disappointed with the lack of responsiveness shown to this critical part of our nation’s economy,  Still some benefits were obtained in the ARIA:

1. $720 million to help support a number of programs at the U.S. Small Business Administration
   • Primarily reducing fees on 7(a) guaranteed loan guarantees - i.e. if you have a SBA loan or need an SBA loan for $35,000 the fees are less and banks have been given incentives to loan these type of deals and amounts.
   • Additional funds for SBIC programs (detailed below)
2. $400 million in support for economic development and entrepreneurship, particularly in distressed rural, urban, and low-income communities.
3. Tax incentives for small businesses, including a continuation of section 179 expensing up to $250,000 on new capital investments in the year spent (i.e. buy an office or real estate and expense the full amount in year one if you want).
4. Extend the loss carry back for up to five years.
5. Reduce the capital gains tax for small business investors holding stock for five years or more.

What are Small Business Investment Companies (SBICs)? SBICs operate under the SBA (Small Business Administration) with the intent to stimulate the flow of equity capital and long-term debt instruments  to small businesses .

In what companies may SBICs invest?
The SBIC Program defines "small” as a net worth less than $18.0 million and an average after tax net income for the prior two years less than $6.0 million. Further, SBICs are prohibited from investing in finance projects such as real estate and motion pictures.

What is typically the purpose of SBICs capital?
Over 90% of SBIC financing typically goes to operating capital (~50%) and acquisition capital (~40%). Other uses of investment capital include plant modernization, refinancing, new building construction, purchase of new equipment and machinery, land acquisition, marketing activities and research and development. Request a Management Assessment Questionnaire from the SBIC Program Development Office at the e-mail address: sbic@sba.gov.

As credit markets have tightened and debt instruments have tightened up, small businesses have become strapped for capital and must reduce expenses. It’s a perpetual cycle that will be broken only by creating long-term operating improvement. 

Additional sources and links :

• How the Money is Being Spent
• The Original Obama Small Business Rescue Plan
• Links to SBICs by state  (currently about 400 SBICs)

Ephor Group and Garry Meier strongly suggest that you contact your local Congressional Representative to insure that the needs of Small Business are “heard loud and clear”.  In addition please feel free to contact Ephor Group to evaluate if your organization can benefit via the recent legislation.

Operational Improvements & Efficiencies are an Imperative

If your business is waiting for the economy to turn around a change in perspective is needed.  While the economy routinely ebbs and flows the recovery is likely to be riddled with inflation, cost pressures from suppliers and customers, limited capital sources for even the best of businesses,  a reduction of the number of small businesses, and increasing amounts of regulations, tax implications, and other constraints. Today improved operational performance is the one sure method to create a sustainable future.

For businesses that do not fundamentally improve efficiencies, create operating leverage, reduce operating costs and insure operating profitability today their ability to compete now and later will be handicapped. 

In today’s chaotic business world the ability to drive change often determines who profits and unfortunately which organizations will eventually dwindle away and close their doors. Change is a crucial piece of a company for the lack of change will result in being overtaken.  Moreover, once the organization is left behind it will almost undoubtedly result in one of the aforementioned outcomes.

Do Not Act In Haste But ACT!
Corporations typically dedicate large resources to implement best-of-breed technologies and best-in-class processes. Small businesses must respond with innovation, better operating models, flexibility and adaptability; i.e.  a small businesses ongoing success requires constant change.   Unfortunately for the most part, the people instigating the change do not take the time to fully educate “why” the new vision is crucial to be adopted and how it will impact the business. Often businesses spend significant resources and finance to “re-invent” themselves without ensuring all level of employees embrace the needed change.  Given the economic uncertainty and other recent factors small businesses must change and adapt to our new operating paradigm, one with more pressures on small business. 

Operational Imperatives for Every Business

1. Efficiency.  Return on capital, assets, and people must be measured on a daily basis.  Daily accountability ensures profitable performance. 
2. Effectiveness.  Satisfaction by clients and employees is the true measure of success. 
3. Adaptability.  Creating scaleable efficiencies is required for small businesses to compete with larger players.   

Over the past 12 months, we have worked with numerous companies that require new or enhanced operating models given their need for resources.  A year ago, these companies would have received a number of attractive offers from debt and equity sponsors.  Today, their options are limited unless they “generate operating capital thru improved operating performance.”

About Ephor Group’s Operational Performance Improvement Practice:

Greetings, I hope your new year is starting off as busy as mine.  Many institutionally sponsored companies have reached out to me over the recent past as an operating partner to improve their portfolio companies during these difficult economic times. 

Based on the outlook in 2009, I would like to share with you a brief note on our practice area that focuses on improving the operations and balance sheets of underperforming companies. 

Ephor Group’s Operational Performance Improvement Practice mission is to increase organizational effectiveness and efficiency by improving productivity, service level drivers, and key business processes to provide enhanced and consistent operating and financial results. 

Why do institutional investors turn to Ephor Group?  When daily operating performance of the people and the operations is critical to financial success; Ephor Group’s approach identifies root-causes and makes performance improvement a reality. 

Ephor Group’s Operational Performance Improvement Practice, is a talented team of specialists. 

Ephor Group’s methodology, the Perform Business Process™, was developed specifically for middle market businesses. It is a blue print for organizations to guide them to the next stage of their development by improving three business aspects: strategy, tactics and operations.  This three prong approach includes balancing stakeholders, operational and functional improvements, and formulating long-term and sustainable success.  Ephor Group’s clients are notorious for above industry average returns, robust distribution and business development capabilities, and scalable processes and measurement systems. 

I am pleased to say that in 2008 we successfully completed a number of assignments that realized significant cost savings, implemented ISO 9000, Malcolm Baldrige and other quality systems, and created operating environments aligned with investment thesis projections.

Best regards,
Garry Meier

P.S. Download case studies, research findings and more at: http://www.ephorgroup.com/resources.asp. 

Or simply give me a call and let us know how we can help!