Sales Tee Off for Success. Inside: Preventing Employee Expense Fraud 2. Volume 7, Number 2

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1 NEWS AND INFORMATION FOR TODAY S BUSINESS OWNER Volume 7, Number 2 Sales Tee Off for Success G olf has its detractors, but one thing is clear: The game is a valuable way for companies to bring in revenue. Many executives believe golf is an essential business tool. Strategic golf isn't the same as recreational golf. Courting business on the course means keeping your business purpose in mind and focusing on your customers. You need to shift effortlessly between business and the sport. Golf can be expensive but it's widely viewed as a profitable investment. According to some estimates, businesses bring in more than $1,500 in business revenue for every dollar spent on strategic golfing. That may explain why the golf course outscores continued on page 4 Preventing Employee Expense Fraud 2 Specifically, beware of these red flags: Y ou can call it psychology or human nature. When some managers or employees are exposed to certain conditions, the odds go up that these individuals will commit fraud against your business. The situation is worse if your company doesn't have a full range of internal controls designed to stop fraud before it happens. In other words, when the motive for fraud meets the opportunity for fraud, watch out! Personal financial stress. Sometimes, managers or employees with access to company assets are under serious personal financial stress (due to bad investments, divorce, family illness, drug and alcohol addiction, credit card debt, and other factors). In many cases, the only way to discover this is by knowing your employees and talking with them regularly. That way, they may feel comfortable telling you about personal challenges they face. This sounds cold-blooded, but the health of your business could depend on your ability continued on page 7 Inside: President s Message 3 Ensuring Business Continuation 4 Tee Off for Success (continued) 7 Preventing Employee Expense Fraud (continued)

2 President s Message The turmoil in the financial sector, as well as in the local economy, over the past several years has been the most severe that I have witnessed in my 40 plus years in banking. The impact is being felt across all industries and all parts of our communities. While the downturn has been particularly sharp in some areas, and while I don t think it is over yet, I do know that South Central Pennsylvania has always had a strong record of recovery. As we work with small and medium-sized businesses to expand by renewing lines of credit or increasing borrowings for new equipment or plant expansion, we have noticed a trend. Businesses that have had financial discipline during the good times to build strong balance sheets and sound financial controls are the ones that have been best prepared for and have weathered this down turn. We are beginning to see consumers borrow more freely, yet conservatively, for home improvements and big ticket items. That s a positive indicator for the local economy and for businesses generally, economic recovery begins with consumers and translates to business recovery. The current environment is a challenge for everyone businesses and individuals but in the middle of these challenges lie opportunities. If you are looking to take advantage of an opportunity and need an experienced banking partner to help, give us a call or stop by one of our offices. Sincerely, William E. Snell, Jr. President & Chief Executive Officer A quarterly publication for the valued customers and friends of F&M Trust F&M Trust Commercial Services and Small Business Banking Philip A. Pantano, Vice President Michael S. Metz, Vice President David P. Zimmerman, Vice President Dianne L. Cornman, CTP, Vice President, Cash Management Specialist Ronald R. Froeschle, QPA, QKA, Vice President, Employee Benefits Officer Mary S. Cordell, Assistant Vice President Matthew D. Harshbarger, Assistant Vice President Donald L. Trego, Assistant Vice President, Small Business Relationship Manager Lynn A. Waite, Assistant Vice President, Small Business Relationship Manager Member FDIC 2 News from F&M Trust Volume 7, Number 2

3 Ensuring Business Continuation Consider this scenario: Two business partners have been friends since high school. After going to college, and spending a few years in the work force, the two friends come back together and start a manufacturing business as equal partners. After a tough first couple of years, they finally get a couple of big breaks, and things were going swimmingly. They have 15 employees and three profitable locations. Then, tragedy strikes: A car accident takes one partner's life. A 19-year-old daughter is the partner's only surviving family member. It's a story that happens all too often. Both partners have most of their net worth invested in the business. However, when one of the partners dies, the other doesn't get to own the whole business. The deceased partner's 50 percent interest in the company goes to the partner's daughter -- who just isn't up to running a 15-employee business. She doesn't have contacts, experience or business skills yet. And she is more interested in completing a nursing degree than in running a business. But although the daughter couldn't contribute to the business, she was still legally entitled to half of every dividend the company issues. To meet its responsibilities, the business has to hire a full-time manager to replace what the deceased partner had been doing -- at a cost of more than $100,000 per year. That cut deeply into the profits generated by the business. To make matters worse, valuation analysts informed the partner that the market value of the business declined by nearly $1 million. Eventually, the surviving partner and the daughter had to sell out to a competitor -- at a steep discount. There was no money for the business to pay its bills, send half its profits to the daughter and still pay the surviving partner enough to make it all worthwhile. Succession Planning Succession planning is the art of thinking through contingencies to ensure that a business that may be providing for many families will be able to remain viable, even when a partner or key individual retires, becomes disabled, or dies. (Continued on page 5) News from F&M Trust Volume 7, Number 2 3

4 Tee Off for Success... Continued from page 1 the hockey arena as a venue for business. (It comes in second place just below restaurants.) But, like any other business investment, you want to maximize the return in terms of the amount of money and time spent. To help with that goal, here are 6 rules to help keep the game above par when playing with business associates: 1. Assess your corporate goals. Prepare for the day as you would for any business or board meeting. Think about what you want to accomplish, whether it's to network, lay the foundation for new business, or strengthen a customer relationship. 2. Know the game. New golfers should have played at least five rounds of golf and have a few lessons before attempting to play business golf. If you score higher than average, let the rest of the group know in advance to save yourself some embarrassment. 3. Stay professional and polite. As a representative of your company, show professionalism in the way you play and adhere to dress codes. If in doubt, call the club to get the policy. Never wear jeans or tee shirts. Obviously, don t criticize how others are playing, don t give advice unless asked, and don t brag about your performance. In addition, don't lose your temper, swear, or show rudeness. People who cheat at golf are often seen as likely to cheat in business. And forget the cell phone. Many courses ban them and even if they don't, turn yours off. A sure way to lose a sale is to have your cell phone ring or play a song just as your prospective customer is taking aim at a put that s going to win the round. Checking your messages on your phone? That's considered rude on the course. 4. Find the right mix. Put together a foursome with similar golfing abilities and temperaments. Ask if they prefer mornings or late-afternoon tee times. Introduce everyone so they feel at ease and consider providing a short advance bio of the players. "Eighteen holes of match or medal play will teach you more about your foe than will 18 years of dealing with him across a desk." -- Sportswriter Grantland Rice 5. Let the client bring up business. Tolerance levels for business chat on the course varies widely, so follow the lead of fellow players. Don't put business ahead of relationship building. Formal business discussions will follow on another day. If the conversation turns to business, keep it light and brief. 6. Don't forget the 19th hole. After the round is over, make sure to allow time for some food, drinks and socializing. This is the time to talk business. Mix the discussions with talk about how the game went. Focus on the highlights, not the bad shots. If the game went badly, this is also a good time to smooth things over. Remember to follow through after the round. Make a phone call or arrange a visit and, with any luck, secure a signed contract. Otherwise, you haven't finished the game or maximized your investment. If you really hate golf, don't bother with it. Pretending you're having a great time when you're not probably won't work. The time and mental investment involved in golf is too great and the return will likely be too small. There are other ways to entertain prospects that everyone will enjoy. 4 News from F&M Trust Volume 7, Number 2

5 Ensuring Business Continuation (continued) Sooner or later, all businesses will encounter this situation. Many of them cease to exist at that point. Some stagger on for a few years before collapsing. Only a select few small businesses are truly designed to continue providing for all survivors after the death or disability of an owner. The fact is that if you have a business with multiple partners, and one of them dies, you might find yourself in a similar situation -- with a well-meaning but absent daughter (or other surviving relative). More often than not, you could be in business not with your deceased partners' family members, but with their lawyers. They probably don't have a commitment to the business only to their client, and that client isn't you. By entering a formal buy-sell agreement, each owner is assured that if something happens to him or her, the interests of the family and heirs will be protected. The remaining owners agree to buy out the deceased's heirs' interest with cash. Each owner, likewise, is protecting himself against the possibility of being severely economically damaged as the surviving partner was in the example above. Indeed, the lack of a buy-sell agreement hurt both the partner and the daughter. Eventually, all business owners will leave their businesses through retirement, death, disability, or selling their interests to other owners. Smart businesses plan ahead for every eventuality. That's where the buy-sell agreement comes in. Buy-Sell Agreements The buy-sell is one of the foundational documents you and your business partners should be drawing up when you open your business. This document sets forth the circumstances under which partners can sell their interest to remaining partners and defines a fair and mutually agreeable method for valuing the company in advance. For example, all the shareholders can agree in advance that the company is worth five times the most recent 12 month's profits. Or they can define the value of a company in terms of the balance sheet -- a simple subtraction of liabilities from assets (a calculation known as 'book value). Finding the Cash Drafting the buy-sell document is only half the battle. The best buy-sell agreement in the world is useless if the business or the surviving owners can't get their hands on the cash to make it happen. To solve this problem, many businesses turn to life insurance. In fact, life insurance is the ideal vehicle in this instance: A small premium nets a substantial amount of cash, tax-free, at the precise time when the company needs it most. When there is a life insurance policy in place of sufficient face value on every owner, each individual can be assured that their heirs will be taken care of in case the worst happens. And survivors know that they won't have to raid the limited cash reserves, or sell valuable assets at a discount, to honor their buy-sell agreement with a deceased shareholders' family. (Continued on page 6) News from F&M Trust Volume 7, Number 2 5

6 Ensuring Business Continuation... continued from page 6 Surviving shareholders know they can continue to operate their businesses without interference from outsiders. Heirs know the cash is available to fully compensate them for giving up their interest in the business -- and all can get along with their lives. Structure If you do choose to use life insurance as the funding vehicle for a buy-sell, there are two main ways to do it: You can have each shareholder own a policy on every other shareholder -- a technique called the "crosspurchase" agreement. That can get complicated, though, when the number of shareholders increases. Alternatively, you can have the business itself own a policy on each owner. The method you choose will depend on the number of partners and on the tax and estate planning characteristics of each individual involved. An experienced life insurance professional can help you navigate these issues. The Disability Contingency It's not enough just to plan for the contingency of the death of a business partner. You also have to consider the possibility of disability, as well. Disability normally won't qualify for a life insurance payout (unless death is expected within a year). But the business would still be damaged from the loss of the contributions of the disabled partner. Permanent Insurance Term insurance will work for a while -- and may be the ideal solution in the early years of a business while cash flow is tight. Eventually, though, the term policies on each owner will become more and more expensive and eventually no longer economical. To solve this problem, some businesses use permanent policies -- whole life or universal life policies, which pay a death benefit no matter how old the insured is when he dies. Premiums are higher, but the premiums are designed to be affordable throughout the insured's life. With whole life policies, premiums are guaranteed level. These can be useful because these policies build cash value, which you can borrow against tax-free -- for any purpose whatsoever. After a few years, these policies can become a valuable source of operating capital for the business. Some businesses own policies on their own executives and key individuals for this purpose. If the owners retire from the business, rather than die, the cash value accumulated over years of service can be easily converted to an annuity to provide a pension for the executive, or a lump -sum payment. To protect themselves, some businesses purchase a disability buyout policy. This insurance policy allows the company to buy out the interests of a disabled partner. Again, an experienced insurance professional or financial advisor can help you design a plan that suits your business's unique circumstances. For more information on Ensuring Business Continuation, contact F&M Trust s Ron Froeschle at (717) Ron is our Employee Benefit Specialist, assisting employers with the recordkeeping, nondiscrimination testing, and administrative aspects of 401(k), pension and related defined contribution plans. A QPA (Qualified Pension Administrator) and QKA (Qualified 401k Administrator), Ron has over 30 years of experience in pension plans, profit sharing plans, 401(k) plans, and business succession planning. 6 News from F&M Trust Volume 7, Number 2

7 Preventing Fraud... Continued from page 1 to draw out even trusted employees before circumstances tempt them to act in ways that may be uncharacteristic for them. Lots of cash and valuable items around. Your company may generate large amounts of cash or hold inventory items that are small in size but large in value. This situation can encourage bad employee behavior. In other words, motive meets opportunity. The key is to eliminate the opportunity with better internal controls. A "Typical" White-Collar Criminal White-collar criminals are often difficult to identify by their appearance. Here are some characteristics you might not expect: 1. Respected and in sensitive positions; 2. Motivated, intelligent and well educated; 3. Without any "priors", and 4. Subject to personal and financial stresses that you don't know about. The moral: You've heard the old saying, "Don't judge a book by its cover." Similarly, don't judge employees' honesty by their appearance and demeanor. Instead, make it very difficult or impossible for potential white-collar criminals to strike at your business. Install adequate financial controls and asset safeguards and recognize changes in your business that necessitate updating those protections. Employees worried about layoffs or outsourcing. In this situation, some employees may feel justified to commit fraud against your company because they perceive that their livelihoods are being threatened. In other words, "one bad turn deserves another." Impending M&A activity. Similar to a fear of layoffs or outsourcing, this situation occurs when employees find out about an upcoming merger or acquisition and believe they will lose their jobs. They may even fear layoffs when none are actually in store. Obviously, the key here is good communication with staff members, so they don't worry about things that are not going to happen. Poor internal controls and accounting. Once again, motive can meet opportunity when an employee in a position to commit fraud has a weak moment. By putting in place better financial controls, better asset management, and better accounting procedures, you can shut down the opportunities. Bottom line: If your business has any of these risk factors, consider bringing in a professional to evaluate your system and install procedures to minimize fraud risk. You may even want a special fraud study conducted to confirm that nothing has already happened. Keep in mind that your company's trusted high-level employees are the ones who are in the best position to do the most financial harm and conceal it for a longest time. Without some effort, you may have no way of knowing that your company is being ripped off until after very serious fraud has already been committed. News from F&M Trust Volume 7, Number 2 7

8 P.O. Box 6010 Chambersburg, PA PRESORTED FIRST-CLASS MAIL U.S. POSTAGE PAID CHAMBERSBURG, PA PERMIT NO. 189 FINANCIAL SOLUTIONS...FROM PEOPLE YOU KNOW 26 convenient locations in: Franklin, Cumberland, Fulton and Huntington Counties ADDRESS SERVICE REQUESTED (toll free) Commercial and Business Services Mike Metz Phil Pantano Mary Cordell Lynn Waite Dianne Cornman Dave Zimmerman Matt Harshbarger Don Trego Trish Hanks Bob Weed Renee Preso Business Focus is published by F&M Trust Tee Off for Success. Did you know that according to some estimates, businesses bring in more than $1500 in business revenue for every dollar spent on strategic golfing? Find out the difference between strategic golf and recreational golf, and how to shift effortlessly between business and the sport. Preventing Employee Expense and Other Fraud. Padding expense accounts with fictitious and inflated amounts is not uncommon in business. And it can lead to more lucrative fraud. Learn how to help prevent expense account fraud and minimize the risk factors for other types of theft in the workplace. Ensuring Business Continuation. What would happen to your family business if you or a key individual were gone? Would it remain viable? Learn about the tools that can help ensure your business continues. Want to receive this newsletter via ? Call us or sign-up online at:

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