There are many issues facing business owners - including HVAC contractors - that often require a different perspective. The NEWS decided to step outside of the normal HVAC business world to seek advice from a person who is no stranger to business or politics: Steve Forbes.

Forbes is the editor-in-chief of the business magazine Forbes as well as president and chief executive officer of its publisher, Forbes Inc. He was a candidate in the United States’ presidential primaries in 1996 and 2000.

Major issues Forbes supports includes free trade, medical savings accounts, and allowing people to opt out 75 percent of Social Security payroll taxes into Personal Retirement Accounts (PRAs). He supports traditional GOP policies such as downsizing government agencies to balance the budget, opposition to extreme environmentalism, opposition to gun control and drug legalization, tough crime laws and support for the death penalty, and school vouchers.

But Forbes has opinions on other topics that involve business owners - and he recently took time to share some thoughts with The NEWS.

STAYING COMPETITIVE AND LIQUID

Two of the major concerns of HVAC contractors are employee hiring-retention and insurance rates, two stumbling blocks to profitability and success. On the employee issue Forbes said, “Retention is more and more of a challenge now that the unemployment rate is so low. Markets are tight and trying to keep skilled people will continue to be a real challenge.”

On the topic of insurance reform, Forbes noted that it is an ongoing problem with the legal system but one that contractors can take an active role in. He said that Hurricane Katrina caused insurance companies to raise rates last year to cover losses but “thankfully the hurricane season hasn’t been that bad this year.”

“The key thing is getting the states to enact more effective tort reforms. Michigan is a good example where you have a Supreme Court that is not controlled by the trial lawyers and can make sane decisions. But it is a hard road, you have to go state-by-state. The Chamber of Commerce is leading the fight on the insurance issues.”

Having money to pay workers and insurance premiums starts with cash flow. Forbes knows that any healthy business needs a cash stream and an investment plan in order to stay solvent.

“Make sure people pay their bills to get flow in before flow goes out,” he said. “Many people don’t have a large margin for error. They should play it safe [when investing] and go for money market funds that are yielding more than they were four or five years ago. Look for soundly run money market funds, too. Don’t swing for the fences because you might strike out a lot.”

Some business owners have a tendency to tie up cash flow and money needed for investing by maintaining large physical parts inventories. Forbes knows that businesses increase inventories in anticipation of future higher prices for products such as steel and copper. But he has a warning:

“There is a real temptation in this mild period of inflation, which is to stock up on inventories to protect from higher future prices,” he said. “Eventually commodity booms end. The best barometer of commodity prices is the price of gold. If that comes down, commodity prices go down and vice versa.”

He added that people should consider the futures market, which is an obligation to buy or sell a commodity at some time in the future, at a price agreed upon today. “But if they aren’t careful, they can get burned,” Forbes said. “If you know six months from now you can hedge using the futures market, you don’t need to have a large physical inventory.”

HVAC contractors who successfully grow their business by adding value and assets are being punished by tax laws that place an additional burden on family members who inherit the business or take it over after an owner retires. These are known as estate or “death” taxes. And Forbes sees no reason for taxation twice.

“The amount of brainpower we waste on estate taxes is remarkable,” he said. “You get taxed on your assets throughout your life, and to be taxed on them after your death is totally wrong.”

He said a unified voice, sending a strong message to Congress, can make a difference.

“Take time to weigh in with your legislators,” Forbes said. “Take a few minutes to talk with your legislator. If enough people weigh in by phone or electronically, things can start to happen. But don’t take a passive approach. The elections this year will make it tougher to get a repeal of the death tax and, sadly, the Democrats don’t want to do anything. A compromise won’t go anywhere so the solution is to get rid of it or let nothing happen.”

Speaking of getting out of the business, Forbes does not see the need for planning an exit strategy upon opening a business. There are other more important items. “You need to make sure you have something to exit with before you enter,” he said. “If you are going in to get out, you should ask yourself why you are getting in in the first place. Your value is your passion for the business, the reason you got into it in the first place. Later on you can figure out timing and if you want to move on to something else.”

ON COMPETITION AND FUTURE TRENDS

With so many of the HVAC contractors falling into the small business category (certainly not the model of Forbes Inc.), how can they expect to compete with larger multilocation companies or businesses that generate millions in revenues? Forbes said the best way to compete is to be unique - and not stay in the middle.

“Small business owners can compete depending on their specialties, their niches, and what kind of relationships they have with customers,” he said. “On a personal level, we will go with a contractor who may not have the lowest bid but we know them and know they do quality work. You want reliability especially when you are on a timetable.

“Being specialized is important. Smaller community banks are doing well because they can provide more personalized service than the big banks. If you aren’t large and if you don’t specialize, you are in the middle - and you really can have some tough times.”

Will HVAC see another wave of consolidation or will independent ownership still be the model to pattern after? Right now both models exist in the business world, according to Forbes.

“There are both trends: consolidation where you can commoditize a product or value-added specialization,” he said.

“But sometimes Wall Street overlooks people in management, e.g., Ray Kroc, founder of McDonald’s. He showed everyone that a [small startup] can have a national presence. It is not a one-size-fits-all world.”

Publication date: 12/11/2006