By ERIK DERR Contributing Reporter The first commercial office condominium park in Palmdale is planned as the Venture Commerce Center, a 69,000-square-foot development in the heart of the city’s business sector the Trade & Commerce Center area is under construction. When completed in early 2007, the project will offer 35 stand-alone office units, divided between five separate building structures. Each unit will come with private front and back entrances and a private parking area, as well as private kitchen and rest room areas and optional warehouse-style doors. Units will range in size between 1,102 and 32,000 square feet. Additional mixed-use and flex office options will be available. Prices for the Palmdale offices are expected to start at $319,000. “People want to control their own destinies,” explained Robert Eves, founder and president of Marin County-based Venture Corporation, developer of the Commerce Center. “A lot of business owners want to own their own property and say bye-bye to their landlords.” The Palmdale property, located on Commerce Avenue between Trade Center Drive and 5th Street West, officially marked the start of construction Oct. 18 with a catered “wall-raising” party where those in attendance had the chance to see giant cranes hoist the first of the complex’s giant concrete-slab walls. Eves sees a universe of new prospects in market statistics from the Small Business Administration, which indicate small businesses with 20 employees or less account for a whopping 79.3 percent of all American companies. “When you compare the costs of ownership to the costs of renting property .at today’s interest rates, it’s cheaper to own,” said Eves. That logic, he continued, is fueling the growing national demand for smaller commercial spaces like those offered by Venture. Venture Corporation was established in 1976 and is perhaps best known for developing Morgan Hill Ranch, the largest business park in Northern California’s Silicon Valley. Eves and Venture have since established scores of Venture Commercial Centers throughout Northern and Southern California, Nevada and Washington state. The company currently has about 30 such parks in development, with an estimated value of over $300 million. Dennis Marciniak, vice-president of GVA DAUM, which brokered Venture’s $1.7 million purchase of the 5.4-acre Palmdale site and will also handle the sale of individual units there, is equally enthusiastic In Lancaster, where Venture Corporation is starting development of another commercial center site, GVA DAUM brokered a $17 million deal for a 61,000-square-foot mixed-use commercial complex developed by McGarrey Development Company. Opened in June, the business park has already sold half of its 21 industrial condos. Eves has tried to sweeten the purchase of the Palmdale condos more by offering 100 percent financing, including a deferred down-payment paid off in thirds after the first, second and third years of ownership. “It just makes intrinsic sense you benefit, not your landlord,” said Eves. “The day will come when we will overhaul the office property market,”

Even after the sale of a majority interest in ValleyCrest Companies, Chairman Burton Sperber insists the company remains a family business. Except now there are two families involved with operating the large privately-held landscape development and maintenance firm Sperber’s and that of the new stakeholder, Michael S. Dell, founder of Dell Computers. The 77-year-old Sperber also foresees no changes in how the company will be run as a result of the sale, vowing “business as usual” at its headquarters in Calabasas, a gleaming 80,000 square foot building overlooking the West San Fernando Valley. “It’s a big company to finance,” Sperber said of the deal with MSD Capital, L.P., Dell’s investment group which was announced on Oct. 5. “We thought we needed some help going forward. This was a good time in company history to go to this next level.” ValleyCrest encompasses six divisions with 8,500 employees in 21 states and generatesg more than $800 million in annual revenues. The company has been named as the No. 1 family-owned business and the largest local construction firm by the San Fernando Valley Business Journal and among the Top 100 companies ranked by Lawn & Landscape magazine. MSD Capital was launched in late 1998 with $1 billion. Investments include a 9.2 percent stake in Glendale-based IHOP Corp., and the Four Seasons Resort Maui at Wailea. The deal between the Sperbers and MSD Capital took six months to complete. Global financial firm UBS acted as the intermediary as ValleyCrest was already working with the firm on refinancing issues. Sperber, son Richard and brother Stuart were all on board with the sale of a majority stake to New York City-based MSD. Richard remains as president and chief operating officer of ValleyCrest, and Stuart Sperber stays on as chief executive officer of ValleyCrest Tree Company. Family succession problems did not play into the decision to bring in an outside partner, as Richard Sperber has been president of the company for six years, his father said. The three Sperbers retain a “significant” equity ownership in the company although Burton Sperber would not disclose the percentage. MSD Capital typically invests between $50 million and $200 million per transaction, according to the firm’s website. Although ValleyCrest’s sale to Michael Dell was a surprise to some, industry observers were not surprised the company was in play. It’s very rare to have a family business grow in substantial size without change in capitalization and some change in ownership, said Ernie Doud, a name partner in Doud Hausner & Associates, a Glendale consulting firm for family businesses. When a family business is professionally run and the family is formally governed then strategic changes in direction can be arrived at thoughtfully and carefully with all family members giving their support, Doud said. “When that’s the case you can do just about anything you want to do and make it successful,” Doud said. ‘Deep pockets’ Going with a “deep pockets” partner like Dell suggests ValleyCrest opening the door to growth strategies they could not have done on their own. “If you are competing with them, watch out because suddenly you have a much stronger competitor than you had before,” Doud said. ValleyCrest was attracted to MSD Capital because of its real estate investments in luxury hotels, commercial and multi-family properties and land development. “We service real estate,” Sperber said. “That’s our business in maintenance and building new gardens.” ValleyCrest in turn brings to MSD entry into the estimated $80 billion to $90 billion dollar landscaping and nursery industry, the fastest growing segment of U.S. agriculture. That’s roughly 8 to 10 times what Hollywood studios bring in at the box office, said Jonathan Bardzik, of the American Nursery & Landscape Association. “At the retail level mass merchants have put product in a lot more places and given consumers a lot more opportunities to purchase that product,” Bardzik said. “Landscaping follows at two to three years behind housing booms and we’ve been going through a big one. That’s driving things a lot as well.” According to its website, MSD puts its money into “outstanding businesses with world-class management teams” a description that ValleyCrest falls under with its compounded growth at 13 percent per year for its 57 year history. Similar histories The companies are a good fit also in that their respective founders share similar traits despite a 36-year age difference. Both Sperber and Dell were in their late teens when they began their business careers Sperber in North Hollywood doing landscaping with a pickup truck and two used lawnmowers; Dell selling computers from his college dorm room in Texas. And both made their ventures successful, with Dell eventually accumulating a personal net worth of $17.1 billion, and Sperber selling his company’s services to Las Vegas casinos, major league baseball stadiums, and high-end golf courses, resorts and shopping areas. Despite a long history with the company, relinquishing control was not a bittersweet moment for Sperber. Instead, he looks to the future and continued growth for the company, especially in the area of designing and building landscaped spaces. In the spring, ValleyCrest bought two landscape architectural firms for their design business. In early October, the company launched Estate Gardens by ValleyCrest, a full-service residential landscape design, construction and maintenance practice. The company has strong roots in landscape design as it was the main service offered before shifting to installing and maintaining landscapes. Designing, building and maintaining landscaped areas will continue to be vital to ValleyCrest’s future, Sperber said.

The Universal City/North Hollywood Chamber of Commerce holds its monthly breakfast. 7:30 a.m. Sportsmen’s Lodge 12825 Ventura Blvd., Studio City (818) 508-5155 noho.org

Executives from a Chatsworth flooring company have been charged with workers’ compensation fraud for bilking an insurance fund out of more than $7 million. The district attorney’s office Monday issued a felony complaint charging Gad Leshem, president and CEO of Cover-All Inc., with four counts of premium fraud and one count of conspiracy. A felony complaint was also filed against Zeev Golan and Irit Golan charging with four counts of premium fraud and one count of conspiracy. Zeev Golan is the company’s vice president and wife Irit Golan is executive secretary and payroll supervisor. The charges stem from an audit by State Compensation Insurance Fund, which provided Cover-All with a workers’ compensation policy since September 2001. The audits revealed that payroll reported to SCIF was significantly lower than the amount reported to the Employment Development Department, according to the district attorney’s office. A complaint about the discrepancy was referred to the CDI Fraud Division and a later investigation found that from September 2001 to April 2005 Cover-All underreported payroll of $26.9 million to SCIF. The underreported payroll resulted in a premium loss of $7.6 million. The district attorney’s office claims Zeev and Irit Golan were responsible for preparing the alleged fraudulent monthly payroll reports provided to SCIF, which were also reviewed and approved by Leshem. Leshem and Zeev Golan also allegedly provided the fraudulent payroll documents to SCIF during routine audits. Bail was set at $6.5 million, but was reduced to $100,000. If convicted, the three could face up to five years in prison and a $50,000 fine or double the amount of the fraud. Arraignment is scheduled for Nov. 13. Leshem founded Cover-All in 1992 to provide flooring installation services to commercial clients. The company now has 40 locations across the country.

Rik Middleton has many stories to tell about clients served at ExecutivExpression, the accent modification service he operates with his wife, Denise Vega-Middleton. One client, an engineer working on a medical degree, had an accent so thick that company staff members forced Middleton to take her calls. Another, a professional giving a speech in New Orleans, consulted with his speech therapist by phone about the talk he was giving. And another client, paying for the service herself and keeping it quiet from her employer, excitedly told Middleton about how she recorded her work voicemail message in two tries. “She was ecstatic,” said Middleton. “That was her Mount Olympus of the program. She had attained something that was incredibly difficult for her in the past.” Founded in 2000, ExecutivExpression is not English-as-a-Second Language training or dialect coaching. Instead, the Middletons have a staff of eight full-time speech pathologists working with clients from foreign countries to modify a thick accent. The Sherman Oaks-based firm works with professionals and para-professionals in the aerospace, biotech and health care fields; employees on the rise in their careers but who hit a verbal glass ceiling and are held back by poor communication skills. “It is very small investment for a corporation that has already invested time to groom this person to get them over that last little hump and have an excellent executive on their space,” Middleton said. Census inspired The couple started the company after Middleton left the technology industry after 18 years. Vega-Middleton, who graduated from California State University Northridge with a degree in speech pathology, also owns and operates her own practice serving developmentally delayed children. A look at the 2000 census figures sparked the idea for ExecutivExpression. When Middleton read in the census report that 870,000 people identifying themselves as professionals admitted their language skills were not up to par, he saw a need to be served. While clients come from many industries, it is health care showing the greatest need as it is the Philippines and India where the highest number of workers come from, Middleton said. Take a doctor with an accent working with a nurse who speaks in another language and add in a patient or their family with limited English and the opportunity for a communication breakdown is huge, Vega-Middleton said. Hangnga “Hana” Vu, a physician at the Jewish Home for the Aging in Reseda, finds the program to have been beneficial at her workplace. The average age of patients she works with is 94 years old and they tend to have hearing problems, said Vu, who completed the ExecutivExpression program this year. As an adult who came to Southern California from Vietnam, Vu said she did not have a chance to take formal English classes. After hired at the Jewish Home for the Aging, she was asked if she was interested in an accent modification program. The Home picked up the cost of the course. “I think the course will help with communication with my patients and my colleagues, Vu said. Speech therapists already working in Vega-Middleton’s practice received additional training to work with the accent modification clients who come in on their own or referred to the company by their employer. The 18-week program begins with a pre-test and an individualized report of what areas need improvement. The client is also video- and audio-taped at the start of the program so they can see the progress they made. In the initial analysis, a speech pathologist looks at the way a client produces vowels and consonants as well as their intonation and stresses the melody of language. Many cultures speak in a monotone, and English is not like that, Vega-Middleton said. “We work on stress versus non-stress of words and phrasing; the way you ask a question. We go up and some languages when asking a question either stay the same or drop down,” Vega-Middleton said. “Those are the areas that we work on.” Practice necessary Like any personal endeavor, the key to modifying an accent is practice. When working with the speech therapist in groups of four, the clients go through drills. Outside of that they are encouraged to practice speech exercises at least an hour a day, and especially encouraged to give it a go in their real life work situations. The staff stays in contact through e-mail and by phone, asking that a client call if they are having difficulties. “You don’t want them to practice it wrong until the next time they see you,” Vega-Middleton said. “They might have it really good in here and have it perfected and then they go out there and it starts getting washed out.” The future of ExecutivExpression as Middleton envisions it is to embrace technology so that face-to-face sessions aren’t always needed. Without giving away too much information, Middleton added that he wants to use technology to expand the client base globally and not wait until people are already in the U.S. The firm is working with strategic partners to make that happen, Middleton said. It still comes down to improving a person’s communications skills to increase their visibility at work and growth in their career. The added benefit is what happens outside the workplace. “They can be leaders in the community. They can take a more active role in their church, in their school, in their political arenas,” Middleton said. “Now they have the confidence and ability to communicate their needs for their community.” SPOTLIGHT – ExecutivExpression Year Founded: 2000 Employees in 2004: 8 full-time speech and language therapists Employees in 2006: 8 full-time speech and language therapists Revenues in 2004: $1.3 million Revenues in 2006: $1.44 million (projected) Driving Force: Working with professionals to improve their communications skills that increases visibility at work, employability, and growth in job and career.

Six years after the dotcom bubble burst and M & A; activity came to a virtual standstill, acquisition fever seems once again to be raging through corporate America. Worldwide, merger and acquisition deals totaled $2.5 trillion in the first nine months of the year, close to the total for all of 2005, according to Thomson Financial, promising that, when all is in and accounted for, this year could see a 50 percent hike in transactions over 2004. And it isn’t just the largest players that are getting action. Firms as small as $5 million are being courted, and just as likely by international suitors as by local ones, often because they have a technology or a niche that will help a much larger player get bigger yet. The Business Journal convened a panel to find out just what buyers, sellers and those who work with them can expect should they venture into the fray. Our panel included: Michael E. Adler, president and managing director of Calabasas-based Informa Research Services Inc., a division of T & F; Informa plc that provides competitive intelligence reporting and services and has acquired three companies since 2003; Peter Cowen, a former co-founder of Data Voice Solutions Inc., now managing partner at Spire Equity, a private equity firm in Camarillo, who has advised over 200 emerging growth companies and helped to raise over $100 million for early-stage businesses; Gordon Gregory, chairman and managing director of Encino-based Mosaic Capital LLC, an investment banking firm and member of the International Network of M & A; Partners that specializes in the middle market and has transacted five deals in the past year; John O. Johnson, founder and managing director of The Spartan Group LLC, a boutique investment banking firm in Glendale focused on public and private middle-market companies that has this year assisted in three transactions on both the buy and sell sides along with venture financing for a film production company headed by Tom Pollock and Ivan Reitman; and attorney Brent A. Reinke, a corporate partner at Musick, Peeler & Garrett in Westlake Village who focusing on mergers and acquisitions, venture capital, advising emerging growth companies, corporate securities and finance, strategic alliances and licensing. From the spirited discussion, it became clear that while there are many opportunities out there, both for those who want to grow by acquisition and those seeking exit strategies, there is also much potential for failure in what has become a frenzy of activity. Question: What is the current environment like for M & A;? Johnson: It certainly is a seller’s market. We saw a deal where we’re actually working on the buy side (unfortunately) for a client where the seller in a particular geographic market said if you want to bid on this and get into the second round, you have to sign a two year non-compete. And when we go to final bids, we rarely take one bidder now. We normally take two and say, mark up the purchase and sale agreement and we’ll use this as the basis of differentiating one and two in the bid process. Adler: Most of the companies we’re buying are companies that were founded 10 or 15 years ago and they are looking for an exit strategy to cash out. The problem we run into is that everybody thinks it’s a seller’s market and some of these companies where they’re really not worth anything, they’re making $100,000 a year and they want $100 million for their company. They’re not being realistic anymore. Cowen: It is a seller’s market. Because it is a seller’s market, people are more delusional. It isn’t quite the irrational exuberance of the dotcom bust. But companies that have innovation and a few customers are getting a lot of attention. And venture funds and even some private equity funds that have found that there’s too much competition at the higher levels are coming to younger companies, boosting up the premium and getting more involved with them. Question: What are some of the biggest mistakes people make when they go out into the market to buy companies or to sell their companies? Adler: A lot of times what we run into is that the owners who are selling have one set of goals but they wind up in this auction process. We’ll look at it and say, ‘okay you want to stay on board, we’re with you, that’s how we’re going to buy it. The company that we may lose out to makes the same promise, but in three months (the former executives) are gone. The next thing they know the whole company has been decimated because it was more of a revenue acquisition. So I think some of these people are trying to get the best of both worlds. They want the most money, but they also want security and everything else. But they don’t realize they haven’t negotiated the right deal, and the next thing they know they have a two year contract and the buyer will just buy it out and they’re gone. Reinke: Especially in the market we’re dealing with now, because there’s so much pressure to get deals done quickly, (what’s important is) really understanding what the company is going to look like and how it’s going to operate post acquisition and whether the synergy is there at the management level. Is integration going to work smoothly? Are you going to obtain value? I’m talking more from a strategic acquisition as opposed to equity. Are you really going to reap the value you think you’re getting out of this acquisition post closing? There’s a lack of due diligence, and I think that’s part of the fallout of the pressure to get deals done. They’re taking on greater risk, not only financial, but because you’re cutting down on reps and warranties, you’re dealing with the indemnity provisions and you’re paying more. And they’re not taking the time to really do the due diligence. Johnson: Statistically, at least 60 percent to 70 percent of acquisitions fail to achieve their objectives. It’s not just quantity of due diligence. It’s cultural due diligence. Do you have a common vision and strategy going forward? Do you have aligned interests? If it’s two companies coming together, is there an integration that makes sense from both a vision/strategy perspective as well as making sure everyone’s interests are aligned? Too often people don’t deal with the tough issues, like they’ll have co-heads. Co- heads never work. You’ve got to have somebody that’s the primary leader in any organization, and a team that’s able to execute on that vision and strategy with that leader. Adler: As advisors, do they really care what is a better cultural fit? Or do they care about getting the deal done? Gregory: Our job is to find out what really matters to our clients. It takes a lot of head shrinking to find out what really matters. Johnson: You do raise an interesting point Michael. How does a seller know when they’re interviewing bankers which ones are going to be more scrupulous? To some degree you have to do your own due diligence. You have to talk with some of the other people they’ve worked with in the past. You have to ask what is the history with that firm? I truly believe the karma thing that what goes around comes around. If you stuff a bad buyer down somebody for the best price something is going to come around and you’re going to have to live with that. And there are some very credible people and in a shifting environment, a lot of people who are not. Cowen: A lot of trusted advisors let their client know what the tradeoffs are. Sometimes a few extra million dollars makes a difference. Sometimes it seems like a huge mistake versus the long term consequences. In our world, when we have a whole group of investors that might want to invest in a deal it’s much closer to a marriage than maybe some of the equity deals. We’re talking about somebody who’s going to be your partner, who has certain power to hire and fire you on the board and they’re also giving you enough rocket fuel to accelerate what you’re doing. So things are going to be a little more unwieldy. How do you handle that? How do they handle that? And the thing I see is that at least in my world venture capitalists and angel investors and high growth investors, on certain deals they’re good and certain deals they’re not. Question: What can buyers and sellers do to make sure the acquisition will integrate well and meet their desired goals? Adler: It’s better due diligence, but you’ve got this pressure of bidding wars going on, and if you don’t strike quickly then you can lose it to the next guy. When we were purchased the first time they spent about four hours doing due diligence on us. And there was a lot of buyer’s and seller’s remorse because what they bought and what they got were two completely different things. They bought us thinking we’re cheap and they thought they were buying a client list but it turned out that who they sold to and who we sold to were two completely different things. After they closed the deal and they realized we had no value to them they just let us meander. And it wasn’t until we wound up selling ourselves to the London based company that we were truly able to take off and prosper. Gregory: One of the difficulties is a seller does not know how to package itself. They do not know how to put the whole story together. They do not know what is required to be ready, ready from the standpoint of being able to do a transaction and what steps they can take to be more valuable. And apart from that, you have the whole transaction process and that absorbs an enormous amount of time and attention so if they try to do it themselves they will not have time to run the business. Johnson: A common misperception by most sellers is they think the value of the banker is in finding the buyer set. I would argue that’s the least value. That’s not entirely true. We do charge for that. It’s positioning the company. It’s getting it ready, not only for a sale but for the due diligence process. It’s managing the process; it’s negotiating; it’s working with a law firm. It’s doing a number of things that have nothing to do with the set of buyers per se or any individual buyer. What we do is get the company ready whether they want to arrange financing, whether they want an exit, whether they want to take chips off the table. Ready is ready. Gregory: We did a transaction a number of years ago of an engineering-manufacturing company. We sold it to a competitor on the East Coast, and the seller was as difficult a human being as there is to be found anywhere. On the day of close they asked him to be packed and out that day. The general manager of the division that was going to be absorbing it was instructed to be prepared to step in and run it as if this guy is gone. Otherwise they would not let him buy it. Johnson: That’s the key. You have to act quickly and you have to act decisively. It points to a couple of different red flags in the industry. If you’re paying high prices, if your due diligence is being stifled or hastened because of a competitive process, unless you’re prepared to go in and analyze not just the numbers but more importantly some of the strategic and cultural aspects, there’s a higher risk of failure. Question: Are there potential problems that are likely to arise down the road from all this easy money chasing acquisitions? Cowen: The market is on a full head of steam, the economy is doing very well, and I think the lenders are becoming halcyonic. They’re over-extending themselves. Their risk return ratio is out of whack. Because of that, a lot of these deals look better than they should. If there’s a glitch and a slowdown and some of the sales slow down and the debt is heavily leveraged as it is, then there’s promise for recalls. There’s promise that the debt market slows down and a lot of that cascades. I think we’re in that situation. Johnson: I think what is different now versus 1999 is the OCC (Office of the Comptroller of the Currency) doesn’t have much impact because these debt providers aren’t banks anymore. They’re hedge funds, they’re mezzanine funds. They’re special purpose funds. It’s there where I think we’re going to have the problem. It’s going to be interesting to see because you don’t have the OCC that’s got the same controls over strictly a bank market. Gregory: And the banks are not totally rational in working with the private equity funds. They might have a relationship with a private equity fund that could do 20 deals in a year, and they’re going to put extraordinary pressure on the bank to go outside of their comfort zone, and they’re very good at doing that. Cowen: There are a lot of new banks that have opened up, some of the smaller, regional ones, and they’re being very aggressive out the door and I will tell you there are deals getting done that we’ve been involved with that are getting done that would not have gotten done three or four years ago. Question: Recently, we all learned that Wendy’s sold Baja Fresh for a fraction of what the company bought it for just a few years ago. Is there a lesson there for large corporations that acquire entrepreneurial companies? Johnson: Absolutely. Part of the reason the General Electric model works is their stated objective with their (acquired) divisions is to be number one or number two in their space, and they make the (divisional) CEOs responsible for that business. The holding company is responsible for providing overhead, administrative services, auditing, to some degree legal and low cost financing, but the fact is that CEO makes or breaks that business on his or her own. That’s the right way to do it. Reinke: There’s too little due diligence going on in any acquisition. If you are going to stay with a company and want to match up with a company that’s going to be a good cultural fit you should do as much due diligence as you can about the culture of that company, about the goals of that company, the outlets that they have, to see if it is a good acquisition. It isn’t all about financing. A lot of clients can get a lot more money from one company but they’ll decide to go with another because the personality feels better. Question: If there is all this activity and frenzy and people are making deals that are not as thoughtful as they could be, does this mean we’re in for a number of business failures down the road? Reinke: I think the bigger issue will be not necessarily failures but deals that weren’t as successful as they could have been a lower value or not as much as they thought they would get (when they go back to market to sell). I see that as being more the case than complete business failures. Cowen: Some companies will be sold for a lot less than what they were bought for.

You have worked hard to build your business. Maybe you would like to retire, maybe you need additional capital and resources to continue to compete, maybe the business has peaked and you believe it is time to get out, or maybe someone has made you an offer you just can’t refuse (everybody hopes for this last one). Whatever your reason for selling your business, there are a few things you should do in order to prepare if you want to maximize your sales price. Protect Your Intellectual Property: While entrepreneurs spend a substantial amount of time developing a unique idea, tradename, logo and brand, many fail to protect their intellectual property nationwide. If you are selling services or products in more than one state, you should obtain a federal trademark or service mark to protect your tradenames, brands and logos nationwide. If you fail to obtain a federal trademark or service mark, your tradenames, brands and logos may only qualify for protection in those areas where they are currently being used. Additionally, you should adopt a formal policy to protect your proprietary information and trade secrets. Make sure that you have your employees, independent contractors, etc. execute confidentiality and non-solicitation agreements to protect your proprietary information (non-competition agreements for employees are prohibited in California, except under very limited circumstances). These policies should also be set forth in your employee manual in order to illustrate the importance you place on your proprietary information. Also, do not widely disseminate confidential information to your employees, restrict access to those on a need-to-know basis and use passwords. By putting together the proper internal systems to protect your proprietary information and coupling this with registering your intellectual property, you can help maximize the value of your business. Remove the Skeletons From The Closet: Ultimately, everything reaches the light of day. Whether this occurs before the documents are executed (resulting in a reduction in purchase price) or after the documents are executed (resulting in an indemnification claim or a lawsuit), most buyers will pursue a seller for anything which causes damage to the business which the buyer did not know about prior to executing the final documents. Therefore, if you have taken some shortcuts to grow your business in order to save costs, etc., fix them, if possible, before you decide to sell. Once a letter of intent is executed, the seller’s leverage plummets and the buyer’s leverage increases as the purchase price has now been locked into place. As a deal progresses and the buyer engages in due diligence, the purchase price can only be reduced. If the buyer finds things during due diligence which hinders the buyer’s outlook for the business, the buyer will often demand a reduction in the purchase price or worse yet, kill the deal. At this point in the transaction, as a seller, you are often times both emotionally and financially committed to the deal. As a result, it is tough to pull out of the deal and many sellers, confronted with this situation, often begrudgingly accept some form of a reduction in purchase price or modified terms. In order to prevent this from happening to you, either (1) remove the skeletons from the closet, or (2) have your advisors disclose the information early in the process, preferably before the execution of a letter of intent and during the bidding process, when the seller still has the most leverage and the buyer is most excited about the business. Prepare Accurate Financial Statements: It is highly recommend that before the business is sold, you obtain at least 2 years of audited financials. Audited financials can help establish your credibility since an independent third party has reviewed and certified the accuracy of your financial records. If you plan on selling your business to a public company, it will help you maximize your purchase price since the buyer will not have to expend as many resources to comply with Sarbanes-Oxley. If you cannot afford audited financials, we would suggest that you at least have them reviewed by your accountant. Additionally, you should talk to your accountant to make sure that you account for potential liabilities which may not be disclosed on your financial statements. For example, many small businesses do not accrue sick time and vacation time. This undisclosed liability oftentimes results in an immediate and unexpected reduction of purchase price if the buyer has not been made aware of the amount of this liability. Negotiate Assignability Clauses: Many entrepreneurs do not appreciate the importance of a contract’s “boilerplate” language; however, the boilerplate language can be very important when you sell your business. For example, if you enter into an asset agreement, one of the requirements of the asset agreement will be to obtain the consent of the other party to the assignment of the contract. If a contract has a non-assignment provision, the other party will have leverage over you and may potentially hold up the deal or reduce the sales price as a result of the potential risk that the contract may not be assignable. Consult With Your Advisers Before Entering Into a Deal: It is important to work with your advisers closely before you enter into a transaction. They can help you find the right buyer as well as structure the transaction advantageously. Kevin E. Rex is a shareholder in the law firm of Lewitt, Hackman, Shapiro, Marshall & Harlan and focuses primarily on mergers and acquisitions relating to privately held and family owned businesses.

The website for O’Henry Sound Studios remains operational, a single page with a black background and a photograph of the studio site, a facility resembling a well maintained home rather than where mixing of film and commercial soundtracks and recording of albums took place. The only text at the site is the farewell letter from its owner Hank and Jacqueline Sanicola dated December 2005 thanking their clients and friends for patronizing the Burbank studio for its 13 years. “We have enjoyed playing our part in the film, television, commercial and record businesses,” the message reads. “Working with you has provided us with many cherished memories.” As a working studio, O’Henry hasn’t gone out of business. As a working commercial studio, it’s another matter. And it’s not unique in the San Fernando Valley, which has seen commercial recording space dwindle as studios have closed or converted into solely private enterprises in recent years. In North Hollywood, the 11,000-square-foot, two-room Royaltone Studios closed its doors to the public in 2005 to become the private recording domain of producer Linda Perry. Paramount Recording Group bought out Third Stone Recording, also in North Hollywood, and leases the 5,000-square-foot facility for private use. The Enterprise, another Burbank studio, went into bankruptcy before converting into a post-production facility. Several factors are at play to explain the dropping number of commercial recording studios, starting with a music industry that in recent years has been cost-conscious about the number of acts signed and the amount of money put into those acts for recording. Then add in that a studio’s real estate becomes more valuable than the work taking place inside of it. “All the history, all the great music making capability gets pushed aside when the dollars dictate it’s worth more as something else,” said Adam Beilenson, of Paramount Recording, which has three facilities in the Valley. Paramount took over Third Stone from former owner Paul Richiutti who now lives in Hawaii. The decision to keep the studio private stemmed from Richiutti’s taking the equipment with him and a demand by clients looking for full facilities, Beilenson said. Whether through closure or going private, the bottom line is less commercial space exists for recording purposes. For the studio space remaining the law of supply and demand gets put into motion. “Once you have fewer options available to you, you end up spending more money than you anticipated getting what you want,” said Ellis Sorkin, whose firm Studio Referral Service matches artists and producers with studio space. The recording studio side of the music business has always been competitive, said Kit Rebhun, studio manager at Glenwood Place Studio in Burbank, and fewer commercial studios has made it all the more competitive. The closure of O’Henry brought additional work to Glenwood Place but the way it happened saddens her, Rebhun said. “I don’t relish the thought of studios closing,” Rebhun added. Those attracted to studio ownership are music industry types – artists, producers or engineers and those with a lot of money who pay to be involved with the glamorous side of the business. Owning a studio is not a big money maker, Sorkin said, with income coming from rental of studio time. At a commercial facility, a fee of $50 to $60 an hour falls in the low end while the high end commands $250 to $300 an hour. For those prices a performer gets the physical space but also amenities, such as fruit bowls, private lounge areas, and even Jacuzzis. “It relates so closely to hotels that it’s interesting,” Sorkin said. “They are both service businesses that are providing space and a product of sorts.” From one performer’s perspective, the hands operating the equipment are as important as the equipment itself. Glendale resident Marina Verenikina recalled being in studios with state of the art equipment operated by clueless engineers. An engineer who knows the potential of the equipment is important as is one who is personable and establishes a good rapport with the artists, Verenikina said. “If you like the person you are working with it’s reflected in the vibe of the music you are creating,” said Verenkina, who this summer recorded a live album before 50 fans at Sound Moves Production Studios in Sun Valley. If the amenities at a recording studio make an artist feel at home the rise of inexpensive yet high-quality recording equipment make possible for them to not even leave home to make their music. Yet Sorkin and Beilenson agree that home studios have less an impact on the number of recording studios than other factors. While a home studio is ideal for pre-production and specific parts of a project such as overdubs, working from home can’t match the atmosphere of a true studio. “I have big producers who have home studios who come to me looking for studios because they can’t bring a client into the house a lot of times,” Sorkin said. “It’s not that professional a feeling to bring some major artist into your third bedroom converted studio.”

Image Entertainment Inc. survived an attempt by spurned suitor Lions Gate Entertainment to pack its board of director with members of its choosing. Company stockholders re-elected the sitting board members at an annual meeting on Oct. 10 in Woodland Hills. Chatsworth-based Image is one of the largest independent licensees, producers and distributors of home entertainment in North America. “We are obviously pleased with the results of the election and support of our shareholders in voting to keep our entire board in place,” Image Chief Executive Officer and Chairman of the Board Martin W. Greenwald said in a prepared statement. “The board, management, and the company as a whole will continue with our ongoing strategy and process of seeking to maximize long-term value on behalf of all our shareholders.” Image’s library of 3,000 titles was coveted by Santa Monica-based Lions Gate as it made attempts last year to buy out the company, which were rejected by the Image board. Lions Gate holds 19.8 percent of Image stock. Its slate of seven board candidates garnered 37.8 percent to 43.3 percent of the shares voted. Votes for Image’s incumbent slate of directors ranged from approximately 56.1 percent to 56.2 percent of the shares voted. Image’s board of directors will be up for re-election on a staggered basis.

Drew Kaplan equates renting space at his server host company to renting an apartment. ISWest accommodates whatever space a client needs be it a single server used for a webpage and e-mail or racks and racks of servers to run a company’s operations. Except this apartment building has 84 tons of air conditioning equipment, a room full of batteries charged by a generator, and biometric palm scanners and combination locks to ensure the security of millions of dollars of IT equipment. Astronomical costs keep companies from providing the same setup on their own, which is why hosting companies with data centers such as ISWest are in big demand. “It makes more sense to outsource it to a company like us because that is all we do,” said Kaplan, a co-founder, chief executive offer and chief financial officer of the privately-held company. Outsourcing of server equipment tends to be popular with smaller data center requirements,” said Michael Bell, an analyst in the Infrastructure and Operations Group for Gartner & Associates. “But with large enterprise centers that are 50,000 to 100,000 square feet, a third party probably can’t improve on the economics,” Bell said. “In fact it would be more expensive because they have to make a profit.” Recognized four years running as one of the fastest growing tech companies in Southern California by professional services firm Deloitte, ISWest is meeting future demand by clients by constructing a new 16,000- square-foot data center a half mile from its headquarters in Agoura Hills. The new center goes on line in May, just five months after Kaplan expects to hit full capacity at the company’s existing data center. Outgrowing space is in ISWest’s blood since the company was founded in 1996. A 1,400 square foot space in Westlake Village then became a 3,000 square foot space. In 2001, the company moved to a 10,000 square foot facility in Agoura Hills for its 22 employees. The new building carries a price tag of $2.5 million to $3 million. A key to success for ISWest has been its location. Not only does Agoura Hills put it along the 101 Corridor, home to many technology and biotech companies, but also gives easy access to a dual sonnet fiber ring providing multiple fiber optic paths to the Internet. A fiber ring from the major telecommunication companies is more commonly found in a downtown area than in an area like the West Valley. “It’s what keeps us here and attracted us to this part of the Valley,” Kaplan said. ISWest provides the space for companies to put their equipment, power to run the equipment, a connection to the Internet, and safety features such as a fire suppression system designed specifically for data centers but the companies maintain their own equipment themselves. What ISWest provides would be too expensive for a company to install on its own. More servers for computer equipment creates more heat and companies don’t want to have to deal with heat dissipations and having enough power to keep it all running, Kaplan said. So, along with the 84 tons of air conditioning equipment to keep the servers cool, ISWest employs an entire room with just batteries to provide an uninterrupted power supply. An on-site generator kicks on if the power goes off. In the tech industry, a tiered system ranks data centers based on their level of redundancy that reduces downtime for the equipment. Clients are looking at more power and redundancy when choosing or building their own data centers because they are trying to avoid the notion of a single point of failure, Bell said. “So they have to double up on the electrical systems and air conditions systems to ensure there is no single point of failure in their operation,” Bell said. “Any one of those failures can bring you down.” Bell identified three factors driving expansion, relocation or new construction of data centers: higher-density servers; consolidation; and improving disaster recovery methods. Whereas four or five years ago, a rack of servers needed 2 kilowatts to three kilowatts of power, today’s racks consume 10 times as much and require the corresponding amount of cooling for the heat generated. Companies are moving past having each of its business units operate its own data center and now bring all that processing power into one place to meet economies of scale, Bell said. Also, software is now available that can run multiple applications from a single server. “You can get more capacity utilization out of a server than you could in the past,” Bell said. “That gives another reason to consolidate.”