Honing the Subtle Art of Hiring the Right Worker

Q: I am going to hire my first employee. What do I need to know about making a job offer? I would like to pay a salary, with no vacation pay.

--Stephen Esmond, Santa Monica

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A: There are legal guidelines on paying benefits and giving vacation time to employees. I would strongly encourage you to talk to a labor lawyer to determine what benefits you legally must give your employees.

Selecting an employee is one of the most difficult things you do in a small business. You have to try to read people, and that’s more an art than a science.

I would recommend building in a 90- or 180-day probationary period for the employee. By that time, you’ll really know what you’re getting.

During an interview, spend 40% of the time letting the candidate talk. When you dominate the conversation, you’re not learning anything about the other person. But you also have to explain yourself and your organization. If you feel you won’t be able to communicate with this person and get along with him or her, conflicts and problems will arise.

Make sure, before you make any offer, that the person understands your organization. If he’ll be doing filing and administration, let him know. If he’ll be selling, tell him roughly how much time you expect him to spend in the field and how much time he’ll be doing paperwork. If you simply need help to grow your business, tell the candidate you need a person-Friday. If that includes running errands for you, let him know it upfront. If there’s a problem later because his expectations were different, you should have it defined on paper.

When it comes to salary, I’m a big believer in offering a reasonable base salary plus some kind of bonus that’s available to everybody, even the part-timers. In a small firm where individuals’ efforts really help the organization, 70% of your employees will be motivated to try harder if they know there’s a bonus they can earn at the end of the year.

I would tie half the bonus to individual performance and half to the success of the organization. If the company is successful, the employee shares in it based on how much he or she personally contributed.

It’s nice to offer an occasional instant bonus as well. If someone does something extraordinary, he gets a dinner for two, or a $50 or $100 gift certificate. Bonuses are tricky to implement and should be clearly defined in writing, but I think in the long run they pay off if you’ve hired the right kind of people as employees.

--Eric Flamholtz, president of Management Systems Consulting Corp. in Westwood, and professor at Anderson School of Management, UCLA

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Q: I work for a small business with six locations. What is “centralized purchasing” and how is it properly used?

--J.B., Downey

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A: With centralized purchasing, small-dollar items are purchased at the discretion of the various locations but large-dollar items are grouped together to be purchased by a central purchasing department. This way, your company can take advantage of the better pricing that comes with larger orders and keep better track of purchases for management reporting information.

The advantages of centralized purchasing include better vendor relationships, because you have a smaller number of people dealing with the same vendors nationally, and less duplication of activity by employees at different locations.

You gain efficiency with centralized purchasing but you may have to give up some flexibility. There are times when a need arises at one location that was not anticipated. If you have central purchasing, that location will have to go through channels to make the acquisition and get delivery. That means there will be some lead time. If your purchasing is decentralized, that location might be able to cut a check and send someone to a store in an emergency.

The amount of revenue that your company puts toward materials and the distance between your locations will determine whether it will make sense to institute centralized purchasing. Generally, the more money you spend on purchasing and the more fluctuation in the price of your materials, the more advantageous it is to have a central purchasing department.

--Elaine Gaspard

Business consultant at Valley Economic Development Center

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Q: I offer short-term rental of individual condominium units that are fully furnished and equipped for residential and office use. I started the enterprise with two units 18 months ago and have built up a steady stream of guests so that I now have to turn away business and want to expand. Preliminary discussions with private investors have been favorable. How do I structure investor participation in my business?

--John Snell, Los Angeles

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A: You would form either a limited partnership or a limited liability corporation.

You will need to put together a business plan, setting forth in some detail what you intend to do with the money you are going to raise. How many units do you plan to buy; will they be all-cash or all-debt deals; what is your anticipated occupancy rate and rental revenue? You would market the deal to investors following private placement regulations.

As the promoter of this private real estate syndication, you should take a reasonable upfront management fee for putting the deal together. Then you’ll also get an ongoing management fee that is based on gross rentals. At the rear end of the deal, you would get a promotional fee based on the return to the investors of their initial capital plus whatever return you have worked out, say 8% or 10%. Anything left over would be distributed on some kind of equitable basis depending on what you negotiate up front.

I have seen deals ranging from a 50-50 split to 75-25, with the investors typically getting the larger portion.

The tax aspects of a deal like this are very important to structure right. I would advise you to get in touch with a securities advisor, such as an investment banker or broker/dealer, an accountant and a lawyer who is a real estate securities specialist with experience in the area of securities law, tax law and limited liability corporations or limited partnerships.

--Peter Pancione

Real estate securities attorney at Gipson, Hoffman & Pancione in Century City and former acting commissioner of corporations for the state of California