Traditionally, real estate leases are long term (i.e., only negotiated every 10 to 15 years) but are usually a material monthly corporate expenditure. Typically, a smaller enterprise has no internal expertise in negotiating such leases. Therefore, before entering into a real estate lease, heavy reliance should be placed on the enterprise's attorney, broker, accountant, and interior decorator. While the base rent is the major component of the monthly payment at inception, escalations (e.g., real estate taxes, inflation based on a CPI index or the standard porter's wage rate) and other hidden costs can become a large percentage of the monthly payment in future years. An expert's ability to slightly change a definition in the lease could save a company thousands of dollars over the lease term.
In addition, the expert might be very helpful in interpreting the lease's "gray" areas. Generally, landlords will appease contesting tenants and/or their representatives in exchange for the tenants not publicizing the contested discrepancies to other tenants.
Negotiating insurance policies can be unusually technical. Failure to employ an insurance expert knowledgeable in both your company and industry is not a good business practice. The chief financial officer must utilize the insurance specialist to:
* Determine coverage needed;
* Determine policy limits and desired deductible amounts;
* Evaluate the financial soundness and claim settling record of the potential insurers; and
* Negotiate the annual premiums.
A perfect industry to emphasize the need for an insurance specialist is promotional marketing. Companies in this industry manage numerous sweepstakes, and contests which require errors and omissions insurance. When I arrived as the CFO of a full service promotional marketing firm, it had paid $46,000 annually for $1,000,000 of errors and omission coverage with a $50,000 deductible. I utilized an insurance professional more familiar with the risks and nuances of the promotional industry to negotiate a new $1,000,000 errors and omission policy with a $25,000 deductible at an annual cost of $12,500. That was an immediate annual corporate savings of $33,500 or 73%.
Negotiating real estate leases and insurance policies are only two areas which require a high degree of expertise. The company's financial professional should utilize specialists whenever he deems it necessary. Do not be "penny wise and dollar foolish."