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Beating the System

How five entrepreneurs did it--but you didn't hear it from us.
May 1, 1999
URL: http://www.entrepreneur.com/article/17654

Now that we've got your attention, we have to confess: The title of this story is a little misleading. You should never try to beat The System.It will always win. If bureaucracy threatens to bury you, remember: The System is all-powerful and all-knowing. You can beat an egg, beat around the bush, or, at the risk of beating a dead horse, you can be upbeat.But if you're thinking of beating The System, think again--or at least think differently: "We tell our clients how to manipulate the system," stresses Frank Sweeney, "and to live as pleasantly as they can."

Sweeney would know. He spent a lifetime trying to beat The System, beginning with a botched bank robbery at age 18. Even while doing 23 years in federal prison, Sweeney was beating the system, or cheating the system, by doing everything from pretending he was Jewish to get the "sumptuous" Kosher meals to feigning mental illness so he could be allowed a private cell. Now the 55-year-old runs Frank A. Sweeney & Associates and is legally beating--er, manipulating--the system. His Tenafly, New Jersey, firm advises federal prisoners on how to survive the Big House.

So what's the secret to being a good manipulator? Advises Sweeney:"You need to think deviously, know the ropes and pull the right ropes."

Which is why we salute these five entrepreneurs. They're hardly in Sweeney's league, but we trust them with rope.


Geoff Williams, a part-time features reporter at The Cincinnati Post, frequently freelances for a variety of national publications. He says he's never really beaten The System, but notes that he was beaten up in the third grade.

There's No Place Like A Home-Zoned Office

The problem: How do you run a homebased business and still comply with those pesky zoning laws?

Reality check: While many regulations have been relaxed in recent years, if you're mired in zoning dilemmas, it's very difficult to get out of them, says Beverley Williams, president and founder of the American Association of Home-Based Businesses. And woe to those who live in Los Angeles, easily the city with the worst of the home-business zoning laws, says Williams."There aren't that many success stories," she says. "A lot of people don't beat the system. It's so costly in time, money and emotion that a lot of people simply move or go `underground' and hope nobody catches them."

So we're celebrating any success story we can: Follow the lead of Matt Miller, owner of Matt Miller Design, an architectural firm founded in 1994. The 31-year-old and his business are housed in an old home (built in 1859) in the South End of Boston. "It's a very trendy neighborhood, full of brick houses, pocket parks and gas lamps," he says.

Miller knew when he bought the house that he wanted to run his business from it--and that's where the zoning issue became tricky. It shouldn't have been, however. Over the years, the house had been home to several businesses, including a hamburger joint and a piano restoration company.

But--and hang on, because it's a convoluted ride--whereas the zoning laws had the home listed as a single-family house, there were two addresses listed for it: one for the residence and one for the previous piano restoration business. "Which shows how the records got screwed up," says Miller. But then, that's The System for you.

For advice, Miller called Allen Lynch, an attorney at Peabody & Brown in Boston. The two then conferred with the local zoning enforcement office. Today, Miller continues with a residential use permit and pays commercial taxes--thereby avoiding fees and paperwork. The type of business he runs out of his home is legal according to zoning laws.

Bottom-line advice: Get an attorney, suggests Miller. And his attorney, Lynch, suggests, "If you need to do missionary work with your neighbors, you should. Because these situations are so low on the priority list, the zoning board doesn't go knocking on doors, seeking to shut down businesses. You get into trouble when the neighbors pick up the phone."

Don't Pay A Tax Until You See The Whites Of Their Eyes

The problem: How do you keep a little--no, make that a lot--more of your money come tax time?

Reality check: Apparently that death and taxes thing is still certain.

Done the Paula Jagemann way, taxes can almost be fun: On the surface, Jagemann, 32, doesn't seem like a Tax Goddess--or even like much of an entrepreneur: She still holds a job as assistant to the CEO of Internet service provider UUNET Technologies, and she's in her eighth year at Hood College in Frederick, Maryland, securing her degree in economics--her bachelor's degree. She's also a millionaire, worth eight figures.

Jagemann saved herself several hundred thousand dollars in taxes when she created Frederick, Maryland, OnlineOfficeSupplies.Com, which has projected 1999 sales of $6 million. Jagemann started her company last year with an initial investment of $500,000. Because she didn't have the half million dollars in cash lying around, she planned to take it from her sizable stock portfolio. But she knew that by doing so, she'd lose perhaps $200,000 in taxes, which would leave her with $300,000 to start her company. (Yeah, we know: We should all have such problems.)

So instead of cashing out the $500,000, Jagemann transferred the stock into her company, an idea she came up with from reading an investment book years before. But wait--won't her company eventually have to pay taxes on that half million when they sell it? If they sell it, yes. But Jagemann points out that her company can hold [the money] and use it as collateral to get loans. If the stock performs well, it's a double benefit to the company.

Bottom-line advice: "Pick up the phone," insists Jagemann. "I don't think you can read Taxes for Dummies and become an expert. You've got to go to an expert and check, just to be sure." Which she did, before transferring her stock into her new company. Even Jagemann admits, "I don't do my own taxes."

Leave Him A Loan

The problem: How do you get a hefty bank loan without collateral?

Reality check: "Banks just aren't going to take a risk," contends Sam Rubenstein, an attorney at Bryan Cave, a Washington, DC, law firm."They'll eliminate the risk to the furthest extent possible because that's what their business is, to be risk-adverse."

What our stalwart hero did: Steve Giordano was shot at in the jungles of Vietnam, so we assumed that asking for a hefty bank loan--without collateral--was probably not all that frightening for him. "That would be a true statement," concedes the 50-year-old Giordano, who tries not to sound incredulous when presented with such a question. After his stint as an Army lieutenant colonel, Giordano owned a technology company for many years before starting a new one in 1996: Digital Now in Vienna, Virginia. Digital Now integrates machines that transform everyday photos into digital photos and creates software that allows customers to make photo albums on their computers.

Although big-name clients signed on immediately, big money didn't.Hewlett-Packard was distributing the software product and would eventually send Giordano a cool $390,000. But the check wouldn't be in the mail for another year, and Giordano needed the money now.

He had already taken loans from banks, using the collateral his business had, which wasn't much. "If you put up equipment in a high-tech company, it depreciates so fast that nobody is going to loan you money against it," Giordano says. "And there was the [software] code we were writing, which is sort of intangible."

Giordano's CPA, Larry Brown, found the bank they ultimately pestered and prodded into lending them the $390,000 by networking through a local business group. The bank's policy was to lend 80 percent of a company's accounts receivable. Unfortunately, the Hewlett-Packard money wasn't officially considered that yet. Giordano wasn't a good candidate for a loan.

But he persisted, and after about a dozen phone calls, the bank agreed to lend Digital Now 60 percent of the money the company was expecting from Hewlett-Packard, which translated to $234,000. Once the Hewlett-Packard deal became an accounts receivable, Giordano's loan was upped to the full 80 percent.

"We were mortgaging our future for current needs," Giordano admits. Fortunately, it worked. Digital Now's projected sales for 1999 are expected to hit anywhere from $10 million to $12 million.

For the still-desperate: The SBA (http://www.sba.org) is a good place to look for funds if you're low on collateral. Jeffrey Letwin, an attorney in Pittsburgh who specializes in bank loans, says that if you have a substantial net worth and a long-term relationship with the institution, you may be a candidate for a "character" loan. And there are plenty of commercial finance companies that will loan money for a larger take on the interest.

Bottom-line advice: "Be creative with the contracts you have," says Giordano. "Even if they don't have a good current value, if you sign a lot of long, strategic contracts, banks may loan against that." What if you don't have long-term contracts in the offering? Be nice to the person who has the money. He or she just might bend the rules for you.

Here's To Your Health

The problem: Getting great health insurance for your employees while retaining your nickname, El Cheapo.

Reality check: Overdosing on episodes of Chicago Hope and ER in order to practice medicine on your employees is probably not the way to go.

The way to go: In 1997, when John Campbell started his Raleigh, North Carolina, firm, he picked up the cost of his employees' old insurance carriers. Campbell, 33, paid through COBRA, which squeezed the financial life out of him. Ironic, because Campbell Alliance Group Inc., which projects sales of $3 million to $5 million this year, is a business development consulting firm that serves healthcare information system vendors and pharmaceutical companies. But not too ironic, Campbell asserts: "Even large provider networks, health plans and hospitals struggle with the cost of providing good care for their employees."

Forget costly HMOs and PPOs, which Campbell considered briefly. Instead, he formed an alliance with Adams Keegan, which isn't a health-care provider at all but a professional employer organization (PEO) in Memphis, Tennessee. Now this is an industry that's a master at beating The System. The alliance allowed Campbell to outsource his human resources functions to Adams Keegan, effectively making the two companies "co-employers." Because Adams Keegan handles human resources for a network of companies, its buying power with health-care providers allows it to find the best coverage at the best price.

Campbell didn't let the co-employer term scare him--after all, he's only sharing the part of his business he doesn't want. Adams Keegan takes care of the health insurance headaches, 401K, workers' compensation insurance and other paper-heavy tasks.

According to Bob Adams, president and CEO of Adams Keegan, PEOs generally charge fees of 1 to
4 percent of a company's payroll. Even taking the cost of the PEO into consideration, Campbell estimates he'll save $20,000 a year in health insurance costs alone. "It lets me sleep a little better at night," Campbell says. But if it didn't, his health care would likely treat that, too.

Bottom-line advice: "Benefits aren't the primary reason employees choose an employer," says Campbell, "but they're often a differentiating [factor]."The moral of the story: Your staff's collective talents will be low if you tell interviewees: "Health benefits? Sure, we provide free cough drops in the receptionist area."

Going Into Contractions

The problem: You've signed a contract. You want out. Now what?

Reality check: "There's no sure-fire way to break a contract and get away with it. If there were, trial lawyers like myself would [be out of] a job," says Ron Gaché, a partner in the Palm Beach, Florida, office of Broad and Cassel. But if your company doesn't have enough capital to make it worth suing, you can probably break free from the contract without fear, says Scott E. Friedman, a business lawyer in Buffalo, New York.

What our mystery man did: No sane entrepreneur would admit to breaking a contract. So we found a 38-year-old business owner who agreed to share his insight, if we kept his name and $20 million international transportation firm incognito.

And Mr. X has broken, or revised, a few contracts in his career.Recently, he signed a real estate-related contract with a company (we'll call it Company Y), and all seemed well and good. But then Company Y was purchased by--you know the drill--Company Z. Company Z was a completely different organization, and suddenly the contract was no longer a good deal for Mr. X. Instead of breaking the contract outright, Mr. X renegotiated--a process that took six months and two weeks--and finally came to terms that Company Z could accept.

Recipe for success: Good communication in the foreground, and an ominous-looking law firm in the background, will show your nemesis you're serious. "That's the best one-two punch you can have," says Mr. X, who adds that you should also invite a third guest to the party: a neutral arbitrator. After six months of bickering, Mr. X found a business associate who knew the CEO of Company Z, and that arbitrator brought the two together for discussions. A new contract was drawn up two weeks later."That common link is important," stresses Mr. X. Without a mutually respected arbitrator, you're just a name and phone number with a checkbook.

Bottom-line advice: "Many entrepreneurs try to cut costs by finding an inexpensive lawyer," says Mr. X. "They don't realize that can be the most expensive mistake they'll ever make." Mr. X uses a smaller-name law firm for his routine tasks but finds more specialized attorneys for his more complicated situations. "It's a lot like hiring an employee. You have to ask yourself, `Am I hiring the person best suited for this task?' "

Contact Sources

Adams Keegan, (800) 621-1308, http://www.adamskeegan.com

American Association of Home-Based Businesses, P.O. Box 10023, Rockville, MD 20849, http://www.aahbb.org

Broad and Cassel, 400 Australian Ave., #500, West Palm Beach, FL 33401, (561) 832-3300

Bryan Cave LLP, 700 13th St. N.W., #700, Washington, DC 20005, (202) 508-6086

Campbell Alliance Group Inc., (888) 297-2001, sherry_mclamb@campbellalliance.com

Digital Now, steve@digitalnow.com