6 Essentials of Refinancing

This article was written by Nick Welch, a Senior Manager in the Advisory and Restructuring practice at GlassRatner who specializes in Corporate Finance, Mergers & Acquisitions and Business Valuation. Nick also undertakes Litigation Support and Interim Management roles.

 

REFINANCING

The bad news is refinancing can be a stressful undertaking. The good news is many obstacles can be overcome with expert help.

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Other reasons to refinance include:

  1. Broken relationships can cause the borrower to seek an alternative – amicably or hostile (we see both);
  2. A change in product, for example switching from a line of credit to a factoring facility to match cash receipts;
  3. A better deal, e.g. lower interest rate, less collateral, a longer term or a principal repayment holiday;
  4. Niche products offered by a sector specialist lender – such products cater for industry nuances, for example healthcare lenders financing “out of network” receivables vs. a traditional Asset-Based Lender (ABL); and
  5. To extract more cash, for example if real estate values increase.

Refinancing could occur for any one, or more, of these reasons – we dealt with a growing number of cases in 2017 and to assist those needing to refinance, we have summarized the key areas to focus on.

  1. PLANNING

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Corporate refinancing takes time. It’s a big event and has serious implications on the lifeblood of a company – its cash flow.

Various stakeholders, both internal and external, need to be aligned. These include: attorneys; the existing lender; the new lender; the management team; regulators (if applicable); and auditors. Therefore set some time aside to plan the process.

Sometimes advance planning isn’t possible, for example in a hostile situation when things can happen suddenly. In this case it will be necessary to negotiate a reasonable time period for replacement funding.  Expert help is recommended to management faced with this situation.

Auditors and regulators are very important stakeholders. If refinancing is fundamental to going concern it may affect the audit opinion, or regulatory capital requirements, in which case it is necessary to complete the refinance before a final audit report is issued or regulatory returns are due.

Seasonality is important. The time of year will dictate cash needs and peaks and troughs in a debt facility meaning greater, or lesser, exposure to the lender (and company). By planning an exit in a low period, the risk will be mitigated and refinancing will be more attractive to a prospective lender (this mainly applies to working capital facilities and not term loans).

Other matters to plan for are time sensitive clauses in facility agreements. If there are early repayment penalties they need to be factored into the timetable. Careful negotiation can usually mitigate some of these, but if your company is a ‘good’ credit the lender may be strict on enforcing the penalties as a disincentive to the exit.

  1. COMMUNICATION

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All strong relationships benefit from good communication.  Whether the refinance is at the lender’s or the borrower’s behest, there should be clear communication with all key stakeholders.

Frequent meetings can be held and can be used as an opportunity to demonstrate management’s willingness to achieve an orderly exit and present its plans.

Milestones should be agreed and individuals assigned as the key contact points on both sides. These individuals will manage all communication and information flow.

Financial monitoring will be part of the existing lender’s exit conditions. The package and frequency of financial information should also be agreed by all parties.  Involvement of an expert third party consultant may be helpful to provide independence and coaching if management are not familiar with the process.

Anomalies in trading, one-off events, key staff leaving and “force majeure” can impede corporate performance and result in loan default and contribute to the reason for refinancing. It is important to present this ‘story’ honestly and to reconcile why the relationship was a bad fit. A prospective lender will want to understand the reasons for the refinance and the chances are, a new lender has heard them before.

Consider how the story will be communicated to the new lender. It might be that a different approach from a lender such as less collateral, cheaper rates, seasonable repayments or other alternative products will plug the holes in the existing relationship.

Take the time to prepare a lender presentation which tells the mission of the business, the historic results, the prospects, the competitive environment as well as the strategic challenges, how they will be overcome and how funding will be used. Inclusion of sensitivities is also recommended to demonstrate how any downside will be managed.

Most importantly, support how the projections will be achieved (using third party data where available) to demonstrate the company’s ability to service the new debt package.

  1. TYPE OF BORROWING

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What type of funding does the business need?

This will vary based on sector, seasonality, life cycle of the business, the term, collateral, capital structure and risk appetite of shareholders/management, among other factors.

The main types of debt facilities are term loans, asset based lending (ABL) for working capital management, lines of credit, bridge financing and mezzanine. A business may require a mix, or one of these.

It is fundamental to understand the purpose of the finance before seeking a new deal and historic cash patterns can be mapped out to understand the highs and lows. For example, when payroll is due at the same time as significant AP accounts there will be a shortage of cash and, if the business is seasonal, high and low periods will affect cash flow. This analysis will inform how to structure the finance and make the decision making process easier.

In the case of term loans secured by real estate, there may be a low LTV due to real estate values improving. Additional equity can be drawn from the property for use in the business and may be a cheaper option than a traditional commercial loan.

  1. AMOUNT AND COST

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The cost of debt includes fees and charges which need to be taken into account. It is beneficial to use a specialist refinance lawyer to understand agreements and the nature of any fees as well as when they become payable.

Exit fees may apply when paying down existing debt and administration/arrangement fees may apply when signing up a new debt package.  Sometimes, in relation to real estate, ‘property participation fees’ are charged and can be significant.

There may be penalties in the facility contract that trigger if the company does not perform certain conditions, e.g. non-provision of financial information, unauthorized withdrawals, set transaction volumes (invoice financing for example). Be mindful of these and ensure you discuss all costs with the lender.

The type of interest rates charged could also be fixed, variable or payable in future (e.g. PIK). To assist you, each facility should be set out using an Excel spreadsheet and the net cost calculated to enable comparison between products.

  1. COLLATERAL

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Oftentimes lenders are over-collateralized i.e. they have too much asset cover to protect their lending exposure.

This can hinder a borrower as too many of its assets are encumbered meaning excess risk is carried and assets are unavailable as collateral for an alternative lender or investor.

The existing debt package should be compared with the collateral pledged.

What is the value of the assets now vs. when the debt was first taken on?

Have any assets been sold or acquired which may weaken, or strengthen, the collateral available?

Recent appraisals will be needed for real estate, stock or plant and machinery assets. We have seen many cases where some of these asset groups can be released leaving them unencumbered and providing the borrower with greater borrowing capacity, or lesser risk. This can assist regulated entities that need to report on ‘free assets’ to regulators.

Lender permissions can also be restrictive when borrowing against certain assets, for example property refurbishment permission is usually required on an encumbered real estate asset, so remain mindful of this too if there are plans to modify certain assets later on.

Personal guarantees are required by some lenders, usually ABLs, but some are comfortable providing a facility using only company assets as collateral. If personal guarantees are provided and backed by personal assets, it may be possible to have these released on a refinance.

  1. INFORMATION

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There is no underestimating the importance of information in a refinancing environment. During the process it is probable that additional tasks and reporting will be required of the company’s finance team and expectations should be managed.

Financial information needs to be up to date and timely. Monthly reporting is usually expected no later than 10 days after the month-end.

The information will be expected to be accurate and consistent. For example, all balance sheet reconciliations need to be performed and agreed. The statements should tie back to the accounting system and relevant metrics such as EBITDA, Free-Cash Flow and Debt Service should be presented consistently (e.g. add-backs).

Depending on the type of trade, both financial and non-financial information may be relevant. In the case of a school for example, student numbers, enrollments, graduations and withdrawals will be relevant.

Projections are usually required on a rolling basis pegged against the year to date historical financials. It is important to remain realistic with projections that can be supported. The proverbial “hockey stick” forecasts with no supporting reasons for growth are common.

The borrower should try to make easy for the lender to say “yes” to a refinance. The more reliable financial information is, the greater credibility will be.

SUMMARY

Refinancing is necessary for a variety reasons, both amicable and hostile. Whatever the reasons, it is important to plan the process and communicate effectively with stakeholders.

Throughout the process, appropriate analysis should be undertaken to make sure the product suits the business needs and is affordable both in terms of cost and collateral.

For dysfunctional financing packages, there is help at hand if needed where plenty of opportunities can be realized.

 

Inspiration for CEOS and Business Owners From Our Founding Fathers

They were lawyers, farmers, merchants, writers and physicians. Those are some of the professions of our Founding Fathers, a topic I wrote about in “Professions of Our Founding Fathers.” Some were wealthy. Some lost everything during the Revolutionary War.

Thomas Jefferson left behind a mountain of debt when he died on July 4, 1826, the 50th anniversary of the signing of the Declaration of Independence, which he primarily wrote.  His rival John Adams, who died just hours later that same day, died free of debt and the owner of 275 acres of land.

No matter their financial situations, these men were successful in creating a new country, one with the largest economy in the world. At $18 trillion, the economy of the United States is close to one-quarter of the economy of the entire world.

As we approach the 241th celebration of that fateful day in Philadelphia, when 13 colonies started the process to create our country, here are some quotes from our Founding Fathers that can inspire any business owner or CEO along with some of their beliefs I find to be self-evident.

founding fathersThey believed in hard work and persistence.  

“I’m a great believer in luck, and I find the harder I work, the more I have of it.” – Thomas Jefferson

“Diligence is the mother of good luck.” – Benjamin Franklin

“Perseverance and spirit have done wonders in all ages.” – George Washington

“Energy and persistence conquer all things.” – Benjamin Franklin

“A people…who are possessed of the spirit of commerce, who see and who will pursue their advantages may achieve almost anything.” – George Washington

“By failing to prepare, you are preparing to fail.” – Benjamin Franklin

“Applause waits on success.” – Benjamin Franklin

They believed in keeping their minds sharp and continually learning.

“Old minds are like old horses; you must exercise them if you wish to keep them in working order. – John Adams

“An investment in knowledge pays the best interest.” – Benjamin Franklin

“Tell me and I forget, teach me and I may remember, involve me and I learn.” – Benjamin Franklin

They believed in the power of principles, confidence and reputation.

“It takes many good deeds to build a good reputation, and only one bad one to lose it.” – Benjamin Franklin

“Associate with men of good quality if you esteem your own reputation; it is better to be alone than in bad company.” – George Washington

“The circulation of confidence is better than the circulation of money.” –– James Madison

“Those who stand for nothing fall for anything.” – Alexander Hamilton

“One man with courage is a majority.” – Thomas Jefferson

“In matters of style, swim with the current; in matters of principle, stand like a rock.” – Thomas Jefferson

“Tis more noble to forgive than to revenge an injury.”  – Benjamin Franklin

They recognized that we the people are only human and it’s important to forgive.

“A fondness for power is implanted, in most men, and it is natural to abuse it, when acquired.” – Alexander Hamilton

“I never expect to see a perfect work from imperfect man.” –  Alexander Hamilton

I’ll close with one of my favorite quotes from Thomas Jefferson, as I make a living as a consultant and turnaround authority. It’s always good to seek help on matters where you need it.

“He who knows best knows how little he knows.”

The #1 Reason Businesses Fail

Around 80 percent of businesses make it through their first year. In five years, only half of those have survived. And only about a third make it to their 10th anniversary.

I’ve written before about the reasons startups fail in my post, “The Top Reasons Startups Fail.”  These include a founder who is inflexible during the startup process, has no contingency plan and who fails to bring in a partner when necessary.

Another major reason startup businesses fail is there is no real need for the product or service they are offering. Many companies fail to do the proper research to determine whether that product or service is really needed prior to launching it.

But well established companies fail too. According to the 2015/2016 Global Entrepreneurship Report, which is published by Babson College and other organizations, more than half of businesses ceased operations due to lack of profits or financial funding. George Bernard Shaw said, “The lack of money is the root of all evil.” It’s also the number one reason businesses fail.

Starting a business without sufficient capital is a major reason startups fail. Even if a business thinks it has enough capital, it needs a contingency fund and a plan to obtain additional funding when needed.

But it’s not just startups that run into funding problems. I tell the stories in my book, “How Not to Hire a Guy Like Me,” about a few companies I worked with that faced major funding shortages. Some of these may be short-term cash flow problems, like needing to cover payroll for a few days. Or they may be more severe. I once worked with a company that relied on its Christmas catalog sales for 65 percent of its business. But UPS wouldn’t deliver the catalogs because the company had consistently broken promises about paying past-due invoices.

A similar situation happened with a company that manufactured oil products. It was behind on its payments to one of the vendors who supplied a key ingredient. The company couldn’t get more of that ingredient to complete a large contract because they didn’t have the funds to keep up with its payment schedule.

Fortunately, I helped both companies overcome their financial shortfalls and both are thriving today.

There are so many other reasons businesses fail. They have the wrong team in place. They didn’t anticipate changes in the market. Their business plan was poorly executed. The senior management is ineffective.

As a turnaround authority, I can evaluate the situation of struggling companies, implement a plan to get them back on firm financial ground, and see them go on to prosper. That’s why I do what I do. But many wait too late to ask for help, or sadly, never ask for help at all. So I’d add that to my list of why businesses fail. They don’t ask for help or they ask too late.

If you think your company could use help, don’t wait to ask for help. An outside consultant has the experience and knowledge to help you find solutions, whatever your issues may be. CEOs need to be proactive to survive.

5 Tips for Running a Healthy Family Business

 

Family-owned companies make up between 80 to 90 percent of businesses in the United States. But only 30 percent of new family businesses survive into the second generation. Here are some tips to help make sure yours is one of the those that survives to the second generation and beyond.

  1. Have clearly defined roles

Family businesses should be like others with job descriptions, goals and regular reviews. As the article “6 Steps for Maintaining a Thriving Family Business” points out, “Family firms tend to be more informal than other companies, and that can lead to misunderstandings about expectations.”

With clearly defined roles, each family member can act independently, without feeling the need to fight for territory or worry about stepping on someone else’s toes. A business can be much more nimble and responsive if everyone knows what their role is.

  1. Try to separate your business life from your family life

This can be one of the hardest things to do. It’s natural when any co-workers gather to discuss business. But when it’s a family business, that talk can tend to dominate.

Some families have rules and set boundaries. No business talk at the dinner table or at family gatherings. This can be especially important for couples who work together.

Francis and Susana V. Ptak co-own Gascoyne Laboratories, an environmental testing lab. In the article For Couples Working Together, Setting Ground Rules is a Must, she says, “Two things have helped us not kill each other. One is that we don’t do the same thing (Francis is a chemist and handles the analytic end of the company; Susana takes care of the business side), and the other is that we don’t talk business at home. In the car, yes, but once we’re actually at home, we just talk family stuff.”

  1. Make sure each family member is trained and suited to the position

Working at a family business shouldn’t be seen as an entitlement. Any family member should face the same screening and testing as any other applicant. They should also receive any training necessary to excel at their job. I’ve seen family members hired and promoted to senior positions despite their lack of necessary skills or suitability for the job.

This article, “Avoid the Traps That Can Destroy Family Businesses,” addresses the issue of family members working for a business as a last resort.

“We’ve encountered many companies that are populated by next-generation members who failed in other businesses or spent their 20s (and sometimes their 30s) as aspiring athletes, artists or musicians before signing on to the firm as unprepared 40-somethings. Despite their lack of experience, these offspring may ascend to leadership positions because of the family connection, increasing the chances that the business will fail.”

  1. Encourage innovation by having several generations involved

Research has shown that family firms are actually more innovative despite a reputation for sometimes relying on old, traditional ways of doing business. One way to encourage continued innovation is by involving members of the younger generation as soon as possible.

Identify younger members of the family who have an interest in the business and get them involved early with internships and entry-level positions. Let them rotate among different departments to see where their interests and talents are. Encourage them to work for other companies for a few years if they’d like and bring that experience and knowledge back to yours. 

  1. Have a clear succession plan 

Having an updated succession plan is crucial for any business. It is even more vital for a family business as family feuds may erupt upon the death of a business founder. In one memorable case in my career, the one I refer to as Crazy Charlie, a business owner died and his daughter became CEO as there was no board-approved succession plan in place. Son Charlie was unhappy about this, primarily because he had been stealing money from the company and we confronted him about it. He expressed his unhappiness by threatening his mother, who controlled the board of directors, with a kitchen knife.

The greatest threat to a family business is the failure to plan and manage succession well. Read more about creating a succession plan in my post Don’t Miss the Exit: Make a Succession Plan.

The Top (Self-Serving) Reason You Need to Keep Your Employees Happy

 

 

Why should I thank my employees for coming to work? Why do we need employee appreciation events like lunches, dinners and parties? I gave them a job, which they are lucky to have these days. Isn’t that enough?

You may have heard these sentiments expressed by CEOs and business owners. Or perhaps you’ve had similar thoughts yourself. Isn’t every two-hour lunch event decreasing your employees’ productivity and costing your business money?

The answer to that is yes. But if these events help keep your employees happy and prevents them from leaving, you are saving money. A lot of money when you consider the high cost of turnover for filling any one of those jobs.

You can find out just how much that cost is with this Turnover Calculator  from The Predictive Index, a workforce assessment company.

This six-step calculator takes into account items such as the cost of covering the position during the time it is vacant, the hiring manager’s time, advertising for the position, resume screening, company time spent interviewing and background checks.

Other costs include the time to onboard the new hire and time for that person to obtain full productivity.  (To obtain the full report on this site, you will have to give your name, company and email at the end. There are other online calculators available as well.)

A study done last year by the Society for Human Resource Management, the 2016 Human Capital Benchmarking Report, concluded the average cost-per-hire is $4,129. And that doesn’t include the additional cost associated with onboarding the new hire.

Whatever the final figure is, it’s indisputable that losing an employee is expensive. So, next time you find yourself concerned about the cost of yet another employee outing or party, remind yourself that if that event helps keep people happy and engaged, it’s a bargain for your business.

The good news is the biggest thing you can do to help retain employees is also the simplest. Show appreciation. Say thank-you. These simple gestures can contribute to your bottom line as well. In an  article in the Wall Street Journal about showing appreciation at the office, it was reported that more than half of human-resource managers say showing appreciation for workers cuts turnover, and 49 percent believe it increases profit.

To read more about how appreciation helps and recognition needs to extend beyond the paycheck, please see my blog Any Time of Year is Good to Express Appreciation.

Here’s some further reading on ways to retain your employees.

How Loyal Employees Contribute to Your Bottom Line
This is a two-part series on the importance of developing and maintaining loyal employees. Part one explores why every company should focus on having loyal employees and how doing so contributes to its revenue. Part two offers tips of how to develop loyal employees.

Work-Life Balance Key to Recruiting, Retention
This two-part series is on the growing importance of offering a work-life balance to employees in your company. Having a work-life balance was ahead of money, recognition and autonomy for more than half the people surveyed in a study done by Accenture in determining whether or not they have a successful career. Part two, Work-Life Balance, the #1 Thing to Offer, discusses the one critical component your workplace must have to keep employees.

5 Things to Know About DIP Financing

If you aren’t familiar with the term DIP financing, well, that might be a good thing. That means your company hasn’t had to explore the possibility of bankruptcy.

DIP (which means debtor-in-possession) financing is for companies in financial distress, primarily for those who have filed for Chapter 11 bankruptcy. Even if you think you may never have to worry about bankruptcy, it’s good to understand what DIP financing is. It is important that you obtain financing PRIOR to filing for bankruptcy protection. To do otherwise seriously jeopardizes your ability to survive.

Remember, even if you are contemplating filing bankruptcy, that does not have to mean the end of your business. Many companies successfully emerge from bankruptcy and DIP financing can be one of the tools your company uses to get it through a difficult time.

Here are five things you should know about DIP financing.

1. This form of debt can allow a company to continue operating until the assets of the company are sold or the business is successfully reorganized. Companies in distress need money to continue operating. But they may already have cash flow problems, and once they have filed for Chapter 11, other forms of credit may dry up, they may begin to lose revenue as customers go elsewhere and they may have additional expenses related to the bankruptcy. So, they may need another source of cash quickly. DIP financing is often the best answer.

2. DIP financing can sometimes be obtained from an existing lender. Sometimes an existing lender will lend money in the form of a DIP loan. They may do so to protect their interests, finance a sale or to protect a liquidation of your assets. The majority of DIP lenders last year were interested parties, according to DebtWire’s North America DIP Financing Report for 2016.

But a current lender may be reluctant or unable to increase its debt level with a company that has filed Chapter 11. A DIP from another lender can be the answer to obtain financing when other sources are not available.

3. Unlike some forms of debt, DIP financing takes top priority, despite it being the newest form of financing for a company. Remember, “Last in, first out”. This is referred to as super priority. A DIP load will be paid back before any other existing debt. This of course is critical to the lender as they have reassurance they will most likely get paid back, even if the company ends up being liquidated. Note that Administrative Claims of the Bankruptcy could be carved out prior to your Super Priority Claim. A good lawyer can assist in this process.

4. Interest rates can vary widely. Rates in 2016 varied from 12% to 18%, according to DebtWire’s DIP Financing Report. Most had maturity rates of less than a year, while some were as short as three months. Note that interest rates for smaller DIP loans (less than $1.0 million), which have more risk to the lender could approach 20%+ range.

Amounts vary widely as well. I’ve worked with companies that needed DIP loans of less than $1million but most required millions of dollars to finance their survival.

5. DIP financing can help restore confidence to the companys vendors and customers. Knowing that a lender has examined the business and its ability to repay the money, and is willing to lend it more money can help calm concerns in the market. Customers and vendors that may have been tempted to take their business elsewhere may be reassured that the company has the funds to continue operations, keep vendors current and is committed to emerging from bankruptcy.

If you’d like assistance in obtaining DIP financing, please contact me directly at LKatz@GlassRatner.com or (404) 307-6150. We have many sources throughout the country. We also have several local lenders that specialize in smaller credit facilities.

Giving Employees Bereavement Time is Good For Business

Facebook made the news recently for adding a generous paid bereavement leave to its list of benefits. An employee can get up to 20 days of paid leave when a member of their immediate family dies and 10 days for a member of their extended family.

COO Sheryl Sandburg, who tragically lost her husband Dave in 2015 during a trip to Mexico, announced the policy on where else? Her Facebook page.

“We’re extending bereavement leave to give our employees more time to grieve and recover and will now provide paid family leave so they can care for sick family members as well. Only 60 percent of private sector workers in the United States get paid time off after the death of a loved one and usually just a few days.”

Her post got over 35,000 likes.

I’m a big proponent of employees taking time off for vacation, and have written about it several times. In “Three Reasons You Want Employees to Take Vacation I discuss how it’s better for their health and makes them more productive to have a break from work.

Bereavement leave is in a different category than vacation, of course. And there is no federally mandated requirement for payment for time off after the death of a loved one, even to attend the funeral. However, about 60 percent of all workers do receive around three days for the death of an immediate family member and one day for extended family members.

The 2016 Employee Benefits Report done by the Society of Human Resource Management reported that 81 percent of employers give paid bereavement leave for their employees.

The typical amount of leave given was one day for an extended family member or relative of an opposite-sex partner; two days for a miscarriage, relative of a spouse or relative of a same-sex spouse; three days for an extended family or partner and four days for a spouse or a child. Most companies did not provide any leave for the death of a friend or a colleague.

(Many companies are giving time off for the death of a pet. But that’s a topic for another day.)

A study done by Boston Consulting Group on a situation that also involves leave – family leave for mothers and fathers – found that “employers see a solid business case for offering paid family leave, including benefits such as improved talent retention and attraction and their own ability to manage the costs of the program through thoughtful policy design.” This study was conducted by reviewing the policies of more than 250 companies.

An article about the study, “Why Paid Family Leave is Good Business,” points to five reasons giving family leave is good for business. I believe a few of these can apply to bereavement leave as well.

  • Employee retention. When employees feel valued as individuals by being given time off when they need it, then tend to stick around.
  • Improved engagement, morale and productivity. An employee who isn’t allowed paid time off after the death of a loved one can suffer from low morale. And even though they may be in the office right after a death, they won’t be very productive. Giving them time off allows them to be with family during a difficult time.

“Companies that stand by the people who work for them do the right thing and the smart thing – it helps them serve their mission, live their values, and improve their bottom line by increasing the loyalty and performance of their workforce,” Sheryl wrote in her Facebook message.

I do have to add one caveat, however. I once worked with a company where a guy took leave three times in one year, each time claiming his grandmother had died. “How many grandmothers do you have?” I asked him after the third time.

“Oh, [expletive],” he said, realizing he’d been caught. “Yeah, you used that same excuse three months ago,” I informed him. He did not get paid leave that time.

In my career as a turnaround authority, I often employ the motto “Trust, but verify.” In the case of bereavement leave, this is a good motto to remember. You don’t want a few people who are taking advantage of a policy to ruin it for everyone else.

Giving employees time to grieve is the right thing to do. It shows an employee you care, and can lead to increased productivity. Sounds like a win-win to me.