Sue Ostrowski

Today’s executives often work long hours at great personal sacrifice to ensure the success of the businesses that they manage. The trade off for this dedication is often the ability to build a great deal of personal wealth, while enjoying the satisfaction of knowing that this wealth can ultimately be used to improve the lives of future generations.

In reality, a smooth transfer of wealth to one’s heirs is not a guarantee, says Lance Yanagihara, a relationship manager who leads a group of Japanese-American bankers at Union Bank’s Private Bank. Without a strategic wealth plan, many people may find that a smaller portion of their wealth will make it to their intended recipient.

Smart Business spoke with Yanagihara about taking steps to preserve wealth for the next generation and about some of the potential cultural nuances of effective wealth planning.

Is there a best time to address wealth planning?

Anytime someone has begun to amass any significant amount of wealth, it is important to begin the process of wealth planning. A lot of people have a living trust, and while that’s not a bad start, those with wealth really need to go beyond the simple mechanics of a trust and explore how else they might be able to transfer wealth while reducing estate tax at the same time.

Due to several current conditions, now is a particularly good time to embark on a wealth planning process. For one thing, if a client has assets that are currently depressed in value, such as real estate, it might be an advantageous time to pass those assets on to their heirs. Using a combination of depressed asset values, discounts for transfers of minority interests, and record low interest rates, wealth transfer and estate planning can be combined to save a great deal of money. Paying gift or estate taxes based on today’s discounted values, rather than waiting until a later date when some or all of that value may have been regained, makes for good planning. Additionally, the current gift tax rate of 35 percent is at a historic low making it a great time to employ selected strategies that can lower gift tax rates to as low as 26 percent.

Passing a residence or vacation home to children using a QPRT (qualified personal residence trust) works well with depressed real estate values. The use of GRAT (grantor retained annuity trust) or CLT (charitable lead trust) can enhance wealth transfer planning with the combination of low interest rates, low valuations and higher discounts, all of which are present today.

How can working with a wealth planning specialist be beneficial?

Often, people are so busy they don’t have a chance to think about planning so it really helps to work with a professional with the experience, knowledge and objectivity to assess the situation and make specific recommendations. Also, a wealth planning strategist is in tune with the constantly changing opportunities that are available. This highly specialized knowledge and experience can translate into a much larger percentage of a client’s wealth being transferred according to their wishes.

Another potential benefit relates to working with a wealth planning specialist who offers very specific expertise aligned with the client’s unique needs. For example, our Private Bank offers experts in succession planning for business owners who need help determining the succession path of the business that they have nurtured over the years. Also, as the Japanese Segment lead, I provide specialized solutions for Japanese and Japanese-American clients including members of the Nisei generation, which is first-generation U.S.-born Japanese-Americans, many of whom are now in their 70s and 80s. Many of these people built their wealth in the aftermath of World War II, so extra care should be taken to transfer their legacy in a tax-efficient manner. This is where I feel I can add great value to these clients.

How important is being fluent in Japanese when working with the Nisei generation on wealth planning?

By definition, the Nisei were born in the U.S., so there are no language issues. But I think many of them would appreciate working with a banker who understands and shares their culture and heritage.

For those who immigrated to the U.S. after the war, or whose spouse is from Japan, however, there may be a strong preference to work with a Japanese-speaking banker. You want to make sure that they understand the options that are being presented, and sometimes the best way to do that is in their native tongue.

When someone is ready to begin planning, what are the first steps?

The process starts with an interview with a wealth planning specialist. Many people have a vague understanding of what they want, and the right wealth strategist will be able to ask pertinent questions to bring those needs to light. Once the wealth strategist has all the relevant information, he or she can develop a goal-based client analysis and then present specific implementation suggestions. After that, he or she will work with the client’s CPA and attorney to help the client implement the plan.

Wealth planning strategies have legal, tax, accounting and other implications. Consult a competent legal or tax adviser.

Lance Yanagihara is a relationship manager at the Private Bank and Japanese Segment lead at Union Bank. Reach him at

Any bank can make a loan, handle your business deposits and help with investments. But to establish a truly enhanced banking relationship it requires a bank with segment specialist bankers that know your industry and understand your business, says David Jochim, senior vice president and division manager at Union Bank.

“Our segment specialists for legal, medical and accounting professional service businesses are dedicated bankers who are focused on a specific industry. They manage a portfolio of similar clients and are seasoned professionals that deliver the best client experience,” Jochim says. “In addition, these individuals have the knowledge and expertise to work with the owners and executives on their personal banking needs. It’s a very holistic approach, where one point of contact, the relationship manager, can assemble the appropriate team to deliver the right products and services to the client.”

Smart Business spoke with Jochim about how a relationship with a segment specialist banker can provide substantial benefits for both your business and personal finances.

What is a segment specialist banker?

A segment specialist banker has a deep knowledge of a particular industry, whether it be law firms, medical practices or accounting firms. The banker is knowledgeable about the unique banking requirements for that industry, including its trading cycle, working capital fluctuations, capital investment requirements, expansion opportunities, real estate needs and treasury management platforms. The professionals and the businesses they own and operate are closely linked together. The specialty segment banker is in a position to assist both.

Because the banker specializes in a particular industry, they understand all the nuances of their business. They have completed industry-specific training as it relates to bank requirements and continually stay current on industry trends and issues. In short, they immerse themselves in the field and, over time, develop a keen proficiency that becomes an asset to the clients they serve.

How can forming a relationship with a segment specialist banker benefit a business?

Initially, it will save time because the business owner doesn’t have to explain the fundamentals of the industry, only specific nuances of their business. The banker will be a strong advocate within their institution for the client due to their extensive knowledge and experience. For example, if the entire industry segment is experiencing a downturn, the banker understands and can apply the appropriate actions to assist their clients accordingly. Their effort is centered on successfully helping the client weather the storm.

Another important benefit is that entering into a specialty banking relationship can often entitle the owners/partners, executives and employees of that business to a preferential array of banking products and services. In this way, all the participants of the firm can derive benefits from the relationship.

In what other ways can the owners or partners benefit from this type of relationship?

These individuals will have the ability to optimize their personal banking needs as the result of having access to the resources of a private bank. Whether they want to set up a trust to protect their heirs or develop a wealth plan to grow and preserve their assets or simply require a jumbo mortgage for a new home purchase, they now have access to a team of experts who can help them make the best financial choices.

If you want to make the switch to a segment specialist banker, where should you start?

Start by seeking out a bank that specializes in your industry. If you don’t have this information, your accountant, lawyer and industry colleagues are good resources. Then sit down with the banker to discuss your specific business goals and objectives. The banker needs to understand how they can assist you on this journey. Every client within a specific industry is unique, but they all have similar banking requirements. The banker will use his or her knowledge of the industry and your business to tailor appropriate cash management, credit and other financial solutions.

The goal is for the owners to feel confident that their banker is delivering consistent banking solutions that help the business and the individuals succeed in meeting their financial objectives.

David Jochim is senior vice president and regional director responsible for specialty banking at The Private Bank of Union Bank. Reach him at (949) 553-2520 or

Thursday, 25 November 2010 19:00

How to take advantage of expiring tax laws

With great uncertainty in the tax arena for 2011, it can be difficult for business owners to plan for the future. But several tax breaks are expiring, and owners need to act now to take advantage of them, says Steve Magovac, CPA, MT, an associate director in tax at SS&G.

“Over the last few years, the government has been favorable to small businesses, offering a significant increase in tax breaks to entice growth and investment in small companies,” says Magovac. “As a result, companies can lower their taxable income, which frees up cash and allows them to reinvest in themselves rather than pay the IRS.”

Smart Business spoke with Magovac about what you can do now to take advantage of changes to the 2010 tax laws.

Why do business owners need to act now to take advantage of the current tax climate?

We have no idea what is going to happen in 2011 and whether or not rates are going to go up. Tax planning right now is a gamble. You may have the opportunity to defer revenue — and therefore, taxation — until next year, but if rates go up, you might pay more than you would have this year. The president and Congress have every intention of raising rates. It didn’t happen this year, and if the economy doesn’t improve, they may put it off for another year, but rates will eventually go up.

How will the HIRE Act impact employers?

The act was passed this year to promote jobs. The IRS granted relief to employers who hire a worker who has not worked a 40-hour-a-week job in the 60 days previous to being hired. The employer is relieved of its Social Security match of 6.2 percent. It applies even if you hire an employee who was working a part-time job, and another employer hires that person on a part-time basis. The second employer would be relieved of that match.

You can’t lay someone off just to hire someone new for the credit. But if someone leaves, or is fired for cause, the person hired to fill that position could be eligible.

On top of that, if you hire that person and he or she works for you for at least a year, the employer is entitled to a tax credit of up to $1,000, which would be claimed on the owner’s income tax returns. This applies to employees hired after Feb. 3, 2010, and for wages paid after March 19.

A lot of companies are missing this opportunity for relief on payroll returns. If you haven’t taken the opportunity because you were unaware of it, you can amend your payroll returns to apply for a refund.

If a business owner hires his or her spouse, the spouse is eligible for the payroll credit, but children, siblings and other extended family members are not. Both incentives to hire new employees are set to expire on Dec. 31, 2010.

How does the new small employer health insurance credit work?

In 2010, any company that pays at least 50 percent of its employees’ health insurance premiums is eligible for a 35 percent credit of premiums paid. This applies to employers with fewer than 25 full-time-equivalent employees whose average income is less than $50,000.

The credit begins to phase out when the employer has more than 10 full-time employees and phases out entirely for those with more than 25 employees. If the average wage is less than $25,000 per year, the employer is eligible for 100 percent of the credit. Starting at $25,000, the credit begins to phase out, and phases out entirely at $50,000.

The credit is able to offset any Alternative Minimum Tax (AMT), which is a good thing, since many taxpayers are subject to AMT.

The calculation is cumbersome, and there are a lot of nuances, but for small employers, it is definitely worth pursuing.

How is bonus depreciation impacted for the 2010 tax year?

Previously, bonus depreciation expired on Dec. 31, 2009, but Congress extended it until Dec. 31, 2010. Bonus depreciation allows businesses to write off the first 50 percent of the cost of the assets, and the remaining 50 percent to depreciate over the useful life of that asset. If you buy a new piece of equipment for half a million dollars, you can write off the first $250,000 and depreciate the remainder. At present, if you wait to purchase the new equipment in 2011, you would have to depreciate the entire cost over its useful life.

Why is now a good time to consider converting a traditional IRA to a Roth IRA?

For 2010, the government has allowed deferral of the income pickup for two years. If you convert in 2010, the first half of that income doesn’t have to be picked up until 2011, with the second half in 2012. If you wait until 2011 to convert, you have to pick up that income in the year you convert it.

However, there are a lot of factors to consider before converting to a Roth IRA. Each person’s personal situation is different, but everyone should consider current and future tax rates, current and future cash flow needs, ability to pay the conversion income tax, time horizon, estate planning objectives, and fair market value of the Traditional IRA account balance, just to name a few. Run the numbers and weigh all the factors. Don’t just assume that you shouldn’t do it, or that it looks great, without looking at all the factors.

What should business owners consider for 2011?

Certain S corporations that were previously C corporations that were considering selling assets should consider waiting until 2011. The general rule has been that if a corporation that was previously a C corporation converts to an S corporation, sells assets within the first 10 years, and is deemed to have built-in gains, it may have to pay the Built-in Gains tax (BIG tax). For 2009 and 2010 tax years, the recognition period was reduced to seven years. In 2011 only, that window for selling assets will decrease to five years. So if you’re selling assets subject to the BIG tax, you may want to wait until 2011.

Steve Magovac, CPA, MT, is an associate director in tax at SS&G. Reach him at or (330) 668-9696.

You’ve worked hard to build your business, making sacrifices to create a successful enterprise. But what’s going to happen to it and all the assets you’ve worked so hard for after you’re gone?

While business owners focus on the day-to-day tasks of running their companies, many fail to plan for the future of the business, says Loma L. Swett, a partner in Stark & Knoll’s Estate Planning & Probate Group.

“You’ve spent a considerable amount of time building a successful business, and you need to ensure that when you’re no longer able to run your business that there is a plan in place to effectively help the business and your loved ones,” says Swett. “Having a will is not enough; you need to have an estate plan in place and to coordinate your assets so the business can continue into the future.”

Smart Business spoke with Swett about how to develop a comprehensive and coordinated estate plan.

What happens if a business owner dies or becomes disabled, and there is no estate plan?

Consequences range from potentially paying estate taxes that wouldn’t have had to be paid with proper planning, to your heirs being forced to sell your business.

For example, there was a gentleman in his fifties who was the sole owner of a company. One morning he didn’t wake up. His estate plan consisted of a simple will. As a result, the business went through a probate court administration process, it’s value was available for the public to learn and the business had to be sold at a dramatically reduced value. Upon his spouse’s death, there will be estate taxes due that, with planning, could have been avoided.

In addition, those surviving you don’t know if you intended for your spouse to take everything, including your business interest. Maybe you have a business partner you wanted to pass your business interest on to, but that won’t happen without, at a minimum, a will, or, better yet, a buy-sell agreement to the partner, or setting up an automatic redemption of your interest back to the company.

Also, what happens if you become disabled, or lose mental or physical capacity? What happens to the business if there is no financial power of attorney in place and no advanced directives for someone to help with financial and health care decisions for you? It leaves everyone at a tremendous disadvantage during an already stressful time.

How can a will and other estate planning documents help preserve your business?

In addition to a buy-sell, there are things you can do through estate planning, such as gifting, setting up a trust with transfer of assets over time or at your passing, or entering into a close corporation agreement so that when you are gone other co-owners of the business don’t have to rely on your family members, who don’t understand the business.

A will is only effective for assets that are in the individual’s name exclusively. The above-mentioned contractual arrangements or beneficiary designations and accounts held jointly with right of survivorship override a will and bypass the probate process.

A will only controls those assets that go through probate court. And through probate, the value of those assets are open to the general public in an inventory that must be filed and an accounting, which will give a prospective purchaser information of the ongoing viability of the business. Those are things that can be avoided with proper estate planning.

What steps can a business owner take to preserve wealth for heirs, or begin to transfer the business?

Taxes will have to be paid if they are due, but there are ways to reduce estate taxes. There are ways to transfer assets during your lifetime, outright or in a trust, that are below the threshold of having to pay tax now. There is also the possibility of taking advantage of any discounted valuation of the business available with appropriate planning.

If you don’t have assets that are liquid and have no estate plan, an heir may have to sell your business to pay estate taxes. However, if you are insurable you can have insurance purchased in an irrevocable life insurance trust and the proceeds will be outside of your estate for tax purposes. That provides liquidity for your heirs if estate taxes are due.

As mentioned above, to begin transitioning the business, you can enter into a close corporation agreement between you, as the controlling owner, and someone who is not. It’s a transfer of the business, but with restrictions on some things that can’t occur without the consent of all parties, guarding against future uncertainty. For example, if you transfer the business directly to your son, he could then sell the company without your consent. A close corporation agreement can be drafted to prevent that from happening. This protects the owner, who has always had an income stream from the business and wants to ensure that the income continues into the future.

It’s one way to transition the business effectively, without animosity or the need for an adversarial setting.

Can a business owner develop a plan on his or her own?

I would strongly advise someone to consult with an expert to gain an understanding of the things that need to be addressed, as opposed to simply going online and filling out a will.

In an initial meeting with an estate planning attorney, he or she will review your assets and listen to your intent, not only for your family members but for your business interests as well. Ideally, that person will also work with your CPA or broker, creating a team to assist you with a comprehensive plan of what you want to happen. Be prepared to discuss your concerns, how you see the business operating without you and what you want to pass on to your family members in light of the time and energy you’ve put into the business.

Once the plan is in place, it should be reviewed every few years to see if your intent or assets have changed and if you need to make revisions.

Loma L. Swett is a partner in the Estate Planning & Probate Group at Stark & Knoll Co., L.P.A. Reach her at or (330) 376-3300.


The new health care reform rules are changing the way that employers will administer cafeteria plans for their employees’ health care.

Under a SIMPLE cafeteria plan, smaller employers will now be exempt from nondiscrimination testing, but other changes will put limits on Flexible Spending Arrangements and Health Savings Accounts, says Kimberly Flett, CPA, QPA, QKA, associate director at SS&G.

“There are several things that are going to be coming up, but fortunately, there’s still time for employers to prepare, as the bulk of the changes don’t go into effect until 2011,” says Flett.

Smart Business spoke with Flett about the upcoming changes and what employers can do to get ready for them.

Which companies can offer a simple cafeteria plan, and how does the plan work?

To offer a SIMPLE cafeteria plan, an employer must have had fewer than 100 employees in the preceding two years. Once the plan is established, the company will be considered as meeting the requirement even if it employs more than 100 people in subsequent years, in order to encourage employers to continue hiring. However, once an employer has 200 or more employees, it no longer qualifies for the SIMPLE cafeteria plan.

A SIMPLE cafeteria plan should allow for employees to pay their portion of the health, vision, dental and other employer-sponsored welfare premiums on a pretax basis. The employer must also provide a minimum contribution of at least 2 percent of the employee’s compensation, or the lesser of a 200 percent matching contribution or 6 percent of the employee’s compensation.

What are the benefits of offering a SIMPLE cafeteria plan?

If an employer offers such a plan, the plan is deemed to pass discrimination testing. In discrimination testing, highly paid executives and other key employees’ (as defined by regulations) benefits in the plan are tested in comparison to other employees who are contributing to the plan. If the plan does not pass certain threshold tests and the plan fails, benefits are refunded as necessary to the HCE/Key employees and they become taxable to them.

For companies that have a lot of higher-level employees, such as a physicians’ practice or a law firm, making the commitment to a SIMPLE cafeteria plan can allow key employees and executives to maximize their benefits by freeing them from discrimination testing.

Another incentive to employers is the savings on payroll taxes. In addition, because the IRS may provide its own checklist in order to implement these plans, employers will save on plan document costs as well.

One drawback, however, is that employers have to make that minimum employer contribution, which means putting more dollars into the plan, but with executives or key employees and discrimination testing issues, it may be worth the investment.

What changes are coming for Flexible Spending Arrangements?

A big change is that beginning in 2011, nonprescription, over-the-counter drugs are no longer eligible for reimbursement out of an FSA, and that applies to Heath Savings Accounts and Health Reimbursement Accounts, as well. In order to be reimbursed for those costs, a person will have to get a prescription from a doctor for the over-the-counter medication. Because unused money in an FSA is forfeited at the end of the year, people were stockpiling over-the-counter medications to empty the account. There was also a lot of confusion over paying for general wellness items, such as vitamins and weight loss pills, which are not covered. Eventually, as a result, employers will have to amend their cafeteria plan documents to reflect these changes. The burden is on the employer to maintain the plan, keep adequate records and ensure the plan is passing testing.

What are some other changes?

Also beginning in 2011, the penalties are increasing from 10 percent to 20 percent if funds from a Health Saving’s Account are used for nonmedical expenses before age 65.

And beginning in 2013, the maximum reimbursement amount will be limited to $2,500 for Flexible Spending Accounts as part of a Section 125 plan. Currently, there is no IRS limit on the amount that employees can defer on a pretax basis into a flexible spending account, although the average company imposed a limit of $5,000 because the employer is responsible for paying the employee those amounts if the employee had made deferral elections. As a result, if an employee opts to defer $5,000, then in January has surgery and wants to withdraw it, the employer must pay, even though that employee hasn’t had that money taken out of his paycheck yet. This presents a problem if the employer reimburses the employee who then leaves the company.

By imposing a $2,500 cap, the IRS generates more after-tax revenue, but it also presents the opportunity for a cost savings to the employer.

Can employers navigate these SIMPLE cafeteria plans on their own?

I would not recommend employers try to navigate this area on their own. It’s really important to consult with your attorney or your CPA to make sure you have all your ducks in a row. You have to be careful, because there are different rules depending on entity type, and you need to consider the tax implications.

Just talking to your insurance carrier who may not be skilled in tax compliance, or getting information from the Internet, could get you in trouble.

Kimberly Flett, CPA, QPA, QKA, is an associate director in the Retirement Plan Design and Administration group at SS&G. Reach her at (800) 869-1834 or

If you’re looking for someone to invest your money, any number of financial advisers will do. But if you’re a high-net-worth individual who wants someone to manage everything from investments to estate planning to insurance, a wealth management professional is better suited to meet your needs, says Michael Spector, CEO of Vista Wealth Management, an affiliate of Burr Pilger Mayer.

“Do you just want someone to invest your money for you, or do you want someone who can pull together and manage all areas of your financial life?” he says. “A wealth management professional will not only invest your money but also act as your personal CFO, building a relationship with you to guide you through every aspect of your financial health.”

Smart Business spoke with Spector about the key differences between a traditional investment adviser and a wealth manager.

Who can benefit from wealth management services?

Almost anyone can benefit from the services that a wealth management firm offers, but most firms have hard minimums and will not work with clients who have less than $1 million of liquid investable assets. Individuals and families that value professional advice and are seeking guidance on all areas of their finances, not just the investment piece, will benefit from wealth management services.

What is the difference between wealth managers and traditional investment advisers?

At Vista, we have modeled much of our service and process based on a formula created by John Bowen, founder of CEG Worldwide: Wealth management equals investment counseling plus advance planning plus relationship management. You need to have all three of those things to provide wealth management.

A majority of advisers in the investment community call themselves wealth managers, although a study by CEG found that 93 percent of those calling themselves wealth managers were really just providing traditional investment generalist services. These investment advisers typically review a client’s portfolio, make suggested changes and then follow up with quarterly performance reviews. The focus is on the investments and the relationship is mostly transactional.

With wealth management, the investments are a piece of it, but the real value comes in the advanced planning and getting the client’s financial house in order. The wealth manager helps a client deal with a variety of issues that include estate planning, insurance planning, cash flow management, retirement planning, charitable giving, college funding, special needs trusts and asset protection, providing the individual with a top-level analysis and recommendations much the way a CFO would present findings to the CEO. In both scenarios, the client is the CEO; the difference is whether or not a CFO provides guidance and does the heavy lifting for the CEO.

How do you identify a wealth manager who’s right for you?

The people are the most important component for any relationship, so making sure that you have absolute trust in the integrity of the team is of paramount importance. You will need to understand what services the firm offers and how they are delivered. Does it have in-depth knowledge of these areas and the services it says it’s going to be providing? Does it have a process that it adheres to and a systematic way of delivering those services? It’s also wise to ask for client references.

How does the process of building a relationship with a wealth manager work?

Most firms start with a type of discovery meeting. Oftentimes the client will be asked to bring bank statements, broker statements, tax returns, wills or trusts, insurance declaration pages, outside investments and any other documents relative to his or her financial situation. The intent is for the adviser to understand the client’s goals and desires and to build a client profile that includes these goals, as well as values, significant relationships, assets, other advisers, interests and hobbies. From that, the wealth adviser can start to understand the client and begin mapping out both the investment plan as well as advanced planning issues that will need to be addressed in the coming weeks, months and years.

Whereas an investment adviser might say, ‘Here’s what you should do with that money,’ a wealth manager takes a more consultative approach, really getting to know clients and everything that is going on in their lives that could have any bearing on their finances and their financial goals.

The adviser will then develop an in-depth plan and a list of actionable opportunities. After the potential client reviews the plan and decides whether or not to move ahead, there is a commitment to the process, at which time the individual or family becomes a client and both sides agree to adhere to the plan. In our firm, we always follow up with a new client 45 days after we begin to make sure that we are all on track with expectations of each other. Then there are regular quarterly meetings, although those meetings can also be more or less often based on the client’s needs.

How do wealth advisers charge for their services?

Most wealth advisers have some form of asset fee, charging a percentage of assets under management. Some charge on a sliding scale, with the larger the amount of assets under management, the lower the fee. For example, if someone has $5 million under management and is being charged a blended rate of 0.75 percent, they would pay $37,500.

Other advisers charge that same fee, then charge other fees for ancillary services such as estate planning and insurance planning, a combination of assets under management, plus fees for a la carte services. Finally, some firms work under the notion that they’re managing much more than liquid wealth; they manage your home, rental properties, outside investments, etc., and add up all the assets on which they’re advising to determine a fee.

Michael Spector is the CEO of Vista Wealth Management, an affiliate of Burr Pilger Mayer. He can be reached at (650) 855-6806 or

New additions to fair value accounting standards have been proposed by the Financial Accounting Standards Board (FASB) with the release of Exposure Draft 1830-100, Fair Value Measurements and Disclosures (Topic 820), on June 29, 2010. If approved, these standards will impact businesses and entities of all sizes. And while the changes will make reporting much more transparent for financial statement readers, it is significantly more work for financial statement preparers, says Daniel Figueredo, manager at Burr Pilger Mayer.

“The new standards in the exposure draft will help converge the U.S. generally accepted accounting principles (GAAP) with international financial reporting standards (IFRS),” says Figueredo. “It’s a pretty robust draft with many new disclosure requirements. If it’s issued as is, it will be challenging for businesses.”

Smart Business spoke with Figueredo about how the new standards will impact businesses and what you can do now to prepare for the changes.

How do the disclosure requirements in the exposure draft change how financials are reported?

One of the most significant disclosure requirements that could affect businesses is the need to disclose a sensitivity analysis that attempts to measure the uncertainty in your fair value measurements categorized as level 3, which are the items that require the most management judgment to value. What this requirement says is, ‘If you change one or more of the assumptions used in your fair value formula to a different amount that could have reasonably been used, what are the effects on fair value and how much would it have changed?’ You will have to disclose the range of that price change, thus giving a reader a sense of the degree of possible swings to your balance sheet for other likely fair values that one could have arrived to.

For example, say a company such as a bank has mortgage-backed securities in its portfolio. These instruments require a fair amount of judgment by management to value, and would likely be categorized as level 3. Factors considered in measuring the value of a mortgage-backed security could include pre-payment assumptions, default rates, loss severities and discount rates, to name a few.

Under the sensitivity analysis, management would need to determine which assumptions in the valuation are most significant and then come up with other likely amounts that could have been used for them to arrive at another theoretical fair value.

What other provisions are contained in the new draft?

As part of the new provisions, the exposure draft indicates that you should not consider blockage factors for level 2 or 3 fair value measurements. That essentially means that you should not take further discounts to fair value just because you own a large chunk of shares, such as with large investors like Warren Buffet’s Berkshire Hathaway or hedge funds. If you have a large position and you need to liquidate, that sale will affect the price of the stock (typically downward). But you could very easily sell smaller chunks of stock over longer periods of time. Blockage discounts are viewed as transaction costs, and the effects should be recognized when the decision to sell a block is carried out, rather than as period to period fair values.

In addition, the new draft contains certain disclosure requirements when an asset is used in a way that differs from its highest and best use. Also, the highest and best use premise should only be applied to nonfinancial assets, and not financial assets or liabilities. An example of a nonfinancial asset might be in-kind donations such as clothing, food and furniture to a nonprofit charity. The proposal has some additional provisions relating to measuring fair values for items classified as shareholders’ equity, financial instruments managed within a portfolio and other disclosure requirements for financial instruments, which have not been covered in much depth in this article.

How will the changes impact businesses?

Financial statement preparers have already commented that it will entail significant effort and money to obtain this additional information. It is not information that is readily available, and it is very judgmental. It will require significant time to be incurred, especially for companies that have a significant number of level 3 assets and liabilities. For example, a financial institution enters into thousands of these types of transactions each year.

What types of companies will the changes affect?

Unfortunately, as it stands, they will affect a broad spectrum of entities, such as for-profits, nonprofits, pension plans and investment companies. No specific industry is scoped out of the exposure draft at the moment, although representatives from various industries are lobbying to have these standards not apply to them. Most of this is targeted toward public companies that file with the SEC. Unfortunately, everyone else gets pulled into it because there’s no scope of size or type of entity currently in the draft.

What can companies do now to prepare for the proposed changes?

Because this is still in exposure draft form and is not effective yet, companies have until September 7 to provide comment letters to the FASB. If it does become effective, it will take a good amount of time and effort to get the systems in place to capture data for these disclosure requirements. People who prepare financial statements should start the process of planning for the change well ahead of time, because it will become effective fairly quickly.

Do not take the fair value standards lightly. They are here to stay. Try to get up to speed as quickly as possible. Consult with your advisers and your auditors early. It is much easier to collaborate with consultants and auditors up front than to run into surprises when you have to issue your final report.

Daniel Figueredo is a manager at Burr Pilger Mayer. Reach him at (415) 288-6284 or

Each month, you pay your electric bill, but do you really understand what you are paying for? And do you know that your current electricity supplier is not your only choice?

By exploring your options and making informed choices, you can save your company a considerable amount of money, says Mike Wise, co-chair of the Energy Practice Group at McDonald Hopkins LLC.

“Because Ohio has a deregulated electricity environment now, almost invariably you can get a much cheaper price for your electricity by going out and shopping for it, rather than just accepting whatever electricity pricing is provided by your current utility,” says Wise.

Smart Business spoke with Wise about how to get the most for your money when buying electricity and how to find the best supplier to meet your needs.

How can a business owner get started saving money on electricity?

The market really opened up in June 2009, and although the major consumers of electricity are aware of the opportunities, smaller and mid-sized companies are just beginning to realize those opportunities.

The first thing to do is to look at your electric bill and understand how much electricity you use. Your bill will also tell you what you are paying per kilowatt hour for your electricity. If you want to go through the process internally, start with the Public Utilities Commission of Ohio Web site to start looking at pricing from other suppliers, or your general counsel can help shepherd you through the process. In relatively short order, you should be able to get a sense of what you are leaving on the table.

Alternatively, you can get outside help. An outside adviser can use an electronic request for proposal process, which is very transparent and forces the generators to provide their absolute best pricing. An adviser will profile your company’s electricity use. Based on that profile, an electronic RFP is created and posted online, so that electricity generators that are serving Ohio are able to bid on it. The process takes about 10 to 14 days start to finish.

An adviser is a great resource for companies that do not want to take the time to do it themselves or that do not feel like they have the aptitude to get their arms around the process.

But whether you address alternative electricity procurement on your own or with the help of an adviser, the important thing is to address it, because even the smallest company can benefit from shopping around.

How often should you review your usage and pricing?

Generally a business will contract with a generator for six months to two years, although there are variable pricing players that will price month-to-month. However, most business owners want more predictability than month-to-month pricing provides.

Reviewing your electricity usage and pricing is definitely something you should do periodically as your current contract nears its expiration. Prices fluctuate daily and can fluctuate dramatically from week to week, so it can be difficult to know when to make the move. An adviser can help you look at historic trends and identify long-term opportunities that can help you make that decision.

You want to try to take advantage of the market, but you also don’t want to go through the effort of doing this every month.

And even after you have locked down a price with a contract, you should make it a habit each quarter of looking at both your gas and electricity usage and pricing to make sure that you are taking advantage of all the opportunities that are available.

What mistakes do businesses make when shopping around for electricity?

Too often, business owners start looking around and then accept the first lower price instead of looking at all their options. It is not difficult for any vendor to present a savings of 5 to 10 percent to a client. But if you are patient and thoughtful about the process, there are additional savings available, with average savings of 10 to 20 percent.

Even if the savings are just tenths or hundredths of a cent per kilowatt hour, if you are using 100 million kilowatts a year, that can add up to a savings of tens of thousands of dollars.

Also, too many companies are unwilling to look beyond their current supplier when seeking a lower price. No matter where you are in Ohio, your current supplier will take the first shot at providing better pricing for you. After that conversation, it is often difficult for a company to pass up that offer and reach out to the rest of the supplier community.

It is well worth the extra week or two to make that effort, particularly if you have someone who can very quickly get multiple pricing options for you.

What do you see as the future of the market?

It is chaotic right now because of pricing fluctuations and all of the new players in the market, and I do not see it getting anything but more chaotic over the next few years as there are more aggressive renewable portfolio standards, which require a certain amount of power consumed in Ohio to come from a renewable source.

In addition, there is the potential for carbon trading to become part of the mix. If the U.S. passes an energy bill that contains a cap-and-trade system for carbon, it will become more difficult for companies that are in a high-emissions business to expand, because they will need to provide some type of offset for the increased emissions that expansion would entail.

It is important for businesses to stay up on what is going on in Washington because if a cap-and-trade bill is passed, it will be a game changer for a lot of businesses.

Mike Wise is the co-chair of the Energy Practice Group at McDonald Hopkins LLC. Reach him at or (216) 430-2034.

Is your business prepared to get sued? It can happen to organizations of any size, including nonprofits, and it will probably happen to you, says S. A. “Sam” Murray, CEO of ManagEase.

“It’s almost inevitable. If you’re in business long enough, you’re going to get sued for something,” says Murray. “It could be employment-related, it could be product-related, but we live in a litigious society, and eventually it’s going to happen.”

Smart Business spoke with Murray about what to do if your company is sued and how working with an HR firm to establish policies now can improve your chances of prevailing in a lawsuit later.

How can you prepare now for a potential lawsuit?

Having regular HR assessments of policies and practices is something that you should institutionalize at your company. Businesses should do this at least once a year.

During the assessment, the HR company will interview managers to identify how they’re implementing policy, review records to make sure that recordkeeping is consistent, and examine compliance factors such as how you’re paying people and how frequently you’re conducting training.

Having the right documentation, policies and practices won’t prevent a lawsuit, but it is a good liability management strategy and will give you ammunition in the event that you are sued. Those documents become most valuable when you have to defend yourself, and working with an HR firm to make sure those documents are in order will pay off down the road.

Is the number of lawsuits against employers increasing?

We are seeing a rise in the number of employee disputes because, as the economy has gotten tighter and more challenging for businesses, they have made some tough decisions, and sometimes employees don’t agree with them.

Perhaps a layoff is made but the employee feels that he or she was singled out and unfairly selected. Jobs are hard to find right now, so laid-off employees are anxious to find some way of getting revenue, and that could be in the form of a lawsuit against a former employer.

What can an employer do to minimize the risk of a lawsuit by a laid-off employee?

The best way to avoid a lawsuit is by providing a severance agreement in which the employee releases the employer from any claim. The best time to do that is at the time of the termination, so the employee isn’t out of work six months down the road, worried that he or she won’t be able to get another job and decides to file suit. That person will probably sue the former employer for a lot more than what they would have accepted in the severance agreement.

That’s the best way to get around a potential lawsuit, but it’s not cheap. As an employer, you have to be able to defend that the severance was a fair settlement of potential claims that the employee could have against you. It has to be a reasonably substantial amount of money. It can’t be $100; we’re talking in the thousands or tens of thousands of dollars.

But the exact amount is tricky, because once you start this practice, you’re going to be measured against it in the future.

Once a suit has been filed against you, what do you need to think about?

If you have employment practice liability insurance, notify the carrier because it will likely assign an attorney to the case. Or if you don’t have insurance, contact your corporate attorney who can make referrals, or ask other business owners who have gone through a lawsuit who they would recommend. Then interview at least two of the attorneys, ideally more, to determine if that person is aligned with you on how to approach your case.

You also need to secure all documents, both electronic and hard copies, that relate to the case. Don’t delete or change anything, and make sure you keep everything. It could be months or more than a year before you get to court, and that is not the time to be looking for e-mails.

You need to be very careful about who you include in knowledge of the suit, because you don’t know who at your company is friends with the disgruntled former employee and who’s going to share information with that person. And the fact that there is a pending lawsuit is not something that you want to announce to the whole company anyway.

Be discrete about how you manage data relating to the case. Often you’ll need to notify the IT person, because that person is the one securing the data, but you need to communicate that the matter is confidential and should not be discussed.

What advice would you give an employer who is facing a lawsuit?

It’s a distraction and it’s a challenge to manage your focus on the day-to-day business matters. The most successful management of lawsuits are the cases in which employers are able to classify the suit as just another business issue. Put it on the agenda of items that you’re dealing with and keep it in that perspective, rather than having the Chicken Little reaction that the sky is falling.

Know that you will get through it, it will be resolved one way or the other, and life will go on. Be confident in knowing that other business owners have been through it and survived.

S. A. “Sam” Murray is CEO of ManagEase. Reach her at (714) 378-0880 or

Despite the poor economy — or in some cases, because of it — people are continuing to open new businesses. But with so many things to consider, an entrepreneur should never go it alone.

“Starting a business is difficult and unpredictable, and having the right advice every step of the way is critical,” says Rich Gunn, a partner in the tax practice group at Burr Pilger Mayer. “Entrepreneurs have the intelligence to do all the things associated with starting a business, but they don’t always have the experience to consider all the variables, and that is what outside advisers bring to the table.”

Smart Business spoke with Gunn about why now might be a good time to start a business and how an adviser can help guide you through the process.

Why would someone start a business during a recession?

Some people wake up with a new product or service idea, and they’re passionate about it and ready to go regardless of the economy. Others do it reluctantly. They’ve been out of work a long time and they do it out of desperation.

The third type of person is opportunistic; the cost of doing business in a down economy is lower, rents are lower, professional services cost less and there are talented people willing to work for less. There’s a big opportunity for someone willing to take the plunge.

Once you decide to jump in, what do you need to consider?

You need to look at the marketplace for your product or service or idea, formulate a business plan, and look at who your audience is as well as who the competition is.

It’s also really important to focus on finances. Think about what type of entity your company is going to be. Are you going to have partners, do you need to bring in money from other people, or are you going to self-start this business?

Seek out help. While there are free resources, such as volunteer organizations, to guide you through the process, the better choice is to hire advisers who will make you their primary concern.

Consult with both an attorney and a CPA, ideally in the same room having the same conversation at the same time, because each is approaching it from a different angle. Bring these advisers into the process as soon as you make up your mind that you’re ready to start. You need to do it before you put out your shingle and say you’re in business, because you want to get it done correctly right from the get-go.

Your attorney and your accountant are going to give you 100 percent of their attention. They’re going to give you value and they’re going to help you think through the implications of your decisions. That could be anything from what kind of image you are giving yourself if you decide to be a sole proprietor to what type of employee benefits can be had through different types of entities.

How can a new business owner determine what type of entity is best for the company?

There is no single entity, no one-size-fits-all that works for every new business. There are so many things to consider, such as how much money do you need to start, where is that money going to come from, do you need to bring in outside investors or lenders and, if so, what type of entity those might demand. Are you going to have co-owners, because if you are, you can’t be a sole proprietor. And people who are putting money into the business but not working in it may have different expectations than someone who is going to be a working partner. Those types of things will shape the type of entity you choose, but you also have to consider things such as exit strategy.

It’s difficult to think about an exit strategy when you’re just getting started, but if your ultimate exit plan is to be bought out by a large public company, you may lean more toward being a corporation so that you can facilitate a tax-free acquisition, which other entities cannot do.

It’s something you should rethink fairly often, as often as you think about your finances or your marketing plans, because your needs may change over time.

What advice would you give someone who’s on the fence about opening a business?

I would say, ‘Think about how passionate you are about it because it’s going to be very difficult in ways you don’t expect.’

People wake up with a great idea or are very engaged in client service or product development, and they forget about the day-to-day things, like struggling to make payroll, and the risks they have to take, like not being able to sign a lease without personally guaranteeing the rent. The compliance, HR issues and accounting issues are often lost in the excitement of developing the product and serving the customer. If you don’t have a passion from the get-go, you can get bogged down and sidetracked and deflated with the day-to-day activities of really running a business.

Talk to other people who own their own businesses and find out what their worst nightmares have been running the business. Then ask yourself if you could live through that and still be happy with having your own business. If you go in with your eyes wide open, you’ll have a much better chance to succeed.

Rich Gunn is a partner in the tax group at Burr Pilger Mayer. Reach him at (415) 288-6218 or