The Kaiser Family Foundation recently released a study that stated premiums available on state-based health insurance exchanges would be lower than expected. In Ohio, rates cited were even lower than the national average, with costs for the second-lowest silver tier plan at $249 compared to $320 nationally.
However, Ohio Lt. Gov. Mary Taylor had earlier announced that individual premiums were expected to increase by 41 percent.
Smart Business spoke with William F. Hutter, CEO of Sequent, about whether the Patient Protection and Affordable Care Act (ACA) will succeed in driving down health insurance costs.
Do the rates cited in the Kaiser study mean costs are going down?
Possibly for a couple of years — we’ve still not seen the community rating prices for small group coverage, and just maybe the lowest prices were illustrated in the Kaiser study. The rates indicate a very low and attractive premium structure. It’s unlikely these rates will be sustainable after 2016 because carriers don’t know the real cost of insuring this group yet.
In addition, the paper didn’t address complex tax implications for both the company and employees that must be considered for total cost. For example, the new taxes on insurance premiums paid by carriers, but collected from employers, are a protection for the carriers. The tax will be set aside to help carriers offset the real cost of coverage for the first two years. After that, the exchange carriers will be on their own, with no government subsidy.
What impact will these rates have on businesses and their health care plans?
One of the leading actuarial firms, Milliman, has an analysis tool to help any company dig through the ‘play or pay’ considerations. Having completed more than 250 separate analyses, Milliman reported it made sense to ‘pay’ for only two of those companies. However, it’s difficult to access the individual total costs relative to plan designs.
What do the delays mean for 2014?
This is a practice year for everyone; 2014 is a penalty-free zone. With the rollback in enforcing penalties and a delay in reporting incomes for the affordability test, people think they are off the hook regarding ACA requirements. But everything else is going forward, including a big increase in taxes.
Unfortunately, the early testing on the exchange, scheduled for early September, was delayed. The Department of Health and Human Services also delayed the deadline to sign final agreements on health plans that will be available to consumers on the exchanges, which might have occurred because some insurers have been hesitant to sign up.
Many people anticipate there may be massive technology glitches relative to the exchanges, including a brewing concern in the technology arena about confidentiality and Health Insurance Portability and Accountability Act (HIPAA) compliance. The system is going to be large and unwieldy.
Who is going to buy insurance from the exchanges?
Even with the individual mandate — which still could be delayed by the government — beginning next year, most people will not be making changes regarding their health care, whether they have insurance or not. If you haven’t purchased coverage because you’re young and invincible, you’re not going to purchase coverage now with minimal individual mandate penalties in the first year.
The people who will be truly interested in participating are the most needy — those who cannot afford other coverage because they are ill and not working.
As for businesses, depending on the average income per worker, some might drop plans and let employees go to the exchanges. Businesses with fewer than 50 full-time equivalent employees will not be penalized when penalties are assessed in 2015. So, they could drop coverage, give everyone a $4,000 raise and let employees buy their own insurance. But companies need to remember that giving a raise to buy exchange coverage causes everyone’s taxable income to increase. Therefore, the employee pays more in taxes, the company pays more in taxes and the increase might bump income over the subsidy limits.
It’s still very difficult to predict what exactly is going to happen because there are so many unknowns. ●
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Many closely held private companies are organized as partnerships or S corporations — pass-through entities with no material tax implications at the organization level. For owners of such businesses, tax planning predominantly focuses on the individual. To properly plan for those taxes, you need to start well before the end of the year, says Michael R. Viens, a director in the Tax Strategies group at Kreischer Miller.
“Although it can be difficult to precisely forecast results for the entire year, a reasonable estimate, along with identification of the material differences that will exist between financial and tax reporting, should be developed,” says Viens.
Smart Business spoke with Viens about key considerations in developing an effective tax planning process.
What is involved in year-end tax planning?
It starts with a solid foundation — just like an unstable foundation can be problematic with a house, tax planning based on inadequate information can lead to a bad outcome.
Some things to consider when developing your forecast are year-end activities that can affect tax reporting, items such as fixed asset additions, the cash basis tax reporting impact of the collection of receivables and seasonal swings in profitability.
It’s also important to take into account tax considerations unrelated to the business. Key components of a business owner’s personal tax obligations are W-2 wages and share of business income listed in a Schedule K-1. But you also need to consider other aspects of the personal tax puzzle. Acceleration of tax deductions is frequently part of tax planning; however, you have to consider what the ultimate tax benefit will be. Too much acceleration of deductions in a particular tax period may result in limiting the related tax benefit to a lower tax bracket than if taken at another time.
So it’s sometimes better to pay taxes earlier rather than defer payment?
Much of tax planning involves a question as to timing when to pay. If there is no material direct or indirect interest charge for deferring payment, that is normally the recommended course. However, a ‘pay as you go’ approach can lead to a better outcome when economic circumstances are not ideal for the accumulation of a significant tax payment deferral.
Another concern with a deferral of tax liabilities is that it can be difficult to monitor future tax payment obligations. Because pass-through entities are not required to identify those liabilities in finance reports, those reports will not help you keep track of when tax obligations may come due.
How does wealth transfer impact tax planning?
Effective estate tax planning may run counter to income tax strategy. You may be able to defer payment of tax due on business profits, but you might not want to do that from an estate tax standpoint. When it’s time to transfer ownership to children, they might not be aware of the need to handle payment of deferred tax obligations. An owner may want to pay the tax, thereby reducing his or her taxable estate and leading to a higher amount of wealth passing along to his or her children.
Should your tax strategy change every year?
An effective tax planning process generally includes some constant elements, such as deferral of revenue recognition and acceleration of deductions. But you need to be flexible to address new challenges.
For example, the new Medicare tax on net investment income will adversely affect owners who do not materially participate in a business, as well as rental arrangements in which commercial property is owned under separate entities. An effective tax plan will consider such changes and adapt to the extent possible. ●
Insights Accounting & Consulting is brought to you by Kreischer Miller
Women continue to impact the business world in growing numbers — 30 percent of all businesses are owned by women, according to the 2012 annual report of the National Women’s Business Council. Those firms have 7.5 million employees and a combined payroll of $217.6 billion.
But even as they assume more leadership roles in business, women are still counted on to manage households.
“Women face different circumstances than men in the world of business because of the demands placed on them in their personal lives,” says Camille Ussery, senior vice president and manager of Small Business Banking at ViewPoint Bank. “Women’s lives are typically spread thinner, and the pressure is greater because of it.”
Smart Business spoke with Ussery about the time-crunch challenge and how to make sure business opportunities don’t fall through the cracks.
What are some of the unique challenges women face when starting up and running a business?
Women are making decisions in the boardroom and then making decisions about what’s for dinner, child care and who will pick up their child from the track meet.
Granted, there have been many changes in the way men are helping out with household responsibilities. But often the bulk of these responsibilities still fall squarely on women’s shoulders.
As a result, many women feel they are barely able to keep their heads above water. While they tend to do a great job in multitasking, the result may be that business opportunities fall by the wayside. Then there is the added challenge of competing in a male-dominated business world.
What is the solution to the unique challenges that women business owners face?
Because women are making a huge economic impact in the marketplace, many outstanding organizations have formed to provide education and resources for women in business. These organizations — from the local chamber of commerce to the Office of Women’s Business Ownership at the U.S. Small Business Administration — offer special courses, workshops and programs just for women who are either starting their own business or already own a business.
How can women make sure that they are doing all they can to help their business succeed?
One thing that many successful business owners do — male or female — is to create and maintain business relationships. Consider organizations and clubs that can help develop business relationships. Because of the time factor, this is one business opportunity that is often overlooked.
However, it’s important for women to stay visible in their industry and in the community. Adding networking to the to-do list could be as simple as attending one chamber event per month.
Also, continually take advantage of educational opportunities that are available in the community. There are a host of seminars, workshops and courses that a woman can take to not only learn but also to fulfill the goal of networking. Many of these workshops are provided as a community service and are useful in developing marketing techniques, effective sales strategy and time management.
Many times business owners only consider a banking relationship as a source for working capital. However, business bankers who specialize in meeting the unique needs of a business can provide much more. With ever-changing technology, your business banker can provide resources and ideas to help manage the day-to-day transactional needs to maximize the flow of cash within a business. They work directly with business owners in many industries and can often provide financial solutions to meet diverse needs as well as networking opportunities for increased business.
How else can women improve the way they conduct business?
Businesses frequently have limited working capital. Women need to have all the right financial components of a business and to learn about cash flow and contingency plans — without money, the business will fail.
The best thing a woman can do is to educate herself, learn as much as she can about the elements of a successful business, and reach out to people in her industry and community for help and advice. ●
Insights Banking & Finance is brought to you by ViewPoint Bank
By ruling that part of the Defense of Marriage Act (DOMA) was unconstitutional, the U.S. Supreme Court also set in motion some changes regarding federal income taxes.
The June decision struck down Section 3, holding that same-sex individuals who are married under state law also must be treated as married for income and estate tax purposes.
“The court’s decision will have an impact on many tax laws in states that recognize same-sex marriage,” says Tom Tyler, a partner at Crowe Horwath LLP. “Though being treated as married for federal tax purposes might provide certain tax benefits, it might also result in increased tax liability.”
Smart Business spoke with Tyler about the tax implications of the DOMA ruling and what they mean for employers.
How many states have legalized same-sex marriage, and which ones recognize those marriages from other states?
In addition to the District of Columbia, 13 states allow same-sex marriage: California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont and Washington. Thirty-five states, including Texas, have banned same-sex marriage, either through legislation or constitutional provisions. New Jersey and New Mexico have no laws either banning or allowing same-sex marriage. Five states — Colorado, Hawaii, Illinois, New Jersey and Oregon — allow civil unions or domestic partnership between same-sex couples, but not marriage.
What affect does the ruling have on federal income tax returns?
Joint returns can be filed for federal income taxes in states that recognize same-sex marriage. If not filing jointly, each spouse will need to file using married filing separately status. Affected taxpayers should review their 2013 filing status and adjust withholding and estimated payments as necessary, keeping in mind the marriage penalty for joint filers.
Generally, the statute of limitations for federal income taxes is three years, so the 2010, 2011 and 2012 tax years are open and returns can be amended. The IRS is expected to issue guidance regarding amending returns under the court’s decision. Taxpayers should wait for this guidance before amending returns.
How have strategies regarding estate and gift taxes changed?
The estate tax exclusion was increased earlier this year to $5.25 million, meaning an estate equal to that amount will not pay any estate taxes provided the decedent has the full $5.25 million exclusion remaining. In addition, the exclusion was made portable such that a deceased spouse’s unused exclusion amount carries over to the surviving spouse upon his or her death for use by the survivor. Therefore, a married couple could shelter up to $10.5 million by simply leaving everything to a surviving spouse. Same-sex couples can now take advantage of these rules as a result of the DOMA ruling. Before the ruling, they couldn’t.
For gift tax purposes, same-sex couples will be able to elect gift splitting, which treats gifts as made half by each spouse. Splitting gifts often allows each spouse to claim the full annual exclusion for gifts made to each recipient, currently $13,000 per person. This allows a spouse to gift up to $26,000 to a recipient without paying gift tax.
What should employers do in response to the DOMA ruling? How does it differ in relation to their state’s legal position on same-sex marriages?
Employers should review the decision with legal counsel to determine its impact. For example, employer-provided medical insurance is now available to same-sex couples on a tax-free basis. Prior to the court’s decision, these benefits were taxable to the nonemployee spouse. Employers might be able to claim a refund of payroll taxes paid on these benefits on a taxable basis, and individuals might be able to claim a refund of income taxes paid on these amounts.
As stated previously, Texas is one of the states that bans same-sex marriage. However, if a Texas business has employees in any of the 13 states or District of Columbia that recognizes same-sex marriage, it could be affected. ●
Insights Accounting is brought to you by Crowe Horwath LLP
Lean and Six Sigma were developed for manufacturing, but are gaining momentum within service industries.
“Both Lean and Six Sigma have been used almost exclusively in manufacturing. Now you’ll see black belts in all fields, from IT to financial services to health care,” says Chris Liebtag, a Lean Six Sigma Black Belt with Rea & Associates.
Smart Business spoke with Liebtag about Lean Six Sigma, a program that melds the two disciplines for maximum benefit.
What are the origins of Lean and Six Sigma?
Six Sigma originated at Motorola, but its roots can be traced through the Quality Circle Movement of the ’70s to the Total Quality Management teaching of the ’50s. It is a project-based methodology seeking quality and consistency. Lean, on the other hand, has a very complete toolkit and is mostly concerned with identifying and eliminating waste or non-value-added steps.
Lean Six Sigma combines the basic tenants of both to look at ways to remove non-value-added steps in a process and improve quality.
What types of businesses can be improved by implementing Lean Six Sigma?
It’s been very strong in health care and financial services. An emergency room might want to look at the process of admitting patients, or a medical billing organization that sends bills to multiple entities might want to determine how long it takes and ways to accelerate the process.
There must always be a business rationale; clients define the value and you’re looking to satisfy their needs and remove wasteful steps.
Should everyone in the company be trained?
It’s important to at least be exposed to the concepts. It does involve a cultural change within an organization, so implementation will require everyone to adopt the mindset of always looking for ways to continuously improve. Select employees should be trained as facilitators, but everyone should be thinking about how to better serve clients.
The results likely will be increased customer satisfaction, an enhanced business reputation and a competitive advantage. If you can deliver your product or service faster than competitors at a higher quality or even a lower price because of operational efficiency, it provides an enormous advantage.
Does that require Lean Six Sigma?
Efficiency and customer satisfaction initiatives can be tackled without Lean and Six Sigma. However, these techniques have been proven to be very effective when it comes to controlling costs and improving satisfaction among clients and employees. Employees are empowered to better their work environment, which eliminates turnover and produces a happier workforce. In turn, that leads to improved customer satisfaction. Lean Six Sigma provides a framework to generate these gains.
Does Lean Six Sigma need to be adjusted to fit the company?
The most successful projects are tailored specifically to address industry- or business-specific circumstances. The 30,000-foot view concepts and methodologies can be applied almost universally — define a problem, measure the variety of steps within that problem or process, and then analyze and improve it. However, the best results are produced by combining the tools and methods of Lean and Six Sigma with industry expertise. That industry expertise component also helps generate buy-in among employees.
How important is it to set goals for improvement?
You should always start with the end in mind, even if that goal might not be immediately achievable. If you want to reduce costs by 10 percent, process changes are designed to produce that result. You might only get to 8 percent — that doesn’t mean it wasn’t a worthwhile enterprise, it just presents an opportunity to continually improve toward that goal.
The idea behind Lean Six Sigma is continuous improvement. It isn’t designed to be a ‘one-and-done’ initiative. It’s a change in culture whereby employees embrace the mindset that the business needs to get a little better each year and sustain the gains. Lean Six Sigma is more than a technique or a process, it’s a discipline and approach to running your business. ●
Chris Liebtag is a Lean Six Sigma black belt at Rea & Associates. Reach him at (614) 923-6586 or email@example.com.
Insights Accounting is brought to you by Rea & Associates
More companies are using non-competition agreements as a means of protecting business interests when employees leave.
“Historically, the agreements in the employment context were narrowly focused on people exposed to technological secrets, or very high-level executives. It’s become more common to have contracts with employees who aren’t in the control group, such as salespeople,” says Robert Cohen, a director at Kegler, Brown, Hill & Ritter.
However, there are legal problems that arise, and courts have held that non-competition restrictions must be reasonable and exist for the purpose of protecting the business by ensuring fair competition.
Smart Business spoke with Cohen about when non-competition agreements make sense and what to incorporate in the language to avoid legal complications.
When are non-competition agreements being used in the employment context?
One example is an agreement that is used to protect confidential information in the employment context and prevent certain post-employment competition. Such an agreement typically spells-out that the employee will be exposed to confidential, proprietary information, and he or she agrees to only use that information to the benefit of the company. These restrictions are typically accompanied by a more direct restriction in the form of a non-competition covenant stating that the person cannot work in the industry for one year, or within a certain geographic radius of their work location, or that he or she cannot perform certain services for the employer’s clients.
How restrictive can companies be?
The general answer, based on Ohio Supreme Court decisions, is that agreements are enforced only if they are reasonable. Obviously the concept of reasonableness is a very general one. A test of reasonableness takes into consideration several factors, including:
- Temporal and geographic restrictions.
- Whether the employee represents the sole company contact with a customer.
- Whether the employee possesses confidential information or trade secrets.
- Whether the covenant seeks to eliminate unfair or merely ordinary competition.
- Whether the restriction serves to bar the employee’s sole means of support.
- Whether the talent the employer seeks to suppress was actually developed during the period of employment with the former employer.
- Whether the forbidden employment is incidental to the main employment.
These factors don’t serve as a checklist, they don’t apply in all cases and they are not weighted equally. The overriding law is that non-competition restrictions are enforceable so long as they preclude unfair competition, but are not acceptable if they are being used to eliminate ordinary competition.
Court decisions vary regarding what is reasonable. There are decisions upholding competitive employment and customer restrictions for time periods of six months to five years. But there are also court decisions holding that restrictions of this same time range are not reasonable on the facts of particular cases. Ohio law also allows the court to shorten the time period set forth in the non-competition restriction to one the court believes is more reasonable.
What is your advice as to whether companies should have non-competition agreements?
Focus on whether either of the following is occurring in the particular business:
- Is the company investing time and money to train employees or establish relationships between those employees and the company’s customers?
- Is the company exposing its employees to confidential or trade secret information?
In those cases, the company has an interest in protecting its investment from being misappropriated to the competition.
If you’re going to have a non-competition agreement, include a question on the employment application asking if the person is willing to enter into such an agreement. This allows potential employees to consider the restrictions before committing to the employment relationship.
Narrowly tailor the agreement to protect your legitimate business interests. For example, geographic restrictions should be limited to your market area, or in some cases to the particular area where the employee functions. ●
Robert Cohen is a director at Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5492 or firstname.lastname@example.org.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter
Leaders are often viewed as great orators who inspire people with their words, but listening is actually the most important leadership trait, according to Matt Zumstein, a partner at Ropers Majeski Kohn & Bentley PC.
“Many leaders are great speakers. However, when you’re able to listen and respond to what clients and employees are saying, you can become a more effective leader,” he says.
Smart Business spoke with Zumstein about what he has observed in successful business leaders and how that translates into more successful organizations.
Why is listening the most important attribute for leaders?
Most people aren’t very good listeners. By listening carefully, you’re also able to ask better questions. Good leaders hear what customers and employees want and need. After listening and gathering useful information, a leader can provide better direction, and the company can focus more on the needs of its clients.
When speaking or presenting, it helps to include a compelling story. Storytelling, or having a theme to your story, is a powerful way to put forth ideas, whether selling a product to a client, giving a team its marching orders or for any other purpose. This can apply to a discussion with a prospect at lunch, in the boardroom or through an online video. The power of incorporating a real-life story into the message can be invaluable.
What other qualities do leaders need to demonstrate?
It’s very important to be authentic. When telling a story, you must be able to personalize the message in order to illustrate integrity, humility and vulnerability. These are characteristics a leader needs to create positive energy. When people can recognize authenticity, they will respond more favorably.
There used to be a clear separation between private and business lives. Today, with technology and social media, the separation is no longer clear. As a result, it is important to understand your client base and use available online tools to your advantage.
A good leader usually loves what he or she is doing. Colleagues and customers can easily recognize when you bring a passion to daily activities. Remember the Energizer bunny? In order to be an effective leader, find your bunny — the thing that energizes you and keeps you going. When you do that, it will become contagious. That’s why motivational speakers like Tony Robbins are successful — people can see their passion.
How do people sabotage their own leadership efforts?
If leaders become too focused on looking ahead at the challenges they face, they can forget what they’ve accomplished and miss out on significant learning opportunities. It is important to be grateful and thankful for what you’ve achieved.
Another problem is not empowering colleagues or support staff to help develop the self-confidence they need. A lack of confidence can breed negativity and infect the entire organization.
A lack of effective communication is the main reason that relationships, and businesses, fall apart. It’s important to be candid and authentic. If you promise a growth opportunity you can’t provide, you will quickly lose your credibility. When you admit what you can and cannot do, people recognize your authenticity and are more willing to support you.
To be an effective leader, don’t limit your focus to the end of a project. Carefully consider all that is needed to get there. If you’re looking to increase revenue by $1 million next year, what effect does that have on family time or the ability of the company to do charity work? How you get there is just as important as getting there.
Don’t forget about the fun part of life. Reward your team with tickets to a movie or gift cards for coffee. When people feel like they are recognized for their accomplishments, it creates a positive energy and everyone will be willing to strive for, and accomplish, a lot more. •
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
The top two concerns of CEOs are talent management and risk management, according to a 2011 study by PricewaterhouseCoopers.
It’s not difficult to ascertain why. In addition to creating a positive work environment that attracts the best employees, good talent management avoids exposure to lawsuits. That’s a particular concern nowadays, as the U.S. Equal Employment Opportunity Commission (EEOC) received a record 99,947 charges of employment discrimination in 2011, with $455.6 million paid in relief.
“It’s a matter of being fair and consistent,” says Carin Zubillaga, SPHR, principal human capital consultant at TriNet, Inc. “Branding has also become important to companies, and they want to know how they can become a desirable employer.”
Smart Business spoke with Zubillaga about what companies can do to limit talent risks.
What do companies need to know today?
Employers need to understand that talent risks start at the onset of the hiring process. Many think they don’t have to be concerned about labor laws until employees are hired. In reality, employers need to create a solid job description to put their best foot forward and hire the best possible candidate.
Are there standard hiring practices everyone should follow?
The most important thing is to have a hiring process. It may differ depending on the level of the position. But, for example, if you ask every candidate for one position the same questions, you can easily benchmark answers to help you find the best fit among all applicants.
Another best practice is to conduct training for all managers or individuals involved in the hiring process. Talk about what can and can’t be asked in an interview. Many people have different ideas as to what’s OK — some think that if you share personal information, it opens the door to ask the applicant. That’s something you absolutely don’t want to do.
Ask your interviewers to not search for candidates’ names on Google or look up their Facebook pages. Already, there are more cases on the use of social media during hiring. Even professional background checks aren’t always reliable. A background report wrongly said an individual had been convicted of a felony, which led to his termination. Now, he is seeking compensation for lost wages, employment opportunity and other damages.
Make sure you pick the most qualified candidate based on knowledge, skills and ability. And be a professional: Close the loop by notifying applicants who didn’t get the job.
Do independent contractors pose particular problems?
If someone is an independent contractor, the employer is not required to pay payroll taxes.
Therefore, the IRS and Department of Labor look for misclassification because they’re missing out on funds; misclassification can result in back taxes and penalties.
There is a series of tests to discern if someone is an independent contractor, such as whether they’re required to be there from 8 a.m. to 5 p.m. or allowed to work for other companies. More often the person shouldn’t be classified as an independent contractor. To determine accurately, use the online test offered by the IRS.
Once a person has been hired, does employment at-will mean you can terminate employees without risk?
Even in employment at-will states like California, problems come up when employers do not adhere to their own policies. If you have a course for disciplinary action that outlines specific steps, that process must be followed. For example, most companies build in language for serious offenses ‘up to and including termination.’
Retaliation has become the EEOC’s top claim. If someone files a compliant against a supervisor and that’s the only reason he or she is terminated, you’ve got a problem.
Sticking to your policies regarding employee issues will mitigate a lot of legal risk. Your state may have employment at-will, but there are laws that trump that and provide the potential basis for a lawsuit.
When it comes to effectively managing talent, consistency is key. Have a process and treat people how you would want to be treated. That is one way to brand yourself and become an employer of choice. •
Insights Human Resources Outsourcing is brought to you by TriNet, Inc.
All banks will tell prospective clients they can serve every need. But proper preparation and key questions will reveal whether a bank is the right one for your business.
“Banks say they do everything, but you have to find the institution that shares your priorities, and focuses resources in areas important to you,” says Matt Christensen, senior vice president and regional manager at Bridge Bank.
Smart Business spoke with Christensen about the process of choosing a bank.
Why is it important that a bank knows your industry?
It’s particularly important if your industry has unique risks. An early-stage company in the technology space will have challenges that are not common in other sectors. After a round of seed funding, it has to show proof of concept. Then it needs to show the ability to generate revenues. Most lenders look for companies that have two or three years of profitability, are steady and have products that are not prone to obsolescence. Technology companies are an entirely different breed. Unless the prospective bank has a business unit dedicated to meeting the unique needs of tech companies, there are probably other options to consider.
Health care is another industry with similar concerns. Businesses might be receiving payments from federal agencies, and they’re facing a regulatory environment that’s ever changing. Industry knowledge can even be useful to something like a car dealership, where certain banks are set up specifically to work with them.
These examples might be extreme, but as you get closer to the extremes it becomes increasingly important for businesses to carefully consider what bank to use.
How can you verify that the bank has the necessary experience?
When interviewing bankers, ask for representative examples of companies they’ve worked with in the industry. Inquire about challenges they perceive within the industry. If they can provide a list of businesses they’ve worked with and intelligently discuss industry challenges, it’s probably a good fit.
During the process, it’s important to go up the line and ensure that the credit apparatus understands lending into the technology space, for example.
Trade organizations also are good sources of information. Find out which banks are active and check their reputations within the industry.
How can you get the most out of interviews with prospective bankers?
First, ensure that the conversation doesn’t default to the banker asking questions about your company. Bankers are trained to formulate questions and can monopolize the discussion by conducting their due diligence and uncovering sales opportunities.
Prepare for the interview by developing questions that will reveal the bank’s priorities. Make sure they prioritize your type of company and products. If your business model includes aggressive growth and relies heavily on debt, ensure the bank does that routinely. Some banks prefer to collect deposits and lend out conservatively.
Banks, especially the large ones, offer every service you might need. However, they have areas of emphasis. They prioritize certain markets in which they’re eager to expand. Find a marriage between your needs and the bank’s priorities. They will not say your industry isn’t emphasized, but you can look at the bank’s financial statements to check its assets and where loans are concentrated.
Does having access to decision-makers matter?
It’s an indication that the bank values you as a client and you are a priority. Also, you want to know the sensitivities of the people making decisions. When you face a challenging situation or have an opportunity, will they be open-minded or are they going to quote policy? If you’re considering an acquisition to double your size, how would they structure a credit facility to accomplish that goal? Ask how they’ve worked with other companies and check references to determine how they’ll work with you.
Banks say they do everything. It’s important to find the people with the experience and skill sets that fit your priorities — a relationship manager and banking team that will advocate for you when you need their assistance. •
Insights Banking & Finance is brought to you by Bridge Bank
Business owners tend to put off succession planning if they don’t intend to exit in the near future. But circumstances can change quickly, and not having a plan in place could be a costly mistake.
“Every business, large or small, will reach a point where a decision needs to be made as to the next step regarding ownership,” says Corinne Baughman, a partner at Moss Adams LLP. “Whether the transition is one year or 10 years away, it needs to be part of the overall plan for any company.”
Smart Business spoke to Baughman about the process of succession planning and how it provides benefits before a transition occurs.
Do most businesses have succession plans?
The main problem with companies’ succession plans is that they don’t exist. Owners have plans to increase sales or add personnel, but they don’t have a strategic plan as it relates to a successor because it’s something they can kick down the road. It takes most companies years to implement a succession plan, and delaying limits options.
Every business should have a succession plan. You might think you’re going to pass the business on to management, sell to a strategic buyer or gift it to your children. That can change, but you need a plan in place to start addressing the issues that arise no matter which way you’re going to exit the business.
What is involved in succession planning?
The first step is to consider your long-term goals. Is it to grow larger, or expand the product or client base? Whether it’s a single owner or a private equity group, what are their business goals? Do they want to retain a certain amount of ownership, pass it on to family members or step away completely?
Once you’ve answered those questions and determined what everyone wants, it’s time to get into specifics and identify your way of getting to liquidity, whether it’s a sale, private equity backing, going public or whatever.
Then you need the right people in place to move the plan in that direction. That’s where many companies fail; one person calls the shots and succession drops to the bottom of his or her priority list. It’s important to spread the wealth of responsibility internally and develop the right support group of attorneys and CPAs. Everyone on the team needs to understand how to grow the value of the company — until you have good strategic financial and business plans, you’re not going to be ready for succession. You’re looking to get the most value out of a transition, but you should be doing that on a daily basis anyway and working on ways to increase the value of the business.
What are the most common mistakes companies make?
The biggest one is timing — the tendency is to put off succession, but fewer opportunities are available the closer you get to a transaction. You might be in the wrong legal structure or find out you should have had additional training for management personnel.
This becomes crucial when something unexpected occurs, such as a death or someone leaving the company. A key component of the succession plan may be gone, and without a strong team you may not have a backup plan.
Another mistake is that owners think a certain dollar amount is a home run that will set them up for life, and don’t plan for the net impact. It can be eye opening to owners when they realize what they end up with after taxes isn’t what they were expecting. You need to forecast future needs and assume whatever cash you receive on the day papers are signed will be the only cash you’ll receive. Many clients had deals with earn-out provisions and didn’t get another penny. Just as you do for your business, you need to create a financial model and budget for your personal needs.
Some people don’t like to think about succession and hang on too long, especially when they built the business themselves. But at some point you’re going to have to step down, and you should have a plan with goals and a time frame for that transition. ●
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