This is Part 1 of two articles addressing the trials and tribulations of a company’s growth and development. First, let us set the scene: A company is on the path to success … great growth … exciting leadership … but has very little management.
This start-up, entrepreneurial company is driven by personality, and not just one, but a combination of personalities that create a unique cultural fingerprint of the company. It is not a formulaic approach; instead, it develops over time. This merging of personalities is an exciting time, driven by a common purpose and the excitement of building something unique. Things are flowing smoothly, and everyone begins to settle into a comfortable rhythm, says William F. Hutter, president and CEO of Sequent.
“This rhythm of early stage companies is a lot like that favorite recipe — the unique combination of foods and spices that make it smell and taste perfect,” says Hutter. “Remember visiting your grandparents’ house after you have been away for a long time? That smell of Grandma’s favorite recipes is deeply imbedded in your memory. Just one hint of that smell takes you right back to the comfort of Grandma’s kitchen. This same thing occurs in an organization during the early stage.”
Smart Business spoke with Hutter about the early stage of a company’s development and the role of the gun slinger.
How does the combination of personalities impact an organization?
The combination of personalities creates a feeling of comfort for those who helped create the collective personality. The founder/entrepreneur who has always run with his or her hair on fire is the head cheerleader. Everyone becomes comfortable, and the company’s cultural fingerprint becomes more established.
In the early stage, leadership is focused on sales, service and growth. The basic needs of the business — cash flow, growth, scale and bench strength — require that these factors repeat for continued growth. The leadership operates intuitively and influences the organization every day with necessary circumstantial decision-making. They are focused on a single objective — growth. This is the way the company operates and it is an exciting time.
What is the role of the gun slinger in this environment?
In the early stages, the importance of the gun slinger role is staggeringly important, because the gun slinger drives growth. We all know a gun slinger or two. They are in every organization. They get things done. It may be the founder/entrepreneur, or someone who has the courage to take on a tough project. They take risks and blaze the trail. The gun slingers in business are a lot like the gun slingers in old westerns. They are hired to do a tough job. They may move from town to town to ‘fix’ a problem, challenge the status quo or lead a group through troubled times.
In a growing business, the modern-day gun slinger is instrumental in driving the growth and the vision and is a constant reminder of the action and effort that are a necessary complement to the rest of the staff. The role of a gun slinger within a company requires creativity, quick thinking, calculated risk taking, gauging of skills, analysis of the objective and a superior level of individual talent. The role also allows for longevity of service and a willingness to accept individual accountability. Modern-day gun slingers must be self-motivated, willing to invest unrelenting effort with a purity of focus and have the ability to execute without regret. What organization wouldn’t want an employee or two with the skills of a gun slinger?
When does the gun slinger come under fire?
As the company grows, both internally and externally, the original entrepreneurial spirit and attitude begin to wane, and the gun slinger comes under fire. Early stage success brings with it the realization that this new company may very well have a long life. Therefore, a transition that ‘feels’ necessary begins to manifest.
Logic sets in. The organization has grown, and the early stage leadership realizes that planning for the next stage is imminent. Financial reporting is hazy, and people begin to point fingers rather than taking responsibility or working together to analyze procedures and methods. So a decision is made to look at what has been an ‘intuitive’ formula.
Time is spent documenting processes and systems to improve efficiency and move from an intuitive formula to one that is more prescriptive. The company also starts to see the risk of having leadership in such a crucial role. As a result, questions emerge — questions that involve re-evaluating what led the company to where it is today. Questions include:
- What do we do if something happens to the leader?
- The company is now a significant asset to its investors. How will the assets be protected?
- How do we document knowledge? How do we establish leadership as a mentor for sharing their unique knowledge?
- Can we decentralize to improve integration of departments?
- Do we need more management oversight?
All of these questions are legitimate, but we sometimes fail to recognize the consequence of seeking answers to these questions.
What happens when the gun slinger is no longer welcome?
In evaluating the factors that led to the early stage success, what had been the company’s strength is now examined as the company’s weakness. Often, when objectives have changed, the esteem once commanded by the leadership is questioned. They are no longer viewed as the strong gun slinger. Just as in old westerns, modern-day gun slingers, while welcomed in times of need, find their welcome has run out once their job is completed.
Next month, watch for Part 2 of the story, “Death of the Gun Slinger.” Learn how the changes fostered by the re-evaluation questions produce separate and distinct outcomes, which ultimately lead to the death of the gun slinger.
William F. Hutter is president and CEO of Sequent. For more information, visit www.sequent.biz. Reach Hutter at (888) 456-3627 or firstname.lastname@example.org.
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The recent accessibility of oil and gas in the Utica Shale rock formation, located throughout much of Eastern Ohio, will have a major impact on businesses and individuals alike. New businesses will be coming to the state due to the drilling, and companies currently here will likely see increased business.
As a result, companies should be considering the state and local tax ramifications of these operations in Ohio.
“Many businesses coming into the state may not have done work in Ohio before,” says Anthony Ott, CPA, senior manager, state and local tax services with GBQ Partners LLC. “For the first time, they will be subject to Ohio’s state and local tax structure, which does have some nuances that differ from other states.”
Smart Business spoke with Ott about how to prepare for the increased business and the resulting tax ramifications.
What are a few key state and local tax focus areas for businesses impacted by the shale boom?
Ohio is one of the few states that allows municipalities to enforce their own income taxes, which creates a very burdensome compliance process.
Owners of land leased for drilling will likely receive upfront lease bonuses, as well as royalty payments once the well is active and producing. This could produce a much larger municipal income tax liability for these individuals, depending on where they live. They may also be required to make estimated payments for municipal income tax, creating a new level of complexity.
It’s also very problematic for businesses to properly comply, especially those coming from out of state that are not familiar with the municipal taxing structure. Ohio utilizes a 12-day entrant rule — if you operate in a given taxing municipality for 12 days during any given year, you’re responsible for withholding and paying municipal income tax in those locations. Businesses with mobile work forces have to track the location of employees and property to apportion their income in Ohio to the correct municipality. This becomes difficult when you have crews working all over the state.
Ohio also imposes sales tax on certain services such as temporary employment. So, if businesses are utilizing temporary help and other taxable services, they will have an impact on the profitability of their jobs.
How do severance and real property taxes apply?
The severance tax is the hot topic right now. With the mid-biennium budget review, Gov. John Kasich proposed certain changes that would increase the tax above its current level and use the additional funds collected to provide an income tax credit to Ohio individuals.
The legislation would establish two categories of wells — hydraulically fractured horizontal wells and conventional wells — and tax each differently. If this legislation passes, it will raise the complexity for companies, particularly those with hydraulically fractured horizontal wells, given the opportunity to use a reduced rate for the first two years while they recoup costs associated with construction of the well.
The real property, or ad valorem tax, allows county auditors to value the oil and gas reserves for producing wells and assign a value for real property tax purposes. The value is determined based on an annual return filed with the county auditor.
What about the Commercial Activity Tax?
Ohio’s CAT is unlike the income/franchise taxes levied in many other states. In essence, it is a tax on a business’s gross receipts. The CAT’s unique requirements around what items are included in gross receipts and how receipts are sourced will have an impact on both businesses and individuals participating in the industry.
What is the overall risk of not understanding and complying with Ohio’s taxing structure?
The risk is that a company operating in the state fails to comply with all the statutory tax requirements. This could lead to an audit by the state or municipality, and the business would likely be subject to the tax assessment and associated penalties and interest.
What are some of the opportunities for companies participating in the boom?
The state and local tax impact can increase dramatically as the associated revenue dollars and investment rise. Depending on the project, there may be opportunities for incentives from the state and local jurisidictions that may help offset some of those increased costs. These may include incentives and tax credits for job creation, capital expenditures, training, etc.
Ohio law also provides a sales tax exemption related to items directly used in the production of oil and gas. I would encourage industry participants, as well as service providers, to fully understand what qualifies for the exemption in order to take full advantage and possibly reduce the overall dollar investment required.
How can companies stay up to date on these issues?
Participants in the industry should keep a keen eye on the severance tax legislation. The Ohio Oil and Gas Association is very active in this area and is a good resource for members of the industry to stay informed.
Regarding current Ohio taxes, businesses and individuals alike should review the structure and consult with a state and local tax professional to better understand how it will apply. Each industry segment, as well as the ancillary service businesses, will be impacted differently.
There are also many opportunities to attend informational seminars specifically related to these issues.
Anthony Ott, CPA, is a senior manager, state and local tax services at GBQ Partners LLC. Reach him at (614) 947-5311 or email@example.com.
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Recovery continues to be slower than most businesses would prefer. Part of the slow growth is due to concern from many business owners regarding whether they can trust some of the leading economic indicators released in the past few months.
On a positive note, recent trends have shown that unemployment is being reduced overall. The National Association of Manufacturers also reported that more than 31,000 new U.S. manufacturing jobs were created in February. This increase, however, is tempered with the belief that many unemployed individuals have simply given up on job searches, as they have now been out of work for an extended period. The end of their search effort causes many to fall off of the tracked statistics. This may be causing some lower-than-actual unemployment numbers to be reported. In addition, a recent University of Michigan study showed consumer confidence figures have fallen slightly due to weakening perceptions about the economic environment.
Two other areas facing business owners have caused them to move at a slower pace when considering expansion, acquisitions and hiring of additional employees. These two areas are taxes and the looming health care changes. With the potential for higher taxes and higher health care costs on the horizon, many entrepreneurs are taking a wait-and-see approach. Thus, the reports of companies continuing to pay down third-party debt and stockpile cash still exist.
It seems businesses have returned to profitability as a result of their concentrated efforts implemented to endure the economic downturn. The threat of losses, liquidity issues and, in some cases, covenant violations forced many businesses to lean up operations, challenge spending and do more with less. As a result, many are producing more with fewer resources and have improved their processes. Earnings levels have improved, but most results are still below the levels experienced in the mid-2000s.
Also of concern is uncertainty in foreign markets. While we have had a credit and debt crisis here, overseas trouble has many business owners contemplating international business relationships and opportunities. In the mid-2000s, many production jobs were moved overseas to benefit from inexpensive labor. With the current domestic economic conditions and the lack of stability driven by the uncertainties in the Eurozone, there are rumblings that U.S. companies may work to grow domestic manufacturing and pull jobs back to the U.S. Innovations also are occurring in certain niche areas, and the shrinking cost advantage of outsourcing production is becoming more evident. Job growth continues to be a major focus domestically, and labor negotiations of major industries, such as auto makers, have demonstrated the desire for large companies to guarantee sustainability and promise to keep jobs in the U.S.
There is also concern regarding the stability of the buying power of foreign markets. U.S. companies have continued to expand their penetration into foreign developing markets. The ultimate results of the various national debt issues in the Eurozone could create an economic ripple effect that could affect demand for U.S. products in many foreign markets. Also, the continued political changes and instability in eastern countries can create swings in energy prices and product demand in those markets. This creates difficulty in planning for growth and expansion — and correspondingly a fair amount of caution when it comes to the timing of capital investment and business expansion.
Merger & Acquisition Activity
While the aforementioned factors have slowed down private business owner activity related to expansion and acquisitions, another business segment seems to have picked up. Private equity groups and private investors have been much more active in recent months. There has been significant public discussion in the past 18 months regarding cash that is on the “sidelines” waiting to be invested. We have seen that as the economy begins to expand and smooth out, more M&A deals are being contemplated. Also, business valuations are returning to more normal and expected levels driven by those wishing to market their businesses, and banks are becoming more willing and involved in financing such deals. We view this as an encouraging sign and an indication of continued movement in the right direction.
Each business faces unique challenges, but all ultimately need to consider, plan for and execute a succession plan. Whether the plan involves selling the company to an unrelated third party, transitioning or selling the company to the next generation, an ESOP or some combination of these, this issue has to be addressed. The recent increase in merger and acquisition activity has been driven in a number of cases by exit strategies employed by many business owners. As the baby boomers continue to exit the workforce and leave their businesses, we will see more and more movement and opportunity in this M&A wave. When these decisions are made and the process starts, planning can have a significant effect on the company’s valuation and the ultimate profit realized by the owner. This truly is one of those areas where “an ounce of prevention (of negative results) is worth a pound of cure.”
Here are a few planning ideas that can be game changers when an owner is looking to improve value:
- Perform due diligence on your business and your business processes and activities. Many sellers believe the diligence process is the buyer’s responsibility. While buyers will spend a great deal of time and effort on due diligence, performing self due diligence can overcome a number of surprises, allow the seller time to position its operations and activities to provide the greatest advantage and better prepare the seller for questions asked during the process. Being prepared when soliciting bidders also will likely increase the number of bidders you may be able to attract.During this process, you should consider reverse due diligence, or preparing the data that will likely be requested during the due diligence process. These are standard documents requested in most diligence engagements. Having this information ready on the front end adds value and helps move the process along. Delays in outside or third-party diligence have been proven to affect deal values.Also, have your company’s financial statements audited by a firm that potential buyers consider reputable. Audited financial statements provide immediate credibility.
- Make sure you impress upon buyers the value of the company you are offering to them. Build a business case for why the company will continue to prosper and grow and what positive effects the existing infrastructure will have on such growth.
- Document agreements with employees and third parties. It is important for buyers to mitigate the unknowns when buying a business, so the more documentation for contractual arrangements, the better.
- Be proactive relative to unresolved or potential litigation. Review pending or threatened claims with your attorneys and be honest about what situations exist. Resolve issues as diligently as possible. Make sure to include all potential human resources issues that may exist.
- Avoid accounting discrepancies, unusual transactions and changes in reporting methods. An audit, as discussed above, can assist with this. However, remember that any such instances will need to be explained and will be challenged by a buyer. Clouding facts will lead to more questions and may ultimately impact the value of your deal.
When it comes to the value of your company, you can never be too diligent. For more ideas on how to enhance value, contact a BKD advisor.
Scott L. Fields is a partner at the Houston office of BKD, LLP. Reach him at firstname.lastname@example.org.
Article reprinted with permission from BKD, LLP, www.bkd.com. All rights reserved.