The Committee of Sponsoring Organizations of the Treadway Commission (COSO) recently updated the Internal Control-Integrated Framework. The goal is to provide greater clarity and guidance related to the design and implementation of an effective system of internal control. In order to implement the COSO Framework by the December 2014 deadline, companies need to get the process started now, says Amy M. Ribick, CFE, CRMA, manager in Risk Advisory Services at Brown Smith Wallace.
“By starting the process now, organizations can have a structure and plan in place by next spring and make the transition seamlessly ahead of the Dec. 15, 2014, due date,” says Ribick.
Smart Business spoke with Ribick about the COSO Framework, what will change with the 2013 update and the process of transitioning to the new standards.
Who uses the COSO Framework?
Most organizations use the COSO Framework to provide a structure for their internal control environment. While publicly traded companies typically use it to assist in the evaluation of internal control over financial reporting, all companies are able to leverage COSO for their overall internal control framework. COSO provides an approach to designing, implementing and evaluating effective internal controls to help ensure the achievement of a company’s strategic, financial, operational and compliance objectives.
What are the significant changes?
The essences of the COSO cube, as it’s referred to, have not changed. The original Framework has been streamlined and underlying principles have been added, which contain specific areas of focus. These changes provide greater guidance and an opportunity to enhance internal control by bringing focus to the specific principles.
The most significant changes in the update are the 17 principles that have been articulated to help in assessing the internal control environment. Within the principles, there are 79 points of focus to provide further guidance on what organizations should consider when evaluating the environment. Another key part of the new COSO Framework is the focus on corporate governance, technology and fraud awareness. The focus for several years has been on financial reporting controls, but internal controls are broader and intended to address other important business objectives such as fraud or internal reporting used by management to make key decisions.
Can companies handle the transition alone?
Many companies have the necessary skills to handle the transition internally. However, others will struggle with finding the resources and time to be able to focus on the transition. There can be advantages to utilizing an external resource — for example, it helps facilitate the transition process so that management and key members of the team can focus on their day-to-day responsibilities. It also provides companies with an independent, outsider’s perspective that may allow for the identification of opportunities to improve existing practices. When assembling a team, it’s important to include people from all areas of the organization so that all aspects are considered. Particular attention needs to be directed to the principles and points of focus attached to each portion of the COSO cube.
What might be most difficult to implement?
Because there has been so much focus in recent years on internal control over financial reporting, many people assume that’s where controls are needed. Of course, if numbers are reported erroneously or fraudulently, that affects the business. But the COSO Framework points out that bad business decisions and fraudulent activity can occur in any aspect of an organization, not just those related to financial reporting. Education on the importance of sound internal controls throughout an organization will be very important.
Companies also will need to provide evidence, documentation and support of their internal control methodology, risk assessment processes, etc., and show how these principles have been addressed.
This is a big undertaking and companies that start earlier will be able to take advantage of the opportunity to improve the efficiency and effectiveness of their internal control environment.
Amy M. Ribick, CFE, CRMA, is a manager, Risk Advisory Services, at Brown Smith Wallace. Reach her at (314) 983-1347 or firstname.lastname@example.org.
For a copy of “5 Steps to COSO Transition Success” to get started on your COSO transition plan.
Insights Accounting is brought to you by Brown Smith Wallace
Enforcement of the employer mandate has been delayed until 2015, along with the annual limit on out-of-pocket costs a patient pays above what insurance covers, but the rest of the Patient Protection and Affordable Care Act (PPACA) is still scheduled to proceed as planned — although it’s uncertain whether that schedule will be kept.
“Right now there’s been two official delays announced. In theory, all other elements of the PPACA are coming into play. But this is so fluid and volatile that we could see the Department of Health and Human Services (HHS) announce that the federal exchange is not ready,” says William F. Hutter, CEO of Sequent.
Open enrollment for the health insurance exchanges, aka marketplace, is set to start on Oct. 1 and continue through March.
“They’re trying to build awareness through a marketing campaign but aren’t sure what to do because they haven’t seen how it is going to work,” Hutter says.
Smart Business spoke to Hutter about the upcoming timetable for PPACA implementation and what to expect regarding scheduled deadlines.
What do these delays mean to the implementation of the PPACA?
Pieces of the PPACA are already in place. The Medicare tax is increasing, the decline in flexible spending dollars have come into play, and the underwriting criteria for carriers is going to change how they underwrite and create similarities in pricing models because plans have to be pretty consistent. The age compression standard — rates can only be three times as much because of age — has been set.
Additional taxes also have kicked in, including the Patient Centered Outcome Institute fee. Employer requirements to notify employees have increased, as well.
Major changes are occurring; no one knows how they are going to pull it off. There are so many variables at this time that no one can predict what’s going to happen.
There’s also the question of whether the exchanges will be ready to go on Oct. 1. As of now, only one is ready — California. There’s also Massachusetts, if you consider that an exchange. The HHS has been quiet following a flurry of releases months ago. Something was leaked that the federal exchange might not be ready and since then there’s been no information, which means they might push it close to the deadline.
Meanwhile, companies are left to fend the best they can in anticipation of open enrollment starting.
Are repeal or defunding possibilities?
The repeal votes are all pomp and circumstance. Defunding is possible, but unlikely. The real problem is that no one can figure out how to make the PPACA work. That includes insurance agents and carriers, enforcement entities and employers.
What difference does delaying the employer mandate a year make?
All it means is that employers don’t have to worry about fines or penalties for a year. We’re recommending that companies proceed based on what they think is the best course of action. Companies need to design solutions to fix some of the exposures of the PPACA; it doesn’t matter what type of business you have, what makes a difference is your financial wherewithal. It’s a matter of coming up with a basic solution to address PPACA requirements and deciding how much you want to spend — like getting a combo meal and choosing between small, medium and large. That decision will be based on factors such as company culture and environment.
One emerging tactic is to seek early renewal of plans because of the uncertainty surrounding the PPACA. If you can get your carrier to renew starting Dec. 1, 2013, then you don’t have to worry about the PPACA and its impact until December 2014.
Right now, there’s no breathing room for companies. What happens if you anticipate that the federal exchange will be ready and the HHS announces on Sept. 10 that it will be delayed? Then there are all of the challenges associated with technology, billing and verification of wages. There’s going to be a whole new system that will handle protected health information, is it going to be secure?
There are so many things to be considered; it makes sense to try to schedule your plan year to avoid the inevitability of the PPACA until there is more certainty.
William F. Hutter is CEO at Sequent. Reach him at (888) 456-3627 or email@example.com.
Insights HR Outsourcing is brought to you by Sequent
Traditionally, businesses protect their intellectual property (IP) with patents and trademarks. These patents are generally utility patents, which protect the function or use of a product. Trademarks protect the name or logo under which a product or service is sold.
A more meaningful protection for businesses could include design patents and trade dress, says Barry A. Winkler, an attorney in the Intellectual Property Group at Brouse McDowell.
“These protections are issued much more quickly and with far less expense than utility patent applications. Design patents protect the decorative appearance of a product. Trade dress can protect the product packaging or product configuration,” Winkler says.
“For example, Volkswagen protected the shape of the Beetle and Apple protected the shape of the iPod by using both a design patent and trade dress. While using either a design patent or trade dress alone will provide some protection for the appearance of a product, using both provides even broader protection.”
Smart Business spoke with Winkler and Jennifer L. Hanzlicek, an attorney in the Intellectual Property Group at Brouse McDowell, about how design patents and trade dress can address areas of IP that are often overlooked.
What are the key differences between design patents and trade dress?
Although there is some overlap between design patents and trade dress, there are differences in the scope, timing and duration of the protection provided. A design patent protects a product’s appearance no matter what the product does, whereas trade dress protects the appearance only for the specific goods and services represented by the product.
As for timing, a design patent can be filed and issued before the product is used or even manufactured. Trade dress cannot be registered until the product is in use. Currently, a design patent is in force for 14 years after it is granted, but trade dress can last indefinitely as long as it continues to be used with its specific goods and services.
Design patents and trade dress can also protect virtual designs that exist in cyberspace, including the color scheme. Design patents protect Google’s teardrop-shaped marker icon on its maps, Samsung’s app icons and Nike’s animated user interface. Apple’s graphical user interface for the iPhone is protected by both a design patent and trade dress registration.
Should you seek both design patents and trade dress protection?
The benefits of using both design patents and trade dress can be demonstrated in the life cycle of a product.
When the design of a new product is complete, you can apply for a design patent to protect the ornamental design before you launch your product. The design patent protects your design for several years as you begin to manufacture and sell your product. Simultaneously, you can apply for trade dress protection for a product’s unique product configuration or product packaging. The trade dress protection then extends beyond the life of the design patent and continues until you cease selling the product.
The number of design patent applications continues to rise as businesses realize the benefit of protecting their product designs. In recent years, design patents have been more aggressively asserted by manufacturers in place of or alongside trade dress claims, including the recent Apple v. Samsung disputes.
Business owners could be foregoing meaningful protection by failing to pursue design patents and trade dress registrations. Taking these measures can offer increased IP protection, keeping competitors from copying the design and appearance of your products and product packaging. When used together, this powerful combination can provide armor for your product, from the finished design through manufacturing and launch, and continuing with sales until the product is no longer in demand.
Barry A. Winkler is an attorney at Brouse McDowell. Reach him at (330) 535-5711, ext. 358 or firstname.lastname@example.org.
Jennifer L. Hanzlicek is an attorney at Brouse McDowell. Reach her at (330) 535-5711, ext. 364 or email@example.com.
Insights Legal Affairs is brought to you by Brouse McDowell
Many employees are surprised when they learn how much employers are spending on them in addition to their salaries. Studies show that benefits can add 30 to 35 percent on top of the salary being paid.
“A total compensation statement is a good way to illustrate this and make employees aware. Most employees will end up appreciating employers more if the information is communicated properly and in an effective manner,” says Dan Wilke, director of underwriting at Benefitdecisions, Inc.
Smart Business spoke with Wilke about the value of providing employees with total compensation statements.
What’s in a total compensation statement?
You want to capture every cost associated with employees from the moment they are hired. The statement takes into account items such as vacation time, sick leave, personal days, holidays, wages, overtime, employer matching 401(k) contributions, and bonuses and commissions.
Then you break out the costs of what the employer pays for insurance — medical, dental, vision, life, disability, and travel and accident. It also includes tax-related costs the employer pays — Social Security, Medicare, federal and state unemployment, and workers’ compensation.
Some companies also reimburse employees for tuition for continuing education, or provide reimbursement for health club memberships as a way to incentivize employees to keep active and in good health.
The statement includes all of these hidden costs that employees forget about. They look at their paychecks and lose sight of the other benefits their company provides. Benefit-related costs are the second largest income statement expense, after payroll, and total compensation statements shed light on how much is spent.
It’s not about telling employees what you do for them, but showing how much they are valued. Studies show that when employees are aware of the total costs, they feel more appreciated and they are more productive.
Are total compensation statements also used as a recruitment tool?
It’s a logical next step. It might become commonplace that prospective employees hand over resumes and are given total compensation statements in return. Prospective employees often focus on the salary number. For example, a friend of mine accepted a new position and was surprised to learn he had to pay $1,200 a month for family health insurance because his company only pays 50 percent of those costs. Had he accepted another offer, he would have paid only $400 a month. He lost almost $10,000 in total annual compensation.
If you have a rich benefits package, illustrating that in a total compensation statement could certainly be valuable in terms of recruitment.
Can statements have a negative affect if you don’t have a rich benefits package?
A statement might not be applicable to all companies. It’s not promoting a sense of increased value to employees if your benefits package is light. A consultant would be able to determine if it makes sense to produce a total compensation statement.
What are the implementation costs?
On a one-time basis, you can outsource the project to a company that produces total compensation statements and the fee will run from $5 to $15 per statement.
However, it is more cost-effective to load information in a benefits administration system, if you have one, because it’s rolled into the cost of the system. There is an indirect cost because it takes legwork by HR to gather the information and enter it into a spreadsheet or database, but it’s worth the effort.
Typically, statements are provided to employees annually. While they can be delivered any time of the year, the best time is after you’ve given raises and had a benefits renewal. You’ll know the new costs and it’s a sensible time to update employees.
It’s important that you don’t just send it out or hand it to employees; there has to be follow-up. Offer to meet with employees on a one-on-one basis to provide explanations and answer questions to show you care about them. Total compensation statements are valuable and they have to be communicated in a manner that conveys that message.
Dan Wilke is director of underwriting at Benefitdecisions, Inc. Reach him at (312) 376-0437 or firstname.lastname@example.org.
Insights Employee Benefits is brought to you by Benefitdecisions, Inc.
Mobile devices have improved the flexibility of the workforce, but also have introduced serious concerns for employers.
“The wall between work and personal time is gone, which creates costly liabilities for employers. If your company is sued, it is a lot easier to defend that action when you can demonstrate you thought about the risks and tried to mitigate them,” says Kailee M. Goold, an associate at Kegler, Brown, Hill & Ritter.
Smart Business spoke to Goold about the risks of working on mobile devices and ways to limit the potential liability for employers.
What are the risks associated with mobile devices and data security?
There are two potential areas of liability: data security and employee behavior. Unfortunately, there is no one-size-fits-all policy or agreement that will provide a solution. Because you cannot eliminate all liability, you have to develop a policy that fits your regulatory environment, risk tolerance and trust assessment.
Identifying important data is a critical concern. Protected health information and financial information are the most regulated data, and the law requires companies handling this data to protect against security breaches. On the other hand, some data can be essential to your business but not regulated by law. For example, your company’s success may hinge on your trade secrets or customer information.
Regardless of the data you work with, you need to consider questions like: Do independent contractors have access to your system? What happens when a cloud-connected device is lost? Does the loss of data make your company liable to third parties?
What should companies know about mobile devices and employee behavior?
As far as behavioral issues, three costly liabilities are worth highlighting. First, consider if you are in compliance with wage and hour laws. Are employees working from mobile devices outside of work hours? Does this off-the-clock work push the employees over 40 hours a week? What seems like a small problem can quickly escalate into a wall-to-wall audit by the Department of Labor and a million-dollar lawsuit.
The second serious behavioral risk is distracted driving. If an employee is using a mobile device for work purposes and causes an accident, the company will be on the hook for all of the resulting damage. This is no small matter: verdicts and settlements have been running in the $15 million to $25 million range. Carefully drafted policies can only help your defense.
Third, you should think about the harm a terminated employee can inflict. For example, when an employee separates from your company, can they take your sensitive data and work for a competitor? If you do not have adequate safeguards in place, you will likely have to sue the former employee, as well as the new employer, to stop the bleeding. This loss of data may also make you liable to third parties if they had rights in the data.
As with most employee behavior issues, proper policies and monitoring can avoid headaches and expensive litigation.
Does it matter if the device is employee-owned or supplied by the employer?
The bottom line is that the use of mobile devices at work is a risk no matter if the company owns the device or you employ a bring your own device (BYOD) policy. So you have to figure the best way for your company to manage these risks.
The advantage of a company-issued device is control. You own the software and data being transmitted, like a computer or phone at a desk. Company-issued devices mean employees have fewer privacy rights and it is easier to wipe data. The drawback is monitoring. You have to consider everything: Are they buying expensive apps? Are they using the phone for unlawful purposes while working? Can you enforce these policies in a nondiscriminatory manner?
If you choose the BYOD route, handbooks and agreements must reduce employees’ expectation of privacy in their device. You will need access to and knowledge of what they are doing with work-related data. However, your access should only be for legitimate purposes, such as the installation of security software and wiping sensitive information.
Kailee M. Gooldis an associate at Kegler, Brown, Hill & Ritter. Reach her at (614) 462-5479 or email@example.com.
Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter
The U.S. Department of Labor (DOL) has increased its compliance enforcement efforts and is expected to conduct more benefit plan audits to determine if the companies that sponsor them are meeting those requirements.
“This is an area of focus for the DOL. A lot of time was spent preparing fee disclosure regulations, and follow up is likely to ensure plan sponsors are using that information. An increase in audits hasn’t been announced, but more auditors are being added to the ranks,” says Andrea McLane, manager, Benefit Plan Services, at Rea & Associates.
Smart Business spoke with McLane about what the DOL expects of plan sponsors and how to meet those expectations.
Do fee disclosure regulations cover all benefit plans?
The primary area of concern is with retirement plans since so many accumulated assets and safeguards are needed to ensure the plans provide income to employees when they retire. The DOL is also looking at welfare plans to make sure those with 100 participants or more are filing Form 5500s.
But the emphasis in the fee disclosure regulations is on fiduciary or other compliance issues regarding retirement plans. The regulations were meant to simplify the explanation of fees so that plan sponsors, with assistance from consultants, can better understand fee structures and evaluate when services were necessary and fees were reasonable.
What can plan sponsors do to document that plan fees are reasonable?
There are two approaches that can be taken to help you meet fiduciary responsibilities:
- Request for proposal (RFP).
You can issue an RFP every three to five years and compare the responses to current provider costs to determine whether fees are competitive. However, it’s difficult for the average plan sponsor to review RFPs because there’s no format for disclosures, making an apples-to-apples comparison challenging.
It’s much easier for plan sponsors to benchmark their fees. You can do this using data from your current service provider only. This method isn’t objective and is of a lower quality. It also may not meet fiduciary responsibilities when it comes to the process of choosing a provider. The best solution is to find a good, independent benchmarking service. While not a requirement, the DOL set an expectation that plan sponsors will benchmark and at least check the reasonableness of their fees.
An investment policy statement (IPS) can help you select and monitor plan investments. An IPS isn’t required, but it’s tough to monitor investments without one. It will also help ease DOL anxiety concerning the level of governance provided. Many investment advisers supply an IPS as part of their services.
Is a benchmarking report enough to satisfy plan sponsor fiduciary responsibilities?
It goes a long way, particularly regarding record keeping fees, but you still have to make sure you have proper oversight and aren’t relying too much on provider assurances. Most high-profile cases the DOL has undertaken have dealt with fees at the fund level. For example, Wal-Mart wasn’t using the best possible share class of funds in its plan — it was using retail-class funds. In this case, the retail giant relied on its trusted advisers too much and didn’t ask enough questions. An independent benchmarking report would have identified that fund fees were too high for a plan of such magnitude, giving Wal-Mart the opportunity to make changes.
Demonstrating that you have a process in place to monitor the investment decision-making of your plan should suffice. The DOL will not second-guess the success, or lack thereof, of the investment decisions within the plan. But it can identify when there is no documented process to monitor service providers, preventing you from meeting your fiduciary responsibility. Without documentation, the DOL will conclude de facto that the fees are unreasonable and the plan is not compliant, resulting in enforcement actions and penalties. It also leaves you open to participant lawsuits for breach of fiduciary duty.
Andrea McLane is manager, Benefit Plan Services at Rea & Associates. Reach her at (614) 889-8725 or firstname.lastname@example.org.
Stay up to date on burning business issues at www.DearDrebit.com.
Insights Accounting is brought to you by Rea & Associates
Today, social media surrounds almost every facet of our lives, including the workplace. While sites like Twitter, LinkedIn and Facebook offer many opportunities for companies to connect with customers and clients, they also can damage reputations when not addressed properly.
“Most companies see value in having a social media presence, but it is important to first develop a social media strategy and formulate a plan for how your business will leverage social media,” says Chad Spears, senior employee relations consultant at TriNet, Inc. “Address your social media policy first. Make sure all employees understand the parameters of what you expect in their communication on company-sponsored sites, as well as their personal use of social media during working hours.”
Smart Business spoke with Spears about what to address in a social media policy to avoid common mistakes.
What should a workplace social media policy include? Does it vary by company?
There are differences, depending on the company size or industry. A small public relations or marketing firm wouldn’t need the same policy as a publicly traded company that is more closely regulated. Every organization should first look at its existing policies, including code of conduct or Internet use, and make sure the social media policy is in line with what is being allowed and is consistent with other polices.
Also, make sure employees understand that even though they may not speak on behalf of their employer, their actions and statements reflect on the company. Inform them there should be no expectation of privacy when using company equipment or sites. As far as personal use on company time, that depends on the job level and organization type. Many companies don’t allow any personal use during business hours, but there is no one-size-fits-all solution. This should be determined based on company culture, and the type of work employees are doing.
Create a good policy that acts as a resource for questions or concerns. It should be a living document — social media evolves rapidly, so no policy will remain relevant without updates.
Who should be responsible for company social media posts?
A company should assign dedicated individuals to monitor content, which could be one person or an entire team, based on the size of your organization. The goal of social media is to get the company’s message or brand out to a broad audience, so encouraging all employees to participate is good. For example, employees could use LinkedIn to share articles they’ve written or showcase work. Have someone monitoring posts to ensure they’re consistent with the company’s marketing strategy, and to take corrective action when that’s not the case.
What common mistakes do companies make regarding social media?
One mistake is having a bare-bones social media page without dialogue or responses to customer questions or complaints. This can be more damaging than not having a social media presence at all. Make sure social media channels are updated and monitored, as they are the first line of contact for many customers and clients. Social media provides a unique opportunity to encourage two-way dialogue and solicit feedback.
Another mistake is making social media pages prepackaged, rather than making it an organic space. It’s a great opportunity to interact with customers, but many companies are too formal. Advertising what you’ve done can be good, but you have to make it fun — a place where customers are comfortable interacting with your company.
Give clients a reason to visit your page, other than to complain, by adding value. You could post white papers showing visitors how to navigate roadblocks, providing resources, not just touting accomplishments.
Companies also need to be cautious about disciplining employees for social media use. Courts have determined that employees may have the right to discuss working conditions online through social media, so consult with a human resources representatives.
Employees and customers are on Facebook and other social media. To harness the potential power of this army of ambassadors, establish a presence and set policies for appropriate use and how the company will be represented to ensure it promotes your company positively, consistent with your culture and brand.
Chad Spears is a senior employee relations consultant at TriNet, Inc. Reach him at (720) 291-1246 or email@example.com.
Connect with us via Twitter, LinkedIn, Facebook, Google+ or YouTube.
Insights Human Resources Outsourcing is brought to you by TriNet, Inc.
Nothing attracts investors more than a company’s future earnings potential. But predicting growth isn’t a foolproof science.
“Investors look at historical financial statements and calculate earnings before interest, taxes, depreciation and amortization (EBITDA). That’s easy to do, but doesn’t provide the entire picture, and certain expenses associated with internal capital projects and leases might not be apparent,” says Tom Vande Berg, a partner with Crowe Horwath LLP in the Transaction Services Group.
Smart Business spoke with Vande Berg about these hidden expenses and how they can affect growth potential.
Why are capital leases an area of concern?
If a lease is capitalized, the associated expense is recognized on the income statement as depreciation and interest rather than rent. Therefore, EBITDA would not include an expense for the lease even though the company has ongoing monthly payments. If a similar piece of equipment were treated as an operating lease, it would incur a profit and loss expense.
When are leases capitalized?
The Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 840 states that leases must be capitalized if they meet one of four criteria:
- Ownership automatically transfers to the lessee at the end of the lease term.
- The lease includes a bargain purchase option.
- The term of the lease is 75 percent or more of the asset’s useful life.
- Present value of minimum lease payments is 90 percent or more of the fair value of the asset.
Companies might have several pieces of similar machinery or equipment for which some leases are considered capital and others are categorized as operating.
What are other examples of hidden expenses?
- Nonlevel rent — If a company has periods of free rent or rent escalations, its rent expense might not equal its cash rent payments. For example, a company could have a 10-year operating lease that increases annually by 3 percent. An investor analyzing rent expense after year five of the lease would see an expense less than actual future cash expenditures.
- Machinery constructed in-house — In these cases, labor and overhead is typically capitalized in relation to the project. If the capitalized labor and overhead relate to salaried employees, the costs should be considered ongoing expenses in an EBITDA calculation.
- Capitalized repairs and maintenance — Companies without a formal capitalization policy might improperly capitalize normal repair and maintenance into fixed assets. These expenditures should be included as part of the normal operating expenditures.
- Capitalized internal-use software — Costs incurred creating new computer software for internal use can be divided into two stages: preliminary project phase and development phase. All costs of the preliminary project phase should be expensed. Development stage activities can be capitalized, but if capitalized payroll and related costs are for salaried employees who would be paid regardless of the current project, the costs should be considered ongoing expenses.
- Capitalized software to be leased or sold — According to FASB ASC 985-20, internal costs in creating computer software are expensed until feasibility is established. Then, the costs of coding, testing and other activities associated with producing product masters are capitalized, which may include allocated indirect costs. As a result, certain ongoing operating expenses such as payroll and rent may be capitalized and excluded from the initial calculation of EBITDA.
So an investor just looking at EBITDA would only be getting part of the picture?
While the EBITDA calculation is a valuable tool for analyzing future earning potential, it might not reflect all recurring expenses. Investors also must consider what expenses are lurking below the surface, as capitalized or lease costs could significantly affect future cash flow.
Tom Vande Berg is a partner in the Transaction Services Group at Crowe Horwath LLP. Reach him at (214) 777-5253 or firstname.lastname@example.org.
Insights Accounting is brought to you by Crowe Horwath LLP
The recession no longer seems to be affecting the technology market, as growth opportunities abound for tech companies.
“We’re seeing a very healthy environment for technology,” says Dick Sweeney, senior vice president and manager of the Northeast Market Technology Banking Division at Bridge Bank. “Within our portfolio of clients, we’ve had a number that in the past six to 12 months were acquired or are in the process of getting letters of intent, with transactions being done at pretty healthy multiples of income.”
Smart Business spoke with Sweeney about the technology sector’s status and what small tech companies are doing to foster growth.
Are funds readily available for growth?
There’s a healthy ecosystem now, especially on the growth capital side. Companies that are a little more mature than a startup — they have decent revenue traction and customer adoption of products and services — are looking for additional resources to expand sales and marketing, or open up international operations. There’s no shortage of funding sources for them on the equity side. They are attracting money from strategic investors and doing so on favorable terms with multiple proposals.
On the debt financing side, there’s also a good deal of competition. Banks are supplying funds, as well as partnering with equity and mezzanine lenders. Mezzanine financing is a hybrid of debt and equity financing where the lender has rights to convert debt to ownership if the company doesn’t pay the loan back in time.
Right now is an ideal time for companies looking into executing a growth strategy by putting more capital to work or exploring exit opportunities.
Do any tech sectors particularly stand out?
There are premium valuations in the customer relationship management space. For example, ExactTarget was recently acquired, and Neolane sold for a revenue multiple of more than 10.
Reoccurring revenue is currently the focus of management teams and investors, and these companies are receiving valuations, whether that means their private equity or exit value. From an investor side, the company has a stable base that is predictable. From a company perspective, reoccurring revenue is attractive because it helps avoid white-knuckle situations where you’re waiting for a very large, one-time deal to go through at the end of a quarter. Whether it makes it in that quarter or happens a day later can really impact your financial performance.
Why is the environment so healthy?
It’s a combination of things. There are some large corporate buyers with a lot of cash on their balance sheets that are looking to fill product holes through acquisition rather than trying to build. The stock market is also pretty healthy — it’s near all-time highs — and that is translating into high valuations on the private side as well.
Companies are being rewarded particularly for building reoccurring revenue streams into their business models. That certainly shows in the public markets that are getting premium valuations. Also, banks are offering different types of financing structures based on multiples of reoccurring revenue. This rewards companies that get away from perpetual license sales and toward monthly reoccurring revenue. It’s an ongoing trend that’s not slowing down anytime soon.
Is there growth outside of companies with reoccurring revenue streams?
There has been explosive growth in mobile advertising, with rates not seen in other sectors. A big land grab is taking place, and some companies are growing rapidly as a result. There are no 800-pound gorillas nor is there a single, dominant incumbent, so that presents opportunity for new entrants. These are mobile ad targeting technologies, mobile ad exchanges and business intelligence that will target ads based on a consumer’s location or other attributes.
Are there any problem areas of the market?
Clean technology continues to be a difficult sector. A lot of investors have looked to exit after some high-profile collapses in solar panels and biofuels. Companies received significant amounts of capital and were not able to deliver. It’s made it very difficult for others in that sector to raise financing, but overall we’re seeing a lot of great companies that are growing rapidly.
Dick Sweeney is a senior vice president and the manager of the Northeast Market Technology Banking Division at Bridge Bank. Reach him at (617) 995-1310 or email@example.com.
Learn more about startups and the technology sector on Bridge Bank's website.
Insights Banking & Finance is brought to you by Bridge Bank
Banking is all about relationships, and the right partner can carry a business from inception through growth and into an industry leader.
“Growing a business is really about having a team of professionals working together. From a banker’s perspective, the most important thing is building a relationship with the business owner,” says Olie Williams, senior vice president and director of Business Banking at ViewPoint Bank.
Smart Business spoke with Williams about how banks work with businesses throughout various phases of their development.
How can start-ups secure bank financing?
It is important to come prepared to discuss four key elements related to financing. The first critical element is a good, solid business plan. This is important for all business owners, but especially small businesses that are just getting started. At a minimum, the plan should be a road map for the first three to five years of your business. What does your company plan to sell, and what is your anticipated annual net profit from those goods or services? It is also important to show how you plan to market your company. Banks love to see the thought and planning that has been put into the business.
The second critical element is to define your capital needs. What capital resources do you have presently to build the business, and what are your projected needs as the business grows? There needs to be some capital investment on the owner’s part. One mistake small business owners frequently make is underestimating capital needs when starting a business. Many times, they don’t account for money they’ll need to support their family’s day-to-day living expenses.
The third critical element is a strong personal credit history.
Finally, you will want to consider what assets you own that could support the loan request in the form of collateral.
Is bank financing the right route for start-ups?
It depends on the answers regarding those four key areas — business plan, capital needs, personal credit and collateral. If you have no capital to invest in your business, it’s going to be a challenge to get bank financing. That’s why many small business owners finance with credit cards or home equity lines of credit.
Of course, start-up businesses also can be financed through banks using U.S. Small Business Administration (SBA) loans. An SBA loan is a good vehicle to use when a company doesn’t have the necessary financial history.
How can banks help companies once they reach the growth phase?
When a business is growing, it’s very important to assemble a ‘go-to’ team of experts that includes an accountant, attorney, insurance agent and banker. These four professionals will get to know and understand the business and work together to support the company.
The more your banker gets involved in your company’s strategic conversations, the better he or she can provide products and services to build on your plans.
Businesses often grow too fast, without the capital base to support the growth. Banks want to see growth, but in a balanced way. Best practices would suggest that your outside team of professionals meet quarterly, or at least annually, and review the business plan and future needs with you.
Does that relationship translate into financial support that might not otherwise have been provided?
Absolutely. When a bank has a relationship and understands the business, there is a comfort level that helps when things don’t go exactly as planned. The banker has confidence in the owner’s ability to operate the business in good and bad times.
The time to get to know your banker is not necessarily when you have a need. If you have a good relationship, your banker understands your business and can address needs that arise, which could be treasury management or other aspects of banking — it’s not just lending.
Growing a business is all about having a good team behind you. An owner needs to make sure he or she has bankers and other key professionals who communicate with each other and understand the business.
Olie Williams is senior vice president and director of Business Banking at ViewPoint Bank. Reach him at (972) 801-5889 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by ViewPoint Bank