There is a lot of buzz around businesses going green, but opportunities to do so are still limited.

Despite ambitious plans to implement renewable energy tools and programs, “the green economy has not yet emerged,” says Nick Lombardi, manager of risk services and energy services practice leader at Brown Smith Wallace LLC.

While some states have adopted renewable energy portfolios, there is no federal standard. And most of the sweeping, green-minded efforts that have been discussed in Washington, D.C., the past few years are still on the table.

That said, there are still things that businesses can do to improve energy efficiency and take advantage of tax credits and incentives for retrofitting commercial property and purchasing equipment.

“Only use what you need,” Lombardi says. “And consider purchasing more efficient lighting, training employees and replacing inefficient motors and other equipment to save on energy costs.”

Smart Business spoke with Lombardi about how to realize savings and reduce energy consumption by taking advantage of available tax credits and incentives and implementing efficiency measures.

How can a business take advantage of green initiatives?

There is no real answer. When the current administration stepped in, there was a lot of hype around developing a green economy. However, much of that has not been implemented, as incentives and government programs remain stalled. How can a business take advantage of a systematic program that doesn’t yet exist?

The good news is that there are some specific opportunities for businesses that are interested in undertaking renewable energy projects. These have been in place for some time and will continue to be available for businesses moving forward. For example, the EPACT (Energy Policy Act of 2005) tax credits apply to commercial buildings that implement energy-efficient measures. If an organization meets certain energy-efficiency standards, it can earn a tax deduction for the facility of up to $1.80 per square foot. Additionally, there are federal investment tax credits available for renewable projects such as installing a wind turbine, or photovoltaic equipment to produce solar energy.

Businesses should also check into local renewable energy programs that may be available through utilities. For instance, some of the most accessible incentives are earned through installation of high-efficiency lighting. Before making any retrofits, however, you should talk to a professional who is well versed in energy consumption and green tax credits.

What are other ways companies can reduce energy expenditures?

Initiating an internal training program to educate employees about energy-saving basics will go a long way toward reducing energy costs. Your mantra should be, ‘Don’t use what you don’t need.’ Highlight the importance of simple things, such as turning off lights when office spaces are not in use, and powering down computers at the end of the day.

Computers demand a lot of energy, and companies can reduce their usage by simply adopting conscientious habits, such as not allowing employees to disable a computer’s standby mode.

Utilize natural light whenever possible, and use occupancy sensors as a cost-effective way to ensure that lights are only on when necessary. Also, daylight harvesting systems are more accessible and affordable to install now. These systems involve lighting that dims and brightens depending on available natural light in a space. There are rebates and incentives available for installing this type of technology.

What is electric power factor, and what impact does it have on utility bills?

Electric power factor is the ratio of the ‘real power’ flowing to the machine to the ‘apparent power,’ the amount of energy a machine uses versus the energy the machine produces. It’s complicated to understand, but essentially, the measurement is the portion of electric energy that is doing the work and not stored or captured in back-and-forth magnetic energy.

There is a misconception that improving this ratio will drastically reduce utility bills. The way electricity is metered, only energy that is ‘doing the work’ is measured. Analyze your utility bill and you will see that the power factor component is an infinitesimal portion of your expense.

The best way to save on utility costs is by focusing on efficiency and considering upgrading to high-efficiency motors, especially those used in pumps, fans and other long-running machinery.

How do usage spikes affect my bill?

There is another utility myth — that huge spikes in power usage drive up costs. When you turn on a large bank of lights, or power up a big machine, the energy surge is depicted on a utility bill as a significant uptick. These energy surges last a fraction of a second, or a couple seconds, at most. Many believe that by reducing these spikes, one can control energy costs.

However, utilities measure electric demand over 15-minute intervals, and those brief, though enormous, spikes hardly change the average. So don’t get sold on devices that claim to reduce those huge spikes and reduce your electric bill. If you want to save money on electricity, the tried-and-true methods are to upgrade to more efficient equipment, monitor usage of items such as lights and computers, and educate employees about wise energy use.

Meanwhile, talk to your utility company or a professional about your rate structure to be sure you’re on the right rate.

Nick Lombardi, PE, is manager of risk services and energy services practice leader at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1323 or nlombardi@bswllc.com.

Published in St. Louis

When talking about tax strategy for 2010 and beyond, the only sure thing is change.

Some tax laws are expiring and others are being enacted to stimulate the economy, presenting tax deduction opportunities for businesses and individuals.

While keeping track of those changes can be difficult and time-consuming for a busy executive, an experienced tax consultant can help you identify opportunities to benefit from the changes and develop your tax strategy, says Cathy Goldsticker, CPA, member, tax services at Brown Smith Wallace LLC.

“As the government works to reduce unemployment and stimulate jobs and the economy, tax strategy is the low-hanging fruit, and an expert can help you identify it,” says Goldsticker.

Planning is critical, and businesses should begin working now with an adviser to start identifying tax strategies to help minimize taxes, says Martin Doerr, CPA, member in charge, tax services, Brown Smith Wallace.

“There are lots of details to finalize and decisions yet to be made, such as the 2011 tax rate or whether certain tax cuts that are expiring this year will be renewed,” says Doerr. “However, businesses should look at everything on the table so they don’t miss any tax opportunities.”

Smart Business spoke with Goldsticker and Doerr about how to plan your rapidly approaching 2010 year-end tax strategy in a fast-changing tax environment and the steps you can take to maximize deductions.

What items can trigger Alternative Minimum Tax (AMT), and what steps can be taken to mitigate the loss of valuable tax deductions?

AMT was created to ensure that wealthy individuals and businesses pay a minimal level income tax. When calculating regular income tax, minus deductions, a separate alternative calculation is also figured.

The taxpayer must pay the higher of the two, and with all of the tax changes coming down the pike, more individuals and businesses will be paying AMT in fiscal 2011 and beyond.

That said, it’s important to consult with a tax adviser and determine how taking deductions or allowable depreciation will affect the overall tax picture. With AMT, certain business and individual tax deductions, such as property taxes, state/local taxes and investment expenses, are not recognized, thereby preventing taxpayers from getting the full benefit of these deductions.

There are some steps businesses can take to mitigate AMT: Slow down allowable depreciation on qualifying property by using a straight-line rather than accelerated depreciation method; defer certain deductions to a subsequent year because these deductions will not provide tax benefit in a year when a taxpayer owes AMT; and project whether AMT is likely in 2011 to plan future tax strategies accordingly.

How can self-employed individuals, such as partners, sole proprietors and S corporation shareholders, minimize self-employment tax?

Consider ways to receive business funds without owing self-employment taxes. Set up rental property and establish supporting operations.

For instance, rather than a business purchasing equipment, the individual buys it and rents it back to the business at fair market value. While that income is subject to income tax, it is not subject to self-employment tax.

Another suggestion that applies only to S corporations is to withdraw income as distributions rather than taking income as wages once reasonable wages are paid. Investor distributions are not subject to Social Security and Medicare taxes, but wages are.

Finally, for business owners of C corporations, now is a great time to consider taking dividends out of the company because they will be taxed at 15 percent this year, without incurring self-employment tax. Next year, that dividend tax will increase to 20 percent, and perhaps more, depending on how tax law plays out.

What should taxpayers know about selling a second home at this time?

Now may not be the time to sell a second home. In today’s environment, sellers who are fortunate to have a profit will pay 15 percent capital gains rates (plus sales tax where applicable) on that profit. This is different from when you are selling a primary residence, where sellers are usually exempted from capital gains tax.

But here’s the real clincher with selling a second home now: Not only do you pay capital gains tax if you make money on the sale, if you sell it at a loss, you do not get to take a deduction. Selling is a lose-lose situation.

Also bear in mind that if you have a foreclosure on the property, there could be hidden tax consequences. Hold out on selling that second home and consider renting; it may be your best option.

Does retirement plan funding still make sense in today’s tax environment?

Employer-sponsored plans, such as 401(k)s or certain IRAs, provide a tax deduction for the employer, and the employee is not taxed on the income. Employers wanting to fund benefits for their employees are wise to consider a retirement plan. A lot of businesses already have these plans in place, they just need to maximize them. The old adage to ‘buy low and sell high’ is a popular strategy, and that’s exactly what’s going on now in the retirement plan funding environment.

Tax law changes are approaching, but, with uncertainty as to which changes will occur, a proactive tax strategy will position businesses to maximize the benefits. Tax planning is essential in times of change.

Cathy Goldsticker, CPA, is a member, tax services, Brown Smith Wallace LLC. Reach her at (314) 983-1274 or cgoldsticker@bswllc.com.

Martin Doerr, CPA, is a member in charge, tax services, Brown Smith Wallace LLC. Reach him at (314) 983-1350 or mdoerr@bswllc.com.

Published in St. Louis

If your business has been underpaying its taxes, look out: States are seeking ways to increase their budgets by increasing their sales tax audit activity on companies that may not even realize they are underpaying.

In the ever-changing landscape of state tax law, many businesses have a difficult time understanding how much sales tax to pay and which transactions are taxable. As a result, businesses can end up paying hefty assessments.

“The keys are to set up your accounting system to accurately capture the data used to calculate the amount of sales tax due, know the laws in the state in which you operate and consult with a professional who understands the application of the sales tax laws and procedures in that state,” says Susan Nunez, state and local tax services principal at Brown Smith Wallace LLC.

Smart Business spoke with Nunez about how to make sure you’re compliant with state sales/use tax laws and how to work through a sales tax audit.

If a supplier does not charge sales tax on the purchase of tangible personal property, is the purchasing company still required to pay the tax?

Yes, if the transaction occurs in a state that imposes a sales tax on the transaction. However, it is important to note that many states, including Missouri, have numerous sales tax exemptions for different industries and/or types of purchases that may apply to transactions otherwise subject to sales tax.

If you conclude that the transaction is exempt, you should provide the supplier with an exemption certificate for the state in which the item will be used. It is still your responsibility to maintain documentation that your claimed exemption is valid under that state’s laws.

What can a company do if it determines that it overremitted sales tax to a state?

Most states offer a mechanism for taxpayers to request a sales tax refund. The process generally involves submitting a refund claim, filing amended returns and attaching supporting schedules and invoices within a certain time period. The time period or statute of limitations is typically three to four years to file a refund claim. Most states require the seller to give the amount refunded back to the purchaser; others, however, do not have such a requirement.

What should a company do if it did not collect and/or remit sales tax on transactions it suspects are taxable?

If a company never remitted tax in a state in which it was doing business, the best course of action is to enter into a Voluntary Disclosure Agreement (VDA) with the state. This allows the company to anonymously ‘come clean’ with the state. The benefits of this approach include a limited look-back period of typically three to four years and, in certain circumstances, an abatement of certain tax penalties.

Because this filing is anonymous, a consultant can negotiate with the state to reach the best result for the company. In some cases, this can be prospective filing only, which means not having to pay any taxes for prior periods. If you’re in this situation, you should talk to a tax professional about the VDA process in the relevant state.

If a company sells a product, does it have to collect tax in every state where it has customers?

That depends on whether the business has a physical presence in the state in which the sale takes place. Nexus includes a state’s right to assess tax on an out-of-state business. A nexus-creating activity usually means a physical presence in the state for sales tax purposes, such as a store front, equipment or employees.

What is the typical sales tax audit process?

First, a company will receive a letter from the state that includes a request for documents. You are generally asked to sign a waiver, which, when signed, gives the state authority to waive the statute of limitations period. It’s best to sign this waiver; cooperation will generally make the audit process go more smoothly.

Next, a state auditor will review your fixed asset purchases, expense items and sales transactions. The information is analyzed, and you will eventually receive a preliminary audit report. You’ll have an opportunity to reply to items flagged for assessment. This review may occur a couple of times before a final assessment is issued.

Once the final assessment is issued, as a taxpayer, you are allowed to appeal the auditor’s findings to an administrative tribunal or state court system. It’s important for you to reach out to tax professionals who are well versed in the state laws where your business operates. Having a third party represent you will ensure that audits are completed accurately and in a timely manner and that excessive assessments and unreasonable deadlines are not imposed on your business.

What can companies do to mitigate their sales and use tax issues?

One department should take responsibility for establishing procedures to assist your company in maintaining accurate records used to calculate the tax. That department should also make the tax decisions related to various purchase and sales transactions.

Creating tax matrices to use as a guide can assist in reducing tax issues. These matrices should be updated on an annual basis to stay current with state tax laws.

Your company should also consult with a tax professional who specializes in state and local tax issues so that you receive knowledgeable advice on compliance issues and on planning ideas to better manage your tax positions across all the states in which you operate.

Susan Nunez is a principal at Brown Smith Wallace LLC. Reach her at (314) 983-1215 or snunez@bswllc.com.

Published in St. Louis

Continuous controls monitoring (CCM) has been on the radar for many companies for the last 20 years, but only recently have organizations really pushed toward meeting this goal. In a broad sense, CCM is a systemic way of verifying transactions and reducing operational, compliance and financial risks. And a key goal is to catch control failures quickly, before they cause too much damage. “If you detect errors as quickly as possible, you’ll have less revenue loss and exposure to risk,” says Janet Beckmann, CPA, data analysis practice leader at Brown Smith Wallace LLC. The impetus for initiating CCM depends on the company but usually is prompted for one of three reasons: because the company experienced loss or fraud and wants to make sure it never happens again; time-intensive processes need to be automated so the company can work more efficiently; or a proactive company has security concerns in a certain area of the business, such as payroll or accounts payable. “Companies first need to determine their key objective,” says Beckmann. “From there, a system can be put in place to help maintain optimum control and identify problems so they can be solved before causing revenue damage.” Smart Business spoke with Beckmann about the value of CCM and what organizations should consider when planning a system. What is continuous controls monitoring, and how does it work for a business? Over time, CCM has become somewhat of a generic term that means a system that verifies transactions. But, in its true sense, CCM is a system that runs live, identifies problems as they arise and alerts people immediately. For example, if a CCM system is in place and someone inputs vendor invoices, the system will signal potential duplicate payments before checks go out the door. However, CCM also means having ongoing processes that help a company better control its environment. For instance, a company may only want to run the system once each quarter or twice annually, depending on the risk assessment and the company’s goals. Regardless of what type of system is put in place, CCM protects a business from fraud and revenue leakage while enhancing the overall control environment. What are the benefits of a continuous controls monitoring system? Ultimately, CCM serves as a highly effective risk assessment tool that allows companies to track key performance indicators and quickly respond to change, rather than waiting until end-of-year financial statements to catch errors or revenue leakage. A system can reduce the risks associated with operations, compliance and finances, and can help stop revenue leakage such as overpayments, duplicate checks and other administrative errors. Also, it can facilitate fraud protection by enhancing the control environment. When employees recognize that a system is in place to watch all transactions and collect data, this raises awareness and tends to improve overall operations. Everyone is more careful because the company is committed to improving controls. Finally, CCM can improve efficiency in an organization by automating time-consuming processes. For instance, one person may spend three out of four weeks in a month working on a single reconciliation. If that process is automated through a CCM system, the employee is freed up to focus on other areas of the business. Where can a company derive the most value from a continuous controls monitoring system? That depends on the company’s objectives. If a company fears that revenue is not growing as it should, a CCM system will help track trends by time, location, product and employee to identify where expectations are not being met. Doing a trend analysis to get this information can be quite difficult, so this is where a CCM system can be very helpful. Companies that work with large quantities of data — millions of transactions, for example — may need to monitor the business in a global sense, as opposed to watching over each business unit; there is no limit on the size or quantity of data that a CCM system can handle. Also, companies with disparate systems that are not effectively linked are at a higher risk for control failure unless a CCM system is put in place. No matter what the goals of the company are, once red flags and patterns that indicate suspicious transactions are identified, the problems can be solved. What is necessary for a continuous controls monitoring system to be effective? The system must be flexible to suit a company’s needs. An off-the-shelf system can’t be truly efficient for every business. It’s worthwhile to invest in a customized system that aligns with your company’s objectives. Also, the system must be simple — the more user-friendly, the better. To take full advantage of the system, a business must have follow-up and reporting policies in place; for example, a system may be set up to produce reports that managers review. Finally, a company must determine how the system and data will be managed. Will it be outsourced, or overseen by someone in-house? It’s a good idea to consult with a professional while going through the risk identification process to pinpoint areas where a system will be most effective. Janet Beckmann, CPA, is the data analysis practice leader at Brown Smith Wallace LLC. Reach her at (314) 983-1254 or jbeckmann@bswllc.com.

Published in St. Louis

As business owners look ahead to the future, many of them are planning on how to transition out of their company. Given that a business owner’s greatest asset is generally his or her company, it’s important to understand the business’s real worth well before it’s time to exit. A proactive business valuation performed well before an ownership change can provide an owner with a roadmap for improving the bottom line, driving profit and increasing overall value over time. Ultimately, this means a more favorable payoff when the time comes to execute a succession plan. “To maximize business value, owners need to develop a strategy to build institutional value,” says Barry Worth, member and director of mergers and acquisitions, Brown Smith Wallace LLC, St. Louis. But aside from simply determining the company’s worth, an owner should dig deeper and work to understand the various components of a business valuation. What areas of the business are driving value and what parts are profitable? And just as important, what departments or product lines or people are not contributing to the bottom line? “A proactive business valuation is about looking at the value of the company, then reaching below and peeling off the layers to identify what components of the business are really driving value,” said Bill Willbrand, tax and accounting member, Brown Smith Wallace. Smart Business spoke with Worth and Willbrand about how a business valuation can serve as a strategic growth tool for your business. Why should a business undergo a business valuation years before an ownership change? By performing a business valuation well before initiating any sort of exit strategy, you can create a baseline, a planning document to use as a roadmap for building value. A valuation can help you focus on key components of the business, understand what areas of the business are really driving value and identify weak spots that are detrimental to the worth of a company. For example, a valuation may show that a certain product line is not actually contributing to the financial success of the company. This might be a surprise to owners, who never fully investigated the product line’s contribution from a value proposition perspective. Based on these findings, the company can set goals to eliminate or sell off the product line and focus its energies on areas of the business that have the greatest impact on profitability and long-term value. A business valuation forces you to really tease out value drivers and spoilers, and it gives you a baseline so you can develop a plan and begin to measure progress. How can a business valuation enhance shareholder value? Through a business valuation, a company can determine its true value drivers. Those might include key client relationships, location, proprietary technology or any number of critical success factors. A valuation illustrates where a company should focus its efforts in order to grow the value of the business and maximize dollars invested in growth. Simply put, investors want to know where to focus time, talent and capital, and a business valuation can highlight those promising areas. You wouldn’t throw money at a product that wasn’t a value-driver. Also, keep in mind, shareholders are the true owners of a business, so a valuation is a critical exercise for identifying corporate differentiators that deliver shareholder value. How can a business owner use a valuation to increase a company’s worth? A valuation can help you begin with the end in mind and create a plan to focus on enhancing areas of the business that promise profit. Once you identify areas of the business that improve profit, you can stop doing the things that don’t. For example, you could eliminate a product line in order to focus your company’s talent and capital on a product that will raise the overall value of the business. A valuation truly serves as a critical planning document that can help you make key business decisions in the areas of customers, people, process and finance. When these four components fall into place, a company has a balanced scorecard and is in the best position to improve its value. What are the keys to developing a value enhancement process? The valuation establishes a baseline and a better understanding of the key value drivers. These are different in every company, but there are three basic areas that affect the value of every company: people, systems and strategy. Management depth and quality affect a company’s value. A company can immediately improve the bottom line, and its overall value, by establishing sound contracts with key personnel. Second, financial and accounting systems are important to assess the value of a company. Third, a company that has vision and a plan to reach its goals is more valuable than one without such a focus. Simply performing a business valuation improves value because it gives owners a clear picture of where the company stands and what components will help it grow profitably. How does an owner get started with a valuation process? Seek out accredited individuals specializing in business valuation who know how to really dissect a business, analyze financial statements and project to the future. While maintaining their independence and objectivity, valuation professionals can apply their business knowledge and recommend steps you can take to improve the overall value of your business. BARRY WORTH is a member and director of mergers and acquisitions and turnaround consulting and BILL WILLBRAND is a member in tax and accounting at Brown Smith Wallace LLC. Reach Worth at (314) 983-1202 or bworth@bswllc.com. Reach Willbrand at (636) 754-0200 or bwillbrand@bswllc.com.

Published in St. Louis

With health care reform under way and economic pressure bearing down on businesses of all sizes, companies are combing their budgets to cull unnecessary expenses. One area that’s often overlooked is dependent eligibility for health care benefits.

On average, companies can save 3 to 8 percent on their health insurance costs by simply identifying and dropping ineligible participants, says Janet Beckmann, CPA, principal, risk services and data analysis practice leader at Brown Smith Wallace LLC, St. Louis, Mo. The key is to conduct a dependent eligibility verification audit to identify “eligibility creep” that can occur over time.

“Employers of all sizes will be taking a hard look at their health insurance plans and benefits as a result of health care reform. While they’re doing that, it’s a good time to perform an audit to ensure everyone on your plan has proper eligibility,” Beckmann says.

An independent firm can conduct a comprehensive, document-based audit that gathers data from employees to verify eligibility, says Larry Pevnick, CPA, CFF, member in charge of insurance and reinsurance services at Brown Smith Wallace.

“This is an opportunity for businesses to save money without reducing benefits to their employees, so it’s a win-win,” Pevnick says. “They can cut their budgets without touching a health care plan that employees value and need.”

Smart Business spoke with Beckmann and Pevnick about how dependent eligibility audits can result in significant savings for your company.

Why should employers conduct an audit?

Between health care reform and our current economy, employers are working hard to save costs anywhere they can. Some think that the only way to save money is to reduce the benefits they offer employees, but that’s not always the case.

By identifying dependents on their health insurance plans who are not eligible, companies can typically save 3 to 8 percent.

Knowing that business owners are focused on savings, health insurance brokers are also getting on the bandwagon to recommend their clients have a dependent eligibility verification audit performed.

What benefits do businesses realize from a dependent eligibility verification audit?

The biggest benefit is immediate cost savings, which can amount to hundreds of thousands of dollars when companies drop ineligible dependents from their plans. As a result, future claim costs are reduced, as well. Employers also gain a better understanding of their participant plan costs and have an opportunity to clean up their eligibility.

How often should an audit be performed?

That depends on the size and operation of the company. Large employers may want to perform an audit every two to three years. If one has never been performed, now is a great time to start. Audits should be performed more frequently for organizations with many part-time and/or transient workers because they are more likely to find a larger number of dependents who do not belong. Also, perform an audit any time there are major changes in operations, such as following an acquisition or merger, and after layoffs or reorganization.

How should an audit be conducted?

The key is to make sure employees are respected during the process because they will be asked to supply personal and other confidential documents to verify their eligibility for health insurance. Managers and those involved in the audit — which usually includes human resources and/or benefits administrators — should communicate clearly to employees, letting them know that everyone is being asked to furnish such information, no one is being singled out and all information will be kept confidential. Next, a third party that specializes in these audits will begin collecting data, including birth certificates, marriage licenses, tax forms, custody agreements, adoption certificates and other court-related documents that verify a dependent’s eligibility. A call center number gives employees an independent resource for asking questions, which is also a key to minimizing the involvement of management so the process remains unbiased, fair and efficient.

Look for a firm that will make the best use of technology to simplify the process and provide a complete audit. For instance, we perform an employee eligibility verification audit using data analysis tools to compare 100 percent of the employee master data set to eligibility files. Those are also compared to claims to pinpoint the exact dollar amount paid for ineligible participants. Those claim costs typically cannot be recovered. The process is about identifying future cost savings. Quantifying the results is helpful when prioritizing or justifying new processes and procedures for in-house eligibility verification going forward.

When is the best time to perform an audit?

Any time that is not a particularly busy time of year for employees. You may want to consider when open enrollment occurs and how employees will be affected if dependents are identified and dropped from the plan.

What should an organization consider when choosing a service provider to conduct an audit?

First, be sure the firm has the experience to staff the process and its goals are to reduce costs and save time. For instance, rather than paying for postage to send letters of request to employees for gathering documents, can the firm set up a website where employees can log on and see what documents they need to provide? Ask the firm how it will make the process respectful, confidential, efficient and fair. Communication is key during the entire audit process. The firm should be prepared to educate your employees so that everyone is comfortable with the process. The firm should also understand your key objectives, which typically include the importance to the company’s financial well being and maintaining the company’s current level of benefits.

Janet Beckmann, CPA, is principal, risk services and data analysis practice leader at Brown Smith Wallace. Reach her at jbeckmann@bswllc.com or (314) 983-1254.

Larry Pevnick, CPA, CFF, is member in charge of insurance and reinsurance services. Reach him at lpevnick@bswllc.com or (314) 983-1247.

Published in St. Louis

The time will inevitably come — whether by choice or not — when you are no longer able to run your business.

So what can you do now to ensure the business and the wealth that you’ve grown will go on without you? Create and execute a succession plan, says Bill Willbrand, a tax and accounting member at Brown Smith Wallace LLC in St. Louis, Mo.

“It is estimated that more than $10 trillion will transfer over the next 10 to 15 years as baby boomers retire,” says Barry Worth, member and director of mergers and acquisitions at Brown Smith Wallace. “When you think in terms of the amount of wealth that has been lost over the last two to three years, succession planning is key for preserving the value of a business for its owners.”

Creating and executing a succession plan, in conjunction with a strategic plan that lays out a company’s vision, can help keep a business on track toward its long-term goals, says Worth. But it can be difficult to set aside the time to do so.

“Many key managers and owners are so wrapped up in day-to-day problems that they never take time to focus on the long-term goals of the business,” says Worth.

Smart Business spoke with Willbrand and Worth about how to construct and implement a succession plan to prevent loss of wealth and ensure that your business will continue without you.

Why is succession planning so crucial to a business?

Succession planning is a tool to help transition the business properly and preserve the value that the owners have worked a lifetime to achieve. Such a plan will put the best talent in place to carry on the vision the company has outlined in its strategic plan.

In the case of the death of a key manager or an illness that takes an owner out of the loop, there needs to be a successor in place who can step in and fill those shoes, someone who has the same intellectual capital to devote to the business. Without a succession plan, the business may never achieve its full value.

What are the primary steps in the succession planning process?

First, the company needs to clarify its needs and willingness to commit to a plan. Commitment to the process is essential. Next, the business leaders must step back and take a good, hard look at the talent pool. What are the strengths and weaknesses of potential successors?

The strategic plan is a critical guide in this exercise, as key managers determine what skills are necessary to achieve the company’s vision. For each candidate, you also need to determine whether the individual has the desire to lead the business. Does that person possess the right skills? If you want to transition to a successor who prefers to do something else in life, the plan won’t work.

Once you complete the assessment, the business should identify a successor and begin to build a supportive team around that person.

How can a company prepare the chosen successor to transition into the leading role?

After identifying the successor, leadership must review the successor’s strengths and weaknesses and do a gap analysis to determine what training is necessary. What skills will help this person gain the intellectual capital necessary to be a strong successor?

Mentoring programs should be put in place to help the successor transition to the leadership role so he or she can succeed in leading the company to its full value.

How does the process differ for succession in a family business?

When family dynamics are involved, an owner’s views on who should take over the business can be skewed. A favorite son might be positioned as the successor rather than a younger daughter or a cousin who has better skill and experience.

These issues get sticky. It’s important to set egos aside and also recognize that the business may need more than one successor — perhaps one leader who is not family — to help realize the company’s vision.

Sometimes, the right answer is to dispose of the business and secure the value for the family. But, if you decided to keep the business in the family, now is the best time financially to hand the reins over to the next generation through a gift or a sale, because shares and assets are worth less today, so taxes will be lower.

Is the process something business owners can do on their own?

Anything’s possible, but outside advisers can be critical to helping guide a business owner through this process.

An outside advisory board can provide a forum of third-party, trusted individuals who help direct the succession process and monitor the execution of the plan. Those advisory board members might include seasoned business owners, industry peers, consultants, attorneys and CPAs.

The idea is to get an independent perspective on the process so you learn the best practices for creating and executing a succession plan.

Bill Willbrand is a member in tax and accounting and Barry Worth is a member and director of mergers and acquisitions and turnaround consulting services at Brown Smith Wallace LLC. Contact Willbrand at (636) 754-0200 or bwillbrand@bswllc.com. Contact Worth at (314) 983-1202 or bworth@bswllc.com.

Published in St. Louis

For very sound reasons, your business carries various types of insurance coverage to protect it from liabilities and reduce risks. But some insurance policies — such as cyber risk, environmental and pollution liability — are expensive or difficult to obtain.

As a result, many businesses forgo insuring for these risks through traditional insurance channels, essentially self-insuring, but not setting aside funds, for those critical liabilities.

“Businesses have a lot of self-insured risk, whether they realize it or not,” says Bill Goddard, CPCU and director of insurance consulting at Brown Smith Wallace LLC. “A company may go out and buy a policy to cover its building in case of a fire, but it may not buy insurance to cover the building in case of an earthquake. Most companies buy insurance policies with deductibles — another form of self insurance.”

Rather than exposing your business to risks that could drain profits, you might want to consider starting a captive insurance company, essentially an insurance company owned and operated by your business. It serves as a tool to cover those self-insured liabilities and can also provide your company with tax benefits.

“In today’s marketplace, it makes sense for small and medium-sized businesses to at least consider starting their own captive insurance company,” says Alan Fine, CPA, JD, and a tax partner at Brown Smith Wallace LLC in the insurance services practice.

“A captive insurance company will allow you to smooth out the cost of insurance over a longer period of time,” Fine adds.

Smart Business spoke with Fine and Goddard about how starting a captive insurance company could make sense for your company, no matter what its size.

What is a captive insurance company?

A captive insurance company is an insurance company owned by a business. It allows a business to organize and formalize a program of self insurance and to buy insurance for risks that are very difficult or expensive to obtain in the traditional insurance market.

This arrangement is attractive for businesses of all sizes because, by owning a captive insurance company, you are, by definition, keeping the profit. On the other hand, when you pay a premium to a commercial insurer, part of what you pay is profit to the insurance company.

Also, if you buy insurance from an insurance company and your company is a better risk than others insured by that company, you will still pay a higher premium because the insurance company has to cover the losses of the other insureds.

If your company is a good risk, you can probably self insure your business for less by starting a captive.

How does a captive insurance company work for businesses of all sizes?

By setting up a captive insurance company, you are creating a rainy day fund in case your business confronts a risk that is not covered by the traditional insurance policies you buy from a commercial carrier. A captive insurance company is like a forced savings plan: You put money aside into the captive in case you need it to cover a risk.

What should a business consider before making the decision to start a captive insurance company?

A captive insurance company is a fit for businesses that can answer yes to the following questions. Do you have risks that you are presently self insuring? Does your company have positive cash flow? Is your business profitable? Many owners want to know how much money they can save annually by starting a captive.

While each situation is different, most small to mid-sized captives tend to save between $200,000 and $400,000 each year. You don’t have to wait for a renewal period to start a captive — and the sooner you start one, the faster you begin saving money on insurance costs over the long term.

Are there tax advantages businesses can realize by starting a captive?

Assuming your business is structured properly, you receive a tax deduction for your premium payment into the captive. Should you need to use the funds to cover a risk, the money is there.

Also, if insurance premiums paid to the captive are less than $1.2 million, your business might not have to pay tax on the underwriting profits. So, if you charge your business insurance premiums that are less than the $1.2 million cap, according to Section 831(b) of the Internal Revenue Code, and do not use the money to cover liabilities that year, those profits are tax-free.

Keep in mind that you must have a business reason for setting up a captive insurance company. An adviser who understands the tax and insurance aspects of captives can provide valuable insight to your specific situation.

What are the estate planning advantages?

One of the estate planning tools associated with a captive insurance company is the ability to have a captive insurance company owned by successors (e.g. grandchildren). For instance, a grandfather who started a captive might pay $1 million for earthquake insurance. If no earthquake occurs that year, those dollars are passed tax-free to a grandchild (who owns the captive). Experienced estate planners can assist businesses with such arrangements.

What are the first steps to establishing a captive insurance company?

The first step is to evaluate your risks and make an assessment of what your business is currently or should be self insuring. This is best done by hiring an adviser who is well versed in both the tax and insurance portions of captives. It’s not enough for a professional to just understand the tax angle, or only focus on insurance. From there, the adviser will help you structure a captive that will truly benefit your company and ensure that the captive qualifies as an insurance company for tax purposes.

Alan Fine, CPA, JD, and Bill Goddard, CPCU, specialize in advising businesses on captive insurance companies at Brown Smith Wallace LLC in St. Louis, Mo. Reach Fine at (314) 983-1292 or afine@bswllc.com. Reach Goddard at (314) 983-1253 or bgoddard@bswllc.com.

Published in St. Louis

It’s a dangerous time for businesses, and even those with decades of operating experience can find themselves facing bankruptcy or liquidation as flaws in their business plans become apparent.

“Most business owners and managers have not seen times like this before, and they are not sure how to manage through it,” says Barry Worth, director of mergers and acquisitions and turnaround consulting at Brown Smith Wallace LLC. “It’s a brand new world of change. Businesses that are not really looking at their business models and thinking ahead may not exist in the future.”

A weak business model that worked in good times may not hold up in more turbulent ones, and businesses must recognize their problems and seek help to get back on track before it’s too late.

“Essentially, that means a business owner or manager has to admit to failure,” Worth says. “Their emotions are wrapped up in their business, and seeing the situation clearly is nearly impossible. They just don’t know how to get out of the spot they’re in. They can meander on and eventually go out of business, or they can seek help from advisers who can see them through their situation.

“By seeking out valuable professional help, most can pull out of it, reorganize their business and retain their family wealth over time.”

Smart Business spoke with Worth about how to get a troubled business back on track.

What’s the first step that companies in trouble should take to get back on track?

First, they must recognize and admit that they are in trouble, and then seek help from a turnaround consultant or other trusted advisers who can provide guidance. Businesses should bring in a third party to assess the situation and help them design a plan for recovery — or for whatever the owner’s goals may be for the business.

While many business owners hesitate to discuss tough times with their bankers for fear of losing financing, bankers are well connected with turnaround consultants and can provide helpful referrals. Banks want to help the businesses they’ve entrusted their money with, so reach out in times of hardship and be honest with your banker about the situation.

Also, consider speaking to an attorney, who may also be able to suggest consultants who can help.

Once a company admits financial hardship and seeks help from a turnaround consultant, what is the next step?

A turnaround consultant’s role is to first come into the business and immediately stabilize the situation, improve the cash flow and get the company to the point where it is not bleeding. After that, the consultant will begin to conduct an in-depth analysis to determine what is creating problems in the business.

The consultant will look at the organization as a whole and determine what is generating the problems. There’s no one-size-fits-all plan, and finding a solution requires the involvement of ownership, managers, supervisors and, to some extent, staff.

The overall process can take 30 to 45 days, sometimes longer. That’s why it’s critical to seek help early on. Continuing to run the business ‘as usual’ could result in having a business that no longer exists down the road.

What solutions can businesses consider to help them deal with extreme financial hardship?

Businesses could file Chapter 7, which is liquidation, where assets are sold off. Another option is Chapter 11, which is reorganization, where consultants help the company get back on sound financial footing and the courts rule on the plan. Chapter 11 is designed to allow a company to continue operating into the future but leave behind certain debts, and the courts may dismiss various types of company liabilities, such as loans or accounts payable.

Or, companies can seek additional equity to help sustain cash flow by bringing in private investors or equity groups. Refinancing is also a possibility for some businesses. This can be accomplished through private equity groups, asset-based lenders or banks.

Finally, an owner can sell the business to another owner.

How can a company determine the best direction for its current situation?

Owners should engage in heart-to-heart discussions with advisers while examining their goals for the business. Some owners become so emotionally burdened and worn out from running a financially crippled organization that they are ready to move on. They want to file bankruptcy, liquidate or sell.

Others want to preserve the jobs they created for so many employees. They see a future in the business, but they need a fresh start.

For many businesses, there is hope for turning around their situations. It’s just a matter of seeking professional help so they can pull out of the mess they’re in, retain their family wealth and jumpstart a company they’ve invested in emotionally and financially.

An outside adviser can bring in a clear perspective, fresh ideas and a plan for action. As a result, many of these troubled business stories can and do have happy endings.

Barry Worth, CPA/ABV, CVA, CM&AA, is director of mergers and acquisitions and turnaround consulting for Brown Smith Wallace LLC. Reach him at (314) 983-1202 or bworth@bswllc.com.

Published in St. Louis

As consumers rely more on debit and credit cards as opposed to cash, merchants are facing increased risk exposures if they don’t have proper security measures in place. Cyberthieves troll for information on merchant networks, which has resulted in significant security breaches that have made headlines.

In 2004, a consortium of credit card companies, including Visa, MasterCard, Discover and American Express, banded together to set Payment Card Industry (PCI) Data Security Standards. These standards direct merchants that process, store or transmit credit card information to maintain a secure environment. And if your business accepts credit or debit cards, the standards apply to you.

“Business owners have to comply with those security standards and implement safeguards to protect customer information,” says Ron Schmittling, security and privacy practice leader at Brown Smith Wallace LLC.

Smart Business spoke with Schmittling about how your company can meet PCI standards and protect against security breaches.

What is PCI compliance, and who must comply?

The three keywords for PCI compliance are process, store and transmit. If your organization processes, stores or transmits credit card information, you must maintain a secure environment as laid out by the PCI standards. So, if customers or vendors use debit or credit cards to make purchases from your business, you must be compliant. This includes meeting 12 standards, which can be broken down into six key areas: building and maintaining a secure network; implementing safeguards to protect cardholder data; maintaining a vulnerability management program; applying strong access control measures; regularly monitoring and testing network security; and enforcing an information security policy.

Your policy will ultimately drive the compliance process, so the first step is to take a security inventory of your business to determine how compliant it is, what security measures are in place and what weak spots must be addressed. An outside adviser with experience in security and privacy can provide feedback on how to structure a plan. This framework will set the tone for your internal compliance strategy and help protect your business.

PCI security standards are not laws; they are a method of self-imposed regulation by the consortium of credit card companies. There are no federal mandates in place, but there is a move in that direction since some states have started to pass laws or require organizations to comply with PCI Data Security Standards. This trend is expected to continue in association with the Data Breach Notification Laws movement.

What are the consequences of failing to comply with the standards?

At their discretion, payment brands such as Visa or MasterCard can fine acquiring banks $5,000 to $10,000 a month for PCI compliance violations. Banks are likely to pass these fees on to noncompliant merchants. Many banks have begun notifying noncompliant merchants of their need to comply or face fines.

You should review your merchant agreement and note any penalties and fees for noncompliance, which can include prohibiting merchants from processing credit card transactions, higher processing fees and other restrictions. Any fraud loss associated with a compromise in security may be borne by the merchant starting on the date of the security breach. Depending on the level of security negligence, the FTC could become involved and impose significant federal fines, up to $250,000 and/or up to five years in prison.

Not knowing is not a viable excuse for noncompliance and could cost you and your organization. It is your responsibility to understand your merchant agreement and what the PCI standards mean to your organization.

What steps can a company take to become PCI compliant?

Compliance responsibility depends on your merchant level, and there are four levels as defined by PCI Data Security Standards. Level 1 merchants are those that process more than 6 million transactions a year. It is important to note the annual transactions are measured in volume, not dollars. Level 2 includes merchants that process 1 to 6 million transactions per year. Level 3 covers merchants with 20,000 to 1 million e-commerce transactions per year. Level 4 includes any merchant with fewer than 20,000 e-commerce transactions per year, and all other merchants with fewer than 1 million transactions annually.

Companies in Levels 2, 3 and 4 follow the same compliance process that includes completion of an annual self-assessment questionnaire and having quarterly network scans performed by a PCI Approved Scanning Vendor (ASV). The results are submitted to the merchant’s bank. Level 1 merchants follow similar procedures, but also are required to have an annual on-site review completed by a Qualified Security Assessor (QSA), a PCI-certified provider and have an annual network penetration test performed. The QSA will submit the merchant’s Report on Compliance to its merchant bank. The PCI Council lists ASVs and QSAs at www.pcisecuritystandards.org.

Where should an organization start on its PCI compliance initiative?

The most important step is to set an internal policy of how you’ll address PCI compliance and information security. Too many times, organizations rush into identifying a new product they think will fix PCI compliance or information security problems instead of organizing their efforts around the organization’s overarching policies and processes.

Once that policy has been defined and implemented, an organization can begin to enforce it and truly drive its compliance initiatives. But compliance starts with your information security policy and security controls. Many organizations struggle with where to start, as PCI compliance can be a daunting and complex task. Reaching out to a QSA to kick-start your PCI compliance efforts is a great first step.

Ron Schmittling, CPA/CITP, CISA, CIA, is the security and privacy practice leader at Brown Smith Wallace LLC in St. Louis, Mo. Reach him at (314) 983-1398 or rschmittling@bswllc.com.

Published in St. Louis
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