“Even though many estates now are under that $2 million range, it doesn’t mean you shouldn’t think about these things,” she points out. “In particular, the idea of what happens if you don’t die, but become incapacitated; that’s a real crucial one for taking care of yourself and your affairs.”
Smart Business spoke with Quay about the initial steps to take when establishing an estate plan, strategies that can be utilized in reducing estate taxes and the importance of periodically reviewing the plan once it’s in place.
What steps should be taken when establishing an estate plan?
You should give really serious thought and consideration to questions concerning what you want to have happen at your death, and prior to your death, should you be unable to take care of yourself.
Questions like, Who are your heirs and what do you want to leave them? Are there conditions or strings attached? Is giving to charity important? Who do you want to have named as your trustee or executor, and what are your wishes concerning health care decision-making?
Those are all questions that the attorney who’s going to write up your estate plan documents is going to ask. It will save a lot of time if you think about them prior to the meeting. You might also want to include your tax adviser and financial planner in the process to make sure that everything is covered and things aren’t missed.
What are some of the documents that should be included?
Most of the basic plans are going to include a will, a living trust and instructions for health care decision-making. Depending on the complexity and the size of the estate, there could be a few or many more trusts for various purposes, most of which are designed to save state taxes.
There can also be a need for either new insurance policies or getting rid of some insurance polices, so those should also be reviewed as part of the process.
Why is creating a trust so helpful in estate planning?
A living trust provides a whole variety of benefits. Avoiding probates and the related costs and publicity that can occur is one of the ones that most people know of. But I think that a benefit that’s equally important is the ability to transfer control of your affairs to someone you trust, should you become incapable or unwilling to manage them yourself.
What are some strategies to help reduce estate taxes?
Strategies that work for both married [couples] and singles are creating life insurance trusts to remove life insurance from being taxed at death and gifting to reduce the estate tax prior to death.
For very large estates, or those involving business interests, there are other more complicated trusts that can be used to reduce estate taxability. One of my favorite strategies that really works well is to use charitable remainder trusts prior to death, because they reduce the estate for tax purposes, they obtain the current income tax deduction, they provide income stream for yourself for others and they benefit a good cause all at the same time.
If children are involved, what special factors should be taken into consideration?
An estate plan with minor children needs to designate who’s going to take care of the children if something happens to both parents and provide the funds for them to be taken care of. That makes it mandatory for anyone with children, even if they don’t have a large enough estate to worry about estate taxes, to have at least a will to designate who takes care of the kids.
How often should people review their estate plans?
Estate plans need to be reviewed whenever there is a change in circumstance like a death, a divorce or a move to another state. A change in a business interest, like a purchase of a business or a sale of a business, might also mean that the plan should be updated or changed. Certainly whenever Congress changes a law, the estate plan should be looked at to make sure that it still accomplishes its goals.
Mary Ann Quay is co-managing partner at Vicenti, Lloyd & Stutzman LLP. Reach her at MQuay@vlsllp.com
Having an effective system in place to recover intellectual property is akin to an insurance policy; hopefully you won’t need it any time soon, but having one in place is mandatory. Hormazd Dalal, the president of Castellan, says, “It’s [data recovery is] a lot of work if your backups are good and it’s close to impossible if you don’t have good backup.”
Smart Business spoke with Dalal about the best practices involved with backing up intellectual property, what data should be backed up and what some of the different recovery scenarios are.
What are some of the best practices for backing up intellectual property?
There are two major kinds of backup: incremental and full. Incremental backup is where you only backup the data that has changed. This is something that was very popular about five to six years ago when backup devices were more expensive and capacity was hard to find.
Now that the prices of backup devices have dropped, we recommend full backup, which means backing up your entire data every single day. [Solutions include] a single tape or tape changer and one person who’s assigned to swap tapes every day. This is the only realistic way of making sure that your intellectual property gets taken off site.
Another solution is a hardware appliance which makes a real-time backup of your data as you make changes to it.
What specific intellectual property should be backed up?
Everything that you consider important to you. This also includes infrastructure data like the directory of users, security permission, etc. E-mail should all be backed up and databases like Oracle and SQL should be backed up. Don’t forget your accounting application either.
Why is it important that the infrastructure information is backed up?
It’s important because in the event of a disaster you don’t have to rebuild your network. If the directory is backed up, it can be restored with its permissions for each user. Without these permissions, e-mail or applications will fail.
In the event that a disaster does occur, what are some of the different recovery scenarios?
It depends on the kind of disaster. If your servers are completely destroyed and inoperable, then you have to purchase a brand new server, install the latest operating system and then restore all of the data.
If you have custom applications then you need to make sure that whichever vendor is maintaining them has the ability to reinstall the application. The data, which is presumably on tape because you backed it up, will enable you to restore the information.
With regard to e-mail, if you lose just a few important e-mails it is possible to restore them, provided that you implemented brick-level backup. This backs up each e-mail box separately rather than the entire database , allowing the restore of a single mailbox. The downside of this is that it takes up a lot of time because you have to backup everything twice. Another solution is to implement a script, which will export mail out to special files, which can then be restored.
How long can a business expect the recovery process to take?
If you’ve just lost one file, between a few minutes to a half-hour. If you’ve lost a server, between eight hours and 24 hours. And if you’ve lost your entire network, of say five servers and the entire work station, it can take eight to 12 hours per server, and one to two hours per work station.
What would be your advice to a company that is down for an extended period of time and they have deadlines looming?
Call a professional that makes it possible to get certain systems up and running. You may not have access to your old data, but can continue working on e-mail and create new documents. There are ways to mitigate server crashes. They are very expensive, but you can cluster your servers so that if one fails the other will keep working.
If a company does not have a backup system in place to protect their intellectual property due to budget concerns, what advice would you give them?
It’s the most important thing in any network this is where they should be spending their money. It’s unacceptable not to be backing up data. They have to find the budget to back up their data. Remember that your information is stored on devices with moving parts and eventually they will fail. Backing up data is the most important aspect of IT.
A ‘disaster’ by definition is unanticipated. A proper backup solution means that a disaster affects your company for hours or days. Without the backup solution, will your company open its doors again?
Hormazd Dalal is president of Castellan. Reach him at (818) 789-0088, ext. 202, or firstname.lastname@example.org.
Mark Neubauer, a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department, has noticed that as the length of employees’ tenures has lessened, the number of conflicts has grown.
“Increasingly in California and elsewhere, as more and more business turns on the development of innovative ideas, trade secrets become increasingly important,” he says. “As a result, there is a tension between an employee’s mobility and the ability of companies to keep what they paid that employee to develop.”
Smart Business spoke with Neubauer about how to best protect a company’s intellectual property if a key employee leaves, what information should be included in an employee’s contract and what steps should be taken if a noncompete agreement is breached.
What steps should be in place to ensure that a company’s intellectual property is protected?
First of all, in terms of trade secrets and confidentiality, they should only allow access as needed. Very often, that involves passwords for computers to get access to certain confidential information, and materials kept secure, such as in locked cabinets ... so that there is not general access to information a company wants to protect.
For other types of intellectual properties, such as copyright, there’s a device called a work-for-hire agreement which, especially in the advertising and entertainment industries, is very important to have people sign. Absent that, the creator, which could be the employee or independent contractor, could own the copyright of a work or a portion of the project.
What information should be included in an employee contract?
It is important with a contract to specify that the employee acknowledge that he or she is receiving confidential information and that they agree that the information belongs to the employer. This can be true especially in sales, but also people working in research and development.
Generally, with certain exceptions, covenants not to compete are disfavored in California, but agreements to protect an employer’s trade secrets and covenants limiting competition to protect those trade secrets are potentially allowed.
Having the employee acknowledge at the beginning of the relationship,”If I receive this information, I acknowledge that it belongs to the employer” is important. An assignment of copyrights and/or invention and a work-for-hire agreement are also important.
If an employee has signed a noncompete agreement but takes a job with a competitor, what steps can the former employer take?
The first step is to put the new employer and employee on notice that your former employee has an agreement not to compete or use any information they obtained (previously). Courts recognize the argument: Why buy a business when you can steal it for free?
If you develop your business through a series of employees, and those employees are diverted to a competitor, the competitor can potentially gain an advantage. In other words, the competitor doesn’t have to invest the capital or start-up time or costs. It’s much easier to just hire an employee.
California will protect the employer against the competitor using those trade secrets, so the first thing is to put both the employee and the new employer on notice with a demand letter that they not engage in that use.
The second thing ,of course, if that does not work, is to consider litigation, including a temporary restraining order and preliminary injunction.
What evidence does a business need to pursue legal action against a former employee whom it suspects has leaked confidential information?
The most interesting evidence in today’s market is e-mails. People have the mistaken notion that if you delete something on your computer, it’s gone. There are a number of companies, witnesses and employees who are finding out that doesn’t happen.
The first thing to do is to check the hard drive when an employee leaves and make sure that it is sequestered. Then go through and see whether or not the employee was downloading confidential information prior to leaving.
The second thing is to find out the circumstances under which the person left and whether he or she attempted to recruit other employees.
What steps can a business take to decrease the likelihood of losing a key employee to a competitor?
The first one is to make sure your employees are well-paid. Generally, when employees leave for a competitor, it’s because they’re thinking there is greater advancement or they’re going to make more money.
Keeping salaries competitive, keeping morale high and keeping your employees happy are the best ways to avoid losing key employees.
Mark Neubauer is a partner in Alschuler Grossman Stein & Kahan LLP’s Business Litigation Department. Reach him at (310) 255-9144 or email@example.com
“If California is doing poorly because of the tech sector or the trade sector, you can be pretty sure that the whole economy at the nationl level is also going to be struggling,” says Comerica Chief Economist Dana Johnson. “Likewise, if those sectors are strong, the national economy is going to be strong. It really is a bellwether for the rest of the economy.”
Smart Business spoke with Johnson about business conditions for 2006, how the devastating hurricane season could affect the economy and the red-hot real estate market in California.
In 2006, do you think general business conditions will be better, about the same or worse?
I think business conditions will be about the same overall, but in the early part of the year, somewhat worse. We’re going to be going through a soft patch in the economy this winter as household spending growth slows quite perceptively.
This will be due to a combination of higher energy costs, higher interest rates and smaller increases in house prices. These three things together will cause most households to spend more cautiously.
We’re going to go through a period this winter, and maybe into the early spring, where household spending growth, which has been one of the main sources of support for the expansion, will grow more slowly before reaccelerating.
For the year as a whole, growth in 2006 will be similar to the growth we’re getting in 2005.
How will the hurricane season affect the economy in the upcoming year?
The aftereffects are of two sorts.
One, there is some ongoing upward pressure on energy prices, the most dramatic being the market for natural gas but also the market for gasoline. The knocking out of some refining capacity has definitely created a bigger increase in gasoline prices than you would have expected based on where crude oil prices have been trading.
That gap, however, is going to be relatively short-lived. We’re going to see most of the refining capacity restored by the end of the year, and we’ll get back into a more normal relationship between crude oil prices and gasoline prices.
The more lasting impact will be from the knocking out of natural gas production in a significant number of wells in the Gulf Coast region. There is not an ability to import natural gas in the quantity needed to make up for lost production there, so I think we’re going to see pretty painful natural gas prices all through the winter heating season.
What challenges will businesses face due to increased energy prices this winter?
A lot of businesses will have trouble passing on their higher energy costs to their customers. Particularly hard hit, of course, will be anybody that uses energy to provide transportation services or in their production processes.
The net effect will be that profit margins are squeezed, which will take some starch out of the economy.
Real estate prices have skyrocketed in California. Do you believe businesses that own real estate will continue to benefit from these evaluations or will demand for real estate cool off?
Demand is going to cool to a degree. I think we’re seeing the lag effect of higher short-term interest rates that the Fed has put in place and the impact of some guidance by the Fed to lenders to be careful in providing highly leveraged forms of financing for real estate acquisitions.
These factors will combine to cool off the housing markets, and as that happens, the commercial real estate markets will cool off as well.
How is California’s economy similar to other parts of the country and how does it differ?
California’s economy ... accounts for about one-eighth of the national economy. At first approximation, it doesn’t have a strikingly different behavior than the country as a whole.
I think it’s fair to say, though, that California is more involved in foreign trade than many parts of the country and it’s more involved in the growth of the knowledge economy with the high number of tech ventures that are concentrated in the state. New trends emerge more quickly in California with regards to the globalization process and regards to high-tech enterprises.
But at the end of the day, the history of California’s economy is that it grows in line, or maybe just a touch faster, than the national economy.
Dana Johnson is chief economist for Comerica Bank. Reach him at (734) 930-2401 or through the bank’s Web site, www.comerica.com.
There is an old saying that all politics are local. While the national elections held in November will likely affect tax issues, regulatory issues and other areas of great significance to Michigan businesses, it is important to examine the local elections to appreciate the effect of last November’s events on business. The most significant state election could be a race that received relatively little fanfare or coverage.
“Potentially, the greatest impact from the November elections is in the change to the Michigan Supreme Court,” says John Mitchell, executive partner at Secrest Wardle. “So often, voters pay little attention to the nonpartisan portion of their ballot, where the judges are elected, without recognizing the significant impact these elections could have on day-to-day activities.”
Smart Business spoke with Mitchell about how the Supreme Court elections could impact business in Michigan and what specific issues the court is expected to take up.
What effect has the Supreme Court elections had on Michigan business?
At this point, the effect is more what people forecast will occur as opposed to what has actually occurred. What everyone needs to recognize is the fact that the court, as a result of the election of a new justice replacing the former chief justice, no longer has a solid, four-justice majority voting block of those most often characterized as conservative republicans. The court now has only a three-member voting block, with the presumption being that the other four justices will form a new voting coalition. This change means that decisions that often, over the past few years, were decided by the four-person conservative majority, with such decisions being frequently viewed as being favorable to the business community, may now be revisited by a court made up of a majority of justices who may not follow such precedent.
What particular issues are expected to be of significance?
At this point, no one can speak with certainty as to what will happen. We do not yet know what cases will be taken up by the court. We do not yet know how the votes will be counted. However, we still know, or at least we like to think we know, what may happen.
An issue that most lawyers presume will be reviewed by the court is the standard required to be able to bring a personal injury claim arising out of a motor vehicle accident. The prior Michigan Supreme Court had set the standard in Kreiner v. Fischer (2004). Most people believe that the new court will take the opportunity to review this issue and may well revise the standard. As a result, the threshold required to bring such an action may be changed and functionally lowered, which could result in appreciably greater numbers of claims, and certainly more viable claims, for liability arising out of motor vehicle accidents. This would be a very specific and direct consequence of the recent election.
Are there any other issues that may come up for review by the Supreme Court?
There are certainly those who believe, and I would be one of them, that we may see a revisitation of the current law as it pertains to common law liability for owners of premises. This would certainly affect all property managers, business owners, retailers and others. This would be, specifically, with respect to the extent to which those who own, possess or control property can avoid liability for alleged hazards that are deemed to be open and obvious.
There is also a belief that there may be a revisitation of what has historically been known as the discovery rule. Recently, the Supreme Court decided that there was no provision, under common law as well as the statutes, to allow a cause of action to be brought once it is discovered or should have been discovered by the person who is bringing the claim. This conceivably, therefore, will be an area to be revisited.
Do you have any projections as to what will happen with these issues?
I must concede that trying to predict the future actions of the Court is, at best, an uncertain science, but let me venture an educated guess with the help of my crystal ball. First, I think it is reasonable to believe that these issues will be revisited and that current defenses, available to businesses to limit exposure to tort liability, will be reexamined by the Michigan Supreme Court. Second, I think it is likely that the Court will lessen the applicable standard to bring an action for injuries from a motor vehicle accident. I also think we may well see an easing of restrictions on the ability of those who bring claims involving claimed defects on business premises.
In each instance, how the Court will decide these questions will depend upon how the issues are presented and the particular facts of the given case. My concern is not so much that there will be changes, but that people need to recognize that, as a direct effect of the recent elections, what has been presumed to be the common law of the State of Michigan may well undergo, within the coming year, specific and potentially significant revisions with a direct impact on Michigan business.
JOHN MITCHELL is an executive partner at Secrest Wardle. Reach him at (248) 851-9500 or firstname.lastname@example.org.
Lease renewals are not always conducted on a level playing field. After all, the landlord is in the real estate business and the tenant is not. By planning in advance and having professional assistance, tenants can increase the probability of negotiating a discount when renewing.
“Companies should plan ahead to allow ample time to complete a renewal,” says Rick Messey, CCIM, vice president, Colliers Turley Martin Tucker. “Companies that fail to do this lose considerable leverage as landlords see the tenants’ options dwindle.”
Smart Business spoke with Messey about the lease renewal process, the importance of starting early and what qualities to look for in a real estate broker.
How does the lease renewal process work?
An important clause found in most leases is the renewal option, which allows tenants to extend their leases for a predetermined amount of time (usually three or five years) by giving their landlords six to 12 months written notice. Renewal options specify rental rates, concessions, tenant improvements and whether a new base year for operating expenses will be granted. These options are sometimes fixed amounts or subject to the fair market value conditions.
What are some common mistakes that companies make during the process?
One of the most common mistakes companies make is negotiating without the help of a commercial real estate professional. Companies believe they can save money by not using a broker, but to benefit in real estate, you need leverage. Landlords are in the real estate business and negotiate with professional guidance, so why not level the playing field? Savings received from using a broker exceed the cost of commissions.
Another mistake companies make when entering into a lease renegotiation is being unfamiliar with their current lease terms. Prior to contacting their landlord about renewing, every company should be well aware of every option and deadline within their lease. As mentioned, most leases contain options that must be exercised within a specific time period, typically nine to 12 months prior to their lease expiration. If, a tenant allows said time period to pass, they risk losing all rights outlined in the option.
What type of cost savings can be extracted during the renewal?
Tenants in a bear market can receive significant cost savings. As the economy weakens, companies continue to lay off and downsize their work forces. Landlords will be feeling the pinch and will offer aggressive concessions and more attractive lease terms to lure new tenants or maintain current ones. Now more than ever, a qualified commercial real estate broker can assist companies in reducing overall occupancy costs and improving profitability. The savings will depend on the availability of competitive vacancies, the efficiencies of the buildings, the market knowledge of the broker and the broker’s ability to negotiate business points and reduce overall exposure. Some of these risks are often found in the operating expense and expansion/contraction options in the lease.
When should a company start the process?
As a rule of thumb, the larger the tenant, the greater amount of time needed to finalize and leverage a renewal transaction. Larger tenants should consider their options several years in advance so that all viable existing and new properties may be considered. New developments or speculative properties often attract larger tenants. These new developments could receive financial incentives, like tax abatements, or federal and state incentives that could be passed along to the tenants. In addition, newer buildings often provide larger tenants more efficient floor plates and advanced mechanical systems that use less energy than their older counterparts. These occupancy savings can all be quantified and compared to the existing renewals on an apples-to-apples basis.
Smaller tenants should consider the renewal process 12 to 18 months in advance of their lease expiration, regardless of what their renewal option dictates. This is recommended so that the tenant can consider and compare all relocation options in the market. Secondly, tenants should begin negotiating any relocation options before their lease options expire. Tenants who miss their lease options incur more risk, as landlords often treat them differently. Landlords view this as an opportunity to push rents higher as the window of opportunity to relocate closes. If tenants holdover, they often see penalties of 150 to 200 percent of their last month’s rent and could also incur consequential damages if they holdover without permission.
In what ways can a company benefit from engaging a quality real estate professional?
Real estate costs account for a significant portion of a company’s overhead. Real estate professionals can provide the guidance needed to minimize costs associated with occupying commercial space. A good broker will possess the following qualities and tools: upto-date market knowledge, expertise in negotiating leases, the ability to provide a detailed financial analysis on a comparable basis and construction expertise. Brokers help companies achieve both short- and long-term goals by asking the right questions. They save companies time and money by being intimately familiar within a specialized market. This, in turn, reduces the tenant’s overall occupancy costs, increases profitability, mitigates lease risks and minimizes time.
RICK MESSEY, CCIM, is the vice president of Colliers Turley Martin Tucker. Reach him at (314) 746-0318 or email@example.com.
The International Financial Reporting Standards (IFRS) is a set of accounting standards that is becoming the global standard for the preparation of public company financial statements.
CPAs working with public companies will be affected by the conversion, and as IFRS continues to grow in acceptance, they will need to become knowledgeable about the standards. While the proposed timeline for the transition is not yet definite, it’s not too early for accountants of public companies to familiarize themselves with the standards, says Don Carobine, CPA and vice president of Gumbiner Savett Inc.
“For accountants that work with public companies, regardless of the proposed SEC timeline, there is no need to hesitate as continuing professional education courses are beginning to surface and will likely become widespread as things progress,” he says.
Smart Business spoke with Carobine about IFRS, why it makes sense for the U.S. to make the transition and when the changes are expected to take place.
What is IFRS and why have we been hearing so much about it the past several months?
These standards are set by the International Accounting Standards Board (IASB) and are used by more than 110 countries for financial reporting. They are separate from the standards used in the United States, which are referred to as U.S. Generally Accepted Accounting Principles (GAAP). You have been hearing a lot about the international standards recently due to efforts in the U.S. over the past several years to converge U.S. GAAP and IFRS with the ultimate goal of the U.S. transitioning to IFRS.
Why should the U.S. transition to IFRS?
It is most likely evident to everyone that we are, and have been, evolving to a world economy. The objective is the development of high-quality, common accounting standards for use in the world’s capital markets to enhance consistency, comparability and efficiency of financial statements, enabling global markets to move with less friction. The U.S. will transition to IFRS or be the only major country in the world that has not.
How has the convergence process progressed over the past several years?
The Financial Accounting Standards Board (FASB), a U.S. GAAP standard setter, entered into a memorandum of understanding (the Norwalk Agreement) with the IASB in October 2002. This marked a significant step toward formalizing the commitment to convergence of U.S. and international accounting standards. For the past several years, the FASB and IASB have been working to identify differences, address them, and arrive at standards under U.S. GAAP and IFRS that are as closely aligned as possible. All pronouncements issued since this commitment by each of these standard setters were arrived at through this collaborative effort. This alignment of standards over time may make for ease when the final transition from U.S. GAAP to IFRS occurs.
What is the current timeline for transitioning from U.S. GAAP to IFRS?
The SEC published its proposed road map for transition by public companies in November 2008. Under the proposed road map, IFRS filings would begin for large accelerated filers for fiscal years ending on or after Dec. 15, 2014. Smaller accelerated filers would begin IFRS filings for years ending on or after Dec. 15, 2015. Nonaccelerated filers, including smaller reporting companies, would begin IFRS filings for years ending on or after Dec. 15, 2016.
The SEC will meet in 2011 to assess how well public companies have been dealing with the transition and how they are progressing toward a set of seven milestones. The milestones include improvements in accounting standards; the accountability and funding of the International Accounting Standards Committee Foundation, which oversees the IASB; improvements in the ability to use interactive data-tagging technology, or XBRL, for IFRS reporting; education and training related to IFRS; limited early use of IFRS where this would enhance comparability for U.S. investors; the anticipated future timing of future rule-making by the SEC; and the implementation of mandatory use of IFRS by U.S. issuers. This proposed road map and the milestones described are not without challenges. It is uncertain at this time when or if there will be a transition for non-public companies.
When should accountants in the U.S. learn IFRS?
Although transition seems certain, the time-line for public companies is in question and no timeline has been set for nonpublic companies. In January 2009, Mary Schapiro, President Obama’s choice as chairman of the SEC, indicated that she could delay the planned transition to IFRS. Some companies are worried about the high cost, estimated by the SEC at up to $32 million for the biggest companies. There is also concern over the independence of the IASB and the looser nature of IFRS’s principles-based standards.
Accountants for public companies should keep an eye on this to determine when to jump in and learn IFRS. Accountants for non-public companies should also keep an eye on this, but will likely not need to jump in and learn IFRS until a timeline for transitioning from U.S. GAAP to IFRS is set for nonpublic companies.
DON CAROBINE is a CPA and vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or firstname.lastname@example.org.
One of the most important relationships that any business will establish is the one it forges with its accounting firm. Often, however, CPAs are underutilized. CPAs offer much more than tax preparation. They can provide expert advice in a number of areas, including estate planning, wealth transfer strategies, and mergers and acquisitions.
“There are many ways that clients can benefit by utilizing their CPA as a business adviser,” says Shreedhar Kothari, vice president of Gumbiner Savett Inc.
Smart Business spoke with Kothari about what types of services a quality CPA brings to the table, how a company should go about finding a suitable CPA and the importance of establishing a long-term relationship with one’s accountant.
Why is it important to consult with one’s CPA before making financial decisions?
Business owners’ financial decisions may affect their banking relationship, their credit facilities, and their corporate, personal or estate income taxes. Financial decisions have a far-reaching effect on both the company and its owners. I would rather have my client call 10 times a day rather than six months later. This gives me the time to plan and strategize before it is too late. It is vital that they pick up the phone and call their CPA before they make important financial decisions.
In what ways can a business benefit from utilizing its CPA as a business adviser?
CPAs are an important piece of the puzzle. They have access to the client’s business and personal information and are in the best position to interpret numbers and analyze them. A qualified CPA brings unique insights that help clients understand the numbers and aids in the decision-making process. I tell my clients to look beyond the financial statements and tax preparation so they can utilize our full potential to their benefit.
What types of services should a quality CPA bring to the table?
A quality CPA should understand the nature of his or her clients’ business and their needs. We handle a variety of businesses and have intimate knowledge of how businesses operate. A CPA should be a trusted adviser — clients should feel comfortable sharing their business concerns with their CPAs and look to them for advice. Apart from preparing financial statements and tax returns, we can help clients with their estate planning, wealth transfer strategies, buy-sell agreements, and mergers/acquisitions, identifying weaknesses in internal controls and ways to overcome them. Most importantly, a CPA should have the guts to tell clients if they are wrong and hold the line if necessary in interest of the business’s long-term success.
How should a company go about locating a CPA that understands its needs?
Companies should be very careful in choosing a CPA; the relationship with one’s CPA should be a long-term relationship. It is important to look at your needs five to seven years from now rather than just your needs today. Will your CPA be able to handle your business’s needs when it has grown manifold? I have seen many instances where a new business just getting off the ground hires a small accounting firm. This works for a while, but when the business grows, it outgrows the accounting expertise and resources it is being serviced with. These businesses don’t know what they are missing; they don’t know what could be done with their businesses to get the maximum financial benefit. It is important to make sure that you aren’t missing out on anything.
Pricing is important when making a selection, but that should not be the only factor. Other factors that should be considered include quality of service and timeliness. Business owners are experts at what they do, but rely heavily on their CPA to advise them when it comes to their financing and taxes. Make sure that your CPA has the resources and expertise to handle your business.
How often should business owners meet with their CPA?
I like to meet my clients at least two to three times a year. Most of my meetings are at their offices or their warehouse or their manufacturing facility, because I like to get firsthand knowledge of how their business operates and talk to management. This puts me in a better position to understand a company’s needs and offer my solutions.
There is no magic number on how often one should meet with an accountant. I would say as often as necessary. I meet with some clients two times a month and others a couple of times a year. It depends on what their needs are.
SHREEDHAR KOTHARI is vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
In recent months, the stock market has experienced unprecedented volatility. Many jittery investors, fearful of further declines, have fled to safer havens. While it can be tempting to convert stocks and bonds into cash during times of financial uncertainty, volatility creates opportunities to buy stocks that are significantly under-valued.
In order to cope with a volatile market, it is important to stick to your long-term investment strategy, manage risk through diversification and avoid making rash decisions.
“One needs to be patient in one’s decision-making,” says Alan Cole, president of Cedar Hill Associates. “Maintain your investment discipline and don’t deviate solely because the world doesn’t seem the same as it was a week or month ago. Investment decisions should be based on an assessment of fundamental information regarding how the investment climate will be in the future.”
Smart Business spoke with Cole about the reasons behind the market’s volatility, how risk can be managed through diversification and the importance of creating a customized investment strategy.
What are some of the underlying reasons for the market’s recent volatility?
There are two primary causes: fear and deleveraging. Over the past year or so, the element of fear can be broken down into several different phases. Early on, there was a concern over the impact of the declining housing market on the stability of the financial system. In September, the failures of Lehman Brothers, Fannie Mae, Freddie Mac and AIG led to a genuine concern that the entire financial system was going to crumble because of the interconnectivity amongst the major banks. October witnessed governments worldwide stepping in to allay much of the concern over the financial system crumbling. More recently the market is sorting out the economic consequences of tight credit markets, rising unemployment and the worldwide economic environment. Everybody recognizes that we’re in a severe recession. The question is, how long will it last and how bad will it be?
The other reason for the volatility is the deleveraging going on in the system. This was initially selling by the banks to help fortify their balance sheets, followed by institutional selling — primarily at hedge funds — which caused a lot of the wide swings in the markets in November and December.
What strategies should be deployed when investing in a volatile market?
Regardless of what stage of the economic cycle you are in — whether it’s a good time or bad — risk management remains an important continuous process. Part of it is being prepared through diversification. Entering a volatile market with the flexibility to take advantage of opportunities is a preferable position to just riding out the storm. It’s preferable both from an asset preservation as well as a psychological perspective. In a volatile market, many investors experience panic and fear and do not make sound decisions.
How can one best strike a balance between risk and return?
We like to focus on risk — and how to best diversify risk — first and foremost, rather than just looking at the opportunity for return. Different investments have different risks. Diversifying investments to include both traditional and nontraditional asset classes can help lower overall risk as measured by volatility. Less risk doesn’t necessarily mean less return. If you properly diversify your risks, you can both achieve an attractive return and lower the portfolio risk at the same time.
How can risk be managed through diversification?
Understanding what diversification really is and how to achieve diversification is the first major hurdle. Many firms believe diversification can be accomplished by investing in different sectors of the equity market, be it value managers versus growth managers, large companies versus small companies or domestic stocks versus international stocks. Our view is this approach isn’t really staying true to diversification because each of these strategies maintains a key common element: the risk that equity markets move in tandem and decline.
From our perspective, diversification has to include other investment strategies. Typically, people look at bonds as diversification from equities. But for much of 2008, corporate and municipal bonds declined at the same time equities were falling. Our approach is to diversify not only with bonds and stocks but also, when appropriate, to incorporate other nontraditional asset classes such as real estate, energy and private equity.
What are the benefits of creating a customized investment strategy?
Some larger firms focus on allocation models that classify clients into certain generic categories such as appreciation-oriented or income-oriented. This approach might be very efficient for the investment firm when dealing with a large number of clients, but it is less likely to meet each client’s specific needs. A customized approach, however, better serves each client’s circumstances, as allocations can be crafted to address specific income, liquidity and tax scenarios.
ALAN COLE is president of Cedar Hill Associates. Reach him at (312) 445-2920 or firstname.lastname@example.org.
Surging energy costs are directly impacting the real estate market. From the locations of manufacturing plants and distribution centers to zoning density regulations to the dwindling land values in outlying areas, the rise in fuel costs is influencing real estate’s fundamental underpinnings.
Higher energy costs are also having an impact on overseas shipping, as there is now an effort to get goods from the Far East closer to the end user.
“Instead of unloading in Los Angeles or Long Beach, some ships are going through the Panama Canal to the East Coast,” says Keith Zeff, director of research for Colliers Turley Martin Tucker. “By getting the goods closer by ship to the end user, there are less transportation costs by truck or other less efficient means.”
Smart Business spoke with Zeff about how rising energy costs are affecting development density, mass transit and transportation logistics.
What impact do higher energy costs have on development density?
The higher the density, the greater possibility there is to have a shorter commuting distance. Municipalities are relooking at zoning density and use mixtures because they want to intensify density in some close-in areas where travel distances are shorter and public transportation options are more plentiful.
The interesting fact about zoning is that it was created about 100 years ago in the United States to separate land uses so people didn’t have to have their house next to a smelly manufacturing plant. Little by little we’ve reversed that trend. For one thing, there are fewer manufacturing plants. And the ones that are around tend not to be smelly — they produce goods that don’t take a lot of the energy used in the past.
Also, people want to be closer to grocery stores, which used to be separated by zoning categories. Mixed use has become a popular phenomenon and has impacted shopping center designs. In fact ‘lifestyle centers’ is a shopping center category that has increased in the past five years. These are all issues largely related to energy use and how people plan their days between their work schedules, their consumer needs and home life.
How are exurbs (commuter towns) affected?
Land brokers have found it very difficult to sell residential land in the exurbs. Part of this is due to the housing crisis. Another factor is the increased interest in coming closer in than the outlying areas. There was a saying in residential sales that went, ‘Drive until you qualify,’ which means people would go farther and farther out until they could qualify for the loans of the houses they wanted to buy. This trend, however, is reversing because the energy costs offset the savings of the lower-priced housing. Outlying locations are definitely not as popular as before.
In what ways is mass transit impacted?
Most urban systems have seen ridership increase. There is also a trend towards development around transit stations. Transit oriented development is a concept the Urban Land Institute has been talking about for a long time, but now it is come to pass that land around the transit stations has become more valuable and higher-density development is a good use of that land.
The issue is coordinating the land use decisions with the transportation system decisions. In some cities, like Toronto, the same governing body that lays out the transit system makes zoning decisions. I visited Toronto over 25 years ago and you could tell from an aerial photograph where the transit stations were because the buildings were higher and denser around the transit stations. A high-density transportation system supports higher-density development and the higher-density development helps support the transportation system. It’s a mutually beneficial arrangement when those two things can be coordinated.
How are energy costs affecting transportation logistics and where distribution facilities are located?
People have cited this as going in two different directions. On one hand, some people are saying that because of transportation costs they need to have the distribution centers closer to the end user. Backers of this argument say it’s best to have smaller distribution centers with more of them scattered around. Others say the opposite: because of deficiencies it’s best to have larger distribution centers. This can be justified by having the distribution centers run by a third-party logistics company that can realize savings by combining shipments of goods from multiple manufacturers.
Will the location of manufacturing facilities be influenced by transportation costs?
It already is. There have been some overseas manufacturing facilities that are now being questioned because of the distance goods must be shipped. In fact, even across borders, like Mexico, many manufacturers opened facilities to take advantage of lower labor costs. But given the distances the goods must travel from the manufacturing plant to the distribution center to the end user, the higher shipping costs may offset the savings from the lower labor costs.
KEITH ZEFF is director of research for Colliers Turley Martin Tucker. Reach him at email@example.com or (314) 746-0353.