States looking to add revenue to tight budgets are upping efforts to collect sales and use taxes from businesses that may not know they owe money.
“Sales tax is one of the largest revenue producers for many states, second only to personal income tax. Since there are so many transactions involving the exchange of property and services, the states are getting more creative in their attempts to collect the tax due on these transactions,” says Susan Nunez, J.D., LL.M., a principal in Tax Services at Brown Smith Wallace.
Smart Business spoke with Nunez about who owes the taxes and what to do to ensure you’re complying with state laws.
How are sales and use taxes different?
Sales tax is a transaction tax imposed on sales of tangible property and certain services. Use tax is a compensating tax to sales tax. If a transaction isn’t subject to sales tax, it will be subject to use tax.
Typically the sales or use tax is due when the final consumer purchases and uses the asset. A company that buys components or machinery and equipment to manufacture a product may be able to purchase them exempt from tax, but ultimately someone will pay the tax when the product is made, sold and consumed.
How are states trying to collect these taxes?
One way is by sending out nexus questionnaires to out-of-state sellers. These notices are used to determine whether an out-of-state company has a filing responsibility. For example, if a manufacturing company from another state is selling product to customers in Missouri, the state may send that manufacturer a letter to determine whether it has sufficient presence in the state to require a tax filing. The state can also obtain federal records of imported products to determine if they were shipped into a state and, regardless of whether the company paid tax on that asset, send a notice that says tax is owed.
These are fishing expeditions; you may not owe tax. But it can be threatening to get a letter saying you owe $100,000.
Is not remitting taxes owed common?
Usually we see it in reverse — clients overpay taxes because of the complexity of the tax laws. Taxpayers err on the side of being conservative and pay tax on items that may very well be exempt.
It is difficult to determine what state has the right to the tax and who is responsible for remitting it. For example, drop shipments are particularly problematic. Say a Missouri company has a customer and a supplier in Illinois. An order is shipped directly from that supplier’s Illinois facility. It’s taxable in Illinois, but the question is, who is liable for that tax? It varies on whether the Missouri company is registered in the destination state, whether the supplier has a valid resale certificate from its customer and other factors.
Should companies determine if they owe tax or wait until they receive notification?
It’s best to calculate your liability and make a decision. If a business has a nexus in a state and its tax liability is $30, the amount is most likely immaterial to the company. But if the company is making $10 million in sales in a state, it should want to take action and ensure it’s in compliance.
Many states are conducting amnesty programs to bring in more money. Amnesty periods are attractive to taxpayers not only because they often abate penalties, but they also limit the number of years the state can assess tax.
The most important steps for businesses to take is to get a handle on how tax decisions are made, and to develop efficient processes to manage and streamline their sales and use tax compliance burden. People making tax decisions aren’t usually in operations and don’t understand how purchases will be used, so they can’t apply the laws to see if those items will fall within an exemption.
You can increase tax compliance, and ensure you’re not overpaying, by developing a customized sales tax decision tool. This enables the person who procures items or prepares the invoices to determine what is taxable and what may be exempt. It also provides your company the control needed to make good tax decisions. ●
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It’s wise to consider the tax implications of business and financial decisions as the year winds down. This year, many tax benefits from the American Taxpayer Relief Act of 2012 (ATRA), which was extended through 2013, and many Bush-era tax cuts will end. The tax law changes from ATRA extensions ending and the implementation of the Affordable Care Act (ACA) introduce layers of complexity.
“It’s difficult for anyone to keep track of everything that is expiring, let alone what’s new. There are more moving parts than I’ve seen in a long time,” says Cathy Goldsticker, CPA, partner, Tax Services at Brown Smith Wallace.
“You need to plan and do some projections so you don’t discover in April that you have unexpected taxes due or you didn’t take advantage of a departing tax write-off.”
Smart Business spoke with Goldsticker about strategies businesses and individuals can follow to reduce tax liabilities.
What effect does the ATRA have on 2013 taxes?
Many of the provisions enacted under President George W. Bush are set to expire. Although the tax brackets from the Bush tax cuts will remain in place and are now permanent, individuals with taxable incomes of $400,000 or more — $450,000 for married couples filing jointly — are subject to a top marginal tax rate of 39.6 percent instead of the 35 percent marginal rate. These individual tax rates also will affect the taxes of the owners of pass-through entities.
A business relief provision that is scheduled to expire is for the built-in gain tax that is created when converting your C corporation to an S corporation, but is imposed after a subsequent sale of corporate appreciated assets. The temporary rule has been that if you hold your S corporation and related assets for five years, built-in gain tax goes away. Starting next year, the waiting period is 10 years. For owners looking to sell assets or a company, that may expedite the impetus to sell before the end of 2013.
Also being eliminated are faster write-offs for depreciation. Under Section 179, companies were able to deduct $500,000 for equipment in year one assuming less than $2 million in assets was acquired during the year. That will revert to the previous limit of $25,000. Bonus depreciation, which allowed you to write-off half of qualified property, is being removed for common acquired depreciable items.
You should think about accelerating your planned purchases, but also consider what your future income levels might be. You could be taking away deductions from future years when it’s possible to get a bigger bang for your buck with higher tax rates.
On the personal side, this is the last year business owners will have a choice between deducting sales taxes or state income taxes because the sales tax option will be going away. This could be a lost state benefit for those paying Alternative Minimum Tax.
This also will be the final year that taxpayers ages 70½ and older can transfer up to $100,000 from an IRA to a charity and bypass having the IRA distribution included as income. That can be important if you’re trying to stay below the $400,000 level and avoid the 39.6 percent tax bracket.
How will taxes change as a result of the ACA?
There is a new 3.8 percent tax on investment income and 0.9 percent Medicare tax that applies to self employment income for high income earners. Careful planning could avoid the claws of this extra tax.
To avoid these taxes and receive more benefit from your writeoffs, you might want to bunch deductions that are subject to phase-outs based on income. Instead of paying expenses such as advisory fees, and tax planning and preparation fees in 2013 and 2014, you might see if you can pay them in the same year.
Do the expiring cuts mean it’s best to move up as many deductions as possible?
You can’t look at your taxes in a vacuum; you still need to consider the impact of all options to determine the best route. Among the many moving parts, we could still see extensions of some provisions.
You should take the facts as they currently stand and put together pro forma projections for the next several years. Do some tax calculations for these years to figure out what you’ll encounter from a cash-flow standpoint, as well as what you could do to reduce some of the current increases. ●
Request your free copy of our 2013 Year-End Tax Planning Guide.
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With more than 3 million people set to retire this year, one significant component of retirees’ cash flow is top of mind: Social Security. Yet the staggering options of how and when to claim benefits can be overwhelming.
“That creates a need in the private sector for someone to look at those options and determine what makes sense based on personal circumstances,” says Roy H. Kramer, CPA, CDFA, CDS, NSSA, a member of Tax Services at Brown Smith Wallace.
Kramer, a certified National Social Security Advisor, says it’s important to review Social Security benefits in the context of overall retirement funds, and with a qualified independent adviser.
Smart Business spoke with Kramer about myths and mistakes people make when it comes to Social Security benefits.
Should Social Security be included as part of an overall retirement strategy?
It’s an important component of your entire financial planning and retirement structure. A lot of people think it’s not going to be around for their retirement, so they don’t factor in Social Security, which is a mistake.
The federal government has projected that 100 percent of current benefits are funded through the year 2033, and then at 75 percent for subsequent years. So we know Social Security has sufficient resources to pay benefits through 2033 and retirement planning should reflect that. Clearly, there also will be some discussion about what to do post-2033 because that reduction would be devastating to retirees who worked so hard and paid into Social Security their whole lives.
What’s the first step to figuring out when to take benefits?
Go to www.ssa.gov and set up an account. It’s the only way to access Social Security statements that previously were mailed. There may be mistakes, and correcting them can be a time-consuming process made more difficult if years have passed and documentation may not be readily available.
A common error may be a Social Security number improperly transcribed when a person is married, and years can go by before it’s caught. Most people don’t keep copies of W-2 forms and tax returns after the statue of limitations has expired. So it’s important to review the information on the website to ensure there are no glaring errors.
What are some often overlooked strategies?
One option, which has been available since 2000, is called file and suspend. If you are married, typically one spouse is a high-income earner and applies for benefits at the retirement age of 66. But he or she suspends receipt of those benefits until age 70. That provides what is called a delayed retirement credit, which increases the benefit by 8 percent a year for a total of 32 percent more at age 70. Applying for benefits allows the other spouse to claim spousal benefits of half of the applicant’s Social Security benefit, without reducing the first filer’s benefit amount. So the family can collect Social Security earlier while increasing the benefit received at age 70.
There’s also a rule that allows you to collect benefits on an ex-spouse if your benefits are less. You have to be at least 62, been married at least 10 years and not currently married. You can apply for spousal benefits if the ex-spouse is eligible for benefits, regardless of whether he or she has applied. Overall, Social Security benefit decisions are more effective when considered in conjunction with tax planning.
How are benefits determined?
It’s an indexed average of the 35 highest-earning years of work history. But in order to qualify for Social Security, you must have paid into the system for at least 40 quarters.
When deciding whether to take early retirement at age 62, collecting benefits at the established retirement age of 66 — for those born in 1954 or later — or waiting until age 70, you have to consider your personal situation.
One couple with both spouses in poor health needed the money and filed at age 62. The thought of them living to the average age expectancy of 84 for a woman and 81 for a man was not a realistic possibility.
But if you can afford it and have a family history of longevity, you can wait until 70 and enjoy that 32 percent increase in benefits for a long time. ●
Find out more on this and other tax topics at Brown Smight Wallace.
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Recovering from a flood or fire is hard for a business. But dealing with problems caused by a lack of business continuity plans or inadequate insurance can make it worse.
“The better you can plan for how to deal with an incident, the better off you’ll be,” says Lawrence J. Newell, CISA, CBRM, QSA, CBRM, manager of Risk Advisory Services at Brown Smith Wallace. “I say ‘incident’ because it could be something not always thought about in typical disaster terms, such as a breach of credit card information.”
Smart Business spoke with Newell and William M. Goddard, CPCU, a principal in the firm’s Insurance Advisory Services, about developing business recovery plans and the insurance options available to reduce risk.
What goes into a business continuity/recovery plan?
One component is a business impact analysis, placing a value on what the business needs to operate. Layered underneath are the business processes, which include the business continuity plan and its identifying process flows. For example, length of shutdown is part of the business continuity plan, which contains timelines.
Then there is the disaster recovery plan, which covers anything the business depends on that is IT related. Information has more value than just the data because of the intelligence built around it. So you need to identify where that data is processed, stored or transmitted.
There is also a communication plan, making sure an incident is communicated upward, downward and outward — upward to the executive management team, downward to the enterprise and outward to customers and business affiliates. Part of the communication plan is identifying the impact, whether it’s a simple outage or a more widespread incident such as a tornado, flood or hurricane.
What options are available to manage risk?
In the example of a credit card breach, there are risk reduction processes such as applying security standards developed by the credit card industry. There’s also cyber risk insurance, which insures costs to locate the problem, including hiring experts to do that, notification of cardholders, and business interruption loss.
What do businesses need to know about disaster coverage in insurance policies?
Generally, what we think of as disasters — earthquakes, hurricanes — are covered under property insurance. But business insurance policies also contain sublimits. For instance, you can have $100 million insurance coverage, but the sublimit might be $25 million for a flood. Policies carry different sublimits, and a company planning to use insurance to cover these disasters needs to be aware of them.
What is co-insurance, and how does that impact claim payments?
After a loss, the insurance company will judge the value of a building, say it’s $1 million. A co-insurance clause is typically 90 percent, meaning that the building should be insured to 90 percent of its value — so you’ve bought $900,000 insurance coverage on a $1 million building. If it burned to the ground, you would be paid $900,000. But if you only bought $800,000 insurance coverage and were supposed to buy $900,000, all recovery is based on having 88.8 percent of the coverage you should have. If a small warehouse fire causes $100,000 in damages, you wouldn’t be paid $100,000, but $88,800. This concept of co-insurance is frequently in policies and can be punitive for loss recovery.
How can insurance costs be reduced?
Insurance companies will inspect your property and following their recommendations can make you a better risk, reducing premiums. It’s also important to figure out exactly what coverage you need — it’s best to get an independent adviser. There have been many court cases involving inadequate insurance; they’re expensive to bring and hard to win. It’s better to get it right when you buy the policy, so you should have someone other than the person who’s selling you the insurance answer your questions and conduct an analysis of your needs.
William M. Goddard, CPCU, is a principal, Insurance Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1253 or email@example.com.
Lawrence J. Newell, CISA, CISM, QSA, CBRM, manager, Risk Advisory Services, at Brown Smith Wallace. Reach him at (314) 983-1218 or firstname.lastname@example.org.
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Many executives only think of their 401(k) when receiving a plan financial statement. They don’t consider plan operations, potential pitfalls or their basic duties in operating plans. A set of recently released regulations is systematically forcing that mindset to change.
Plan sponsors’ and fiduciaries’ duties to a plan and its participants were clarified by the new regulations. Patrick M. Shelton, GBA, managing member of Benefit Plans Plus, LLC, says, “Legally, plan sponsors are now required to have intimate knowledge of and communicate specific plan information to participants. If they fail to do so, they could face regulatory penalties, legal action from employees or get embroiled in class-action lawsuits.” He says most information must be communicated at least annually to participants, even those who have left the company but still have plan balances.
Smart Business spoke with Shelton about plan regulations and the critical importance of “benchmarking.”
What is the key determination?
Under federal law, plan fiduciaries must act ‘prudently’ and ‘solely in the interest of plan participants and beneficiaries’ to ensure a plan pays covered service providers (CSP) no more than ‘reasonable’ fees. Sponsors must review and understand all plan fees and then formally communicate them. While costs are important, they are not the only consideration. Lowest cost is rarely a determination of a well-run and effective 401(k) plan.
What are the new regulations?
Regulations are under section 408(b)(2) of the Employee Retirement Income Security Act (ERISA) and are designed to help plan fiduciaries ensure that plan service arrangements are ‘reasonable.’
The regulations impose a duty on every plan CSP to provide information to plan fiduciaries necessary for them to assess the reasonableness of CSP compensation, identify potential conflicts of interest, and satisfy reporting and disclosure requirements.
ERISA section 404(a)(5) regulations require fiduciaries — of plans allowing participant directed investments — to provide specific information designed to enable participants to make informed investment decisions. General plan and administrative and individual expense information are required.
What is benchmarking and how can it help determine ‘reasonableness’?
Benchmarking is a process for compiling and comparing plan data to plans with similar design and demographics. Data might include plan design, including its underlying details, eligibility requirements, benefit or contribution formulas; assets; direct and indirect administrative costs; investment choices; compliance; and performance.
Benchmarking simply assists fiduciaries in determining a basis for reasonable fees. If fees are higher than average for similar-sized plans, there should be a clear explanation of why more is being paid.
What are some best practices?
You should benchmark your plan every three to four years, recognizing that the costs of professional reviews vary widely from $1,500 to $25,000. You should use benchmarking services that provide relevant data and rotate service providers to vary the results and avoid biases. You should also ask about the methodology to ensure you get valid information. In addition, you should maintain results in a file where all 401(k)-related information is readily accessible and periodically review the results and form an action plan to bring your plan in line with company philosophy and values.
Most benchmarking providers don’t adjust their comparisons by region and often extract unfiltered data from public sources. Further, while more plan data is becoming available, currently there’s not strong benchmarking data for small plans, or those with fewer than 100 participants.
What happens if you’re out of compliance?
Plan sponsors and fiduciaries are personally liable for any failure to procure the required information from CSPs. However, the regulations contain a ‘safe harbor’ method of complying — shifting responsibility to non-compliant CSPs and notifying authorities. In most cases, CSPs provide disclosures on a quarterly and annual basis that are designed to be compliant with all of the rules.
Patrick M. Shelton, GBA, is managing member at Benefit Plans Plus, LLC Reach him at (314) 824-5252 or email@example.com
For more information regarding fiduciary responsibilities, visit www.bpp401k.com/fiduciary-health-check.
The recession caused businesses of all sizes to take stock of their organizations and find ways to run leaner, work smarter and maintain profits.
For many family businesses, this has meant asking whether their businesses could continue to support their lifestyle. Change isn’t easy, but those who took serious measures to improve efficiencies are now positioned to leave a successful legacy to the next owners, whether by succession or sale.
“By changing the way their businesses govern operations, many family owners have become more nimble and re-energized because they understand smarter ways to work,” says Tony Caleca, member in charge, audit services, Brown Smith Wallace LLC.
And that’s essential because businesses must embrace change and remain flexible to continue to compete in a global economy.
“The international flavor of business today is having a growing impact on all organizations,” says Bill Willbrand, member in charge, industry services, Brown Smith Wallace.
Smart Business spoke with Caleca and Willbrand about how successful family businesses are managing in an age of uncertainty.
Coming out of the recession, how can businesses regain the value they lost in the last few years?
The good news is that much of the money lost was value-based; its value depended on the desire of the marketplace to acquire businesses and on the ability of businesses to drive profits for buyers. As a response to the recession, businesses made their organizations leaner, resulting in a much lower overhead burden than they previously had. The result: a greater ability to generate cash flow and profitability.
The recession forced businesses to operate differently, to take a hard look at every component of their organizations and determine how each working part drives value to the overall business. It’s been a time of self assessment and retooling, and those coming out of the recession with a stronger organizational structure are poised to attack the market, both locally and globally.
Will banks finance expansion in this rebound era?
Banks are absolutely financing expansion for businesses today, but there is a caveat: Financial institutions are lending growth capital to businesses that are truly qualified. Those that are qualified are the ones that have worked closely with their banks through the good times and bad. These businesses have improved efficiencies in their organizations and done what’s necessary to improve cash flow and profitability.
Businesses positioned to get financing have close relationships with their bankers. They’ve enabled the bank to understand how their debt will be repaid and to fully understand how those loaned funds will be utilized to improve the long-term financial position of the business.
Banks are still willing and able to lend when they are confident in the business borrower. Banks typically gain this confidence by reviewing the history of how a business dealt with the recession and what strategies it used to reduce costs and expand products and services.
Preparation is critical for presenting appropriate materials to the bank and telling your story. Businesses should approach any financial discussion with the bank as if they were meeting with their largest potential customer. Flat out, businesses seeking financing must be that prepared.
What is the upside to the current situation?
Businesses that survived the recession are running more efficiently. They have reduced waste and addressed issues that may have been lingering for some time. The recession jumpstarted change at many organizations, and although it may have been uncomfortable, there’s nothing bad about that. They’ve survived.
For the next generation to lead the business, or, in the event of a sale, the next owners, this means many of the tough decisions have already been made. Businesses are positioned for success; they’re prepared to grow. The fat is off; the challenge for the next owners will be keeping it off.
When is the right time to start transitioning to the next generation, or to prepare a business for sale?
The transition process should always be ongoing, but a formal process should be initiated at least five years prior to an exit. It is critical to identify who will drive the business going forward. Who is the ‘A’ team? The future management team must be prepared for the exit. You don’t want to walk in one day to find you’ve got a new job; the owner is checking out.
Five years — or more — gives an owner the opportunity to determine what skills are needed in management. Where are the holes, and how can those be filled with talent? Time allows the family to work through the nonfinancial issues that are inherent in a family business, primarily, what’s next after the business is transitioned? During the transition period, family members and key advisers should be involved in planning the future as a team effort.
For example, a business might appoint a transition team consisting of key advisers, an outside board of directors, attorneys, bankers and accountants. The earlier that goals, strategies and ground rules are developed, the smoother the transition will be.
What key attributes will define success for the next-generation business?
It’s critical today to focus on creating a sales culture. As we move out of this recessionary period, many businesses are identifying a need to develop qualified salespeople who can expand the business as quickly as prudently possible.
Many organizations are running lean effectively in terms of cost structure, but they still must increase their market share. To do that, they need talented, dedicated sales professionals to drive business. Adopting a sales culture while remaining nimble will position a business to succeed far into the future.
Tony Caleca is member in charge, audit services, Brown Smith Wallace LLC. Reach him at firstname.lastname@example.org or (314) 983-1267.
Bill Willbrand is member in charge, industry services, Brown Smith Wallace LLC. Reach him at email@example.com or (636) 754-0200.
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For many executives, their eyes glaze over and their minds wander to other, more pressing, issues when the topic of enterprise risk management (ERM) is broached.
But yet the topic is getting considerable attention these days from regulatory bodies and many of the world’s most successful companies. So where’s the disconnect?
“Risk management practices have been around as long as businesses have been around,” says Ted Flom, member in charge, Risk Advisory Services, Brown Smith Wallace, St. Louis, Mo. “But as businesses have grown and the world has become more interconnected, risk management approaches need to evolve. While many companies are already ‘doing risk management,’ there are typically opportunities to enhance longstanding approaches and elevate the discussion in order to keep up with today’s business environment. Companies with a solid understanding of and approach to risk, and how it affects the whole organization, are more successful, more profitable and ultimately better able to manage through difficult times like a recession.”
ERM focuses on developing thoughtful strategies that address risks in a variety of areas, including strategy, finance, operations and technology. While it is not a new concept, it is an evolved way of approaching risk management, where a company proactively looks at risk from the strategic, enterprise level, versus taking a siloed approach. ERM acknowledges that risk is not good or bad, but rather that it needs to be recognized and understood so a company can most effectively prepare and react.
Smart Business spoke with Flom about ERM and how companies can implement some simple risk management principles in their organizations.
What is enterprise risk management, and how is it different from what companies have done in the past?
ERM is a continuous process that seeks to identify, analyze, mitigate and monitor potential events that create uncertainty to the achievement of a company’s objectives. An effective, integrated ERM program can help an organization identify and take action on risks that may be affecting the achievement of its core strategic objectives.
ERM should align with a company’s goals and objectives. It’s more than just a program or process: It’s a cultural shift. ERM should approach risk from a wide-angle view of a company, rather than homing in on specific activities or areas. ERM is becoming more than just a way of managing risk but also a way of doing business.
Why should companies consider adopting ERM?
In 2010, the Corporate Executive Board Co. conducted an analysis of the root causes underlying market capitalization declines of 50 percent or more in a single year. This analysis found that more than 80 percent of these significant declines were tied to strategic and operational risks. The potential consequences of these risks are considerable and highlight the need for comprehensive ERM programs.
No one likes surprises, especially ones that overturn your market share or competitive advantage. ERM takes into account silo risks, such as IT systems security or finance department checks and balances, and integrates them into the big picture of the business and its long-term goals and objectives. A company that has this comprehensive understanding of risk is likely to be less volatile and more successful in the long run.
What benefits can a company realize through ERM?
Companies that understand their risks have a greater ability to prevent or react to events that can impact goals and objectives. Ultimately, this can translate into less volatility and a competitive edge. A good grasp of risk can also open up a company’s perspective on opportunities it may want to pursue.
ERM enables management and the board to have a more consistent view of and approach to risk. Management and the board often have different perspectives on a company’s most important risks, such as implications of a disaster or a business disruption.
Often, a company’s ability to respond is not truly understood until an event such as a tornado or earthquake occurs. Considering that 50 percent of companies experiencing a major disruption or disaster are out of business within five years, a company’s preparedness can make all the difference.
How can a company begin implementing ERM?
Several recognized frameworks can be leveraged when considering ERM. COSO’s ‘Enterprise Risk Management — Integrated Framework’ and ISO 31000 ‘Risk management — Principles and guidelines’ are widely recognized information sources and good places to start.
Start small to get a feel for what ERM is, its benefits, and what it can and should be. Most companies start by doing a risk assessment and then deciding what to do with the results — e.g., which risks should be focused on, where and how should discussion occur on those risks, and who is responsible for monitoring this information and keeping it relevant.
A successful ERM program should be customized to integrate into a company’s existing organizational framework and culture, as opposed to being set up and managed as a standalone program.
What kind of culture shift can occur when ERM practices are adopted?
Ultimately, a company should seek to be more aware of risk at all levels, and to make decisions and set goals utilizing that understanding. ERM helps make risk part of the everyday agenda; it’s a way to bake it into the culture. That is when you begin to see the real benefits.
Risk management then becomes less bureaucratic, less resource intensive and more focused on implementing strategies that help a company reach its long-term goals.
Ted Flom is member in charge of Risk Advisory Services at Brown Smith Wallace, St. Louis, Mo. Reach him at (314) 983-1294 or TFlom@bswllc.com.
With each day, companies are becoming more dependent upon their systems and data. While these changes offer significant opportunities and benefits, they also carry many new and significant risks, including cyber security risks that business owners and management need to be aware of.
To protect your business from cyber security threats, it’s time to start thinking like a hacker. What sensitive or confidential data do you collect, store or transfer that could be compromised? And how vulnerable is that data to attack?
The risk is significant for businesses that do not make cyber security a priority. Failing to put security measures and infrastructure in place can affect a company’s reputation, productivity and bottom line, says Christopher Byrd, manager of Security & Privacy, Risk Advisory Services, Brown Smith Wallace LLC.
“Exponential growth in the access to and use of data can give organizations a competitive advantage, but with that comes increased vulnerability for cyber attack,” says Byrd.
The types of organizations being targeted are becoming more varied, says Tony Munns, member, Risk Advisory Services, Brown Smith Wallace LLC.
“Several years ago, the primary targets were financial services and similar organizations, but we are now finding that other companies with a high dependence upon technology are becoming targets for attack,” says Munns. “The size of the company doesn’t seem to matter, as hackers often choose their targets based on ease of attack and availability of data.”
Smart Business spoke with Byrd and Munns about the cyber threats businesses face and how they can maintain data security.
What cyber security challenges are companies facing?
While companies are not purposely exposing themselves to cyber security risks, many have limited resources to understand and address their vulnerabilities. Today, companies are doing more with less at a time when the number and severity of attacks are on the rise. Companies often focus on keeping systems up and running, while information security drops down the priority list. The greatest challenge is that this is a complex area that is constantly changing, requiring expertise and resources that often aren’t readily available to companies. So, increasingly, they turn to a third party that specializes in cyber security to perform a security audit and testing to identify weak points that can be invitations for hackers.
What impact will companies face because of these issues?
There are many potential impacts if sensitive information is not adequately protected, including direct costs such as fines, investigation, notification and legal fees, and indirect costs, including lost business opportunities due to reputational harm. The impact can also depend on applicable laws and regulations, such as:
- HIPAA — The Health Insurance Portability & Accountability Act, which addresses the protection of personally identifiable health information.
- PCI DSS — The Payment Card Industry Data Security Standards, which is aimed at protecting payment (credit, debit) card security.
- GLBA — The Gramm-Leach-Bliley Act, which is designed to protect personal information collected by financial institutions.
Many industries have regulations in place to enforce data security, and there are more regulations being enacted at every level. In addition, virtually every state has adopted data breach notification laws that companies must adhere to. Exposure of personal information can result in hefty repercussions — cost estimates exceed $200 per record lost. For organizations with hundreds or thousands of records, the financial impact can be significant.
Often, as a result of a security breach, company executives find their time and attention consumed by the response, similar to other types of major incidents.
It is critical today for businesses to establish security measures and an infrastructure that protects data so that if security is breached, there is a record of compliance with laws and regulations. Across the board, there is an emphasis on urging companies to get their house in order on matters of cyber security.
How do cyber security breaches occur?
There are generally two basic types of security incidents. First, there are unintentional situations, such as an employee losing a laptop computer containing company data. In these cases, data security is generally not top of mind, as no one plans on these incidents.
The other security threats are very much intentional. There are cyber criminals who make money by hacking into systems and mining data. Once a system is compromised, the attacker can siphon off data or steal money directly, for example by initiating large bank account transfers.
Recently, there has been a resurgence of ‘hacktivists’ — ideologically motivated hackers that attack an organization to damage its reputation because of a political or social stance. Additionally, there have been a number of recent breaches involving industrial espionage, some purported to have been sponsored by other countries. These attackers can stay embedded in a company while compromising information that provides a competitive advantage.
What can businesses do to protect their interests?
The key is to identify security risks and put an appropriate security program in place. A company’s security program should include a comprehensive security policy with assigned responsibility, risk assessment, security control framework, independent assessment and employee awareness. And, for when all else fails, there should be a response program, which should be tailored to meet regulatory requirements and be regularly tested.
Reach out to an expert to get a security risk assessment and begin developing a plan to protect information from cyber threats. When — not if — a security breach occurs, you want to be prepared with a plan to protect your business interests.
Christopher Byrd is manager of Security & Privacy, Risk Advisory Services, at Brown Smith Wallace in St. Louis, Mo. Reach him at firstname.lastname@example.org or (314) 983-1374. Tony Munns is member, Risk Advisory Services, at Brown Smith Wallace. Reach him at email@example.com or (314) 983-1297.
Whatever their long-term plans for a company may be, owners and investors are interested in increasing the value of their companies. When an owner takes the perspective of an outside, objective investor in looking at the company, he may see more clearly opportunities to grow value.
This type of analysis gives a company the ability to identify opportunities to increase long-term value and creates an important roadmap to help increase the likelihood of success. This strategic roadmap, coupled with a long-term tactical plan for increasing value, is critical for any company that wants to succeed in today’s highly competitive global market.
This means looking beyond your five-year plan and considering what your business will look like and how your customer base will have changed 10 to 15 years from now and beyond.
“Companies that have the highest value are those with a track record of sustainable growth in sales and profitability, and that both understand their customers’ needs and meet those needs as effectively and efficiently as possible,” says Cathy Roper, director of financial advisory services at Brown Smith Wallace. “They know what they do better than the competition — whether that’s speed of delivery, customer service, or low pricing — and really focus in on refining and communicating those differentiating factors.”
The tried-and-true SWOT analysis is an important evaluation tool. Identifying the company’s strengths, weaknesses, opportunities and threats can help an organization define a path toward success in the new economy.
“Other less time-consuming options can also provide an organization with actionable insights,” says Tony Caleca, member in charge of audit services. “Tools such as competitive benchmarking can help expedite critical changes in the short term.”
In addition, trade publications are often a great source of information on what best-in-class companies in your industry are doing and what important trends are occurring that may impact your business in the future.
However they get there, companies need a strategic plan for how they will address industry disruptions, changes in the work force, global competition, and the online business world and its lack of borders. There’s also the question of, “What’s next?” and figuring out how to execute a succession plan, particularly considering the aging population and its effect on future management at all companies, especially private and family-owned businesses.
“A big part of figuring out the next step is to carefully assess your key managers and your entire work force,” says Bill Willbrand, member in charge of industry services. “Do you have the talent pool in place to take your business to the next level? And, more important, what does that next level look like? Who are your customers and what do you offer them? How will you get to where you want to be from where you are today?”
Accomplishing all this is admittedly a big task, but having the support and guidance of a team of professionals who can bring independent, specialized perspectives on these business issues can help position a company for accelerated growth.
“Whether the long-term plan involves selling the business, growing it through acquisitions, or any number of strategic moves, business leaders need help looking at their companies with an investor’s critical eye so they can make the best decisions to reach their goals,” says Ted Flom, member in charge, risk advisory services. “This means facing up to the hard questions, answering them and executing the answers. It’s a challenging process, but it’s essential to ensure sustainable growth.”
Smart Business spoke with this team of professionals at Brown Smith Wallace about how to position your company to succeed.
What prime areas do investors focus on when looking at a business?
First, investors factor out nonrecurring income and expenses of the business to estimate its future earnings potential. Second, they look at the company’s competitive position, along with anticipated changes in the market to determine the business’s long-term viability, especially as it relates to the transition to new ownership. Third, investors will factor in efficiencies that they believe the current owner/operator has not fully realized. They want to identify areas where they can improve profitability to boost the business’s cash flow and value.
Once owners recognize the areas that investors focus on, they can work to maximize the value of the business. For example, if a company’s average receivables collection period is significantly longer than that of competitors in the industry (thus negatively affecting cash flow), the company can work to reduce the average collection period, improve cash flow and reduce interest expense associated with financing customer receivables. Of course, if the company is in very poor shape, investors will consider whether it’s even possible to revive the business.
Investors will also look at risk factors such as too much concentration of business coming from one customer, or a critical production component whose price (or supply) is unstable and/or is controlled by a few key industry suppliers. If certain intellectual property is critical to the success of your business, the investor will want to see that it is protected by the appropriate patents, copyrights and trademarks. For example, an investor looking at a drug company is going to pay a lot more for a company with relatively new patents than he or she would for one where the patents are close to expiration with no new patents on the horizon.
Investors will also look at potential liabilities such as environmental and other regulatory compliance issues that could result in legal actions and/or fines. They will evaluate the loyalty of the existing customer base and will look for any obsolescence that must be addressed, such as equipment that needs to be replaced or upgraded, or technology that must be updated.
What are the key drivers that contribute to growth and sustainability?
Sustainability relies on maintaining relevance in the marketplace. In this global economy, and with fast-changing technology, that encompasses many things. You need to be nimble, stay close to your customers, have an intimate understanding of your competition, constantly evaluate your work force, raising the level of talent, and keep an eye on the long-term business plan rather than just focusing on year-end and other shorter-term goals.
But the key driver contributing to growth and sustainability is planning, and planning requires strategic analysis — a serious look inside and outside of your business. It means asking global questions such as what is your internal capacity and how does that match the opportunities available in the market today and in the future? Then it means breaking down the hard numbers that lead to the answers.
It also means understanding what need you fill for your customers and other ways in which that need may be met. For example, had railroad executives in the 1940s and 1950s defined their business more broadly as ‘transportation,’ they might have identified the growing interstate highway system and jet planes as competitive threats much earlier than they did.
How does a company assess its management team?
First, determine who holds key leadership roles in your business. Analyze whether your business requires oversight in a particular area where it is currently lacking. For instance, a manufacturing operation with plans to expand its product offering by starting a new division might require a leader with different skill sets not currently available in the company. Or, perhaps there are areas of the business that are not competitive and could possibly be phased out in the future, but they have underutilized leaders.
Do the managers in these uncompetitive areas have talents that can be applied elsewhere in the business? If so, what additional training may be required for them to successfully make the transition? In short, assess management strengths and weaknesses with an eye to the changes required in the future.
Next, be sure that the business is successful because of what it does, not because of who does it. The business should be sustainable with any good team at the helm. An organization should continue to drive success based on properly trained employees and the right management team. If this is not the case, it’s time to do some serious succession planning and focus on raising talent that can take the business into the future.
What key aspects of the work force should be evaluated?
Start by getting a business evaluation so you have a real measuring stick to use as you work toward goals. Then begin matching the talent you currently have with the organization’s goals. Are all needs met? Where are the gaps?
You’ll want to focus on gaining the expertise required, whether that means training existing employees or hiring new talent. This can be an especially delicate issue in a family business.
Have conversations about who is accountable at the business and where you will recruit your work force of the future. How will you replace employees, if necessary?
When should a business evaluate its strategic opportunities, and what does this process entail?
There’s no better time than now. In the short run, you’ll identify costs you can drive out of the business and, in the long run, you’ll be well positioned when things turn around. Evaluate the economic environment and the changes taking place in the organization and the industry on all fronts: legal, technology, market share, customers, competitors, work force, etc. The key is to map out how you will do business in the future, and what resources you need to succeed down the road. For example, those companies in the health care industry that anticipated and strategically planned for the aging baby boomer demographic are now on track to tap into a significant and growing customer base.
Of course, the global economy is a major factor. What role does your company play in this world market? Look at how the Internet, technological advances and online businesses have truly removed borders, even in industries where we never expected to see changes driven by global competition.
For instance, hospitals have typically never worried about global competition because health care used to require health care professionals to be physically present, but intense cost pressures, coupled with technological progress, are working to change that. Today, a surgeon halfway across the world may be performing surgery through the use of a robot whose movements are controlled by the remotely located surgeon. Even the location of the patient is no longer a given. Several insurance companies have started to give patients the option of flying to India to have their surgery and recuperate in an Indian hospital in exchange for reducing the patient’s out-of-pocket expense.
Start by analyzing risks and opportunities your company faces today. What could put you out of business? What other alternatives are available to your customers? Think outside of your comfort zone. What opportunities exist for you in the future?
We’re not saying this is easy to do. That’s why working with a team of professionals with expertise in key areas such as tax planning, process improvement, valuation and turnaround consulting, and who possess extensive experience providing integrated solutions for private companies, can help you build a sustainable platform for growth.
Cathy Roper is director of financial advisory services at Brown Smith Wallace LLC. Reach her at (314) 983-1283 or firstname.lastname@example.org. Ted Flom is member in charge, risk services at Brown Smith Wallace LLC. Reach him at (314) 983-1294 or email@example.com. Bill Willbrand is member in charge, industry services at Brown Smith Wallace LLC. Reach him at (636) 754-0200 or firstname.lastname@example.org. Tony Caleca is member in charge, audit services at Brown Smith Wallace LLC. Reach him at (314) 983-1267 or email@example.com.
Knowing the value of your business is important for making wise gifting decisions, especially because there could be quite a difference between an organization’s perceived value and its actual value.
“Business owners really should know how much their business is worth so they can determine whether or not to make a gift, and to ensure the amount of the gift is appropriate for their estate plan,” says David Heilich, family wealth planning practice leader at Brown Smith Wallace LLC, St. Louis, Mo.
As a result of the recent recession, lower fair market values have made gifting a much more attractive option, giving business owners the opportunity to leverage closely held stock and partnership/LLC interests, especially when applicable discounts for lack of marketability and lack of control (the so-called minority shareholder discount) further decrease the amount potentially subject to taxes.
At the same time, doing a business valuation sooner rather than later — meaning years before a possible ownership change — can potentially add to the future value of the business when an eventual sale to an outside party is planned.
“Now is a great time to discuss with a professional how to take advantage of estate planning opportunities,” says Cathy Roper, director of financial advisory services, Brown Smith Wallace.
Smart Business spoke with Heilich and Roper about year-end gifting and the benefits of a business valuation.
What year-end gifting opportunities make this an attractive time of year to be generous?
Currently, there is a $5 million gift exemption, which is significantly higher than ever before, and, under the current law, in 2013, the estate, gift and generation-skipping tax (GST) exemptions decrease to $1 million, with the GST exemption indexed for inflation. In 2011 and 2012, single individuals with net worth of at least $5 million, and married couples with net worth of at least $10 million should consider making outright gifts and/or executing various estate planning techniques.
Advisers should take into account the nature of the assets being gifted and projected future values to determine if gifting makes sense and to avoid gifting too much.
How should an individual plan this year, considering the uncertainty of gift laws in 2013 and beyond?
It is unknown when the law in 2013 and future years will be settled, and if there will be any changes to the current law. You don’t want to be paralyzed by the uncertainty of the future. The opportunities in 2011 and 2012 could be lost if you wait until there is better guidance on the current and future estate and gift tax laws.
There are a lot of creative estate and gift tax planning opportunities that provide options and flexibility. Consult with a team of qualified professionals and take into account all relevant factors in order to make an educated decision about whether now is the time to take advantage of gifting opportunities.
How can getting a business valuation years before an ownership change is planned potentially add to the future value of a business?
A business valuation is an opportunity to do a ‘wellness’ check of your business and provides you with the type of dispassionate view a potential buyer will have. The valuation analyst will tell you where your company ranks compared to the industry on a number of different measures such as days outstanding on receivables, capital expenditures as a percentage of sales, gross profit margins, etc., and suggest areas where efficiency and, thus, profitability, can be increased.
Here’s an example: In a recent due diligence engagement in which we were evaluating a software business for a potential investor, we recommended switching from a traditional development model in which a client purchases the software and upgrades as new versions come out to a software-as-a-service model in which the software is leased and the continuous monthly lease payments smooth out the revenue stream and cash flow. This reduces the need for interim financing, reduces income variability and stabilizes the customer base, which reduces risk for a potential buyer. The less risk an investor has, the safer the investment is and the more an investor is willing to pay, or, put another way, predictable cash flow is always more valuable.
What is involved in the process of getting a business valuation?
The process is fairly straightforward, but often takes four to six weeks. First, you will receive a document request list that requires gathering at least five years’ worth of financials on an accrual basis, along with the most current financials. These are reviewed, and your ratios are compared to the industry average.
Once the valuation analyst gets a feel for the industry’s outlook and how the company compares to the industry, he or she will schedule an on-site visit in which owners are interviewed and questions are asked to further assess the company relative to the industry and to its competitors. Documents reviewed may include corporate charters, partnership agreements, minutes and any previous offers to buy the company.
Is it too late to begin the gift planning and valuation processes after the New Year?
Not at all. 2011 is an opportune time to take advantage of gifting opportunities, and a valuation is important to make wise decisions. Under current law, the gift exemption continues through 2012, so the New Year will still provide opportunities to continue estate planning and reap benefits from current estate, gift and GST exemptions.
David Heilich is family wealth planning practice leader at Brown Smith Wallace. Reach him at (314) 983-1273 or dheilich@ bswllc.com. Cathy Roper is director, financial advisory services at Brown Smith Wallace. Reach her at (314) 983-1283 or firstname.lastname@example.org.