By some estimates, oil and gas wells will be pumping $30 billion into Ohio’s economy in 2015, creating 200,000 jobs. All that money and activity also promises to keep attorneys busy.

“Companies are still feeling things out. So far, there have been about 500 permits issued and there are only about 80 producing wells. But 101 permits were issued in March alone. There will be a lot more drilling this year,” says Michael Schottenstein, an associate with Kegler, Brown, Hill & Ritter.

As companies look to start drilling, property owners with leases signed when offers were lower want to renegotiate more favorable terms. And some communities continue to fight to keep hydraulic fracturing of shale rock formations, a process also known as fracking, from taking place within their borders.

Smart Business spoke with Schottenstein about current legislation and the outlook for oil and gas well production in Ohio.

What’s the status of potential fracking bans?

In a recent case in the 9th District Court of Appeals, State ex rel. Morrison v. Beck Energy, the court said Ohio Revised Code section 1509.02 gives the Ohio Department of Natural Resources, Division of Mineral Resources Management, exclusive authority over drilling permits, pre-empting local ordinances. Municipalities can regulate things like excavation and right-of-way usage and construction, but have no authority when it comes to drilling.

However, there are still municipalities discussing bans. The city of Munroe Falls has appealed to the Ohio Supreme Court and asked the court to weigh in on the issue, but the court has not said yet whether it will take the case. It’s unlikely municipalities will be able to impose outright bans.

What are some other legal developments?

The natural gas severance tax increase Gov. John Kasich proposed in his new budget is significant. Drilling companies and other industry players have been trying to stop it because they say it would discourage drilling. The industry may have won the fight for now, though. The budget plan the Ohio House Republicans recently put forward left the severance tax where it is. It’s still possible it could get passed if the Ohio Senate makes some changes, but it is unlikely.

Another development involves a line of cases dealing with lease terms and whether perpetual leases are void as being against public policy in Ohio. In Monroe County, a judge in the case of Hupp v. Beck Energy essentially said that public policy in Ohio so disfavors perpetual leases that any oil and gas lease that allows drilling companies the right to extend the lease indefinitely by paying delay rentals without an obligation to actually drill are void as against public policy.

There’s also a federal case from the Southern District of Ohio in which the decision says state law disfavors perpetual leases and will interpret them not to be perpetual when possible, but did not say they are actually void.

These are important cases because a lot of landowners are trying to find ways to get out of leases signed when companies were paying a lot less for them.

What are leases going for now?

Royalty percentages had historically been about 12.5 percent for the landowner, but we’re seeing some up to 20 percent. Reports out of eastern Ohio are that some companies are offering bonus payments of $5,000 to $10,000 an acre. Those who entered into a lease 20 years ago, got a small bonus payment and now get a royalty check for $10 a month, are trying to get a better deal.

Oil and gas leases typically provide for a period of one to five years during which companies can explore to see if there’s oil and gas on the property. Leases also usually have a clause that the lease continues as long as oil or gas is produced in paying quantities, which can be an issue if drilling was interrupted for some reason.

Are their other issues on the horizon?

One major concern is waste disposal. Fracking produces waste, called brine, and it can’t just be put it back into the water system. Because this liquid would pollute the water table, drilling and disposal has to be done right and companies must take necessary precautions. A company near Youngstown was recently indicted for dumping brine into the Mahoning River, but if companies don’t cut any corners, our water should be safe. Still, expect more litigation, legislation and regulations involving waste disposal in the future.

Michael Schottenstein is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5451 or mschottenstein@keglerbrown.com.

Join us for Eggs & ESOPs on Thursday, May 23, for a morning seminar discussing the ins and outs of ESOPs. Visit www.keglerbrown.com for more information.

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter

Published in Columbus

On Feb. 12, President Barack Obama signed the executive order, Improving Critical Infrastructure Cyber Security, which will set cybersecurity standards for certain private companies.

However, remarks by Lisa J. Sotto, chair of the U.S. Department of Homeland Security (DHS), Data Privacy and Integrity Advisory Committee, raised red flags. She said: “I would suggest that these standards will become the standards by which companies will be judged, so that if there is a cybersecurity event there may be negligence claims that follow if the standards are not complied with. Also, there could be shareholder suits, if a company suffers damage as the result of a cybersecurity event where they’re not complying with the cybersecurity framework.”

“If the government says, ‘We’re officially setting the bar and if you’re not above it you’re going to be found negligent,’ then companies will need an insurance policy that will defend them,” says Karl Henley, vice president at SeibertKeck Insurance Agency.

Smart Business spoke with Henley about possible implications of this executive order.

What is the executive order’s goal?

After failing to pass the Cyber Intelligence Sharing and Protection Act of 2012, the Obama administration wanted to protect what it felt was critical infrastructure — private companies. This executive order establishes the foundation for a ‘framework’ between the private sector and government, seeking to set standards for certain industries. The goal is to improve communication and awareness so the private sector can take steps to protect itself.

Currently, only some private industry sectors have set cybersecurity standards, such as the credit card processing industry. This is the government’s first attempt to set a wider standard for all private companies.

Do you think many are aware of this?

Large corporations should be aware, but this could have been missed by many middle-market and owner-managed businesses that may not have an in-house compliance group to stay on top of developing regulations.

What will be impacted?

The areas that will be impacted are defined as critical to our country and economic infrastructure, such as financial services, and electrical, water, water treatment and fuel suppliers. Before July 12, the secretary of the DHS will identify where a cyberattack could cause catastrophic problems, regionally or nationally, for public health or safety, economic security or national security.

Executive orders cannot make mandates, so this will be voluntary for most. However, courts may choose to use these as the standard for negligence. Government contractors will be incentivized to comply as a criterion for contract selection.

What are the cybersecurity implications?

One positive is the improved flow of information from government to the private sector about cyberthreats. CIOs and IT staff will have improved access to timely information about potential hazards.

However, Sotto’s remarks are troubling. Anytime someone in government uses the words ‘negligence,’ ‘judged’ and ‘claims,’ it’s generally not good for businesses. It will be critical that companies minimize potential weaknesses in cybersecurity infrastructure.

What does this mean for insureds?

A general liability policy excludes most cyber-related losses, so insureds will need to fill coverage gaps with a cyber liability policy.

It also will be important to keep informed as insurance policy language changes to incorporate the standards within your policy. Good dialogue around your business model, Internet presence, and interaction with customers with an informed adviser or the right consultants will be essential to helping companies adapt and protect themselves from negligence claims. Director and officers executive liability policies, often overlooked by non-publicly traded companies, generally cover the defense of shareholder suits.

What are some next steps?

The private sector, in conjunction with the National Institute for Standards and Technology, is being asked to help design the standards and develop a fluid framework, as cyberattackers frequently change tactics. The proposed framework will be published Oct. 10, with the final due Feb. 12, 2014.

Karl Henley is vice president of SeibertKeck Insurance Agency. Reach him at (330) 294-1358 or khenley@seibertkeck.com.

To keep up with the latest insurance news and how your company could be impacted, sign up to receive our newsletter.

Insights Business Insurance is brought to you by SeibertKeck

Published in Akron/Canton

On Feb. 12, President Barack Obama signed the executive order, Improving Critical Infrastructure Cybersecurity, which will set cybersecurity standards for certain private companies.

However, remarks by Lisa J. Sotto, chair of the U.S. Department of Homeland Security (DHS), Data Privacy and Integrity Advisory Committee, raised red flags. She said: “I would suggest that these standards will become the standards by which companies will be judged, so that if there is a cybersecurity event there may be negligence claims that follow if the standards are not complied with. Also, there could be shareholder suits, if a company suffers damage as the result of a cybersecurity event where they’re not complying with the cybersecurity framework.”

“If the government says, ‘We’re officially setting the bar and if you’re not above it you’re going to be found negligent,’ then companies will need an insurance policy that will defend them,” says Cliff Baseler, vice president at Best Hoovler Insurance Services Inc., a SeibertKeck company.

Smart Business spoke with Baseler about possible implications of this executive order.

What is the executive order’s goal?

After failing to pass the Cyber Intelligence Sharing and Protection Act of 2012, the Obama administration wanted to protect what it felt was critical infrastructure — private companies. This executive order establishes the foundation for a ‘framework’ between the private sector and government, seeking to set standards for certain industries. The goal is to improve communication and awareness so the private sector can take steps to protect itself.

Currently, only some private industry sectors have set cybersecurity standards, such as the credit card processing industry. This is the government’s first attempt to set a wider standard for all private companies.

Do you think many are aware of this?

Large corporations should be aware, but this could have been missed by many middle-market and owner-managed businesses that may not have an in-house compliance group to stay on top of developing regulations.

What will be impacted?

The areas that will be impacted are defined as critical to our country and economic infrastructure, such as financial services, and electrical, water, water treatment and fuel suppliers. Before July 12, the secretary of the DHS will identify where a cyberattack could cause catastrophic problems, regionally or nationally, for public health or safety, economic security or national security.

Executive orders cannot make mandates. However, courts may choose to use these as the standard for negligence. Government contractors will be incentivized to comply as a criterion for contract selection.

What are the cybersecurity implications?

One positive is the improved flow of information from government to the private sector about cyberthreats. CIOs and IT staff will have improved access to timely information about potential hazards.

However, Sotto’s remarks are troubling. Anytime someone in government uses the words ‘negligence,’ ‘judged’ and ‘claims,’ it’s generally not good for businesses. It will be critical that companies minimize potential weaknesses in cybersecurity infrastructure.

What does this mean for insureds?

A general liability policy excludes most cyber-related losses, so insureds will need to fill coverage gaps with a cyber liability policy.

It also will be important to keep informed as insurance policy language changes to incorporate the standards within your policy. Good dialogue around your business model, Internet presence, and interaction with customers with an informed adviser or the right consultants will be essential to helping companies adapt and protect themselves from negligence claims. Director and officers executive liability policies, often overlooked by non-publicly traded companies, generally cover the defense of shareholder suits.

What are some next steps?

The private sector, in conjunction with the National Institute for Standards and Technology, is being asked to help design the standards and develop a fluid framework, as cyberattackers frequently change tactics. The proposed framework will be published Oct. 10, with the final due Feb. 12, 2014.

Cliff Baseler is vice president of Best Hoovler Insurance Services Inc., a SeibertKeck company. Reach him at (614) 246-7475 or cbaseler@bhmins.com.

To keep up with the latest insurance news and how your company could be impacted, sign up to receive our newsletter.

Insights Business Insurance is brought to you by SeibertKeck

Published in Columbus

As Voice over Internet Protocol (VoIP) matures, a growing number of businesses are making the switch from traditional phone services to Internet-based services.

When looking for a VoIP provider it is important to seek a company on the forefront of technology that can serve as a trusted adviser.

“Businesses are looking for flexibility, reporting functions and a provider that has its best interests at heart — someone who can help them recognize current trends and provide true consultative services,” says Alex Desberg, sales and marketing director at Ohio.net.

Smart Business spoke with Desberg about the latest VoIP trends, the importance of adaptability and the re-emergence of user-friendly phone systems.

What are the trends for new or growth companies?

Organizations are creating subgroups within themselves for different lines of business.

The best way to illustrate this is to think of a holding company with smaller companies underneath — they want a division within their organization and they are using a phone system to create this impression.

For example, a publishing company might have a traditional publishing arm and an electronic publishing arm. By setting up different VoIP phone routes within their organization, they are able to have different pods even though they are all just part of a greater whole.

With this model, if a customer needs to reach the electronic publishing division he or she doesn’t have to go through the traditional publishing arm’s receptionist and get re-routed, he or she is directly reaching the people that he or she wants to talk to.

Why is VoIP a good fit for companies that are start-up, virtual, experiencing growth or changing their structure?

There has been an insurgence in the number of businesses turning to VoIP solutions that are either start-ups or changing their structure away from the brick and mortar model to a virtual model.

Some change so they can gain the advantage of having a new phone system with new capabilities. Others make the change so they can segment various parts of their business operations.

Either way, they are able to present a new look, sound and feel when they are communicating with their customers.

How important is a phone system’s adaptability for a company in transition?

A good VoIP system can almost serve as a marketing tool for a business. Companies want to know how their phone system can adapt to changes in their customers’ desires to communicate.

For example, VoIP offers custom reporting tools so management can track how customers react to different messages.

If needed, the system that drives communication can be adjusted in order to ensure optimal customer satisfaction.

What features are businesses looking for today?

There has been a huge shift back toward the importance of talking to a live person.

Bringing the customer closer to the person that they really want to talk to is paramount in the business world today.

Businesses want to make sure that their customers aren’t on hold for extended periods of time and that they don’t have to go through voice mail hell.

Advances in telecom technology should not be used to create barriers between a business and its customers — they should bring them closer together.

Alex Desberg is sales and marketing director for Ohio.net. Reach him at adesberg@ohio.net

For a list of educational seminars, follow this link.

Insights Telecommunications is brought to you by Ohio.net

Published in Cleveland

The retirement plan marketplace is a buyer’s market right now. Plan sponsors that haven’t shopped around in the past couple years might not be getting the most value for their money.

“The retirement marketplace is constantly changing with the addition of new products and services and the compression of costs,” says John Adzema, Vice President of Sales and Consulting at Tegrit Group. “Plan sponsors need to be aware and take advantage of these enhancements.”

Smart Business spoke with Adzema about the necessity of reviewing and benchmarking your retirement plan.

How often should plan sponsors have retirement plans reviewed?

Have your plan reviewed every three years or as certain events dictate, such as company acquisitions/divestitures, workforce changes, etc. You also could look at your company and its demographics to see if it makes sense to add another plan type such as cash balance, employee stock ownership or non-qualified.

What should you discuss with your financial advisor during a review?

As the plan quarterback, the financial advisor typically is tasked with overseeing plan investments, taking some type of a fiduciary role and managing the involved service providers. So, you should ask:

  • Are my plan costs reasonable?
  • Are my plan’s service providers, including the financial advisor, meeting service standards and helping me meet my fiduciary requirements?
  • Are the plan investments performing as expected?
  • Is my plan receiving the best consulting and latest technology?
  • Are my employees getting the investment help they need?

What could happen if plans aren’t reviewed?

Even though you might not change anything, you need to compare your plan to the marketplace. You may save on costs or be able to expand to another fund family. You could get more tools for participants, website capabilities and educational materials. If your company acquires another  firm and the plan assets increase from $1.5 million to $8 million, not only do you need to review from an operational standpoint to ensure compliance, but as a bigger plan you’ll have more purchasing power.

There can be legal consequences as well. In March, a court ruled against the plan fiduciaries in Tibble v. Edison International because they selected retail mutual funds with higher fees when lower cost institutional funds were available. To protect against Tibble-type claims, fiduciary committees should:

  • Follow written plan documents and procedures, including any investment policy statements and committee charters.
  • Document committee meetings and decisions with respect to plan investments.
  • Review 408(b)(2) fee disclosure information and benchmark fees to comparable plans based on the number of participants and plan assets.

What’s the value of benchmarking?

Retirement plan benchmarking is the act of comparing your own plan’s qualities to similar plans. People immediately think about the plan investments or costs, but benchmarking also extends to a plan’s operating provisions and comparing your plan to plans of the same demographics, industry and geography. Benchmarking this helps ensure you are getting the best value for the price paid.

It’s wise to benchmark certain plan items like investment rates of return on an annual basis, but the entire plan’s workings and its service providers should be reviewed at least every three years.

Any final words on benchmarking?

Your financial advisor or another trusted party should carry out the benchmarking process for a consistent and independent approach. Generally you will get better pricing if you’re a bigger plan with larger average account balances and your plan is easier to run.

While benchmarking is a good indicator of what the masses are experiencing, your plan may have unique provisions that work well for you and your employees. If you pay a little more for someone to administer a plan that’s outside of the norm, then that’s OK.

John Adzema, QPA, QKA, TGPC, AIF, is vice president of sales and consulting at Tegrit Group. Reach him at (330) 983-0525 or john.adzema@tegritgroup.com.

Visit Tegrit’s Advisor Resource Center for additional retirement planning tips.

Insights Retirement Planning Services is brought to you by Tegrit Group

Published in Akron/Canton

Many businesses neglect cyber and privacy issues because they simply don’t believe they are at risk or they do not fully understand the exposure.

“The majority of them think they’re safe because they have a secured firewall in place and virus protection. This is the biggest misconception out there. In reality, data thieves are simply looking for the path of least resistance. Owners of small to midsize businesses who become complacent or think they have adequate protection against cyber and privacy attacks can actually be a bigger target than large companies,” says Derek M. Hoch, president of Leverity Insurance Group.

Attacks can be harder for small and midsize businesses to recover from. Many businesses close permanently within six months after being victimized by cybercriminals.

“That’s why it is vital to have adequate controls and the proper insurance in place,” says Hoch.

Smart Business spoke with Hoch about cyberattacks and how business owners can protect themselves.

What are the cyber and privacy issues for business owners?

Cyber and privacy liability is best described as any third party or first party hacking into your database for personally identifiable information (PII). This includes access to names, dates of birth, Social Security numbers, credit card information, emails and passwords. Ultimately, this can potentially lead to identity theft and/or cyberextortion.

In addition, businesses that operate with paper files or ‘non-electronic’ information have the same potential to be compromised by both third parties and employees.

However, the most overlooked exposure to business owners is the actual cost of a data breach when your records have been compromised. On average, a data breach can cost a company more than $200 per record when considering loss of business, ongoing forensic expenses, notification costs and credit monitoring.

What types of businesses need cyber and privacy liability coverage?

Every business owner has exposure on some level if they have third-party and/or employee information stored on a computer or in paper files.

Cyber and privacy liability is relatively new, so most business owners don’t even know that the coverage exists or is available in today’s insurance market. It is a significant exposure and should be included in your overall risk management program.

How can businesses protect themselves?

It starts with the culture of the business owner and includes training employees to use proper cyber and privacy security policies and procedures. This list of procedures should include the following at a minimum:

• Use passwords on all computers, laptops, tablets and smartphones.

• Regularly change passwords every 30 to 40 days.

• Limit employee access to data.

• Restrict authority to install software unless approved by management.

• Provide ongoing training for employees who gather, use, transmit and dispose of confidential data.

• Install and update anti-virus and anti-spyware programs on every computer. Smartphones and tablets are often overlooked, yet most salespeople out in the field are using them.

• Back up your data off-site in a secure location, not in the same facility of your day-to-day operations. If the system is hacked or temporarily shut down, you can still retrieve the information and continue to operate your business.

Isn’t cyber and privacy liability part of standard business insurance?

No, most insurance policies exclude this coverage or may offer a small amount of ancillary coverage to recover or reconstruct any lost data. Cyber and privacy exposures are not covered under any property, general liability, crime, directors and officers liability, or umbrella policies. Business owners need to purchase a true cyber and privacy liability policy including security and privacy liability, notification and forensic expenses, business interruption, and cyberextortion to complete the proper risk management of their business.

Derek M. Hoch is president of Leverity Insurance Group. Reach him at (216) 861-2727 or derek@leverity.com.

Social Media: Keep up on issues that could impact your business at www.linkedin.com/company/leverity-insurance-group-inc.

Insights Business Insurance is brought to you by Leverity Insurance Group

 

 

 

Published in Cleveland

When manufacturing companies are looking for a new or additional location, they’re often concerned with the availability of quality labor, utility costs, freeway and rail accessibility, local and state taxes, and building availability and costs.

While these are all important considerations, there are some things to look at that might not be as apparent, which is why working with an experienced commercial real estate broker can help.

“Brokers will talk with members of the business community from similar industries to give their client a more three-dimensional picture of what it’s like doing business in the area,” says George J. Pofok, CCIM, SIOR, senior vice president of CRESCO Real Estate. “They’ll also connect with their area colleagues who live and work in those markets to give company executives both the 30,000-foot and on-the-ground views.”

Smart Business spoke with Pofok about conducting a nationwide site search and how brokers can help companies dig deeper.

What might be the biggest hurdle in conducting a national site search?

It can be difficult to get quality and timely data on building availability from existing databases. When casting a search that wide, it’s important to talk with state economic development groups in addition to searching the national databases such as CoStar and LoopNet. Commercial real estate brokers also can help companies in their search by tapping into the Society of Industrial and Office Realtors (SIOR) professional network to solicit potential sites that suit a client’s needs.

However, relying on listings is precarious. Properties as advertised are not always what they seem. Once properties of interest have been identified, phone calls should be made to all the listing agents to start verifying accuracy and solicit property brochures, photographs, floor plans and site plans.

How much weight should a company give to economic incentives?

Economic incentives can be extremely beneficial, but they often come with strings attached. Sometimes to get the benefit of an incentive a company needs to meet certain hiring requirements or pay a certain wage. But if the company fails to do so, which can be the result of factors outside of the company’s control, there can be clawback provisions.

Incentives are helpful but shouldn’t be the key driver for a decision to move. They should be weighed against other factors such as the state or county’s environmental regulations, corporate income tax and municipal tax rates. But all things being equal, incentives can tip the scales.

How can commercial real estate brokers help companies choose a site?

Many brokers come from full-service firms with coverage in most major markets, both nationally and globally. They can help tenants and/or buyers with site acquisition, incentive and location analysis, and often partner with their consulting arm to perform a network rationalization study, which allows companies to compare regions to determine the impact each would have on the different aspects of their businesses and end users.

Further, brokers can work closely with key individuals in federal, state and local government to vet initial search findings and see how each agency might be able to work with the incoming company. Being on the ground also allows a broker to determine if the local quality of life suits the business. They’ll look at housing values, the retail areas and other local amenities to give CEOs a good sense of the community they could soon become a part of.

What are some important qualities of the agent who helps conduct the search?

Look for a broker who has experience. If an agent hasn’t completed similar deals he or she won’t know the right questions to ask. Also, a broad network is key, in regards to both the firm he or she represents as well as his or her professional network. An affiliation with groups such as SIOR and the Certified Commercial Investment Member Institute (CCIM) provides a network of top-producing real estate professionals throughout the country. Ultimately, you need a broker who is diligent, works hard to earn your business, and is timely and responsive.

George J. Pofok, CCIM, SIOR, is senior vice president at CRESCO Real Estate. Reach him at (216) 525-1469 or gpofok@crescorealestate.com.

Social media: Stay in touch with CRESCO Real Estate on twitter or Facebook.

Insights Real Estate is brought to you by CRESCO

 

 

Published in Cleveland

It may not seem vital to know the value of your business until it’s time to sell. However, by then, it’s too late. There’s nothing you can do if it’s not worth what you expected.

“Typically, a closely held business is the largest asset owners have, perhaps 60 to 80 percent of their net worth.

Unfortunately, many just guess at the value and guess wrong. Then their retirement is significantly different than what they expected,” says Tim McDaniel, CPA/ABV, ASA, CBA, a principal with Rea & Associates.

Smart Business spoke with McDaniel about determining the value of a business and steps owners can take to help it grow.

How is the value of a business determined?

There are a few different approaches an evaluator will use to value a business, but in most cases, the most effective way is an income approach. In this approach, the valuator uses the mindset of an investor to project the company’s future cash flow and determine how much risk is associated with it.

All valuations are really a forecast. Historical trends are reviewed to predict future cash flows, but the valuator will also interview management to understand what the company’s future looks like.

Should owners always know what the business is worth?

People will spend a lot of time with an investment manager trying to grow a stock portfolio that may be only 10 to 20 percent of their net worth and ignore their largest asset, their business. In order to treat the business as an investment, the first step is to know the value.

Next, set goals — how much should the value grow annually and where do you want it to be when you exit — and implement a plan to reach them. There are three major factors that impact the value of a business:

  • Increase expected future cash flow.
  • Decrease risks associated with your business.
  • Increase the future growth rate.

Develop a plan addressing how to positively impact these three areas. Too often business owners don’t develop a plan — they work in their business, not on their business. Between keeping customers happy, ensuring employees are doing their jobs and maintaining quality control, it’s easy to get caught up in the day to day.

It’s rare when an owner treats the business as an investment and has an annual or biannual valuation. One owner recently thought his business was worth five times its actual value because his CPA told him the value was one times gross revenue, which is completely erroneous. That may be how a CPA firm is valued, but there’s a lot more involved in valuations than a simple multiplier, and it takes years to develop the necessary skills. The unfortunate part is that some people have been living with the assumption that they will retire as millionaires, but come to find they might not be able to retire.

What are the best ways to exit a business?

Exit strategy depends on the individual. If you want the highest dollar amount, sell to a synergistic buyer — a bigger company in the same industry. The downside is that some of your long-term employees might lose their jobs. Another way is to sell to a financial buyer or employee stock ownership plan where the business may continue to run in a similar fashion. Many owners prefer to keep businesses in the family and give stock to children. If that’s the case, make sure your retirement is funded and you gift stock when the value is down. Another strategy that’s gaining popularity is retaining the business and hiring a professional management team to run it so you can significantly reduce your role.

It’s important to develop exit plans early. If you want to retain the business, it takes time to develop a good management team. If you want to sell, you want to sell when cash flows are highest. If you want to gift it to your children, they have to be ready. No matter which way you proceed, it’s a long process.

Tim McDaniel, CPA/ABV, ASA, CBA, is a Principal at Rea & Associates. Reach him at (614) 889-8725 or tim.mcdaniel@reacpa.com.

More on this subject can be found in Tim’s new book, “Know and Grow the Value of Your Business: An Owner’s Guide to Retiring Rich.” Learn more here.

Insights Accounting is brought to you by Rea & Associates

Published in Columbus

You don’t have to be pirating software to get in trouble during a compliance audit.

“Where companies get ensnared is in the deployment phase. It’s not that they are trying to get away without paying, they get caught up in the terms of conditions found in the fine print of licensing agreements,” says Heather Barnes, an intellectual property attorney with Brouse McDowell.

Smart Business spoke with Barnes about what businesses can do to make the software audit process go smoothly.

What prompts an audit?

Software companies include the right to request audits as part of the terms and conditions of the software license agreement. The fine print contains the right for the software company to audit your computers and systems. Sometimes audits are performed because that organization received a tip from a discharged employee. There also are companies that conduct audits as a regular course of business, either itself or through a third party, such as The Software Alliance. Because of the economy, software revenues have decreased, so software owners are replacing lost revenue by ramping up enforcement with compliance audits.

Once you’re notified about an audit, what should you do?

If you are an organization with in-house counsel, contact them immediately. Smaller companies should retain outside counsel, because attorneys can make a big difference in the final outcome.

The first thing an attorney will do is assist with the parameters for the audit — how and when it will occur, as well as the scope. If there is a noncompliance issue, legal counsel can draft a settlement agreement; they may even negotiate the settlement to a more reasonable number. Even if there are no compliance issues, you still want a document drafted that acknowledges how the audit was conducted and what was found, as well as a release of any claims the software company could have brought.

What problems can occur if you proceed without legal counsel?

Much is dependent on the particular company, but the audited company wants to prevent the software owner from having free reign of its systems, and that is a role legal counsel can help control. For example, legal counsel can assist in defining the scope of the audit by determining which computers are included in the audit. Do you include every computer? Just computers in use? What about the computers that are older and sitting in a warehouse? A software company could attempt to include any computer you own, even those that are obsolete and unused.

Another potential issue is how the audit concludes. You might come to an agreement at the conclusion of the audit and think a settlement is in place. Without legal counsel involved, a company could find itself with no settlement agreement or other document detailing what occurred and the responsibilities of each side going forward.

What are typical noncompliance issues and how much do they cost to fix?

Terms and conditions of the software license agreement vary by company. Many companies allow you to use older versions of software when you obtain a license for their latest product, but some do not. However, many people think that it’s an industry standard that you can deploy older versions.

Another problem is maintenance of business records proving owned licenses for software. You need to have documentation and keep those records current and accessible. That can be complicated when the software was purchased from multiple third-party vendors and for software that is old. Companies should conduct internal audits to ensure they are in compliance with what their records reflect, which could help mitigate exposure when an audit occurs.

Normally, if you are out of compliance, you’ll be charged the licensing fee you should have paid. If it is $200, $300 or $500 per license, multiply that by the number of computers out of compliance and it can get expensive quickly.

Further, if you’re found to be noncompliant, develop internal procedures to ensure compliance in the future. If you are audited once and are found to have compliance issues, it is just a matter of time before the software owner is back to check again.

Heather Barnes is an intellectual property attorney at Brouse McDowell. Reach her at (330) 535-5711 or hmb@brouse.com. Learn more about Heather Barnes.

Insights Legal Affairs is brought to you by Brouse McDowell

 

Published in Akron/Canton

The IRS has a complicated set of guidelines for determining whether a worker should be treated as an employee or independent contractor for payroll tax purposes. It may be tempting for business owners to just classify people as independent contractors and save payroll taxes, but it’s not worth the risk, says Jim Forbes, CPA, a principal with Skoda Minotti.

“The IRS is conducting more payroll tax audits of small businesses, but the risk is always there with any audit. No matter what triggers the audit, the IRS will ask for all of your W-2s and 1099s and will be suspicious if a contractor is being paid like an employee,” Forbes said.

Smart Business spoke with Forbes about the process of determining whether a person is an employer or an independent contractor and why it poses such problems for businesses.

How do you determine if a worker is an employee or independent contractor?

The IRS uses 13 factors; some employers will look at a couple and think a person is clearly an employee or a contractor, but you have to look at all 13. Even then, there’s no set number you have to pass, it’s all a matter of facts and circumstances. That’s why it’s tricky for companies to figure out how to classify workers.

The 13 factors are:

• Type of instructions given. An employee is generally subject to follow instructions about when, where and how to work.

• Degree of instruction. The key consideration is whether the business retains rights to control details of a worker’s performance.

• Evaluation system. If the system measures details of how work is performed, that points to the person being an employee.

• Training. On the job training indicates a particular way of performing the job is desired and is strong evidence the worker is an employee.

• Significant investment. Independent contractors often have invested in the equipment used for work. However, that is not required for independent contractor status.

• Unreimbursed expenses. Independent contractors are more likely to have unreimbursed expenses.

• Opportunity for profit or loss. Having the potential of incurring a loss indicates a worker is an independent contractor.

• Services available to market. An independent contractor is generally free to seek out business opportunities.

• Method of payment. An employee is generally guaranteed a wage for hourly, weekly or other period of time. Independent contractors are usually paid a flat fee for jobs.

• Written contracts. The IRS is not required to follow a contract stating that a worker is an independent contractor; how the parties work together determines how the worker is classified.

• Employee benefits. Insurance, pension plans and other benefits are generally not given to independent contractors. However, absence of benefits does not necessarily means the worker is an independent contractor.

• Permanency of the relationship. If a worker is hired for an indefinite time, that is generally considered evidence of an employee/employer relationship.

• Services provided as a key activity of the business. Companies are more likely to have the right to control activities when the services are a key aspect of the business.

Why would companies attempt to classify employees as independent contractors?

With smaller companies, there is a greater impact from the additional payroll taxes. If the person is an employee, you have to pay 7.65 percent payroll taxes for Social Security and Medicare. There are other taxes, including unemployment, but that is the primary motivation.

There could be more incentive in 2014 with the employer mandate under health care reform. A business with 49 employees that needs to add two more people might want to bring them on as independent contractors to avoid the rules that kick in when you reach 50 full-time equivalents.

Still, most companies will try to do the right thing; it’s just difficult sometimes to figure out what that is. You can meet 10 of the 13 tests, but there’s no guarantee that means the person is an independent contractor. Ultimately, that answer rests with the IRS.

Jim Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or jforbes@skodaminotti.com.

Follow up: If you’d like to schedule a confidential consultation regarding employee classification concerns, call Jim at (440) 449-6800.

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Published in Cleveland