The only thing that is certain for businesses in Ohio right now is that there is a lot of uncertainty in the tax arena, both at the state and local levels.
In light of the state’s budget proposal, there will likely be a reduction to the Ohio Local Government Fund of more than $100 million. That fund supplements operations for local governments across the state, and it is unknown whether that will be absorbed down to the local level, or whether local governments will seek tax increases to offset that loss of funding, says Michael Caputo, chair of the Government Affairs Practice at McDonald Hopkins LLC.
“Anything is possible,” says Caputo. “The one thing that is becoming clear is that there is this trickle-down belief where the federal government is spending less, state governments are spending less, and the question is whether or not that truly means a reduction in the tax burden, or if that just means a shift from paying taxes at the federal level or the state level and instead paying them at the local level.”
Smart Business spoke with Caputo about what businesses can do to prepare for any eventuality, and how a new state office is providing renewed hope for Ohio’s business climate.
How can businesses plan for the future with so much tax uncertainty on the horizon?
It is really difficult. For example, the businesses building casinos in Ohio are facing challenges securing financing because no one really knows what the requirements and obligations are going to be.
From a business planning perspective, the one thing that we do know is that state government does not want to increase taxes and it is unlikely, given the background and philosophy of state leadership, that tax increases will be a viable option. At the state level, there is widespread agreement among the governor, the Senate president and the Speaker of the House that Ohio’s business climate needs to improve, and one way to improve that climate is to reduce the state tax liability, state regulatory obligations and really move at the speed of business.
What is uncertain is what will happen locally. It is unclear if local taxes will increase as a result of cuts to the local government fund. Local governments will be looking to balance their budgets with far fewer resources than they have enjoyed historically.
As a result, business leaders need to increase their awareness of the health of their local entities. For example, since Mayor Jackson took office, the city of Cleveland has been able to balance the budget without seeking additional revenue, but it is unclear whether that will continue to be the case.
From a financial perspective, it will be important for business leaders to pay additional attention to the overall health of their local communities — not just their cities, but their counties and other taxing jurisdictions, as well.
What is the current business climate in Ohio?
Ohio is not viewed as a state that is friendly to business. Some may say that Ohio struggles to attract business because we are not a warm weather state. Indiana, Illinois and Minnesota seem to be doing just fine with attracting jobs, and those states do not have tropical climates.
It is the tax environment, the regulatory environment and, perhaps most significant, the local tax burdens that are placed on businesses that make Ohio less competitive.
What is the state doing to create a more business-friendly climate?
The first executive order that Gov. John Kasich signed established the Common Sense Initiative Office, chaired by the Lieutenant Governor.
If you are a business owner in the manufacturing business, you will likely interface with the Bureau of Workers’ Compensation, the Ohio Environmental Protection Agency, the Department of Taxation and possibly the Department of Natural Resources. And for years, there has been a concern in the business community that these regulatory bodies do not work to enhance the business climate but instead actually stifle economic activity.
This new office is looking at the bureaucratic red tape that exists within Ohio’s regulatory agencies, figuring out what can be eliminated and what can be streamlined, and looking at what can be done without hurting the state.
For example, there is a local company that makes specialty sauces, some of which include alcohol as an ingredient. To buy alcohol, the company had to go to the corner liquor store and pay retail prices. That made it hard to compete with companies across the country because it was paying twice as much for ingredients as its competitors.
In one of its first initiatives, the Common Sense office, working with the Department of Commerce and the Division of Liquor Control, got the law changed in April, saving this one company potentially hundreds of thousands of dollars.
It is the simple solutions like that one that this new office is looking at to begin to change the state’s business climate. It sounds easy, but historically, leaders have not paid attention to these issues that are fairly easy to solve.
What advice would you give business owners struggling in the current business climate?
Hang in there. Give this administration a chance to deliver on what it says it is going to do and give this environment an opportunity to right itself.
At the macro level, look at what happened with Bob Evans and American Greetings. Both were looking very seriously at leaving Ohio and in the last three months, both have met with the state’s new leadership, both have responded to what the new leadership is prepared to offer, and they are now staying in Ohio.
Not all companies will have that muscle, but there is a reason for cautious optimism for businesses in Ohio.
Michael Caputo is the chair of the Government Affairs Practice at McDonald Hopkins LLC. Reach him at (216) 348-5770 or firstname.lastname@example.org.
Employers may think that because they do not have a formal social media program that they do not need to worry about their online presence.
Whether you choose to actively participate or not, you need to be aware of what is being said about your company and what your employees are doing online, says Lori Clary, of counsel at McDonald Hopkins LLC.
“Employers need to be cognizant of social media because, whether they decide to use it affirmatively or not, it’s likely that many of their employees — not to mention competitors — are utilizing it. A company’s reputation is potentially being impacted by social media regardless of whether the company is doing anything with it or not.”
Smart Business spoke with Clary about the benefits and risks of social media and how to create an effective social media policy.
What would you say to a company that says social media does not impact it?
It may not have impacted you before because its exponential growth has occurred only in the past few years; so it is not surprising you have not yet had to address issues presented by social media. But even though social media may not have affected you yet, it is eventually going to impact you in some way, shape or form. You can either deal with it in a proactive manner by looking at the situation and its potential legal implications now, or be reactive later once problems arise.
What issues can arise for employers regarding social media?
There are a host of employment law matters and traditional labor law matters. For example, if you are using social media to recruit and screen potential employees, you may be privy to information you could not necessarily ask for on an application, which can get you into trouble under anti-discrimination laws. Another area with respect to employees’ rights falls under the National Labor Relations Act. Employees have certain rights to engage in what is called protected concerted activity and, as an employer, if you try to quash that type of discussion, you can find yourself on the wrong side of the National Labor Relations Board.
What are some issues outside of the employment arena?
A lot of companies are struggling with managing their brand in the social media world. If your company is putting information out there, you have a great degree of control over what is said. In the social media realm, however, you have customers providing feedback and employees or others associated with your company who may have their hearts in the right place but who are doing things that are not consistent with the brand. As a result, marketing and advertising problems can arise.
Also, if you become aware through social media that a product you offer is being used in ways it was never intended to be used, you may need to address that to reduce the risk of potential liability for injury claims. Social media can also increase the risk of disclosure for trade secrets or other confidential or proprietary information. Given the reach of social media, such a disclosure can pose a significant threat to your competitive advantage.
How can employers manage their concerns?
To a certain extent, you have to accept that part of the power of social media is that it is interactive and there is going to be a loss of control — which employers inherently dislike. However, you can go a long way toward managing those issues by establishing a social media policy that tells those you have control over, such as your employees and vendors, what you expect from them and how you want to manage social media to maximize the benefits and minimize the risks.
Should employers be monitoring what their employees are saying about them online?
If a company is able to monitor what is being said about it, it is worth doing so. It is impossible to monitor everything, though, and that is where a policy can help you. It gets everyone on the same page. The policy should incorporate the existing rules of conduct, emphasize personal responsibility and good judgment, explain the company’s expectations, spell out the consequences for violating the policy and designate an appropriate resource to answer questions.
Make it clear to employees what you expect of them, so if an issue does arise, you can take the necessary steps to address it. Keep in mind, however, that a policy is only as good as the training and communication that follow it. And make sure it is consistently implemented. Having a policy and not following it, or not following it consistently, often puts you at greater risk for legal liability. If enforcement is inconsistent, it can have an impact on morale as people see what the company says does not really matter as much as what it does.
Can an employer design a policy on its own?
Because you cannot just go online and adopt a policy that someone else has developed for their own unique circumstances, the process should be a partnership with your legal adviser. The adviser needs to know about your culture and the ways in which you use social media, because the policy of a retail venture is going to be very different from that of a law firm. An adviser can help you put together a policy that meets the needs of your company and that is in step with where the company is as a whole.
To be effective, it is not something that you create and put away. It should be reviewed at least annually to update with changes in the law or technology. If it is a new policy, you may want to look at it more frequently to make sure it addresses the issues your company is actually facing instead of ones you thought it was going to face.
Employers cannot stick their heads in the sand. It is time to assess where you are and decide what approach you want to take so that you are not blind sided as social media continues to develop.
Lori Clary is of counsel at McDonald Hopkins LLC. Reach her at (614) 458-0031.
After a few slow years, the mergers and acquisitions arena is beginning to pick up steam, and that means more opportunities for both buyers and sellers, according to David Watson and Michael J. Meaney, co-chairs of the Mergers and Acquisitions Practice at McDonald Hopkins LLC.
“Activity in the M&A markets indicates that 2010 was a much stronger year than 2008 and 2009, which were very negatively impacted by the recession,” says Meaney. “Activity in 2010, both in terms of number of deals and volume, was way up, really accelerating toward the end of the year. And all indications show that it will continue in 2011.”
Watson adds that although some sales were forced by financial distress, “some industries, such as health care, were active despite the broader economy.”
Smart Business spoke with Watson and Meaney about trends in the M&A market and how both buyers and sellers can take advantage of current conditions.
What is the current state of the M&A market?
There will probably be fewer transactions this year caused by distress, and more segments where good companies will be available at relatively full prices. Potential buyers fall into two broad categories: strategic buyers and financial buyers.
Strategic buyers, or corporations seeking to acquire a business in their own or a complementary business, are becoming more confident, based on the strength of the economy, that they can make an acquisition that will have a favorable result. Many of those buyers have strong balance sheets and the larger ones are seeing ready access to capital to the degree that they need to raise it externally.
Financial buyers, such as private equity funds, are also becoming more active because many are flush with cash and are under pressure to invest. Now that the economy is turning around, they are more confident in their ability to make profitable acquisitions. Many private equity groups will not purchase a troubled company at any price, preferring to purchase healthy and sound businesses. In a market where people were holding good businesses off the market, that severely restricted the availability of businesses that met the criteria of many professional buyers.
Are prices beginning to trend higher?
Yes, but there are still good deals. As prices begin to go back up, businesses that are ready to be sold will be offered to market either by owners who want to retire or by private equity groups that need to exit an investment in their portfolio.
It is important to note that, although prices expressed as multiples of cash flow are rising, business cash flow is often still lower than it was, so purchase prices in the sense of absolute dollars probably have not fully recovered.
How are transactions today different than they were three to five years ago?
Although banks are still finding their way back into the market, both buyers and sellers should expect banks to do intensive due diligence. Buyers and sellers should spend a good deal of time understanding what the bank needs and make sure key criteria of the deal are brought to lenders early in the process in order to avoid surprises later. We have seen several transactions falter late in the process when banks have discovered obstacles not previously brought to light.
Another increasingly critical area is state tax liability. It used to be that most of the attention was on potential federal tax liability, but with states under extreme budget pressure, they have become much more active in going after companies to make sure they are paying every dime that is supposed to be paid. Our state tax experts have become extremely busy advising our clients in this new era of aggressive state tax enforcement.
In this new environment, buyers are paying more attention to whether the target company may have hidden state tax liability issues. It is important to ferret those out before buying and to make sure the transaction documents give you sufficient recourse if liabilities do surface later.
What other issues need to be considered?
Issues around employment are getting a lot of attention, including the classification of employees and whether they are exempt from wage and hour laws. Another issue is workers who, in the eyes of the employer, are independent contractors, but in the eyes of the government are employees for whom payroll taxes should be withheld. With the government looking for additional revenues, these areas are seeing a lot of enforcement, calling for increased vigilance before purchasing a business.
Finally, there has been a great deal of seller financing, both in the form of contingent payment arrangements, such as earn-outs and in the form of the fixed deferred payments such as seller notes. But contingent post-closing payments are one of the most likely places for a dispute to arise, both as to how the payment should be calculated and as to whether the buyer has operated the business in a way to maximize the amount of the payment.
Can business owners handle deals on their own?
Having good financial and legal advice from experienced professionals can have a major impact on outcomes. We have seen swings in the price of a business of as much as 100 percent above, or 50 percent below, the originally proposed price, either by structuring a process that includes higher offers or by discovery of issues in the due diligence that change the willingness of the buyer to pay the indicated asking price. There really is an opportunity to affect your outcome by thinking up front about what your issues are and how you might solve them.
Find an adviser who wants to do the transaction that you want to do and asks questions about your objectives, rather than someone who, right out of the box, is telling you exactly how the transaction should be structured.
David Watson is a co-chair of the Mergers and Acquisitions Practice at McDonald Hopkins LLC. Reach him at (216) 348-5814 or email@example.com.
Michael J. Meaney is a co-chair of the Mergers and Acquisitions Practice at McDonald Hopkins LLC. Reach him at (216) 348-5411 or firstname.lastname@example.org.
On December 17, 2010, President Barack Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Significant components of the new law are provisions related to the federal estate or “death” tax.
There are parts of the law that were surprising to most estate planning attorneys and it was hoped that the law would provide clarification. However, there was some clarity, followed by more confusion, says Jeff Consolo, who chairs the Estate Planning and Probate Department of McDonald Hopkins LLC.
“The act does provide some clarification for the next two years, but come January 1, 2013, we could be right back to where we were prior to the signing of the act in December,” says Consolo.
Smart Business spoke with Consolo about the act and its impact on business.
What did the act do with regard to the federal estate tax law?
It did a great deal, but the highlights are the increase and reunification of the estate, gift and generation-skipping rules, including both the exemptions allowable and the tax rates imposed; the granting of portability of exemptions between spouses; and the fact that Congress did not eliminate the use of valuation discounts for estate planning purposes. The reunification and the increase of exemptions to a $5 million level surprised most estate planning attorneys.
What does that mean in layman’s terms?
At the end of 2009, the exemption for gifting purposes during life was $1 million, and the exemption for estate purposes was $3.5 million per person. In 2010, the gift tax exemption was the same but there was no federal estate tax. In 2011 and 2012, the exemption is now $5 million per person, whether used during life or at death. That is a huge difference. Simplistically, an individual can now pass up to $5 million to anyone, estate and gift tax-free.
The portability issue is also important. Previously, spouses each had a $3.5 million exemption so, in theory, they could transfer up to $7 million to their beneficiaries tax-free. From a practical standpoint, that was not always the case, because to do that, each spouse needed to have $3.5 million in their own name. Sometimes, this balancing of ownership was not possible because assets had to be held by one or the other. Now, you do not need to worry about that. If the first spouse dies and only uses $3.5 million of the $5 million exemption, the surviving spouse has $6.5 million of exemption to use.
Finally, the ability to couple valuation discounts and a larger gift exemption is an incredible benefit for purposes of transferring wealth to younger generations.
How does the coupling of valuation discounts and a larger gift exemption assist in transferring wealth?
Previously, it was only possible to transfer up to $1 million to individuals other than your spouse without paying a gift tax. Now, it is possible to transfer up to $5 million. When you couple this larger exemption with other estate planning techniques, it is possible to transfer even more than $5 million without paying a gift tax. The ability to transfer these amounts, whether $1 million or $5 million, is not relevant for many individuals, but for those individuals or families with significant wealth, these changes are almost too good to be true.
Does someone who doesn’t have a large amount of wealth need to worry about estate planning?
Yes. If you and your spouse never accumulate more than $5 million, you may not have a federal estate tax issue, but you may still have a state estate tax to be concerned about. In addition, many individuals want to avoid, or at least reduce, the necessity of having their estate pass through probate at their death.
Parents will still be concerned about how and when their children are to be given assets at the time of their deaths. If parents have a special needs child, they must plan for that child and, in certain instances, planning can be used for creditor protection. There are just as many non-tax reasons to plan now as there were before.
What are the portability issues you mentioned earlier?
The biggest issue is in the context of a second marriage. For example, a husband and wife each have been previously married, each has children from those marriages and both have $500,000. The husband dies first, does no planning and passes everything to his spouse, knowing there will not be tax and assuming she will provide for his children.
She then has $1 million. There is no tax at her death and she could pass all $1 million only to her children, which is probably not what the husband expected. So even though taxes can be avoided with minimal planning, individuals must consider their personal situations and plan accordingly.
What are some key items to be considered in estate planning?
First, if you have a will and trust, contact your attorney to see if it needs to be reviewed in light of the new law. Second, if you do not have an estate plan, do not assume that just because your estate will not exceed $5 million that you do not need to plan. Third, if you have significant wealth, review the possibility of making transfers to younger beneficiaries, and do so sooner rather than later because the law only extends for two years. So, in late 2012, the process begins all over and there is no guarantee that the rules will remain the same.
Jeff Consolo is the chair of the Estate Planning and Probate Department of McDonald Hopkins LLC. Reach him at (216) 348-5805 or email@example.com.