A professional staffing company can find candidates who are a better fit for your company, and speed up your hiring process.

“The key is to select a staffing company that is a specialist in the area you’re recruiting. They need to understand your company and its culture,” says Heidi Hoyt, managing director at Skoda Minotti Professional Staffing.

Smart Business spoke with Hoyt about the benefits of using a professional staffing firm and how to find the right one.

Why use a professional staffing company for hiring?

A company’s HR person is likely to be a generalist. The greatest advantage in using professional staffing firms is the invaluable industry expertise they possess.  A staffing firm will provide access to candidates that a company wouldn’t reach on its own. They are well-connected in their specific field, whether that’s financial or another industry, and they are always talking to passive candidates as well as those actively seeking employment. You want access to passive candidates, not just the people who are on the job boards.

Professional staffing firms also have a broad knowledge of what other companies in an industry are doing, which adds value. They’ll have technical experts in accounting and finance, for example, and will be able to identify candidates and look for intangibles that would go unnoticed without their accounting background.

Another advantage: Professional staffing firms weed out lesser-qualified candidates, which saves a company time and money. Instead of having to review 100 resumes, a client receives a select few that have been pre-screened and are right for the position. That service drastically shortens the hiring process, sometimes by weeks. If the staffing firm is doing its job correctly, it’s only sending highly qualified candidates for review, so that all the client has to do is pick the person who’s the best fit.

How does a staffing firm evaluate candidates?

Candidates might have similar education and experience, but a staffing professional will look for other items on applicants’ resumes that differentiate. For example, they might look at past employers — they know what types of candidates those companies hire. They know that XYZ company is a demanding place to work; that it hires strong people who excel even within a tough environment. The staffing professional will also dig into work histories, and it will carry more weight if someone was promoted regularly at XYZ company, because it’s known to holds its employees to high standards and exceptional work performance.

What criteria should companies consider when selecting a professional staffing firm?

Pick a firm that specializes in your area of need; that goes back to having professionals on hand who understand the nuances of the industry within which you’re conducting the search. If they’re specialized, they will be even more connected to the specific pool of candidates that you are targeting.

Also look at reputation and how well recognized the company is within the field from which you’re seeking a candidate, and within the staffing industry overall. That will help you select a firm that will consider your company’s culture and evaluate candidates from a behavioral standpoint in additional to their skills.

Most companies hire people with whom they have a connection, and who will be a good fit within a company’s culture, even if they lack some of the specific hard skills listed in the job description. It’s important to find a staffing firm that looks beyond education and job description specifics — one that sees the position from an all-encompassing perspective. You might have an accounting department comprised of ‘Type-A’ personalities and an HR department that’s a bit softer. It’s important that the firm you select understands the culture of the department and the company to ensure the right fit overall.

Heidi Hoyt is managing director at Skoda Minotti Professional Staffing. Reach her at (440) 605-7227 or hhoyt@skodaminotti.com.

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Published in Cleveland
Thursday, 28 February 2013 20:57

Understanding the American Taxpayer Relief Act

When President Obama signed the American Taxpayer Relief Act (ATRA) into law in January, the much-feared “fiscal cliff” was avoided, for the most part.

Smart Business spoke with Jim A. Forbes, CPA, a principal with Skoda Minotti’s Tax Planning & Preparation Group, about five key elements of the act affecting both individual taxpayers and businesses.

What item most benefits individuals?

Signage of the act provides permanent relief from the Alternative Minimum Tax (AMT). If the AMT ‘patch’ had not been put in place, as many as 30 million taxpayers could have been affected. Fortunately, a permanent AMT patch has been put in place.

Retroactively, effective for tax years beginning after 2011, the AMT exemption amounts (and indexes for inflation) have been permanently increased to $50,600 for unmarried taxpayers, $78,750 for joint filers and $39,375 for married persons filing separately. This means that, for a single person, the first $50,600 of income is exempt from the AMT calculation.

Do any items have a negative effect on individual taxpayers?

Overall, passage of the act positively impacts most individual taxpayers. The return of the phase-out of itemized deductions and personal exemptions, though, could have a negative impact.

The Personal Exemption Phase-out (PEP) is reinstated with a starting threshold for those making $300,000 for joint filers and a surviving spouse; $275,000 for heads of household; $250,000 for single filers; and $150,000 for married taxpayers filing separately. For 2013, you’ll be able to deduct $3,900 for yourself, your spouse and your dependents. However, if you are over these thresholds, the value of each personal exemption is reduced by 2 percent for each $2,500 above the specified income thresholds. So a married couple making $400,000 would see a $2,000 cut in their personal exemptions.

Also, the ‘Pease’ limitation on itemized deductions was reinstated, with starting thresholds that are the same as for the PEP. For taxpayers subject to the ‘Pease’ limitation, the total amount of their itemized deductions is reduced by 3 percent of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deductions. For example, a married couple with income of $400,000 filing their tax return with $50,000 of itemized deductions would see about a $3,000 reduction in their itemized deductions, resulting in about $1,000 more in tax.

How are higher income individuals affected?

The regular tax rate and dividend/capital gains tax rate both increased for higher income individuals. The income tax rates for individuals will stay at 10, 15, 25, 28, 33 and 35 percent, but now a 39.6 percent rate applies for income above $450,000 for joint filers and surviving spouses; $425,000 for heads of household; $400,000 for single filers; and $225,000 for married taxpayers filing separately. The top rate for capital gains and dividends permanently rises to 20 percent for taxpayers with incomes exceeding $400,000 ($450,000 for married taxpayers). When combined with the new 3.8 percent Medicare surtax on investment income, the overall rate for higher income taxpayers will be 23.8 percent.

What are some of the ways that businesses are affected?

Two that are applicable to most businesses are the extension of bonus depreciation and the increase in Section 179 deduction.

The act retroactively extended 50 percent bonus depreciation for property placed in service before Jan. 1, 2014. And some transportation and longer period production property is eligible for 50 percent bonus depreciation through 2014. In other words, businesses can deduct 50 percent of the cost of the property while deducting the remainder of the cost of the property over its useful life. Plus, bonus depreciation can be used to create a loss. The Section 179 deduction can now be taken on new or used property up to $500,000, allowing businesses to fully deduct the cost of the property in the year it acquires it instead of deducting a portion of cost over its useful life. Previously, the deduction could only be applied to new or used property up to $139,000.

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

Contact: Have questions on how the American Taxpayer Relief Act affects you or your business? Contact our Tax Planning & Preparation Group at (440) 449-6800.

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Published in Cleveland

Traditional desktop phones are on the way out, as companies discover that unified communications software now provides additional and more convenient ways to communicate and share messages with employees and clients.

“When Voice over Internal Protocol (VoIP) was introduced, many capabilities were promised. With the recent uptick in real-time communication services — instant messaging (IM), presence information, video conferencing, speech recognition, etc. — being used in conjunction with non-real-time communication — voicemail, email and fax, we’re finally seeing some of those capabilities being implemented and the promises of VoIP finally being delivered,” says Jeff Beller, IT and telecom consultant with Skoda Minotti Technology Partners.

Smart Business spoke with Beller about unified communications and how it enables companies to be more efficient.

What is meant by unified communications?

Unified communications has evolved to now deliver more fully on the promises of VoIP — to streamline communications so as to accelerate it, extend its reach and afford efficient means of collaboration. Recent advances in presence and mobility technologies have made it more useful.

Unified communications is software that brings different communication into a single user interface. The software provides presence, voice, IM, ad hoc collaboration — audio or video, and online meeting capabilities — all viewed, monitored, initiated and controlled via a single unifying application. All communication modes are connected so that workers and clients are able to get help at that moment in time.

As a comparison, only 20 to 30 percent of calls are answered when using more traditional services, with most calls going to voicemail. The phone tag scenario and, ‘I’m not available, please leave a message,’ won’t differentiate you from the competition.

What equipment is needed?

You need a VoIP-enabled phone system. The software application can run on your desktop, smartphone or tablet so it’s not only unifying communications, but also the various devices. Your smartphone turns into an office desk phone, and when you leave the office, a caller automatically reaches you. It’s not call forwarding; it behaves like your office desk phone with the same number and controls like transferring or conferencing.

Manufacturers that offer VoIP also have unified communications applications (chat, presence information, etc.), or you can use a third-party application, like Microsoft Lync, with those VoIP systems. Have a needs and readiness assessment performed to learn what your needs are, understand what is out there and then decide what works best. It’s best to work with a consultant who can demonstrate different manufacturers and technologies, rather than just one offering.

How does ‘presence’ work?

Presence makes communications more efficient by mining data in your Outlook calendar and, when you’re unavailable, switching availability off for your instant messenger or phone system. It can tell how you’d prefer to be reached or who to contact in your absence. Also, if there’s no keyboard activity for 15 minutes, others can see you’re likely not at your desk. This information populates a dashboard in the unified communications interface that also controls calling, instant messaging and conferencing.

The real-time display of intelligent presence information, combined with mobility, really benefits a receptionist, who can direct the caller to the right person almost instantly. Fewer calls go to voicemail, so clients are served better. Similarly, field service staff can communicate with co-workers more efficiently to solve problems faster and provide better customer service.

What’s the future of unified communications?

The need for a desk phone will become less as workers acclimate to using unified communications software on their desktops. Presence technology also will improve with multiple datapoint mining for instant assessment of communication states. As this state becomes more granular and meaningful, it drives ‘smart’ communication routing. And, as ‘always-on-and-always-connected’ mobile devices (smartphones and tablets) are integrated into the corporate network infrastructure, the use and significance of desk phones will dissipate.

Jeff Beller is an IT and telecom consultant with Skoda Minotti Technology Partners. Reach him at (440) 449-6800 or jbeller@skodaminotti.com.

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Published in Cleveland
Monday, 31 December 2012 21:15

What you need to know about trade shows

If you’re committing resources to a trade show, don’t expect to spend a lot of time on the golf course, poolside or in a casino.

“Once you’ve chosen a show and established a budget, the most important thing to know is that it’s not a vacation,” says John F. Kallmeyer, director, Visual Marketing, Skoda Minotti Strategic Marketing. “There’s a perception out there that you go to these trade events and it’s a big party. But the reality is that if you’re spending the money to go to a trade show, you better go in with a plan and proper training beforehand.”

Kallmeyer says an EXPO Magazine survey of business-to-business marketers showed average spending on trade shows was about 20 percent of a company’s overall marketing budget.

Smart Business spoke with Kallmeyer about preparing for trade shows, the benefits of being an exhibitor and things you might not know about industry events.

If your industry has a trade show, do you have to participate?

It isn’t mandatory, but one of the top reasons companies do trade show marketing is to increase brand awareness — to be seen by all of the major players in the industry, whether your clients, your prospects or even your competition. So in that sense it’s good to go to shows if you want to be a player in your industry.

From a business development standpoint, it’s important to note the top-cited reason attendees go to trade shows is to see new products and services. They like to stay up on industry trends and issues, so if you have something new to offer to the industry you should be at the trade shows and putting the information out there.

What do you need to know before operating a booth?

Make sure you match your message to the audience, the particular attendees going to the show, and not only know how you’re going to promote that to get people to your booth, but also have a very specific plan to follow up with anyone you talk to and capitalize on that.

Pre-show marketing strategy is very important. Promote that you’re going to be there — for example, include that information on your website, promote your participation on social media sites, send out mailings to invite people to stop by, and send emails and newsletters and include that information. The more people see your name, logo and message, the greater the chance that when they’re wandering around that 80,000-square-foot exhibition hall, they’re going to seek you out or stop if they see you.

Also, create a concise message that matches the audience and then have properly trained booth staff to get everyone on the same page, looking toward the same goal and delivering the same message.

How is the sales environment different?

The trade show environment presents a very rich, yet challenging selling atmosphere. In a very hectic, crowded environment, you have to make eye contact with a potential buyer, engage them long enough to pre-qualify them and convert them to a viable sales lead — all in under just a few minutes.

Attendees generally want to see the entire show, so you have a limited time to make an impression. That is why pre-show planning and staff training are so important.

What are some important strategies for following through on sales leads after the show?

It’s critical to have a post-show marketing strategy in place before the show. As soon as you get back you should begin to follow up on show leads — for example, send a promotional item or an email follow-up or make phone calls. Additionally, it’s imperative to identify and track show leads so you can calculate meaningful ROI from attending the show.

John F. Kallmeyer is director of Visual Marketing with Skoda Minotti Strategic Marketing. Reach him at (440) 449-6800 or jkallmeyer@skodaminotti.com.

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Published in Cleveland

No matter your income, your taxes are likely going to increase in 2013. Although the amount depends on what Congress does about the “fiscal cliff” of budget measures due to expire at the end of 2012, chances are that at least one of many scheduled changes will directly impact your finances.

In addition to automatic spending cuts, the fiscal cliff includes an end to Bush-era tax cuts that will take brackets from current rates of 10 percent, 25 percent, 28 percent, 33 percent and 35 percent back to 15 percent, 28 percent, 31 percent, 36 percent and 39.6 percent, respectively.

Other changes include raising the capital gains rate from 15 percent to 20 percent, reducing the child tax credit from $1,000 to $500, reducing the exemption for estate taxes from $5 million to $1 million and an end to temporary relief for the so-called “marriage penalty.”

“Absent action, we know what’s going to happen — all of these things are going to expire,” says Jim A. Forbes, CPA, a principal with Skoda Minotti. “I read an article calling this the legislative equivalent of a slow-motion train wreck. I’m sure they’ll get something done. It’s a matter of how many things get done before the end of the year.”

Smart Business spoke with Forbes about scheduled tax changes and the impact on families and businesses.

How will these changes impact business owners?

If your business is a closely held corporation, like an S Corp or a partnership, its tax flows through to your personal tax return. So your tax rates are going up if you own a small business that is an S Corp or a limited liability company.

For all businesses, regardless of the type, your ability to write off capital goods or fixed asset purchases will likely be severely limited in the future. Since 2001, we’ve had some form of bonus depreciation — accelerated writeoffs of purchases like computers, machinery, equipment and office furniture. In 2011, you were allowed a 100 percent write off. In 2012, it was 50 percent.

In 2013, absent any action, you’re not going to get an immediate writeoff; you’ll have to depreciate it over five years or whatever the life of the asset is. So incurring capital expenditures before the end of 2012 will give you a much better tax deduction than in 2013.

We’ve been telling clients for a long time to accelerate purchases if it makes good business sense because they’ll get a bigger deduction right now.

How are estate and gift taxes changing?

This year is an ideal time, if you’re wealthy, to gift something to your children. Right now, you can gift up to $5 million per individual, or, if you die today, no estate tax is paid on the first $5 million. Beginning Jan. 1, that reverts back to $1 million. If someone who is 55 or 60 years old wants to get their kid involved in their business that’s worth several million dollars, they can start gifting shares to them now because they can gift up to $5 million.

How will the Alternative Minimum Tax (AMT) change?

Your individual tax is computed under two methods. One is under the regular Form 1040. There is also a separate AMT calculation you have to do. It doesn’t allow you certain deductions, like state and local taxes, and it uses a different tax rate. What happens is that you pay the higher of the two, regular tax or AMT. The AMT captures upper middle class people generally with incomes from about $100,000 to a few hundred thousand — people who are wealthy but not in the top 1 percent of earners.

The AMT exemption is not set to index for inflation, so what’s happening is more people are going to be subject to AMT. That happens every year, but historically, they always put a patch on it. The exemption amount has been around $75,000 and it’s going to drop to $45,000 without action by Congress. About 4 million people paid AMT in tax year 2011. Without a patch, it’s projected that 31 million will pay AMT on their 2012

returns.

How will the average family be affected?

The one change that everyone will see in their paychecks is the end of a 2 percent reduction in the Social Security taxes they pay. Since 2011, the rate has been 4.2 percent. That was put into place as part of the stimulus plan. The likelihood of that one getting extended is not very high. That change affects anyone who gets wages. Absent anything else, you’re going to see a 2 percent reduction in take-home pay in January.

Another one that will affect an average family is the reduction of the child tax credit. If you have a child, you’ve been getting up to a $1,000 tax credit per child; that number is going to decrease to a maximum of $500 per child.

Also, the marriage penalty is going to come back. Many years ago, the rule was that the standard deduction and graduated tax rates for a married couple were not two times that of a single person, they were about 167 percent. Congress fixed the marriage penalty and, over the last few years, a married couple’s standard deduction and tax rate were exactly double a single person’s. What’s happening now is that the marriage penalty is returning.

The exemptions and tax brackets that were double the single person amount revert back to around 167 percent. So married couples are going to pay a little bit more tax, absent anything else. That applies whether you file jointly or separately.

JIM A. FORBES, CPA, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or jforbes@skodaminotti.com.

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Published in Cleveland

Data centers, software providers and information technology firms can expect that clients will be asking to see their service organization control (SOC) reports.

SOC reports have replaced the Statement on Auditing Standards 70 (SAS 70) as a means of assuring companies they do business with that proper controls are in place.

“Years ago, it was mostly payroll companies having SAS 70 audits done because they were affected more than everybody else. They managed their clients’ money, and their clients needed to make sure that they had controls in place,” says Robert B. Brenis, CGEIT, CISA, CRISC, PMP, a principal with Skoda Minotti Technology Partners. “A lot of companies are now seeing the need for these because, with the advent of technology, many have access to their clients’ information.”

Smart Business spoke with Brenis about the differences between SOC reports and SAS 70 audits and the types of companies that should have them prepared.

What is a SOC report and how does it differ from the SAS 70?

SAS 70 was one report, now the SOC 1, and it covered service organization controls related to financial statement assertions. SOC reports break SAS 70 reports into three different reports: SOC 1, SOC 2 and SOC 3. SOC 2, also known as AT 101, audits any or all of five trust service principles: security, availability, processing integrity, confidentiality and privacy. It also contains descriptions of tests performed and the results. The intended audience for a SOC 2 report is management of the user entities. While SOC 3 reports look at the same data as a SOC 2, it is more of a general use report, providing only the auditor’s report on whether the system achieved the test criteria. A SOC 3 report is intended for any user who wants assurance on the five trust service principles and wants this report freely distributed.

Why was a switch made from SAS 70 to SOC reports?

The biggest reason is that the SAS 70 was not being used the way the American Institute of Certified Public Accountants intended it to be used. Accountants were opining on more technical things like firewalls they have in place and secured socket layer encryption. Accountants, however, weren’t entirely sure what any of that meant.

There were way too many IT things creeping their way into the SAS 70 report, so they broke them into two different standards — the financial assertion standard, which is now the SOC 1, and the SOC 2/SOC 3 which focus on the five trust principles.

How do you know if you need a SOC 1 or SOC 2 report?

It gets back to the type of business that’s being provided. If a service is being provided that can affect a client’s financial statements, a SOC 1 is absolutely needed. Say you’re housing servers. That’s more in the realm of security and availability, which talks to the trust services principles found in SOC 2. You should talk to the client to understand the service they’re providing and make sure they get the right one done.

What is meant by Type 1 and Type 2 reports?

As was the case with the SAS 70 audit, there are also two types of SOC reports. With a Type 1, the policies you have are reviewed to determine if they cover the controls you have described in the ‘Management’s Description’ section of the report. In a Type 2 report though, it’s not just the policies that are audited but also the procedures. If you have a policy that says you are reviewing employee network access monthly, for a Type 1 this policy is enough. For a Type 2, you need to show proof that these reviews are happening on a monthly basis.

What value does a company get from a SOC report?

  •  You will have a description of your business in your words.
  • Your clients’ concerns about certain controls are addressed before these concerns become issues.
  • You will have an SOC report completed before you are required to have one for an RFP.
  • You will demonstrate to your clients that your business uses due care in managing information.
  • You can use this process to review and improve internal controls, eliminating unnecessary risk from your business.

One example is a medical billing company that thought it had all the policies and procedures in place to ensure it was tracking receivables on a consistent basis. When we went through the process of the controls that were in place, it was discovered that any receivable that got beyond 180 days dropped off their radar. So they weren’t chasing after money when they should have been. It helped them realize where they had holes and led to a change in their processes. The next year they didn’t have anything in their receivables that came up to 180 days. So the receivables were watched on a much tighter basis.

Other examples would be if your SOC 1 business description says that you have service level agreements with your clients. An audit can be performed against those service level agreements to determine if they’re being met. If not, it could mean that you’re going to owe some clients money, so you need to maintain your service levels that have been agreed upon by your clients. You are liable because you’re supposed to be

following up.

ROBERT B. BRENIS, CGEIT, CISA, CRISC, PMP, is principal with Skoda Minotti Technology Partners. Reach him at (440) 449-6800 or rbrenis@skodaminotti.com.

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Published in Cleveland

When selling your company, parting with it can be difficult. You’ve spent countless hours growing the business from a small operation to the enterprise it is today, and that shouldn’t be minimized. But decision making in the early stages of this process can be guided more by emotion than logic, says Kenneth M. Haffey, CPA, CVA, a partner at Skoda Minotti.

As the project progresses, however, he says emotion lessens and upfront planning on both sides predicates whether the deal is finalized.

“Almost always when a deal doesn’t work, it’s because the proper things leading up to the merger and acquisition weren’t done — they were shortcut — and sometimes that leaves a nasty trail that has to be picked up,” says Haffey.

Smart Business spoke with Haffey about mergers and acquisitions and what both buyers and sellers should consider.

What factors should be first considered with mergers and acquisitions?

When looking to acquire a business, determine your strategic goals. Do you want to expand geographically, add to your current type of business or acquire a tuck-in or bolt-on that could be a smaller, complementary piece to your existing company? Does it make sense to stay in your area or expand to another part of the state or country? Pricing is another factor. What can you truly afford and how will you pay for it — with your own working capital or borrow from investors, a bank or a private equity group?

On the other side, a business owner looking to sell needs to find individuals or companies with which he or she feels comfortable while getting ready for the liquidity event. Hire experienced professionals — CPAs, lawyers, investment bankers or financial advisers — who work on mergers and acquisitions. Price is important for this side of the deal, too, and could be determined by a multiple of sales, net income, or earnings before interest, taxes, depreciation and amortization (EBITDA).

Who should be a part of the transaction team?

Deals happen or don’t happen depending on advisers. For example, if you let your recent law school graduate nephew be your deal attorney, it is a disaster waiting to happen. Internally, your team would be made up of human resources, operations, marketing, finance and possibly legal advisers.

Who should be on the list of potential suitors/targets?

There are different ways to compile lists of suitors or targets. For example, some advisory firms keep lists of companies that they’re working with to continually connect dots. Other options include trade associations, contacts you know from conferences and newsletters to find those who might be interested. Also, chat with others who have gone through such transactions.

There are two types of buyers — financial and strategic. Strategic buyers are in the same business space and want to expand geographically or absorb new technology. A strategic buyer usually gives the largest selling price. A financial buyer looks to get into a new business, using his or her own means to take on a new venture. There’s nothing wrong with selling to a financial buyer — that’s how private equity groups build — but the learning curve and pieces of operations are easier and quicker on the strategic side.

How can business owners determine what to pay?

Each side should have an independent valuation done by a professional. Appraisers or valuators specialize in valuing companies for M&A purposes, which differs from valuing a company for estate tax purposes — a CPA can have specialized accreditations, such as being a certified valuation analyst or accredited in business valuation. Then, stick to the value the professionals tell you. If a business owner has a preconceived, unrealistic notion of the worth, it may be impossible to continue.

Value also depends on timing. At any point, retail, service or manufacturing may be hot or ice cold. If your business is flying high and the industry isn’t, you probably won’t get the multiple of earnings you think you’re worth as buyers won’t trust what’s going on. Value is difficult to gauge because supply and demand can jack prices up overnight — some of it not based on any financial reasoning.

After the transaction is completed, what should be done to integrate the two companies?

The make-or-break point is what you’re going to do with the individuals and assets after you purchase them. You need to know where you’re going long before you finalize the deal. Once you’ve found suitors or targets, understand the financing and have hired advisers, complete your due diligence before discussing offers and finalizing paperwork. The whole process usually takes between five and 10 months; if it’s taking longer, both parties need to take a step back and determine the holdup.

Integration ranges from taking all aspects of one organization and folding them in under another — eliminating human resources, marketing, accounting and some operations — to leaving it alone because the new company is five states away or in a new business space. The integration team should analyze the company workings to figure out if one system is better. Forget who is bigger or smaller, or whose name is on the door. The smaller company may have a far superior system because, for example, it kept up on technology.

Most people run their company, do a good job and then go home. Many employers will only have one transaction their whole life, so competent professionals are necessary to meet your needs and maximize your situation.

 

Kenneth M. Haffey, CPA, CVA, a partner at Skoda Minotti. Reach him at (440) 449-6800 or khaffey@skodaminotti.com.

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Published in Cleveland
Saturday, 01 September 2012 13:40

Five things to know about executive compensation

Well-drafted executive compensation programs aren’t just used to recruit and retain top-level leadership to your company. Public and private companies can tailor executive pay packages to encourage executives to achieve certain goals.

“We can put strings on short-term and long-term benefits to drive executive behavior, and that’s one of the things that’s really coming to the forefront now,” says Ted R. Ginsburg, CPA, JD, a principal with Skoda Minotti.

Smart Business spoke with Ginsburg about leveraging executive compensation.

What are the key components of an executive compensation program?

In general, an executive compensation program consists of four key parts. These are base pay, annual bonus, long-term incentives and perquisites, which could include car allowances, country club memberships, executive physical programs, security services and use of the company airplane. Because of recent economic events and more scrutiny by shareholders, perks are not such a big part of the package anymore; employers are providing higher base pay and instructing executives to acquire the perks on their own.

An optional component is a sign-on and/or retention bonus. A sign-on bonus is appropriate when trying to hire an executive from another company who would lose a bonus if he or she left. The retention bonus — a promise to stay through a certain date or event in order to receive a bonus — is used when you have incurred hard times and worry the executive is going to leave.

How does executive compensation differ in a public and private company?

There are some significant differences, and oftentimes, private companies are at an inherent disadvantage. A public company normally provides a long-term incentive using either a stock option or restricted stock. A stock option allows executives to purchase shares at a stated price while he or she remains employed; a restricted stock program gives executives a share of stock outright after meeting certain targets. Stock doesn’t drain cash flow, often doesn’t immediately reduce earnings and can have favorable tax treatment for the company and the recipient. In a publicly traded company setting, the recipient can usually turn around and resell the shares on the open market immediately. The total pay package of chief executives of major public Cleveland corporations may comprise 60 to 70 percent in company shares.

Many executives in private companies don’t want to receive stock unless they already own a substantial company stake. Executives would need to pay income tax on the stock and can’t sell part of the shares to cover the amount. Also, executives usually must sell the stock back when they leave in exchange for a cash payment made over time. Furthermore, private company owners might not share financial information with executives so the value of the ownership interest is unclear.

What can a private company offer someone from a public company instead of stock options?

Some private companies award only base pay and an annual bonus, but attracting a senior-level executive from a public company is difficult without a long-term incentive program. There are programs that provide a cash payment based on company performance and the current company value over a number of years, making executives feel as if money has been put aside for their future. Two types of long-term incentive programs are:

  • Phantom stock — an owner gives executives a check representing the full value of a number of shares of stock when they leave.

  • Stock appreciation rights — an owner gives executives a check when they leave, which equals the number of rights given to them multiplied by the difference between the value of the stock when it was awarded and when they leave. Mimicking a stock option, it rewards executives for increasing the value of the company.

These programs often have a vesting schedule stating an executive leaving before a certain time does not receive the entire benefit.

Another methodology is a change of control payment, where an owner planning to sell or transfer the business gives the executive a check based on the sale price or value of the company at the time ownership is transferred.

Some larger private companies with the necessary liquidity also use long-term cash incentive programs. Over a period of time, if revenue is up or costs are down, cash is put aside for when the executive leaves.

Why do long-term incentive programs help an employer?

These programs act as retention devices. They focus employees on long-term performance rather than maximizing annual bonuses and they don’t drain cash immediately as they are deferred payment obligations.

Long-term incentive programs are familiar to public company executives. If a private business owner offers to pay to replace the value of stock options lost because the executive left for a private company, the recruited public executive might ask what he or she is going to get for subsequent years.

Finally, they allow for a trial period, giving  the option of cutting him or her loose early.

Why are employers moving away from discretionary annual bonuses?

With discretionary bonuses, private company executives walk away without knowing what they did to earn it and how to repeat it. Many businesses now give bonuses based on company performance.

Well-drafted programs have easily measured goals that drive behavior and set annual priorities. Long-term, multiyear program goals relate to financial performance and other forward-thinking items, such as establishing a new geographic market or bringing a certain number of products to market. If the goals aren’t met but executives put in the effort, ownership can always give discretionary bonuses. This type of program helps employers manage the executive’s expectations and creates transparent working conditions.

 

Ted R. Ginsburg, CPA, JD, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or tginsburg@skodaminotti.com.

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Published in Cleveland

When one company is acquiring another, the deal price is often the primary factor considered. Too many times, however, critical issues are overlooked, says Sean R. Saari, CPA/ABV, CVA, MBA, senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team.

“Deals get started and then take on a life of their own. During the acquisition process, the company is often focused on negotiating and finalizing the deal. However, there are a number of valuation-related issues that can be important to consider, but which are often overlooked,” says Saari. “Some companies try to address these issues after the fact, but the earlier you’re able to get the valuation and accounting issues handled on the front end, the easier things are going to be on the back end.”

Smart Business spoke with Saari about the five things you need to know regarding business valuation before making an acquisition.

What is the appropriate standard of value to consider in an acquisition scenario?

There are two different standards to keep in mind — fair market value and strategic value. Fair market value represents the value of the business if it were to be sold to an unrelated third party and it sets the floor value to what an acceptable purchase price may be.  Fair market value is typically most appropriate when financial buyers are involved because they don’t really have any synergies to squeeze out of the company, they simply want to purchase the business ‘as-is’ and continue its operation. However, if the potential acquirer is in the same industry as the target company and the deal is a strategic acquisition, it is important to consider the ‘strategic value’ of the business. Under this standard of value, the acquirer considers the impact of certain redundant expenses that may be eliminated. The elimination of certain expenses may allow a strategic acquirer to pay a price that is greater than fair market value while still receiving an appropriate return.

Can the structure of an acquisition impact the price paid for the target company?

There are competing benefits between structuring a deal as a stock or an asset deal, which can impact the purchase price of an acquisition. Generally, sellers prefer stock deals because their proceeds are taxed only once as capital gains. In stock deals, however, the buyer cannot pick the assets and liabilities that it would like to assume, all unknown and contingent liabilities must be assumed by the buyer and the buyer gets no step up in the basis of the assets purchased. Therefore, buyers typically prefer asset deals because they can pick the assets and liabilities they want and they get a step up in the basis of the assets acquired. This step up, typically for fixed assets and intangible assets, creates additional depreciation tax deductions for the buyer, which can allow them to pay more than they would under an asset deal. This is particularly true when fixed assets with little carrying value are purchased or when intangible assets make up a significant portion of the purchase price. Sellers can be averse to asset deals, however, because contingent and unknown liabilities existing as of the purchase date typically are retained and the sale proceeds can be subject to double taxation.

How are earnouts accounted for?

Earnouts can be an effective tool to bridge the gap if the owner and the seller can’t agree on price. In an earnout, the buyer and seller agree that, after the transaction has closed, there may be additional payments to the seller based upon company performance. It allows the buyer to compensate the seller if certain levels of activity are achieved or to keep the purchase price lower if the targets aren’t met.

However, while it is a great tool, there are some accounting issues that the acquirer is often not aware of.

When an earnout is present, generally accepted accounting principles require the buyer to record the fair value of the earnout as a liability on its books. This is based on the likelihood of the earnout being paid and how much the earnout payment might be. Buyers often don’t realize they have to carry that extra liability on their books and that the balance has to be adjusted every reporting period until the earnout is settled, with the changes in value being reported in the income statement.

What other accounting requirements must be addressed when an acquisition is made?

When making an acquisition, consider the post-acquisition purchase price allocation, in which the purchase price is allocated to the various assets acquired. In many cases, the purchase price exceeds the value of the tangible assets acquired. Accounting rules require that the purchase price in excess of the tangible asset value be allocated to the intangible assets purchased, such as trademarks, customer relationships, technology and non-competition agreements. Any unallocated purchase price left after the intangible assets have been valued is assigned to goodwill.

Determining the fair value of intangible assets acquired is a complex process and typically involves the use of a third-party valuation expert to develop a supportable valuation analysis that will withstand scrutiny from the acquiring company’s auditors.

What are the potential issues if you overpay for an acquisition?

If an acquirer overpays, it results in a lower return on their investment or possibly the loss of a portion of the investment.

From an accounting standpoint, if an overpayment has occurred, it’s likely that goodwill and certain intangible assets may need to be impaired, which can result in a significant charge to the company’s earnings in the period of impairment. Assistance from a third-party valuation expert is often necessary when goodwill or intangible asset impairment is present to determine an appropriate amount that satisfies the company’s auditors.

Sean R. Saari, CPA/ABV, CVA, MBA, is senior manager with Skoda Minotti’s Valuation and Litigation Advisory Services Group and Accounting and Auditing Team. Reach him at (440) 449-6800 or ssaari@skodaminotti.com.

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Published in Cleveland

If your company has a benefit plan such as a 401(k) with 100 or more eligible participants, each year you are required to have an audit performed on that plan that is filed with the IRS and the Department of Labor (DOL). Failing to do so could mean major penalties for your business, says Danielle B. Gisondo, CPA, a principal with Skoda Minotti.

“What often happens is that a company gets to that 100 employee mark and it is not aware of the requirement,” says Gisondo. “A few weeks before the deadline, the company that is preparing the required Form 5500 for all benefits plans for the company will send the company a letter that says, ‘You need to have an annual audit this year because your participant count has climbed to more than 100, so please forward us your auditor’s information.’ The company may read that and begin the search for an auditor or just ignore it. And ignorance of the requirement is no excuse.”

Smart Business spoke with Gisondo about what you need to know to stay on the right side of the law and avoid stiff penalties.

When is a benefit plan audit required?

ERISA requires that an audit be performed on most benefit plans with more than 100 eligible participants. The auditor is required to be an independent accounting firm, one that is independent not only of the client but of whomever is administering the plan and holding the investments.

Every plan has to come up with a standard plan document that outlines how the plan should operate relating to contributions, distributions and loans. The DOL wants to make sure companies are properly running their plans in accordance with what their plan document says.

What happens if a company does not have a benefit plan audit performed?

If a company fails to have an audit performed, it will be faced with penalties from the DOL and the IRS, which can get very steep. If you fail to file at all, the penalties can be up to $30,000 per year per plan. And a deficient filing can result in penalties of up to $50,000 per year per plan.

How long does the benefit plan audit process take?

If the auditors get everything they need, the process typically takes three to four weeks. If there’s a delay in getting information, either from the client or from one of the third parties involved, it may take six or seven weeks to complete.

The auditors will first compile a comprehensive request list with everything they need copies of and access to. Depending on the size of the plan, the auditors will be on site for one to three days and will typically work with someone in HR or accounting to get the necessary information. The rest of the work is done off site to minimize disruptions to the client’s business.

What are the deadlines?

For a calendar year-end plan, the initial due date for Form 5500 and the audit is July 31. If you can’t meet that deadline, you can file a two and a half month extension, which brings the due date to Oct. 15.

What steps can you take if you realize you should have had an audit performed but you didn’t?

If the IRS/DOL notifies you that you should have had an audit, it’s difficult to get out of paying the penalties by saying that you didn’t realize you needed one.

However, the DOL offers compliance programs that companies can go through if they failed to file. These programs allow you to pay a reduced fee that varies depending on the type of plan and the number of participants. Once you have paid that fee and file the necessary 5500 forms and audits as needed, you can be relieved of the penalties.

If you know you have a problem, don’t wait. Reach out to the IRS/DOL and let them know you have a problem. If they come to you and say, ‘We don’t have your 5500 form and the applicable audit,’ it’s too late to go through the compliance program and you will face major penalties.

What should companies consider when selecting a benefit plan auditor?

Ask if the firm has expertise in performing benefit plan audits. A lot of people assume that any accounting firm can do them, but it is a separate area of expertise and you should make sure the firm has it. Accountants undergo specialized training on an annual basis to ensure they are comfortable with all of the changes that continue to come from the IRS and the DOL.

Make sure the people you are working with are properly trained, that they know what they are doing and that they audit multiple plans, because a firm that audits just one or two plans doesn’t have the experience of a firm that is doing 20 or 30. Also ask about the audit process and ensure that whomever you are working with has the experience necessary to perform the work.

 

 

 

 

 

Danielle B. Gisondo, CPA is a principal with Skoda Minotti. Reach her at (440) 449-6800 or dgisondo@skodaminotti.com.

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Published in Cleveland