Meredyth McKenzie

Cloud computing is one of the hottest topics in business today. This technology lets companies utilize massively scaled information technology infrastructure at a remote site instead of their own data center, resulting in increased redundancy, security and significant cost savings.

“The cost of purchasing and maintaining the infrastructure internally and the salaries of people to operate the infrastructure continues to increase, while the cost of obtaining it on a larger scale from cloud service providers continues to decrease,” says Michael Dickson, CPA, CISA, CISM, CRISC, director, business technology services at GBQ Partners LLC. “The result of these two trends is an intersection of the cost models for computing.”

Smart Business spoke with Dickson about how the cloud works and how to select the right cloud service provider.

What is cloud computing?

There is much confusion about what cloud computing is, because there are so many different kinds of cloud service offerings. Cloud computing is nothing more than a new name for an old concept (time sharing).

Cloud services enable you to connect to a provider’s application (Software as a Service — SaaS), deploy, run and manage your own applications on a provider’s computing resources (Infrastructure as a Service — IaaS), or you can deploy, run and manage your own applications that were created using programming languages, databases and tools supported by the provider (Platform as a Service — PaaS). In each of these models, the provider and management have different responsibilities as it relates to owning and managing the operating and application systems.

Remotely hosted applications, like Office 365 and are perfect examples of using SaaS. The applications are developed, owned and hosted on providers’ infrastructure, and users subscribe to the services they need and connect over any network (company or home network, WiFi, Cellular, etc.).

Examples of IaaS are products like Amazon’s Web services and Rackspace’s cloudfiles. Subscribers pay for the amount of computing or storage they need, relying on the provider to manage and maintain the infrastructure.

What companies are best suited to take advantage of a cloud?

A company that is looking to replace legacy software or hardware or is planning a significant expansion is in an ideal position to take advantage of cloud service offerings.

Some companies are driven to look at cloud solutions simply because they are having trouble retaining an IT staff with appropriate technical skills and/or are driven by cost reduction measures to look at the options.

What are some key items you need to understand about cloud computing?

You need to understand the benefits and risks, because they will vary for each company depending on which service type you are considering. The key is to understand your specific risk posture by assessing the application landscape, the type of data processed and understanding the unique accessibility, confidentiality, security and compliance requirements of your specific situation. This will drive the decision on what should be ‘put in the cloud.’ Moving into the cloud doesn’t have to be an all-or-nothing proposition. You can start by putting a low risk commodity application in the cloud, and keep your high-risk core business applications on site until you get more comfortable with how it works for you.

What are some keys to making cloud computing safe?

It’s safe if you choose your provider carefully and structure your agreement properly. The biggest misconception is that you don’t know what’s happening to your data when they are in the cloud. If you select the right service partner, they will have implemented the appropriate security and physical and logical access controls to prevent others from gaining access to your computing environment.

A reputable data center will have engaged an independent auditor to express an opinion on the appropriateness and effectiveness of controls put in place to ensure the availability, reliability, security and processing integrity of their data center environments. These reports used to be called SAS 70s but are now referred to as SOC (Service Organization Controls) reports.

What are the benefits and risks associated with cloud computing?

The big benefits are cost savings and increased reliability/availability resulting from economies of scale. If a business has a peak time, it can take advantage of extra processing capabilities for that peak period, but doesn’t have to maintain and own all of the computing capabilities all year round. Computing is becoming a utility. Like electricity or natural gas, you pay for what you use.

Another benefit is having access to new applications and technologies that the cloud service providers can purchase, implement and leverage over multiple customers as they update their service offerings.

For risks, the biggest concerns are related to access to data and being locked into a service provider for a multi-year term. You need to look carefully at the terms and conditions to know how your data are stored and how they might be made available back to you or to a successor provider in the event of a dispute.

People also fear they will lose control of their computing capabilities, and that can be good or bad, but it needs to be addressed. They’re fearful that if they get into a fee dispute with their provider, or become unhappy the level of service provided, the service provider holds all of their eggs in their basket. You can mitigate these risks by structuring the agreement to address users’ rights to data in the event of a dispute and by implementing solutions that provide real time back-up outside of the cloud.

Make sure your data are encrypted, access controls are strong, and you know who owns the data.

Michael Dickson, CPA, CISA, CISM, CRISC, is director, business technology services at GBQ Partners LLC. Reach him at (614) 947-5259 or

Tuesday, 31 January 2012 19:02

How to lead during difficult times

Business leaders face many challenges each day. The state of the economy over the last few years has proven to be a big challenge for leaders, who also must figure out how to deal with day-to-day issues and survive despite less than ideal situations.

“If you can lead people through tough times, and show them a direction and give them something to believe in, you can certainly do it through good times,” says Darci Congrove, CPA, managing director at GBQ Partners LLC.

Smart Business spoke with Congrove about the benefits of strong leadership on your business and how to position yourself as an exceptional leader.

What are some of the current challenges that many business leaders are facing?

Leaders have gotten very accustomed to playing defense, and figuring out how to operate in a difficult economy. It’s a hard transition for them to shift from thinking defensively and protectively about the business, to thinking strategically for the future. It’s difficult to plan for the future when you don’t know exactly what type of environment in which you can expect to work. The current economic climate and regulatory environment are both still uncertain.

A lot of leaders are having a tough time deciding when to hire and when to spend. They can see the things they need to do next, but they’re nervous about doing them. It’s a tricky balance.

It has been an emotionally draining time and a difficult couple of years for associates and leadership. It’s hard to stay enthusiastic when the news is all very grim. Even if your company is doing well, you’re still nervous and the attitude may not be great — it’s a lot easier to move people forward when everyone’s excited about what happens next.

How does dealing with these challenges make someone a better leader?

It forces leaders to improve their skills, particularly with regard to communicating throughout their organization. When things are down or uncertain, you have to be a lot more focused on communication so that everyone knows what’s going on. In the absence of good solid information, associates will fill the gap with rumor and innuendo, and take it in a direction that is often more negative than reality.

Associates want to know that leaders have a plan. It doesn’t matter exactly what that plan is; they just want to have some confidence that their leaders are working on it, and they can trust it will be OK.

How does having a strong leadership presence benefit a business’s position in the marketplace? What about in the business community?

Strong leaders get alignment, commitment and enthusiasm with their teams. Leaders can inspire people and get them rallied around a common cause. Those associates then go out in the community and touch other people — clients, prospects, or customers. That consistent representation of the brand influences the audience.

Those people who are outside the organization view it favorably and want to be associated with it. If every time you meet someone from ABC company, they are enthusiastic, professional, etc., that supports the merits of doing business with the company. The strong leadership presence that can be set by an individual or multiple individuals from an organization in a community can influence whether or not people want to do business with that company.

A lot of businesses and leaders are involved in community issues and charitable giving, and the people in those audience categories see the business favorably because they see the leader favorably based on what they’re doing for the good of the community.

How do you define exceptional leadership?

Exceptional leaders are those whom people want to follow, regardless of their title, position or authority. Leadership can happen at any level in an organization. Leaders distinguish themselves by being people who can influence others and make others want to go in the direction they are going.

A lot of people have leadership by title and that gives them authority, and then people are forced to follow them, but that’s not the definition of exceptional. Exceptional is when the crowd wants to go along and believes in that person and the direction.

How can someone position him or herself as a leader?

That can happen at any level. Leaders are able to look not just at what’s happening today, but what’s going to happen tomorrow and beyond, and how to do something different or better to make that future different or better. Individuals at any level in an organization can do that by having some vision or strategy and influencing those around them to join.

Leaders create followers. You’re not a leader just by virtue of the title you have. The most important thing a leader can do is turn around and make sure people are still following. If you don’t have any followers, you’re not a leader.

Leadership can also be learned. Some people subscribe to the theory of being born a leader, or that it is an innate personality characteristic. I think it’s a skill that can be learned.

Darci Congrove, CPA, is managing director of GBQ Partners LLC. Reach her at (614) 947-5224 or

Fair value accounting is changing, and businesses need to adapt to the new standards to ensure they have followed the new guidance.

Over the past few years, the Financial  Accounting Standards Board (FASB) has made several changes to fair value accounting standards. The board has also developed a consistent methodology to determine fair value, and amended the standards to get rid of the six different methodologies previously in place. One of the proposed changes currently being evaluated is for entities that meet certain criteria to measure their investment properties at fair value.

“While it is somewhat controversial still, providing market value information and requiring companies to record certain assets at market value gives a better picture of their financial situation,” says Paul Anderson, CPA, director of assurance services with GBQ Partners LLC.

Smart Business spoke with Anderson about the key things you need to know regarding the new fair value accounting standards and how to prepare for any future changes to these standards.

What are some key things you need to understand about fair value accounting standards?

The first key thing for business owners to understand is that not all assets are recorded at fair value as part of these changes. There are some liabilities that are also recorded at fair value, but not all of them. For example, property and equipment is not valued at fair value, it is still valued at historic cost. Goodwill is valued at historic cost, unless there has been an impairment determination. Marketable securities and other financial assets are usually recorded at fair value.

The second key is to understand the mechanics of fair value, and how it is determined. There are three methods of determining fair value, which vary in terms of the amount of objectivity involved. At the high end, there’s a marketable security, where you can go right to the Wall Street Journal or Google and determine the price. On the other end of the spectrum, you might determine fair value by using an independent valuation. This can be highly subjective, because it is based on the assumptions that an appraiser will use.

How do you go about determining fair value?

Fair value, as defined, is an estimation of what would be received for an asset or paid to assume a liability in an orderly transaction. How fair value is determined depends on the type of asset or liability, as well as the availability of the objective information. For example, a marketable security is the most reliable and easiest way to determine fair value. There’s a middle ground that looks at the value of similar assets or liabilities. The third and least reliable method is management’s own method, or the use of an appraiser or valuator to determine the fair value. The reliability and validity of a valuation is higher when less subjectivity is involved in the process.

How do you prepare for the fluctuations in the fair value that you see from year to year?

It’s not so much preparing as it is just being willing to understand and explain the fluctuations when the changes do occur. The changes are really caused by market forces outside your control. For example, if housing prices decline by 20 percent and you are a homebuilder with a lot of land, it’s possible that your land prices are going to go down. That is outside of your control.

What are the risks and benefits associated with fair value accounting standards?

We just went through a period of fairly significant economic downturn that some people believe was partly caused by fair value accounting. One of the risks is that in unsettling financial times with greater market fluctuations,  these factors can cause greater fluctuation in financial results. It depends on how much of the assets or liabilities are marked to market. That’s the biggest risk of fair value accounting. The second risk would be the ability to accurately determine fair value, because it’s a moving target.

The biggest benefit to fair value is that most people would think that by marking to market, you’re able to determine what something is really worth. An asset on the books at fair value usually has a more accurate valuation than its historic cost.

Do you see any more changes coming to fair value?

Yes, I do. The movement to fair value is still a work in progress, and it’s come a long way. If you go back several years ago, nothing was marked to market and everything was at historic cost. We slowly have been moving down this path. There are proponents of fair value accounting who would like to see the whole balance sheet based on fair value. Right now I don’t believe FASB has the appetite for that because it would cause a lot of complexity.

The second issue is that FASB is dealing with whether or not it is appropriate to have small company GAAP. A proposal being considered would allow a  set of modifications and exceptions to GAAP for smaller, private companies. It is not certain if the small company GAAP will be approved or whether fair value will be one of the exceptions. It’s all on the table, and no one’s quite sure where we’re going.

Paul Anderson, CPA, is director of assurance services at GBQ Partners LLC. Reach him at or  (614) 947-5203.

There are a lot of uncontrollable factors that can affect your business. Economic, technological, competitive, regulatory, political issues and even succession, can all have an impact on your business at the most inconvenient of times. But planning in advance can be the key to maintaining your business through these shocks.

“If you plan in advance, even for a negative event, you can oftentimes increase your options in the event of a shock,” says Jim Lane, director of Redbank Advisors with GBQ Partners LLC. “If you know a drop in demand would force you to reduce your head count, planning in advance and restructuring work assignments can help you do that without endangering quality or sacrificing customer satisfaction. You’ll be in a much stronger position than you would be had you not thought it through in advance.”

Smart Business spoke with Lane about the importance of data mining to help prepare for these uncontrollable factors.

What is data mining, and why is it important?

Data mining is taking a look at the inventory of information that you normally generate as part of your ongoing business, and peeling it apart for insight into your business.

The biggest reason to do it is because we tend to operate on automatic pilot. As you’re driving to work everyday, you don’t take into account everything you pass. The first few times you saw everything and were making careful decisions about where to turn, or anticipated it. Now, you go there on automatic pilot.

The same is true in your management approach. You get in a groove for managing your business in a particular way and don’t look at the scenery anymore. The scenery in business is constantly changing. Unlike your route to work, which only changes when they change the road, the business environment is changing all the time. Competitors are coming in and changing it. Today, the economy and even political change are factors that people are not used to taking into account when changing and improving the business. Data mining gets you in touch with what’s going on right now and what the trends have been, so you can identify what’s been changing.

How can you start data mining in your business?

That depends on how sophisticated your company is, in terms of infrastructure. If you have sophisticated systems, often they come with reporting and data mining tools that you can use. If your business is smaller, you may need to export the information from your business systems into Microsoft Excel or another analytic tool in order to do trending and spot extremes.

A good place to start is with your order records. Make a line for every sale you’ve made in the past 24 months, including the sale price, cost, customer and the market segment that customer is in. By doing that, you can begin to spot trends on pricing. Is erosion occurring in your pricing? You can look at your margins and determine how you are doing on an order-by-order basis. You can compare sectors, divisions or plant performances against one another. That’s an easy way to get into it.

How often should you complete data mining and how can this be used in business planning?

You should do it on an ongoing basis. It’s the kind of thing you want to take into account in your daily operations. It’s looking at what’s happening in the business, what the trends are, how you are doing against your plan, and performance monitoring on a monthly or periodic basis. You also want to analyze trends and performance on an annual basis, prior to strategic planning.  This allows you to determine if your strategy needs to shift, or if you’re on track. If you do need to change your performance, analytics help you see where there are opportunities for performance improvement in the business and what those improvements might be.

What challenges and risks are associated with data mining?

The challenge is having the data in a form that’s usable. In spite of the fact that we all think of information systems as being a done deal, in many businesses, they are still not all that useful. Getting information that is decision-ready can take some massaging and normalizing.

The risks occur in not analyzing your data and taking a look at what’s happening in your business. The risks of doing this are relatively few. You need to be conscious of the amount of data you’re looking at so you have a statistically valid sample. Once you get beyond that, the benefits of looking at the data and doing the analytics far outweigh any risks of making a wrong decision based on it.

What are the benefits associated with data mining?

When you’re in touch with your business, and the performance of your various products and services, as well as customers, you can begin to make decisions about where to focus the energy of the business. If you find a product line that’s more profitable than others, you might want to put more emphasis on selling that. If you find a group of customers that are not profitable to serve, you can focus your efforts on other customers and potentially raise prices on the customers who are not profitable to serve. More sophisticated analyses enable leadership to play ‘what if.’ This is incredibly valuable in shockproofing a business. It puts control into leadership’s hands to determine the direction of the business and the response it will take to those external factors.

Jim Lane is the director of Redbank Advisors with GBQ Partners LLC. Reach him at (614) 947-5257 or

The end of the year is fast approaching — which means it’s time to start thinking about year-end tax planning, both for your business and personal accounts. Planning early will help ensure maximum benefits.

“Many items within tax planning are time sensitive,” says Tim Schlotterer, CPA, director, tax and business advisory services at GBQ Partners LLC. “Tax planning is best done throughout the year.  However, if you are interested in year-end tax planning, it’s best to start in November or early December.”

Smart Business spoke with Schlotterer regarding key items to look at when starting your year-end tax planning, as well as the risks and benefits associated with such matters.

Have there been any recent changes in taxes?

As of right now, there have not been any major tax changes in 2011. The current primary focus in Washington is related to providing assistance with unemployment and incentives for companies to hire unemployed workers.

President Obama has been pushing his $447 billion American Jobs Act package to Americans and Congress with minimal support.  With next year being an election year, history shows that it is doubtful any major tax laws will be placed into law as we approach November 2012.

What are some key things business leaders need to understand about year-end tax planning?

Good financial information is the starting point for good tax planning. It’s important to understand the current financials to date and to be able to project what you think will occur toward the end of the year. Companies should plan on working with their trusted CPA in ensuring that financial information is complete and accurate. In addition to financial statements, business leaders should look at the important factors that drive growth for their business; this can help determine what type of incentives might be the best to explore.

Timing is also important. Look at income recognition and the expenses that will be incurred, and determine whether those items will be recognized before year end.  It is important to work with a trusted tax advisor to assist with year-end tax planning. Book to tax differences lead many companies to a higher or lower projected taxable income.

Your trusted tax advisor should be able to assist in identifying these differences and providing proper planning in assisting with your tax situation.

What are some key items to consider when looking at year-end tax planning for your business?

One of the key areas to look at in 2011 is capital expenditures. Depending on the facts, companies have two options in 2011 available to them in expensing qualified purchases for tax purposes. The first option is under Internal Revenue Code Section 179.  If a company has taxable income and capital purchases which are under $2 million,  a taxpayer can write off the first $500,000 worth of qualified assets, either used or new. However, this does not include real property, so you have to be cognizant of the type of assets you’re buying to determine whether or not they qualify. If you have more than $2 million in purchases or want to maximize additional purchases, bonus depreciation is the second option available. You can deduct 100 percent of your qualified asset purchases in 2011. Please note that in order to claim the 100 percent bonus depreciation, the asset must be new and placed in service on or before December 31, 2011. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to deduct most, if not all of their outlays for machinery and equipment. The expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities. These tax depreciation incentives allow you to accelerate a deduction you were already going to have. If you would have depreciated these assets over a five-, seven- or 15-year period, you’re able to take a deduction hopefully in year one.

What are some other unique tax credits or incentives that businesses can take advantage of this year?

Nail down the work opportunity tax credit (WOTC) by hiring qualifying workers. Under current law, the WOTC may not be available for workers hired after this year, unless extended. Qualifying individuals hired by a company can get up to a $9,000 tax credit.  You have 28 days from the time the associate is hired to submit this information in order to qualify. It’s important to work with your tax adviser and human resources department to ensure that you qualify and receive the benefits.  Qualifying workers include food stamp recipients, veterans, felons, families on assistance, individuals in empowerment zones and several other at-risk individuals.

Make qualified research expenses before the end of 2011 to claim a federal research and development (R&D) credit.  This credit could give your company up to six-and-a-half cents for every dollar spent on qualified research expenditures and could be used as a credit to offset federal tax. Many states offer incentives as well on qualified research expenditures.  For example, Ohio allows a research credit against the commercial activity tax.

Finally, while many companies have had to cut out benefits for their work force due to financial burdens, 401(k) matching is one area to consider keeping. Not only does it help with securing employment and ensuring job satisfaction, you can also get a tax deduction for making a matching contribution to a qualified plan.

Tim Schlotterer, CPA, is director, tax and business advisory services, at GBQ Partners LLC. Reach him at (614) 947-5296 or

When a company plans to expand operations into a new state, there are many important issues to consider.  However, between keeping the business running profitably, finding a new location and hiring new employees, companies often overlook state licensing requirements and tax issues.

“If you have to go back to prior years and pay a tax liability that you were not aware of, there’s typically interest and penalties associated with that liability that a company would have to pay as well,” says Sara Goldhardt, CPA, tax senior manager at GBQ Partners LLC. “It’s good to know everything up front and start fresh when a company begins doing business in a state, so you don’t have any surprises a couple years down the road.”

Smart Business spoke with Goldhardt about what to think about when doing business in multiple jurisdictions and why up-front planning is important.

How do you begin to plan for doing business in multiple jurisdictions and what factors need to be considered?

A company needs to fully understand exactly what business activity is going to be taking place in a state.  Some questions to consider are:  Will the company have a physical location in the state? Will there be employees living in the state? Will the company sell tangible personal property in the state?  Will company employees or independent agents perform services in the state?  Knowing the answers to these questions will make the planning process much easier.

Once a company decides it’s going to do business in a state, a company representative typically speaks with an attorney first.  An attorney can help the company register with the state’s Secretary of State’s Office and obtain any applicable licenses or permits. A company should also speak with its tax advisor to understand all of the state and local tax ramifications.

Other licensing requirements will depend on the company’s business activity. If it’s an insurance agency, for example, the company may be required to register with the state’s Board of Insurance. If the company is a contractor, it may need to register with the state’s Contractors Board.

Why is this planning important?

If a company begins doing business in a state and doesn’t consider the proper registration requirements or state tax impact, the company  will not be compliant. As a result, the company could end up incurring an unexpected large tax liability or hefty fines and penalties years later.

How do you determine what taxes you will need to register for and remit to a state?

To determine which taxes to register for and remit to a state, a company needs to analyze the activities being performed in that state. For example, if the company will have employees in the state, it could be subject to withholding taxes on those employees.  If the company will have property in a state, the company may be subject to real estate or personal property taxes. Some states, such as Ohio, have a gross receipts tax, which means that a tax is levied on the total taxable gross receipts of the company. Moreover, depending on the type and amount of activity being done in a state, the company may also be subject to sales/use taxes and income/franchise taxes.  In some states, such as South Carolina, simply registering with the Secretary of State can necessitate an income/franchise tax filing.

How do you determine if your taxes are being filed correctly, and why is this important?

Businesses can change each year —they may begin selling in new states or may move out of states in which they were not profitable. When completing the state tax returns, look at where the company is filing and where the company should be filing to make sure it is filing in all proper jurisdictions.  A company should discuss any changes with its tax advisor to help avoid tax compliance issues.  Incorrect filings can result in tax notices, assessments, additional taxes, interest and penalties.

Also, it is important to stay on top of the latest tax changes. States change their rules seemingly every year, so it’s important to keep up with new state tax legislation to, again, avoid additional tax notices and assessments.

What should you do if you realize that you should have been filing in a state but have not?

If a company realizes that it has not been filing and remitting tax to a state and should have been, we typically recommend the following course of action.  First, calculate what the tax liability is that the company owes for the current and prior years, depending on how long the company has been doing business in the state.  If the tax liability is very small, it may not make sense  to go back and file returns for all open years. The company may consider  filing on a prospective basis only.

However, if the expected tax liability is large, a company generally has two options. One is a state amnesty program. Many states have been using amnesty programs as a way to help taxpayers resolve their tax issues while bringing in more revenues to the states. With participation in a tax amnesty program, a company has the opportunity to resolve an outstanding tax liability without paying any interest and/or penalties. Usually there’s some type of abatement offered for involvement in the program. The other option is to do a voluntary disclosure. States will allow a company to come forward voluntarily and pay to become compliant in the state. Similar to the amnesty program, a state will generally offer some type of abatement on interest and/or penalties.

Sara Goldhardt, CPA, is a tax senior manager with GBQ Partners LLC. Reach her at (614) 947-5243 or

Wednesday, 31 August 2011 20:02

How to develop a buy-sell agreement

Companies should not only have a plan outlining how they conduct business, but also covering what happens if one of the owners leaves the company. A buy-sell agreement outlines who may purchase an owner’s shares, how the value of the shares will be determined, and the terms of a purchase. It’s important for any business with more than one shareholder to have a buy-sell agreement as a critical element to succession planning and to ensure continuity when a shareholder leaves.

“Buy-sell agreements ensure that shareholders are treated fairly when they leave a business, and that they will ‘know the rules of the game before they play’ — i.e., know when and how their shares will be bought out when they leave, how the company will deal with other shareholders leaving, etc.,” says Brian Bornino, CBA, CFA, CPA/ABV, director of valuation services at GBQ Consulting LLC. “It is crucial to have an agreement in place before a triggering event, since these events often cause disputes and friction, which can make the process very problematic.”

Smart Business spoke with Bornino about what you need to understand about buy-sell agreements and why valuation plays a critical role in administering these agreements.

What are some key items business leaders need to understand about buy-sell agreements?

  • You have to have one.
  • Regularly, shareholders should ‘play out’ the agreement to see what would happen if someone left so there are no surprises.
  • Review the agreement occasionally.
  • Shareholders should consider funding future buyouts triggered by the buy-sell agreement with life insurance.
  • Valuation is perhaps the most critical part of a buy-sell agreement, and independent valuations are highly advisable for administering these agreements.

How does valuation come into play with buy-sell agreements?

Valuation is probably the most critical part of a buy-sell agreement. Knowing how to value the shares of a departing shareholder is critical — and is often a huge ‘unknown’ for shareholders. While some agreements establish a formula, there are many flaws with formulas and they often produce unintended and irrational results. Formulas should never be used if the shareholders’ intentions are to buy shareholders out at fair market value; rather, independent valuations should be performed. A simple formula cannot encompass all of the complex factors that are involved in a proper business valuation.

There are many different ways that valuations are used in buy-sell agreements.  Sometimes a value is established annually. Sometimes a value is only established when there is a triggering event. In these cases, sometimes ‘each side’ gets a valuation and there might even be a third ‘tie-breaker’ valuation if the two valuations are not sufficiently close.

The best practice is to have valuations completed regularly and communicated to all shareholders — and to do this before a triggering event. Although there are costs associated with this approach, the benefits far outweigh the costs since valuation is, by far, the most common element of disputes with buy-sell agreements. Shareholders will appreciate knowing the value before there is a triggering event, as it provides comfort and certainty.

Also, knowing the value of the shares allows the company to plan for repurchases and perhaps fund them with life insurance. Additionally, it is much easier to value a company before a triggering event, because shareholders are getting along and generally agree on the business’s future prospects, which are important to a valuation. After a triggering event, valuation becomes much more difficult because shareholders begin ‘jockeying for position’ and advocating higher or lower values based on their own best interest. In these cases, the valuator has to sort through both sides of the story — i.e., two completely different sets of projections regarding the business’s prospects — and do their best to come up with a reasonable answer. Not to mention, as a shareholder’s ownership interest in their business is often their most valuable asset, doesn’t it make sense to know what it is worth before the shareholder leaves?

How can you ensure that you have a well-crafted agreement?

Have the agreement reviewed by both an attorney and a business valuation expert. Many agreements are deficient, particularly with regard to the valuation language. Valuation formulas should almost always be avoided. Also, the valuation language should be clear as to whether valuation discounts apply, as this is often the source of confusion and disputes.

Valuation discounts apply when assessing the fair market value of a noncontrolling ownership interest in a privately held company. Since these discounts can be quite large — often 20 to 40 percent — it is important for everyone to understand whether these discounts should be applied to the company’s value when determining the value of the shares pursuant to the agreement. If the agreement is silent on whether discounts apply, disputes can arise.

Ultimately, it is important for all shareholders to understand what happens when shares are to be purchased, and all advisers should be on the same page as the shareholders.

What are the risks and benefits associated with buy-sell agreements?

The biggest risk is not having one. Other risks are having a nebulous, confusing agreement, an ill-conceived approach to valuing shares, such as a valuation formula, or having to sell a business when a shareholder leaves.

The benefits include shareholder comfort and certainty, the ability to plan for repurchases and business continuity.

Buy-sell agreements are truly an example of when an ounce of prevention is worth a pound of cure. It is much easier to ‘do it right’ ahead of time than deal with costly and disruptive disputes later.

Brian Bornino, CBA, CFA, CPA/ABV, is director of valuation services at GBQ Consulting LLC. Reach him at (614) 947-5212 or

Health care costs for all industries have increased between 120 to 130 percent over the last decade. In 2010 alone, costs increased by 8 percent. Dependent eligibility audits have become important tools for businesses to utilize to ensure the employees and dependents on their plan are eligible participants and to also ensure compliance with requirements such as ERISA and Sarbanes-Oxley.

“If you can’t afford to cover an employee because you have ineligible people on your health care plan, you’re not going to be able to attract great, new talent to your business, because everyone wants health care coverage,” says Jenny Harmon, CPA, director, GBQ Physician Practice Group. “If you can’t provide good benefits, your talent pool will become limited.”

Smart Business spoke with Harmon about the key components of a dependent eligibility audit and how health care reform has affected audits.

What is a dependent eligibility audit?

A dependent eligibility audit determines which members of your health insurance plan are actually eligible. Certain requirements must be met to be eligible for a health insurance plan, such as being an employee or a dependent. The employer sends notices to its employees and has to show that the people currently covered are eligible.

Situations like divorce, common law marriage and overage or part-time students result in ineligibility for previously eligible people.

Why should an employer conduct an audit?

Larger companies, or companies that undergo regular financial audits, have to ensure compliance with Sarbanes-Oxley. They have to show there’s no misappropriation such as fraud or theft with their assets.

ERISA, which governs health insurance plans, only allows coverage for people who are ‘eligible.’ The employer can define what ‘eligible’ is – but there may be problems if the employer covers people who are ineligible, or if the policy discriminates.

For example, you may unknowingly be covering Suzie’s common law husband when you’re not supposed to be, or her 29-year-old son, because no one’s ever kicked him out of the plan — and you may have declined to cover another person’s 29-year-old son.

Dependent eligibility audits are especially important for self-insured employers, because of their additional responsibility.


What are some key things business leaders need to understand about these audits?

Communication is key during an audit. Don’t just send out a letter telling employees to provide documentation — you need to educate employees on eligibility rules. Sometimes, you can provide amnesty: employees can turn themselves in and fix everything.

The average cost per dependent is $3,000 to $5,000 in a self-insured plan. Most audits find 4 to 12 percent of dependents currently on a plan shouldn’t be covered. So employers actually end up with a cost savings.

How can you prepare for an audit?

The logistics of asking everyone to prove that they are actually married, have children who cannot get insurance elsewhere, or have a handicapped child who is eligible for continued coverage from their plan are a lot of work. The volume of information is huge. Set up a call center where employees can call in and ask questions. If you have 1,000 employees, it’s smarter to do that externally. A 100-employee company may be able to manage it internally, but has to worry about complying with HIPAA and other privacy policies.

For a 1,000-employee situation, one of these plans typically costs $6,000 to $8,000, and you will probably make that back times four in claims and premiums. It’s better to have someone else have that responsibility than try to do it internally.

What impact has the Health Care Reform had on dependent eligibility audits?

The biggest thing is, there are now ‘theoretically’ fewer ineligibles. You have to provide the opportunity for dependents up to age 26 to be on your plan, whether they do or do not live with an employee, are still in school, etc. It’s opened up the opportunity for coverage to expand to more people. You will have fewer ineligibles, and it also added a component where you can’t discriminate for the cost — a dependent is a dependent, up to age 26.

Before health care reform, you could retroactively bill employees or cancel their insurance if you found out their dependent was ineligible. You can’t do that anymore. Unless you can prove that they fraudulently signed that person up, you can withhold coverage from this day forward. The fear was, if you kept someone on for six months after a divorce, and all of a sudden that person had a huge car accident resulting in many claims and the insurance company or self-insured plan paid the resulting bills, once the person was found ineligible the insurance company would request repayment from the doctors and hospitals making the self-insured plan or the employee responsible for the bills.

What are the risks and benefits associated with dependent eligibility audits?

The biggest risk is lack of communication with employees as to why this is happening. Before, many companies were sending out an affidavit form that listed who was on their insurance, and employees just had to sign off that all of these people were eligible.

It’s also a major privacy risk. If you ask questions about an employee’s spouse, especially in a plan that might cover same-sex and common law partners, do you really want to know that information?

The largest benefits are compliance with ERISA and Sarbanes-Oxley requirements, covering who is supposed to be covered, and controlling costs. If you’re self-insuring a plan, and remove just two ineligible dependents from your plan, you’re saving money and eliminating risk of any costly health issues that might arise with that dependent.

Jenny Harmon, CPA, is the director, GBQ Physician Practice Group. Reach her at (614) 947-5246 or

The sales landscape is changing. To succeed, businesses need to focus on three key drivers of profitable growth — customers, pricing and innovation.

“If you think about those three things, sales is the critical nexus through which they all flow,” says Jim Lane, director of RedBank Advisors at GBQ Partners LLC. “You can’t get a decent price if your sales people cave when they’re pressured. You can’t hear about innovative demands and needs from your customers if your sales people are not listening carefully. You can’t establish customer satisfaction with a sales force that is setting expectations that you cannot meet. Sales is a critical enabler of all three drivers of profitable growth.”

Smart Business spoke with Lane about how to understand the changing sales atmosphere and make sure your sales force can accommodate the changes.

How has the sales environment changed?

If you rewind a little bit, a lot of businesses thought their sales guys were absolutely amazing in the 1990s, and many of those sales people are still in place. Early in this decade, business leaders looked at sales people a more little critically, but then the sales group seemed to recover and hit their feet again. That all changed with this last downturn, and now no one seems to know how to sell.

Have the sales people really been getting better and worse? No, but what’s been happening is that our feelings about sales people track with the economy. So in the mid to late 1990s, the economy was raging along, and all you had to do was show up with a sales book to get an order. In the early 2000s, there was a bit of a downturn, so we looked at sales people with a bit of a critical eye. But we recovered and started to make progress again, so business leaders thought that sales people knew what they were doing. But it wasn’t until this latest downturn when we figured out that they really don’t know it all, and in many cases, are not suited for sales or don’t have the knowledge or skills to be effective at sales. As a result, we’ve seen a bunch of sales managers and sales people who’ve been exposed as not good at what they’re doing.

What are some key things business leaders need to understand about the changing atmosphere of sales and growth?

The key difficulty that business owners have when looking at their sales force and growth curve is that, once they know what their own desires and goals are for growth, they don’t separate out what they’re accomplishing versus what’s being accomplished because of the business environment. In the 1990s, we all thought we were geniuses. But over the last 18 to 24 months, we all thought we were idiots. Have we really changed, or is it just the performance of the economy that’s driving the change in the business? You have to separate out what you can control versus what the economy controls. That will help you determine the difference between an opportunity to improve and factors beyond your control.

How do you work with your sales force to accommodate this change?

The first aspect is getting the right people in place with the right psychological makeup. The second part is making sure that they have the skills and training that they need.

That first part is really a price of entry, it’s really a go or no go. There are a couple of key characteristics of a good sales person’s psyche, which deal with a willingness and commitment to do whatever it takes to make oneself successful. The other one is fortitude and the ability to hear no, keep on going and keep your drive up. If someone is lacking in those two elements, it’s probably not a good idea for that person to remain in sales for a career. You have to evaluate each sales person with a rigorous assessment tool so you can determine his or her potential. Then you can track progress against their potential each year as you go along.

Then you can train your sales force on a whole series of different skills. You can definitely impact these and improve performance through some of these skills in a way that has a return associated with it. When you first look at your sales force, you need to determine if you receive a continued return on investment. You might as well just trade them out or eliminate those positions if you do not. If you have a group of sales people who have those core psyche elements, then you can determine what the return on investment will be for that group. That’s where you see an opportunity to continue to invest in and improve the performance of the existing sales group.

Once you’ve been through this analysis, and you know how to invest in your current talent pool, then you can look at the gaps. You look at what types of sales people that you do have, and what types of sales people that you need to drive growth.

What are the benefits and risks of focusing on the key drivers of profitable growth?

Business leadership is a balance of looking at drivers of growth and profitability and looking at efficiency, which is more cost focused. Drivers of growth tend to be revenue and top line oriented. Drivers of efficiency tend to be cost and bottom line oriented. As with anything, if you focus too much on the left hand, you forget what the right hand is doing. You need to keep a balanced outlook.

If you do focus on profitable growth, the key benefit is that you become a much stronger organization. Companies that did well over the last 18 to 24 months were ones that had already taken up the challenge of being profitable. They came into the downturn with the cash to take advantage of buying opportunities and were able to invest in new capabilities and talent at a time when they were relative bargains.

Being more profitable makes you a much stronger firm. When another company is trimming to survive, you can attack their customer base and introduce new products. That financial strength enables you to do a lot of things when there are competitive opportunities to move.

Jim Lane is the director of RedBank Advisors at GBQ Partners LLC. Reach him at (614) 947-5257 or

When The Ohio State University marching band steps onto the field this month, they’ll be ready. And the journey they take from raw recruits to a national television-ready band can teach us a lot about business. In a conversation with Jon Woods, the band’s director, Jim Lane, director of GBQ Redbank Advisors, identified key lessons that apply to both marching bands and businesses.

“A rigorous focus on fundamentals, talent development, and balancing innovation and tradition drives performance of bands and businesses,” says Lane.

Smart Business spoke with Lane about the lessons learned from OSU’s marching band, and how to incorporate those lessons into your business.

How do you define fundamentals?

Fundamentals are the core activities that a business repeats in order to satisfy customers. It can be closing an order, making a product, or purchasing something, but there are fundamental things that your business does over and over again, everyday. The power in these comes from the number of times they are done. In the case of the band, there are 60-some odd fundamentals a band member needs to know to be successful. Examples include four different types of marching steps, how to tip a hat and how to create a horn flash. The fundamentals characterize how the band looks as a unit. By doing them consistently, the band looks like a cohesive group. By combining fundamentals in the proper sequence, enormously complex musical and visual displays can be created.

Once the fundamentals are identified, the power of their numbers comes into play. Because they are repeated so frequently, even if you improve each one just a little bit, they have a big impact on the business because they’re repeated often. Take a business that sells a high number of orders per day. If that business focuses on the sales process and reduces the amount of discounting on each customer’s order by 1 percent, on average, they have put an entire percentage point of revenue to the bottom line. Without that focus on a fundamental process like sales, results are unlikely to occur evenly across the business and they will under-achieve the potential.

What lessons can you learn about the talent life cycle?

The band has an interesting approach to the talent life cycle. They go out and impress young musicians from high school marching bands, but they also recruit good musicians who haven’t necessarily marched before. Musical talent is critical. Marching they can teach. There is more to this recruiting than just putting on a good show for the enthusiastic recruits though. They also need to help them understand before they commit just how difficult it is being a member of the OSU marching band. It’s a two-phase commitment process — inspiring and attracting and then getting recruits to understand the nature of the commitment.

Once they have committed, the recruits are trained and developed by students. There are directors and instructors supervising the process, but the student squad leaders run the tests to see who is the strongest. Young band members relate very well to the squad leaders who are closer to their age. They also communicate in their own terms, so there’s less lost in translation.

The last lesson from the talent life cycle is that Woods has final say on who will make the band each year. Squad leaders develop recommendations, and rankings are given, but the director makes the final decision. It helps maintain that single vision of what the band needs to be. This translates directly to the business world. Each part of the business, but particularly the talent, needs to reflect the vision of the business.

What lessons can you learn about tradition and innovation?

Every great tradition of the band started out as an innovation — Script Ohio, Hang on Sloopy, Across the Field — everything had its debut moment. The trick is to continually debut new material and strong pieces that have potential of becoming traditions, and let the fans (or in the case of a business, the customers) make the decisions. If the band doesn’t play Sloopy often enough, the fans will start yelling for it.

In business, the analogy is listening to the customers and letting them be the arbiters of which innovations should become traditions. Be quick to abandon the ones that don’t work — like playing the sinking of the Titanic during the 41-14 loss to Florida in the National Championship game. You also need to continue to refine the innovations that are successful. If you look at historic photos of Script Ohio versus what it looks like today, it has the same fundamental design, but the form is very different. Years of refinement of the fundamentals and tweaking the overall design of the performance make it truly incomparable among college and university band performances. Once you’ve got something that’s worthy of becoming a tradition in your business, keep drilling on it and refining it to improve the overall effect.

How do you integrate these lessons into your business?

Start by identifying the fundamentals. These are the high repetition activities that occur over and over again. Identify steps in each function of the business. Employees that do them should be involved to document and understand them, and then work on refining and improving the steps. Determine if you can eliminate any steps in order to make them faster, more effective, increase the quality or improve the effect on your customers.

What benefits will you see by integrating these lessons into your business?

The value of the focus on the fundamentals is the easiest to see. You repeat these things so often that adding a little more to the price or selling a few more each month can really impact the performance of your business and make you grow more profitably.

Jim Lane is the director of GBQ Redbank Advisors, GBQ Partners LLC. Reach him at (614) 947-5257 or