Medicare coverage and what you need to know before enrollment

There are many misconceptions surrounding Medicare coverage, specifically regarding the coverage it provides and the costs those insured by Medicare are responsible for. This can greatly affect the ability of Medicare-eligible individuals to make the best decision regarding their health care coverage.

“Many people do not realize that original Medicare does not have a maximum limit on out-of-pocket spending,” says Charris Nelson, a Medicare specialist at Skoda Minotti. “In order for an individual insured through Medicare to have a cap on his or her out-of-pocket expenses, that person needs another strategy. And that strategy needs to be examined closely to avoid costly mistakes.”

Smart Business spoke with Nelson about what consumers should know about Medicare coverage ahead of an enrollment period.

Considering that Medicare may not cover all costs and services a person needs, what options are available to someone with Medicare coverage that will help them cover the gaps?

There are a number of ways to get coverage to fill gaps in original Medicare or get assistance with Medicare costs. While individual circumstances dictate a person’s options, available to them may be employer coverage, retiree insurance, Veteran’s Administration Benefits or Medicaid. Traditionally though, it’s through supplemental insurance provided by private health insurance companies in the form of Medigap, Medicare Advantage Plans and stand-alone Medicare Part D drug coverage.

There are many options — benefits, provider networks, and premiums vary between insurance companies offering them. Each individual’s circumstance is unique, so a thorough comparison of your options is necessary to determine which is most suitable.

When is the annual enrollment period and what should those who intend to enroll understand before doing so?

For 2017 Medicare coverage, the annual enrollment period is Oct. 15, 2016, to Dec. 7, 2016.

During the annual enrollment a person can make changes to his or her Medicare coverage. It is important to stay up-to-date and carefully review the information made available by your health plan provider since it will outline changes for the upcoming year. When annual enrollment is underway, you can make the necessary changes to reflect your current health coverage needs. This may be the only opportunity during the year to do so.

What can be changed during the annual enrollment period?   

Enrollment opportunities are contingent on election periods, most common being the annual enrollment period. During this time, eligible individuals are making changes to their existing plans. This can be done by joining a new Medicare Advantage Plan or by joining a new stand-alone prescription drug plan. You can also switch to Original Medicare with or without a stand-alone drug plan from a Medicare Advantage Plan during this time. There are many combinations for people to consider and it can get confusing, which is why it’s a good idea to consult with an adviser.

What can an adviser offer in terms of assistance during Medicare enrollment periods?

Approaching a Medicare decision, and comparing and exploring options, is complicated and can be overwhelming. Those approaching eligibility, or who are on Medicare, are inundated with mailings of plan options from each insurance carrier. Consulting a specialist who will take the time to explain how Medicare works — Part A, B, C, D and Medigap plans — so there is a clear understanding before enrollment is crucial. These choices are complex and their ramifications can be long lasting. Working with an experienced professional who is knowledgeable about Medicare plans can save a great deal of time and money.

Too often beneficiaries rely on information and feedback they receive from another enrollee to make their decisions. Your needs differ from that of a co-worker, neighbor, relative or spouse. This is why it is important to know your options and seek advice in order to become well-informed.

Insights Accounting & Consulting is brought to you by Skoda Minotti

Minimize the risks of not properly managing your company’s benefit plan

A lack of compliance in your company’s retirement plan is easy to prevent with the right amount of planning. Plus, once you get everything set up with the right structure, it’s not time consuming or burdensome. The key is being proactive upfront, before you face unexpected pitfalls.

This isn’t a responsibility you can avoid, either. Even if you bring in others to help bear the burden — hire a co-fiduciary and co-trustee, usually an investment adviser, Employee Retirement Income Security Act (ERISA) attorney or CPA — a plan sponsor never fully gives up the fiduciary role, and the risks that come with that.

“If you feel overwhelmed or are unsure of where to find help, especially when you’re also dealing with other rules and regulations that are being put upon your organization, you’re not alone,” says Kimberly Flett, managing director of Compensation and Benefits at BDO USA, LLP. “Some employers get frustrated, saying, ‘This is too much work, too much cost to worry about, I just won’t have a retirement plan.’”

But there are ways to set up a structure to run the plan successfully.

Smart Business spoke with Flett about how to minimize your retirement plan risks.

What risks are associated with not properly managing your retirement plan?

The No. 1 risk is a lack of education. Your employees aren’t sure what to do, so the management is hit and miss and your organization makes knee jerk reactions to changes. This can lead to operational and compliance errors, where the plan doesn’t follow its plan documents and related requirements. You might miss enrollments. If there’s disconnect between your payroll company and your staff, you may not be withholding the right amounts or fulfilling a participant’s requests for deferral election changes in a timely manner. You may also be at risk for distribution errors.

If these pitfalls occur, you and your company run the risk that the plan will be funded incorrectly and distributions will be missed. This can trigger an audit and draw penalties from the IRS and the Department of Labor (DOL). You run the risk of losing your tax-qualified status. You run the risk of an employee suing because he or she feels the plan has been mismanaged. You run the risk of employee fraud.

What’s the best way to oversee a plan?

The employers that are the most successful at managing their retirement plans have identified the right internal team to monitor the plan. That team may include the CFO, the benefits coordinator and HR director, acting like a board of directors for your plan. Generally referred to as the 401(k) committee, this group should meet at least annually or semiannually and follow a timeline for the year’s tasks.

That committee then works in conjunction with an outside group, which might consist of your third-party administrator, ERISA attorney, CPA and investment adviser. These advisers can assist with plan operations, such as compliance and regulatory changes — basically telling you what you don’t know.

It comes down to planning, review, communication and education.

One way to improve employee education and communication is holding an annual town hall for the employees, where you explain what management is doing to administer the retirement plan and outside advisers are on hand to answer questions.

How do you foresee the new DOL fiduciary rule playing a part in 2017?

This DOL rule provides a higher legal standard for investment advisers. Their recommended funds must be in the best interest of their clients, which may not have been the case in the past. This will make it easier for employers to make sure the plan helps employees invest wisely and prudently.

What else do employers need to know?

It’s critical to disclose the existence of all plans to all of your advisers — whether that’s a retirement plan, employee stock ownership plan, 403(b), simple plan, health and welfare plan or non-qualified plan — because these plans interact with each other.

In addition, don’t forget to consider benefit plans when your company goes through a merger, acquisition, sale, shutdown or ownership structure change or redesign. The whole structure can be impacted if, for example, a new owner owns other companies. These changes must be looked at on a broad scope by experts.

Insights Accounting & Consulting is brought to you by BDO USA, LLP

Redefine what your customer is buying and create market differentiation

At some point in its lifecycle, every company eventually faces the pricing and margin pressure that results from increased competition. This is often a good opportunity to look at both your marketing strategy and value proposition and develop a more targeted message to present to your customers.

Smart Business spoke with Chris Meshginpoosh, Director at Kreischer Miller, about techniques companies can use to differentiate offerings, drive growth and increase profitability.

Why do companies struggle so much trying to find ways to differentiate?
In mature industries, factors that customers consider when making buying decisions are widely known. Companies tend to benchmark their offerings against their competitors, considering those widely-known factors. The result of this is that, over time, companies in an industry tend to all look the same. When you focus myopically on the same factors, it can be very challenging to drive real differentiation.

How do you break that cycle?
In “Blue Ocean Strategy,” W. Chan Kim and Renée Mauborgne introduced a framework that can help companies create uncontested space in the market. One of the first steps in the process is to try to redefine what the customer is buying.

For example, in the real estate industry, it would be easy to assume that most homebuyers are simply looking for help identifying and closing on the purchase of a house. However, the purchase of real estate is often only a small part of one of the most stressful life events: moving. Reframing the customer need in this manner might reveal opportunities to develop an offering that stands out from the crowd.

Once you identify a customer need, how do you make sure your offering is unique?
You need to step back and identify the common factors that customers and buyers always consider when making buying decisions. Once you have assembled that list, start thinking about factors you could completely eliminate.

For example, in our industry, most of our competitors provide audit services to both publicly and privately-held companies. We completely eliminated one factor – auditing publicly-traded companies – which immediately impacted every facet of our business, including the services we offer, the people we hire, the training we provide and our overall cost structure. As a result, we look much different to the market we serve.

Is eliminating factors the end of the process?
Not at all. Next, think about the reframed customer need that was identified in the first step. With that need in mind, try to identify factors that none of your competitors are currently offering. Going back to the real estate example, what if your customers were looking for assistance taking the stress out of finding, buying and moving into a new home?

When put in this larger context, it becomes clear that customers could benefit from assistance with not only identification and closing on a real estate transaction, but also title insurance, financing and relocation services. A client of ours did this and built one of the largest real estate brokerages in the country.

Once you have identified factors to eliminate or add, what are the next steps?
The final step is to consider what other factors you could reduce or raise. For example, if all of your competitors are stressing a factor such as a wide range of products, one option might be to reduce the scope of your offerings.

Narrowing your focus might allow you to go deeper into an important category, as well as reduce costs throughout your supply chain. Many internet retailers have been wildly successful executing strategies like this.

Do you have any final words of advice?
The marketplace is always changing, so these principles should be part of a company’s ongoing strategic planning process. By systematically challenging your team to reframe customer needs and your offerings, you can find uncontested markets, and drive both growth and profitability. ●

Insights Accounting & Consulting is brought to you by Kresicher Miller

Budgeting, forecasting for a business and how it impacts personal finances

The personal lives of business owners, especially those with smaller companies, are intertwined with their business as long as it’s in existence. It’s a means of support for family expenses and their lifestyle. Good budgeting and forecasting for business owners and their companies are critical to achieving the goals of each.

“A lot goes in to budgeting and forecasting, but when the business fiscal year ends, it’s a brand new ball game. Questions need to be answered before it begins,” says Michael Van Himbergen, CFP®, a financial advisor at Skoda Minotti, and ProEquities, Inc.

“Review your financial situation and the financial situation of your business annually to make sure any obstacles — anticipated or otherwise — are handled before the end of the year so they don’t become roadblocks.”

Smart Business spoke with Van Himbergen about what to include in annual financial reviews and why they’re important.

What are the major considerations business owners should make as they budget and forecast?

Every goal needs a timeline, whether short- or long-term. Consider inflationary factors — the longer the timeline to achieve the goal, the greater the impact of inflation — and establish a target rate of return for each goal.

Make sure you’re paying yourself first out of business revenue. Calculate that as an expense and build it into the budget every year.

Establish a retirement plan for yourself and your employees if you haven’t already. There are a number of factors that determine what type of plan is best to implement, such as the number of employees, their average age, employer and/or employee contributions, to name a few.

If you want to cover college expenses for your children, the longer you wait the more it costs. Families need to save $500 to $600 per month per child from the time their child is born to get them through four years of an in-state public university. However, take care of yourself first to make sure you’re on track for retirement before funding a child’s education. Children will have their entire productive lives to pay back student loans. You can always help out down the road.

Also, don’t forget to plan for weddings, big vacations and any other major purchases, accordingly. And it’s always prudent to have three to six months of monthly living expenses to cover an emergency.

How frequently should business owners review their business and personal finances?

Every year. Is your plan doing what it’s supposed to? Review the company 401(k) with employees. Is participation low? If so, determine the reason they’re not participating and educate employees on the benefits of the plan.

Always review income projections. A cash flow analysis will show you whether income is stable or fluctuating.

Review personal investments at least annually unless there are significant changes that would affect longer-term planning. If that’s the case, talk to your financial adviser/accountant to determine how that life-altering event could affect your long-term financial goals.

What, generally, are some ways to adjust to the new financial realities that follow a life-changing event?

Changing jobs, death or disability, death or disability of a partner or a key employee, having children, getting married or divorced are common life-changing events. When these events happen, it’s important to determine how they impact your financial plan. Any of these can affect cost of living, the level and type of insurance protection that’s prudent, and how much money is available to save and spend. Regardless of what’s happened, it’s important to stick to a financial plan and make adjustments as needed, rather than stop saving altogether.

Unexpected aside, define your goals to determine the level of risk that’s prudent given your situation and the goal you’re trying to obtain. Review your circumstances at least annually with your financial adviser, both in terms of what’s going on in your life and in your finances, and you should have no trouble achieving your goals.

Advisory Services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC. Skoda Minotti is independent of ProEquities, Inc.

Insights Accounting & Consulting is brought to you by Skoda Minotti

Cloud accounting is stirring up the business world; don’t get left behind

Cloud accounting is not only getting bigger and better, there’s been a change in perception with accounting firms and business owners, says Deborah Defer, managing director of Business Services and Outsourcing at BDO USA, LLP.

People in the U.S., particularly in the accounting profession, have recognized the inevitable technology change with the benefits that cloud-based accounting solutions bring. They are starting to understand it’s so much more transparent and efficient that it’s worth making the change.

“Embrace the change. You can kick and scream all you want, but it’s coming,” Defer says. “Don’t wait, because you’ll be sorry. You can’t imagine how many clients tell me ‘I wish I had done this two years ago. Why didn’t I do this before?’”

Smart Business spoke with Defer about what business owners need to know about cloud-based accounting.

How much has cloud accounting grown?

It continues to grow. As a good example, in BDO’s Business Services and Outsourcing advisory group, four years ago, we had a few clients who used QuickBooks™ Online. Today, it’s several hundred.

The products are also advancing rapidly. Everyone, from small startups to big corporations, is investing hundreds of thousands of dollars into improving the technology. For example, a hybrid product, which is partly used in the cloud and partly on your own hardware, can often be a bridge for learning how to work in the cloud comfortably. It can allow you to keep certain feature sets that you aren’t prepared to give up.

What’s the biggest benefit to switching?

As business owners start utilizing the systems, they realize they can get hours of their day back. You have access any time, anywhere to real-time data. For example, if a business owner uses QuickBooks™ Online and turns on an external add-on, he or she can get key performance indicators instantaneously.

How do you make an accurate business decision looking at a financial statement that’s weeks or months old? Cloud-based accounting can help you manage your cash flow much easier. You’ll know what is your outstanding accounts receivable, what is your inventory turnover, etc. You can see today, right now, your cash flow and know where you’ll be a week from now.

Cloud accounting also can be used for a variety of areas, from a sales representative that is tracking expense reports, to time entry and GPS that tracks miles.

And while low cost can be a factor, it’s usually not the highest priority.

Is security still a concern?

It’s always going to come up. But you need to realize that your accounting solution may be more secure on an Amazon server that has been thoroughly vetted and reviewed, than a desktop where somebody can walk off with your laptop or hack into your personal computer.

How can business owners get the most out of their cloud accounting solutions?

Find an adviser, first and foremost. You should align yourself with an experienced adviser — someone with a track record that can recommend and help you build out your end-solutions.

There are thousands of different applications out there. Business owners do not have the time to vet five or six different point-of-sale systems. They don’t have time to figure out what expense report is the best. They don’t have time to figure out which system holds hands with another system.

Even after you chose a product and have gone through the initial training, that adviser can be helpful. You could need to set up specialty reporting or maneuver in the system, as time goes by.

When you implement cloud accounting, you will have to spend some time preparing a timeline and game plan. You have to make sure your employees are trained to utilize the third-party applications that complement the system, prior to operation. You may decide to run the new program simultaneously next to the old system during a transition period; others just switch over. However you do it, you can work with your advisers to ensure it goes as smoothly as possible, and that your history, your comparative financial statements, is still accessible.

Insights Accounting & Consulting is brought to you by BDO USA, LLP

Would you buy your company if it was for sale?

Many private company owners lose sight of the importance of the returns their business generates based on the capital they employ and the risks that they take.

The chief reason for this is that the business becomes a “lifestyle business.” Its principal purpose is now to support the owner’s lifestyle rather than to function as an important asset that is growing in value. This lifestyle view can come at a significant cost to an owner in terms of lost business value. When you view your business as an outside investor would, it can create more value over time.

“Taking this perspective requires the owner to change the way they organize and view the business, and the way they measure how the business is performing,” says Mario O. Vicari, CPA, a Director at Kreischer Miller. “This all takes discipline and effort. However, given that the business is the largest personal asset for many owners, the effort is worth it.”

Smart Business spoke with Vicari about the value of taking an outsider’s view of your business.

How do you evaluate your company with the perspective of an outsider?

To take an outside investor’s view of your company, start by asking yourself the following question: If your company was for sale, would you be willing to buy it based on its current state of performance? And how much would you be willing to pay?

Asking yourself this rhetorical question will give you a more objective view of how your business is performing and what changes are needed to boost its performance and create more value for the owners. In answering this question, it’s helpful to understand how third-party buyers evaluate private companies.

These investors have a singular focus on returning as much capital back to their investors as soon as possible. So every decision they make is based on whether the business will generate an increase on their return on invested capital. While there are some limitations to this approach if you focus too much on short-term results, taking this ‘investor’s view’ can be very instructive when applied in the proper context.

What are the key areas to focus on in order to take an outside investor’s view of your company?

■ Bias — Remove your biases about the business, how it works and how it is organized. Take a fresh, objective view and organize it in a way that makes sense, without getting caught up in how things have been done in the past or who does what.

■ Strategy — Invest serious time to develop and refine the company’s strategy and business model. If your strategy is wrong, your company will never achieve its full potential.

■ Goal Accountability — After your strategy is developed, establish clear goals and hold people accountable for achieving them. Create incentives for achieving important goals, as well as consequences for when goals are not reached.

■ People — Make a very honest assessment of all your people, especially those in key leadership positions. The business can only ever be as good as the people you surround yourself with. You have to be willing to make the tough decisions to ensure you have the right people in the right roles.

■ Governance — If your company doesn’t already have one, establish a board. Private company boards can fill in gaps where the company may need help. They can also instill operating discipline by holding the owners and managers accountable. And they add structure by formalizing the reporting and accountability processes of the business.

■ Financials — Increase the value you get from your financial reporting so that it becomes a strong decision-making tool. Upgrade your financial reporting requirements so there is increased visibility on what is happening in the business along with an emphasis on proper allocation of capital to achieve a hurdle rate of the returns on invested capital.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Why you must invest in your business, and the tax credits that can help

The U.S. isn’t a low wage nation. We have to make things and serve people better, smarter, faster and with more skill. Therefore, business owners are always working to improve their offering for customers. What equipment or methodology will technologically put you ahead of the curve?

The good news is that a few helpful tax credits have been made permanent or extended out several years, says Floyd Trouten, tax partner at BDO USA, LLP. Now, you won’t have to wait until the end of the year to plan your investments, worrying whether or not you can get the credit.

“That’s a heck of a way to run your business, especially with long-term investments that can costs hundreds of thousands of dollars,” Trouten says.

Smart Business spoke with Trouten about long-range planning and investment, as well as tax provisions that help offset these costs.

Why do U.S. manufacturers, distributors and service providers need to invest in themselves?

The U.S. dollar is high against a lot of currency right now, so it costs more to buy our finished goods. We have to ensure that we’re more efficient — better and faster — to stay attractive. At the same time, foreign companies can sell their goods cheaper because a dollar buys more finished product in the European Union or South America.

As another example, China now faces dumping duties on coiled steel. As a result, they’ll probably send more completed parts, which won’t have duties. Before, the Chinese might ship the steel and your company would convert and sell it to the user. Now, the Chinese are going to say, ‘OK, I’ll just make the part and sell it to the direct user.’

Having state-of-the-art equipment and the ability to find niches with expanded offerings is critical in today’s market.

What do companies need to know about the R&D tax credit?

The R&D credit for growing research and development has been made permanent, after 14 separate extensions. Employers can better plan and take more risk because the government is venturing with them.

The R&D credit applies to more than just product improvements or testing. It can be used for sales, general and administrative costs, as long as it’s continual improvement.

There are two calculation methods. The simplified method requires three years of data for a 14 percent credit. The full credit is 20 percent and requires five years of data. If you’ve incurred time from your engineers, line employees and management on a new product, you can do an R&D study to ensure you’re picking up all costs, in order to maximize the credit.

Also, if you’re a small company, typically $5 million in revenue or less, you have the option to use up to $250,000 of the credit to offset what you pay in Social Security and Medicare taxes.

How has bonus depreciation and Section 179 changed?

With bonus depreciation, in the initial year of service you can write off 50 percent of an asset. The bonus now extends through 2019. Employers will get 50 percent through 2017, and then it goes down to 40 percent in 2018 and 30 percent in 2019. This is particularly useful for employers with capital-intensive equipment needs.

A subset of this, Section 179 allows a company to expense up to $500,000 in the initial service year, as long as it’s not putting in more than $2 million in fixed assets. This has been made permanent and it will adjust for inflation. Also, companies can now expense off-the-shelf software under Section 179, rather than amortize it.

So, if you buy equipment, you could get a tax deduction, whether it’s 50 percent bonus depreciation or Section 179 immediately, even though you’re still paying the bank and the asset will benefit you for years to come.

Are there other tax credits that might apply?

There are additional credits, but one to consider is the Work Opportunity Tax Credit (WOTC). The WOTC or other similar programs, found on federal, state and local levels, are designed to help those who face barriers to employment, such as veterans, disabled, people on government assistance, etc. There’s a lot of paperwork and detail that you need to pay attention to, but it is something to think about if you have a talent shortage, whether you’re a manufacturer or restaurateur.

Insights Accounting & Consulting is brought to you by BDO USA, LLP

Stricter ACA enforcement will require attention to costs, detail

Affordable Care Act (ACA) regulatory requirements will continue to roll out in the coming years. Accompanying these changes will be greater enforcement of those rules, leaving noncompliant employers to face significant penalties.

Smart Business spoke with Ted Ginsburg, CPA, J.D., a principal at Skoda Minotti, about what employers can expect and strategies to lower costs and avoid penalties.

What should companies keep an eye on in the coming years regarding the ACA?

There may be new regulations coming out regarding certain classes of employees and situations — for instance, defining who can be classified as a seasonal employee.

While it’s not likely to transpire until 2018, the IRS will start to assess an excise tax for failure to provide the right amount of insurance to employees. If an employer is penalized for not providing appropriate coverage to employees, employers will have two months to respond. If they don’t, the IRS will come after them.

The IRS has made clear that the 1095 series of forms will continue to be used, and that the forms will be due Jan 31, 2017. There will be no extensions, so forms must be completed and submitted on time.

What can employers do to stay compliant with the ACA while reducing the costs associated with compliance?

One option to reduce the cost of providing health insurance coverage while staying in compliance with the ACA is to become self-insured, which suits companies with 200 or more employees. Programs are being marketed that would allow smaller employers to pursue this strategy. That move could save employers 30 percent annually on the cost of health insurance.

Employers could also better estimate how much they can charge employees for insurance premiums and still meet ACA affordability guidelines. Explore various policy alternatives such as Health Savings Accounts. Examine the plan and plan design to see if cost savings can be uncovered. Take into account both the amount that the company must pay in total for the coverage as well as the amount that the employee could be forced to pay while meeting the ACA standards.

Those that had an unpleasant experience preparing 1095 forms in 2015 should be looking at ways to make the experience better. The forms are not difficult to prepare, but many employers had trouble getting the necessary data out of their payroll system to complete the process.

What can employers expect in terms of enforcement of ACA regulations?

The IRS is starting enforcement actions for failure to file or inadequate filings. And employers that fail to give employees their required 1095 form will be penalized $250 for each form that’s not sent out.

When it comes to policing employers, the IRS is looking to the 1095 series of forms for clues. The IRS can easily check if an employer has completed that filing, so penalties for noncompliance can and will be doled out. The Department of Labor (DOL) may also help with enforcement. If, for instance, a disgruntled employee files a complaint for whatever reason with the DOL, it will likely ask if a 1095 was filed on the employee’s behalf. If not, the DOL will alert the IRS.

What should employers know about the “Cadillac tax”?

Employers trigger a 40 percent excise or Cadillac tax when the actuarial value of an employee’s health coverage exceeds a certain dollar level — the tax is on the benefit above that level. It won’t be imposed until 2020.

The level of benefit that triggers the Cadillac tax is relatively low but is indexed for overall inflation. Most collectively bargained plans will be subject to it as will most employer plans. Employers, then, need to think about how they can provide less of a benefit to employees and still remain in compliance with the ACA guidelines. Employers should be proactive here. In the collective bargaining sector, some employers are reducing the offered health benefit and giving employees a pay raise in exchange for accepting a lower level of benefits.

The Cadillac tax is a major funding source for the ACA and will be used to pay for the subsidies provided through the exchanges, so the government doesn’t want to give that up.

Most employers hold their open enrollment periods during the September through November time period. Employers should work with a trusted adviser prior to that time to examine changes in program design, employee contribution levels and the preparation of the 1095 forms.

Insights Accounting & Consulting is brought to you by Skoda Minotti

A quality of earnings report can be a valuable tool when selling your business

Quality of earnings reports are independent reports that are generally associated with the sale or acquisition of a business. While quality of earnings due diligence occurs more frequently on the buy side of transactions, they can be very effective for owners looking to sell their business.

Business owners may be taking a big risk by not completing a quality of earnings report in advance of any effort to sell their company, says Richard Snyder, CPA, Director of Audit & Accounting at Kreischer Miller.

“Discovering surprises once the due diligence phase begins can put the seller at a significant disadvantage in the negotiation process and can often result in adjustments to the sale price, the inclusion of an earn-out to protect the buyer or may lead to the transaction being terminated altogether,” Snyder says.

“Moreover, the process of selling a business is very time consuming, can be a distraction from day-to-day operations and can be very stressful on owners and senior management.”

The intent behind a quality of earnings review is to create an objective document that determines the accuracy and quality of historical earnings and assets, as well as the sustainability of earnings in the future.

Smart Business spoke with Snyder about the value of this report when considering the sale of your company.

What does a quality of earnings report include?
A quality of earnings report is usually prepared by an independent professional as part of the due diligence phase in an acquisition. It typically includes a summary of EBITDA before adjustments, with management and due diligence adjustments, and adjusted for capital expenditures; identification of debt and debt-like items; and a summary of seller changes and their impact to revenue and expenses.

In addition, reports include a breakdown of revenue by categories and customers; historical revenue and operating expense analysis and trends; balance sheet and working capital analysis; and identification of one-time or non-recurring expenses. Reports also include key observations noted during the due diligence assignment, a review of revenue recognition policies, and a review of federal, state and local tax filings.

What are the advantages to completing a quality of earnings report in advance of a transaction?
There are several reasons why completing this report is beneficial to a potential seller. It can allow the seller to objectively assess and evaluate the condition of the business, as well as understand issues that may come up during a buyer’s due diligence process.

This allows the seller to be in a better position to discuss potential issues with a prospective acquirer if they arise. Completing the report also identifies non-recurring items and other issues that could impact the sale price of the business and minimizes potential surprises when the buyer completes its due diligence review. When performed well in advance of an anticipated exit, owners will have time to correct or change identified issues and concerns.

When you understand the components of a quality of earnings review and are equipped to answer the majority of the questions that may come from a potential buyer, you put yourself as the seller in a stronger position to manage the due diligence phase of the transaction. You are also better able to limit or anticipate the number of changes the buyer may propose.

How do you know when it’s the right time to request a quality of earnings report?
Determining when is the right time to have a quality of earnings report completed is a matter of judgement. Owners and management need to consider the need for the report and the potential timeframe for the sale of the business.

Owners and management should consult with their professional advisors (i.e. accountant, attorney or consultant) to discuss the advantages and benefits to performing a quality of earnings report prior to the sale of a business.

In most instances, an owner should consider this type of due diligence about a year to two years from the time the business is anticipated to be available for sale. This will give the owner and management the necessary time to make any recommended changes or adjustments as a result of the due diligence. ●

Insights Accounting & Consulting is brought to you by Kreischer Miller

Mitigate cyberthreats by testing your network for vulnerabilities

Cybersecurity has become a necessity for every business, regardless of size or industry. A hack that results in loss of client information could result in fines or jail time if it was a protected class of information — as is the case with medical records — and the company did little to protect it. Even if unprotected information was lost, a breach of any customer data could mean irreparable damage to a company’s reputation.

“In many cases, basic controls such as firewalls do a reasonably good job of keeping the bad guys out,” says Joe Compton, CISSP, CISA, QSA, CICP, a principal at Skoda Minotti. “What many companies don’t protect is the data leaving its network perimeter. Viruses can get past sophisticated protective software through social engineering attacks that are delivered via email from a recognized sender. Clicking an innocuous link from a seemingly trusted source could cause a major breach. That’s why it’s necessary to understand the unique risks that face your company and implement controls designed to protect it where it’s most vulnerable.”

Smart Business spoke with Compton about finding and eliminating weak points in company systems that could otherwise leave companies exposed to cyberattacks.

What liabilities might a breached company face as a result of its inability to keep data secure?

A company’s liability varies based primarily on the type of information lost and the steps the company took to prevent a breach. There are significant monetary fines and possible jail time for a breach of health care information if a company failed to take reasonable steps to protect that data. In banking, regulators could close a bank if IT controls were deemed missing or inadequate to protect nonpublic customer information.

Businesses that handle unregulated information and are breached risk a damaged reputation. They can survive such a breach, but rebuilding consumer confidence can be complicated and expensive.

What is a compliance framework in the context of cybersecurity and when is it necessary or prudent for a company to establish one?

A control framework provides an outline of safeguards to consider implementing in specific areas to mitigate risk and secure information that’s vulnerable to a company. Some are industry specific, such as Payment Card Industry Data Security Standards for merchants, Health Information Trust Alliance CSF for health care entities and the International Standards ISO/IEC 27001 framework for information technology.

Industry and type of information stored aside, companies should take these basic steps to learn more about their risks:

  • Understand what information they posses and classify it — who internally can see what information, what should be restricted and why.
  • Figure out where that information lives — on workstations, in the cloud, and/or on a server or servers in the office.
  • Determine what information is critical to day-to-day operations.

These are the first steps in deciding what controls are best suited to protect company information.

How can companies know that the cybersecurity measures they’ve implemented are adequate?

It starts with a risk assessment. This inventories items such as hardware, software and data, and explores the risks and threats around those based on day-to-day business operations.

A vulnerability assessment is used to test those inventory items for weaknesses so that the control structure around them can be improved. Once the control structure is implemented or enhanced, a penetration test is conducted to see if a security engineer can break through the new controls.

Security is maintained through a cycle of risk assessment and updating the control framework to address the risks identified. It’s a process companies will want to repeat at least annually.

There’s no such thing as perfection when it comes to cybersecurity, but there are steps companies can take to significantly reduce the risk of having their systems compromised. Control frameworks show a company took reasonable steps to protect customer information and reduce threats. While companies can’t ensure a breach will never happen, they must do all they can to protect their sensitive information.

Insights Accounting & Consulting is brought to you by Skoda Minotti