How thinking ahead can maximize value in transition

Entrepreneurs live for the challenge of launching and building their business. Growing an organization that solves problems, delivers new products and creates value can be an all-consuming passion. As an entrepreneur, building is in your blood. While building may come naturally, it isn’t the only thing that matters when it comes to getting value out of your business. In fact, the way you exit your business can have an even greater effect on what you get out of it, than the way you started it.

Smart Business spoke with Bob Belshe and Kevin Strain, audit partners at Sensiba San Filippo LLP, on how entrepreneurs can develop and implement exit strategies to maximize value and meet personal objectives.

Why do business owners need an exit plan?

The right exit plan can help you achieve both business and personal goals. Conversely, failing to plan for transition can create the need for difficult choices, loss of value and avoidable tax liabilities.

Successful business transitions require an understanding of the objectives and priorities of the business owner. Do you want to maximize value in a transaction? Are business continuity and legacy important? Every business is unique and every business owner has his or her own idea of success. Success requires more than just a great business. It also requires a great exit strategy.

When is the right time for exit planning?

Whether your eventual exit is one year or 20 years away, it’s never too early to think about your end game. Decisions made on day one can have huge implications down the road. Transition objectives should inform your decisions throughout the life of your business. An entrepreneur who wants to maximize value for an external sale within a five to 10 year window should make much different decisions than a business owner who wants to transfer ownership to employees. From corporate structure to investments to distributions and tax planning, the way you manage your business day to day must align with your end game.

What exit alternatives are available to business owners?

With the right planning, there are many different options for selling or transitioning a business. Initial public offerings, asset based sales, stock sales, management buyouts, employee stock option plans and private equity recapitalization can all provide different benefits in transition. While there are numerous ways to sell or transfer a business, there is usually a much smaller pool of alternatives that align with both personal and business objectives.

How can business owners develop the right exit strategy?

Planning the right exit strategy requires an understanding of your business, your personal and business objectives and knowledge of exit alternatives. The objectives of the owner will help prioritize maximizing the value of the business, facilitating retirement and financial security, controlling method and timing of exit, ensuring the survival and growth of the business, and reducing employee and family uncertainty. A good exit plan provides a solution that serves all priorities. Without an exit plan, business owners are often left to choose between value, timing and continuity.

What are common transition objectives?

Maximizing value at transition is a very common objective. In Silicon Valley, many entrepreneurs are also focused on job creation and the legacy of their organization. Having employees understand end-game strategy for management is very important as transition approaches. Communication can help eliminate uncertainty and provide security, keeping employees engaged and motivated. Business owners should not be afraid to have open conversations with their management team and employees.

What can business owners do today to plan for a successful exit?

Regardless of when you plan to sell your business, it’s never too early to plan for transition. Decisions made today such as business entity selection, ownership structure and tax strategy can have a profound impact on transition. Entrepreneurs should meet regularly with experienced advisers to develop, implement and review their exit plan.

Insights Accounting is brought to you by Sensiba San Filippo LLP

A look at what you need to think about if you’re considering an ESOP

The term ESOP is an acronym for an Employee Stock Ownership Plan, a qualified retirement plan. Just like any other qualified retirement plan, the sponsoring company makes tax deductible contributions to the ESOP for the benefit of the employees.

Unlike other plans, these contributions are used to acquire stock in the employer company. An ESOP provides an exit strategy for the company’s shareholders.

Smart Business spoke with Walter McGrail, a principal at Cendrowski Corporate Advisors LLC, regarding the benefits of adopting an ESOP in your business.

What are the benefits of adopting an ESOP?

There are several benefits to consider when deciding whether to adopt an ESOP.

Most people think of the tax considerations as the employer receives a deduction for making contributions to an ESOP just like it would if it made contributions to a 401(k) plan. Employees can continue to make tax-deferred contributions to the ESOP just like a 401(k). Owners of C corporations can completely avoid income tax on qualified sales of stock to an ESOP.

Sponsoring employer companies are able to shelter earnings from income tax. Aside from tax benefits, the single most influential consideration in deciding whether to adopt an ESOP is that an ESOP stands ready, willing and able to buy shares of your company.

A company doesn’t need to identify potential shareholders or a market through brokers. If a company has an employee workforce in place, it has a potential buyer for its shares.

How does an ESOP work?

An ESOP is established by the employer company.

The company’s shareholders sell their shares to the ESOP. The selling shareholders can provide seller-financing for all or a portion of the purchase price.

To the extent that the sponsoring company has access to bank financing, the company can borrow funds to loan funds to the ESOP to either pay down, pay off or, in some cases, completely pay the purchase price.

The ESOP repays the company loan or the seller financing or both with the proceeds from the tax-deductible contributions made by the employer. This is often referred to as the company receiving a tax deduction for the repayment of the loan used to purchase its shares.

The ESOP may own 100 percent of the company or own company shares along with other continuing shareholders. The ESOP is represented by a trustee, who is a fiduciary, acting on behalf of the employees’ interest in the ESOP.

How much does the ESOP pay for the company’s shares?

The purchase price paid for the shares is based on an independent, third-party appraisal.
The appraisal is conducted on behalf of the ESOP and based upon such valuation, the ESOP acquires the shares. The appraised value will reflect the market value of the shares sold.

How do I find out more about ESOPs?

An ESOP involves several parties like any other sales transaction. As discussed, the ESOP will need a trustee.
The trustee will need legal and financial counsel, including an independent valuation provider. The company and the exiting shareholder require quality legal and financial advice as well.

Leveraged ESOPs require a bank or other lending institution. As with any other qualified plan, the company will need a plan administrator.

When it’s all said and done, the most important person to the company and its shareholders is an experienced ESOP facilitator.

You want to work with a professional that possesses the expertise to lead a company through the ESOP adoption process, as well as the share sale process. A strong firm can also provide qualified valuation analysts to assist with the valuation process. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How outsourcing accounting services can facilitate growth

Accurate and up-to-date financial information is a powerful tool for a growing business. With reliable information, business owners can make better strategic decisions, secure resources and increase profitability. But, how can business owners ensure they have this competitive advantage?

“Financial information can be empowering, but managing it can also be a burden on a growing business. Partnering with a CPA firm that specializes in providing business services can provide a spark for many organizations,” says Brenda Stelle, a manager of the business services department at Sensiba San Filippo, LLP.

Smart Business spoke with Stelle about the benefits of working with a business services department.

What are business services and how do they bring value to a growing business?

Recognizing the need for accounting solutions for small and midsize businesses, some leading accounting firms have assembled business service teams that provide bookkeeping, financial reporting and tax planning services. These business service teams are particularly useful for growing and startup businesses that need help but may not yet require an internal accounting department. It’s also a way for companies to acquire expert services without the risk and investment of a new hire.

Many business service teams also offer project costing and accounting system design and implementation. Sometimes startup companies just don’t know where to begin or how to properly prepare expense reports or get a loan to finance growth. Business service teams have answers, so owners don’t have to waste time searching for them.

What should be expected from an accounting firm’s business service team?

Business service teams can help clients see that their future success depends on being proactive. They work with owners to analyze the critical financial information that may help to avoid a crisis, manage an unforeseen financial problem or seize an opportunity for growth. With accurate, meaningful and timely information, a business owner can analyze key performance indicators with confidence.

Maybe the biggest thing a business service provider can offer is peace of mind. Business owners can feel overwhelmed on a daily basis just because they don’t have an accounting system to reassure them that bills will be paid.

How does a business choose the right business services partner?

Work with a business services partner that has experience in your industry and has the resources of a strong CPA firm. Also, be sure to get referrals and check references.

Not all business service providers are the same. It’s a good idea to find out if an accounting firm has made these services a priority. Firms that have dedicated business service teams are often more focused on providing services that maximize the value they deliver. These dedicated teams allow for greater responsiveness and timely turnaround.

When choosing a business services partner, take the time to communicate expectations to ensure that your new partner can handle your needs. Be clear about what you expect, otherwise you may find yourself with a provider but not a solution.

How can business owners ensure they are receiving value?

A properly staffed business services team can work with clients of varying sizes, from startups to those with $20 million in revenue. Some will bundle services together so that the whole is greater than the sum of its parts.

Business owners should seek out a CPA firm that focuses on long-term relationships, and has high retention rates and client references you can speak with. Sit down with them and let them get to know you, your business and where you want to go. They will identify the critical functions that will provide the information needed to run a strategic business. From there, they will set up a plan of action and move forward.

Insights Accounting is brought to you by Sensiba San Filippo LLP

How to set up internal controls on limited resources

Setting up internal controls is challenging for small and midsized companies. Generally, you don’t have that many employees, and they tend to wear multiple hats. The business processes that fuel day-to-day operations take priority, while the internal control aspect often takes a backseat.

“We often hear, ‘This is too much work. I don’t have time for this,’” says Michaela McGinn, CPA, principal and director of assurance services at Rea & Associates.

“If you don’t have time to look at who has control of your cash, then — and this is a great example given to me — if I handed you a briefcase of $100,000 and said, ‘Here hold this for me,’ would you be OK with that?” she says. “The answer might be yes, but what if it was $500,000 or $1 million?

“That’s what you’re doing when you give full access to information and resources with no one monitoring it.”

Smart Business spoke with McGinn about key internal controls that even organizations with limited resources can implement.

How do internal controls differ among different sized organizations?

A single owner and two to three people in an accounting department cannot recreate the control environment of a Fortune 100 company, but you can still provide yourself a level of comfort and oversight.

There are two types of internal controls. Preventative controls are established to ensure something doesn’t happen, such as limits on certain transactions and segregation of duties. A detective control is a check on the backside to make sure there wasn’t human error and your assets are secure. An example is the reconciliation of accounts and a review of that reconciliation.

Smaller companies may need to utilize more detective than preventative controls because there is a greater chance that one person has full access to funds — from making deposits to issuing checks and payroll to performing monthly bank reconciliations. It’s a matter of choosing what controls can be done in a timely, economic, efficient way.

If you trust your employees completely, are controls even necessary?

If Mary has worked for you for 30 years, and you trust her with everything, you still need to implement controls for both her benefit and yours. Don’t put Mary in a position — if you truly trust her — where that trust is being questioned. The more you separate out the different pieces of a process, the more you reduce the potential risk associated with inaccuracies or coverage of assets.

What are some best practices for setting up these controls?

All operational processes need to be documented and re-evaluated at least annually. If possible more than one employee needs to be familiar with the process, so in the case of death, sickness or job loss someone else can pick up the task.

Do monthly reconciliations of key accounts, such as receivables, cash, inventory, payables, payroll costs, etc. Then, have those reconciliations independently reviewed. For example, the controller or business owner could review reconciliations by a payroll clerk.

Limit your exposure with approval processes and limits on transactions. You also can restrict access to the general ledger — allowing only a very limited number of individuals the ability to post entries vs. read-only access.

Review your vendor lists to keep them up to date, and have someone look over the standard and nonstandard journal entries.

On the receivables side, put together a policy for creating credit limits for customers, and then evaluate that policy regularly to ensure you’re following it.

Other areas to monitor are where employees have the ability to manipulate something for the benefit of somebody else. If you have a bonus or commission structure based on a formula, determine whether people can beef up sales financial information to make it look better.

If you’re unsure where to start, with the help of your accountant or auditor, pick a few key controls and weave them into the day-to-day or monthly process. There are many ways to accomplish this without hiring additional bodies or increasing the roles and responsibilities of your people on a significant level — and at the end of the day, it provides a greater peace of mind and helps protect what’s most important to the company and its owners.

Insights Accounting is brought to you by Rea & Associates

What to consider when looking at the benefits of a cost segregation study

A cost segregation study is the process of identifying fixed assets and their costs and classifying these assets and costs to maximize federal income tax depreciation deductions.

It involves reclassifying some of a building’s costs presumed to be subject to a 39-year cost recovery life into shorter personal property or land improvements with a five or seven year rate of depreciation for personal property and/or a 15 year rate for land improvement projects.

“With engineer-based cost segregation, a building owner may depreciate a new or existing facility in the fastest allowable time, accelerating the owner’s tax depreciation and tax deduction and deferring income taxes,” says Lou Petro, senior manager at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Petro regarding the benefits of performing a cost segregation study.

What facilities are available for a cost segregation study?

Cost segregation studies are economically viable for almost any commercial facility. The facility may be newly acquired or constructed, under construction, inherited, or a property upon which a full cost segregation study has never been performed.
Applicable facilities include apartment buildings, breweries, car dealerships, banks, distilleries, grocery stores, health care facilities, hotels and motels, laboratories and research facilities, and manufacturing facilities.

The list also includes office buildings, resorts, restaurants, retail malls, warehouses and wineries. In essence, any depreciable real property used in a taxpayer’s business would be suitable for a study.

How much can a cost segregation study save?

Typically, the present value of a taxpayer’s cash flows is increased by about 20 cents for each dollar reclassified out of a 39-year property. In a typical cost segregation study, between 15 and 45 percent of a building’s costs can be reclassified to shorter life assets.

The percentage depends on the type of facility and on such things as special use or process equipment, interior finishing and land improvements. For newly constructed property, the bonus depreciation allowance allows the deduction of up to 50 percent of qualifying shorter life asset costs, which accelerates the tax savings extensively.

Who would perform a cost segregation study?

The IRS requires that cost segregation studies be engineering-based. The IRS Cost Segregation Audit Techniques Guide states, ‘Preparation of cost segregation studies requires knowledge of both the construction process and the tax law involving property classifications for depreciation purposes.

‘In general, a study by construction engineers is more reliable than one conducted by someone with no engineering or construction background. Experience in cost estimating and allocation, as well as knowledge of the applicable tax law, are other important criteria.’

How would a taxpayer choose a firm to perform a cost segregation study?
A taxpayer needing a cost segregation study should use a firm that has the qualified personnel and expertise in place to perform an engineering-based study.

Generally, such a firm would have experience with this kind of work and could assist you through the process and answer any questions that might come up along the way.

A combination of registered Professional Engineers and tax-qualified CPAs would be appropriate for the work. The firm, in general, would provide a potential client with a fixed fee proposal for the cost segregation work. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

What you need to know about valuation standards and their impact

Valuation of a business or an interest in a business may be done for many purposes. What many businesses don’t understand, however, is that the applicable standard of value required in the specific situation has a direct impact on the final result.

Smart Business spoke with John T. Alfonsi, Managing Director at Cendrowski Corporate Advisors LLC, about the impact the purpose of the valuation has on the result.

What are some reasons a business valuation would be called for?

A business or an interest in a business may need to be valued for a sale of the business or interest, gift tax purposes, estate tax purposes, shareholder or partner buy-out/redemption, divorce, litigation purposes, or financial reporting purposes, among others. The same interest in the business may have a different value depending on the purpose of the valuation.

How does the purpose of the valuation affect the bottom line value?

The applicable standard of value dictates what the value may be. The standard of value answers the question ‘Value to whom?’ which has an effect in determining the value of the asset. There are many standards of value, but some of the more common are fair market value, fair value and investment value.

What are the standards?

Fair market value is probably the most common standard and the one people hear most often. It is the applicable standard for all federal tax purposes, whether it is income tax, gift tax or estate tax.

Fair market value is the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and both parties have reasonable knowledge of relevant facts.

Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and are informed about the property and the market for such property. It is not the value to a specific person or buyer, but is generally thought of as the value to a hypothetical financial buyer.

Fair value has a couple of meanings. For financial reporting purposes, fair value means the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

It is similar to fair market value but with some subtle differences, for instance it’s meaning for state law purposes.

Fair value in state law shareholder dispute matters is generally defined as the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the shareholder objects using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal without discounting for lack of marketability or minority.

The valuation analyst needs to be familiar with the applicable standard for the state to which the matter relates, as each state may be different. Investment value is the value to a specific person.

It is most commonly used in a sale or merger transaction as it will capture the synergies of the business with the specific buyer/acquirer.

How do these standards of value affect a 20 percent interest in a closely held business?

Where fair market value is the applicable standard, the value would be the price at which a hypothetical buyer would pay for that 20 percent interest. It may reflect any applicable discounts in that determination, such as a discount for lack of control and a discount for lack of marketability.

In a state law fair value context, the value would be 20 percent of the value of the entire business without regard to any discounts for lack of control and lack of marketability. It generally produces a value, then, which is greater than that determined under a fair market value standard.

Investment value would take into consideration synergies or value with respect to the specific buyer.

It is most commonly applied in valuing the entire business rather than an interest in the business. Investment value would generally produce a value greater than that determined under a fair market value if the buyer is a synergistic buyer rather than a financial buyer. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to make your building work for you with a cost segregation study

If your business has recently invested in construction or purchased commercial real estate, consider getting a cost segregation study. These studies offer immediate and significant tax savings through accelerated depreciation deductions for current tax provisions and improved cash flow.

“If you buy a building and it’s all capitalized as one lump sum on a business’s tax return, then it can only be depreciated over 27 to 39 years,” says Matthew Sanders, CPA, audit manager at Rea & Associates. “But if you break it down into cost components, the business owner can depreciate certain costs over five, seven or 15 years to accelerate tax deductions.”

Smart Business spoke with Sanders about the benefits of a cost segregation study.

Who should consider getting a cost segregation study? Are there instances where this can be more valuable?

Companies that are either constructing or purchasing a building can benefit from cost segregation studies. Also, cost segregation studies can prove valuable for renovations, depending on the total cost.

The type of facility plays a part in the cost benefit. The more complicated the building, the more worthwhile a study might be. If it’s just a warehouse that’s going to be used for storage, it may not have a significant amount of separate components that would assist you in accelerating depreciation like electric, plumbing, HVAC systems, offices, etc.

What are the benefits to a study?

It’s a time value of money benefit. By accelerating your tax deductions and reducing your tax liability, you increase your current cash flow. This can prove important to a business when making such a large investment. Studies have shown that the amount of costs that can be reclassified to a shorter recovery period range from 15 to 40 percent of total costs. It still ends up in your favor if the study costs $10,000 to $20,000.

Besides immediate tax savings and increased cash flow, a cost segregation study assists in creating great records and an audit trail that could help to resolve IRS inquiries quickly. A business isn’t more likely to be audited because of a cost segregation study, but in the event it does get audited, it’s helpful to have these records on hand.

There are also potential opportunities to reduce real estate tax liabilities and identify sales and use tax savings opportunities.

When should you get a study done?

It’s best to perform a cost segregation study within a year of purchase or construction. But if you have a look-back study done a few years after you are in the building, the IRS allows you to catch-up. You’ll have a lower tax liability that first year because you’re catching up the depreciation.

The longer you wait, however, the more you’ve already recognized the depreciation on the building so the catch-up may not be as great and the cost benefit can be lower.

How can new rules help with writing off replacement costs?

Cost segregation studies assist in identifying the replacement cost of a specific component of a building, which can be written off in the year of replacement under new IRS regulations.

For example, if a building owner replaces a roof on the building and no study was performed, the costs of the replacement are capitalized on the building owner’s depreciation schedule. Essentially, he or she could be depreciating both roofs. Under the current IRS rules, the value of the old roof (if known) can be written off in the year the replacement is performed.

What are the first steps to getting started on a cost segregation study?

If you think a cost segregation study might make sense for your organization, call your CPA or business adviser. They can help you do an assessment of how valuable a cost segregation study could be and help you gather the necessary records.

Studies can take one to two months, so plan on setting aside some time to work with the engineering specialist.

And while good records are important, an experienced engineer should be able to do an extensive site visit if you don’t have the necessary records available. This includes measuring and estimating costs using accepted techniques and pricing guides to identify all property costs and determine which components qualify for shorter recovery life periods.

Insights Accounting is brought to you by Rea & Associates

Understanding, mitigating cybersecurity risk

In today’s economy, information and technology drive value creation for businesses of all sizes across every industry. Information can be accessed and stored remotely in real-time, allowing for collaboration and coordination across time zones and continents.

While information technology has changed and improved the way business is conducted, it has also changed the equation for organizational security. In a world where information is value, information is also a target. Data security is now organizational security. In order to protect themselves and their customers, business owners must now develop a strategic approach to data security.

Smart Business spoke with Jalal Nazeri, senior IT audit manager at Sensiba San Filippo LLP, to learn more about best practices for addressing cybersecurity, assessing data security and developing strategies to mitigate risk and demonstrate controls.

What is the first step a company should take when assessing cybersecurity risk?

The first step a company should take is to perform a comprehensive risk assessment for the environment, with a major emphasis on the risks with the organization’s data.

Different types of data carry different levels of value and risk. Data such as protected health information (PHI) and personally identifiable information (PII) are highly sensitive. Companies handling this type of data must comply with state and federal legal data security regulations.

Other companies may transmit highly valuable intellectual property — whether their own or that of clients or customers. Once you understand your data, you can prepare the right plan to protect it.

Once a company understands the value of their data, what comes next?

The most effective security step a company can take is to ensure that the data itself is encrypted. Encryption isn’t a bad idea for any valuable data, but for highly confidential information like PHI and PII, it’s absolutely essential.

How can companies prevent a data breach?

Encryption is the key to preventing a data breach. Annual or semiannual risk assessments are critical to identifying new weaknesses in the infrastructure.

Creating a security policy is an important piece to creating a secure environment. The purposes of a security policy is to ensure that appropriate measures to protecting the network are written down, communicated and are put in place. Once a security policy is established, ongoing monitoring and maintenance of your policies and procedures will ensure ongoing effectiveness.

What other steps can be taken to protect data?

There are many tools and strategies available for preventing both data theft and data loss including IDS/IPS, anti-virus software, system monitor logs, firewalls, off-site backups and more. Keeping data secure requires utilizing these tools strategically to mitigate potential risks. To be effective, both your security policy and the tools that you utilize to carry out your policy must be reviewed and updated regularly.

What additional advice can you offer regarding cybersecurity?

You can’t lose what you don’t have. Many businesses keep valuable data longer than necessary. Businesses should understand data retention requirements and create data policies that ensure that sensitive data isn’t being stored unnecessarily.

Regardless of the business you run, your data will continue to become a more important part of your success. As a business owner, it is critical to understand that where there is value, there is always risk. When you consider both the value and the risk associated with your information systems, you can advance and protect your organization at the same time.

Insights Accounting is brought to you by Sensiba San Filippo LLP

Understanding physical and online retail convergence

Technology has fundamentally changed the consumer retail experience, which has led to evolving consumer behaviors and expectations.

Consumers have become more demanding, requiring the convenience and information of online shopping with the service and feel of the in-store experience.

This modern consumer has necessitated a new type of business model, one that must seamlessly provide both online and in-store shopping alternatives integrating customer service, systems, supply chain and execution.

Smart Business spoke with Frank Balestreri, audit partner at Sensiba San Filippo LLP, about the changing landscape of the retail industry.

Are brick-and-mortar stores heading for extinction?

It wasn’t long ago that many believed that brick-and-mortar stores were going the way of the dinosaur, yet changes in consumer behavior brought on by online retail have led to something altogether different.

Instead of eliminating their demand for in-store experiences, consumers are now demanding the best of both worlds.

They want the convenience of online shopping along with the service and hands-on feel of the in-store experience.

Brick-and-mortar stores might be shrinking in size, but they aren’t going away.

How are changing buying habits affecting business strategies?

Changes in consumer demands and behaviors have led to changes in strategy for traditional and online retailers.

Online retailers are increasingly realizing that they need to have a physical presence, while traditional big-box retailers continue to enhance the online experiences they provide to their customers, leading to the rise of an integrated retail business model known as brick-and-click.

To be successful, the brick-and-click model requires aligning all retail channels to create a uniform buying experience.

The white glove customer experience of a store must also be available online, while the convenience and information of online shopping has to be present even inside of a store.

We are now seeing sales representatives in stores carrying tablets that connect in real time with integrated global inventory systems, while online retailers are using data and systems to offer suggestions for complementary purchases, just like a live sales associate.

What does the emergence of brick-and-click mean for accounting systems?
The brick-and-click model has tremendous potential, but it doesn’t come without challenges.

To be successful, businesses must coordinate their warehouses, stores, online distribution channels, and even sales and support functions.

As companies face changes in purchase and return cycles, we help them reinforce internal controls and develop accounting policies critical to managing the increased return volumes over longer time periods.

Smart retailers are using technology, information and training focused on customer service to minimize returns while keeping their customers happy.

Elongated exchange cycles and online consumer buying behaviors have also led to difficulties in establishing effective revenue recognition policies. Online purchases can have greater return volumes that stretch over longer time periods.

For example, consumers may purchase multiple sizes or colors of the same item, planning to return what they don’t want, knowing that in many instances the shipping is free.

This behavior presents a revenue recognition challenge. It’s important to capture and analyze data necessary to incorporate buyer behavior into revenue recognition policies.

Finally, integrating sales across multiple channels can stress inventory management systems. Systems must be able to track inventory levels, sales and returns across multiple channels and locations.

This requires integrated systems, proven policies and real-time data.

While brick-and-click strategies are being successfully implemented by both traditional and online retailers, the strategy doesn’t come without obstacles. To be successful, systems, processes and people must be aligned to achieve a uniform and optimized customer experience. ●

Insights Accounting is brought to you by Sensiba San Filippo LLP

How ESOPs align shareholder and employee interest

As baby boomer business owners age, there is a pressing need to select their business exit strategy. One option is an employee stock ownership plan (ESOP), where the business owner sells the company — up to 100 percent of the stock — to the employees.

If you sell 30 percent or more, there are tax advantages that could mean that you end up with more after tax proceeds than selling to an outside party. This is nice, but often the bigger benefit is your legacy.

“If you sell to an outside third party, whoever buys it can do whatever they want with your business, and they may not maintain the employees or your business philosophy,” says Tim McDaniel, CPA/ABV, ASA, CBA, director of business valuations at Rea & Associates. “But with an ESOP, your business philosophy usually continues, and the employees continue to have jobs.”

At the same time, the employees get ownership, which motivates them to put in the extra effort and work as a team to build their own stock value. They have more pride going to work, and many long-term employees can retire with a nice nest egg if the company does really well, he says.

Smart Business spoke with McDaniel about which companies may be right for an ESOP.

Have ESOPs become more popular?

They haven’t exploded in popularity, but ESOPs are more popular today than they were a few years ago. In the past, the complexity intimidated business owners, and many lenders were reluctant to fund ESOPs. This has changed as knowledge about how ESOPs work has grown.

How are ESOPs different from employee stock option plans?

In an ESOP, which is most often an exit strategy, all employees own stock — although compensation and longevity will determine how much. An ESOP gives certain employees the right to buy stock. The key word is ‘certain.’ Usually, the company offers top-level employees stock as a short-term incentive.

What organizations are best suited to become ESOPs?

ESOPs are costly to establish because you need to hire an attorney, trustee and valuator. Therefore, they aren’t a good idea for companies without very much profit. A good rule of thumb is that you need at least $500,000 in ongoing profit for it to make economic sense.

In addition you need a strong management team. An ESOP is a leverage transaction and requires a bank loan. It’s important to have a leadership team that is able to manage the business and pay back the loan over time.

A stable workforce with little turnover is also important. The ESOP pays employees, usually over a period of five years, when they quit or retire; and it’s usually a large portion of their retirement plan.

Are there any disadvantages to ESOPs or risks that you should guard against?

Like any owner, the employees face the same advantages and disadvantages of owning a business — there’s higher risk and reward.

Some ESOPs replace other retirement plans for employees and if all of their retirement is in your company stock, they can be severely hurt if the company doesn’t do well or goes bankrupt. Don’t encourage this. You’ll want to allow for some diversification in the employees’ retirement.

The Department of Labor and IRS regulate ESOPs, so there will be more oversight from outside parties. Also, with new shareholders, some things like how much money you and the company makes is available to your employees. An ESOP might be your best exit strategy if you would like your legacy to continue and your employees to act like owners, and you don’t mind the additional oversight and cost.

Also, remember that you aren’t locked into an ESOP forever. If the ESOP no longer meets the needs that it was set up for, you can terminate the plan. But just like establishing an ESOP, it’s not cheap.

If this sounds like something that might work for your company, what’s the first step?

You’ll want to have somebody come in and do a feasibility study of what it actually would look like for your business. The study will determine what the value would be and what after-tax proceeds a business owner could expect. Then, you can determine whether to proceed, go another way or defer until your business is healthier.

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