Study the landscape to find, face common business challenges

“In the business world, there are threats around every corner,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank. “And in some ways, the level of volatility has increased in recent years.”

He says areas such as payments, whether making or receiving; data protection; interest rate changes; and currency instability have become a greater concern for many businesses. Fortunately, he says, there are steps businesses can take to address those concerns.

Understanding the good and bad of each business decision is inherent in most service areas of commercial banking and financial management that often manifests in something as basic as a conversation between the representative and the client. Moreover, there can be much to gain from a knowledgeable banking team engaging in a formal assessment of factors contributing to a business’ performance in the market.

Smart Business spoke with Altman about areas of volatility and how to move smoothly through them.

How is payment fraud affecting businesses?

Companies are typically reactive when it comes to payment fraud, responding as incidences happen to mitigate the impact of that event. That’s unfortunate because it takes days or weeks to understand that fraud has occurred.

Most companies believe that payment fraud will occur at some point, but they often don’t believe they can stop it from happening. There are, however, preventative measures companies can put in place to reduce the probability of a fraudster’s success and control the impact. Banks, for instance, have a treasury management suite of products designed in part to help secure ingoing and outgoing payments.

What are companies doing to fight data breaches?

Businesses are becoming more proactive as they attempt to protect themselves against data breaches, but often aren’t mobilizing until there’s a security breach.

Cyberbreach techniques are dynamic and continually evolving. As a result, there isn’t one tried-and-true approach to preventing a breach. Many proactive companies turn to cybersecurity insurance to soften the blow of a breach. The process of acquiring insurance often includes a risk assessment so companies can better understand where risk exists within their systems, giving them a chance to shore up those weak spots.

What might happen with interest rates?    

It is likely that the Federal Reserve’s early indication of two interest rate increases this year will impact commercial banking. If rates start to climb, the expectation is they’ll rise quickly. Companies that don’t budget for interest rate increases could experience higher than anticipated costs.

Banks can hedge the variable component of interest rates. That may not mean getting the extremely low interest rates that the U.S. has had in recent years, but companies will at least know what they’ll pay.

How is currency volatility affecting businesses?

When it comes to currency volatility, much like hedging interest rates, companies can lock in a price for a foreign currency that’s experiencing volatility, achieving a great measure of consistency and predictability in an uncertain market. In fact, the strategies to offset currency volatility do not rest with just hedging. There’s a lot companies can do when transacting with customers abroad to mitigate losses. For instance, companies can conduct business transactions in U.S. dollars as well as foreign currency to insure the most favorable payment option is always available depending on the most current environment, which can regularly fluctuate. And they can implement insurance programs to guard against losses related to domestic and foreign buyers.

Who can help navigate these challenges?

Companies can find aid in a knowledgeable banking partner that can help find and assess a business’ most pressing concerns, manage them and put solutions in place to mitigate them. In today’s environment, business owners should expect nothing less.

It’s important that companies assess their financial provider on its ability or willingness to help. Otherwise, companies are missing the chance to work with an organization that could do more to protect their business.

Insights Banking & Finance is brought to you by Huntington Bank

Get your bank involved in plotting your company’s growth strategy

Financial projections that are objective and realistic go a long way toward earning the trust of your bank, says Kurt Kappa, Senior Vice President and Market Leader, Cuyahoga County, at Westfield Bank.

“You want to under promise and over deliver,” Kappa says. “If you put together a projection that says the sky is the limit just to look good on paper for your bank and then you don’t hit those numbers, it will reflect poorly on your company. Your bank will want to know where you went wrong and why you fell short of your stated goals.”

A better approach is to set realistic financial projections with clear objectives. This approach will demonstrate to your bank that you have strong financial acumen and in the process, strengthen the relationship.

“Your bank will view your company as one that has its finger on the pulse of what’s happening and feel confident in your leadership and decision-making process,” Kappa says.

Smart Business spoke with Kappa about how to engage your bank in the growth of your business.

What are some key things to think about before you meet with your bank?
Make sure you are fully prepared when you meet with your bank. Have current financial statements, projections and a plan in place of what you want to achieve.

Have everything lined up and ready to go, along with a detailed request that you can present to your bank. If there are any issues in your financial statements, be prepared to provide an explanation. Being transparent with your bank will provide you with the best opportunity to achieve your goals.

Where is a good place to start when developing your growth plan?
You should have a plan set forth about six months before the end of the year that enables you to strategize for tax planning purposes. Work with your banker and CPA so they can make recommended adjustments for year-end planning and accurately forecast your needs.

When formulating a growth plan, your bank will not base its decision on where you are today, rather on where you were last year. Demonstrating cash flow with projections will allow your bank to put a deal together that is customized for your needs.

The importance of working as a team is that for every action, there is a reaction. Every time you do something on the accounting side, there is a reaction on the banking side that might otherwise get missed. You may be hitting a covenant that the bank put in place for your loan, but you’re not thinking about the expansion that you’re planning at the end of the quarter.

What are you going to need in the way of financing from the bank to manage that expense? Forming a team of trusted advisers will ensure that fewer things are missed and poise your company for future success.

How much value is there in having your bank visit your business?
There is more value in visiting a company than there is in looking at financial statements. You see employees and how they interact with each other. Are they happy employees? If you go to a manufacturing company on a Wednesday at 10 a.m. and there is no work going on, you know there is some kind of an issue.

A visit to the physical location provides a better sense of how the company is operating. An on-site visit provides context and valuable insight that can be factored into the discussion the bank has about the support it can offer your company.

How important is collateral?
There are some banks that only care about cash flow and don’t worry about collateral. Banks that do use collateral will typically want to be in first position in order to protect their security interests. They won’t look favorably at taking a second or third position on a piece of property that has already been used as collateral with another bank.

Insights Banking & Finance is brought to you by Westfield Bank

It’s never too early to start planning for the next tax year

Tax reform is on the agenda in Washington, D.C., but it’s difficult to know what form it will take or what impact it will have on both U.S. businesses and taxpayers, says Drew Shealy, Vice President and Director of Trust & Portfolio Management at Home Savings Bank.

“You can only proceed on what you know for sure,” Shealy says. “Communication is key, so make sure the people representing each facet of your financial plan are collaborating and looking out for your best interests. From a small business standpoint, the biggest takeaway thus far is that the federal government is looking to ease regulatory burdens on small business owners.”

President Donald Trump has already inked an executive order to repeal two regulations for every new regulation added to the books.

The intent is to spark job and wage growth and free up capital for companies to expand through acquisition and infrastructure spending. As you assess your own personal financial outlook, it’s important to consult regularly with your financial planner, your legal counsel and your accountant or CPA to make sure you’re all on the same page.

Smart Business spoke with Shealy about best practices to prepare yourself for the next tax year.

Where is a good place to begin your tax planning?
You can start by making sure that your quarterly estimates are on pace with your income levels to avoid overpayment, thus making an interest free loan to the government; or underpayment, wherein you expose yourself to penalties and interest.

A lot of folks get into a situation where they miss something and it paralyzes them. They get so worried about what’s happened that they end up doing nothing about it. Some even believe the situation will resolve itself by the end of the year.

But the best thing you can do is to talk to an adviser or a professional to get the problem rectified. It may cost a little to reach a solution, but it’s a far better way to go than to ignore the problem and hope it goes away.

What role can an adviser play in your tax planning strategy?
If you don’t make time for regular conversations with each member of your financial team, you’re missing out on valuable advice and perspective. Each person brings a different set of knowledge and expertise to the table.

You may think that your question is not worth bringing up, but it never hurts to ask. The sooner you let your adviser know about what’s happening, the better off you’re going to be. Financial professionals can offer you advice and help you plan for a change in your investment portfolio or your tax strategy.

If you find that time gets away from you and you forget to make these appointments, use your quarterly estimates as a tool to hold yourself accountable to these check-ins.

What if you have recently made changes on your financial team?
If you have changed banks or have a new investment adviser helping you, it is important to let them know if you have loss carryforwards. Loss carryforwards can often be applied in the current tax year to offset gains on appreciated assets that are no longer performing.

If your advisory team is aware of your history and informed about your tax loss carryforwards, it will allow for more flexibility in the management of your assets, including rebalancing, to reflect your investment objective.

What are some tools that can help you with your tax strategy?
Financial planning software or online aggregators can assist in the organization of your entire financial life in one spot.

They often provide details as to what your overall portfolio allocation looks like and help your advisers plan for your future financial needs, as well as store documents for important matters such as estate planning.

It’s also important to look at appreciated securities versus cash. Find opportunities to shift appreciated assets from yourself to whomever it is you’d like to support, whether it’s your church or another local philanthropic organization.

Donating these highly appreciated securities may help mitigate the tax burdens you might have if you were to liquidate those assets and use the proceeds for yourself.

Insights Banking & Finance is brought to you by Home Savings Bank

Trade credit insurance mitigates risk, offers opportunities to grow business

Trade credit insurance provides coverage for nonpayment risk on accounts receivables that can be attributed to protracted default, bankruptcies, or commercial or political risks, the latter being more of a concern when a foreign government could impose capital controls that won’t allow money to leave the country for the U.S.

“Accounts receivable is a big item on any company’s balance sheet,” says Jim Altman, middle market Pennsylvania Regional Executive at Huntington Bank. “It’s converted into cash that’s used to pay creditors and employees, which are among the most important functions of a business. But often it’s the one asset that’s not covered. Also, in terms of low rates, it’s hard to build a case for not doing it.”

Smart Business spoke with Altman about trade credit insurance, what it covers and how it can be used to grow a business.

In what situations does it make sense to have a trade credit insurance policy?

Any company that sells good or services could use this insurance. Companies with more than $5 million in sales are good candidates.

While some industries — mining, energy, metals and automotive, for example — are ideal candidates, given our current economy, for credit insurance, the type of business and sales volume are less relevant than a specific industry or buyer base. Companies in highly cyclical industries will find it prudent to insure their accounts receivable.

With respect to circumstance, highly leveraged companies with tighter cash flows should consider credit insurance as well. A general rule of thumb is companies that have receivables of a magnitude that nonpayment could impair their ability to service their debt or cover payroll should be insured. Also, if you’re dealing with a high degree of customer concentrations, look to insure.

It could be too late or too costly if a company waits for the industry to deteriorate before insuring. In those cases, it can be tough to get approved, or there will be higher-than-usual rates because of the inflated risk.

What policy provisions should businesses consider or be ready to discuss with their broker when negotiating credit insurance?

A good place to start would be with a company’s comfort level with risk. If a $100,000 bad debt expense can be afforded, then that’s a good place to set the policy deductible.

Pay specific attention to reps and warranties, exclusions and the length of the waiting periods. The insured will want the fewest reps and warranties and shortest claim times after a default occurs.

Be mindful of situations where there are exclusions, and reps and warranties the insured can’t control. For example, sanctioned language that says if the U.S. government slaps punitive sanctions on a country, then the policy may be canceled.

Generally, it’s important to understand credit insurance is a very niche business with just a few insurance companies that have expertise with this product. Businesses considering insuring their accounts receivable should expect their insurance broker to understand their business and not just have insurance product expertise. That’s why working with an experienced broker is so important. There is so much flexibility and many ways these policies can be set up that it takes someone who knows what they’re doing to put them together.

Why is credit insurance a good investment?

In addition to mitigating risks to accounts receivables, savvy companies have used credit insurance to grow their businesses. They use it to increase domestic credit lines, offer extended terms to clients and explore new geographies. In other words, they use it to proactively make their business larger and stronger in a manner consistent with their risk tolerances.

Consider one growth-minded Western Pennsylvania company that put this coverage in place. With help from the insurer identifying which prospects had the financial wherewithal to pay invoices, they generated enough incremental net sales to cover the policy premium within a month.

Companies considering this coverage shouldn’t wait for an issue to arise to buy insurance. Rather, they should be opportunistic and grow their business through strategic use of trade credit insurance.

Insights Banking & Finance is brought to you by Huntington Bank

How remote deposit technology can help your business be more efficient

Technology is changing the face of banking. In recent years, we’ve seen an increased adoption of technologies like online banking, mobile deposit, person-to-person payments and mobile pay.

“While many developments in technology have been focused on the personal banking experience, there are applications and conveniences, like remote deposit technology, which are designed to make life easier for business owners on the go,” says Marianne O’Connor, Cash Management Advisor at Northwest Bank.

Smart Business spoke with O’Connor about what remote deposit technology can do for your business.

How can remote deposit technology benefit businesses?
Remote deposit technology is handy on those days when you just can’t get to the bank. You can make deposits any time, right from your office. Some banks will give you the option to make deposits after normal business hours and still post to your account on the next business day.

It can also save time spent signing checks because it virtually endorses the back of the checks when they’re scanned in. Customers have easy access to 24 months of reporting and check images, which are conveniently stored right in the system.

What are some misconceptions that could prevent some businesses from taking advantage of this tool?
When people are hesitant to adapt to technologies like remote deposit, it’s often because they’re afraid it will be difficult to understand. The bank’s job is to make your life easier and provide one-on-one training to help you become familiar with the new technology.

You want to work with a bank that has a dedicated team of support experts available to promptly answer any questions you may have. The system is easy to use — deposits can be created and sent in a few simple steps. But you still need a support team that can help you when issues come up. Customers who sign up for remote deposit typically find it saves them valuable time and streamlines their deposit process.

Another common misconception is that it’s expensive. In reality, it’s affordable for businesses of any size. Work with your bank to develop a plan that meets your specific needs.

What’s the key to making an effective transition to remote deposit technology?
Preparation and education are important for a smooth transition. Banks will often help your business designate multiple users as a backup in case the primary depositor isn’t available and teach them about the importance of having a safe place to store their checks until they can be shredded or destroyed.

You should recognize the value and importance of continuous education, and work with your bank to stay on top of changes as they come up. Training during the setup process and ongoing support once the new system is in place is vital to successful adoption.

What security benefits are provided by using remote deposit technology?
Remote deposit is secure and offers the latest in encryption technology to keep customer data safe. It recognizes check numbers and dollar amounts, stamping ‘electronically deposited’ on the check after it’s scanned through the system — eliminating the possibility of depositing the same check more than once.

It’s a useful tool for business customers because it’s easy to use and cost-effective. For businesses that operate outside of banking hours, or companies whose owners are too busy to make it to the bank regularly, remote deposit is a convenient feature that helps keep operations running smoothly.

All it takes is a quick credit approval to get started. Before you sign up for remote deposit, talk to your banker to develop a plan that works for your business.

Northwest Bank is Member Federal Deposit Insurance Corp. (FDIC), Equal Housing Lender

Insights Banking & Finance is brought to you by Northwest Bank

Women are empowered to speak about sex-based pay gap

Women face an uphill battle to reverse the gender pay gap that continues to define compensation for the American workforce, says Ann-Marie Ahern, a Principal and Employment Law Specialist at McCarthy, Lebit, Crystal & Liffman.

In fact, a recent study by the Federal Reserve Bank of New York found that women in management face even greater sex-based pay disparity than women who work in non-managerial roles.

Overall, the gender pay gap in September 2015 was listed at 78.6 percent, according to the U.S. Census Bureau.

“It goes all the way to the top,” Ahern says. “Female CEOs are paid less than male CEOs. And up until recently, people didn’t talk about it.”

But that is changing. Ahern believes that the public attention surrounding the Lilly Ledbetter case and the subsequent equal pay legislation in 2009 elevated the issue into a national discussion.

Another significant factor, Ahern believes, was the 2013 publication of Facebook COO Sheryl Sandberg, “Lean In: Women, Work, and the Will to Lead.” The book brought the topic into the mainstream and has given credibility to women who speak out about this issue.

“There has been a paradigm shift as it relates to women feeling comfortable asserting their rights and being more forceful about taking their place at the table,” she says.

Smart Business spoke with Ahern about what can be done to continue to bridge the gender pay gap.

What are some of the root causes behind the pay gap?
At least one reason women continue to lag behind is because they start off from behind. At the onset of an employment relationship, women often feel that to negotiate salary will be viewed as lacking gratitude for the opportunity they have been given.

There is a fear that they won’t be seen as a team player right from the start. The perception that women who are assertive are pushy, while men who share the same trait are aggressive, influences the way communications regarding salary requirements can be perceived. Of course, some companies simply don’t value the services of women equally to those of men.

But, some factors are within the control of female employees. A study of MBA candidates found that men were more comfortable and more likely to negotiate salary than women, who typically accepted jobs at the first salary offered.

As those women climb the corporate ladder, the disparity in wages compounds year over year, creating a significant disparity in pay over time.

What are some tips to strengthen your negotiating position as a woman?
When you’re applying for a new job or new opportunity, know what the market rate is for the position you are seeking. Arm yourself with information that you can use to justify your expectations.

Don’t use your current salary as a floor. If you’re going to make a move and take a risk, it should be for increased pay. Employers typically won’t start at what they’re willing to pay because they expect that the salary is going to be negotiated. If you don’t get the salary you want, negotiate bonuses that are based on the attainment of objective criteria.

Tie your compensation to performance to eliminate risk and potentially benefit your employer. Pursue growth roles that allow you to expand your scope of expertise and take on new challenges. Be aggressive and don’t settle for what fits your comfort zone.

What legal remedies are available to confront sex-based pay discrimination?
Title VII of the Civil Rights Act of 1964 is a federal law that prohibits employers from discriminating against employees based on a number of things, including gender.

The Lilly Ledbetter Fair Pay Act of 2009 amended the law to state that the 180-day statute of limitations for filing an equal pay lawsuit regarding pay discrimination resets with each new paycheck affected by the discriminatory action. Ohio also has a statute with similar remedies that applies to smaller employers of four or more employees.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

A little financial knowledge can go a long way for your employees

Financial experts get paid to crunch the numbers and then make recommendations that enable their businesses to remain profitable. But without a sense of what’s behind these numbers, this process can become flawed, says Cindy Mahl, Executive Vice President and CFO at Westfield Bank.

“Some of the most successful financial people in business have also served in an operational or sales role during their careers,” Mahl says.

“It gives you valuable perspective. Otherwise, you might make a strictly financial decision that has an impact on a part of the business that you didn’t foresee. You’re not able to appreciate the impact of your decision. That broader knowledge gives you credibility across your business.”

Strong businesses make an effort to continuously strengthen the level of financial expertise in their organizations across a wide spectrum of their respective workforces.

“When people feel entrepreneurial and believe they have a stake in the business and an understanding of where that business is going, it helps them to be more engaged,” Mahl says. “If you can get your employees to feel like you’re all in it together to win, that can only be a positive.”

Smart Business spoke with Mahl about the importance of developing financial acumen in your company.

What are the benefits of a broader knowledge of your business?
When you understand finance and you learn about other aspects of your company, you learn that it’s more than just a matter of debits and credits.

With a broader understanding of how an organization works, you start to see why a line of business has a particular set of challenges and how that fits into the bigger picture. The same applies in reverse. Those who aren’t in finance should have a general understanding of how the financial side of the business works.

If you understand the balance sheet, you really have an advantage in your company. In a manufacturing company, the people who work in manufacturing might think that it’s mainly about inventory. The sales team might think success only comes from making sales. Finance might think it’s about managing lines of credit with your bank. You have to understand how all the pieces fit together in order to be effective.

How is this understanding gained?
There needs to be an ongoing conversation. When you talk to employees who aren’t in finance, provide some insight as to what the numbers on your company’s balance sheet and income statement mean. Some companies have their reasons for keeping this information secret and not everybody is going to be interested in all the numbers.

But to the extent that you are comfortable sharing data, share it. Even if it’s just that sales are up 4 percent this month. That could be motivational.

One of the most important things to look for in an employee is an innate sense of curiosity or a thirst for knowledge. This type of employee always wants to know not just what, but why. Part of it is on the employee to have that quest for knowledge.

Part of it is on the employer to provide those opportunities. Look at it as an investment. You’re investing in the knowledge base of your company. The same way you might buy a machine to help produce your product, you’re investing in your people.

How can your bank support these ongoing financial education efforts?
Let’s say you’re applying for a loan. You are going to submit your financials to a banker and the bank is going to analyze that information in order to make a decision as to whether to grant the loan. If your banker comes back with questions or denies the loan, don’t dwell on the negative. Because of their expertise, your banker can often help you see details that you had not thought about.

Insights Banking & Finance is brought to you by Westfield Bank

Preparation is key to securing a bank loan for your business

Getting a loan for your business can seem like a daunting task if you don’t know where to start. In reality, it doesn’t have to be difficult. There are a number of ways you can show a lender you’re a capable borrower — it just takes a little knowledge and preparation.

Smart Business spoke with William Dickson, Jr., Senior Vice President and Commercial Lender at Northwest Bank, about how businesses can increase the likelihood of securing a loan.

What can companies do to help their chances of securing a bank loan?
Securing a loan from the bank really comes down to knowing what the lender is looking for and compiling that information to help the lender make its decision.

When you come to the lender meeting prepared with financial statements, a business plan and knowledge of your industry, it shows that you’re credible and can help speed up the loan process.

As a business leader, show your bank that you have put a lot of thought into this plan and what it can do for your company. Do your research, know your market and have a loan payback plan in place. Lenders will see that you’re serious and invested in your company’s success.

What are some common mistakes companies make as they go through this process?
One of the biggest mistakes businesses make when applying for a loan is being unprepared. In order to truly understand your needs, the bank needs to take a thorough and holistic look at both your business and industry. If you can’t answer questions about your business plan, finances or how you would use the loan to your advantage, it could cost you the loan approval.

Business owners are encouraged to keep their business and personal finances separate. Maintain detailed records of financials, including bills, revenue and other debts. All it takes is proper organization and solid planning.

Lastly, a big mistake is not having a well-thought-out “Plan B” of what you’ll do if things don’t quite work out the way you intended. Having a solid secondary way to repay the proposed loan will go a long way with the bank.

What if a company is reluctant to pursue a loan due to recent challenges with the business?
Financial situations can vary depending on the type of business and industry. Businesses that operate seasonally, like a ski resort, may need a loan during the offseason so they can pay their bills and staff.

Taking out a loan when there’s a lull in business may not make sense for everyone, so it’s best to assess your overall needs, consider how much cash you have on hand to cover expenses and have a conversation with your local lender to determine if a loan is the right decision for you.

Alternatively, a good banker can help you understand what you need to do or how to structure your business in order to qualify for conventional bank financing. If you’re not completely sure, engage with your banker and have a conversation to address your concerns.

How much do banks consider the presentation and approach when deciding whether to approve a loan?
It’s hard not to notice an obvious lack of preparedness when you’re in a business meeting. When you come to a meeting prepared with your business plan and a thorough background knowledge of your industry, the bank takes notice.

With proper planning and good organization, getting a business loan doesn’t have to be an intimidating process. Lenders can help answer your questions, so don’t be afraid to ask if you’re unsure about something.

Northwest Bank is Member Federal Deposit Insurance Corp. (FDIC), Equal Housing Lender

Insights Banking & Finance is brought to you by Northwest Bank

Why business owners should consider ESOPs when exiting their business

Every privately held company, whether owned by individuals, a family or private equity firm, must go through ownership transition at some point. When the time comes, an owner has several options: create liquidity via a leverage recapitalization using a debt-funded dividend to owners; sell control to a strategic or financial buyer; or sell a minority or majority stake of the company to an Employee Stock Ownership Plan (ESOP).

“An ESOP is a qualified retirement plan designed to give employees an opportunity to own employer stock,” says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank. “ESOPs are the only retirement plan allowed to borrow money to purchase employer stock. Once purchased, the employer stock is allocated to accounts for individual participants so that, when they retire, they can either receive cash or shares, which are then sold back to the ESOP.”

Altman says an ESOP is considered a Qualified Defined Contribution Retirement Plan that is invested primarily in company stock. It’s a flexible tool for owners to sell all or part of a privately held business.

“In this arrangement, the business owner controls the timing and extent of his or her exit, but may still maintain company control or use the tax advantages to help fund its sale.”

Smart Business spoke with Altman about ESOP viable options and potential benefits the structure provides owners and their companies.

What are the characteristics of companies that are typically found to use ESOPs successfully?

ESOP plans work well for companies with:

  • Strong cash flow.
  • A history of stable sales and profits.
  • Taxable income.
  • A capable management team in place that will remain after the sale.
  • An annual payroll of $1 million or more.
  • An owner who has a significant portion of his or her net worth invested in the value of the business.
  • Valuable employees.

Industries considered suitable for ESOPs include:

  • Manufacturing.
  • Financial Services.
  • Construction.
  • Professional Services.
  • Wholesale Trade and Distribution.

What advantages does transferring ownership to an ESOP offer?

Significant tax advantages come with ESOP ownership as selling to an ESOP is a tax advantaged transfer of ownership. The seller’s proceeds can potentially be tax-free via 1042 rollover. There are income and estate tax savings for sellers, management and the company. If the business is structured as a 100 percent ESOP-owned S-Corp., the company will not pay federal income tax.

Also, an ESOP can deduct the transaction price over time, enhancing cash flow and improving credit metrics.

Among the advantages to a seller when transferring ownership to an ESOP is liquidity — the seller gets more money after tax for the sale of closely held stock than for the sale of assets to a third party. The seller enjoys a rate of return via the seller notes, which is far superior to any return available on an alternative investment with fully understood risk and within the seller’s control to manage.

Selling to an ESOP offers flexibility as an owner may sell between 30 to 100 percent of the shares either all at once or gradually over time to accommodate multiple seller exit scenarios. It also creates the option for the seller to maintain control over his or her company, or allow the previous management team to maintain control and management of the company. Warrants and stock appreciation rights may be used to provide incentives to key managers.

How does the transition to an ESOP affect the employees who remain at the company?

There are indications that transitioning to an ESOP improves employee performance as a result of having an ownership interest in company and the accompanying enhanced retirement benefits.

ESOPs can provide advantages to owners transitioning out of their companies, as well as employees. For the right companies, it can be worthwhile to explore an ESOP option.

Insights Banking & Finance is brought to you by Huntington Bank

Find a bank that believes in your company’s business model

Companies that have built and maintained a strong relationship with their bank are in a much better position to overcome financial hardships, says Rick Hull, Executive Vice President and Regional President at Home Savings.

“Let’s say your business is strong, but you have a bad quarter or even a bad year and you’re showing a loss on your financial statement,” Hull says. “Now it’s time to renew your line of credit at the bank. If you have someone at the bank who is an advocate for your business and has the ability to tell your story to the bank’s credit committee or to regulators, you have a better chance to get the benefit of the doubt. You need someone at the bank who believes in you and believes in your business.”

When those relationships begin to fade and the connection you feel to your bank weakens, it may be time to consider other options.

“When you’re no longer being treated like a prospect or a valued client and you start to feel neglected to the point that you have to pick up the phone and make the call to maintain the relationship, that’s a clue that you should start looking for a new bank,” Hull says.

Smart Business spoke with Hull about how to recognize when it’s time to look for a new bank.

Where do things tend to go wrong in the relationship between a business and a bank?
One potential trouble spot is when your primary contact at the bank is continuously changing. This gets back to the idea of building relationships with someone who can tell your story. If you have to keep bringing a new person up to speed with what you do and how your business works, that’s taking time away from focusing on your business.

Or, your business may not be getting the attention you need because your banker doesn’t understand your business and has no authority to make local decisions, so he or she is unable to advocate for you. You may need a bank that is willing to visit your company, understand your needs and put together a plan that works for you and the bank, then get answers for you quickly.

It also may be that your business has expanded significantly or your needs have changed and your bank doesn’t have the capacity from a capital standpoint to maintain the same relationship that it once had with you.

Change is always going to happen, both in your business and with your bank. When the change becomes uncomfortable for you and/or more than an isolated incident, that’s when it’s time to be concerned.

What’s the best approach to find a new bank?
You want to evaluate your banking situation with some frequency. If you’re going to make a change, you want to be the one driving the change. This puts you in a much stronger position than would be the case if your bank is the one asking you to leave.

In reality, it’s a good idea to have a relationship with two banks. Certainly, one bank will be your primary bank.

But if something goes wrong there, you have the second bank that knows who you are and would be in a position to take your business. This bank might be willing to take a lesser role in hopes that one day it will become your primary bank.

The key is to operate from a position of strength and to not wait until you’re forced to make a move out of desperation.

What materials should you bring when you’re meeting with another bank?
Everybody is going to want to see your tax returns from the last couple years, your profit and loss statement and your personal financial statements. What was your budget last year, how did you perform against expectations and what are you projecting for the near future?

Another key point is that you need to have a succession plan. A majority of privately owned companies in Ohio are owned by people over 60. What’s the future of your business? Your bank should have confidence that you’re going to be there for a while and understand the plan for when you decide to move on.

If you’re open with the bank and the bank is open with you, it’s a good start to a positive relationship for your business.

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