Whether your wish list includes manufacturing, medical, transportation or technology equipment, how you finance major purchases may not only impact the return on your investment but the success of your entire company.
“Financing decisions impact cash flow and a company’s ability to capitalize on opportunities or respond to adversity,” says David Beckstead, Pacific Region sales manager for the Equipment Financing Division at California Bank & Trust. “Executives need to weigh their options carefully before making a decision.”
Smart Business spoke with Beckstead about the need for prudent financing decisions when purchasing machinery and equipment.
What should executives consider as they are reviewing various financing options?
The rule of thumb is to match the financing terms to the life of the asset. In other words, it’s best to use short-term financing for short-term business needs, and longer-term financing for long-term business assets such as equipment that will generate revenue or reduce operating costs for the foreseeable future.
You can avoid finance charges and interest by paying cash, but leasing the equipment or borrowing the funds lets companies preserve capital for other purposes. You should also consider the tax implications and the ultimate cost of the equipment along with your ability to make a substantial down payment to secure a traditional bank loan.
When does leasing make sense?
Leasing makes sense when companies want to preserve cash for future growth or expansion, they need flexibility or they don’t have a lot of cash to put down. Since leasing companies usually maintain ownership of the asset, companies can upgrade or return the equipment should their needs change. For example, you can align the lease terms with a customer agreement or upgrade to a bigger, faster model as your company grows. Plus, most leasing companies don’t require a down payment and it may be possible to negotiate a longer-term payment plan, improving cash flow.
With leasing you can usually deduct the lease payments as a business expense on your tax return, and on short-term leases the rental expense may provide a better tax benefit than depreciating the asset. You may be able to transfer the risk of ownership to the leasing company depending on the type of lease.
How can executives research the market and secure favorable leasing terms?
Prioritize your needs, and then search for the best combination of rates, terms, flexibility and customer service by contacting several firms. Bank leasing companies usually have high underwriting standards but lower rates, while finance companies can be more lenient lenders but generally charge higher rates. Vendor finance companies are a third option and are generally the most flexible about taking back or exchanging equipment. However, they usually charge higher rates.
Beware of upfront payments and fees, hefty residual payments, pay-off fees and other clauses that may boost the overall cost of the equipment. In fact, it’s a good idea to ask a knowledgeable third party to review the agreement so you don’t forsake the benefits of leasing by accepting disadvantageous terms.
What should executives look for in a leasing firm?
Always consider a firm’s reputation, check its references and read its contract before requesting a quote. Contracts differ between companies and impact everything from tax deductions and residuals due at the end of the lease to the responsibility for servicing the equipment. Finally, select someone you trust. Your financing partner should provide funding and be committed to your success. ●
Insights Banking & Finance is brought to you by California Bank & Trust
Leaders are often viewed as great orators who inspire people with their words, but listening is actually the most important leadership trait, according to Matt Zumstein, a partner at Ropers Majeski Kohn & Bentley PC.
“Many leaders are great speakers. However, when you’re able to listen and respond to what clients and employees are saying, you can become a more effective leader,” he says.
Smart Business spoke with Zumstein about what he has observed in successful business leaders and how that translates into more successful organizations.
Why is listening the most important attribute for leaders?
Most people aren’t very good listeners. By listening carefully, you’re also able to ask better questions. Good leaders hear what customers and employees want and need. After listening and gathering useful information, a leader can provide better direction, and the company can focus more on the needs of its clients.
When speaking or presenting, it helps to include a compelling story. Storytelling, or having a theme to your story, is a powerful way to put forth ideas, whether selling a product to a client, giving a team its marching orders or for any other purpose. This can apply to a discussion with a prospect at lunch, in the boardroom or through an online video. The power of incorporating a real-life story into the message can be invaluable.
What other qualities do leaders need to demonstrate?
It’s very important to be authentic. When telling a story, you must be able to personalize the message in order to illustrate integrity, humility and vulnerability. These are characteristics a leader needs to create positive energy. When people can recognize authenticity, they will respond more favorably.
There used to be a clear separation between private and business lives. Today, with technology and social media, the separation is no longer clear. As a result, it is important to understand your client base and use available online tools to your advantage.
A good leader usually loves what he or she is doing. Colleagues and customers can easily recognize when you bring a passion to daily activities. Remember the Energizer bunny? In order to be an effective leader, find your bunny — the thing that energizes you and keeps you going. When you do that, it will become contagious. That’s why motivational speakers like Tony Robbins are successful — people can see their passion.
How do people sabotage their own leadership efforts?
If leaders become too focused on looking ahead at the challenges they face, they can forget what they’ve accomplished and miss out on significant learning opportunities. It is important to be grateful and thankful for what you’ve achieved.
Another problem is not empowering colleagues or support staff to help develop the self-confidence they need. A lack of confidence can breed negativity and infect the entire organization.
A lack of effective communication is the main reason that relationships, and businesses, fall apart. It’s important to be candid and authentic. If you promise a growth opportunity you can’t provide, you will quickly lose your credibility. When you admit what you can and cannot do, people recognize your authenticity and are more willing to support you.
To be an effective leader, don’t limit your focus to the end of a project. Carefully consider all that is needed to get there. If you’re looking to increase revenue by $1 million next year, what effect does that have on family time or the ability of the company to do charity work? How you get there is just as important as getting there.
Don’t forget about the fun part of life. Reward your team with tickets to a movie or gift cards for coffee. When people feel like they are recognized for their accomplishments, it creates a positive energy and everyone will be willing to strive for, and accomplish, a lot more. •
Insights Legal Affairs is brought to you by Ropers Majeski Kohn & Bentley PC
Depending on your circumstances, year-end tax planning strategies can bring multi-year benefits.
“The end of the year is a great time to review for tax planning opportunities because most of the income items for the year are known,” says Geoffrey M. Zimmerman, CFP®, senior client advisor at Mosaic Financial Partners, Inc.
Smart Business spoke with Zimmerman about some tax planning items to consider.
How can big year/little year planning help?
If your income varies significantly from year to year, look for ways to decrease income in the big income year and increase income in the small income year. Corporate executives with stock options have flexibility as to when they recognize this income. Employees with access to nonqualified deferred compensation (NQDC) plans have opportunities to defer some annual income.
For the charitably minded, a big income year offers opportunities to leverage the use of a donor-advised fund: A larger-than-normal charitable donation is made to the fund in the high-income year when the itemized deduction has more tax benefit, and then funds are disbursed to your preferred charities over multiple, lower-income years. Charitably minded investors over age 70 ½ with IRAs should consider making some charitable donations directly from their IRA.
Households with unusually low income in 2013 may benefit from accelerating income by exercising stock options, or via a partial conversion from an IRA to a Roth IRA. Once in a Roth IRA, the converted amount plus any growth is generally tax free, and is not subject to minimum distribution requirements. This is a powerful planning tool for managing future income tax liability and preserving wealth across generations.
What’s important to know about alternative minimum tax (AMT) planning?
Households in the early stages of AMT should explore strategies involving timing of itemized deductions, particularly AMT preference items like property tax and state income tax payments.
Households that are deep into AMT have some significant opportunities beginning at the point where Alternative Minimum Taxable Income (AMTI) exceeds approximately $480,000 up until the point where ordinary tax exceeds AMT. In this range, the top marginal tax rate is 28 percent, not 39.6 percent. The opportunity involves increasing income — via exercise of stock options, IRA to Roth conversions, or other means — if such income would otherwise be taxed at a higher rate in the future.
As a starting point, couples with taxable income between roughly $500,000 and $1.2 million — particularly those with large amounts of preference items — should take a close look here.
What else should executives know about stock options?
Incentive stock option (ISO) strategies deserve a close look at the end of the year. If you have ISOs and are not in AMT, consider exercising ISOs up to the point of triggering AMT. If you’ve exercised ISOs during the year then you need to review your ability to meet the qualifying holding periods and the cost of paying AMT.
The AMT event is locked in on Dec. 31, so year-end planning is crucial to avoid the risk of paying AMT in the current year and ordinary tax the following year if the qualifying holding period isn’t met.
How can executives use NQDC plans?
An NQDC plan allows participants to defer a portion of their income to a future date. Salary deferrals typically may be invested and diversified, and distributions and taxation postponed until separation from service.
A tax-neutral planning strategy matches salary deferrals with stock option exercises of a like amount, moving dollars from a position with single stock risk and a distinct expiration date into a more diversified pool of funds with no explicit expiration date. NQDC plans do have risk because these plans are typically considered company assets until distribution occurs. •
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
Every business, regardless of size, desires to maximize value to its shareholders. And maximizing value usually means minimizing tax liability. For many businesses, the decision between filing as a C corporation versus S corporation can have a significant effect on overall tax liability, and by extension shareholder value.
“As a business owner, you should be asking yourself, ‘Is our filing status maximizing shareholder value?’ If you’re not sure, it is probably time to talk to a professional,” says Wonsun Willey, tax partner at Sensiba San Filippo LLP.
Smart Business spoke with Willey about the benefits of C-corps and S-corps.
What makes an S-corp different from a C-corp?
C-corps and S-corps both provide the same legal benefits. The difference lies in how the corporations are taxed. Income from a C-corp is actually taxed twice. The C-corp itself is taxed on its net income at its corporate tax rate. Then, after paying tax at the corporate level, shareholders also pay dividend tax on distributions. Income from an S-corp, on the other hand, is only taxed at the shareholder level at individual income tax rates.
Common sense would indicate that it’s better to be taxed once rather than twice. In many cases, that’s exactly right. But it’s not always that simple. Variances in tax rates, the availability of incentives, ownership requirements and investment opportunities can cloud the picture. There isn’t one ‘right answer’ that applies to every organization, but there is almost certainly a right answer for your organization.
What businesses are eligible for S-corp status?
S-corp filing status is intended as a filing option only for small corporations. An S-corp can have no more than 100 shareholders, can only include U.S. citizens and resident aliens, and must have a calendar fiscal year. An S-corp also does not have the ability to have different classes of stock. So organizations that have foreign ownership, a large investor group or that may seek private equity investments are not good candidates for S-corp status.
What is involved in making or terminating an S-corp election?
Making the S-corp election is relatively simple. An existing corporation must file a Form 2553 with the IRS. If the election is made within 75 days of formation of the corporation, there are no additional tax ramifications.
Converting a long-established C-corp to an S-corp can be more complicated. The accounting rules for S-corps are different, often making the conversion a cumbersome task. An S-corp can also face additional tax on net unrealized ‘built-in gains’ from the C-corp. Gains recognized during the 10 years following conversion are subject to the highest corporate tax rate of 35 percent. Selling a business within 10 years of converting to S-corp status can trigger a substantial tax liability.
Changing from an S-corp back to a C-corp has fewer challenges, but should be carefully considered before action is taken. Once you give up your S-corp election, you can’t go back to being an S-corp for five years.
How should a business decide which status is best?
For many small businesses, especially start-ups, S-corps are clearly preferable. They provide significant tax savings and any losses incurred can be passed through to the personal level rather than being trapped within the corporation. Businesses seeking outside funding, looking for rapid expansion or needing multiple stock classes are limited to C-corp status.
Small C-corps that meet the requirements for S-corp status frequently benefit from making an S-corp election, even years after formation. Ultimately, the decision should be made based on the individual circumstances of the organization following consultation with a qualified adviser. •
For more tips and best practices, visit Sensiba San Filippo LLP's blog.
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The top two concerns of CEOs are talent management and risk management, according to a 2011 study by PricewaterhouseCoopers.
It’s not difficult to ascertain why. In addition to creating a positive work environment that attracts the best employees, good talent management avoids exposure to lawsuits. That’s a particular concern nowadays, as the U.S. Equal Employment Opportunity Commission (EEOC) received a record 99,947 charges of employment discrimination in 2011, with $455.6 million paid in relief.
“It’s a matter of being fair and consistent,” says Carin Zubillaga, SPHR, principal human capital consultant at TriNet, Inc. “Branding has also become important to companies, and they want to know how they can become a desirable employer.”
Smart Business spoke with Zubillaga about what companies can do to limit talent risks.
What do companies need to know today?
Employers need to understand that talent risks start at the onset of the hiring process. Many think they don’t have to be concerned about labor laws until employees are hired. In reality, employers need to create a solid job description to put their best foot forward and hire the best possible candidate.
Are there standard hiring practices everyone should follow?
The most important thing is to have a hiring process. It may differ depending on the level of the position. But, for example, if you ask every candidate for one position the same questions, you can easily benchmark answers to help you find the best fit among all applicants.
Another best practice is to conduct training for all managers or individuals involved in the hiring process. Talk about what can and can’t be asked in an interview. Many people have different ideas as to what’s OK — some think that if you share personal information, it opens the door to ask the applicant. That’s something you absolutely don’t want to do.
Ask your interviewers to not search for candidates’ names on Google or look up their Facebook pages. Already, there are more cases on the use of social media during hiring. Even professional background checks aren’t always reliable. A background report wrongly said an individual had been convicted of a felony, which led to his termination. Now, he is seeking compensation for lost wages, employment opportunity and other damages.
Make sure you pick the most qualified candidate based on knowledge, skills and ability. And be a professional: Close the loop by notifying applicants who didn’t get the job.
Do independent contractors pose particular problems?
If someone is an independent contractor, the employer is not required to pay payroll taxes.
Therefore, the IRS and Department of Labor look for misclassification because they’re missing out on funds; misclassification can result in back taxes and penalties.
There is a series of tests to discern if someone is an independent contractor, such as whether they’re required to be there from 8 a.m. to 5 p.m. or allowed to work for other companies. More often the person shouldn’t be classified as an independent contractor. To determine accurately, use the online test offered by the IRS.
Once a person has been hired, does employment at-will mean you can terminate employees without risk?
Even in employment at-will states like California, problems come up when employers do not adhere to their own policies. If you have a course for disciplinary action that outlines specific steps, that process must be followed. For example, most companies build in language for serious offenses ‘up to and including termination.’
Retaliation has become the EEOC’s top claim. If someone files a compliant against a supervisor and that’s the only reason he or she is terminated, you’ve got a problem.
Sticking to your policies regarding employee issues will mitigate a lot of legal risk. Your state may have employment at-will, but there are laws that trump that and provide the potential basis for a lawsuit.
When it comes to effectively managing talent, consistency is key. Have a process and treat people how you would want to be treated. That is one way to brand yourself and become an employer of choice. •
Insights Human Resources Outsourcing is brought to you by TriNet, Inc.
All banks will tell prospective clients they can serve every need. But proper preparation and key questions will reveal whether a bank is the right one for your business.
“Banks say they do everything, but you have to find the institution that shares your priorities, and focuses resources in areas important to you,” says Matt Christensen, senior vice president and regional manager at Bridge Bank.
Smart Business spoke with Christensen about the process of choosing a bank.
Why is it important that a bank knows your industry?
It’s particularly important if your industry has unique risks. An early-stage company in the technology space will have challenges that are not common in other sectors. After a round of seed funding, it has to show proof of concept. Then it needs to show the ability to generate revenues. Most lenders look for companies that have two or three years of profitability, are steady and have products that are not prone to obsolescence. Technology companies are an entirely different breed. Unless the prospective bank has a business unit dedicated to meeting the unique needs of tech companies, there are probably other options to consider.
Health care is another industry with similar concerns. Businesses might be receiving payments from federal agencies, and they’re facing a regulatory environment that’s ever changing. Industry knowledge can even be useful to something like a car dealership, where certain banks are set up specifically to work with them.
These examples might be extreme, but as you get closer to the extremes it becomes increasingly important for businesses to carefully consider what bank to use.
How can you verify that the bank has the necessary experience?
When interviewing bankers, ask for representative examples of companies they’ve worked with in the industry. Inquire about challenges they perceive within the industry. If they can provide a list of businesses they’ve worked with and intelligently discuss industry challenges, it’s probably a good fit.
During the process, it’s important to go up the line and ensure that the credit apparatus understands lending into the technology space, for example.
Trade organizations also are good sources of information. Find out which banks are active and check their reputations within the industry.
How can you get the most out of interviews with prospective bankers?
First, ensure that the conversation doesn’t default to the banker asking questions about your company. Bankers are trained to formulate questions and can monopolize the discussion by conducting their due diligence and uncovering sales opportunities.
Prepare for the interview by developing questions that will reveal the bank’s priorities. Make sure they prioritize your type of company and products. If your business model includes aggressive growth and relies heavily on debt, ensure the bank does that routinely. Some banks prefer to collect deposits and lend out conservatively.
Banks, especially the large ones, offer every service you might need. However, they have areas of emphasis. They prioritize certain markets in which they’re eager to expand. Find a marriage between your needs and the bank’s priorities. They will not say your industry isn’t emphasized, but you can look at the bank’s financial statements to check its assets and where loans are concentrated.
Does having access to decision-makers matter?
It’s an indication that the bank values you as a client and you are a priority. Also, you want to know the sensitivities of the people making decisions. When you face a challenging situation or have an opportunity, will they be open-minded or are they going to quote policy? If you’re considering an acquisition to double your size, how would they structure a credit facility to accomplish that goal? Ask how they’ve worked with other companies and check references to determine how they’ll work with you.
Banks say they do everything. It’s important to find the people with the experience and skill sets that fit your priorities — a relationship manager and banking team that will advocate for you when you need their assistance. •
Insights Banking & Finance is brought to you by Bridge Bank
Business succession is the one thing many companies fail to address for fear of relinquishing control, a lack of time, the feeling that successors aren’t ready or other reasons. But, it’s never too early to start succession planning.
“Statistically, roughly only 30 percent of family-owned businesses are effectively transferred to the second generation and just 10 percent make it to the third generation,” says Julianne Cruz, managing director of Advisory Services at CB&T Wealth Management. “There are myriad reasons for this, but one recurring issue is a lack of effective succession planning.”
Smart Business spoke with Cruz about how to effectively position your chosen successors for success.
How should business owners get started?
You need to consider the three ‘T’s of successful transition:
- Transferring management.
- Transferring ownership.
- Tax consequences.
In all cases, having a plan that is strategic and well executed is key, but that takes time. The most successful transition plans take place over a number of years, as successors develop the skill sets required to run the business.
How is management transferred?
It’s important to select an independent adviser who is highly experienced with planning issues to arrive at the best plan for you and the next generation.
Some areas to consider are: If more than one child is involved in the business, how will contentious decisions be made once you exit the business? If you want certain key, loyal employees to be cared for, as they are likely necessary for a smooth transition, what assurances do you have this will happen? What happens if unexpected health issues force the transition early? A well-developed plan ensures the business will thrive without interruptions, helps the next generation grow into their role at a reasonable pace and promotes future harmony among family members.
A short-term plan ensures there’s enough liquidity and insurance to hire necessary experts and avoid a fire sale. A mid-term plan must prepare developing successors or key employees to be in decision-making roles initially. It also would have a timeline for family members to step into their new roles with certain targets. The long-term plan is ultimately what you want to happen — the best of all circumstances.
After discussing your plan with advisers and successors, involve your key employees, who may be more satisfied knowing the company’s future.
What are some factors to consider with transferring ownership?
Once the management transition plan is established, plans for transferring ownership can occur. Usually this begins with your retirement plans. How much income will be needed and what’s the timeline? If you need cash from the business, are you willing to bear the ‘investment risk’ of the business as a source of income once you’re not involved?
Then, consider estate-planning issues. Are all your children involved in the business? If not, do you desire to ensure each child will ultimately receive an equal estate share?
How do tax consequences factor in?
Taxes are the tertiary consideration once decisions have been made regarding the general retirement and estate plans. As is the case with investment portfolios, taxes should never drive the decision-making process. Tax-reduction strategies should only be considered after other issues are decided.
Business owners in general, and particularly family-business owners, should begin now and get an experienced, independent adviser to guide them through the process. The earlier you plan, the better the results. Sound, experienced advice will make the process that much easier, and maybe even bring family members closer. λ
Julianne Cruz is managing director of Advisory Services at CB&T Wealth Management. Reach her at (310) 258-9301 or firstname.lastname@example.org.
Insights Banking & Finance is brought to you by California Bank & Trust
Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), which operates as CB&T Wealth Management in California. Contango is a registered investment adviser, a nonbank affiliate of California Bank & Trust and a nonbank subsidiary of Zions Bancorporation. Some representatives of CB&T Wealth Management are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango. #CCA0813-0090
A subtle, but very significant, change is underway in the world of Sarbanes-Oxley compliance, specifically audits of Internal Control over Financial Reporting (ICFR). As a result of this change, many public companies will face additional compliance burdens and new exposures, even if they believe they have a well-established and stable system of internal control.
“Some public businesses may be completely unaware that even though they’ve had effective ICFR for years, this year may be a different animal,” says Eric Miles, a partner in Business Risk Services at Moss Adams LLP. “We’re seeing that controls or approaches that were fine in the past are now getting much more scrutiny from external auditors.”
If you have not yet had discussions with your external auditors about your 2013 ICFR compliance efforts, you may have a little time to get out in front these changes, he says. Many companies are already experiencing these changes in expectations and have found compliance to be very frustrating.
Smart Business spoke with Miles about why there’s activity change in ICFR compliance expectations and what you can do about it.
Why is there increased focus on ICFR compliance?
Over the last two years, the Public Company Accounting Oversight Board (PCAOB) has drastically increased its inspection focus on audits of internal control over financial reporting (ICFR) and as a result, virtually every major accounting firm has received reports indicating deficiencies in their audits of ICFR. The PCAOB was concerned about the pervasiveness of the findings, so much so that it published a special supplementary report in December 2012 detailing the most pervasive deficiencies identified in firms’ auditing of internal control over financial reporting during the 2010 inspections, and also including information on the potential root causes of the deficiencies.
The SOX ICFR compliance pendulum has swung back and forth over the years. When the SOX ICFR assessment requirement was first implemented, it yielded very rigorous and costly audits. In response to the litany of criticism, the PCAOB issued a new audit standard in 2007 (Audit Standard No. 5) to clarify expectations and ultimately to focus SOX ICFR efforts on areas of the most importance. What we are currently seeing is the PCAOB’s reaction to the mis-implementation of that standard. It appears that from the PCAOB’s perspective, the pendulum swung too far. As a result the PCAOB is trying to put more rigor into audits of internal control over financial reporting.
What is the biggest internal control problem?
Although the PCAOB noted several pervasive deficiencies, the issue currently causing the most consternation with companies is the design and testing of ‘Management Review Controls.’ These are controls, such as account reconciliations, budget to actual, etc., that theoretically allow several key risks to be mitigated with a single control. The PCAOB noted that the auditors’ evaluation of the design and operation of these controls has typically been cursory at best, such as an examination of a document for signature and date. As a result, many firms are now asking companies to be very detailed in the explanation of these controls, explaining aspects such as what triggers management’s attention, what management does when an item for investigation is identified, and how resolution of review items is documented. Further, firms are expecting management to maintain much more evidence of operation than in the past.
If your company has management review control problems, what can result?
There’s a real risk that organizations that heavily rely on management review controls are going to be surprised, even if their auditor has said for years the controls are fine.
With the new scrutiny, some external auditors may conclude there’s a material weakness. Ultimately that impacts the value of the organization. In any case, it takes a lot of time and effort to update documentation to get back in sync with your external auditor.
What should organizations be doing now?
The first step should be to have a proactive conversation with your auditor to understand whether their expectations have changed or are expected to change. There is a real risk that companies will substantially complete their own internal control assessment activities before fully understanding the scope of needed changes with their external auditors. As a result, companies may need to go back and update their already completed testing to comply with the auditor’s new approach. That’s far from ideal.
Once you have a better understanding of the external auditor’s needs, you need to understand what controls are considered to be ‘review controls.’ By taking an inventory of your controls, you may find that you have just a handful of management review controls, however, organizations that really embraced Audit Standard No. 5 will likely have more concerns.
For the identified controls, make sure your control descriptions include specific investigation criteria such as dollar or percent variance or other qualitative considerations, with clear precision thresholds. There needs to be evidence of control performance that can be tested through re-performance, not just through a review of signatures. If you can update your documentation in advance of external auditors coming in, it will save you trouble later.
Overall, be prepared for increased auditor activity, particularly with respect to walkthroughs and management review controls.
Eric Miles is a Partner in Business Risk Services at Moss Adams LLP. Reach him at (650) 808-0699 or email@example.com.
Insights Accounting & Consulting is brought to you by Moss Adams
Franchise owners have some particular obstacles to overcome when thinking about succession. Each one has a manufacturer or headquarters that has conditions for ownership and succession, so it’s critical to plan ahead.
“You can’t forget about dealing with developing bench strength, even when facing an uncertain future,” says Ricci M. Victorio, CSP, CPCC, ACC, managing partner at Mosaic Family Business Center. “It’s your bench strength — the pipeline of multigenerational talent — that drives you into success, even if businesses performance is transforming.”
Smart Business spoke with Victorio, who has helped automobile dealerships strategically plan for 15 years, about how franchise owners can fit the puzzle pieces together to pass their business on to the next generation.
What situation do franchise businesses face today?
Many franchises, such as auto dealers, have gone through massive restructuring to survive. But businesses had to watch for the tipping point — cutting the fat and not the muscle.
As we start to come through the recession, these franchises are carefully picking up the pieces and looking to hire the right people. They also are waking up to the fact that time is passing — no matter what the economy is doing — and strategic planning, team training and succession planning cannot be ignored long-term.
This is important for any business, whether a franchise or not, because even in tough times it’s necessary to keep a strategic eye on how you’re going to navigate the future.
How is franchise succession planning unique?
Any franchise that sells a product has to answer to headquarters or its manufacturer. It’s not like a typical family business, because if you’re holding a franchise there is someone above you dictating what the rules are to own that franchise. And if you don’t have business success or an approved successor, they can take it all away. You can’t even sell your franchise without approval.
In addition, you shouldn’t just focus on the development of the next generation. It’s not just talent. If you don’t have enough market share, if your customer service doesn’t meet standards or even if your building isn’t up to specifications, that may stop you from passing the mantle. Not having these in order upon the death or inability of a dealer to continue running his or her store would give the manufacturer a wedge.
How can franchise owners meet these challenges?
You have to present your succession in a pretty package with a bow on it. The strategic plan, the bench strength of your managers, your service, your sales, customers’ reaction to your culture and environment, and the education of your chosen successor all get scored.
Various manufacturers also have required successor development programs. For example, the National Automobile Dealers Association has an 11-month dealer’s academy where developing successors spend six weeks in training sessions and then have homework back at their dealerships for six weeks before returning for another week at the academy.
It can take five to 10 years to get everything in order. You have to think far out, so you may need to start working with an adviser as soon as your children come into the business. Remember, it’s not about being old and thinking about retiring, it’s about having a plan so you don’t lose the business.
Additionally, in a succession plan, you need a short-term contingency plan — what if you don’t come home tomorrow — as well as a long-term plan, such as your kids growing into the business. In the short-term, maybe ensure your general manager has been approved and certified by the manufacturer as a dealer-operator to protect your long-term legacy for the next generation. However, this may come at a price; if someone has qualified to be a dealer, they will want some ownership. An adviser can help you devise creative ways of bridging this succession gap.
Ricci M. Victorio, CSP, CPCC, ACC, is a managing partner at Mosaic Family Business Center. Reach her at (415) 788-1952 or firstname.lastname@example.org.
Insights Wealth Management & Finance is brought to you by Mosaic Financial Partners Inc.
Reducing your above-the-line income is a smart strategy this year as higher tax brackets go into effect.
Monic Ramirez, CPA and senior tax manager at Sensiba San Filippo LLP, says there are several income thresholds that should be managed, and planning should start now in order to avoid costly financial errors at the end of the year.
“Reducing above-the-line income will minimize the effects of the higher tax brackets and maximize the tax savings from deductions,” Ramirez says.
Smart Business spoke with Ramirez about strategies to implement immediately to position yourself for a more favorable tax bill in April 2014.
What are strategies for utilizing savings plans?
I advise clients to maximize their contributions to tax savings and retirement vehicles such as 401(k), 403(b), 457 plans, 529 plans, health savings accounts, simplified employee pension plans and Keogh plans. This year, high income earners who do not implement strategies to maximize their retirement and health savings plan contributions will be taxed on that lost benefit at a much higher rate.
Individuals and their tax advisers should revisit their decisions to contribute to a traditional versus Roth retirement plan. Distributions from Roth IRAs and Roth 401(k) plans are not subject to regular tax or the Medicare investment tax and, therefore, are a more attractive retirement savings vehicle for many individuals. However, if hovering around the threshold for the new Medicare tax, consider moving Roth contributions to a traditional retirement plan to create a tax deduction.
How will the tax increases impact planning for capital gains?
All capital gains are subject to the new 3.8 percent Medicare investment tax. Although long-term capital gains still maintain their preferential rates, high income earners received a 5 percent rate increase on those long-term gains on top of the 3.8 percent tax. Even worse, short-term capital gains are also subject to higher ordinary income rates.
By working with your adviser, you can better manage your tax rates on capital gains. There are tax deferral mechanisms that should be considered, such as a Section 1031 exchange or an installment sale.
An installment sale will spread the gain over several tax periods in order to minimize or entirely avoid the Medicare tax on investment income. Taxpayers should also consider realizing losses on existing stock holdings, while maintaining their investment position by selling at a loss and repurchasing at least 31 days later or swapping it out for a similar, but not identical, investment.
What other tax saving strategies should be discussed with your financial adviser?
In light of recent tax developments, it is important for individuals to work with their financial adviser to build a highly customized tax plan. Plans may include:
- Strategies to avoid at-risk limitations on flow-through investments. If a loss has been incurred, make sure it’s deductible.
- If self-employed, consider any capital expenditures that will be needed in the coming year. Favorable Section 179 deductions and bonus depreciation have been extended through the end of 2013 and can be used to minimize the impact of the new Medicare taxes.
- Consider moving investments into tax-exempt vehicles, such as municipal bonds, to avoid the Medicare investment tax.
While it might seem as if it’s a bit early to start tax planning, right now is the most important time to think about taxes because it may be too late to enact some strategies in December.
Monic Ramirez, CPA, is a senior tax manager at Sensiba San Filippo LLP. Reach her at (408) 776-8900, ext. 5524, or email@example.com.
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