When is the last time you reviewed your company’s buy-sell agreement? If you’re like the owners of many private companies, that document is sitting in a file collecting dust. The stagnant legal document is often viewed as something that you create and then put away, only looking at if a business partner dies, retires, gets sick or decides to leave.
But that is a big mistake, says Mario O. Vicari, director at Kreischer Miller in Horsham, Pa.
“The buy-sell agreement is a critical roadmap that outlines the economic terms and conditions of transactions between a company and its shareholders in case of a triggering event in a private company’s stock,” says Vicari. ”It essentially determines the market for the company’s stock among shareholders.”
The buy-sell agreement is a highly customized document that a company’s shareholders should intimately understand and should play an active role in crafting so that it reflects their collective intent.
Smart Business spoke with Vicari about how to execute an effective buy-sell agreement.
What is the purpose of a buy-sell agreement?
First, when structured properly, a buy-sell agreement reflects the intent and the bargain of shareholders relative to transactions in a private company’s stock. For this to occur, shareholders should participate in the crafting of the document and its provisions, and review it at least annually.
Second, the agreement protects the company by ensuring that its provisions do not present a set of economic circumstances that could jeopardize the company’s liquidity by requiring it to fund a transaction that was not planned for or properly structured. Important elements to consider are reasonable valuation and payment provisions.
Third, it protects the shareholders and their families by providing funding mechanisms through proper insurance coverage in the event of an untimely death of a shareholder. Finally, a properly structured and monitored agreement helps avoid shareholder disputes and litigation because the economic provisions are well understood and agreed to by all parties in advance of any triggering events, and the valuation is monitored annually.
What are the important triggering events that should be addressed in a buy-sell agreement?
There are five major triggering events that are normally addressed in a buy-sell agreement: death, disability, separation from employment, retirement and sale. It is important to note that each trigger could cause different terms and conditions in the agreement, such as length of payout or discount on valuation. For instance, a company can protect itself from an unanticipated liquidity event caused by an unplanned separation from the company by placing a discount on the valuation and/or longer payment terms on that transaction trigger.
There are two other common triggers — divorce and bankruptcy of a shareholder. In each of these cases, company stock could become part of a divorce or credit estate and the holder of those shares would have the same rights as the other shareholders. In order to avoid this type of situation, a well-designed agreement can prevent a shareholder from allowing shares to fall into someone else’s hands by requiring the shareholder to ‘put,’ or sell their shares back to the company in exchange for a note before the divorce or credit action is settled.
What are common mistakes that business owners make in these agreements?
The most common mistake is having a provision that the company’s value is to be determined by an outside appraiser in case of a triggering event. This causes problems on several fronts. First, when shareholders don’t understand the value of their shares within the agreement, they are often surprised when a trigger occurs. This sometimes leads to bad feelings, disputes or litigation. It also does not allow shareholders to properly plan their personal affairs.
Second, when an important variable in the agreement such as the value of the shares is not known, it is impossible to know whether other elements of the agreement are properly structured, such as the amount of life insurance to carry or whether the company can afford the payout provisions. A better strategy is for the shareholders, with the help of a valuation adviser, to develop a formula that is contained in the agreement that can be measured and quantified each year after the company’s financial statements are complete.
This allows shareholders to monitor the value for their sake, as well as the company’s, and to make sure that the valuation and payment provisions are reasonable in light of the company’s current financial position and cash flows.
Who should be involved in drafting a buy-sell agreement?
We think that balanced advice is very important. Certainly, all the shareholders should be active participants, as it is their company and their stock. We also think it is a good idea to include the company’s financial officer.
Outside advisers should include the company’s CPA, attorney and insurance counsel. If the company’s CPA does not have valuation expertise or credentials such as a CVA, then a valuation adviser may also be needed.
Mario O. Vicari is a director at Kreischer Miller, Horsham, Pa. Reach him at email@example.com or (215) 441-4600. Follow him on Twitter @mariovicari.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Here’s a litmus test to determine whether your accounting firm is providing the level of service and expertise your business needs to grow and succeed. Ask yourself: Are you a better company today than you were a year ago?
“The right accounting firm will provide your business with proactive solutions, including tax saving, performance improvement and financing ideas,” says Stephen W. Christian, CPA, managing director, Kreischer Miller, Horsham, Pa. “When you partner with a true adviser, accounting services become an investment in your business’s future success.”
However, all firms are not the same, and you must choose wisely.
Smart Business spoke with Christian about how selecting the right firm can bring tangible results to your organization.
What is the significance of working with the right accounting firm?
The right accounting firm will support your business as a trusted adviser and serve as much more than a provider of tax services and financial statements. All firms can prepare financial statements and tax returns, but what else are you getting for your money?
Your accounting, tax and advisory services should be viewed as an investment rather than the cost of a commodity. The reality is that many organizations that have not utilized a sophisticated accounting firm do not realize what they are missing: business advice and strategy based on company goals. The right accounting firm visits your place of business, gets to know the operation inside and out and can provide you with valuable insight to make your organization stronger.
What should a business consider when looking for an accounting firm?
That depends on what you’re looking for in an accounting firm. If you want to hire a transactional provider focused on preparing tax returns and financial statements, and cost is a key factor in your decision, you’ll find plenty of firms that perform these basic services.
But if you’re looking for more — a relationship with an adviser who gets to know your organization and can advise you on critical business decisions — then you’ll need a high-value firm that focuses on comprehensive client service. You’ll benefit from a firm with a consultative approach.
So first, identify your needs: audit, tax, consulting, low-cost and value-added. Then, interview firms and select one based on your priorities.
How can a business identify potential firms?
Talk to your advisers and professionals who know your business, including lenders, lawyers and colleagues in trade associations. Ask them for referrals. Review accounting firms’ websites to see how the companies are represented. Do their priorities match with yours? Personally interview the team of professionals you are considering and not just the partners.
What type of value can a business realize when partnering with the right firm?
Your business will be stronger and in a better position to succeed by engaging the right firm. A good accounting firm can provide an outside perspective that will sharpen the performance of your organization.
An accounting firm works with many diverse companies, and experiences what works and what doesn’t. Communicating mistakes to avoid can steer your company toward success. And it can share best practices from successful companies and help you execute those ideas at your organization.
Also, a good accounting firm is proactive and solution based, providing an abundance of advice on such matters as financing, compensation and benefits strategies, and risk mitigation. In addition, the firm can provide meaningful benchmarks against other similar companies and share ideas on optimal tax structures, beneficial technology initiatives and succession issues.
What are the keys to selecting the right firm?
Now that you have determined your priorities, be sure the firm’s service offerings are compatible with your needs. The team of accountants should be passionate about serving you — and team is the operative word.
Many businesses are disappointed when they select a firm based on one individual who works there, then later learn that they will be working with other associates that are not comparable. Find out who will service your needs, and make sure you meet the other players serving you. And be sure you can gain access to the firm’s leadership and decision makers. This is a common complaint among businesses that are unhappy with their accounting firm relationships.
You want a firm that recognizes the importance of your time and a firm that is respected in the community and has a philosophy of personal development. The right firm is forward thinking, not just a score keeper. This firm will spend the time to get to know all aspects of your business and your industry.
What if a business is reluctant to cut ties with its current accounting firm?
First, ask yourself why you might be looking to make a change. Do you feel you are not getting the personal service you deserve? Is it difficult to reach the firm’s management? Do you want more from the firm that it is capable of providing?
Next, determine in an unemotional way which firm best fits your needs. Remember, this is an important business decision for your organization. You could consider maintaining your current firm for personal tax work while hiring a new firm for corporate work. And there are other creative ways to maintain the relationship if you must.
A firm that truly has your best interests at heart will partner with you to find a solution.
Stephen W. Christian, CPA, is the managing director of Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
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Proposed lease accounting rules could have a serious impact on businesses that have significant leasing activities.
A draft standard for lease accounting developed by the U.S. Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) will affect any business that enters into a long-term lease and result in significant accounting changes for both lessees and lessors.
“There is a lot of controversy over this new draft standard for lease accounting,” says John Helmuth, a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa.
The current accounting guidance has been criticized for not requiring all lease commitments to be recorded on a company’s balance sheet, resulting in inconsistency for banks and other third parties that require a business’s financial statements. Under current standards, companies aren’t required to include operating lease commitments as liabilities on their balance sheet unless they meet certain criteria to be treated as capital leases, and some users of financial statements are seeking a more black-and-white approach.
Smart Business spoke with Helmuth about the proposed lease accounting rule changes, what businesses should know and how they can prepare for the impact that it may have on them.
How did the proposed lease changes come about?
Mainly, there has been feedback from users of financial statements, such as banks, that they are not getting a clear financial picture of a company’s leasing activities. Balance sheets don’t show the complete picture in some cases.
For example, companies are required to include capital leases on their balance sheets, but operating lease commitments are only included as a note disclosure to the financial statements. A company could be committed to paying a lease obligation, but that lease might not have been recorded on the balance sheet. Essentially, certain leasing activities could have been left off of the balance sheet, making the financial statements inconsistent with reality.
In reaction to this, the FASB and IASB created an exposure draft of proposed lease accounting changes. The proposed rules affect lessees and lessors, and there are significant changes for both parties. For now, there is still discussion, and a revised exposure draft is expected to be complete in the next several months.
How could the proposed changes impact businesses that lease space?
The new model would result in the elimination of off-balance-sheet lease financing for lessees. The proposed rules require that lessees record leasing arrangements based on a right-of-use model. Under that model, lessees would recognize an asset representing its right to use an underlying asset during the lease term and a liability representing its obligation to make lease payments during the lease term.
Additionally, there will be no distinction between operating and capital leases, and therefore, no ability for a lessee to leave a lease obligation off of the balance sheet. Depending on a company’s lease portfolio, this requirement could have a serious impact on the balance sheet.
For example, consider corporations that lease large facilities across the country. Under the new proposed guidance, these companies will be required to record assets (right-of-use) and liabilities to make lease payments. Interest expense will be recognized on the liability to make lease payments and the right-of-use asset will be amortized over the shorter of its estimated useful life or the lease term. It will change the income statement from a budgeting standpoint, because rent expense will be essentially replaced with interest and amortization expense.
Essentially, the proposed changes will result in assets and liabilities being ‘grossed up’ because all leasing transactions will be recognized on the balance sheet. This could deteriorate key leverage and capital ratios. Also, the proposed rules will require a system for gathering and tracking lease data, which could be extremely cumbersome.
How will lessors be affected by the proposed rules?
There are proposed changes to accounting by lessors also. The FASB and the IASB introduced the receivable and residual approach.
Under this approach, lessors would derecognize the underlying leased asset and initially measure the right to receive lease payments at the present value of the lease payments, along with a residual asset measured at the lease commencement. This model does not apply to short-term leases or leases of investment property.
How can businesses best prepare for these proposed lease accounting changes?
For now, the proposed lease accounting changes are still under debate. But it is prudent to consider how these rules will impact your business if they are put into effect tomorrow. How will this change your balance sheet? How could the rules impact budgeting?
Businesses of all sizes will see a definite difference in their financial statement presentation, so it’s important to get a handle on the lease commitments you currently have. Quantify those and project the potential financial impact on financial statements. And begin tracking and keeping careful lease records that will help you make business decisions about leases down the road. Now is the time to discuss with your banker any debt facilities that require financial covenants that could be revised based on lease accounting changes.
And businesses should consult with a trusted accounting adviser, who will help them implement any processes. An experienced accountant will guide you through these lease accounting changes and make recommendations to ease the process.
John Helmuth is a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Insights Accounting & Consulting is brought to you by Kreischer Miller
Businesses that thrive in today’s competitive marketplace recognize that the data they collect on a daily basis can be a valuable asset.
But just collecting data isn’t enough. It’s critical to organize this business intelligence so that it is accessible and can be analyzed to improve an organization’s performance by driving innovation, spurring fresh ideas and giving managers the tools to make smarter business decisions, says Sassan Hejazi, director of the Technology Solutions Group at Kreischer Miller.
“Having the ability to analyze data and use it as a benchmarking tool internally and against competitors can change the culture and character of an organization,” says Hejazi.
Smart Business spoke with Hejazi about how to centralize business intelligence and how that data can be harvested and used to make key business decisions.
How can data be valued as assets in today’s business environment?
Companies are capturing valuable data in numerous ways — from clients who make online purchases, from sales calls and even through daily business practices.
Consider the volume of electronic documents that your business creates and files away each day. Now, ask yourself, ‘Is this information easily accessible?’ Businesses collect enormous amounts of data that are tucked away, often in disparate locations, during the regular course of business. However, all of this collected data is not effective if it cannot be accessed and analyzed and acted upon.
More businesses are working toward going paperless and storing their data in a centralized repository versus in file folders and boxes. When data is uniformly formatted and accessible on a centralized system, the business intelligence that can be gained is incredibly valuable. Businesses should aim to implement systems that allow them to harvest this data so they can make better decisions.
What are some common missteps that businesses make with collecting and accessing data?
Often, companies need to capture data quickly, so they settle for a quick fix. For example, a salesperson visiting with a potential client transfers information into an Excel document, then presses ‘save’ on his tablet. Another member of the sales team gathers information from a phone call and enters it into a spreadsheet on his desktop computer.
There are countless pieces of disparate data floating around that don’t connect; therefore, the information cannot be linked, harvested and analyzed to make business decisions. The answer to this problem is to centralize all data so that managers in your organization can build reports and analyses of this data, making decisions based on the whole picture.
What are the first steps to centralizing data so they become uniform and accessible?
The first order of business is to design a data collection system and decide how that data will be managed. That is called creating a data map, a system of how data will be merged, uniformly formatted and accessed within an organization.
This requires an understanding of what data currently exist by taking an inventory of an organization’s data assets. Then, a plan is configured to migrate toward an integrated data management system.
This process requires a multidisciplinary approach involving business process owners and technology staff. These players must all work together to ensure that the data map addresses the business and technology objectives of the company.
From there, information systems can be designed to add capabilities for allowing a business to capture data in a more integrated fashion. With this, a company is in a position to maximize its technology investment and use reporting tools to gain a competitive advantage.
What is the best way to present data to managers so they can use them to make key business decisions?
Once a centralized data system is in place, a business can implement dashboards, which are the most effective way to present all of this collected data to managers and other stakeholders. Dashboards are displays that can appear in different user-friendly formats, such as a speedometer or graph.
Dashboards are the new way to report information because they can capture and analyze selected data. They are able to give managers a picture of what’s going on inside and outside of the organization. Dashboards create a link between day-to-day activities in the business and long-term goals, plans and objectives. And, they’re simple to view on a computer screen and understand.
How can companies harvest data for a competitive advantage?
Data can lend insight into opportunities and risks. For example, a sales and marketing team can use collected data to benchmark performance against targeted sales goals. The team members can learn from high performers and track sales trends. Access to sales data can change the culture of sales management in an organization.
The same goes for operations. Operations managers can understand where bottlenecks, as well as efficiencies, exist in their processes and then compare those to industry benchmarks. This gives a business the spirit of continuous improvement.
Having data at your fingertips to analyze and compare how you stack up against the competition can aid in evolving your company’s culture, better managing risks and moving it toward being a more performance-oriented organization.
Sassan Hejazi is director of the Technology Solutions Group at Kreischer Miller. Reach him at (215) 441-4600 or firstname.lastname@example.org.
Businesses today face more competition than ever, driving them to go beyond their own backyards and look globally for ways to capture market share and meet the needs of customers. Whether doing business at home or abroad, many of the challenges businesses face remain the same — turning a profit, delivering value to shareholders and satisfying customers, says Robert Olszewski, a director in the Audit & Accounting Group at Kreischer Miller, located in Horsham, Pa.
“Beyond those basic goals of running a business, customer demands have become more persistent, with heightened expectations from markets that companies can potentially serve,” says Olszewski. “The good news is that significant advances in technology during the last two decades have provided the tools that businesses need to grow their presence internationally. Companies that take advantage of these resources and think beyond geographic borders can capture market opportunities outside the U.S. The business world has become a flat playing field, and companies have developed strategies to adapt to an ever-changing world that may present expansion across the globe.”
Smart Business spoke with Olszewski about the advantages of going global and how a business can prepare to compete in the international marketplace.
What benefits can businesses realize when they go global?
International expansion can provide an opportunity to deliver new products or services to a previously unexplored market. Making this possible are technological advances that have enabled companies to operate efficiently across international boundaries at spending levels that were previously insurmountable.
Global expansion continues to extend beyond sophisticated overseas markets. Companies have benefited from expanding into newly industrializing countries such as Korea, providing an additional stimulus to international business activities. By going global, companies can take advantage of an enhanced supply chain network of facilities and distribution centers that expedite the delivery of goods. There are tightened demands with respect to procurement, manufacturing materials into intermediate and finished products, and product distribution to consumers. Global expansion may give companies geographic leverage by having production facilities, distribution centers and sourcing points that may drive efficiency and promote success.
How can a business prepare to expand its operation for global business?
Before simply jumping into the pool, it’s a good idea to test the waters and determine whether global expansion is truly an option for your company. Companies that have effectively integrated into global markets must have a well-designed strategic plan, which involves market research and analysis of those results. It requires establishing a first-year operating budget and developing a support structure to accommodate anticipated growth.
The plan should also prepare the company for expansion, answering the question of what is next. The creation of a plan will serve as your roadmap, albeit one that is reviewed often and revised as needed. The main goal of your strategic plan for going global is to identify the right mix of domestic and international operations, and the sequence of expansion into varying markets.
Ultimately, success at the international level requires a broad awareness of the local environment. The company and its leadership should be flexible and prepared to adapt to change quickly. By identifying the risks and opportunities of expansion in advance, a company can make smart tactical decisions while implementing its strategic plan.
What are some common mistakes companies make when doing business globally?
The most common mistake is not playing by the rules. Corporate policies must be appropriate and comply with conditions in the countries in which a global expansion occurs. Simply put, a one-size-fits-all approach will not work. Companies involved in international markets must be aware of government regulations and pay careful attention to these when conducting business.
This can be difficult without a well-established management team that possesses an understanding of the requirements. It’s a good idea to enlist the help of a third party who has expertise in international business and who can steer your company in the right direction as the strategic plan is implemented.
It’s also important to recognize that international trade and financing have grown at a rapid pace. Companies are buying, selling and making financing decisions across borders. As a result, businesses must formulate policies for managing cash flow in foreign currencies that must be updated and monitored as relevant information becomes available.
Finally, companies must carefully manage human resources if they want to succeed in the international market. Again, since no two companies operate the same way, how HR issues are handled will depend on the organization.
What advice would you give to companies that are considering entering the global business marketplace?
First and foremost, global expansion is not meant for everyone. The U.S. is blessed with a significant population, high gross domestic product, large median income and a limited language barrier.
For the majority of companies that fail with global expansion, the reason is not a substandard product or service. Instead, they fail because of poor advanced planning, refusing to understand the local environments and investing funds without regard for the anticipated return. That is why careful analysis and planning are critical first steps to expanding business globally.
Consult with trusted advisers as your strategy is developed to ensure that the company stays on course for success.
Robert Olszewski is a director in the Audit & Accounting Group at Kreischer Miller in Horsham, Pa. Reach him at (215) 441-4600 or email@example.com.
Many businesses that put hiring on hold during the recession are now prepared to retool their top talent. Organizations that are prospering in what is the new economy recognize that a sharp, experienced team is critical to success.
“Companies are looking for opportunities to take their businesses to the next level, and that includes upgrading executive talent,” says Tyler Ridgeway, director for the Human Capital Resources Group at Kreischer Miller. “They are evaluating their key players. Who are the executives they can’t afford to lose, and who are the ‘B’ and C’ players that they can upgrade?”
Leading executives have also been affected by persistently high unemployment rates. There are plenty of experienced leaders who are in transition. Some have sold their companies and haven’t yet settled into their next business role. Others left corporations to seek different work cultures.
So the good news for companies positioned to hire executives is that the crop of talent is rich, and those people, too, are looking for the right match.
“They want work that has meaning,” says Ridgeway. “They want to make an impact on a company’s future success.”
Smart Business spoke with Ridgeway about what top executives are seeking in a position, and how companies can implement creative strategies to attract top-notch talent.
What do top executives in transition seek in a new leadership position today?
The game has changed in the last five years, and executives are focused on much more than compensation. They are equally interested in a company’s vision and the ethics of its management team.
They’re looking for inspirational leadership, a strong moral compass. They want to make a difference and they want to make an impact on the company’s growth. We’re also seeing executives potentially take lateral compensation roles if adequate bonuses and incentive compensation are negotiated. Executives for hire are looking closely at companies to be sure they can present a compelling strategy and platform for growth.
How does a company attract interest from experienced top talent?
Companies that have success recruiting the best executive talent use creative strategies to build a strong applicant pool before making their selection. First, reach out to the trusted advisers who know your company best. This includes retained search consultants, bankers, accountants, attorneys and other members of an advisory board.
Talk to these individuals about potential gaps in your business: What expertise is lacking? What functions in the business require more attention or oversight? Essentially, what are those missing pieces? These discussions can help you seriously consider what job functions new talent could fill.
At the same time, tap into social media and utilize resources such as LinkedIn to grow your connections. Social media is not only helpful for finding talent but for getting referrals and accelerating the interview process. Tools such as LinkedIn allow you to develop more trust in candidates and can help you gain a deeper understanding of their experience and their connections.
How has the interview process changed?
The interview process in this market has stretched into a longer course. In some cases, the process slows because of business issues that must first be addressed. However, companies also recognize the ramifications of hiring the wrong person. They want to get it right the first time, so there is greater scrutiny and more screening involved.
For instance, a business might ask a candidate applying for a chief financial officer position to write a business plan for what he or she aims to accomplish in the first six months of employment.
Another option some businesses explore is hiring interim executives to fill roles, often with the potential of transitioning into a salaried, full-time position at the company.
How can hiring an interim executive benefit a business looking to fill gaps?
Interim assignments are a very effective mechanism for companies that want to attract solid talent, and the type of positions that can be filled on a temporary basis extends beyond the accounting functions that were once typical. Now, companies are posting interim assignments in the areas of finance, technology, operations and marketing.
The way these arrangements often work is that a business owner hires an executive to manage a specific project. By bringing the person inside, the owner gains a sense of how the executive performs. Does this person mesh with the company culture? In some cases, a project expands into an open position, and the owner can feel confident hiring an executive who has been tested.
The challenge with this type of employment is that you are limiting your pool of candidates largely to those who are not currently employed. But the benefits of an interim hire include the ability to fully realize what skill gaps the company needs to fill and to potentially reduce the hiring cycle.
The key to attaining top talent in today’s market is to think beyond traditional hiring means and keep your options open. Connect with trusted advisers and use tools such as social media to help validate decisions.
Tyler Ridgeway is director of the Human Capital Resources Group at Kreischer Miller. Reach him at firstname.lastname@example.org or (215) 441-4600.
Nexus is a Latin word for a common tie or a connection, and, in today’s business environment, it is also a key term in determining the tax jurisdiction that applies to state business taxes.
Because of the interconnected nature of our economy today, the discussion of state tax nexus has clear implications for many business owners. They often find themselves operating in multistate environments but may lack the expertise and the means to limit their tax liability and audit risk.
And as a result of that lack of technical expertise, business owners may find themselves stymied by a state tax nexus questionnaire, says Timothy A. Dudek, a director of tax strategies at Kreischer Miller in Horsham, Pa., and chair of the firm’s State and Local Tax group.
“Nexus questionnaires are not to be taken lightly,” says Dudek. “Incorrect responses on the company’s part to what can be very confusing questions — questions that prompt only yes or no answers — may give rise to unsuspecting and irreversible results. This, then, leads to being subject to the multitude of taxes within each jurisdiction.”
Smart Business spoke with Dudek about how to approach a nexus questionnaire and how to proceed should your business receive one.
Why would a business receive a nexus questionnaire?
In the current economic landscape, more and more states are feeling the impact of the budget crunch. In an effort to increase revenue, states are sending nexus questionnaires to out-of-state businesses that they suspect may be underreporting and underpaying taxes in their jurisdiction. Choosing to ignore these questionnaires may be dangerous for a business, as these states may take steps to impose arbitrary assessments and force companies to then defend themselves, ultimately resulting in a lot of professional fee expense for the business.
How do state and local taxing jurisdictions obtain their mailing list of companies to target?
It’s not too difficult to reason how they get the names of companies that may be liable for some type of tax liability within their jurisdiction. State auditors research potential business links such as customs reports, FAA logs, boating registries and realty transfer transactions.
Other revenue officials may roam trade shows and business centers, peruse telephone directories and websites and watch bridge crossings to target companies whose names are not already listed on the state database. Advanced technology allows for interdepartmental inquiries within each given state, with wage tax systems interacting with corporate tax systems.
Lastly, because of state tax compacts (information sharing agreements) signed among a number of neighboring states, the audit of one company leads to information about another company, and so on.
What types of taxes are subject to these inquiries?
While the list of taxes that are subject to these inquiries would be beyond the purview of this article, it’s essentially any tax or fee that can be imposed under that state’s taxing ordinance. This would encompass everything from corporate income and franchise taxes to unclaimed property reporting to sales and use taxes to wage taxes.
What danger do these questionnaires pose to businesses that are not familiar with them?
The answer is twofold. First, a company needs to understand the concept of nexus, which is defined differently for the different types of taxes involved. Companies may or may not be subject to state taxes based on a variety of state tax concepts, such as physical presence, constitutional nexus, economic nexus, affiliate nexus, agency nexus, or Public Law 86-272, which addresses the circumstances under which a multistate business may owe state income taxes.
Second, the questions asked on the nexus questionnaire can be quite broad in nature. A company may think that the response to a particular question should be a simple ‘yes.’ However, a more accurate answer may be, ‘Yes, except for … ’ In other words, if a company answers ‘yes’ to a particular question without providing further explanation of that answer, it becomes easier for the state to conclude that the company has nexus. Being able to provide a further explanation may provide a solid basis for concluding that the company does not have nexus.
Because of that it is a very good idea for companies to review their answers with their state tax professional before returning the questionnaire to the state. Once submitted to the state, it becomes extremely difficult to retract answers that were originally given in good faith but that were incorrectly submitted.
What other factors should companies be aware of regarding nexus questionnaires?
Companies should continuously assess their operations in any state or local jurisdiction where they do business. If you find that you have established state tax nexus, the law requires you to register in those jurisdictions and begin paying taxes.
However, before you register, if there is a possibility that state tax liabilities may have existed for your business in earlier years, first talk to a state tax professional about your options. There may be voluntary disclosure, amnesty or exemption programs that your business can utilize to resolve its tax requirements.
Timothy A. Dudek is a director of tax strategies at Kreischer Miller in Horsham, Pa., and chair of the firm’s State and Local Tax group. Reach him at (215) 441-4600 or email@example.com.
Recovery from the economic recession has been gradual and has changed the banking environment. The financial industry took a major hit, and the result has been increased regulation, stricter lending policies and a number of mergers and acquisitions that have left the banking landscape forever altered.
After riding out the storm, the financial industry today is cautiously optimistic. While lenders continue to be risk-averse, they are also strengthening their balance sheets by building capital, thereby creating available funds to loan to potential borrowers. Business owners are in a position to take advantage of historically low interest rates and develop relationships with the competitive banks that want to earn their business, says John Helmuth, a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.
“Banks are recovering and getting stronger, and that is good news for businesses,” says Helmuth.
Smart Business spoke with Helmuth about the challenges facing the financial industry and how smart business owners can capture opportunity in today’s banking environment.
What key challenges are banks facing?
The economies in the United States and overseas are impacting financial institutions and affecting their ability to grant loans to individuals and businesses of all sizes.
Banks are no different than other businesses that have experienced financial hardship during the last few years. We are witnessing a very slow recovery from the recession, and, while the credit environment is improving, financial institutions are still acting conservatively as they adhere to increased regulation.
In addition, some banks have experienced significant credit losses, particularly in residential and commercial real estate, which contributed to the significant financial collapse that occurred in the recent past. There are also additional credit losses resulting from loans that were perhaps too risky or aggressive.
Meanwhile, banks are dealing with a deterioration of collateral values if they have loans or financing that is tied to the value of an asset, particularly in real estate or in capital expenses such as equipment for companies in manufacturing. Because asset values have decreased, financial institutions are faced with more frequent and independent appraisals of those assets.
Revenue growth for financial institutions has also been a challenge, as many banks have reduced the number of loans that they grant and are taking a stricter approach to lending. That results in reduced income from interest. And because of today’s historically low interest rates, banks are not recovering as much through interest income for those loans outstanding.
What major impact do business owners feel from a challenged banking environment?
While there are opportunities for strong businesses to obtain loans, banking industry regulation has led to stricter credit approval processes. So, borrowers might find it more challenging to obtain financing at the levels needed to run or grow their businesses.
But the good news is, with more aggressive competition among banks, financial institutions are actively looking for good customers — business clients that are poised to grow and that need additional credit to make capital investments. With many banks sporting stronger balance sheets, coupled with low interest rates, now is a great time for businesses to take advantage of the current banking environment and the products that financial institutions have to offer.
Will those low interest rates be increasing soon?
We don’t see any signs of interest rates increasing because recovery from the recession has been very slow. By maintaining these historically low interest rates, the goal is to avoid slipping into another recession.
And so far, it’s working. With rates so low, businesses that are in a position to secure financing can really leverage their credit dollars and get more for their money.
What direction can you provide business owners in light of today’s economy and the state of the financing industry?
Business owners should communicate openly and often with their bankers. Share both the good news and the bad. Tell the story — what challenges the business faced, what the business did to overcome those obstacles and what the plan is for the future.
Now more than ever, banks are looking beyond the numbers. So many businesses in all industries experienced losses over the past few years. There’s more to a credit decision today than the balance sheet and operating results, although these are still of significant importance.
Banks that have developed strong relationships with business owners want to maintain those relationships. And this is especially true as financial institutions continue to merge and organizations work to retain their customers.
John Helmuth is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 241-4600 or firstname.lastname@example.org.
Nearly every business function can be outsourced, and today more companies are exploring ways to delegate tasks to professionals outside of their organizations as they seek ways to reduce their fixed costs.
“During the most recent recession, companies felt the pain resulting from a lack of focus on cost containment. As in most recessions, the knee-jerk reaction was to aggressively reduce personnel costs,” says Christopher Meshginpoosh, director-in-charge of the Audit & Accounting Group at Kreischer Miller, Horsham, Pa.
Now, with leaner work forces and the pressure to do more with less, businesses need the flexibility to scale their businesses as demand returns, but they don’t necessarily want to increase their payrolls. As a result, many companies are looking to outsource a wide range of business processes.
The good news is that, as a result of maturation of the outsourcing market and vast technological improvements, there are virtually no limits to what a company can outsource. Gone are the days of simply passing off payroll activities to third-party firms. Today, entire departments can be outsourced.
“In the quest to remain competitive, a lot of companies are devoting their time and energy to the processes they can manage most efficiently and effectively in house,” says Meshginpoosh. “And many of the remaining processes can be outsourced.”
Smart Business spoke with Meshginpoosh about opportunities to outsource business processes and how this can benefit companies.
What business functions can companies outsource?
Over the last decade, the breadth of activities that can be outsourced has expanded dramatically. Today, there are very few functions that cannot be outsourced. Rather than just outsourcing payroll, companies might choose to outsource their entire human resource functions. Or, rather than just outsourcing distribution, companies might outsource large portions of their supply chain management to third-party firms with deep supply chain and logistics capabilities.
More recently, the trend is to outsource large pieces of business to a single service provider rather than assigning processes to a large pool of different service providers. By dealing with one provider, companies can minimize the time and energy associated with the management of multiple vendors.
What are the benefits of letting go of some of these tasks?
One of the most significant, tangible economic benefits is the ability to turn a fixed cost into a variable cost. While a company might surrender a portion of profits during peak periods of activity, it can dramatically reduce the negative impact during slower periods.
Perhaps more important is the less tangible benefit that results from allowing the company to focus more closely on the areas that create a competitive advantage for it. For example, if a company’s competitive advantage centers on the unique products it delivers to customers, outsourcing activities such as logistics, warehousing and fulfillment might allow managers to spend more time focusing on product development, preserving the company’s competitive advantage.
What are the first steps a company should take before outsourcing?
First, a company must truly understand where it creates value. What are the key aspects that differentiate it from its competitors? Also, companies must be careful to avoid outsourcing activities in which the risks outweigh the potential benefits.
Another question to ask is how essential the activity is to the business. How does it impact customers and critical employees? Is the function one of the company’s core competencies? Does performing the activity require deep knowledge or expertise that is only held by company employees?
How can a company reduce risk when delegating business tasks to a third party?
First, ensure that the third party is financially strong and that it has the infrastructure, systems and personnel necessary to support the activities that will be outsourced. Additionally, determine whether outsourced activities will be performed on site or at the vendor’s locations, and consider the potential impact on customers, personnel and other business processes. It’s also important to ask for references and find out what other companies have to say about the potential vendor.
Additionally, many outsourcing companies have annual examinations of internal controls formerly referred to as SAS 70 reports, which can provide insight into potential issues related to specific vendors. Obtaining and analyzing these reports during the planning and vendor selection process can help identify processes that the company should retain, as well as help weed out potential vendors.
How can a company find a reputable outsourcing firm?
A good place to start is your accounting firm, because it most likely has had experience with many clients who have had successes and failures with outsourcing initiatives. This experience can be incredibly valuable to management teams and owners as they try to separate critical from noncritical functions and assess risks resulting from outsourcing business processes, as well as analyze the potential economic impact associated with outsourcing.
By ensuring that they leverage this experience in the decision-making process, companies can maximize the probability of success with outsourcing initiatives.
Christopher Meshginpoosh is the director-in-charge of the Audit & Accounting Group at Kreisher Miller, Horsham, Pa. Reach him at email@example.com or (215) 441-4600.
A business’s continued success is most fundamentally determined by its reputation in the marketplace.
And in today’s environment, in which scandals seem to occur on a daily basis, people often think of reputation only in terms of integrity or ethics. But it is much more than that, says John F. Schlechter, director, Auditing & Accounting at Kreischer Miller.
“Certainly being ethical in business practices is critical, but reputation includes such things as leadership and vision, quality of products or services, the workplace environment, financial results and corporate citizenship, to name just a few,” says Schlechter. “The challenge is to balance all of these elements in a way that produces a reputation that leads to a successful business.”
Smart Business spoke with Schlechter about how to build your corporate reputation — and how to protect your good name.
What are some keys to building a company’s corporate reputation?
A company’s reputation is most significantly impacted by its management team, which is responsible for developing and nurturing the company’s vision or mission. The tone is set at the top.
Many companies have well-thought-out and articulated mission statements, codes of conduct and business practices. Employees are indoctrinated in these practices through training sessions, and a company’s hallways are filled with constant reminders of key components of the company’s mission. But the single most important factor in building a company culture is how management models it on a daily basis. Management must walk the talk. When management leads by example, employees get the message that mission, codes of conduct and treatment of the customer are important and they must follow if they want to be successful in the organization. A strong corporate culture develops, which ultimately leads to a positive reputation in the marketplace.
Fundamental to building a corporate reputation is providing quality products and services. Branding and marketing efforts, while they might help to create a corporate image, do not build reputation. You can have the world’s greatest marketing campaign, but if you do not produce quality products and services, you will not create a sustainable business. The focus on quality is paramount to a sustainable customer base. Other shortcomings may be overlooked if people love your product.
How can the work environment contribute to reputation?
The workplace is an important aspect of creating reputation. Organizations known for having a great working environment have no trouble attracting quality people. Quality people, typically, help produce quality products and services. If people are challenged, treated respectfully and properly rewarded for their efforts, they have a positive view of the organization, which affects how they work and how they talk about their employer in the community.
If you have sound leadership, quality products and good people, financial results will typically follow. Solid financial results are, obviously, an important indicator of the success of the business, which enhances the public’s image of the company.
Dealing fairly with suppliers, i.e., paying a fair price for the vendor deliverable, and paying bills on time are also important contributors to corporate reputation. Financial results at the expense of the business’s supply chain can create another kind of reputation.
How else can a company enhance its reputation?
Getting involved in the community by participating on nonprofit boards, sponsoring community events, or making charitable donations is another key element of creating corporate reputation, but these things must be done out of a genuine desire to contribute. Being self promotional in such endeavors can lead to less-than-desired results. Having a keen interest in the project and enjoying the participation is the key to corporate citizenship.
How do you maintain your reputation once you have earned it?
Corporate reputation takes years of cultivation, but it can be destroyed in an instant. A lapse in judgment, an uncontrollable event, a misspoken word, a bad product batch, or even a simple misunderstanding can suddenly impair the best of reputations.
Particularly in this technological age, when information flies around the Internet at unfathomable speed, businesses need to be vigilant about their good name. However, even with the utmost diligence, high-profile events can occur that are outside the business’s control. In these situations, it becomes important to deal with the issues as quickly as possible. Speed can only be a mistake if the response is made before there is a full understanding of what has occurred and what all the implications may be.
How should a business respond to a reputational crisis?
A business does not want to have to make continual responses or modifications to initial responses unless it is a fluid situation and the circumstances warrant a continual dialogue with the marketplace. As with most problems, the quicker a problem can be dealt with, the quicker the healing can begin.
Taking responsibility for a mistake is also an important element in responding to a problem. Most people are more forgiving of businesses that acknowledge their mistakes and fix them than they are of those that either try to cover them up, or make excuses as to why the mistake happened. Taking responsibility and fixing it as fast as possible are measures that go a long way to preserving corporate reputation, or at least minimizing the damage.
A strong reputation is fundamental to successful businesses. Build your reputation with great care, and closely monitor and guard it once it is established.
John Schlechter is a director in the Audit & Accounting Group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or firstname.lastname@example.org.