Enterprise value is an amount that represents the entire economic value of a company. In essence, it is a measure of the takeover price that an investor would need to pay in order to acquire a firm. Calculated by adding a corporation’s market capitalization, preferred stock and outstanding debt together and then subtracting cash and cash equivalents, enterprise value is a more accurate reflection of a company’s takeover cost than market capitalization alone.
In order to increase enterprise value, says Lou Savett, managing principal of the strategic transaction services group for Gumbiner Savett Inc., it is important to position your company for future earnings growth. “The way to increase earnings is by taking a hard look at your marketplace and seeing to what extent you can expand it,” he explains.
Smart Business spoke with Savett about enterprise value, the importance of having a strong management team in place and how to best preserve the value of a business when in the selling process.
What steps can a company take to increase its enterprise value?
First of all, a company has to make a determination about where they fit in the marketplace. There are wholesalers, retailers, manufacturers and service companies, each of which has a separate group of component ingredients that makes it more or less valuable. Underlying all of that is the fact that the enterprise value of a company is almost always determined by some version of discounted future cash flow. If you are able to diversify your market, get into areas where there is less price resistance and get into rapidly expanding marketplaces, then you are increasing enterprise value because the future cash flows will be greater than they are now.
We also know that pricing multiples change with regard to the future components of the company’s vision. If you are not growing then you are unlikely to get a high multiple. If you are growing very rapidly, in a way that people believe will continue, you might get a multiple that is two or three times higher.
What is the main driver that affects the enterprise value of a business?
The main driver will always be earnings and the question will always be: What sort of future earnings will a prospective buyer be convinced can be attained? The higher this number is the better off you will be. Philosophically speaking, there are only two ways to increase business. One way is to sell the same product to more people. The other, is to sell the same people more products. You need to do both of those things. Wells Fargo Bank, for example, recently bought an investment banking group and a national insurance brokerage company, expanding the services that it can sell to its clients.
How can a strong management team increase enterprise value?
A company needs to take a hard and sincere look at its management. Generally speaking, when we walk into a company there is usually one key person. If you ask that person, he will quickly tell you that the company is what it is because of his efforts. If you tell that to a prospective buyer the pricing multiple will be reduced nobody wants to take a chance on the genius being there forever. On the other hand, if you can say we have a management team that through thick and thin can run this company for its highest and best purposes then the amount of enterprise value goes up.
What role does enterprise value play in succession planning?
Enterprise value comes to the fore with any type of exit strategy because it accurately predicts what the person or group who is exiting will get in the way of benefits. When you do your succession planning, you want to build your enterprise value up to a certain point. For example, let’s say that your succession planning involves putting together an Employee Stock Ownership Plan. Your contributions to the plan are in percentages of your capital stock, so if the enterprise value keeps going up, you put less shares in the plan and keep more for yourself. You will get a bigger bang for your buck tax wise if you continue to increase enterprise value while you’re in the midst of succession planning.
How can business owners best preserve the value of their business when in the selling process?
We advise our clients to bring together their core management group and get them involved in the selling process. If you don’t do that people will get scared that their job doesn’t have a future and either leave to a competitor or make other plans that aren’t in your best interest as a seller. As you move forward in the selling process it is important to determine what to tell your customers and vendors and when to tell them. All of this has to be handled very delicately. If you don’t, and something goes wrong in the selling process, you’re going to lose a lot of value.
Electronic bill payment solutions allow businesses to trim costs while improving efficiencies. By eliminating the need for customers to deliver or mail paper items, payments enter the collection stream quicker and with less effort than through traditional methods.
Electronic payment alternatives enable bill payers to make payments at their convenience 24 hours a day, seven days a week through a variety of convenient electronic options including debit cards, major credit cards and electronic check. Companies using an electronic bill payment solution can improve their record keeping while saving time and costs.
“Electronic bill payment allows a company to automate the payment collection and posting processes,” says Joy Gilmer, senior vice president of treasury management for Comerica Bank’s Western Market. “It reduces or eliminates exception items, therefore saving time in internal costs.”
Smart Business spoke with Gilmer about electronic bill payment, how the concept works and how companies can benefit from the solution.
In what ways have banking solutions advanced during the past several years?
In the past, accounts were settled with cash and checks either on-site or by mail. Banking solutions have advanced to mobile solutions transactions can be conducted electronically, over the Web or over the telephone line. With checks now being intercepted and converted into electronic form, the process and exchange can be conducted electronically.
How does the concept of electronic bill payment work?
Electronic bill payment allows companies to offer their bill payers an electronic payment alternative without making a large investment in infrastructure and staff. Payment options include making payment via the Internet, interactive voice response or a human contact center representative.
A company should first try to understand what its customers are asking for based on customer comments, typically through its existing sales and customer service teams. It then sits down with its bank respresentative and begins to form a customized electronic bill payment solution, which can include payment delivery channels, settlement choices, payment parameters and security controls.
What benefits does an electronic bill payment solution provide to business customers?
The electronic bill payment solution is a value proposition for companies and enables them to better serve their customers by providing additional payment options, flexibility and convenience. Customers are able to make their payments when and where it is convenient for them to do so. A company is now empowered to collect payment 24-7, which accelerates the accounts receivable timeline and results in quicker deposits of funds. It also automates the updating of the accounts receivable system, reduces fraud, eliminates audit concerns related to the storage of private financial data of customers, eases account reconciliation tasks and provides new customer service tools for internal staff.
What kind of fraud protection and security measures are incorporated into an electronic bill payment solution?
There are multiple fraud protection security measures, which include the number of days a payment can be made, number of payments made in a day or specified time frame and ZIP code validations. Companies can restrict their customers and only allow them to pay via a particular settlement option, such as a credit card, particularly if the company has already experienced returns for non-sufficient funds in electronic checks. Also, card verification values can be set up, which are similar to a security code on the back of a credit card. In some cases, a company may elect not to accept an electronic payment by using a negative file, also known as a stop file. You see this feature used a lot with mortgage companies because in some cases accepting a payment could cause legal issues down the line.
How can electronic bill payment be branded with a company’s own identity?
At Comerica, with our Easy Pay option, we brand the solution with the client’s own logo, look and feel. If the company chooses the Internet-only solution, our client needs to provide us with its current Internet site address and a file containing its logo so that our site will look like the client’s. If the client cannot provide us with those items, we will work with the company to build a site.
JOY GILMER is senior vice president of treasury management for Comerica Bank’s Western Market. Reach her at (714) 435-3931 or email@example.com.
In the current economic environment, obtaining a business loan can prove to be a challenging task. In order to improve your chances, it is important to understand what criteria banks are looking at when making their decisions.
It is also important to understand that the relationship established between a bank and a borrower does not conclude once a loan has been disbursed.
“A commercial banking relationship is not just about providing loans and banking products to a customer,” says David Song, first vice president of Comerica Bank’s Western Market. “A bank needs to make the utmost effort in understanding the dynamics of its customer’s business to be able to provide optimal banking solutions to the customer in a proactive manner.”
Smart Business spoke with Song about the hurdles that businesses must overcome in order to obtain a loan, how banks analyze risk and under what circumstances yield requirements may be waived.
What basic hurdles must be surmounted in order to obtain a business loan?
In general, there are six hurdles that businesses are subject to when obtaining loans:
- Credit policy: Every bank has a set of
credit or loan policies. These policies generally determine the types of lending transactions acceptable to the bank.
- Credit analysis: This hurdle focuses on
the risk of the proposed loan transaction.
- Loan structure: This determines whether
the repayment terms and conditions sufficiently match the repayment capabilities of
- Loan and account profitability: A loan
request may pass the first three hurdles with
no problems but fail miserably if it provides
little profit to the bank from the transaction.
- Loan documentation: A loan cannot get
funded until it is properly documented and in
compliance with guidelines and policies.
- Loan management: The final hurdle focuses on how the fully disbursed loan is managed by the bank. It mostly involves the bank’s internal procedures but requires the borrower’s compliance with the terms and conditions of the loan.
How does the bank analyze the risk of a proposed loan transaction?
The credit analysis hurdle is ultimately a test of management’s skills and capacities. It is management’s policies, decisions, investments and actions that determine whether the bank gets repaid. Credit analysis involves historical analysis and projected analysis. While historical analysis focuses on past financial performance and the borrower’s track record in repayment of debt, the projected analysis focuses on the borrower’s prospect of generating sufficient cash in future periods to service the debt.
There are five possible sources of cash to pay interest and amortize debt: cash from operations, additional equity, sale of nonoperating assets, additional borrowing and liquidation of business. A bank analyzes and assesses the prospect of generating cash from all of these sources with primary emphasis on the first one. The better the prospect of the first source, the more likely the loan will get approved.
Why do banks establish minimum yields?
Just like the businesses receiving the loans, banks must ensure that their cash returns exceed their expenses. Most banks have established minimum yields on loan transactions, depending on the loan size and risk levels. Thus, a loan proposal is subjected to a set of minimum yield requirements, which consider the cost of the transaction in terms of the cost of funds and overhead expenses as well as projected revenue from the interest income, fees and deposit balances.
Under some circumstances, yield requirements may be waived. Sometimes, a bank may do certain transactions that do not meet the minimum yield requirements if there are other relationships with the same borrower or related entities that provide sufficient yield from the overall relationship. In the current difficult banking environment, this has become extremely important to all banks.
What type of documentation is required for funding to be released to the borrower?
Full documentation of all of the agreed-upon terms and conditions, including the loan amount, interest rate, fees, repayment schedule, collateral, UCC (Universal Commercial Code) filings where appropriate, loan covenants, reporting requirements and so on, must be documented before funds can be released to the borrower. Required documents include a promissory note, loan agreement, security agreement, guaranty (most cases), resolution to borrow and agreement to furnish insurance. Depending on the case, additional documentation may be required. For example, when there is a shareholder loan or loan from an affiliate, banks may require a subordination agreement.
How important is the banking relationship after a loan has been disbursed?
The relationship between the bank and the borrower does not end with the disbursement of the loan but actually begins with the funding, as the bank and the business continue to develop a long-term mutually beneficial partnership. These days, everyone talks about relationship banking, but it is much easier said than done. Ongoing communication based on trust and sincerity usually forms the basis of an enduring relationship between a bank and its customer.
DAVID SONG is first vice president of Comerica Bank’s Western Market. Reach him at (562) 463-6502 or firstname.lastname@example.org.
Forging a relationship with your banker can pay huge dividends. By openly and frequently communicating your business needs, you allow your banker to become more proactive and less reactive. A collaborative banking relationship benefits all parties involved: Companies receive the support they need and bankers have the opportunity to offer targeted banking solutions.
In order to fully take advantage of your bank’s products and services, it is important to meet with your banker on a consistent basis and provide as much information as possible.
“I’ve never heard of a situation where we had too much information the more the better,” says Melissa Pollard, senior vice president and group manager of Comerica Bank’s North Orange County Middle Market Group.
Smart Business spoke with Pollard about establishing a personal relationship with one’s banker, how to prepare for banker meetings and what type of service and performance standards should be expected.
Why is it so important for business owners to establish a relationship with their bank?
Establishing a relationship with one’s bank is very important because it adds color to the business owner’s situation. We have the benefit of financial statements and quantifiable information, but it’s the qualitative information that we gain by getting to know the business owners and senior management. In fact, when we make credit decisions, one-fourth of our assessment is based on management. From a banker’s perspective, it is important to have a relationship with a company’s key individuals so we can effectively rate management and make proper evaluations.
How often should business owners meet with their banker?
It really depends on the business. As bankers, we try to tailor our approach based upon the client’s preferences. There are some clients that love to meet monthly or, during the throes of a transaction, even weekly. Other clients prefer a quarterly approach. We strive to be proactive and upfront in asking what type of schedule best meets our clients’ needs.
How should a business owner prepare in advance for a meeting?
A meeting with your banker provides the opportunity to showcase your accomplishments over the past quarter or however many months it has been since the previous meeting. In order to make the most out of a meeting, it is important to have specific objectives in mind. This can range from helping your banker get his or her arms around a new business opportunity to discussing your recent projections.
Bankers don’t like surprises, so the more information the better. Being proactive and sharing as much information as possible helps us to anticipate future needs. It is so much easier if we know in advance that a client may miss one of the bank requirements because then we have the opportunity to modify or alter the requirements to keep that client within compliance.
What type of information should be brought along?
If it is a brand-new company that we’re still trying to get to know, it is important to provide historical information and the background on key managers, including resumes or business biographies. This allows us to have an understanding on how the company has evolved over the years and possibly over different generations.
If it is an existing client, we already have the benefit of this historical information, so we need the updated financial performance relative to the client’s business plan. Also, it is important to provide qualitative information that rounds out the numbers and enables us to see what is behind the obvious mathematics. A business might think it is bringing in too much information and will bore their banker, but there can never be too much information.
Who should be present at banker meetings?
It depends on the size of the company. With some companies, we deal with the business owner and/or CEO, which can be the same person. But sometimes it is the CFO that we are working with on a regular basis. If the CFO makes the final call in regards to financial decisions, then developing a strong relationship with that person is just as critical as it is with a business owner or CEO.
What type of service and performance standards should owners expect from their banker?
They should expect the same standards that we enjoy from our clients, which include being able to undercommit and overdeliver and being a business partner through thick and thin. It is easy to provide banking products and services when factors are very favorable, but our most loyal of relationships have been solidified during situations where there have been bumps in the road.
Bankers should stand behind their client and give candid feedback in terms of what they can and cannot do. If it is something that truly does not fit their area of expertise, they should do their very best to refer outside resources. And the relationship works both ways. By providing candid information and being forthcoming about their business challenges, clients will make it easy for their banker to service their needs.
MELISSA POLLARD is senior vice president and group manager of Comerica Bank’s North Orange County Middle Market Group. Reach her at (714) 940-6751 or email@example.com.
The failure to properly prepare for the sale of your business can put family members and others connected to your venture at serious risk. A well-thought-out strategy, however, can ensure that others will benefit from the wealth you have created.
“Planning for your eventual departure is the best thing that you can do for your family, the nonprofit organizations that you support and other enterprises that you care about,” says Mike Silva, senior vice president and group manager of Comerica Bank.
Smart Business spoke with Silva about exit planning, the importance of clear financial reporting and how to preserve value during the selling process.
How should business owners go about preparing for the sale of their business?
Buyers of businesses today, more than ever, are focused on purchasing a stream of cash flows. Whatever you can do to enhance and grow that stream will directly accrue value to you as the seller. Consistently working to maximize EBITDA (earnings before interest, taxes, depreciation and amortization) is important in order to show a positive growth trend.
One seemingly simple way to boost cash flows and maximize EBITDA is to increase the price of your goods or services. Oftentimes, business owners are reluctant to increase prices because they are worried that such a move will drive away customers. However, we’ve found that the market today is more open to price increases from businesses that are leaders in their field because of the perceived value that is associated with doing business with these companies. We are in an environment now where we’ve seen substantial increases in the cost of commodities and people are used to paying more.
How far in advance of an anticipated departure should exit planning occur?
I don’t know if you can start too early. A couple of years in advance of an anticipated departure would be the minimum. You should start by talking to a mergers and acquisitions attorney, your CPA and your banker. Also, it might be helpful to speak with some investment bankers about ways to enhance the value of your business.
Why is it so important for a company’s financial reporting to be clear and accurate?
When you start the process of selling your business, it is important to think about the quality of information that prospective buyers will be looking at because you will want them to write a check for five to eight (or more) times the EBITDA of your business. We see a lot of deals where valuations are substantially decreased during the due diligence process because the quality of information is subpar. Having good, clean, consistent financial reporting is crucial.
What are some common techniques for exiting a business?
There is a wide gambit of techniques available ranging from handing or selling the business to a son or a daughter to hiring an investment bank and conducting an auction. Questions to consider in identifying the appropriate method for your situation include: Do you have potential successors involved with the business? Do you have a management team to whom you would like to sell the business? Would you be OK with selling the business to an outsider?
Also, a lot depends on the size of your business. If it is a smaller business you might be able to sell it to your management team and take a payout from future cash flows over a period of time as your payment. If you have a larger business this strategy won’t work and your options would be to sell to a financial or strategic buyer.
How should owners go about determining the value of their business?
It is important to keep track of multiples of cash flow paid for businesses in your industry. This information can come from talking to competitors, others in your industry, M&A lawyers, CPAs and investment bankers. Ultimately, however, the value of your business is what the market will pay when you decide to sell it. Ideally, you would like two or more potential acquirers to fall in love with your business and then you can bid them against each other.
During the selling process, how can owners best preserve the value of their business?
Losing focus on day-to-day operations during the selling process is a common problem, especially for entrepreneurial businesses where the owner is the primary operator. The due diligence, negotiations and sales process can be all-consuming. If you’re the person responsible for making sure everything runs smoothly, it can be very hard to concentrate on both selling and running a business. It is important to have a good internal finance person to keep you on track.
Also, in order to preserve value, it is important to be extremely selective to whom you market your business. If, and when, your competitors get wind of the fact that your business is up for sale, they are certainly going to try and exploit this and try to take away your customers.
MIKE SILVA is senior vice president and group manager of Comerica Bank’s San Francisco and North Bay Middle Market Group. Reach him at (415) 477-3274 or firstname.lastname@example.org.
The Sarbanes-Oxley Act, introduced in 2002, has had a significant impact on the auditing process. Over the past several years, heightened regulation has increased the amount of audit evidence that must be obtained and led to more stringent documentation requirements. Against this landscape, it is more important than ever to employ the services of a quality independent auditor.
Exceptional client service is the hallmark of an effective auditor, says Sheldon Ausman, principal and managing director of client services for Gumbiner Savett Inc.
“Independent auditors should be evaluated on the quality of the service they provide their clients,” he explains. “A company has the right to expect exceptional quality of service as described in the accounting firm’s engagement letter.”
Smart Business spoke with Ausman about finding the right independent auditor and issues that audit committees are currently facing.
How can companies locate an independent auditor that recognizes their needs?
If I had a company with 25 to 35 employees, I would try to find an accounting firm that was organized in a manner to accommodate and understand the needs of a company our size. The chemistry between the independent accountant and the company is related to the size of both institutions. There will be a difference in approach between one of the major accounting firms compared to a smaller accounting firm in recognizing what your needs are. For example, when I was with Arthur Andersen, because of our size, scope of practice and the organization of our firm, we found that many companies were too small for us to provide the equivalent service of a smaller firm. Not only because of size but because we were structured to provide service focused on larger entities.
Why is it important for companies to hire auditors and accountants with experience in their industry?
The bottom line is the ability to communicate. There are terms and procedures that are unique to one industry that aren’t typical of another. For example, if you are a health care institution, you wouldn’t want to hire a company that focuses its practice on the gaming industry. It is easier and more effective to communicate when you are speaking the same language. Also, there are certain accounting rules that apply to certain industries that differ from the typical manufacturing company.
In what ways has the Sarbanes-Oxley Act affected the auditing process?
Because of the limited amount of time that large publicly traded companies had to comply with the Sarbanes-Oxley Act, the cost the first year was horrendous. Much of it was inexperience by the government, accounting firms and the private sector in understanding the legislation and its implications. There is no question of my support for the intent of the bill, but I also understand and sympathize with those who incurred the high cost. How can one argue against quality of reporting? I recently read in the Wall Street Journal that the chairman of the SEC is asking for a postponement for the implementation of Sarbanes-Oxley for smaller companies. This indicates a recognition that there is a difference between large companies and mid-cap companies and the procedures necessary to achieve the objectives intended in the passage of Sarbanes-Oxley. Cost needs to be judged in relationship to objectives.
What are some other issues that board members/audit committees are currently facing?
In addition to the Sarbanes-Oxley Act, another change that is costing a significant amount of money is the implementation of FIN 48, an initiative that focuses on income taxes. Auditors and clients alike have spent a considerable amount of time in understanding the rule’s applications and principles. Both sides are learning, but it is becoming a very costly learning experience.
Another issue is stock options. This doesn’t affect as many companies as the Sarbanes-Oxley Act, but it is unfortunate that the matter is being applied to too many companies without considering materiality and intent. In many cases, stock option pricing was innocently applied retroactively.
What type of discussions should a company expect from its independent auditor?
I believe that when communicating with your clients it is best to err in providing too much information rather than too little. Management likes to know what is happening on a timely basis and, where appropriate, well in advance of the issue, so that the client can minimize the cost of correction or adjustment by using internal personnel and skills. It is important for the auditor and accountants to have regularly scheduled meetings with appropriate levels of management personnel. Certainly where audit committees are involved, the same effort applies if only with the chairman of the audit committee.
SHELDON AUSMAN is principal and managing director of client services for Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
Improved technologies coupled with the liberalization of trade policies have led to an explosion of global business opportunities. In order to fully maximize the benefits of conducting business in this surging international market, it is imperative to implement appropriate risk management tools.
“There are several tools available in the foreign exchange hedging portfolio toolbox to manage exchange rate risks,” says Hilary Love, vice president in the Foreign Exchange Group of PNC Bank, National Association.
Smart Business spoke with Love about currency risk management and how to shield against exchange rate risks.
Why is currency risk management so critical in today’s global economy?
We are so interrelated now; what happens in one country affects what goes on in other parts of the world. Financial flows are global in nature. Investment decisions made in one country can affect the currency of another country and can lead to disruptions in a domestic economy, based on the decisions fund managers or central bankers make in other parts of the globe.
For instance, because the United States is a large importer, U.S. companies paying overseas entities in U.S. dollars is resulting in an accumulation of large reserves of U.S. dollars overseas. Ultimately, overseas investors must decide if they want to keep the reserves in U.S. dollars or diversify into other currencies. By diversifying into other currencies, overseas investors sell U.S. dollars in exchange for the desired foreign currency, putting downward pressure on the U.S. dollar, a trend that has been accelerating over the past year or so. As global funds become more liquid, there is an increased volatility in the U.S. dollar, which affects every entity doing business in the U.S. through exchange rate movements and also domestic interest rates.
What steps can be taken to manage exchange rate risks?
For currencies that are freely traded on the international exchanges like the euro, British pound, Japanese yen, Canadian dollar many companies use a hedging technique called a forward contract to manage exchange rate risk. A forward contract is an agreement that a company enters into with a bank that obligates the company to buy or sell a certain amount of foreign currency in exchange for a certain amount of U.S. dollars at a pre-agreed date, or range of dates, in the future. Another technique to manage exchange rate risk is called a foreign currency option, which gives the buyer the right, but not the obligation, to buy or sell currency at a pre-agreed rate.
For government-controlled, or restricted currencies, which are usually in the emerging parts of the world, a hedging technique called a non-deliverable forward contract has been developed. This is an agreement similar to a forward contract, but where no currency changes hands. This is increasingly being utilized in the Chinese market. The fear of U.S. companies that import from China is that the yuan could rise and cause their cost of goods sold to escalate rapidly. To hedge against this risk, companies enter into a non-deliverable forward where they lock in a value of the yuan for a certain period of time. A non-deliverable forward essentially provides a way of settling up in U.S. dollars for fluctuations in the currencies.
How can a company effectively balance risk and return when investing in global markets?
While there are some higher investment rates of return available in non-U.S. markets, right now it is important to take into consideration the potential negative impact of currency moves. To effectively manage this risk, U.S. companies should consider having a baseline hedged amount. Companies should also consider implementing foreign exchange risk management polices in written form that describe what risk the company will tolerate in terms of the impact rate fluctuations may have on both business and investment decisions.
How can foreign currency loans benefit companies with a subsidiary in another country?
In the past, many companies believed they had to establish a borrowing relationship with a local foreign bank if their non-U.S. subsidiary had funding needs. Increasingly, there are alternatives that allow a parent company to use its U.S. bank. The first option is to borrow directly in a foreign currency to fund the subsidiary, with the assumption that the subsidiary will generate sufficient revenue in the applicable currency to repay the debt. Another alternative is a cross-currency interest rate swap, where the company, either in the name of the parent company or the subsidiary, can borrow in U.S. dollars from its U.S. bank and swap it into a foreign currency. This method removes the risk of foreign currency movements and the interest rate risk.
This article was prepared for general information purposes only. The information set forth herein does not constitute legal, tax or accounting advice. You should obtain such advice from your own counsel or accountant. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Opinions expressed herein are subject to change without notice. © 2007 The PNC Financial Services Group, Inc. All rights reserved.
HILARY LOVE is vice president in the Foreign Exchange Group at PNC Bank, National Association, Member FDIC and a subsidiary of The PNC Financial Services Group, Inc. Reach her at (888) 627-8703 or firstname.lastname@example.org. To learn more about currency risk management, check out PNC's Middle Market Advisory Series at pnc.com/joinus.
There are many rewards associated with turning a hobby or passion into a business. One of the biggest is being able to fully leverage one’s strengths and interests on an everyday basis.
Ron Greene, executive vice president of Gumbiner Savett Inc., has successfully incorporated his passion for food and wine into the accounting sector. By establishing relationships with those in the food and wine industry, he’s developed a number of business relationships. Networking, he explains, plays an important role in the process of converting a passion into a profit.
“Networking provides me with opportunities to expand my knowledge and experience base and demonstrate it to others,” he says.
Smart Business spoke with Greene about turning a passion into a business, potential hurdles that must be overcome and the advantages of having a true passion for one’s work.
How should a person go about converting a passion into a business?
Businesses already exist with respect to most people’s passions. For example, if you have a passion for sports, music, theater, travel, shopping or reading any kind of activity that you are passionate about all of these are already businesses. It’s a matter of seeking out the right types of people, making them aware of you and your passion and becoming aware of what they can do for you.
What I have found is that establishing relationships outside of the business context is valuable. Relationships established by letting people get to know about you, your skills and passions, and your interest in their field of endeavor are important. When an opportunity arises, they know you’re passionate about their fields of endeavor, and they believe you can bring help, guidance or skills to the table.
What factors should be considered when determining if one’s hobby or passion has potential as a business?
Not all passions have business potential. Many business areas are already saturated with wannabes as well as with skillful businesspeople. If you have a passion for something you have to consider what stage of life you’re at and whether it’s appropriate at this point in time to try and enter the arena of your passion. Some of the factors that should be considered include current family and other commitments and obligations that you might have, and whether you have the financial resources and staying power to get involved with something where you may have to pay your dues before you can succeed.
What are some potential hurdles that might be faced when attempting to turn a passion into a business?
Just because you are passionate about something doesn’t mean that you have the right skill sets to play in the ballpark of your passions. The big hurdle might be learning what you need to know. If you love food and wine like I do, you might say, ‘Hey, I want to be a winemaker.’ But what do you know about the chemistry of making wine? You have to obtain that knowledge, get those skills and learn from others. Gaining acceptance can be very difficult because in most areas of commerce people already know who the experts are and who they want to do business with. You’re the outsider looking in, and it may take quite a while to establish yourself and get people to accept and trust you.
What are the advantages of having a true passion for one’s work?
If you have a true passion for your work, almost nothing is going to get in the way. You can overcome the obstacles you’re going to face because you know that this is what you want to do and you’re going to stay on the chosen path. Having a passion for your work keeps you focused and helps you become successful because you love what you are doing. Defeats become opportunities.
What types of opportunities are available?
The world is your oyster if you want it. Especially if you have succeeded at earlier endeavors, you just have to be willing to take a step back, take a step down and apprentice yourself to the industry or business that embodies your passion. As long as you keep learning and growing you will be fine. The opportunities are there for people willing to think outside the box. If you take a concept that builds on your passion and are able to grow it into something new, you have the opportunity to be successful. I know many people who have successfully pursued their passions. As we say in the wine world, ‘Cheers.’
RON GREENE is executive vice president of Gumbiner Savett Inc. Reach him at (310) 828-9798 or email@example.com.
AGrantor Retained Annuity Trust is a popular estate-planning tool used by business owners for wealth preservation. When utilized properly, a GRAT can assist in transferring wealth on a nearly tax-free basis.
New IRS proposed regulations, however, could significantly alter this form of trust.
“The proposed regulations impose tough valuation standards that work indirectly to undermine the transfer tax benefits that certain grantor trusts have traditionally been able to provide,” says Mouris Behboud, principal-attorney at law for Gumbiner Savett Inc.
Smart Business spoke with Behboud about GRATs, the benefits they provide and what effects the IRS regulations are likely to have.
What is a Grantor Retained Annuity Trust?
A Grantor Retained Annuity Trust is an irrevocable trust that pays an annuity to its grantor for a specified period of time. At the end of the term of the GRAT, the remainder passes to the grantor’s descendants or other beneficiaries. If the rate of return on the GRAT assets exceeds the applicable Internal Revenue Code Section 7520, wealth passes to the remainder beneficiaries upon termination of the grantor’s annuity interest with the grantor having made a small or no taxable gift. The use of GRAT has become one of the most powerful estate-planning techniques since the enactment of IRC Section 2702 in 1990.
What type of benefits does this technique provide as an estate-planning tool?
A properly formed GRAT achieves the possible transfer of wealth on a tax-free or nearly tax-free basis. It is an excellent technique when the trust assets are likely to appreciate substantially and rapidly. For example, the owner of a closely held business who plans to sell his business may consider using a GRAT. The value of the business interest contributed to the trust is reduced using valuation discounts for lack of control and marketability. When the business is sold within the term of the GRAT, the trust receives the proceeds of the sale, which may be substantially higher. In effect, the GRAT has provided for a significant transfer of wealth to the business owner’s descendants or the remainder beneficiaries.
Another popular form of GRAT is a zeroed-out GRAT, also known as a Walton GRAT, which is created without generating a taxable gift. Simply put, this involves dividing the original principle amount by the rate of the appropriate factor for the corresponding term of years and Section 7520 in order to compute an annual payment that results in an annuity having a present value equal to the original trust principle.
When forming a GRAT, what considerations should be taken into account?
One of the critical considerations in forming a GRAT that practitioners usually face is the length of the term of the GRAT. The benefits of using a short-term GRAT are twofold. First, a short-term GRAT minimizes the possibility that a year or two of poor performance of the GRAT assets will adversely impact the overall effectiveness of the GRAT. A series of short-term GRATs funded with volatile securities perform better than a single long-term GRAT. In turn, the remainder beneficiaries receive significantly higher value using a series of short-term GRATs.
The second advantage of using a short-term GRAT is the reduced exposure to the risk that the grantor will die during the term.
On the other hand, when funding annuity payments is likely to be a problem because of insufficient cash flow, a long-term GRAT may provide a good solution. An additional advantage of using a longer-term GRAT is in a low interest rate environment when one can lock in the low interest rate applicable at the beginning of the term.
How do the new IRS-proposed regulations affect this form of the trust?
On June 7, 2007, the IRS published proposed regulations to IRC Section 2036 and 2039 regarding the inclusion of GRAT assets in the estate of the grantor when the grantor does not survive the term of the trust. These new proposed regulations appear to be part of the IRS’s larger strategy to curtail the use of grantor trusts and other similar techniques used as vehicles for minimizing transfer tax liability.
Under the proposed regulations, the amount includible for estate tax purposes is not based on the present value of the future stream of annuity payments. Rather, it is the amount of trust corpus that is necessary to yield the annuity payment based on the IRC Section 7520 rate in effect at the date of death or alternate valuation date.
In light of these proposed regulations, how important are timing issues?
These proposed regulations are especially not favorable for short-term GRATs. Since a short-term GRAT has a high annual annuity payment intended to zero-out the taxable gift, the result of the formula under the proposed regulations can significantly exceed the total value of the assets in the GRAT. This problem is magnified if the GRAT assets significantly outperform the IRC Section 7520 rate. IRC Section 7520 provides valuation tables for annuity, any interest for life or a term of years and remainder or reversionary interests.
MOURIS BEHBOUD is principal-attorney at law for Gumbiner Savett Inc. Reach him at firstname.lastname@example.org or (310) 828-9798.
When renting vehicles for business use, it is important to fully understand your insurance coverage.
Coverage varies from one rental agency to the next, so it’s vital to be familiar with potential risks and how to protect against them.
Recently, rental agreements have evolved, which creates possible pitfalls for auto renters.
“Each year, the liabilities assumed under rental agreements expand,” says Jim Kapnick, president of Kapnick Insurance Group.
Smart Business spoke with Kapnick about how to minimize risk when renting a car for business purposes, how liabilities have expanded in recent years and how to proceed in the case of an accident.
How can companies minimize their risk when renting cars?
If possible, work with one corporate-approved rental company. This will establish that the rentals are for business use and that the business is renting the vehicle, not the employee. Review the contracts from at least three rental car companies and choose the one that best suits you. This will allow you to make informed decisions regarding accepting or rejecting the Loss Damage Waiver (LDW) or Collision Damage Waiver (CDW) and properly structuring your business automobile insurance policy.
Also, include hired car physical damage coverage on your business automobile policy.
What are some basic rental procedures that should be followed when traveling for business?
- List both the business name and your personal name on the rental agreement.
- List the business address, not your home address, on the contract.
- Do not purchase gas from the rental agency. Rather, fill the vehicle prior to returning it.
Should drivers reject or accept the insurance offered by rental car companies?
In our opinion, the coverage under most rental agreements is unreliable since there are provisions in every rental contract that can void coverage. For example, coverage is often voided if you have a single drink before driving, if an unauthorized driver is operating the vehicle, or if the car is taken on unpaved roads. For this reason, we have been advising our clients to purchase hired car physical damage on their business auto policy and reject the ‘insurance’ offered when you rent a car.
What are the limitations of personal auto policies and credit card coverage in regards to rental car insurance?
Some personal insurance policies will not cover an SUV, van or pickup truck being used for business. Plus, a personal automobile policy won’t cover if physical damage coverage is not provided a likely case if the person drives an older vehicle. Also, the claim will be handled on the personal automobile policy, which will be on the driver’s loss record and might result in premium surcharges and/or cancellation of coverage.
Typically, with credit card coverage, if you violate any terms of the rental agreement, the credit card coverage is voided when you need it most. Many credit cards exclude rented SUVs, and some exclude any weather-related damage, like flood or hail.
How have liabilities assumed under rental car agreements expanded in recent years?
At one time, renters were responsible only for actual damage to or theft of the vehicle. Over the years, the rental car companies added ‘loss of use.’ As a result, if the car is in the shop for two weeks after an accident, you, the renter, are liable for the revenue the rental car company has lost. Plus, storage fees may be passed on to you. In addition, some agreements require that you pay for ‘diminution of value.’ This is the reduction in resale value for a vehicle that has been in an accident. These two items typically are not covered on insurance policies, so unless you purchase the LDW or CDW offered by the car rental company, these amounts will be your responsibility.
How should a driver proceed in the event of an accident?
The same rules apply as an accident in an owned vehicle:
- Stay calm and don’t argue with others involved in the accident.
- Call an ambulance if anyone is injured. Assist those injured, but do not administer first aid unless you are qualified.
- Call the police, and do not discuss what happened with anyone except the police.
- Do not admit responsibility for the accident or sign a statement.
- Report the claim to your insurance carrier representative.
JIM KAPNICK is president of Kapnick Insurance Group. Reach him at (888) 263-4656 x132 or Jim.Kapnick@kapnick.com. Kapnick Insurance Group is a member of Assurex Global, an international network of insurance and employee benefit brokers.