Not all executives have a financial or legal background. However, most would acknowledge a need to have a basic understanding of those areas to facilitate better communication with the company’s finance and law departments. Yet when it comes to information technology, executives often would rather leave all decisions to the “techies.”

“IT is a newer field that started as a separate entity — a black box that we didn’t understand,” says Sassan S. Hejazi, Ph.D., director of Kreischer Miller’s Technology Solutions Group.

He says executives have been comfortable delegating IT responsibilities to specialists, but there is a growing population who have taken the initiative to become more tech-savvy.

Smart Business spoke with Hejazi about the separation between executives and IT departments and the technology fundamentals all business leaders need to know.

Why do executives tend to take a hands-off approach when it comes to technology issues?

They understand the concepts, but think technology people should handle technology issues. They want to delegate these business improvements rather than get very involved themselves because they might not be familiar with the technology or are intimidated by the jargon.

What fundamentals do executives need to understand regarding technology?

Executives need a basic understanding of the:

  • Right IT systems for the business; the wrong ones will not enable the company to achieve its business goals.

  • Latest changes in technology. For example, IT systems are moving toward the cloud. Executives need to know what is happening with cloud technology and how it addresses the overall needs of their business.

  • Impact of social media. They need to know how social media changes the ways customers interact with companies.

  • Quality of data. If the right data is not being captured, decisions are not made properly. Executives need to be adamant about ensuring a high level of data quality in the system and that they’re capturing the right analytics.

Executives need to understand technology projects in order to take ownership of them and leverage specialized IT resources for those projects. If they want to gain a competitive advantage from IT investments they have to think of those projects as business improvements or business transformation initiatives rather than just technology initiatives.

When you have an IT professional in charge of an IT project, the tendency is to think of it as just a technology project. Implementing a new accounting system, client/customer management system, management dashboards or social media marketing program are very technology-intensive, but at the core they’re business projects.

How might leaving decisions to IT managers put the focus on technology instead of cost or business needs?

Even if they have an appreciation of business results, IT personnel are not impacted directly and are not involved in pricing and delivery of the company’s products and services. As a result, their decisions are focused on technological efficiencies rather than business realities. That’s why it’s important to have non-IT managers champion projects and be held accountable for their success from a business standpoint. Make sure they’re working closely with their IT counterparts, but leverage IT personnel as a resource rather than having them lead projects.

IT departments are viewed as a means to execute plans instead of participants in the planning process, and it’s often assumed that they don’t understand the business. If executive management makes decisions in collaboration with proper IT resources, it sets the tone for the organization and ensures IT managers are integrated within overall management decision-making. As non-IT managers become more tech-savvy, IT managers need to be more business-savvy. IT employees are also there to achieve business goals and involving them in the process makes them more engaged and productive team members.

Sassan S. Hejazi, Ph.D., is a director at Kreischer Miller. Reach him at (215) 734-0803 or


Book: Get Sassan’s new book, “Tech-Savvy Manager: Harnessing the Power of Information Technologies for Organizational Performance” at Amazon.


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Thursday, 28 February 2013 21:38

How to get the most out of lender relationships

External financing is typically the lifeline of a company, enabling it access to capital to purchase property and equipment, hire employees, and ultimately expand the business.

Commercial lending institutions provide the most common source of such financing.

“In order to get the most out of your lender relationship, the business owner or manager needs to understand what’s important to the commercial banker,” says Mark G. Metzler, CPA, director of Audit & Accounting at Kreischer Miller.

Smart Business spoke with Metzler about establishing a relationship with a commercial lender that will benefit your business.

What does a commercial lender look for in a banking relationship?

First and foremost, like most companies, the commercial lender is in business to generate a profit. Consequently, it’s imperative that the lender has confidence in the borrower’s ability to repay its loan. Therefore, in addition to evaluating the integrity of management, the commercial lender will look for a strong balance sheet and positive cash flow as indicators of the company’s ability to repay its obligations.

What else is important to the lender?

Lenders look at the experience and strength of management. In particular, they evaluate management’s ability to guide the company and execute its strategy. How has management been able to navigate through the recent turbulent economic environment? What are the backgrounds of the CFO and senior management? The lender will look at the company’s other business advisers, including its outside CPAs and attorneys, to help assess the company’s credentials. Does management surround itself with the right professionals? Lastly, the lender is interested in timely, open communication with management, sharing both good and bad news. The lender understands that projections and forecasts may change, but they don’t want to be surprised. The lender wants to know: What is management’s business plan, how has it historically performed and what are the key assumptions in the plan?

What should the business owner look for?

There are many options available to companies, and the business owner needs to evaluate a number of factors. First, who will be the company’s relationship manager and what is his or her experience? Remember, the relationship manager will be the one who presents the company’s case for extending the loan to the bank’s credit committee and monitors the company’s performance. The relationship manager plays a critical part and he or she should understand your business, its opportunities and threats, and potential capital requirements. Second, what type of financing is most appropriate? Options include traditional term debt, lines of credit, asset-based arrangements and SBA loans, among others. The size of the requested credit facility may help dictate the type of loan and banks that are suitable. Third, are there other services that you may need from the bank? For instance, if you have a global business, the bank’s foreign exchange capabilities may be important. Another business may be interested in cash management. Finally, because the company is often the business owner’s greatest asset, what private banking services are available to the owner individually?

What role do interest rates play?

Terms and conditions are always important, but we’ve found that commercial banks will be competitive for the right credit. Depending on the size and type of loan, the lender may be interested in collateral or personal guarantees. Obviously, companies with the strongest balance sheets and cash flows will generally obtain the best terms. While the lowest interest rate may appear to be most desirable, the experience of the relationship manager, the depth of service offerings and the commitment of the bank to your business are intangible factors that should not be ignored.

Do you have any recommendations?

Because your CPA works with a number of companies and has access to credit arrangements offered by various lending institutions, he or she is ideally positioned to guide you through the process and assist you in negotiating an optimal lending relationship for your company.

Mark G. Metzler, CPA, is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or

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Businesses are continuously challenged to deliver products or services faster, at higher quality, and to bring new items or issues to the forefront. Finding the time to address all of the issues businesses face daily is often a challenge in today’s fast-paced environment.

However, planning for continuous improvement is critical, says Robert S. Olszewski, a director in the Audit & Accounting group at Kreischer Miller, located in Horsham, Pa.

“Nothing can be achieved without hard work,” says Olszewski. “However, a successful company has the ability to balance between managing today’s challenges and planning for the future. A structured business improvement process, discipline and accountability lead to the development of systems and strategies that leverage the future and foster the true value of a business. Improvement involves assessing the now, where and how.”

Smart Business spoke with Olszewski about the business improvement process.

Are there stages in the business improvement process?

Most people are aware the first step in a business improvement process is to get the structure right. The right structure means the right customers, products, cost to manufacture and people. They don’t realize that once the structure is mostly in place, they should move to the next stage, which is to get the waste out of the structure.

There are seven primary areas of waste: defects, waiting, motion, storage, overproduction, transportation and processing. The identification of waste can be achieved by interviewing personnel, utilizing intellect and flow-charting a process. Identification of waste is the easy part. Businesses must implement a strategy to reduce waste and continuously monitor results.

The time frame for addressing structure and waste is normally a two-year period. However, the final stage of the business improvement process -— changing the belief system of people — can span over a time period of up to five years. One of the significant factors limiting the attainment of change is the degree to which people believe that they are in control of their own destiny.

What is the most difficult part of the business improvement process?

Most companies can respond quickly when asked where they currently stand in the business environment. The difficulty is revealed when a business is asked where it wants to be and how it plans to get there.

The key to addressing the where and the how is defining your sustainable competitive advantage (SCA). The clear definition of SCA is the baseline for developing specific strategies in marketing, operations, innovation, human resources and finance that will generate results in the business improvement process.

What issues do you see in making improvements and implementing change?

One of the greatest obstacles is the acceptance of the status quo or the historical norm. However, being successful in the past is not a sound indicator for predicting future success.

Most successful process improvements involve a vision, a plan and surprisingly, dissatisfaction. Providing insight into the positive elements of change will create dissatisfaction with the status quo and motivate others to adopt the change. Companies that can clearly demonstrate why and how the change will have a positive impact, leading to dissatisfaction, have a higher probability of effective change.

How can you tell if changes are actually improvements?

Key performance indicators must be established from the inception of the business improvement process. Although some things are difficult to measure, specific items need to be quantified and supported by data. Keep it simple, visible and meaningful to everyone involved in the change process. Sharing the goals and making the results readily available to those involved is often a key element to success. Visibility of the common goal and success to date will enhance the efforts of the team.


Something NEW has arrived for private companies! Introducing the Center for Private Company Excellence, a community created by Kreischer Miller. Learn more at

Robert S. Olszewski is a director, Audit & Accounting, at Kreischer Miller. Reach him at (215) 441-4600 or

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Monday, 31 December 2012 19:47

How to grow an already successful company

It’s common for businesses to attain some measure of success and reach a point where they need to take strategic action in order to continue to grow.

“Basically, you’ve run the business to a certain point. What do you do next with a successful company? You could sell it, just keep the status quo — which I don’t think is a good idea — or you could grow it,” says Mario O. Vicari, director at Kreischer Miller.

Vicari says there are four options owners can consider to keep growing: Acquire a similar company; diversify by acquiring a company in a different industry; leverage what you have by figuring out how to cut costs or increase efficiency; or leverage your position by expanding into new markets.

“There could be a lot of different strategies under these four areas, but that covers the basics,” says Vicari. “Another option is selling the business. Maybe there is a point where the market is right to sell, but that has a lot to do with the personal goals of the owners.”

Smart Business spoke with Vicari about the different growth strategies and how they are implemented to build companies.

How do you leverage assets or market position to grow?

You can figure out how to do things better or more efficiently; that’s leveraging intangible capital. Every business also has tangible assets such as machines and buildings, and you can look at whether you can use those assets in different ways. Those might be line extensions or new products that you make with your existing technologies and hard assets.

Instead of focusing on assets, you can look at market position and ways to take share from competitors, assuming, for example, that it’s a billion-dollar market and you have a 10 percent share of a pie that isn’t getting bigger. You could take market share by expanding the sales force or distribution channels. For instance, if you’re only distributing in the northeast, you could open a distribution site in Indianapolis.

Another way to leverage your position is to look at existing customers and see if there are products they buy that you’re not presently selling but are close enough to your product line that you could. For instance, if you distribute HVAC equipment, you might want to expand your line and start selling water heaters.

What are the different acquisition strategies?

When you grow by acquiring a similar firm, it’s because they have different characteristics, such as geography or products, which complement the position you have. Maybe they give you a footprint in another three states. Or maybe they do commercial HVAC rather than residential.

You can also diversify through acquisition — for example, an HVAC company gets involved in home alarm systems, which is an entirely different business. Some businesses like diversification as a risk management strategy because you’re not concentrated in one industry. But the reality is it’s often very risky because it takes you outside of your core competency and it’s not easy to operate a business without experience in the industry.

Is it ever OK to stop growing your business?

It’s OK to maintain your position as long as you maintain your margins. The problem is that a lot of companies fall into doing nothing, not because they intentionally decided to do so, but because they become complacent.

Ninety percent of the time, companies in the status quo category tend to be there because they’re comfortable and not putting pressure on themselves to grow. That’s a dangerous place to be because when you have no goals or plans to improve your business you could wind up diminishing its value.

Mario O. Vicari is director at Kreischer Miller. Reach him at (215) 441-4600 or

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In May 2012, the Financial Accounting Foundation (FAF) of the Financial Accounting Standards Board (FASB) announced the formation of the Private Company Council (PCC). The PCC was created to work with the FASB to determine whether and when to modify U.S. generally accepted accounting principles (GAAP) for private companies. The PCC will replace the Private Company Financial Reporting Committee (PCFRC).

According to the FAF’s final report, Establishment of the Private Company Council, the PCC has two principal responsibilities. The first is to determine whether exceptions or modifications to existing nongovernmental GAAP are required to address the needs of users of private company financial statements and the second  is to serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Smart Business spoke with Laurie A. Murphy, director, risk management, at Kreischer Miller about these changes.

Could you give us a brief history of differential accounting standards?

The question as to whether and how to establish differential accounting standards for public versus private companies, which is referred to as Big GAAP versus Little GAAP, has been going on for decades. The movement abroad to address the needs of private companies has already taken place. The International Accounting Standards Board (IASB) issued GAAP requirements for small and medium-sized entities in July 2009. These standards are significantly smaller and less complex than the International Financial Reporting Standards (IFRS) or U.S. GAAP. The IASB recognized that small, privately held companies usually don’t need the complex reporting standards and disclosures of public companies. Under IFRS, small, privately held companies can utilize and choose reporting standards that make the most sense for their particular size.

In 2006, the FASB created the PCFRC to provide recommendations to the FASB on issues related to standard setting for private companies in the U.S. In 2009, the FAF undertook a nationwide ‘Listening Tour,’ and one of its results was the formation of the blue ribbon panel (BRP) on private company accounting by the FAF, the AICPA and the National Association of State Boards of Accountancy (NASBA).  The BRP was established to address how accounting standards could best meet the needs of users of U.S. private company financial statements and was charged with providing recommendations on the future of standard setting for private companies to the FAF.

The BRP submitted its report to the FAF in January 2011, in which it included recommendations for how GAAP could best meet the needs of private company financial statement users. Among them was a recommendation for a new board, to be overseen by the FAF, which would focus on developing the exceptions and modifications to GAAP for private companies to better respond to the needs of financial statement users. Importantly, the BRP did not believe that the system of accounting setting had done a sufficient job of understanding the information that users of private company, as opposed to public company, financial statements consider useful and weighing the costs and benefits of GAAP for use by private companies.

Is the PCC the solution that the BRP expected?

The BRP recommended the establishment of a separate private company standards board that would work closely with the FASB but also would have final authority over exceptions and modifications. The BRP also recommended the creation of a differential framework to facilitate standard setters’ ability to make appropriate, justifiable exceptions and modifications. However, the authority to approve exceptions and modifications to GAAP was not granted to the PCC. While PCC is charged with determining whether exceptions or modifications to existing GAAP are required to address the needs of users of private company financial statements, approval by the FASB is required before those exceptions will be incorporated into U.S. GAAP. Since recommendations of the PCC must go through the FASB’s lengthy approval process, it may be a slow process to make changes that will benefit private companies. It is also unclear whether these changes, which will be incorporated into existing GAAP, will result in a differential standard.

What is the FRF for SMEs?

It appears that the AICPA was tired of waiting on the FASB or it lacked confidence that the FASB would accomplish its original charge of simplified standards for private companies. Therefore, in November 2012, the AICPA released an exposure draft on its proposed Financial Reporting Framework for Small-and-Medium-Sized Entities (FRF for SMEs). The FRF for SMEs, otherwise known as a special purpose framework, is intended to be an optional, simpler framework for the millions of small and medium-sized entities in the U.S. that are not required to prepare financial statements in accordance with U.S. GAAP. The FRF for SMEs is based on a simpler historical cost and accrual tax basis framework and, if adopted, would be a standardized alternative to GAAP if permitted by financial statement users. The FRF for SMEs is considered nonauthoritative and would be an optional method of financial reporting for internal use and for external use when external users have direct access to management. While this is not a replacement for differential standards, it may fill the gap for a subset of privately held companies.

Laurie A. Murphy is the director of risk management at Kreischer Miller. Reach her at (215) 441-4600 or

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With year-end tax season in full swing, a cloud of uncertainty hovers over businesses. Forecasting what 2013 will bring in terms of tax rates and legislation is difficult because of the impending presidential election and the unknowns about whether the Bush-era tax cuts will be extended.

What will happen to tax rates in 2013? How could estate planning be affected? Is now the time for your business to buy equipment?

“This year, the traditional planning techniques of deferring income and accelerating deductions may not be appropriate, depending on what happens with tax rates,” says Michael R. Viens, director, Tax Strategies, at Kreischer Miller, Horsham, Pa.

Viens recommends businesses plan early but hold off on executing any specific plan until the post-election dust settles and Congress gives some indication of its direction concerning late 2012 or early 2013 tax legislation.

Smart Business spoke with Viens about how businesses can best prepare and position their organizations to be flexible in light of the uncertain political and economic climate.

How is this year different in terms of tax planning? 

A key concern is tax rates and whether they will increase in 2013. If nothing happens legislatively by year-end, tax rates are scheduled to increase, impacting a number of events. Traditional business tax strategy focuses on deferring income and accelerating deductions, keeping as much cash in the business as possible. But such a strategy, if employed this year, may create higher taxable income in 2013, with the potential for a higher tax bite that could more than offset 2012 tax savings. Once the election is over, we should have clearer indications as to the likely tax regime in 2013 and beyond and will be in a better position to make decisions regarding implementation of specific tax planning initiatives.

Start planning now. Work through the what-ifs with your advisers, but wait before pulling the trigger until after the election.

Is now a good time to purchase equipment?

The purchase of appropriate qualifying equipment is a common year-end activity for businesses that wish to take advantage of the value of  bonus-depreciation opportunities that allow an immediate 50 percent write-off, and a Section 179 expense deduction that allows deduction of the full amount of the purchase price of the equipment, up to $139,000, in the year in which it was purchased and placed in service. Bonus-depreciation provisions expire Dec. 31, 2012, and the Section 179 deduction is scheduled to revert to $25,000 for tax years beginning in 2013, unless extended.

With equipment purchases, economics should drive the decision, with tax impact being secondary. If the equipment is important and acquiring it today means the business will be in a better position than it would be buying it in January, purchasing now likely should win the day. But all things being equal, a purchase in December versus January may be worth considering once it is understood what tax deductions and rates will apply in 2013.

How might an equipment purchase in 2012 be more beneficial than in 2013 if the current tax structure is not continued? 

Say a business purchases qualifying equipment for $1 million and places it in service in December 2012. It immediately gets a $500,000 tax deduction in 2012 per the 50 percent bonus depreciation rule and may also receive normal first-year depreciation for another $100,000. That equals a $600,000 deduction in 2012. And with a 35 percent tax rate, the tax savings is $210,000, resulting in a net short-term cash outlay for the equipment at $790,000.

If this purchase is deferred until January 2013 with no bonus depreciation and a new 40 percent tax rate, the business may save in the short term only $80,000 in cash rather than $210,000. However, due to subsequent depreciation, the business would realize a total of $240,000 in tax savings on the same $600,000  deduction that would be otherwise accelerated into 2012.

The business should weigh the longer-term $30,000 tax savings from deferring the equipment purchase into 2013 against an earlier short-term tax savings. The choice involves tradeoffs — short-term cash flow versus the present value of longer-term higher tax savings. Without knowing what 2013 will bring, planning for both scenarios is key.

How should businesses proceed with succession planning given tax law uncertainty? 

Estate taxes are of importance to business owners in transferring ownership to the next generation, and there is uncertainty regarding those provisions. There are currently opportunities to transfer significant family wealth without incurring gift tax due to historically high lifetime gift exemption levels. But this could go away if the estate/gift tax structure is not extended. Businesses transferring ownership should discuss opportunities now with an attorney and their tax adviser.

What traditional year-end tax planning techniques still apply, regardless of what the tax law brings? 

Address safe harbors to avoid underpayment penalties. Because many businesses are seeing 2012 earnings that are more robust than in 2011, a prior year-based 100 or 110 percent (applicable for higher income taxpayers) safe harbor comprised of withholding and/or estimated tax payments may be an easy answer. A business with a tax liability of $100,000 in 2011 could use a $110,000 safe harbor and make up a shortfall when tax returns are due next April.

What planning strategy can business owners adopt to prepare for unknown 2013 outcomes?

Develop a Plan A and Plan B, working out how your business will react if tax law continues as is, and what decisions will be implemented if the current tax opportunities and tax rates change. Depending on the position of the business and owner circumstances, this year may require a more robust planning process than in the past, which is a good reason to enlist an experienced accountant and begin the tax-planning dialogue early.

Michael R. Viens is director, Tax Strategies, at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or

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In the current economic environment, many businesses are finding financing difficult to come by. But with the proper preparation, gaining funding for your business is not impossible, says David Shaffer, director, Audit & Accounting, Government Contracting Industry group leader at Kreischer Miller.

“Getting your business in order and presenting a strong case to your banker can improve your chances of getting financing,” says Shaffer. “It’s not as easy as it once was, but even in difficult economic times, banks and other organizations are still providing financing to businesses.”

Smart Business spoke with Shaffer about how to position your business to succeed when seeking financing.

What does a business need to have ready prior to looking for financing?

Whether you are a new business or have 50 years of history, anyone looking to provide financing is going to want to see the plan of how the business is going to repay the loan.  Most lenders do not want to have to liquidate the collateral to collect the loan; they want to set up reasonable terms and conditions so the business can repay the loan, over time, and the lender can make a reasonable profit.

In most cases, this means providing the lender with a monthly budget of the business’s income, balance sheet and sometimes cash flow for 12 months, and an annual budget for at least two years from that point. The lender will use these statements to create financial covenants, so management must be comfortable that they can meet, or preferably exceed, the budgets.

Lenders are also going to review management’s history and the business’s history of repaying debt. If there have been any issues with historical debt, this should be discussed with the lender up front, prior to the bank discovering it on its own.

If you are an existing business, three years of historical financial information should also be provided. Audited financials are best, but in most cases, reviewed financials will be sufficient. If the company does not have audited or reviewed financial statements, compiled or internal financial statements should be provided, but if this is the case, be prepared for more due diligence from the lender. If there have been historical losses or other items that might give a lender concern, discuss the issues with the proposed lender prior to sending.

If this is the first time through the process, owners should consider having their CFO/controller involved, or involve their CPA or legal counsel who is familiar with typical terms and conditions of business loans. But even if you have done this before, no matter how experienced you are, make sure that you have an experienced attorney who has knowledge of these loans review all documents prior to signing.

How long does the process typically take from start to finish?

Most banks need 45 to 60 days from the initial meeting to the time of funding a loan. If the loan is more complex, it may take longer.

What collateral will a lender typically request?

Most banks will request that all business assets collateralize their loan (assuming they are the only lender) and, in most cases, will require the business owners to personally guarantee the loan. If the loan is very risky, they might also request liens on specific owner assets such as stock portfolios, personal home, and/or cash surrender value of life insurance.

What interest rate can businesses expect in the current environment?

Banks and other lenders determine their interest rates based upon the perceived risk of the loan. Most business loans that are not high risk have variable interest rates ranging from prime minus .5 percent to prime plus 1 percent. Fixed rate loans will vary depending on the length of the loan and the collateral.

Other than banks and personal savings/assets, where else can a business seek funding?

President Obama recently signed the Jumpstart Our Business Startups Act, and one aspect of that, called crowdfunding, provides up to $1 million of loans for businesses. Transactions must be administered by a broker or a funding portal that is registered and complies with the Securities and Exchange Commission requirements.

The Small Business Administration and other government-guaranteed loans also provide funding alternatives to businesses. The SBA can provide loans up to $5.5 million. Such loans require a lot of documentation from a business, but their rates are very competitive. In most cases, a bank will still need to be involved to underwrite the loan, and many banks have specific lenders specializing is SBA loans.

Some companies also consider joint ventures. However, this is quite risky because it requires a strong leader to bring together a group of businesses so that each member of the group understands the risks and responsibilities involved. It also requires the involvement of an experienced attorney who can write a joint venture agreement that everyone understands and is willing to sign. Joint ventures are often used to complete a specific project for a customer when one company does not have all the skill sets to complete the contract on its own, so will go out and find a ‘partner’ with those necessary skill sets to propose on the project.

Venture capitalist/private equity is also viable, especially if the business is promising and can grow quickly with the proper funding. Typically, these companies will get an ownership in the business. Some firms have been willing to lend money to a company, but it is typically at a much higher interest rate than a bank may charge.  The advantage of venture capital/private equity, however, is that the business now has the network of contacts of the venture capitalist or private equity provider at its disposal.


David Shaffer is director, Audit & Accounting, Government Contracting Industry Group leader, at Kreischer Miller. Reach him at (215) 441-4600 or

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Many entrepreneurs devote the vast majority of their time to building their businesses — creating new products or services, building a team and developing new client relationships — often at the expense of ensuring that there is a viable way to monetize that value at some point in the future.

Unfortunately, this often leads to surprises down the line in the form of a delayed exit or a loss of value upon exiting the business, says Christopher F. Meshginpoosh, director, Audit & Accounting, at Kreischer Miller, Horsham, Pa.

Smart Business spoke with Meshginpoosh about the exit planning process and how to begin.

How soon should an entrepreneur start planning an exit strategy?

The reality is that it is never too soon to begin planning. Oftentimes, some of the early decisions, such as the form of the entity or the nature of the equity issued to the owners, end up having a significant impact on the timing or value of an exit.

Sitting down and spending some time early on thinking about long-term personal goals and exit options can help minimize problems down the road.

What are some of the exit options that an entrepreneur should consider?

There are a wide range of potential options that an entrepreneur can consider depending on his or her objectives. For example, there are strategies that an entrepreneur can use to transfer ownership to other owners, to nonowner employees, to family members or to outside investors.

What should an owner think about when contemplating a sale to another owner?

If this is a potential outcome for the business, owners should formalize their agreement about the mechanics and value of the transfer. If owners wait until an exit is imminent, it is often very difficult to get the parties to agree on these types of matters.

By entering into a buy-sell agreement that defines how the transfer will occur, owners can avoid many problems and distractions down the road.

What if the owner would like to keep the business in the family?

We see that quite a bit in our client base, and the good news is that there are several options available, including negotiating buy-sell agreements, transferring through gifts to other family members, establishing grantor retained annuity trusts, or establishing family limited partnerships. However, these options are all dependent upon identifying and grooming specific family members who can lead the business upon the departure of the existing owners.

Can you describe some of the strategies that can be used to transfer the business to existing employees?

First, there is one prerequisite: existing ownership members have to make sure that they have a plan to hire and develop managers who are capable of running the business. Assuming those managers are already in place, owners can provide senior management with equity incentives that reward management for increases in the value of the business.

This not only aligns management interests with those of ownership but also provides a way to gradually transfer ownership interest in the business. Once an owner is ready to transfer the remaining interest, it is often possible for management to obtain sufficient debt financing to purchase the owner’s remaining interest in the business. Other options include the formation of an employee stock ownership plan, or ESOP, to gradually or immediately redeem existing ownership interests and transfer those interests to employees.

What are the options if there are no other owners or employees capable of buying the business?

In those situations, either a partial or complete sale to a third party is necessary. Determining the right party is often a function of the owner’s goals, as well as of the willingness of market participants to purchase the business.

For example, if the owner is willing to continue to work in the business for a period of time, options such as a sale to a private equity firm or a roll up might be good alternatives. The sale of a partial interest to a private equity firm might also provide the owner with some upside potential if the business continues to increase in value.

If the owner plans to cease involvement at the time of a transaction, then other options such as the sale of the entire business to a strategic buyer might be the best alternative. Regardless of the strategy, owners really need to prepare for a transaction well before the planned exit.

In light of the time it takes to prepare, how do you recommend that an owner start the exit planning process?

There are many potential alternatives, and each one has its own unique complexities. Consulting with experienced advisers — including accounting, legal and wealth management professionals — is essential to avoiding obstacles and maximizing value upon an exit.

Christopher F. Meshginpoosh is a director in the Audit & Accounting group at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or

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There is some good news about the economy — the recently issued “Fiscal Survey of States” reports that revenue collections are up in many states throughout the nation and fiscal conditions are continuing to improve into fiscal year 2013, although many state budgets are not fully back to prerecession levels.

“However, despite the increase, that is not enough to let down your guard when it comes to examining state tax nexus for your business enterprise,” says Timothy A. Dudek, director in the Tax Strategies Group at Kreischer Miller.

The term “nexus” as used in this article refers to what constitutes “doing business” in a state that requires the filing of tax returns.

“A large amount of revenue generated by the states in the past few years has come from aggressive enforcement measures with regard to their out-of-state nexus groups,” says Dudek.

Smart Business spoke with Dudek about why it continues to be important to address state tax nexus, even in years of improved revenue and cost-cutting actions by states.

If states have improved tax collections and are taking action on cost-cutting measures for the future, why do the aggressive enforcement measures continue with regard to state tax nexus?

Future revenue shortfalls are projected. Both the National Governors Association and the National Association of State Budget Officers warn that despite improvements in tax collections, states are now being squeezed in two different directions. First, the budget assistance provided to states via the federal American Recovery and Reinvestment Act is gone. The loss of that money alone wipes away state increases in tax collections.

Second, local governments are experiencing revenue declines due to lower housing values — a situation that will put pressure on state leaders to boost funding for cities, counties and schools.

What other factors prompt a state government to continue tax collection programs?

We tend not to think of the cost of state Medicaid programs, which continue to rise each year.  The health insurance program now accounts for nearly one of every four dollars spent by states. Over the next 10 years, total Medicaid spending is projected to increase annually by 8.3 percent.

What is state tax nexus, and how do states reap the benefits of this type of program?

Nexus, under the Commerce Clause of the U.S. Constitution, requires that a business must satisfy certain standards before a state can exercise its power to tax the business. Nexus must have a definite link — some minimum connection between the state and the business it seeks to tax.

It embodies the spirit that a state cannot impose a tax on persons unless there is a certain level of presence or activity by a business within the state seeking to impose the tax. The trick is to understand that different taxes, such as income, net worth, sales taxes, may have different standards for establishing nexus in each state.

Many businesses may unknowingly have satisfied nexus requirements long ago but have never filed the required tax returns with the individual states. State enforcement measures in the nexus arena are designed to discover and ferret out taxpayers that are not in compliance with existing state tax laws.  Once a state identifies a business through nexus discovery, the business usually must file tax returns and pay the tax, interest and penalties retroactive to when nexus was initially established in the state.

Depending on the term, that can be a very expensive proposition for a business if, for example, it has to file and pay for 15 years of back returns.

What action can a business take to address these types of state tax programs?

Businesses are well advised to become proactive and to have all of their state tax activities evaluated by a competent state tax consultant, especially knowing that increased nexus audit activity is being conducted by numerous states.

If the consultant determines that nexus exists and tax returns have not been filed, the best action to take on the taxpayer’s behalf is to minimize the exposure for prior years’ taxes, interest and penalties through use of a voluntary disclosure agreement. These agreements can be a valuable tool in resolving prior years’ outstanding state tax liabilities for unregistered businesses that have sufficient presence but have not filed state tax returns.

The benefits of voluntary disclosure agreements to the business include:

  • Years open to statute because of unfiled tax returns are generally reduced from an unlimited period to a three- to four-year look-back period.

  • Penalties for failure to file tax returns and failure to pay taxes are typically fully abated and waived, although interest continues to accrue.

Generally, the voluntary disclosure program is available to taxpayers who have not been in compliance with the state’s tax laws and who have not been previously contacted by the state department of revenue.  Once the state has identified a taxpayer on its own, it is generally too late for the taxpayer to participate in this type of program.

Virtually all states are willing to work with most taxpayers in resolving their prior years’ tax liabilities in a settlement fair to both parties. Voluntary disclosure agreements are offered as a positive, money-saving option to resolve the taxpayer’s outstanding liabilities.


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

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A fundamental investing concept is that investors need to be compensated for taking on additional risk.  However, investors often do not anticipate operational risks, and as a result, are often not compensated for them, says Todd E. Crouthamel, director, Audit & Accounting, at Kreischer Miller, Horsham, Pa.

“Operational risk can be difficult to price into the risk premium because human error is unpredictable,” says Crouthamel.  “Therefore, many investors are left to assume that human errors will be prevented by the managers’ systems and controls, in order to rationalize hiring that manager. However, this is not always the case.”

Smart Business spoke with Crouthamel about how to differentiate between investment risk and operational risk.

What is investment risk?

Investment risk can be defined simply as the risk that the actual return on an investment will be lower than the investor’s expectations. Many investors are able to assess investment track records and investment models to decide if the potential rewards are worth the perceived risks in an investment. This type of risk is also readily measurable using various statistical measures, including:

  • Alpha, the excess return of an investment relative to the return of the benchmark
  • Beta, the measure of a volatility relative to the overall market
  • R-squared, the measure that represents the percentage of an asset’s movement that can be explained by movements in the benchmark
  • Standard deviation, the measure of the dispersion of data from its mean
  • Sharpe ratio, which describes how much excess return is generated for extra volatility of holding an asset

What is operational risk?

The ratios described above are all built on certain assumptions, including that volatility equals risk. These ratios all derive risk measures based on quantitative factors; however, they do not consider qualitative factors, including the investment manager’s internal controls, design and implementation of its systems, and oversight of its employees. This is operational risk.

Human error makes operational risk unpredictable. Many investors may assume that human errors are prevented by the managers’ systems and controls, but that is not always the case. Consider the following situations:

  • You hire Manager A to manage a large cap equity portfolio, and instead, Manager A finds better opportunities in the small caps and rationalizes investing your portfolio in small caps in the interest of earning you a better return. This guideline violation results in your portfolio being overweighted in small caps and minimizes your exposure to large caps.
  • Manager B was recently examined by the Securities and Exchange Commission (SEC) and the SEC concluded that Manager B’s compliance program was wholly inadequate.
  • Manager C has a trader with inappropriate access rights to override controls in the compliance system. The trader executes trades that are in violation of the investment guidelines and conceals these through the inappropriate access rights so these securities are not identified as investment guideline violations.

These examples are real. While some of these risks may be identified in the risk measures described previously, many go undetected until disaster strikes and losses pile up.

How can investors protect themselves from operational risk?

Elimination of operational risk is virtually impossible; however, it can be mitigated with some additional due diligence. Consider the following best practices:

  • Review the Form ADV. If your investment manager is registered with the SEC, go to and read the adviser’s Form ADV, which consists of two parts. Part I provides details on the business, ownership, client base, employees, affiliations and disciplinary actions. Part II is a narrative that describes the services offered, fees, conflicts of interest and the backgrounds of management. Make sure that this information is consistent with what you already know about the adviser.  If you are uncomfortable with any of the disclosures, make additional inquiries of the investment manager. If you are still not satisfied, consider another manager.
  • Read the investment manager’s most recent SEC examination letter.  The SEC conducts routine examinations of investment managers’ compliance systems and issues a letter detailing violations and enhancements that the investment manager should make. If your investment adviser is reluctant to share this letter with you, consider another manager who is more transparent.
  • Make inquiries of the investment manager regarding its systems and internal controls surrounding compliance with investment guidelines. The compliance system should be automated, and overrides of transactions outside of the investment guidelines should require more than one sign off, preferably by someone who is independent of the trading and investment management process.
  • Make inquiries of the investment manager regarding the financial strength of the company. An investment manager that is having financial difficulties may be more likely to take bigger risks.
  • Read the investment manager’s report on internal controls.  Many investment managers have a report that is prepared by an independent third party that tests various internal controls surrounding establishing new accounts, trading, reconciliation and accounting. This report generally details the testing performed and the results.
  • If you are not confident in your ability to conduct operational due diligence, consider hiring a third party to conduct it on your behalf.

While these best practices may reduce your exposure to operational risks, there is no substitute for a healthy dose of skepticism. If an investment manager’s returns look too good to be true, they probably are.

TODD CROUTHAMEL is a director, Audit & Accounting, and a member of the Investment Industry group at Kreischer Miller. Reach him at (215) 441-4600 or

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