Learning what your organization is really worth can bring dividends

The value of a business is commonly a large portion of its owner’s net worth. Understanding what the business is really worth, or could be worth, allows an owner to make important decisions regarding key issues like retirement, estate planning and choosing a business successor.

A frequent question owners ask is, “What is my business worth?” The answer is not necessarily what the assets would sell for — a common misunderstanding of owners.

Smart Business spoke with James F. Schultz, principal at Cendrowski Corporate Advisors LLC, about how the sale value of a business is properly determined.

Learning what your organization is really worth can bring dividends

The first step is to hire an independent valuator to determine the realistic sales price of the business. This important step should be done by a professional experienced in merger and acquisition processes and in valuation analyses. The valuator will look at the business and use the standard valuation approaches of asset, income and market to estimate the enterprise value of the business.

For most operating businesses, the income and/or market approach will have the most influence in estimating the sale value of the business. Research is needed into the industry of the business to find trends and key economic factors driving profitability.

Next, a look at sales of comparable businesses in the industry can provide various multipliers of income factors that can be applied to the business. If comparable sales are not available, estimating proper investment returns on income based on risk/reward analysis will estimate value.

When applying the income approach, it may be necessary to identify synergies/cost savings created from the sale. This will enable the valuator to establish investment value (to an acquirer) rather than fair market value (to a hypothetical purchaser).

In cases where the return on investment is low and/or little labor is involved, the asset method may be more applicable.

What happens after the enterprise value is estimated?

The next step is to estimate what the purchaser will actually receive from the seller. Most sale transactions today are structured as asset sales rather than stock sales. In an asset sale transaction, specifically identified assets and liabilities of the selling company will be transferred to the purchaser. The purchaser will require all the fixed assets necessary to run the business, which can range from computer systems to manufacturing machinery.

In addition to the fixed assets, the purchaser acquires various intangible assets and rights relative to trade names, patents, goodwill, occupancy/lease rights, client lists and vendor lists, to name a few. The more difficult item to quantify is the level of working capital that the purchaser will require as part of the sale transaction.

The purchaser is looking to acquire an operating business and the necessary liquidity to allow the business to continue to operate in a smooth fashion without requiring additional equity amounts.

The items typically included in working capital are accounts receivable, inventory and accounts payable. The net value of those amounts need to provide a liquid cushion to continue business operations. The sale negotiations will normally determine the appropriate level of liquidity, and an adjustment of the purchase price may be required if the level is not met or if there is an excess when the sale closes.

In most cases, the purchaser will not assume liabilities other than trade payables.

After estimating the purchaser’s requirements, what are the final steps?

The final step is to analyze the existing balance sheet of the company for items that will not be transferred to the purchaser. This typically consists of cash, investments and other non-operating assets on the asset side, and all liabilities excluding trade accounts payable on the liability side. The net value from the combination of the aforesaid items is then added to/subtracted from the enterprise value. The result of that computation is the estimated net sale proceeds of the business.

In order to determine what the owner will be able to put in the bank, an estimate of the income taxes related to the sale transaction should be calculated. That amount is subtracted from the estimated sale proceeds to determine the after-tax cash available to the owner.

Accounting is brought to you by Cendrowski Corporate Advisors LLC

 

What you and your business can do to protect against cyberattacks

With all the headlines about massive security breaches at the IRS, major retailers and social media sites, it is easy to think of cyberattacks as a problem solely impacting large organizations.

In reality, small organizations and even individuals can be the victims of an attack. While it is practically impossible to completely eliminate the risk of cybercrime, there are several simple actions you can take to reduce the risk.

Smart Business spoke with Jim Martin, Managing Director at Cendrowski Corporate Advisors LLC, about what you and your company can do to protect yourselves.

What can a person or small business do about the threat of cyberattack?
As cyberthreats evolve, the methods of protecting individuals and businesses need to evolve as well. Cybersecurity should be an ongoing cycle to identify risks, work to mitigate that risk, monitor for intrusions and new threats, and respond and recover from actual attacks.

This needs to be an ongoing process as new threats emerge, rather than a one-time review. The same principles can be applied to a cybersecurity program for an individual or small business.

It’s critical to remember that our home and business lives are increasingly interconnected. Even if you don’t do much more on your home computer than check email and shop, you might still be downloading and storing information inadvertently.

For example, if you check your work email on a home computer, and open attachments, you likely have a history of correspondences and copies of the attached documents, even if you didn’t save the files.

Similarly, if you use your work computer to enter your bank account information to check your balance, or use a credit card for online purchases, residual data may be saved.

Most internet browsers will offer to save passwords for websites you visit and these are also stored on your machine. When you start to think about your actual use, you will likely find that the computers you access contain all sorts of sensitive data.

What about a person’s smartphone?
Phones and mobile devices also store file and password data, and should be used cautiously and protected. Also, be aware of cloud backup and sharing platforms as they can propagate files across all the devices on the same cloud account.

Your work might have a Bring Your Own Device (BYOD) policy that describes the limits of data you can access with your device, which should be followed rigorously. Your mobile devices should be configured with a passcode or other ID to prevent others from accessing data if the device is lost.

If possible, your device should be encrypted to prevent more intrusive methods of accessing your data.

What are some warning signs that should be noted?
Monitoring is a big part of any effective cybersecurity plan. It’s important to be aware of changes in the way your devices operate.
If you notice popup windows (especially those asking for password information), redirection to strange websites while you are browsing, or extremely slow processing it might mean you have malware infections.

While many of these simply push advertising, they all have the potential to do a lot of harm — or install other malware that could do harm. Anti-virus and anti-spyware programs can remove these malware applications, or a specialty computer support company can help.

Registering your anti-virus program with your email account can be helpful for monitoring and anti-virus companies send out frequent alerts about new types of attacks. Professionals who operate in high risk environments should consult with a security firm for in-depth assistance as part of a personal risk assessment.

For example, attorneys involved in high-profile litigation, attorneys involved with law enforcement or those who frequently access confidential documents at home are at greater risk.

Basic awareness of the risk of cyberattack to personal computing devices can greatly reduce the risk of an attack, and the impact should an attack occur. It is every user’s responsibility to ensure the safety and security of the data they maintain on their personal devices. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How best to open the door when the government comes knocking

Missteps in the days immediately following the launch of a governmental investigation can have costly and far-reaching consequences. Organizations need to plan ahead and be prepared.

Cooperate, be honest and forthcoming, have a complete and total understanding of your company and be sure to communicate with your employees. Firms need to have a set of proper procedures and processes in place early in order to avoid any scrambling.

Smart Business spoke with Theresa Mack, senior manager at Cendrowski Corporate Advisors, to discuss what your firm should do if it becomes subject to a government investigation.

If a company is facing a government investigation, what are the first steps?

A firm often learns it is going to be the subject of an investigation when an agent either serves a search warrant or requests an employee interview. There is no time to prepare for these, which is why your firm needs to have standard processes in place to handle these situations.

One of the most important steps after being informed of a governmental investigation is the preservation of documents. Once a firm has been notified of the investigation, its counsel should issue a written directive, a preservation memo, to everyone in the company telling them not to destroy any documents.

This written directive applies to all offices and branches of the company worldwide, not just the physical location where the investigation started. Do not destroy or delete anything that could be perceived as important to the investigation. If the investigation leads to a trial and the destruction of documents comes to light, there can be dire ramifications.

In these types of investigations, everything eventually comes to light. Firms must be especially careful about the inadvertent destruction of documents. Many servers automatically delete stale emails or documents housed in electronic storage areas. If any employees are leaving the company, their records should be maintained rather than deleted.

This will likely require informing a firm’s IT staff about the investigation to ensure none of the former employee files are deleted. Firms can go one step further and have IT staff back up everyone’s data, so even if people delete documents on their machines, a copy will be preserved elsewhere.

How do you know where your company stands during an investigation?

First and foremost, cooperate with the investigation. Your counsel should be in contact with the prosecutors. Be responsive and timely, and ask any questions you may have. Make sure you ask what your status is in the investigation, as all companies and individuals fall into one of three categories: witness, subject or target.

A witness is not yet under suspicion but may have information of interest. A subject is someone whose conduct is within the scope of the investigation, but it is uncertain that any crime has been committed. A target is someone whom the prosecutor has substantial evidence linking him or her to the commission of a crime and who, in the judgment of the prosecutor, is a likely defendant.

Listen to the terms that the prosecutor or investigator is using and have your counsel inquire as to the status of the investigation where appropriate. Some prosecutors are more willing to discuss the investigation than others.

Some will provide ‘non-target’ or ‘non- subject’ letters to the individual upon request. This request is often made before someone will submit to an interview, assuming that he or she is not a target of the investigation. This letter, when obtained, provides a level of comfort to the interviewee and allows for a more cooperative and informative interview.

Should a company make a public statement if it is under investigation?

Some companies will want to send out a press release right away to show that they are on top of things, but firm executives and board members should first weigh their options. Will coming out to the public impact the company’s value and or stock? Are you sure that the investigation will not lead to charges?

Often an investigation ends with minimal evidence and the case is closed before it can go to court, so consider not speaking too soon. However, if you do decide to disclose the investigation, ensure everyone in the company is on the same page.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

What you need to know to protect your business from a cyberbreach

In today’s complex business world, cyberthreats are becoming more prominent.

As dependence on computer systems continues to grow, so does the threat for data and security breaches. Cybersecurity encompasses all the processes involved in protecting data that is stored or transferred between computer systems, networks and programs.

Smart Business spoke with Michael Maloziec, an accountant at Cendrowski Corporate Advisors LLC, to discuss the risks associated with cybersecurity and what your organization can do to protect itself.

What impact can a cyberbreach have on an organization?

A cyberbreach can have a varying degree of impact, ranging from minor inconveniences all the way up to compromised customer data and lost information. Kaspersky Lab’s IT Security Risk Survey 2014 found that damages from one successful targeted attack could cost a company as much as $2.54 million in repairs. Cybercrimes are continuously evolving and businesses need to take a proactive approach to ensure protection from unauthorized users.

Who is vulnerable to a cyberattack?  

Any organization with an internet connection could be susceptible to an attack.

The level of security needed depends on what sensitive information your organization possesses. Obvious high-risk information includes anything from credit cards, bank account information or even Social Security numbers, amongst other important data. Different organizations will face different risks depending on their industry and operations. It is impossible to completely prevent cyberattacks or even identify all the possible forms of cyberrisks because of their changing nature.

By implementing a cyberrisk management plan ahead of time, you will be better prepared for any risks that could arise.

What steps are involved with a cyberrisk management program?  

The five steps present in every cyberrisk management program are: identify, protect, detect, respond and recover.

The first step would be to identify and catalog the critical data within your organization. Employees should have an understanding of what critical data impacts their business. This also includes identifying key infrastructure and security assets.

Improve protection by managing access to systems. Implement policies and standard procedures, verify system backups and hold regular staff training. Continuous monitoring of the network and threat environment will aid in the detection of unauthorized actions and programs. In order to adequately respond to a suspected attack, organizations should proactively test their response plan and identify the root cause of each incident.

This includes applying procedures to contain the incident and mitigate damages as efficiently as possible. The final step of a cyberrisk management plan would be to learn from an attack and update your recovery strategies based on evolving best practices. Installing a cyberrisk management program can greatly reduce your risk to any threats or breaches.

What can organizations do to help prevent being the victim of a cyberattack?

The first step would be to become familiar with some of the known risks. Hackers try to gain access into your computer system from the outside through a weakness in the programming or software.

Malicious code or malware are specific codes sent out to gain access into your system. Malware requires an action from an existing user in order to take effect. Many attacks are disguised as email attachments or links to a specific Web page. Once a user opens the attachment, or visits the Web page, access could be granted to that computer or even your entire system.

To protect your business, keep your systems and software up to date. Replace old operating systems (like Windows XP), apply software updates and patches as soon as they become available and keep your antivirus software up to date.

Regular testing of firewalls and server settings will help keep unauthorized users out. Also, educate your staff about the risks of opening suspicious emails or attachments. If you use laptops or other portable devices, use encryption, and be sure to educate the users of those devices about their responsibility to keep them physically secure.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

How to protect your business from being a victim of corruption

An article entitled “Confronting Corruption” by Ravi Venkatesan, published by McKinsey Quarterly in 2015, discusses illegal and corrupt business practices. There is an increasing response in the U.S. and developing markets against corporate wrongdoing, including new legislation and government officials boldly taking a public stance against fraud and corruption.

“Governments are strengthening existing legislation such as the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act,” say Natasha Perssico, Forensic Accountant, and James F. Schultz, Principal, at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Perssico and Schultz about anti-bribery and corruption matters covered in that article.

What sorts of actions are considered illegal or corrupt?
Payments for bribes used to secure an improper business advantage in obtaining or retaining business such as payment for regulatory approval of a product, reduction of taxes, or to avoid customs duties, are a few examples.

Speed money, or ‘grease payments’ are payments made to government officials or employees in the private sector to prevent undue delays in conducting business.

Other examples are employees who perpetrate financial reporting fraud to meet financial performance expectations or accept personal rewards such as kickbacks from vendors, advertising agencies, or commissions on real-estate transactions or machinery purchases. Another common practice is accepting deposits in overseas bank accounts upon successful business transactions.

What preliminary steps do you recommend to clients to avoid illegal actions?
Establish strong, unified internal controls over financial reporting and operational policies and procedures on a company-wide basis. Ensure compliance with laws and regulations regarding potential illegal acts for each operation line and geographic segment, regardless of the amount of revenue that is brought in from any segment or region.

What is the best course of action for top management to follow?
Enforce zero tolerance from the top. Too many companies emphasize meeting performance metrics, with insufficient attention to the company’s commitment of meeting goals and objectives within an ethical framework.

Support anti-bribery laws, speak out against corrupt practices in your industry and explicitly acknowledge any loss of business that results due to adherence to ethical principles. Ensure that every employee in every part of the world is utterly clear about what conduct is acceptable and what is not.

What recommendations would you make to avoid employees’ improper acts?
Train employees to be fully informed of unacceptable behaviors.  Have a formal code of conduct that is clearly and frequently communicated to employees, customers, vendors and business partners.

Additionally, foreign employees, vendors, and managers need to be trained to be both familiar and compliant with global laws such as the U.S. FCPA.

There should be clear policies, procedures with approval processes, stringent controls and regular internal audits of high-risk areas.

Respond to instances of fraud and corruption quickly and be prepared to investigate the issue immediately. Fair and decisive action should be taken that clearly communicates that fraudulent behavior is unacceptable.

What are the risks of taking a strong stance against corruption?
Be prepared for short-term repercussion.

While an unwavering commitment to ethical business practices is necessary to establish a strong reputation of high ethical standards, refusing to participate in bribery and corruption may result in certain short-term repercussions, including declines in business, missed budgets, increases in the length of time the company has to wait for approvals or other business processes, and possibly, angry responses from officials who are seeking bribes and other facilitation payments. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

A look at what you need to think about if you’re considering an ESOP

The term ESOP is an acronym for an Employee Stock Ownership Plan, a qualified retirement plan. Just like any other qualified retirement plan, the sponsoring company makes tax deductible contributions to the ESOP for the benefit of the employees.

Unlike other plans, these contributions are used to acquire stock in the employer company. An ESOP provides an exit strategy for the company’s shareholders.

Smart Business spoke with Walter McGrail, a principal at Cendrowski Corporate Advisors LLC, regarding the benefits of adopting an ESOP in your business.

What are the benefits of adopting an ESOP?

There are several benefits to consider when deciding whether to adopt an ESOP.

Most people think of the tax considerations as the employer receives a deduction for making contributions to an ESOP just like it would if it made contributions to a 401(k) plan. Employees can continue to make tax-deferred contributions to the ESOP just like a 401(k). Owners of C corporations can completely avoid income tax on qualified sales of stock to an ESOP.

Sponsoring employer companies are able to shelter earnings from income tax. Aside from tax benefits, the single most influential consideration in deciding whether to adopt an ESOP is that an ESOP stands ready, willing and able to buy shares of your company.

A company doesn’t need to identify potential shareholders or a market through brokers. If a company has an employee workforce in place, it has a potential buyer for its shares.

How does an ESOP work?

An ESOP is established by the employer company.

The company’s shareholders sell their shares to the ESOP. The selling shareholders can provide seller-financing for all or a portion of the purchase price.

To the extent that the sponsoring company has access to bank financing, the company can borrow funds to loan funds to the ESOP to either pay down, pay off or, in some cases, completely pay the purchase price.

The ESOP repays the company loan or the seller financing or both with the proceeds from the tax-deductible contributions made by the employer. This is often referred to as the company receiving a tax deduction for the repayment of the loan used to purchase its shares.

The ESOP may own 100 percent of the company or own company shares along with other continuing shareholders. The ESOP is represented by a trustee, who is a fiduciary, acting on behalf of the employees’ interest in the ESOP.

How much does the ESOP pay for the company’s shares?

The purchase price paid for the shares is based on an independent, third-party appraisal.
The appraisal is conducted on behalf of the ESOP and based upon such valuation, the ESOP acquires the shares. The appraised value will reflect the market value of the shares sold.

How do I find out more about ESOPs?

An ESOP involves several parties like any other sales transaction. As discussed, the ESOP will need a trustee.
The trustee will need legal and financial counsel, including an independent valuation provider. The company and the exiting shareholder require quality legal and financial advice as well.

Leveraged ESOPs require a bank or other lending institution. As with any other qualified plan, the company will need a plan administrator.

When it’s all said and done, the most important person to the company and its shareholders is an experienced ESOP facilitator.

You want to work with a professional that possesses the expertise to lead a company through the ESOP adoption process, as well as the share sale process. A strong firm can also provide qualified valuation analysts to assist with the valuation process. ●

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

The who, when, why and how of machinery and equipment appraisals

Executives often wonder why they need to have machinery and equipment appraised, but these appraisals are important components of business today.

“Typically, appraisals are performed because of buy/sell agreements, mergers and acquisitions, business valuations, partnership dissolutions, insurance, bankruptcy, property taxes, financing and Small Business Administration lending. Other reasons would be divorce, estate planning or other estate issues, retirement planning, cost-segregation analysis and litigation support,” says Theresa Shimansky, a manager at Cendrowski Corporate Advisors LLC.

Smart Business spoke with Shimansky about how machinery and equipment appraisals are typically handled.

What is the useful life of an appraisal?

Generally, an appraisal is good for three years, but it depends on the current market, economy and industry. An appraisal’s useful life also depends on the availability of the type of equipment being appraised. The value can drastically change with economic factors such as supply and demand. 

Is a machinery and equipment appraisal beneficial when buying or selling a business?

Absolutely. Buyers want to know the breakdown between real and personal property. This is a cost segregation analysis or study. Appraisals are completed for many reasons, but most importantly for tax reasons — breaking the assets into different categories for depreciation purposes. 

What information and documentation will an appraiser require?

The appraiser will need to know the manufacturer, model, serial number and age of the equipment. This information typically can be found on a plate attached to the equipment. Mostly, it will be visible; however, sometimes locating this plate can be tricky. For example, restaurant equipment will occasionally have a kick plate covering the information plate. Machines may have the plate attached inside a compartment or near the motor, while others may not have one at all. When a machine does not have a plate, it is helpful if the owner has the original manual or sales invoice that should list most of the information. 

The appraiser also needs to know about the condition, special features and upgrades. Important questions to keep in mind are:

  • Does it work well?
  • Has it had any major repairs or is it in need of any?
  • Is it maintained according to manufacturer specifications? The appraiser may request to see maintenance logs or ask about special attachments or upgrades.
  • Is its software up to date?

An appraiser will evaluate and photograph each piece of equipment. When this is not possible, appraisers will note in the report which equipment could not be visually inspected and explain they are relying on the representations of similar machines’ condition and other pertinent information. 

What is a ‘qualified appraisal’?

A ‘qualified appraisal’ is clearly defined in Internal Revenue Service (IRS) Publication 561, where the appraisal: 

  • Is made, signed and dated by a ‘qualified appraiser’ in accordance with appraisal standards.
  • Does not involve a prohibited appraisal fee. 
  • Includes, but is not limited to, a description of property, condition, date of value, terms of the engagement agreement, qualifications of the appraiser, method used to determine value and basis for value.

Generally, an appraisal is considered qualified if it follows the Uniform Standards of Professional Appraisal Practice, developed by the Appraisal Standards Board of the Appraisal Foundation.

What should you look for in an appraiser?

When searching for an appraiser, only use a ‘qualified appraiser.’ This is an individual, as defined by the IRS, who has earned an appraisal designation from a recognized professional organization for demonstrating competency in valuating property. Also, qualified appraisers regularly prepare appraisals for which they are compensated, and demonstrate verifiable education and experience in valuating the type of property being appraised.

Theresa Shimansky is a manager at Cendrowski Corporate Advisors LLC. Reach her at (866) 717-1607 or [email protected].

Website: For additional information, please visit our website at www.cca-advisors.com.

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC