In This Issue

Business Briefs

The Impact of Consumer-Driven Healthcare on the Health Insurance Market

With healthcare costs continuing to skyrocket, the U.S. may now be on the cusp of the next major shift in health insurance—one that has been dubbed "consumer-driven healthcare."

The idea behind consumer-driven healthcare (or CDHC) is to let employees shoulder more financial responsibility for their own healthcare spending by making decisions on whether they need care or not, and what kind of care they need.

Health Savings Accounts (HSAs) are the most publicized form of CDHC to have emerged so far. They were created as part of the Medicare Prescription Drug Improvement and Modernization Act of 2003, and have been available to Americans since January 1, 2004.

HSAs allow employees and employers to make tax-deductible contributions to special accounts and withdraw the money tax-free in order to pay for medical care. They are established in conjunction with high-deductible health plans (HDHPs), which are separate insurance policies that kick in to cover major medical expenses. Employees own the funds in their HSAs and may take them with them when they change jobs.

In addition to HSAs, there are two other primary CDHC options for employers:

Health Reimbursement Arrangements (HRAs)—Unlike HSAs, which can be funded by employees and employers, HRAs are funded by employers only. They are strictly reimbursement plans—employers reimburse employees for their healthcare expenses from HRA accounts set up for employees. HRAs are also usually accompanied by a high-deductible health plan to cover major medical expenses. However, HRA funds are owned by employers, not employees.

Flexible Spending Accounts (FSAs)—Often included as part of a cafeteria plan, these permit employees to divert a portion of their paychecks to an account to pay medical expenses not covered by insurance on a tax-free basis. Employers may also make deductible contributions, and employees' contributions reduce their annual taxable income.

The biggest drawback of FSAs is that unused funds revert to the employer at the end of the year (a provision known as "use it or lose it"). Recent legislation has allowed a 2 1/2 month grace period that may help with employees not forfeiting any contributions. BMF&C

About Our Staff

The Partners of BMF&C proudly announce the following staff promotions:

Lori Sheets was named treasurer of Greenleaf Family Center.

Jim Merklin is serving as a Member Leader for the Employee Benefit Plan Audit Section of the Ohio Society of Certified Public Accountants. Additionally, Jim has been appointed to the Executive Committee and as Chair of the Audit Committee for Goodwill Industries of Akron, Inc.

Mark Bober was featured in the July, 2005 issue of BVFLS E-News, a nationally-distributed electronic newsletter of the AICPA, sent to CPAs engaged in business valuation and forensic/litigation support services, highlighting the Firm's practice in this highly complex field. BMF&C

Fall 2005

INFOLETTER

Read and print the Fall 2005 InfoLetter in Adobe PDF format. Requires the free Adobe Reader.

Partner's Perspective

Mergers & Acquisitions:
They're Not Just for Big Corporations
By Mark B. Bober, CPA/ABV, CVA

When most people hear the term "mergers & acquisitions," they think of huge corporations and mega-mergers, like AOL-Time Warner, General Electric-NBC or Bank of America-Fleet Boston.

But for every mega-merger that's on the front cover of the business magazines, there are thousands of mergers and acquisitions of small and mid-sized businesses just like yours. In 2004, there were 8,064 middle-market M&A deals in the U.S. worth more than $152 billion combined, according to FactSet Mergerstat, LLC.

So, does a merger or acquisition make sense for your company? Let's take a look at this question from both sides of the table -the buying side and the selling side.

Buying a Business: One Way to Grow

There are many different ways to grow your business, and one of them is to buy another business. For most companies, there's a limit to how much they can grow internally (or "organically") before adding more staff and other overhead.

Buying another business is an alternative to organic growth that may enable you to add new and complementary products and services to your mix (i.e., vertical integration). Or maybe there's a competitor who's looking to sell, and joining together offers more potential benefits to both of you than continuing to operate independently.

The first question you should ask is a simple one: Why do you want to buy a business? There may be many different reasons, but the final decision should be the result of a strategic planning process and long-term vision for your business.

Does an acquisition help you meet your strategic goals and objectives? Does it strengthen your product line offerings? Does it give you deeper penetration into your market? Does it help you better utilize assets that aren't delivering an adequate return on equity? Will it increase your efficiencies, strengthen your purchasing power or avoid duplication of costs?

On the other hand, can you meet your strategic and growth goals by some other strategy? Could you put more money into research and development, or hire additional salespeople? You must go through the discipline of answering these and many other questions like them before embarking on a business acquisition.

Finding Acquisition Targets

If after working through these questions you decide that you do have valid strategic reasons for buying another business, the next step is to begin the process of searching for acquisition targets and performing due diligence on them. Acquisition targets may be fairly limited and obvious if yours is a niche industry or if your goals are narrowly defined. If not, a business broker can help you identify possible targets.

In looking at potential companies to buy, remember that regardless of the purchase price or past sales or earnings of the company, what you are really buying is a future stream of earnings—or in other words, the ability of a business to generate profits in the future. If a business isn't generating enough earnings to provide an acceptable return on investment, and you're not sure you can make that happen, then you should proceed with extreme caution.

Beyond the financials, you also need to consider the cultural issues involved in an acquisition. Is the new business going to be culturally compatible with your existing business? In recent years we've read about large corporate mergers that made sense on the surface but broke down due to "softer" issues like conflicting corporate cultures.

As you get deeper into your due diligence and negotiations with a potential acquisition target, be careful to guard against "falling in love" with a company. Remember: when push comes to shove, you don't have to buy the business -you can always just walk away if you don't become too emotionally attached. The acquisition will be rational and make financial sense or it won't, so be sure you can tell the difference.

Selling Your Business: Steps to Take

Just like the decision of whether or not to buy another business, the decision to sell your business must also stem from your strategic plan. Again, you have to honestly assess why you want to sell your business: Are you ready to retire? Do you want to start another business? Are you feeling burned out? If so, maybe you just need a good vacation to help get some perspective on the situation.

Assuming you're not selling to employees or family members, one of the most important decisions you'll make in your preparations is your choice of an investment banker. The investment banker will serve as the "quarterback" of your team of experts and professionals who will guide you through the process of selling your business&—a team that should also include an accountant and an attorney who are experienced in mergers and acquisitions.

The investment banker's most important role is that of "market maker." He or she will build a database of prospective buyers and then work to create interest among the buyers and, ideally, an auction environment for the sale of your business. The investment banker will also create a confidential memorandum that presents your company to potential buyers and highlights the most salient points.

A good investment banker will create a memorandum that attracts the right kind of potential buyers and positions your company to sell at the highest possible price. He or she will know what details to include and omit, what features of your business to highlight, what issues to address, and what questions to answer in the memorandum. The investment banker can also help you weed through the "tire-kickers" and focus on the best-qualified buyers for your business.

Many sellers assume that if they're not selling their company in the public markets via an initial public offering (or IPO), then they don't need an investment banker. But this may be penny-wise and pound-foolish. The sale of your business is probably the largest and most complicated transaction you'll ever undertake, and so it's wise to bring as much experience as possible into your corner.

For assistance in buying or selling a business, please call or email me at markb@bobermarkey.com or your partner/manager contact. We have experience in many aspects of the M&A process. BMF&C
 

Word to the Wise: Beware of "Friendly" Financial Advice
By James M. Bowen, CPA, MT, Partner

How many times have you heard investment or tax advice from your friends over a card game, at the gym or on the golf course? Expense deductibility, automobile depreciation, charitable contributions—everyone has an opinion.

Here's some professional advice for you: whatever financial input your friends give you, don't act on it until you've checked it out with your own financial advisor. Even if you have the smartest, most successful friends on the planet, their advice may not apply to your specific situation.

People often try to help out by passing along what they believe to be valuable money-making or money-saving tips. In reality, the advice may not apply to you for a variety of reasons. Acting on such "friendly" advice can truly be disastrous. Here are a few thoughts to ponder:

Costly to fix: Certain actions come with enormous tax consequences. For example, giving family business stock to a minor or changing the status of your corporate organization can have huge tax implications. If you make a mistake in one of these areas, it can be very costly to undo. By talking to your CPA before taking action, you can save a lot of money.

Impossible to fix: Setting up an irrevocable trust is indeed irrevocable. Certain stock gifts to children or charities may be irretrievable. By missing a tax code expense deadline, you're losing an opportunity forever. A quick planning session could stop any of these actions before it's too late.

Nice idea, bad timing: Some advice isn't inherently wrong—it just may not be smart to act on it yet. For example, because of tax implications on gains, timing is very important when converting from a C corporation to an S corporation. Or perhaps it would be smart to wait until a certain date to buy or sell an asset.

Illegal or too risky? Tax laws change constantly and vary from state to state. Depending on your corporate set-up and state regulations, acting on your friend's advice might be downright illegal—or it just might not be smart for your situation. It's hard to keep up with tax code. For example, corporate boxes at sporting events used to be deductible, but in most cases, they're not any longer. Some of your friends may pay their children a salary from the family business, but it has to be reasonable compensation for whatever duties the child is actually performing.

Ask before you act. A quick conversation with your tax professional can save you a lot of headaches—and a lot of money. BMF&C
  

The Critical Importance of Business Succession Planning
By Richard C. Fedorovich, CPA, Managing Partner

Have you given serious thought to what would happen to your business if you were to suddenly and unexpectedly die or become disabled?

While thinking about your own mortality and the need for succession planning may not be the most comfortable process, failing to deal with succession planning can be disastrous for your company and its shareholders and employees. Without proper advance planning, the business could quickly crumble under the weight of estate taxes and battling between the competing interests of heirs and surviving owners/shareholders.

"But that's pretty unlikely," many owners (especially younger owners) think with regard to premature death or disability. Think again. According to actuarial tables, in a business with two partners both 35 years of age, there is a 47 percent chance that one of them will die before age 65. For two partners both age 50, the probability drops only slightly to 40 percent.

Statistics like these point to the critical importance of business succession planning for small and closely held business owners. With proper planning, you can ensure the smooth transfer of your business either to your heirs or to the remaining partners while minimizing estate taxes due upon death that can cripple your business.

Ownership and Management Succession Planning

Ideally, succession planning is divided into two main categories: ownership succession and management succession.

• Ownership succession—Since the primary value in most small businesses is in their relationships, there must be a structured plan for transitioning those relationships to the successor owners. This isn't something that happens overnight, so planning for ownership succession ideally should start at least three or four years before the owner plans to leave the business.
   
• Management succession—The key to successful management succession is to build a strong successor management team well in advance of your planned (or, in too many cases, unplanned) departure from the company. If yours is a family business, you must objectively determine whether or not your heirs are being adequately prepared to lead the company after you're gone, or if they even want this responsibility.

Questions to Consider

Here are a few questions to consider as you begin thinking about formalizing your succession plan:

• Have you defined and articulated to others your personal goals and vision for the transfer of ownership and management of the business? Ideally, your goals and vision should be communicated clearly and unambiguously in a formal written business succession plan that addresses both management and ownership succession.
   
• Is your successor identified and ready? This may seem like an obvious step, but it's one that's often overlooked. Many companies have only an interim succession plan prepared for dealing with the sudden death or disability of top leadership.
   
• Is there a buy/sell agreement in place? A buy/sell agreement is an essential part of ownership succession planning for closely held companies. It creates an immediate market by which any owner's interest can be translated into cash through the buyout of that partner's shares by the other partner(s). There is usually a valuation formula tied to the agreement that creates the immediate market.
   
• Are you dependent on the business for retirement cash flow? For most owners of family and closely held businesses, the sale of the business represents their primary source of retirement income. It is essential that you work together closely with estate and personal financial planning experts who can help you plan the financial side of succession so that it provides a comfortable stream of income to support your desired lifestyle during retirement.

When done properly, succession planning may take months, if not years, to develop and implement. This process is crucial, however, to helping ensure that the years of hard work you've put into building your business are not wasted.

For assistance in succession planning, please call or email me at rickf@bobermarkey.com. We can provide objective advice and perspective to help you think through the many issues involved with forming your succession plan. BMF&C
 

Profiles

In this feature of InfoLetter, each quarter we provide a profile of one of our professionals who is available to work with our clients and friends. Danielle J. Kimmell CPA, Senior Manager—Assurance & Advisory Department

Danielle recently joined Bober, Markey, Fedorovich & Company as a senior manager in the Assurance & Advisory department. Danielle has nearly ten years of experience, including several years with a regional accounting firm.

Danielle is focused on serving large, middle market privately held companies in a variety of industries, including manufacturing and distribution companies. She also has significant experience in the area of Employee Benefits Plans, as well as issues arising in small business settings, including audit, compliance and tax issues. Danielle, an Akron resident, holds a Bachelor of Science Degree in Accounting from The University of Akron.

Danielle has served as a speaker for the accounting departments at The University of Akron, Kent State University, and Mount Union both in the classroom and for student organizations on technical accounting topics as well as discussing careers in accounting with students.

Danielle is a member of the American Institute of Certified Public Accountants, the Ohio Society of Certified Public Accountants, Association of Fraud Examiners, Young Professionals of Akron, and is Treasurer of Project GRAD Akron (Graduation Really Achieves Dreams).

"BMF&C is committed to quality, both in the compliance work that is performed and in our value-added advisory services. This commitment starts with the Partner group and extends all the way to the administrative staff. This is evident in the positive results received from external inspections and the relationships that have developed as trusted advisors for our clients." BMF&C

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