Info Letter
Client Advisor
ValuationAdvisor
Partner's Perspective
Top Six Reason Why You Don't
Need Help With a Buy-Sell Agreement
By Mark B. Bober, CVA/ABV,
CPA, Partner
2. My partner and I are best friends. Are you good friends with your partner’s spouse and children? How about your partner’s attorney? Remember, you already predicted your partner is going to die first, so these are the people with whom you will be dealing.
3. I know the value of our business. Great! Now, do the other partners or shareholders agree with this? Will the IRS agree? How about all of your new partners or new shareholders that are created by the death of the other owner(s)? Remember, you will be the last to die.
4. Value is a simple concept everybody understands. Which value are you talking about? Is it "Fair Market Value," "Strategic Value," "Fair Value," or some other type of value you have in your mind? Value is not a precise term.
5. This is a family business, so why would we need a Buy-Sell Agreement? OK, divorce attorneys are a figment of our imagination, and our children never argue.
6. We have a Buy-Sell Agreement and we set the value of the business every year. We use book value in our Buy-Sell Agreement. Great. Is that tax book value or accounting book value? When was the last time this book value was compared to fair market value? Would you really sell for this value or is this just the value you would be willing to pay your partner? Oops, we forgot: Your partner is going to die first so what you would sell for doesn’t matter.
Our suggestion:
A properly drafted Buy-Sell Agreement is an important part of any business organization. One of the key ingredients in the Agreement will be providing a definition and means to arrive at a value for the business. This value will be used in the event of death, disability, retirement, or dispute, so it is important that all of the parties agree up front.
To ensure that the Agreement will achieve what the owners intend, it is vital that a valuation professional work with the business’s attorney and tax advisor during the drafting process. For example, the fair market value of an owner’s interest may not be equal to the owner’s pro rata share of the fair market value of the business as a whole.
To illustrate, an owner of 1/3 of a business worth $300,000 could learn that his or her interest is not worth $100,000, but rather only $60,000, or even less. The $40,000 difference in value recognizes that minority interests suffer from a lack of control and a lack of marketability. This may not be what the owners intend, but without a properly drafted Buy-Sell Agreement, this could be what happens. This is but one of a number of potential surprises that might result from an Agreement that is not carefully written.
By the way, what’s the best reason to have a well-written Buy-Sell Agreement? You might be wrong about Number 1 above.
A Buy-Sell Agreement that would be prepared by qualified legal counsel must be customized to meet the needs of your business and its principals. Having an Agreement in place will effectively counter the danger of a sudden transition in ownership. Please call or email me at markb@bobermarkey.com if you want to discuss your situation. BMF&C
Q When discussing financing for business, I rarely hear much about fixed-rate loans. Are they available for business purposes?
A Fixed-rate, or term, financing is generally associated with the purchase of real estate or equipment, whether for personal or business purposes. Some lenders also will approve fixed-rate loans to finance a business acquisition, change in ownership, or other long-term business needs. These loans are fully amortized, meaning that the fixed monthly payments will completely pay off the principal and interest over the term of the loan.
Q Knowing up front what payments will be is an advantage. Are there disadvantages to fixed-rate financing?
A Fixed-rate loans do not allow borrowers to benefit from a decrease in interest rates. In addition, while fixed-rate loans may allow borrowers to increase working capital in the short term, those loans may also preclude future needs if they aren’t structured with those needs in mind.
Finally, long-term, fixed-rate loans may have terms from five years to as long as 30 years, so it’s important to structure them so that repayment matches cash flow, considering not only existing indebtedness but also any other cash needs that may arise during the term of the loan.
Q Where do I go to find out about a fixed-rate loan?
A Life insurance companies are primary fixed-rate loan providers for businesses. Investment banks, pension funds, and some quasi-governmental entities such as Freddie Mac or Fannie Mae are other possibilities. BMF&C
Committees Help Companies Navigate Pay
Issue
By David C. Armour,
CPA, Manager
One way to shift responsibility for this hot potato issue is to establish an independent compensation committee. Having a committee make pay decisions removes the issue from the family arena and takes pressure off the chief executive officer, who is usually a family member.
Family businesses in their second generation or later are good candidates for compensation committees because pay issues tend to become more, not less, complicated over time.
Typical responsibilities of a compensation committee include:
- Establishing sound compensation practices and plans,
- Benchmarking pay and benefits against external sources,
- Reviewing compensation packages to ensure they make good business sense, provide incentives and link to results,
- Balancing employee and shareholder interests,
- Arranging development opportunities for management and key employees, and
- Assisting owners in managing retirement and financial planning issues.
If a family business has a board of outside advisors or directors, members of the compensation committee might be drawn from that group. A three-person committee is usually ideal for family businesses, although many benefit from even one objective advisor.
Compensation committees are an excellent solution for family businesses looking for a better way to navigate the emotional minefield of compensation. Outside advisors can keep the focus on professional qualifications and business contributions in making pay decisions - not on one's place in the family, the number of children that must be supported or patriarchal guilt.
By removing these factors from the process, compensation becomes based more on business than on blood. If I can be of assistance, please call or email me at david@bobermarkey.com BMF&C
| Sales Tax Update: The State of Ohio has made some changes to tax rates, forms, and due dates. Please go to the BMF website at www.bobermarkey.com for a brief summary of the changes to identify whether they are relevant to your circumstances. |
Pledging Assets: A Proven Way To Raise
Cash
By Lori Sheets, CPA, Senior Manager
As
the economy’s attack of the doldrums continues, more and more businesses
are finding that the doors of traditional lenders are swinging open less
freely than they did in the 1990s. As a result, many are taking closer
looks at asset-based lending, a financing option they might have once
ignored.
Asset-based lending, one of several financing approaches we are examining in this issue of the newsletter, helps companies maximize their liquidity by pledging accounts receivable and inventory as collateral to get the financing they need. This is in contrast to factoring, where assets are sold outright.
Once viewed as vehicles only for struggling companies that were unable to obtain more conventional financing, such as unsecured bank loans, asset-based loans now are gaining favor with even very large firms, and it is no longer unusual to see such loans in the range of $500 million or more.
To be sure, asset-based loans remain a valuable option for companies whose balance-sheet leverage has increased and whose debt rating has deteriorated to the point that other financing options are limited or prohibitively expensive.
But businesses whose growth is so rapid it outpaces conventional markets’ willingness, or ability, to keep up also are using asset-based loans to obtain the cash flow they need to ease growing pains.
Blurred Lines
The lines between conventional financing and asset-based loans have blurred in recent years, and banks and large finance companies such as Wachovia, Bank of America, GE Capital, and Siemens Financial all include asset-based loans in their product offerings.
Different lenders target different financial and geographic markets, but professionals such as accountants and attorneys can help steer companies to an appropriate and trustworthy lender.
Although terms may vary among lenders, it is fairly standard for businesses to receive loans equal to 80% of their accounts receivable, or of the orderly liquidation value of their inventories. Fees are fairly standard industrywide, usually varying only about a quarter of a point among institutions, but interest rates for the vast majority of these loans are floating, rather than fixed.
The loan term is generally two to five years, and loans can often be renewed for similar periods almost indefinitely.
Extensive Paperwork
Not surprisingly, given the fluid nature of the assets being pledged, lenders maintain a close watch on the collateral. Borrowers subject themselves to considerable scrutiny, extensive monitoring, and additional paperwork with asset-based loans, because they are required to provide regular reports on assets that may change daily.
In addition, although some lenders want to know only that the value of the collateral is enough to cover the loan if the borrower defaults, most mainstream asset-based lenders are equally concerned with the viability of the borrowing company as a whole.
Those lenders want to see business projections for a year or two, demonstrating that the company’s performance and strength will be adequate to avoid liquidation.
Asset-based loans are unnecessary for companies whose corporate debt ratings remain extremely strong, but they may be just the solution other firms need to shore up sagging balance sheets or manage and continue growth. In short, they can give companies maximum liquidity in a sluggish financial environment.
If I can help you in your evaluation of financing alternatives, please call or email me your plans at loris@bobermarkey.com. BMF&C
|
4th Annual Top Management Retreat More than 200 attendees, our largest turnout yet, joined us at our Top Management Retreat this year to hear presentations by Joe Kanfer, CEO of GOJO Industries, and our own Mary Taylor, Cindy Johnson, and Ray Dunkle. The afternoon concluded with cocktails, hors d’oeuvres, and networking amongst the participants. |
IRS Sets New Audit Priorities
National Research Program
By Mary Taylor, CPA,
MT, Senior Manager
THE
National Research Program ("NRP") is a comprehensive effort by the IRS to
measure payment, filing, and reporting compliance of individual taxpayers.
Future studies will review other types of taxpayers and taxes, including
corporate, employment, and excise taxes.
The IRS is hoping to reduce the number of no-change audits it performs on an annual basis with the information gained from this study. The IRS is developing innovative approaches to measure taxpayer compliance with the tax law. There are several key elements to this new effort:
- It will be far less intrusive and burdensome on taxpayers than
previous compliance studies.
- It will help the IRS build better compliance programs to more
effectively catch tax cheating and help ensure all taxpayers pay a fair
share.
- It will help reduce audits of taxpayers who filed an accurate return by at least 15,000 tax returns a year.
"Honest taxpayers shouldn’t have to shoulder the burden for those who don’t pay what they owe," said IRS Commissioner Charles O. Rossotti. "This approach will give us the tools we need to help ensure the fairness of the American tax system."
According to the IRS, NRP will not result in additional audits of taxpayers. The vast majority of those selected for audit in the program will answer questions about only a limited portion of the tax return, which will sharply reduce the amount of time and burden for taxpayers.
Many taxpayers selected under this program will participate by mail. So, if you receive a notice from the IRS in the mail regarding your return, don’t automatically assume there is something wrong with the accuracy of your return; you may have simply been chosen to participate in the National Research Program.
"Ultimately, this project will help all taxpayers by giving the agency timely, accurate information about tax compliance," Rossotti added. "This information will allow the IRS to replace outdated audit formulas and develop compliance efforts targeted at the tax returns most likely to have errors, rather than those from honest taxpayers."
Auditing compliant tax returns is a waste of time for both the IRS and the taxpayer. The NRP study will give the IRS a much–needed road map for selecting future audits. The IRS will use information from these audits to update existing screening techniques to select tax returns for audit.
The NRP effort will review a small, statistically valid sample of individual returns for tax year 2001, less than 50,000 returns out of 132 million individual returns filed. The new NRP process will have four main categories:
- No IRS Contact. About 8,000 returns will be checked relying
solely on information already available to the IRS.
- Correspondence. These will be less intrusive correspondence
exchanges with taxpayers – rather than the old standard sit-down audit.
About 9,000 returns will be included in the process.
- Less intrusive audits. Instead of the old "line-by-line"
examination approach, the IRS will gather more information beforehand
from agency records and focus only on selected parts of approximately
30,000 returns.
- Calibration audits. These will consist of about 2,000 examinations that will check each line of the return, but, in a major change from earlier programs, taxpayers will not be required to provide line-by-line substantiation.
"This approach symbolizes how we will do business in the new IRS," says Rossotti. "We want to work smarter to minimize headaches and costs for taxpayers and maximize compliance with the tax laws."
Let’s hope it works.
In the meantime, you might be one of the "lucky" ones to participate in the program. Please don’t panic if you receive that notice in the mail; either call or email me at maryt@bobermarkey.com, or contact your partner/manager contact, so we can assist you as needed. BMF&C
In this feature in InfoLETTER, each quarter we provide a profile of one of our professionals available to work with our clients and friends.
James E. Merklin, CPA, CFE, M.Acc., Partner
Jim
serves as Director of Manufacturing Services and Employee Benefit Plan
Audit Services for Bober, Markey, Fedorovich & Company, and also works in
the Firm’s Forensic Services Group. Jim’s experience is focused on serving
privately held middle market and high growth clients in a variety of
industries. He has extensive experience in working with closely held and
family-held businesses, merger and acquisition, tax and business planning,
financial forecasting, human resource consulting, attestation services,
fraud and forensic investigations, litigation and transaction support, and
internal control and operations reviews. Jim also has significant
experience in working with underperforming and troubled companies.
Jim won the Dean’s Award for high scholastic achievement when he graduated with a Masters of Accountancy from the Weatherhead School of Management at Case Western Reserve University. After working for several years in Cleveland for a national and a regional CPA firm, Jim joined Bober, Markey, Fedorovich & Company in 1997, and was elected a partner of Bober, Markey, Fedorovich & Company in 2003.
"Enhancing client profitability and long-term viability is emotionally rewarding. Helping our clients with the problems they face on a day-to-day basis is truly fulfilling to me. I work with our clients not just on issues impacting their financial statements and tax returns, but on virtually every aspect of their operations. And, wearing another hat, participating in the protection of employee assets in their benefit plans by providing high quality plan audits that bring value to the plans and to the plan sponsors is also very fulfilling."
BMF&CIn order to support continued growth in our practice, the Partners of Bober, Markey, Fedorovich & Company are pleased to announce the following additions to our professional staff:
- James M. Bowen, CPA, MT, Partner, Tax Services. Jim joins the
Firm after having served as the Lake Erie Area Director of Tax
Operations for nine offices in a national CPA firm in Cleveland. Jim has
nearly 19 years of public accounting experience, with a focus on
providing tax services to middle market/Fortune 1000 companies in
manufacturing, distribution, and retail industries. Jim also has
significant experience working with companies in cost-effective
outsourcing of internal tax operations.
- Maria T. Pramik, CPA, Supervisor, Tax Services. Maria has several years of experience with a national CPA firm in Akron. Prior to entering public accounting, Maria worked as a plan administrator for Charles Schwab Retirement Plan Services. Maria is a University of Akron graduate.
Cindy Mitchell has been elected Treasurer of the Canton Players Guild.
In September, 2003, "Consolidation of Variable Interest Entities," written by Al Palfi, was published in the newsletter for the Akron/Canton Chapter of the Ohio Society of CPAs.
On October 9, 2003, David Armour presented an update on new accounting standards to the Akron/Canton Chapter of the Ohio Society of CPAs. David has also been named a board member and treasurer of the Western Reserve Planned Giving Council – Planned Giving Council for Summit, Portage, and Medina Counties.
On October 23, 2003, Ray Dunkle served as Professor for the Day at the University of Akron and presented " Identifying and Preventing Fraud." Ray also served as a guest lecturer on the topic of fraud at The University of Akron’s Community and Technical College on October 14, 2003, and presented "Assessing Fraud Risk for Audits - SAS 99" to the Akron/Canton Chapter of the Ohio Society of Certified Public Accountants on November 13, 2003.
Denise Buccigross became a Certified Payroll Professional (CPP) after passing an intensive examination in October, 2003.
On November 4, 2003, Lisa Stemple was elected to the Norton Board of Education.
On November 19, 2003, Jim Merklin and Ray Dunkle (both Certified Fraud Examiners) presented "Performing a Fraud Risk Analysis" to the Akron Chapter of the Institute of Management
Accountants. Additionally, Jim presented "Tips to Plan Sponsors on Improving Quality and Value of Annual Plan Audits" to benefit plan sponsors on December 12, 2003.
Paula DiVencenzo and Ray Dunkle were featured in the November 2003 issue of
Small Business News Magazine in "Family Tree – How and How Not to Pay Relatives Who Work for You." Paula also presented "Multi-State Tax Update" for the University of Akron’s National Tax Conference on November 5, 2003.
Jim Merklin has been appointed to the Board of Directors and as Treasurer of St. Joseph Parenting Center and to the Strategic Planning Steering Committee for Heart to Heart Communications.
On November 6, 2003, Bober, Markey, Fedorovich & Company conducted its 4th Annual Top Management Retreat. Presenters at this session included the following:
- Mary Taylor – "New Opportunities for You and Your Company
After the Tax Act of 2003"
- Cindy Johnson – "The New World of Business Continuity
Planning"
- Ray Dunkle – "Show Me The Money"
Allan Markey and Leif Erickson gave a presentation November 21, 2003 to the Akron Foodbank on "Charitable Contributions: Tax Impact for Individuals & Corporations."
Assurance & Advisory:
Audits, Reviews & Compilations
Bookkeeping Services
Financial Projections
Internal Control Reviews
Cash Management and Forecasting
Financial Planning
Tax Services
Corporate and Individual Tax Return Preparation
Business, Estate & Personal Tax Planning
Employee Benefit Planning & Administration
Non-Qualified Deferred Compensation Planning
Executive Incentive Compensation Planning
Multi-State Tax Planning
Foreign Tax Minimization
IRS Representation
Employee Stock Ownership Plans (ESOPs)
Consulting Services:
Business Valuation
Litigation Support
ESOP Valuations
Buy-Sell Agreements
Executive Search
Cost Accounting
Merger & Acquisitions
Due Diligence Transaction Support
Preservation of Family Wealth Planning
Ownership Succession Planning
Strategic Planning
Financial Management, Reengineering, & Restructuring
Profit Enhancement Studies
Fraud Investigation
Lender Collateral Audits
This newsletter is designed to present
ideas for building and preserving wealth. Items are discussed in general
terms and, therefore, should not be relied upon for professional advice.
© Copyright 2003 Bober, Markey, Fedorovich & Company