Changes to Indiana Child Support Calculations

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation & Litigation Services
Email Jason
~and~
Christopher Sargent, CPA/ABV, AM
Senior Analyst, Valuation & Litigation Services
Email Chris

On October 17, 2023, the Indiana Supreme Court issued an order amending the state’s Child Support Rules and Guidelines. These amended rules and guidelines will go into effect on January 1, 2024. While these amendments ultimately impact the amount of child support an individual may pay/receive, they have little impact on the current guidance regarding the determination of Weekly Gross Income, a driver for determining Weekly Support Payments.

Within the various amendments is a discussion around the use of new economic data. This discussion introduces the “Rothbarth” approach, which is based on the assumption that the amount of spending on children can be inferred by examining how parents reduce spending on themselves as the number of children in the family increases. The approach uses the data of Consumer Expenditure Surveys from 2013 to 2019 as support for its findings. The approach was considered a more accurate reflection of direct estimates of child spending levels than used in the existing rules and guidelines.

This data on the spending by intact families on children prompted changes to the Weekly Support schedule. The table below highlights the impact of these changes on varying levels of combined Weekly Adjusted Income:

The table indicates an increase of $51 ($312 – $261) in the Weekly Support Payment of a mother and father with combined weekly income of $1,190 [1]. This weekly increase equates to an annual increase in support of $2,652. For divorcing couples at the high end of combined weekly income levels ($9,200 being the maximum amount included in the Weekly Support schedule), the annual dollar increase is more significant, $6,136. In general, the new 2024 rules and guidelines’ Weekly Support schedule indicates increases in amounts for Weekly Support Payments across most combined weekly income levels [2].

If we can be of assistance in determining income available for child support or any other financial analysis for you or one of your clients, please call us at (317) 608-6699 or email Jason or Chris.

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1. This amount is representative of an annual combined income of $61,944, Indiana’s median household income as reported by the U.S. Census Bureau for 2021.

2. The Weekly Support Payment increases in the new 2024 rules and guidelines begin at a combined Weekly Adjusted income of $590 (annual amount of $30,680) for a single child family. Below $590 of combined Weekly Adjusted income, the Weekly Support Payment decreases in the new 2024 rules and guidelines. The impact of the new 2024 guidelines on the Weekly Support Payment amount differs based on combined weekly income and the number of children.

Do the Right Thing — It Pays Off!

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
Email Jason

We take ethics seriously here at Sponsel CPA Group. In fact, we regularly undergo ethics training and must pass an ethics exam before obtaining a CPA license. But the fact of the matter is that every company should conduct their business in a transparent, ethical manner. Younger professionals and consumers especially like to see businesses wearing their social values on their sleeves. And in the end, ethical business practices pay off bigger than greedy methods.

Take the clothing company Patagonia, for example. In a move that seemed counterproductive to marketing and sales, Patagonia launched the “Don’t Buy This Jacket” campaign. But it ended up only helping — and not just the company. The campaign promoted the durability of Patagonia’s products, increased sales and raised awareness of consumerism’s negative impact on the environment — thus also revealing the company’s values. Patagonia took a big financial risk in telling people not to buy excess clothing, but it was the right thing to do for the sake of protecting the environment.

Business ethics are really no different than the ethics you employ in your personal life. Always ask yourself, “Am I doing the right thing?” You should do the right thing regardless of pecuniary consequences. If a customer returns a faulty product or expresses disappointment with a service, making it right with them is the only solution. If that means giving out refunds, you may find yourself worrying about your short-term financial results. Start thinking about the long-term benefits instead. You’re establishing your business as one with integrity, one that cares about its customers and stands behind their product or service. Those are the businesses that stick around for the long haul.

Your employee group will also rally around this honorable practice. They will be proud to work with a company that values the customer experience and, more importantly, its relationship with customers. In many cases, these same companies have an above average relationship with their team of employees, as people like to work in environments with which they can take pride in being associated.

If you operate with best practices, employees and customers will respect you and pledge their loyalty. Think of the regulars at mom-and-pop coffee shops. They would probably prefer the convenience of a drive-thru Starbucks, but they keep going to the family-owned store because it has a sense of history and character. They like the people pouring their coffee. That personal touch. They value the trusted relationship.

A business can’t run effectively for its employees or customers without a strong sense of ethics. If you’re not doing what’s right for your customers, employees and other stakeholders … what are you doing exactly? Stay focused on what’s right, and your business will keep booming.

If we can assist you further with achieving success in your business or personal affairs, please contact us at (317) 608-6699 or email Jason.

Summer Camp for You

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
Email Jason

Success is about continuous learning, not crossing a finish line beyond which there is nothing but smooth sailing. (A smooth sea never made a skilled sailor!) Many of those at the supposed top of their game keep striving to reach greater heights. For instance, many Academy Award-winning actors still turn to coaches and take acting lessons to improve their versatility.

This summer, as your kids head to camp and your company welcomes new interns, think about what new skills YOU should acquire. While it can be easy to get lost in the daily grind and think you’re doing just fine at your current skill level, continuous learning and improving are important not only for professional success but for personal satisfaction, confidence and self-esteem.

As a business leader, you should budget time for personal improvement. As Indiana CPAs, we are required to attend a minimum of 120 hours of continuing professional education every three years in order to maintain our licenses. What do you require of yourself and your staff to maintain skills and quality? Do you invest in training?

What is your own personal black belt you’d like to earn this summer? In this time of remote working, maybe you need to brush up on your communication skills. There are lots of online courses for effective email communication and etiquette. Media training could also help you — not only with communicating in general but in creating a relationship tailored to your audience/clients’ needs. If you know anyone who does a lot of writing or speaking for a living, maybe ask them to be a mentor.

A coach can provide a unique perspective that allows you to more clearly identify areas in which you could improve. As esteemed actor Hugh Jackman said, “The coach can see what you can’t see because you’re in the forest, they’re outside of it.”

With summer just around the corner, maybe it’s time for outdoor team-building activities. Enhance your team’s chemistry and refine their collaboration skills by working together in settings outside the workplace.

Your personal growth as a business owner and your company’s progress go hand in hand. Growth is not just measured in revenue dollars but also in expanded capabilities and talent, and development of new products or services. Investing in human capital, both yours and others, can make these things possible and If done effectively, growth in revenue dollars and net income will come naturally.

HR professionals often refer to their sphere of responsibility as “Talent Management.” Think of that term in another way: How are you managing your personal talent, and are you adding to your skills to reach your full potential? Only YOU can answer that question!

If we can assist you further with your business or personal affairs, please contact Jason Thompson at (317) 608-6694 or email Jason.

Leadership: Vision and Perseverance

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
[email protected]

Many business owners may believe they are good managers, but they often become frustrated that the progress and success they are seeking is only experienced by other owners of enterprises. They may toil investing many hours in their respective business operations, but that “next level” is fleeting to them.

One possibility may be that they are managing their business well, but they are not demonstrating the leadership to attain what they seek. In his book, The E- Myth, Michael E. Gerber refers to this in another way: You should be working on your business more than you work in your business!

Leadership is about your vision for all aspects of your business that, when applied in the aggregate, results in a growing, successful business. It is not an easy assignment and one that requires significant, intentional perseverance. As the leader, you will be challenged at every corner, but allow that vision to carry you through. Many managers show up every day to do their job, but the leader has that vison thing — looking months or even years down the road to the success for what she is creating! A leader is willing to make investments that may dent profitability in the short run but will result in exponential benefits to the enterprise in the long term.

We know it’s easy to get lost in the daily grind. But that’s management, NOT leadership. While managers operate in the trenches of the business, a leader takes a bird’s-eye view and maintains a vision for the future.

Excellent managers can become great leaders when they apply their many work experiences to provide solutions with a clear picture in their mind as to where they will end up.

While day-to-day operations are obviously important, sharpening your vision for the future is how leaders keep their businesses thriving. It is important to sustaining your desired culture within your team.

Confidence is also key. If you enter your workplace with an assured attitude, your demeanor will likely rub off on other stakeholders, and everyone’s spirits will lift up the company. Move forward cautiously and with prudent skepticism, but hold your head high as you do so. When challenges create darkness, allow your leadership to shine bright with solutions that deliver! Persevering through tough times can bring out the best in us.

Don’t discount your impact on your team and individual members thereof. A leader’s positivity can go a long way, not only in motivating team members to be more productive but in helping them through personal struggles outside of work as well.

If we can assist you further in your leading of your enterprise to success, please contact Jason Thompson at (317) 608-6694 or email [email protected].

Summer is Over … Now What?

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
[email protected]

This is a big week, as it marks the end of summer and the start of the autumn season. The days get sequentially shorter, temperatures will drop and leaves will fall. But now is your chance to rise toward a brighter future! How will you finish out this year and set yourself up for success in 2023?

As you look back on what brought you to this point and how you will move forward from here, it’s easy to focus on the macro influences of the economy, the IRS and the government at large. But don’t spend too much time on those forces beyond your control. Remember … the businessperson in the mirror is the only one you can control! Over the summer months, outdoor functions and activities allowed you the excuse to procrastinate on those important but not urgent initiatives. Allow this change of seasons to provide the focus and energy to address your specific success factors.

So, what should your main focus be as you put the final touches on 2022, laying the foundation and setting the momentum for 2023? Well, what’s left on your plate? Think of the strategic tasks you outlined at the beginning of the year and expedite them to completion. We’re in the fourth quarter of the game now — it’s no time to procrastinate! Your team and business are depending on your leadership!

Also remember the fact that you now have a bit of time before the holidays hit. Take advantage of it, and plan ahead! Or use the quiet moments of solitude during holiday vacations to think of new products and services your business can offer in the future. Reflect on employees who have gone above and beyond. Who would thrive in a higher position and crystallize your vision for the future? What team members will allow you to start 2023 with a bang?

Now is an ideal time to put on your thinking cap, as studies show that our brains work best in the Fall Season. In a study from Sunnybrook Health Science Center and the University of Toronto, “researchers tested the thinking and concentration of 3,353 participants throughout Canada, France and the US over the course of one year. They found that in the late summer and early fall, participants concentrated better and had improved memory, focus and thinking skills, which led to greater productivity.”

As the article linked above suggests, “fall back into your best state of mind,” focus on triumphantly crossing this year’s finish line and lay the groundwork for a great 2023! Hopefully we have all had a productive summer, full of many good experiences and memories. Now is a great time to focus on a successful future!

For further assistance with your personal or business affairs, please call Jason Thompson at (317) 608-6694 or email [email protected].

Invest in Your Own Personal Growth

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
[email protected]

Learning is a lifelong process. In an interview with Moviemaker Magazine, even master filmmaker Martin Scorsese, who’s been making movies for five decades now, said he’s “still learning to tell stories with pictures.”

This summer, as your kids earn their merit badges and karate belts or take on internships, think about what new skills YOU should acquire. Although it’s easy to get lost in the daily grind and think you’re doing just fine at your current skill level, learning and improving are vital not only for professional success but for personal satisfaction, confidence and self- esteem as well.

As a business leader, you must budget personal improvement time. As Indiana CPAs, we are required to attend a minimum of 120 hours of continuing professional education every three years in order to maintain our licenses. What do you require of yourself and your staff to maintain skills and quality?

What is your own personal black belt you’d like to earn this summer? In this time of Zoom, increased remote working, etc., maybe you need to brush up on your communication skills. Take a speech class or a writing course. If you know anyone who does a lot of writing or speaking for a living, maybe ask them to be a mentor. (Even Academy Award-winning actors have coaches throughout their entire careers.)

Your personal growth and your company’s growth go hand in hand. Growth is not always measured in revenue dollars, but rather growth in capabilities, talent, the frequency of trying new approaches, products or services. Invest in human capital! If you do that effectively, the growth in revenue dollars and net income will come naturally.

This isn’t just about creating a successful business. Investing in your personal growth is also about reaching a point where you feel confident and fulfilled with how you conduct yourself, which is a good way to feel in the summer. It’s time for you to shine!

HR professionals often refer to their sphere of responsibility as “Talent Management.” Think of that term in another way: How are you managing your personal talent, and are you adding to your skills to reach your full growth potential? Only YOU can answer that question!

For further assistance with your personal or business matters, please call Jason Thompson at (317) 608-6694 or email [email protected].

Making Your Family Business Your Legacy

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
[email protected]

Like any successful entrepreneur, most business owners look upon their company as not just their livelihood, but as part of their identity. As they approach retirement, it’s a natural instinct to want to protect that legacy and pass it on to worthy successors. This desire can be complicated when the business in question is family-owned.

The thought of relinquishing control to the next generation of the family may seem reasonable when you’re looking far down the road. But when the day actually arrives, control is often the last “asset” owners are willing to give to someone else.

Sponsel CPA Group has extensive experience with assisting the successful transition of family-owned businesses. Many of these clients are first-generation owners, but we also have some that are in the fourth generation of ownership succession.

The statistics can be alarming: most family businesses do not survive through the third generation of owners. The initial generation of owners are often the most “transition” challenged, as they have no experience “passing the baton.” Subsequent generations tend to better understand the challenge of ownership transition because they have personally lived through that experience. They know what a successful transition looks like and what pitfalls to avoid along the way.

The challenge of successful family business ownership compounds when there are multiple generations and lines of family descendants.

A succession strategy must address numerous areas, including management transition, financial transactions related to ownership transfers, and the ultimate question: when will control actually transfer?

In some cases, companies are transferred via “gifting” shares of ownership from one generation to another. Right now is an excellent time to take advantage of the historically high limit of the Lifetime Gift Tax Exemption, currently at $11,700,000. Given the political turmoil in Washington, the future of this exemption amount is highly uncertain.

In addition to gifting, there are other strategies for transferring wealth while retaining control of the business. These options can be beneficial because value is transferred out of the owner’s estate, but he/she maintains control of the asset transferred — in this case, the family business.

If you are family-owned company and desire to perpetuate the enterprise, Sponsel CPA Group recommends the following steps:

Communicate your exact desires directly with the future generation of owners, often and openly.
Seek their feedback and reaction to your family succession plan for the business.
Start the process early — at least 10 years before the elder generation wants to retire.
Be open-minded about the direction the company may take after transition. The next generation could have more energy and inclination for implementing major changes to the business model.
Provide the future business operators the benefit of your experience, but allow them to make their own mistakes — so long as they’re not detrimental to the business.
Use professional advisors to assist in counseling sessions designed to discuss difficult issues and the financial aspects of the business, both in good times and economically challenging ones.
Develop a plan to address family members who are not involved in the business.
Actively engage in the process — before, during and after transition.

Often we encounter older business owners who do not have a succession plan in place because of a misguided desire to avoid family conflict. In fact, the opposite is true: dealing with the issue of transition while you are still among the living is more beneficial to familial harmony than leaving your heirs to speculate what you wanted after you are gone.

Unfortunately, we have seen many families permanently and tragically divided over the settlement of estate and business ownership issues. But this doesn’t have to be the case with your family.

Become proactive in working with your trusted advisor (CPA, attorney, etc.) to develop a succession plan. Conduct family meetings to explain and implement a plan that is best for your family-owned company’s situation. And take the necessary steps to ensure your business becomes your lasting legacy.

If we can be of any assistance in helping your business with succession issues, please call Jason Thompson in our Valuation and Litigation Services department at (317) 608-6694 or email [email protected].

Employee Spotlight: Jason Thompson

Jason Thompson has been with Sponsel CPA Group from the very beginning. One of the founding Partners of the firm, he has led the the Valuation and Litigation Services department since its inception, helping clients find innovative solutions to challenging financial and legal issues. He provides executive-level counsel to business owners and investors across a broad range of industries, specializing in the valuation of privately held businesses, ownership interests and intangible assets.

Jason routinely provides consultation related to business valuation in mergers and acquisitions, in estate and gift tax compliance and planning and for an array of litigation related reasons. In addition to his skills as a valuation professional, he also performs the firm’s fraud and forensic accounting investigations and serves as an expert witness from time to time in accounting and financial related matters.

In 2008 he was named a Super CPA award by Indiana Business magazine. Active in the community, Jason volunteers his time as a board member for Noble of Indiana, a not-for-profit organization serving people with disabilities and their families.

Reporting the Red Flags of Fraud

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
[email protected]

Occupational fraud continues to be an all-too-common threat across a wide spectrum of industries. Perpetrators range from entry-level employees to C-suite executives. Small businesses with under 100 employees are particularly vulnerable to fraud, experiencing a median loss of $200,000.

Among other things, this report identifies the employees and departments that pose the greatest threat to organizations when it comes to occupational fraud.

According to this study, fraud is most often committed by perpetrators who fall within the following demographics. Keep in mind that these demographics are not indicative of employees who will definitely commit occupational fraud; they are merely common demographics among occupational fraud perpetrators.

• Gender — In the United States, men accounted for 58% of all occupational fraud cases. Even when taking authority level into consideration, men still tend to cause larger losses than women in managerial and owner/executive positions.

• Age — According to the study, the largest median losses were caused by fraudsters aged 56 and older.

• Education — Approximately 60% of perpetrators have a college degree or higher.

• Position of perpetrator — Occupational fraud is committed most frequently by low-level personnel, but fraud committed by managers/executives results in much higher median losses.
o Employee — 44% of cases; median loss of $50,000
o Manager — 34% of cases; median loss of $150,000
o Owner/Executive — 19% of cases; median loss of $850,000
o Other — 3% of cases; median loss of $189,000

• Perpetrator’s tenure with the business — Fraud losses significantly increase based on how long the fraudster worked for the company.
o Less than 1 year — 9% of cases; median loss of $40,000
o 1-5 years — 44% of cases; median loss of $100,000
o 6-10 years — 23% of cases; median loss of $173,000
o More than 10 years — 24% of cases; median loss of $241,000

• Department within organization — Employees in the accounting department generated the highest number of occupational fraud cases, followed closely by operations and executive/upper management.

• Prior criminal background or negative employment history — Most occupational fraudsters are first-time offenders.

Fraud losses tend to be much lower in organizations with telephone hotlines or some other kind of anonymous reporting mechanism. Random audits and forensic data monitoring also rank among the most effective tools for detecting occupational fraud.

If you are concerned about occupational fraud in your organization, please call Jason Thompson at (317) 608-6693 or email [email protected].

What Can Business Owners Learn from the Electoral Process?

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services
[email protected]

Last Tuesday, voters cast their ballots in a round of primary elections for federal, state and local offices. In the business world, people vote every day, selecting products and services based on how effectively companies tailor their campaign to customers.

If you want to breathe new life into your business, put on your campaign hat and start running it like a political race! Here are some things to consider and ways to win your customers’ vote!

Build a campaign staff. Surround yourself with people who will represent your company in the best possible light. Just as politicians need fans waving signs of support, business owners need a team of folks who firmly believe in their company, spreading the good word about how it can benefit customers.

Keep your campaign promises. Business owners are like politicians in the sense that they set high expectations and build a buzz around themselves. They present a grand vision for the public to rally behind. Once you’ve won over your audience and gained their support, don’t lose sight of that vision. Always remember what you’ve promised and evaluate whether you’re living up to the portrait you’ve painted of your company.

Learn from your opponents. Think of your competitors as fellow candidates in the race and see what you can do to distinguish yourself from them. Do you need to change your brand image, your messaging, the way you interact with customers? What is the public’s perception of your company at the moment? Is it time to improve your reputation? These are just a few of the questions that should be rattling around in your head as you hike up the campaign trail.

When you go into work every morning, your first thought should always be: How many votes am I going to win today? In your world, every day is Election Day!

If you have questions about the value of a business or the valuation process, please call Jason Thompson at (317) 608-6693 or email [email protected].

What Factors Should Valuation Analysts Consider When Valuing A Business?

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner and Director of Valuation and Litigation Services

When performing a business valuation, a valuation analyst reviews numerous factors that may impact the resulting value. While the specific factors considered may vary from business valuation to business valuation, Internal Revenue Service (IRS) Revenue Ruling 59-60 identifies certain factors the IRS considers fundamental to analyze when valuing a closely held corporation’s stock.

IRS Revenue Ruling 59-60 was developed to provide guidance for valuing a closely held corporation’s stock, when market quotations are not available, for estate and gift tax purposes. Because this guidance comes from the IRS, it is considered by most valuation analysts as a relevant guidance when performing any valuation engagement.

The following is a discussion of the “Factors to Consider” identified in IRS Revenue Ruling 59-60:

The nature of the business and the history of the enterprise from its inception – This factor deals with issues like stability or instability, growth or lack of growth, the diversity or lack of diversity of operations, and other facts needed to form an opinion of the degree of risk involved inside the business.

The economic outlook in general and the condition and outlook of the specific industry in particular – This factor considers the current and prospective economic conditions as of the date of the valuation, both in the national economy and in the industry or industries the business operates within. These factors are issues outside the business that impact risk.

The book value of the stock and the financial condition of the business – This factor addresses issues like liquidity, reported values of assets, liabilities, working capital and debt, capital structure and net worth. These factors are helpful in identifying financial risk for the business.

The earning capacity of the company – This factor deals with financial performance and the use of trends in financial performance as predictors for future financial performance. This is another mechanism for identifying the financial risks of the business.

The dividend-paying capacity – This factor, which differs from the previous factor, addresses the amount of funds flowing through the business to owners and the amount of funds that could reasonably flow through to owners without jeopardizing the financial stability of the business.
Whether or not the enterprise has goodwill or other intangible value – This factor deals with whether the business has value beyond that of its tangible assets. In many cases, the existence of “excess” net earnings over and above a fair return on the business’ tangible assets is an indication of goodwill or intangible value. In certain situations, the identification of goodwill or intangible value is needed as part of the business valuation.

Sales of stock and the size of the block of stock to be valued – This factor and the next both address the consideration of known transaction data. In this case, the transaction data is other sales of the subject closely held corporation’s stock. While this information may exist, careful consideration of the terms and the block/position previously transacted is necessary before applying this data in a current business valuation.

The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter – This factor directs a valuation analyst to consider published transaction data for other companies when valuing a closely held corporation. We refer to this as a Market Approach. The market approach is based on the theory of substitution, meaning that the known value of a business’ stock can serve as a benchmark indicator of value for the subject closely held corporation’s stock.

At Sponsel CPA Group, our team of valuation experts is well versed in not only the factors to consider from IRS Revenue Ruling 59-60, but also many of the other factors that influence the value of a business.

If you have questions about the value of a business or the valuation process, please call Jason Thompson at (317) 608-6694 or email [email protected].

Treasury Pulling Back from Limiting Valuation Discounts

By Jason Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
[email protected]

Earlier this month the U.S. Treasury announced its plans to withdraw its newly proposed regulations under Section 2704 related to limiting valuation discounts. The move came after intense pushback from valuation experts, the estate planning community and family business owners.

The move is good news for owners of closely held businesses who plan to eventually pass the company on to the next generation.

Commenters on the proposed regulation claimed Section 2704 would have hurt family-owned and operated businesses by making it difficult and costly to transfer companies to the next generation. Critics also claimed the valuation requirements of the proposed regulations were unclear and could not be meaningfully applied.

Treasury Secretary Steven T. Mnuchin made the announcement as part of the Trump administration’s ongoing effort to reduce the burden of tax regulations. Its comprehensive review has already identified over 200 regulations that Treasury believes should be repealed, which will begin in the fourth quarter of 2017, according to a statement from the Treasury.

“This is only the beginning of our efforts to reduce the burden of tax regulations,” Mnuchin said. “Our tax code has been broken for too long, and this retrospective review, along with our efforts on tax reform, will ensure that we have a tax system that fosters economic growth.”

If you have questions about transitioning your closely held business to the next generation, please contact Jason Thompson at (317) 608-6694 or email [email protected].

What Is Your Continuous Improvement Plan?

Many occupations start out with initial requirements for training or certification. For instance, a Certified Public Accountant (CPAs) needs a master’s degree in accounting, then must study for, take and pass an exam to get a CPA license. An electrician begins as an apprentice, then progresses to a journeyman before becoming a master electrician. For many, education and training are something you do at the start of your career, rather than a life-long endeavor toward self-improvement regardless of where you are in your career.

Whether you own the business, are managing it or a new staffer, consider developing your own Continuous Improvement Plan (CIP). Your CIP can be as simple as a list of goals, prioritized with a plan of action and timetable. If you’re in a position of influence in your organization, encourage other team members to each write their own CIP.

Start with what makes sense for your chosen occupation. For example, in addition to being CPA, I have obtained an Accreditation in Business Valuation (ABV), and am also an Accredited Senior Appraiser (ASA), a Certified Fraud Examiner (CFE) and Certified in Financial Forensics (CFF).

From there, think about the knowledge and talents necessary to help you become a more valuable member of your company’s team. This knowledge and experience will not only help you rise within the ranks of your organization, it can also focus your interests and assist you in planning your career goals for the next five, 10 or 20 years.

Some companies have a formal process for CIPs, including assigning each employee a coach to help them develop their skills and expand their base of knowledge. The goal of this process should be to have each employee develop into a well-rounded person as they move up the chain of responsibility. Too often, newly promoted employees are found to be lacking skills their new position requires.

For example, many if not all Millennials joining the job market today are more technologically savvy than any generation before them. They’re digital natives who grew up with the Internet and mobile devices. Many however, tend to be weaker on the “soft” skills necessary to advance into senior leadership roles: writing, speaking and communicating objectives.

Companies with a formal CIP process may need to allocate time and money for their employees’ improvement plans, and even provide a curriculum.

Some mutual benefits of a corporate CIP process are; team members realize they are valued by their organization, climb to higher positions with increased responsibilities, and realize their personal goals. The employer gains a stronger and more valuable workforce with more diversified capabilities, which in turn can translate to greater employee morale and loyalty.

As you and your team develop CIPs, don’t forget to talk to customers about the products and services they desire to assist them in their operations. Use their input to tailor the improvement plans, balancing individual preferences with the skills needed to deliver on what your clients want.

Your company may already be great at what it does. To continue or even prolong its greatness consider encouraging employees to hunger for improvement of themselves and their capabilities. This can lead to growth and evolution from new opportunities.

If you have questions or comments, contact Jason Thompson at (317) 608-6694 or [email protected].

Employee Spotlight: Jason Thompson

As one of the founding Partners of Sponsel CPA Group, Jason Thompson has led the firm’s Valuation and Litigation Services department since inception, helping clients find innovative solutions to challenging financial and legal issues. He provides executive-level counsel to business owners and investors across a broad range of industries, specializing in the valuation of privately held businesses, ownership interests and intangible assets.

A graduate of Indiana University with a bachelor’s degree in accounting, Jason places a strong emphasis on continuing education and expanding his areas of expertise. In addition to being a CPA for over two decades, he holds certifications as an Accredited Senior Appraiser (ASA), Certified Fraud Examiner (CFE), Financial Forensics (CFF) and Accredited in Business Valuation (ABV). Jason routinely provides consultation related to business valuation in mergers and acquisitions, in estate and gift tax compliance and planning and for an array of litigation related reasons. In addition to his skills as a valuation professional, he also performs the firm’s fraud and forensic accounting investigations and serves as an expert witness from time to time in accounting and financial related matters.

What makes you different from your best competitor?

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

I have often heard that it’s difficult to see your own weaknesses – especially in an organization of like-minded people. When everyone is committed to a common set of goals, there’s a tendency to overestimate strengths and downplay – or even ignore – weaknesses.

If you want your company to improve in what it’s doing, take a look at the blind spots. One mechanism to do this is to ask yourself what makes your organization different from your closest competitor.

As a business owner, you may constantly compare your business to other organizations in the marketplace, though usually from the perspective of: who’s landing the top clients, who attracts the top talent or who’s got the most revenue, etc.

Drilling down on this comparison a little deeper may shed some light on what makes your company different. As a business owner, it shouldn’t be difficult to identify your biggest rival (closest competitor). Next, make a list of the differences between your company and theirs. Ask questions like:

What do they do better than us?
What do we do better than them?
Why/how are they adding customers?
Why/how do their costs compare to ours?
Do they have a market niche we don’t?

This exercise can be humbling if your competitor is a larger entity with access to a broader range of resources. If this is the case, you are the small fish and they are the big fish, asking these sorts of comparative questions can help you identify opportunities you might not have previously explored. Keep in mind, a smaller enterprise is often more nimble, entrepreneurial and closer to customer relationships than large companies.

As you identify your differences, don’t be afraid to emulate the things your competitor does well. In areas they are weak, consider ways to develop your team’s expertise and offerings and fill that gap or be the “better” option!

Ego can sometimes get in the way of an exercise like this. It’s healthy to take pride in your business’s capabilities and accomplishments. Just don’t let ego get in the way of improvement.

Challenge everyone in your office, especially younger team members. Make sure their 30 -second elevator speech emphasizes how your company stands out in the crowd. Simple things like a consistent message go a long way toward building perception.

Weaknesses within your business may be difficult to see, but if you ask the right kinds of questions and make the difficult comparisons, you’ll soon recognize weaknesses as opportunities to improve. Then maybe one day in the future, your company is the standard others compare themselves to.

It is OK to be a “secret admirer” of your competition. Use that admiration to make your company BETTER!!!

If you have questions or comments, contact Jason Thompson at (317) 608-6694 or [email protected].

IRS Regulations to Limit Gift and Estate Tax Valuation Discounts

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
[email protected]

In August 2016, the Internal Revenue Service (IRS) followed through with its threats to impose new regulations affecting the valuation of closely-held business interests for gift and estate tax purposes. The net effect of these changes is to limit valuation discounts in the case of the transfer of family-owned businesses and assets.

Such discounts reduce the amount of the estate tax exemption applied in a transfer of an ownership interest, such as commonly made to children, grandchildren or other family members.

There has been a flurry of activity in the business valuation and estate and gift tax communities since the issuance of these proposed regulations. Much of it has been focused on understanding the impact of the proposed regulations and organizing the fight to prevent the proposed regulations from becoming final.

The American Society of Appraisers has recently issued talking points for use in expressing opposition to the proposed regulations. These serve to highlight the controversy the proposed regulations have sparked among the business valuation community, estate and gift tax advisors and family business owners.

The following is a listing of the ASA’s talking points:

The Proposed Regulations Unfairly Increase the Values of Fractional Interests in Family Controlled Businesses and Holding Companies for Estate and Gift Tax Purposes.

The result is a “stealth” tax increase of 25 to 50 percent (or more) in taxes. The root cause of the tax increase is the IRS’ institution of the discredited notion of “family attribution.”

IRS Replaces Fair Market Value with a New and Unknown Definition of Value – Counter to Its Own Standard.

Revenue Rulings 59-60 has long been clear on the issue of what standard of value is to be applied: The price at which a hypothetical willing buyer and seller at arm’s length would agree to buy/sell an interest for. Based upon the realities of the marketplace, the fair market value of a minority interest is not worth as much as that interest’s pro-rata share of the whole entity. This is because such interests do not enjoy control or marketability. These required valuation adjustments are referred to as “discounts.” The IRS now proposes the use of a new valuation theory for taxing intra-family estate and gift transfers, with the seller and buyer allowed to be known parties. Because of the lack of clarity in the proposed regulations, valuation discounts will either be reduced substantially or disregarded altogether. This renders useless all accumulated prior knowledge built up by decades of Tax Court precedent, appraisal education and experience and academic research.

The IRS’s Return of “Family Attribution” Has Been Rejected by the Supreme Court and the IRS Itself.

In Estate of Bright v. United States, the Supreme Court dismissed the IRS’s position that families will always work in concert and always agree on business and financial matters. A subsequent Revenue Ruling, 93-12, makes clear that discounts for lack of control cannot be denied simply because the interests are passed from one family member to another.

The Rule Treats Intra-Family Transfers Differently Than Those Involving Non-Family Third Parties.

The proposed rule applies only to transfers from one family member to another; meanwhile, non-family third parties can still claim the same discounts on similar estate or gift transfers. The IRS does not provide any reasoning as to why this disparate treatment exists.

The Proposal Would Override Limitations Placed on Interests in the Business – Including Those Imposed by State Law.

The IRS proposes – by regulatory fiat – to overturn both existing private party contractual agreements and various state laws by ignoring the marketability restrictions placed on interests when valuing them for taxation purposes.

The Impacts to Family-Owned Businesses Will Be Significant.

At a minimum, these businesses will delay capital investments or hiring as the available cash will go toward paying an increased tax bill. Worse, these businesses may take on more debt simply to pay the IRS. Finally, business owners may decide to sell or liquidate the business rather than continue on as a family-owned going concern. The last outcome is highly destructive, especially for small businesses.

Support the Protect Family Farms and Business Act!

The House bill proposed by Rep. Warren Davidson (R-Ohio) is H.R. 6100. The Senate bill proposed by Sen. Marco Rubio (R-Florida) is S-3436.

These talking points illustrate what is at stake for the family business should these proposed regulations become final.

If you have any questions about how the new regulations on estate and gift tax valuations could affect your business succession plans, please call Jason Thompson at (317) 608-6694 or email [email protected].

Are You a Thought Leader in Your Organization?

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

Do you know what it means to be a “thought leader” within your business or organization? It’s not just someone who acts smart and offers lots of pushy ideas!

A thought leader is a person who shares their knowledge with other members of the team in order to enhance the capabilities of the entire organization. It’s someone who sees learning as an ongoing endeavor rather than something you do when you’re young to land your first job.

When someone behaves in this manner on a consistent basis over a long time, eventually others will seek them out for their knowledge and advice. So if you’re a manger or executive in your organization – or seek to become one – you should strive to be in a position where people recognize you as a thought leader.

Everyone who’s been around awhile gains knowledge, even if it’s just a basic sense of do’s and don’ts. But a thought leader seeks out information. They read about current events and devour industry-related publications and websites – such as Financial News, Wall Street Journal, Fortune magazine, etc. They read business related literature on a regular basis as they can provide informed discussions on new trends in business and government policies.

Thought leaders grasp that learning is not just about going to training: it’s also the things you do on your own to expand your base of knowledge and improve your power of positive thinking. Doing this also allows you to be a better performer in whatever path you choose in life.

For example, as a CPA I am often asked about the current state of the financial markets or who would be the best political candidate for local, state or federal office, and why. Instead of just giving a reflexive opinion, this is an opportunity to educate the questioner using the perspective you’ve gained over the years related to critical economic success factors – local, state, and national.

Thought leaders can be both young and old – certainly when it comes to emerging technology and digital communication, the novice can educate the old-timer these days!

But as a general rule of thumb, thought leaders tend to be people who’ve plied their trade for 10, 20 years or more. Experience breeds valuable insights as to what long-term success looks like. Sometimes the wise person will forego short-term success for the benefit of a long term permanent solution. In this age of instant gratification, this may appear to be a novel strategy.

Because they’ve been around the block a few times, their knowledge goes beyond theory to real-life successes and failures. Veterans know what works and what doesn’t. When it comes to becoming a thought leader, there really is no replacement for experience.

Sometimes people gain a great deal of information and experience during their tenure within an organization, but keep it to themselves. Often they think they are guarding their own position, or improving their chances at promotion by keeping a few “aces up their sleeves.”

While it’s possible hoarding knowledge can help an individual’s prospects in the short run, over the long term this type of practice is harmful to the health of the entire organization. Executives would be wise to instead promote a culture that rewards sharing and support between colleagues.

Thought leaders thrive in an environment where nurturing other people is standard practice. Servant leadership is the overriding principle. If you create dialogues with other people and freely offer them the benefit of your counsel and experience, soon people will seek out your knowledge.

You should seek to be an inspirational leader who drives others to thirst for the knowledge of experience and desire to learn more. This will lead to a stronger, more informed organization that operates in a productive manner to achieve success.

Seek out knowledge, and share it, and you will have enhanced your own professional status as well as your company’s future prospects.

If you have questions or comments, contact Jason Thompson at (317) 608-6694 or [email protected].

What Were the Craziest Business Expenses of 2015?

Ever wonder what employees are trying to pass off as legitimate business expenses through the expense reimbursement process? Certify, Inc., a travel and expense software reporting company, has a list of their Top 10 most outlandish things people tried pass off in 2015.

These make for great stories. What’s really amazing is that some of these came not from the financial officer responsible for reviewing the expense report, but were actually sent in by the people who submitted the expense!

I particularly liked the $18,000 night in Las Vegas. That took a lot of guts to put on an expense report. I wonder if that included gambling losses?

Among the others:

$400 for a shotgun given to a customer as a gift
$85 for a separate hotel room for garlic samples, because the sales person couldn’t stand the smell
$1,000 for “adult entertainment”

Head over to the Certify website to read the rest.

All joking aside, occupational fraud is a serious problem, and expense reimbursement fraud is one of the sub-schemes within the asset misappropriation category. According to the Association of Certified Fraud Examiner (ACFE) 2014 Report to the Nations on Occupational Fraud and Abuse, expense reimbursement fraud made up about 14 percent of all asset misappropriation cases, ranking fourth in overall frequency.

Another interesting stat from this survey is that about 50 percent of companies utilize a spreadsheet as the system for the expense reimbursement process. While that stat appears to be in line with what we see across our own client base, there are a number of issues to consider when using this basic system for expense reimbursements.

Generally speaking, a spreadsheet system for expense reimbursements should include/address the following:

Communication of the acceptable guidelines for when employees may utilize their own funds to pay for a business related expense. This should be done frequently – definitely more than once after an employee’s initial hire. Ideally, business-related expenses should be paid with business funds whenever possible.
A template spreadsheet for reporting the common types of expenditures acceptable for reimbursement.
A time limit for submitting an expense for reimbursement.
A requirement that expenses submitted for reimbursement be substantiated with an original receipt or appropriate documentation.
Independent approval of expenses submitted for reimbursement. This tends to be a critical factor in preventing fraud.
Comparison of expenses submitted for reimbursement to a budget or expectation for the expense.
Review of trends and ratios for expense categories that are typically reimbursed.
Surprise audits of employee’s expense reimbursement submissions and communication to the employee group that these audits occur.

Preventing occupational fraud is an ongoing process. In many instances, oversight or the fear of oversight is an important deterrent. Something as simple as another employee, supervisor or even business owner reviewing an expense report for approval can be enough of a deterrent to prevent fraud in the expense reimbursement process at your company.

If you want to learn more about occupational fraud deterrents, we would be happy to discuss how we can assist you. Please call Jason Thompson at (317) 608-6694 or email [email protected].

Get Out of the Weeds: THINK Strategically!

“In the Weeds” is a saying commonly used to describe being immersed or entangled in details. For many business owners, managing the day-to-day details (the weeds) of the business is a constant task. Thus being stuck in the weeds leaves a business owner with little, if any, time and energy to think strategically.

In managing time and energy, it’s important to distinguish between tactical and strategic matters. Tactics cover the day-to-day details necessary to keep a business running smoothly, such as maintaining customer relationships or making sure deadlines are met. Strategy is long-term. It is the planning that incorporates broader goals for continued and future success.

Are you driven by tactics or strategy? Knowing which one drives you is vital if you are going to successfully allot time for strategic thinking.

Some business owners are driven by tactics, so dealing with day-to-day details is rewarding to them. If you like spending time in the weeds, then you will probably need a push from someone outside your company to get you to do strategic thinking.

For other owners, the weeds are the last place they want to be. Unfortunately, many of these owners get pulled into the weeds regularly because they are the owner. Having the right people doing the right things is a must for these individuals if they are going to get out of the weeds and think strategically.

Regardless of which camp you are in, strategy is important. Formulating your strategy can be as simple as having a vision and a direction for the future. Where do you want to go? What benchmarks would you like to achieve? Once you’ve identified these goals, then you’ll need a map for how to achieve them.

The map tends to surface as “action steps” or initiatives that move the company toward the vision. Monitoring of the action steps with the existing daily tactical activities is a good way to assess whether or not the company is moving in the direction you want to go. If there isn’t much movement, then it may be time to revise the action steps.

A key to making a strategic initiative successful is making sure everyone in the business, from the old timers to the latest hire, understands the initiative and steps for getting there. Encourage your workforce by illustrating to them how their role fits within the overall strategic blueprint.

Communication of the plan to your key personnel is especially important. Not only should they be taking time — whether it’s daily, weekly or monthly — to think strategically, they should also be a messenger to the entire workforce about the plan and how employees can help.

Strategic goals can be addictive, meaning once you begin the process of setting goals you want to tackle everything at once. Keep in mind, strategic movement is a continuous process. Thus, two or three goals a year are usually all most businesses and employees can accomplish. Prioritizing and focusing on the most critical initiatives increases the chance of effectively addressing them — and thereby creating opportunity to move on to other issues.

Making time for strategic planning isn’t easy; if it were, everyone would do it regularly. The weeds are going to get in the way, but keep in mind the benefits of regular strategic planning tend to be exponentially more valuable to the vitality of your enterprise than any short-term hiccup in day-to-day operations.

The age old adage is true: owners that work on their business see more success than those who choose to work in their business.

If you would like to talk about assessing your enterprise from a strategic standpoint, or have questions or comments, contact Jason Thompson at (317) 608-6694 or [email protected].

Hit the Beach, Root Out Fraud

It’s June and summer is in full swing: the weather is hot, kids are out of school and the pool is open. Summertime for many also means vacation, so where are your employees going this year? Did you know the answer to that simple question could be an indicator of whether there is fraud in your business?

Sound crazy? Let’s take a look at the “fraud triangle” to find out how.

The fraud triangle is in essence an explanation of why fraud occurs. The triangle has three elements: Opportunity, Pressure and Rationalization.

Opportunity tends to manifest itself when an employee has access to a business asset and also controls the reporting of that business asset. Pressure is a motivation or incentive to do something, while rationalization is the mental justification for doing it.

When all three elements exist, an employee is more likely to commit fraud.

Opportunity is the element employers have the greatest ability to control. Eliminating opportunities for employees to commit fraud lowers the risk of it actually happening. One way to limit opportunity is through the cross training of employees to do the work of another employee when they are away from the office.

This tends to happen when people take vacation or are out sick. Thus a rotation of duties is helpful in preventing fraud in a business.

Going back to the vacation question, what does the answer tell us about an employee? In most cases the answer is not something to be concerned with, because in general people are good and behave accordingly.

However, an employee who doesn’t take vacations may be someone worth looking into. If you have an employee like this who is also very protective of their work and activities, refusing to share or let other employees help, this should be a red flag they may have something to hide.

At the other end of the spectrum, an employee going on an extravagant vacation given their level of compensation may also be something to watch for. While this may not be an issue in the particular situation, a common characteristic of fraudsters is spending beyond their means.

Do you know where your employees are going on vacation — or not going — this summer? Maybe you should.

If you would like to talk about a potential fraud situation in your business, or have questions or comments, contact Jason Thompson at (317) 608-6694 or [email protected].

How do you use a financial expert?

When should I hire a financial expert? How much will an analysis cost? What will the work product look like?

These are common questions we get asked before being engaged as financial experts. Because of the wide variety of situations that necessitate the use of a financial expert, there is no one-size-fits-all answer for these important questions.

Timing

There are different strategies in play with many of the projects we are asked to assist with. Some may be legal strategies, some are geared at gaining negotiating power, and others simply may be a matter of getting educated about a particular issue.

In any of these situations, early involvement of an expert is often better than waiting until the last minute. The earlier an expert is on board, the more opportunity they will have to provide input based on their knowledge and expertise. In many cases, this specific knowledge and expertise can be very beneficial to the overall process and for arriving at a favorable result.

Costs

Financial experts are professionals; professionals sell their time and expertise. Therefore, their cost is a function of use, so the more you use the expert the higher the cost. Determining the right amount of involvement (use) or the right level of service needed from the expert is therefore critical to identifying a potential cost.

Financial experts understand the client doesn’t have an open checkbook to fund their engagement. So asking for a range of fees, or even a fixed fee agreement, is something experts have learned to expect for common services or projects. Agreeing to a fee up front is beneficial to both parties, and it sets the parameters for the work that will be performed on both sides of the table.

Scope of work

What is the right level of service or work product for my situation? This is a key question to answer in effectively and efficiently utilizing a financial expert. In some situations, the answer may be obvious; in others, it may evolve as the situation progresses. This is again where communication with an expert early on is beneficial.

There are some situations where a limited amount of work may be sufficient to achieve the results needed. Communicating this to the expert early on allows them to know what is needed and adjust accordingly. If that work product doesn’t remedy the situation, then the expert may be able to layer on additional analysis to arrive at a more complete or defendable answer and thus bolster the chance of arriving at a favorable result.

If you need a financial expert, would like to talk about a particular situation or have further questions or comments, please contact Amber Hoover at (317) 613-7844 or [email protected].

Most family-owned businesses lack a succession plan

A new survey by PricewaterhouseCoopers LLP shows that the majority of family-owned businesses in the U.S. lack a succession plan — and that’s not good news for the next generation that will eventually take over the company.

According to an article in CFO.com:

“PwC surveyed 154 owners, leaders and top executives of U.S. family businesses and found that 73% of respondents admitted they do not have a documented and robust succession plan in place for senior roles. Moreover, two-in-five respondents say it would be difficult to hand over complete control to their successors, and 56% would remain involved in management longer than optimum to ensure a smooth transition.

This does not bode well for survey respondents who are “next-generation” family members, as 47% say the delay in handing over the reigns was creating an age gap that was making succession more difficult.”

Alfred Peguero of PwC labeled this “Sticky Baton Syndrome,” in which the older generation of management hands over control of the firm in theory, but remains in charge of what really matters. As a result, transitions take longer and potential successors don’t gain the experience they need to run the company.

Here at Sponsel CPA Group, we advise business owners to start planning 5 to 10 years out for succession — though it’s never really too late to get started. If you would like to learn more, read our ongoing series on succession planning, or contact me at (317) 608-6694 or email [email protected].

Thinking about retirement? Know the value of your business

At Sponsel CPA Group we often encounter business owners who haven’t given enough serious thought to their exit strategy, whether it’s retirement or a new venture. In these cases, they often haven’t done very much to determine the value of their company — even though it’s usually the chief source of liquidity after a sale.

Over at The Exit Planning Review, T. Ray Phillips has an excellent new article up that addresses this subject, “Knowing Business Value is a Very Good Place to Start.”

You can read the entire article by clicking here.

He writes:

“Knowing the value of your business today is critical whether you plan to leave your business tomorrow, or in five years because:

An estimate of value establishes your starting line and distance to the finish. An estimate of value tells you where your unique race to your exit begins. Your job, whether your company is worth $500,000 or $50M, is to fill the gap between today’s value (the starting line) and the value you need when you exit (the finish line). Based on today’s value, your race to the finish may be shorter, longer, or perhaps much longer, than you expect. Once you know how far you and your business need to travel, you can begin to create timelines and implement actions to foster growth in business value.
An estimate of value tests your exit objectives. An estimate of value helps you to determine if your exit objectives are achievable. Let’s assume that you decide that your finish line (financial objective) is to receive $7,000,000 (after taxes) from the transfer of your business interest. You also want to complete your race in three years (timing objective). An estimate of value will tell you if the distance between today’s value and the finish line is too great to reach in three years. If a growth rate is unrealistic for your business, you must either extend your time line or lower your financial expectations.
An estimate of value provides important tax information. First, an estimate of value gives you a basis for analyzing the tax consequences of Exit Path alternatives. Once you choose your path, the value estimate provides a basis for your tax-minimization efforts. Taxes can take a significant chunk out of a business sale price so the value of your company (what a buyer pays for it) must usually exceed the amount of money you need to fund your post-exit life. The size of that excess depends on how you and your advisors design your exit, and exit design in turn begins with knowing starting value and the distance to your finish line.
An estimate of value gives owners a litmus test. When owners know how much value they need to create to meet their objectives, it helps them determine where they need to concentrate their time and effort. Instead of growing value for the heck of it, dedication to a goal may enable owners to exit sooner with the same amount of after-tax cash than owners who do little or no planning. Pursuing exit plan success all begins with a starting value.
An estimate of value provides an objective basis for incentive plans. As you design incentive plans for key employees (such as Stock Purchase, Stock Bonus and Non-Qualified Deferred Compensation Plans) to motivate them to increase the value of your company (so you can successfully exit) you must base these plans on an objective estimate of value. You and your employees need a current value (or starting line) that you all can confidently rely on.”

Please read the entire article for more of Phillips’ analysis and information. And contact me at (317) 608-6694 or email [email protected] if you need to jump-start your own exit planning.

Budgeting: Key to Your Success in 2015

As a new year begins, so do many of us undertake resolutions and goals for 2015, whether it’s to spend more time with our children or drop a few pounds. And just like people, businesses need a plan in order to improve and reach those goals. For a business this plan usually takes the form of a budget.

For some business owners, setting a budget is not always a top priority. Often this is because they have no mechanism for guessing what will happen with their company in the coming year. So creating a scenario that takes a stab at predicting the year’s outcome is not seen as very important.

As financial advisors, we here at Sponsel CPA Group disagree with this mindset.

A budget can take many forms, from something basic that serves as a measure for whether the business is performing as expected to a more exact estimate of performance used in setting key metrics for incentives and performance bonuses. A budget can also encompass both an estimate of financial performance (an income statement) and financial position (a balance sheet).

At its most basic level, a budget is a simple comparison of the upcoming year to the prior year. If everything goes as planned, then the results should be much the same. If you begin with the prior year as the starting point, you can then modify its actual results for things you know will change in the coming year.

For instance, let’s say the business has won over a new client and that account should generate an additional $50,000 in revenues for 2015. The simple modification to the 2014 revenue amount would be an increase of $50,000, assuming everything else is expected to remain status quo.

With the additional revenues, you can then begin to estimate the additional costs that will be incurred to generate these additional revenues. Product costs, salaries and other overhead items can easily be projected from other customer relationships and then used with this new customer revenue to arrive at the expected profitability associated with the new account.

This basic example can be leveraged across different lines of revenue and expenses to generate a new expectation for the coming year’s profit.

An additional benefit of budgeting is the potential to predict cash flow patterns for the coming year. By building a balance sheet with a budgeted income statement, a business owner can visualize how cash may be generated and used over the course of the year. This exercise can be very helpful in planning for capital expenditure needs and debt service obligations that should be part of the budget but do not manifest themselves in an income statement.

If you are interested in the budgeting process or want to learn how a budget can help your business, we would be happy to discuss how we can assist you. Please call Jason Thompson at (317) 608-6694 or email [email protected].

How to Value a Business: The Asset Approach

(Part 4 of 4)

In part three of our series on the valuation process, we discussed the market approach, one of three approaches available to a valuation analyst as they determine the value of a company or partial interest in the company. Our final communication in this series addresses the third valuation approach, the asset approach, and the specific methodologies within it.

The asset approach is defined by the International Glossary of Business Valuation Terms (“Glossary”) as a general way of determining a value indication of a business, business ownership interest or security using one or more methods based on the value of assets minus liabilities. Under this approach, the valuation analyst adjusts the value of the assets and liabilities (both reported and not reported) of the business from their stated values to the chosen standard of value for the engagement, i.e. fair market value.

In applying an asset approach, the valuation analyst must make an assumption about the operational premise of value for the business. The operational premise of value is an assumption regarding the most likely set of transactional circumstances that are applicable to the business being valued. Two of the general premises utilized are going concern, meaning the business is expected to operate indefinitely into the future, and liquidation, meaning the business should be shut down and the assets disposed of in either an orderly or forced manner.

This approach is typically used in connection with a business that has a heavy concentration of assets, e.g. real estate or investment holding companies. In addition, this approach is often utilized in situations where the earnings of a business are insufficient and do not provide a reasonable return on assets.

One of the more popular methods within this approach is the adjusted net asset method. This method is defined by the Glossary as a method whereby all assets and liabilities — including off-balance sheet, intangible and contingent — are adjusted to their fair market values. Under this method, all assets and liabilities of the subject company are identified and adjusted from their stated values to their fair market values. The adjustments considered are dependent on the “premise of value” chosen for the valuation.

One challenge that often accompanies the application of an asset approach is the identification of off-balance sheet assets and liabilities/contingencies. Under Generally Accepted Accounting Principles and the various U.S. Treasury regulations that guide income tax reporting, there are varying definitions for what is and what is not reported on a balance sheet.

For instance, neither set of these “accounting rules” requires a business to record their own internally generated goodwill, an intangible asset of the business. Thus a subject company’s balance sheet will not include any amount for internally generated goodwill, only goodwill purchased from a third party. In order to appropriately apply an asset approach, this goodwill would need to be valued and included with the other reported assets. This same issue exists for unreported liabilities or contingencies, e.g. a long-term operating lease obligation.

Use of the asset approach often requires the assistance of other appraisers. Real estate, machinery and equipment appraisers can be very helpful in determining the specific fair market value of assets held by the subject business. In addition, it often requires the use of other valuation methodologies and therefore can be a more cumbersome valuation approach if you are already applying an income and/or market approach.

For more questions about how to determine the value of your business, call Jason Thompson at (317) 608-6694 or email [email protected].

Succession Planning: Avoiding the Post-Exit Blues

(Part 4 of 6)

In our previous segments of this series, we have discussed the sequence of events leading up to the exciting big event that the business owner has worked toward: when you “cash out” and head towards your “second career” in retirement.

We find that many owners who go through this process do not always prepare themselves for the post-exit transition period. This can be a very challenging existence for a number of reasons.

Many sale agreements require that you remain with the company for a transitional period — usually 6 months to two years. During this time you may find that no longer being “in charge” is not only foreign to you, but a situation that you find incredibly frustrating. You may find that the new owner is making changes to your “beloved operations” that are very different from your philosophy and inconsistent with the way you ran the business for 20, 30, or 40 years!

You may also find that your former employees are not being treated in the manner that was at the core values of the company when you owned it. You may also find that after the initial transition period, you are still being paid and have an employee agreement, but there is very little for you to do but answer questions. You may even come to question in your own mind what your value is to this endeavor.

Our experience is that in about 40%-50% of these cases, the former owner terminates the transitional employment agreement before its term is complete. The former owner will be challenged by his or her own relevancy to the company they used to preside over, as the “troops” are now seeking direction from the management team installed by the new owner.

So as an owner contemplating a sale of your company, how do you avoid these pitfalls? To a certain degree, you can’t, as they come about as a result of a natural human reaction to life’s events. But you can help yourself as follows:

Psychologically prepare yourself for this change. Many owners have sought counseling, or at least conferred with other business owners who have experienced a similar transition.

Talk very candidly with the buyer and clearly define your terms, conditions and responsibilities during the transition period.

We would recommend agreeing to a short transition period as practical, with options to extend upon mutual agreement, rather than a longer period.

In the sale or exit event, if there are people or conditions you want to see maintained, negotiate for those in the sale agreement. Because after this transaction, you are no longer the owner, president or CEO – you gave up that authority upon the sale, and hopefully have a much larger bank account to show for it!

The key to a personally successful exit from your company and avoiding any second-guessing after the transaction includes:

Honest self-reflection on your personal motivation for exiting, and acceptance that your professional life will change!

Proper planning in all phases and negotiations of the transaction.

If you have any “sacred cows” of any sort, cover these in the legal agreements related to the sale.

Discuss any apprehensions with your spouse or significant other, as you will need their listening ear and support.

Make it a fun event!

We as a firm have done a multitude of exit transitions on a number of different scales and structures. If we can help, please give us a call Jason Thompson at (317) 608-6694 or email [email protected].

Succession Planning: The Exit Transaction

(Part 3 of 6)

In last month’s article on succession planning, we talked about selecting the right leadership team for a business ownership transition. Now it’s time to discuss the actual sale transaction: determining the liquidity the owner can expect to receive and what form it might take.

The first thing to determine is what type of sale it will be: a total outright transaction for the entire enterprise or a portion of the equity. Typically an outright sale occurs when the owner(s) is looking to retire or start an entirely new venture. If they want to stay involved, but move out of the hot seat of leadership, they might choose to sell only a part of their equity.

The next question is to whom the business will be sold. While sale to an outside party is common, other possibilities include a buyout by the current management, merger with another company, acquisition by an Employee Stock Ownership Plan (ESOP) or a similar vehicle in which the employees become the owners.

In my experience with many business exits, I find that the objectives of the selling shareholder — i.e., what they would like to see happen to the business after their departure — will define what type of transaction the “sale” evolves into. Many business owners who worked hard to build their enterprises feel a responsibility to the company’s legacy and to their employees, and that weighs heavily into their exiting objectives.

Part of any successful exit plan it to gather a team of advisors who will help the seller facilitate the transaction in a way that meshes with their objectives. This team can include legal counsel, accountants, a business broker who finds a buyer, insurance professionals and others necessary to properly effect the transition in an efficient manner and manage the risk involved.

Part of the advisors’ job is to manage the expectations of the seller, to help develop terms and conditions for the transaction and then be flexible in negotiating a transaction favorable to the seller. The most important things are getting a fair price for the value of the company and formulating a plan for the sale proceeds that meets the seller’s requirements.

As a rule, 100 percent cash sales are very rare. So that means the seller is probably going to carry some paper on the transaction. It’s important to establish terms of payment, time frame — it’s better to keep it short — and the interest rate. The seller also needs to consult with a tax advisor to understand the tax consequences of a sale to one’s personal financial situation.

Also, a seller should be aware that it is common for a buyer to insist upon a non-compete clause, so the seller can’t operate in the same market and/or industry for a specified term. After all, from the buyer’s position it makes little sense to pay a fair price for a company if the seller takes their expertise and business relationships to set up a new competing shop across the street!

Gathering the correct documents and executing them can be a time-consuming process that can even put the transaction at risk. Once the Letter Of Intent is signed, the seller should establish a tight timeline for consummation of the sale so distractions and delays don’t endanger the deal.

Finally, in my experience the most successful transactions are those in which the seller and buyer personally like each other. When they can communicate well and have a shared base of trust and mutual respect, differences and misunderstandings can often be worked out without sinking the sale. In one case that I was a party to, the lawyers reached a stalemate over terms, and the CEOs of the buying and selling companies resolved the matter with a simple phone call.

In next month’s succession article, we’ll talk about avoiding the Post-Sale Blues.

If we can assist you with any succession planning and business exit planning issues, please call Jason Thompson at (317) 608-6694 or email [email protected].

Succession Planning: Selecting the Right Leadership

(Part 2 of 6)

In our last article on succession planning, we gave an overview of how to begin the discussion of an exit strategy for the business owner or owners. Now it’s time to look at selecting the right leadership team to ensure a smooth transition, as well as maximize the value of the company in preparation of a sale – whether to a third party or a family member.

One of the keys to making a business more valuable is to have the right human assets, talent and skillset already in the company at the management level. Depending on the role of the business, one of the best ways to provide for the perpetuation of the company’s success is to ensure you have outstanding management in place in all vital areas of the operation.

Think about it from a seller’s perspective. If you knew most of the key managers who helped build and run the business would leave after the transaction, or if the current leadership seems inept without daily guidance from the current owner, it will seem like much more of a challenge to take on. As a result, they won’t want to pay as much.

On the other hand, the more the managers already in place can operate in an autonomous way without requiring direction from the current owner/leader, the more valuable the company can be.

The first priority should be in the “C-suites,” the highest-level executives: the CEO, COO, CFO, CIO and so on. It’s obviously critical to have the “right people on the bus” — those who have the proper expertise for their role and share a common vision for the company’s goals.

But don’t ignore the lower levels of management. It’s smart to take a really hard look at the organization chart in a strategic manner, and think about who might be ready to retire or move on – and who their replacement might be.

In contemplating a succession, you should perform an exercise where you evaluate every key position you have, whether the current person is performing up to task, and if you have somebody identified who would be the logical choice to step in and take over.

At Sponsel CPA Group, we advise most owner/managers to start thinking about succession five to 10 years out – though it’s never too late to start planning. During this phase it’s important to recruit, train and promote from within the business so your bullpen is always strong.

This can be a challenge for some strong-willed CEOs, who think everything revolves around them and the business would come crashing down without their daily oversight. This may be true, and even gratifying to some extent, but it diminishes the potential value of the company if the people around you aren’t trained to operate in your absence.

We recommend that business owners meet from time to time with managers in vital positions to assess their place within the organization. Talk frankly about what’s expected of them today, and also how you envision their role changing in the next three to five years. If you spot a hole in the skillset they’ll need to advance to the position you both desire, develop a plan to fill it.

It can even be helpful to have a written plan of how to groom someone for their move up the company ladder. For example, in year one they will take on certain new responsibilities; in year two they will gain oversight of this particular department, and so on.

If you feel like your current team of managers isn’t up to snuff, start making moves now so in a few years they’ll be fully trained and ready to go when you’re heading out the door. This will not only help the company you created or grew, but enhance your own financial position when the business gains in value.

If you have any questions about the succession planning process, please call Jason Thompson at (317) 608-6694 or email [email protected].

Building Business Value In The Exit Planning Context

Recently the Exit Planning Review distributed an excellent article from T. Ray Phillips titled, “Building Business Value In The Exit Planning Context.”

In it, he talks about building value in a business in anticipation of the owner exiting the company with the right amount of cash they desire for retirement or their next venture.

He says:

We look at building value a little differently because in exit planning, we take a longer view and help business owners prepare to exit their companies when they choose, and for the amount of cash they desire.

So building value is not exit planning, but building value is a necessary and principal part of every owner’s Exit Plan. In turn, Exit Planning provides the context for building value. In other words, building value serves many masters—one (and I’d argue the primary one) is to enable owners to reach their ultimate goal of converting their lives’ work into the post-business lives they desire.

When we talk about building value in the context of Exit Planning we ask:

What is the company’s current value?
What value must the company achieve to enable its owner to reach his/her lifetime income and other exit objectives?
What tactics will you employ to close any gap between today’s business value and the value you need upon exit?
How can you transfer business value most efficiently (tax and otherwise)?

He goes on to offer some case studies of different clients’ situation, and how they used exit planning to enhance their position.

To read the entire article, click here.

How to Value a Business: The Market Approach

(Part 3 of 4)

In our last article on the valuation process, we discussed the income approach, one of three valuation methods available to a valuation analyst as they determine the value of a company (or partial ownership of the company). This article talks about another approach, the market approach, and the specific methodologies within it.

The International Glossary of Business Valuation Terms defines the market approach as a general way of determining the value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject of the valuation to similar businesses, business ownership interests, securities or intangible assets that have been sold.

In general, this approach is based on the theory of substitution, meaning that a known value can serve as a benchmark indicator of the value for a particular subject. In order to apply the market approach, the valuation analyst must identify and establish a relationship between the known values of another business (or business ownership interest) and the valuation subject.

Within the market approach, two of the more popular methodologies are the Guideline Public Company method and the Guideline Private Company Transaction method. As indicated by the names, the source of the known values used as guidelines is either public company values or private company values.

There are numerous sources for information on public companies, leading one to think this methodology would be most commonly utilized. While there is an abundance of data available for use in this method, the key to utilizing the method is establishing a “substitute” or “comparable” for the particular subject business or ownership interest.

When it comes to publicly traded companies, many are gigantic in revenue size and have diversified revenue streams, global operations, skilled and highly knowledgeable management, ready access to capital markets, complex capital structures and a wealth of other characteristics that simply don’t exist for a privately held business, or exist only in a limited fashion. These differences, if not properly adjusted for, can make use of this method quite challenging.

The private company transaction method is a second source for guideline information. In most instances private companies do not publicly disseminate the details of a sale. However, in some cases these transactions involve brokers or other professionals who may retain that information. With proper permission, they can submit it to various databases that collect and analyze transactions.

Valuation analysts subscribe to databases such as Prats’ Stats, BizComps, DoneDeals and the Institute of Business Appraisers (IBA) Market Database to gather information for use with the guideline private company transaction method.

Like the public company method, analysis of the information related to the transaction is key to identifying whether a particular transaction or a group of several transactions are a good substitute/comparable for use in valuing the subject business or ownership stake.

A third methodology often utilized within the market approach is the Prior Transaction method. This methodology uses prior transactions of the subject company as an indicator of current value. In applying this method, it is important to assess the circumstances surrounding the prior transaction in order to verify it is an arm’s length transaction and is representative of current market expectations.

In the final article of our series, we’ll analyze the asset approach to valuation.

For more questions about how to determine the value of your business, please contact Amber Hoover at (317) 613-7844 or [email protected].

How to Value a Business: Determining the Value (Part 2 of 4)

In our last discussion we provided a broad overview of the valuation process. One of the crucial steps in this process is “determining the value” of a company (or a partial interest in the company). In order to determine a value, valuation analysts have three valuation approaches and several valuation methodologies available to them. This article addresses one of those valuation approaches: the income approach, plus the specific methodologies within that approach.

This is one of the more commonly used approaches in valuation. The International Glossary of Business Valuation Terms defines the income approach as a general way of determining a value indication of a business, business ownership interest, security or intangible asset using one or more methods that convert anticipated economic benefits into a single amount.

There are two primary methodologies within the income approach: the capitalization of earnings method (COE) and the discounted cash flow method (DCF). In general, the COE method utilizes historical information to determine a value, while the DCF method employs forecasted or projected future cash flow expectations to determine a value.

The COE method is defined by the Glossary as a method within the income approach whereby economic benefits for a representative single period are converted to a value through division by a capitalization rate. Thus the COE method requires the development of a single period economic benefit and a capitalization rate. This method is often utilized in situations where earnings are stable and are expected to grow at a steady rate into the future.

In the DCF method, the present value of future expected net cash flows is calculated using a discount rate. Thus a DCF requires the development of projected expected net cash flows and a discount rate. This method is somewhat the opposite of the COE method in that it utilizes several periods of fluctuating earnings before a stabilized period, instead of just a single earnings period.

Both of these income approach methods require the determination of an earnings measure, either for a single period or for several future periods. The earnings measure selected by the valuation analyst can be any number of earnings measures. In many cases cash flow is considered the preferred earnings measure for the application of an income approach methodology. This is because cash flow is the best representation of the return an equity holder or invested capital holder (debt or equity) can expect from their investment in the business.

Equity cash flows differ slightly from invested capital cash flows. The difference is the treatment of cash flows to fund debt service. Equity cash flows are calculated after debt service payments (principal and interest) and/or inflows (borrowings). This is because, in most cases, debt holders have a preferred claim to cash flow over equity holders.

In addition to identifying an earnings stream for either a single period or for several periods into the future, both of the income approaches require identification of the risk associated with obtaining the earnings stream. This measure of risk is referred to as either a capitalization rate or a discount rate. These rates convert the earnings into values. Capitalization rates are used in conjunction with a single period earnings measure to determine value, while discount rates are used to present value future expected net cash flows back to a single present value.

While the income approach is the most common method used in valuing a business, it is not the only method to consider. In our next communication, we will look at the market approach and the various methodologies associated with it.

For more questions about the valuation process or how to determine the value of your business, call Jason Thompson at (317) 608-6694 or email [email protected].

Fraud 301: Why do perpetrators commit occupational fraud?

(Final in a 3-part series)

In the first part of our series, we dealt with popular occupational fraud schemes. In Fraud 201 we discussed who commits occupational fraud. This article delves into why employees may commit fraud and offers some suggestions on what you can do to keep it from happening.

Dr. Donald R. Cressey, a criminologist whose research focused on embezzlers, developed the following hypothesis:

“Trusted persons become trust violators when they conceive of themselves as having a financial problem which is non-sharable, are aware this problem can be secretly resolved by violation of the position of financial trust, and are able to apply their own conduct in that situation, verbalizations which enable them to adjust their conceptions of themselves as trusted persons with their conceptions of themselves as users of the entrusted funds or property.”

This hypothesis is the foundation for Cressey’s “Fraud Triangle,” a model for explaining the factors that cause someone to commit occupational fraud. The factors are Pressure, Opportunity and Rationalization. The existence of these three factors together can lead to fraudulent behavior.

Pressure is an incentive or reason for doing something. Pressure can be internal or external to the company. Internal pressures include perceived lack of appreciation, the perception of being under-compensated, being mistreated by a supervisor/boss/owner, etc. External pressures include addictions, unexpected financial difficulty, health concerns, family financial pressures, etc. In the context of occupational fraud, the pressure ultimately causes a financial problem for the employee. Thus they are forced to look for ways to solve their personal financial issue.

Identifying pressures is often a difficult task and one that may not provide a benefit in excess of the cost when trying to deter fraud. Keep in mind, however, that many convicted perpetrators were living beyond their means. So having knowledge about your employees’ activities outside of you business can prove to be a valuable fraud prevention technique.

Opportunity is any chance for advancement. Opportunities exist for employees when they have both access to an asset and access to the company records regarding that asset. For instance, when an employee has both the ability to authorize and record a cash disbursement.

Opportunities can be minimized with well-designed internal controls. Therefore, a review of your company’s processes, combined with periodic oversight and inquiry, will help in identifying opportunities and ways to eliminate them. Segregation of duties and authorization, along with avoiding conflicts of interest, are also strong preventive tools.

Rationalization is often considered the trigger for fraud to occur. Rationalization is the justification of the fraud as the solution to the pressure. In general, most people are good and want to do good things. Therefore rationalization is necessary in order for the good person to allow the pressure to coerce them into doing a bad thing.

The existence of all three fraud triangle factors in a particular instance causes the chances of fraud to skyrocket. Don’t get caught holding the triangle — know your critical employees, design and implement effective internal controls and watch for changes in employees attitudes, habits and activities.

If you are concerned about occupational fraud in your organization, call Jason Thompson at (317) 608-6694 or email [email protected] we would be happy to discuss how we could be of assistance and ideas for prevention that you can take advantage of.

Fraud 201: Who Commits Occupational Fraud?

(Second in a 3-part series)

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services

Our Fraud 101 article last month dealt with common occupational fraud schemes that occur in privately held businesses. This knowledge can be helpful in designing internal controls to reduce the opportunity for fraud in your business. It’s also helpful to understand exactly who commits occupational fraud.

The Association of Certified Fraud Examiners (ACFE) 2012 Report to the Nations is their most recent study published on occupational fraud and abuse. This report includes demographic information about fraud perpetrators. Based on this data, occupational fraud is most often committed by perpetrators with the following characteristics:

Gender – Males account for approximately two-thirds of occupational fraud cases.

Age – According to the study, approximately 54 percent of the perpetrators were between the ages of 31 and 45.

Education – Approximately 54 percent of perpetrators have a college degree or above.

Position (level of authority) within the Company – Occupational fraud is committed most frequently by the rank and file employees of a company. While this level of authority constitutes the most frequent level of perpetrator, fraud at the owner/executive level of authority is approximately six times more costly than those of other employees.

Tenure with the Company – The longer an employee works for a company, the more trust they can build with supervisors and co-workers. They also have more experience and a better understanding of the company and its transactions. These factors contribute to employees with tenure of between one and five years being the most frequent perpetrators of occupational fraud.

Department at the Company – Employees in the accounting department generated the highest number of occupational fraud cases, according to the study. It was followed closely in second and third place by operations and sales, respectively.

Prior Criminal Background/Employment History – Approximately 87 percent of cases in which information about prior criminal background was available indicated the perpetrator had not been previously convicted of a fraud-related offense. Of the cases with employment history available, 84 percent showed the perpetrator had no prior termination or punishment for occupational fraud.

Keep in mind that just because an employee falls into one or more of these demographic patterns doesn’t mean they will commit occupational fraud; these are merely the common traits found among occupational fraud perpetrators.

Next month’s article will delve into “Why” a person may commit occupational fraud.

If you are concerned about occupational fraud in your organization, please call Jason Thompson at (317) 608-6694 or email [email protected] to discuss how we could be of assistance in finding or preventing fraud.

Fraud 101: What Does Occupational Fraud Look Like?

(First in a 3-part series)

By Jason S. Thompson, CPA/ABV, ASA, CFE, CFF
Partner, Director of Valuation and Litigation Services
[email protected]

Most people may think they know what “fraud” means, but for a business owner/manager it is especially important to understand how to find and prevent fraud in their operations. In a three-part series beginning this month, we’ll look at types of occupational fraud, learn who commits it and why.

The following is a basic discussion of fraud schemes that often occur in privately held businesses. Having a rudimentary knowledge of these schemes can help you design internal controls that reduce the opportunity for fraud in your business or organization.

Asset misappropriation is a common type of occupational fraud. It is simply a fancy word for theft. Asset misappropriation can happen either internally (committed inside the business by employees) or externally (committed outside the business by non-employees, i.e. customers, vendors, etc.).

Asset misappropriation comes in many different forms and can involve any number of business assets (cash, accounts receivable, inventory, etc.). Cash schemes tend to be the more popular types of asset misappropriation. These schemes include skimming, larceny and fraudulent disbursements.

Skimming in its simplest form is theft of cash before it is reported by the company. Not reporting or under-reporting a sale in the company’s records and keeping the payment is a typical skimming technique. Outright theft of a company’s incoming payment or swapping a payment made by check with company cash are two other methods.

Larceny is also theft. The primary difference between skimming and larceny is that while skimming happens “off the books” (before cash is reported by the company) larceny happens when funds “on the books” are stolen.

Fraudulent disbursement schemes include check tampering, register disbursement, billing, expense reimbursement and payroll schemes. These approaches tend to be the most common type of asset misappropriation.

These schemes are also “on the books” and involve an employee misdirecting company cash for their benefit – for example, an employee’s use of a company-issued credit card for personal transactions. Without appropriate internal controls, expense reimbursement schemes can be difficult to detect.

Most people believe that occupational fraud involves a complex conspiracy with lots of moving parts and many levels of deception. Our experience, however, indicates that this conception rarely aligns with real-world occurrences. In fact, in most cases, if basic safeguards had been in place and utilized, the occupational fraud that occurred could have easily been prevented.

In next month’s installment, we’ll look at what types of employees are most likely to engage in occupational fraud.

Making Your Family Business Your Legacy

By Jason Thompson, Partner and Director of Valuation and Litigation Services

The thought of relinquishing control to the next generation of the family may seem reasonable when you’re looking far down the road. But when the day actually arrives, control is often the last “asset” owners are willing to part with.

The statistics can be alarming: most family businesses do not survive through the third generation of owners.

The initial generation of owners are often the most “transition” challenged, as they have no experience “passing the baton.” Subsequent generations tend to better understand the challenge of ownership transition because they have personally lived through that experience. They know what a successful transition looks like, and what pitfalls to avoid.

The challenge of successful family business ownership compounds when there are multiple generations and multiple lines of family descendants.

In some cases, companies are transferred via “gifting” of shares of ownership from one generation to another. Right now is an excellent time to take advantage of the historically high limit of the Lifetime Gift Tax Exemption, currently at $5,120,000. Given the political turmoil in Washington, the future of this exemption amount is highly uncertain.

In addition to gifting, there are other strategies that can be utilized to transfer wealth while retaining control of the business. These options can be beneficial because value is transferred out of the owner’s estate, but he/she maintains control of the asset transferred – in this case, the family business.

If you are family-owned company and desire to perpetuate the enterprise, Sponsel CPA Group recommends the following steps:

Communicate your exact desires directly with the future generation of owners, often and openly.
Seek their feedback and reaction to your family succession plan for the business.
Start the process early – at least 10 years before the elder generation wants to retire.
Be open-minded about the direction the company may take after transition. The next generation could have more energy and inclination for implementing major changes to the business model.
Provide the future business operators the benefit of your experience, but allow them to make their own mistakes – so long as they’re not fatal!
Use professional advisors to assist in counseling sessions designed to discuss difficult issues and the financial aspects of the business, both in good times and economically challenging ones.
Develop a plan to address family members who are not involved in the business.
Actively engage in the process – before, during and after transition.

Often we encounter older business owners who do not have a succession plan in place because of a misguided desire to avoid family conflict. In fact, the opposite is true: dealing with the issue of transition while you are still among the living is more beneficial to familial harmony than leaving yours heirs to speculate what you wanted after you are gone.

Unfortunately, we have seen many families permanently and tragically divided over the settlement of estate and business ownership issues.

What can the Market tell us about Valuation?

By Jason Thompson, Partner and Director of Valuation and Litigation Services

When it’s time to put a price tag on your company, there are three valuation approaches that are generally accepted for determining the value of a privately held business. For this discussion, let’s focus on the Market approach.

Simply put, the market approach is based on the theory of substitution. That means comparing the value of an asset, business or ownership interest in a company to the value of a similar asset, business or ownership interest. When using this method, the veteran valuation analysts at Sponsel CPA Group identifies “Guidelines” from which metrics can be developed for valuing of the ownership – whether it’s the entire company or just a slice of the pie.

Sponsel CPA Group subscribes to myriad resources containing transactional information, from which we can identify these guidelines. These resources, which have begun publishing summaries of the data they collect on transactions, can be extremely helpful in understanding general market indications. But they must be considered cautiously when trying to apply them to the valuation of a specific business.

According to Pratt’s Stats Private Deal Update, a quarterly publication analyzing private company acquisitions by private buyers, the number of reported transactions decreased by almost 200 from 2010 to 2011. The median reported Market Value of Invested Capital (MVIC) to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) multiple for transactions across all industries reported for 2011 was approximately 2.5 – virtually the same as the 2010 median multiple.

Another source, the PitchBook & Grant Thornton Private Equity Exits Report, 2012 Annual Edition, reports that exits by private equity firms in 2011 were down slightly compared to 2010 (420 total versus 434). This source, however, indicates a much larger median exit EBITDA multiple: 8.6 times for 2011, up from 8 times in 2010.

As you can see, while the trend data for number of transactions is similar in each of the publications, there is a wide disparity in the valuation multiples reported. This difference is probably due to the size and sophistication of the companies analyzed in each publication.

Pratt’s Stats is for smaller privately held businesses, while the private equity investments in PitchBook Grant Thornton are for larger companies with potentially complex capital structures. In other words, each publication is only representative of the population of data represented.

This is an important concept to grasp when relying on the market to derive a value for a privately held business. Generalized information, while easy to obtain and understand, may not be representative of the subject asset, business or ownership interest in the business being valued.

Issues such as size, growth, customers, competition, liquidity, profitability, management, location, etc., all factor in significantly when arriving at a valuation under the market approach.

If you ignore these differences, or assume they are somehow eliminated by using an average of the entire population of data, you could get two distinctly different indications of value – both of which may be incorrect!

That’s why you need a valuation analyst who can utilize these resources for a market-based valuation, while grasping their inherent limitations when applying them to a specific business.

If Sponsel CPA Group can be of assistance in helping you with a valuation or litigation need, please feel free to contact Jason Thompson at (317) 608-6694 or [email protected].

Our Valuation And Litigation Services Are Designed To Provide Credible Answers To Difficult Financial Problems

In my role as a partner and director of valuation and litigation services for Sponsel CPA Group, I provide strategic counsel to business owners, buyers, sellers and other third parties primarily in the manufacturing and distribution, construction, professional service and retail industries. The entire team, including Jason Gritton and Amber Cash, specializes in the valuation of privately held businesses, partial ownership interests in privately held businesses and intangible assets. When requested, I also serve as an expert witness in valuation and an array of other financial matters including, economic damage analysis, lost profit/lost business value analysis, and fraud or forensic accounting investigations.

To learn more about what the valuation and litigation team can do to help you, schedule a consultation today.