Business-consulting | RKL LLP
Posted on: January 9th, 2018

5 Factors in Valuing the Family Business During a Divorce

5 Factors in Valuing the Family Business During a DivorceGiven the intertwined nature of personal and commercial factors at play in a family owned business, it’s natural for the enterprise to wind up in the center of an owner’s divorce dispute. An equity ownership in a private company often represents the largest component of an owner’s personal net worth. Calculating its overall value for the equitable distribution of marital property plays a significant role in the financial aspect of divorce proceedings. Below, we outline several steps to help owners assess the value of the family owned business during a divorce settlement.

Examine and recast five years of financial data

A sustainable level of profits is one of the biggest factors that drives value. Looking back at five years of financial statements and tax returns provides a good sample size of the business’ activities and trends. From there, income statements may require adjustment, eliminating any unusual and nonrecurring income or expense items. Typical expense adjustments might include changes to officer compensation, fringe benefits and related party rents.

Review normalized profitability

Recasting expenses to a normalized level creates a true economic profit level for the company, exposing the entity’s actual financial performance. Making those adjustments can often be an educational experience for the owners, as the normalized results may look quite different from the financial data reported on income tax returns and year-end financial statements. As a result, the owners may find out their businesses make significantly more or less profits than they realized.

Valuation approaches

To determine value, an asset-based approach, income approach or market approach can be used. In the case of a business with an adequate level of normalized profits, it is most appropriate to use an income-based approach. Under this approach, a normalized profit level can be divided by a risk rate to equate a measure of value. While it may seem simple on paper, it is a complex process to measure those two elements in the formula. Because of the scrutiny and debate around the assumptions made and results obtained during the divorce process, it is best to tap the judgment and expertise of a professional business valuation expert.

Impact of valuation discounts

The privately owned business is not readily marketable like a publicly traded stock. This marketability factor may result in a significant investment in time and transaction costs before the owner can receive any cash from the sale of their business. In addition, the value of an ownership interest in a closely held business is seldom equal to a proportionate share of the total value determined from the various valuation approaches. If the owner is not the majority shareholder (ownership of greater than 50 percent), the stock may be treated as a non-controlling interest. Estimating the valuation discounts associated with a lack of marketability or lack of control is a process best left up to a professional valuation expert, particularly since these factors can be frequently disputed as the underlying value of the marital asset is determined.

Other factors in measuring a business’ marital value

If the business was started before the marriage occurred, then its value at the date of the marriage is considered non-marital. And, if any business interest was received through an inheritance or gift, that value at the date of receipt is considered non-marital. In these cases, only the appreciation that occurs during the marriage would be considered marital property.

Often a small business owner represents a significant portion of the enterprise value, maintaining most of the critical relationships or operational skills. Continued success can be dependent on the owner’s unique attributes. Where these skills cannot easily transfer to another owner is referred to as personal goodwill. Under Pennsylvania law, personal goodwill is not considered martial property. The difficulties in measuring the business owner’s personal attributes and quantifying personal goodwill presents an additional challenge to the valuation process.

Determining the value of a family business is a critical step in completing the property settlement phase in a divorce. There are many factors to consider, and, with the high degree of professional judgment required, it is important to address the business value issue early in the process. This allows both parties and their respective advisers time to gain a good understanding of the overall property value of the marital estate.

Given the complexity of the factors outlined above and the high degree of professional judgment required, family business owners should rely on an expert to gain a thorough and comprehensive assessment of the overall property value of the marital estate. RKL’s team of business consultants has deep experience in a variety of valuation circumstances – contact us today to learn how we can serve your valuation needs. 

 

Francis D. Morris, CPA, ABV, CFF, a Manager in RKL’s Business Consulting Services GroupContributed by Francis D. Morris, CPA, ABV, CFF, a Manager in RKL’s Business Consulting Services Group. Frank has experience conducting valuations and financial analysis for a variety of transactions, including divorce proceedings and business sales.

 

 

 

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Posted on: December 18th, 2017

RKL’s Barrett Earns Certified Exit Planning Advisor Credential

Paula K. Barrett, CPA/ABV, CVA, CGMA, Partner in RKL's Business Consulting Services GroupPRESS RELEASE

WYOMISSING, PA (December 18, 2017) – RKL LLP today announced that Paula K. Barrett, CPA/ABV, CVA, CGMA, achieved an advanced level of professional certification in business exit planning and value acceleration. Barrett, a Partner in RKL’s Business Consulting Services Group, recently earned the Certified Exit Planning Advisor (CEPA) credential from the Exit Planning Institute.

Established in 2007, the CEPA program is the most widely endorsed exit planning designation in the world. To earn the CEPA credential, Barrett completed a comprehensive curriculum of individual study, hands-on instruction and a proctored examination, specifically designed for business advisors to privately held companies.

One of the region’s most skilled and highly credentialed business consultants and valuation experts, Barrett has three decades of experience assisting closely held companies and their owners with exit strategy formulation, ownership interest transfers, business valuations and succession plan development.

Barrett holds the Chartered Global Management Accountant designation and an Accreditation in Business Valuation from the American Institute of Certified Public Accountants. She also belongs to the National Association of Certified Valuation Analysts. She resides in Maidencreek Township, Pennsylvania with her husband.

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Posted on: December 13th, 2017

How to Avoid Gift Card Fraud This Holiday Season

How to Avoid Gift Card Fraud This Holiday SeasonAmericans spent $46 billion on gift cards throughout 2016, according to market research firm Packaged Facts. While gift givers and receivers value the convenience and flexibility of gift cards, they have also been targeted by fraudsters over recent years. Gift card fraud is far less pervasive and damaging than credit card fraud, but it can present headaches for both consumers and retailers. It is important for those buying and selling gift cards to understand the risk of fraud and take precautions to protect their investments this holiday season and beyond.

Common types of gift card fraud

Most fraudsters use one of two methods to commit gift card fraud: hacking into accounts associated with gift cards or stealing gift cards or gift card numbers from a retailer.

  • Hacking into accounts associated with gift cards: As online registration for gift card balance tracking and reloading becomes more common among retailers, it has also opened opportunities for hackers to exploit weaknesses in the system. In 2015, Starbucks experienced a hack of its mobile app that allowed fraudsters to drain bank accounts attached to the gift card auto-load feature. Conversely, fraudsters are also using gift cards to drain value in other hacked accounts, like credit card rewards. In these cases, hackers gain access to a consumer’s credit card rewards or points and redeem them for gift cards, which they can then convert into cash via online services or physical kiosks that offer over 50 percent of gift card face value.
  • Theft of gift cards: Another method of gift card fraud is physical theft. Particularly during the holidays, retailers might position stacks of gift cards throughout the store for convenient shopping. Thieves will often steal a stack of these cards in order to write down the identifying information (card number, PIN, security code) or unlock the information using a magnetic strip reader. Once the information is exposed, they will return the cards to the store and then use software that allows them to keep track of card activation and balance in order to drain the card value before the consumer can use it.

Gift card fraud prevention tips for consumers

This holiday season and beyond, consumers can avoid gift card fraud by adopting the following best practices.

  • Only purchase gift cards from trusted, reputable retailers both in person and online. Ideally, try to buy them directly from the store where they’ll be redeemed. Cards purchased from reseller or auction sites may be stolen or counterfeit.
  • Do not disclose personally identifying information when buying a gift card. Unlike a credit card, this information is not required, so requests for bank account number, Social Security number, date of birth or similar personal data are red flags to be avoided.
  • When purchasing a card, examine it for physical signs of tampering. Details like an exposed PIN may indicate that the card has been redeemed. Return any card that looks questionable and ask for another that is unblemished.
  • Have the cashier scan the card at the time of purchase to ensure the card is valid and has the correct balance
  • Take advantage of available online registration and activation services. Having online access to monitor the card allows consumers to detect issues or drained balances sooner.
  • Keep the receipt as proof of purchase until the card balance has been depleted. If the gift card is lost, some retailers may re-issue the card at full value with proof of purchase.

Gift card fraud prevention tips for retailers

Retailers can also reduce the risk of gift card fraud by implementing the following policies and procedures.

  • Improve in-store security by only placing blank gift cards at the register. Consider keeping them behind the counter or behind lock and key.
  • Require a PIN for the use of gift cards, instead of just the number on the front of the card.
  • Maintain gift card PINs in a separate database from gift card numbers.
  • If an online registration portal is available, limit account balance look-ups within a certain time period.

As the popularity of gift cards continues to rise during the holidays, so does the potential for their fraudulent use. Remaining vigilant against signs of tampering and securing physical and online access to cards can help consumers and retailers avoid the financial and reputational damage associated with gift card fraud.

RKL’s team of fraud consultants are available to help businesses assess prevention protocol and implement best practices to ward against a wide range of fraud threats. Contact one of our local offices today to get started.

 

Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services GroupContributed by Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services Group. He provides forensic accounting, litigation support and business valuation services to companies and organizations across a number of industries. Jeremy’s expertise includes reconstruction of financial records, employee theft investigation, damage calculations for litigation purposes, and valuation of stock for gifting, buyouts and marital settlement. 

 

 

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Posted on: November 7th, 2017

Six Questions to Ask for a More Engaged, Effective Board

Six Questions to Ask for a More Engaged, Effective BoardAn effective board of directors is key to an accountable, successful organization. What does an effective, engaged board look like? Beyond the traditional financial, policy, compliance and mission-driven roles, a fully engaged board is also actively and productively invested in the work of the organization. Boosting board engagement is not an exact science and may involve some trial and error, but organizations can take actions to affect how board members feel about the organization and how they interact with each other and with the management team. Below, we outline key questions to consider when evaluating board effectiveness and engagement.

How Empowered is the Governance Committee?

Is your governance committee really just a nominating committee or is it empowered with the ongoing development and engagement of board members? This involves focusing on fundamental issues like execution of the strategic plan, adherence to the organization’s mission, assembly of an experienced, diverse board and securing the necessary education or information to seize opportunities and minimize constraints for the board.

Are You Actively Recruiting Board Members?

With 70 percent of nonprofits reporting difficulty with qualified board member recruitment, the governance committee can make it easier for the right candidates to emerge by creating specific profiles for new board positions and current members. Understanding and identifying the right mixture of skill sets, experiences and mindsets of current and potential members is critical to creating the right board team.

How Strong is Your Board Orientation?

Recruiting a board member is only the first step in what can be a very beneficial relationship. A comprehensive orientation program that introduces new board members to their roles and responsibilities and to the organization’s mission sets the tone of engagement for new board members.

A board mentoring program that assigns new board members to a veteran or past member is an effective way to address questions and pass along important information. A board member who recently rotated off may be an ideal person for this role. This helps a new member gain comfort in the role, while retaining the past member’s engagement.

Are Board Members Engaged in Successful Partnerships?

It is critical for all board members to personally connect and forge a relationship with the organization they serve. To that end, encourage board members to build relationships with one another and with the management team. This starts with the rapport between the organization’s Executive Director and the board chair. Regular and candid communication between these two leaders establishes mutual trust, and sets the stage for a shared governance model.

Are You Committed to Diversity?

In its survey of more than 1,700 nonprofit chief executives and board chairs, BoardSource found that 90 percent of CEOs and board chairs were white, as were 84 percent of all board members. These numbers are largely unchanged from BoardSource’s initial survey in 1994. Studies indicate that board diversity fosters greater engagement by allowing members to share perspectives that come from varied backgrounds and experiences. People tend to interact differently in a diverse group. They tend to probe topics more extensively, engage in fuller conversations and make better decisions.

Do You Assess Board Performance Annually?

An annual board assessment is critical to ensuring and maintaining a high level of engagement. The governance committee should take on the responsibility of leading the annual board self-assessment process. The results will help identify the board’s development opportunities for the following year.

Investing time to cultivate board engagement will pay dividends for any organization. When truly engaged, board members are the organization’s top ambassadors, advocates, strategists and supporters.

Board engagement is an ongoing, fluid process with discrete components and steps. RKL’s team of business consultants and operational improvement experts are available to assist your organization with implementing a board engagement program. Contact Douglas L. Berman, CPA, Not-for-Profit Industry Group Leader, to start the conversation.

 

Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services GroupContributed by Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group. As a Certified Valuation Analyst, Gretchen has extensive experience providing business valuations for privately held companies, general partnerships and family limited partnerships. She also conducts operational reviews for closely held businesses, governments and not-for-profit organizations, which allows her to identify and prioritize opportunities for financial and operational improvements.

 

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Posted on: October 10th, 2017

Three Intangible Assets That Drive Your Company’s Value

Due to its heavy reliance on assumptions, fair value reporting has often been dismissed as an art, not a science. Thanks to expanded regulatory requirements, improved technical training and certifications for practitioners and increasingly sophisticated methodology, today’s fair value reporting is more reliable and sound than ever. What does this all mean for business owners and their management teams? Increased scrutiny and standards will only serve to improve the quality of the information provided by fair value reporting. 

Fair value reporting as long-term investment

Business owners and financial executives who are required to obtain a valuation for financial reporting purposes (fair value) should not dread this additional cost, but instead consider the information provided a useful management tool that provides insight on what drives the value of their companies. Intangible assets are often the primary contributors to a company’s earning power, allowing it to create value through revenue growth, innovation and profitability, so they should also inform business strategy and decision-making.

Customer relationships

Retaining a loyal customer base is critical to a company’s profitability. Long-standing business axioms related to customer satisfaction and retention are now backed up with data. Market research firm Forrester puts the cost of acquiring new customers five times higher than the cost to keep current ones.

Business owners who understand the relationship between customer loyalty and fair value can leverage that information into strategies to reduce attrition, drive repeat business and increase future revenue. Companies that measure and manage customer retention are making an investment that will reduce operating costs, generate referral activity and increase long-term profitability.   

Trademarks

Whether it is a company logo (McDonald’s golden arches) or a slogan (Nike’s “Just do it”), trademarks are important legal and social defenders of a brand identity. As a company’s brand reputation strengthens, so does the value of the trademarks that protect its design and text elements. The goodwill created by trademarked brand identifiers can be an asset in the war for talent. It can also influence buying decisions and increase the loyalty of the customer base. Respected and easily identifiable trademarks can help companies expand more easily into new products or services, and enhance marketability in the event of a sale of the business. 

Workforce in place

Many businesses boast that “our people are our best asset” for marketing and recruiting purposes, but what if it could be proven true? Valuations of the workforce in place often reveal it as one of a company’s most valuable assets. Regardless of the size of the business, the expense related to recruiting, hiring and training a replacement workforce could be significant. Having a well-trained, highly skilled employee complement in place not only drives the inherent value of a company; it is also attractive to potential buyers who would be spared the considerable expense of investing in an entirely new team.

Viewing employees collectively as an asset that drives value instead of simply another operating expense may be a change in perspective, but this mind shift could inform decisions and policies related to workforce development, training and learning opportunities, recruitment efforts, employee engagement and even compensation.

Beyond the compliance reasons, the fair value process can help business owners and their management teams gain a more comprehensive understanding of how intangible assets drive their company’s value. In a competitive economic landscape, this useful business intelligence can be deployed strategically by decision makers to support growth, expansion and competitiveness in the marketplace.

Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services GroupContributed by Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group. As a Certified Valuation Analyst, Gretchen specializes in valuations required for GAAP-based financial statement reporting including purchase price allocation and employee stock options issued as compensation. Gretchen’s valuation work often focuses on the intangible assets of a company, such as trademarks, customer relationships and intellectual property.

 

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Posted on: September 19th, 2017

The Equifax Hack: How to Protect Your Data

The Equifax Hack: How to Protect Your DataEquifax recently announced that its systems were breached this summer by an unauthorized third party, which gained access to personal information including full names, Social Security numbers, birth dates and addresses.

The breach, which Equifax discovered in late July, has the potential to impact approximately 143 million consumers. With nearly one in three American’s personal data potentially exposed, consumers are left wondering what they can do to protect themselves or their companies.

Determine Equifax exposure

Equifax says it will be contacting all consumers whose personal information was breached. In the meantime, the credit reporting bureau has set up a dedicated website to provide information and help consumers find out if they’ve been impacted. Visit equifaxsecurity2017.com and click the “Potential Impact” tab or call the Equifax hotline at 866.447.7559.

ID theft protection from Equifax

Whether or not they are directly affected, Equifax is offering one year of free identity theft protection and credit monitoring to all U.S. consumers. To get the free year of TrustedID Premier Credit Monitoring, visit equifaxsecurity2017.com and click the “Enroll” tab. Please note that after the one-year period expires, standard charges will apply.

Credit monitoring best practices

The significant impact of this and other recent hacks is an important reminder to all consumers, businesses and organizations to remain vigilant about identity theft. Below is an overview of steps to take now and into the future to monitor the security of personal and financial data.

Use two-step authentication

Most companies and financial institutions offer two-step authentication. This adds a second layer of protection to account log-ins, by requiring an additional credential beyond username and password. Examples include a bank sending a one-time passcode via text or email to access accounts, or a ZIP code required to confirm a credit card payment. Consumers should explore all online accounts and enable two-step authentication when available.

Regularly review credit report

Consumers have the right to request a free copy of their credit report once a year from each of the three credit reporting bureaus. A best practice is to stagger these requests so an updated report can be reviewed every four months. Unrecognizable accounts or activity could indicate identify theft. Free reports can be requested from www.annualcreditreport.com.

Beyond the free credit reports, consumers may consider engaging a service provider to closely monitor existing credit cards and bank accounts closely. Constant fraud monitoring services are available for a fee, but there are also free services available, such as CreditKarma.

Place fraud alert on credit report

By placing a fraud alert on their credit report, consumers require lenders and creditors to take extra precautions in verifying their identities before extending credit. Initial fraud alerts are free and last for 90 days. Placing a fraud alert can be done online through any one of the three major credit reporting bureaus (Experian, Equifax or TransUnion), and the agency of choice will notify the other two bureaus.

Freeze credit report

Placing a security freeze on a credit report takes a consumer’s information out of circulation and makes it harder for a third party to open a fraudulent credit card or new account. No current or potential lender can access credit history when frozen, so consumers that need to apply for credit would need to lift the freeze before doing so.

Unlike a fraud alert, there is a cost to activate and deactivate a credit freeze. Freezes also differ from fraud alerts in that they must be placed individually with the three credit reporting bureaus via phone.

Today’s digital world requires constant vigilance against cyber threats. At RKL, ensuring the security and privacy of our clients is a top priority, and our team of fraud investigators help businesses and organizations prevent, detect or mitigate fraudulent activity. Contact your RKL advisor or one of our local offices with any questions or concerns.

 

Bethany A. Novis, CPA/ABV, CVA, CFE, partner and leader of RKL’s Business Consulting Services Group

Contributed by Bethany A. Novis, CPA/ABV, CVA, CFE, a partner in RKL’s Business Consulting Services Group. Bethany specializes in fraud investigation, business valuation and litigation services. In addition to being a licensed CPA accredited in business valuation, she holds designations as a Certified Valuation Analyst (CVA) and a Certified Fraud Examiner (CFE).

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Posted on: August 24th, 2017

More Changes in Store for Federal Employment Form I-9

More Changes in Store for Federal Employment Form I-9Less than one year after a new version was introduced, Form I-9 is undergoing more changes. Employers based in the United States must ensure that all new hires properly complete a Form I-9 in order to verify an individual’s employment eligibility status.

In January 2017, a new version of Form I-9 was introduced that could be completed electronically. Last month, the U.S. Citizen and Immigration Services (USCIS) issued yet another revised version of Form I-9 that will take effect on September 18, 2017. Employers can confirm they are using the correct form by looking at the version and expiration dates. This new version is dated July 17, 2017, which can be found in the lower left corner, with an expiration date of August 31, 2019, which is printed in the upper right corner.

Here employers can find a guide to completing Form I-9, but below we take a look at the changes contained in this latest version.

Complete I-9 on, not during, first day of work

One of the distinctions in the new version of Form I-9 is a minor tweak in language related to when it needs to be completed. USCIS removed the language that employees complete the Form I-9 before the end of their first day, instead requiring it to be complete before employees begin working.

This language change may be intended to prevent employees from conducting any work for the employer before the Form I-9 is reviewed and supporting documentation is verified to establish employment eligibility.

Additions and reorganizations to acceptable documents

As in previous versions, the fourth page of Form I-9 provides a list of acceptable documents to use for proof of identity. While Form I-9 can be filled out electronically, hard copies of unexpired documents must be presented in person to the employer. An employee may present any document from List A or one document each from List B and List C.

The new version of Form I-9 effective September 18, 2017, adds Birth Certificate to List C as an option for documentation. Employers or hiring managers familiar with previous versions of Form I-9 may also notice that document types were aggregated or renumbered within List C.

What employers should do now

While the latest revisions are not significant, it is important that employers are aware that this new version exists and that they begin using it as soon as possible. Employers should discard any older, printed versions of Form I-9 they have on hand, and start using the most recent electronic version for convenience and compliance.

A best practice for employers is to craft the onboarding process so that employees report to orientation with Form I-9 already completed. The electronic form is designed to not allow an employee to finalize the document until all appropriate areas within Section 1 are completed properly, helping to ensure compliance. Ask employees to sign their Form I-9s right away and have the document review and form verification process take place immediately on their first day of employment. This allows time for any issues to be addressed and prevents potentially ineligible workers from completing any job duties, which could expose employers to federal fines.

Companies with questions about Form I-9 or any aspect of new employee onboarding can contact me at dhoffer@rklcpa.com or 717.394.5666.

Danielle J. Hoffer, SPHR, leader of RKL's Human Resources Consulting PracticeContributed by Danielle J. Hoffer, leader of RKL’s Human Resources Consulting Practice. Danielle advises clients across a wide range of industries on HR projects and issues, including recruitment, employee development and relations, compensation and benefits administration, employment compliance and more. She also manages RKL’s internal human resources function.

 

 

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Posted on: August 8th, 2017

Why Board Reporting Must Align with Strategic Planning

Why Board Reporting Must Align with Strategic PlanningAn engaged, effective board is critical to the successful execution of an organization’s mission and achievement of its vision. Far too often, however, the information and data the board rely upon to make significant decisions and set policy for the organization are presented without the context of the overarching strategic plan. Below, we’ll take a look at how connecting your organization’s reporting to the strategic plan helps the board manage accountability and measure progress toward its goals.

Board and management responsibilities

Before discussing improved board reporting, here’s a quick overview of the basic responsibilities of an organization’s board and management team. A good board is focused on setting policy, making key decisions and directing management to move the organization forward. A good board chair facilitates that focus by setting a clear agenda and keeping the members on track. Overall, the board is responsible for:

  • Approving and adopting the organization’s strategic plan;
  • Reviewing performance results compared to the organization’s mission, strategic goals and peer organizations;
  • Establishing performance metrics and goals for key management functions and roles; and
  • Developing a consistent schedule of review and carry out accordingly.

An organization’s management team is responsible for:

  • Maintaining a good relationship with the board;
  • Providing the board with regular performance reports and updates;
  • Executing board-approved policies to achieve strategic goals and objectives; and
  • Developing, applying and monitoring written performance standards for all organization functions.

Connect to strategic plan and measure performance

The common thread running throughout the roles and responsibilities outlined above is strategy. Without a clearly defined strategic foundation, the board cannot live its values and carry out the organization’s mission.

Once the strategic plan has been adopted, the board should identify the performance metrics that will be used to gauge progress and how regularly these metrics must be measured and reported. Ideally, performance metrics include results from the current period and a “trend period,” generally a previous five-year period, to provide helpful context and comparison.

Benchmarking data that compare the organization to its peers can also be a valuable assessment tool. Management should always include a narrative that explains negative trends, significant variances between time periods or differences between the organization and its industry or peer group. The frequency of performance metric reporting depends on the organization; however, a general best practice calls for the analysis to be completed quarterly at a minimum.

An organization’s performance metrics form the basis for evaluating and tracking progress toward strategic goal achievement. They also provide the board with information related to the organization’s goals. Goals that are not met should be assessed to determine if further action is warranted and goals that are consistently met should be evaluated to see if they should be increased or raised.

Other best practices for board reporting

An organization can also adopt the following to improve overall board reporting:

  • Adhere to established timeline for information availability and ensure that information is available well in advance of board meetings
  • Use technology and intranet (iPads, web portals, GoToMeeting) to expand access and participation
  • Develop a consistent, visual reporting format, like dashboards, charts or graphs

Interested in aligning board reporting with your strategic plan? RKL’s team of consultants can assist organizations, government agencies and other entities with this and many other financial management and operational improvement efforts. Contact one of our local offices today for more information.


Mark S. Zettlemoyer, CPA, CFEContributed by
 Mark S. Zettlemoyer, CPA, CFE, Partner in RKL’s Audit Services Group, and Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group.

Mark has nearly three decades of public accounting experience serving local governments, not-for-profit organizations and a broad range of corporate clients.

Gretchen has significant experience is providing operational consulting services to both not-for-profit and commercial entities.

Gretchen G. Naso, CVA, MBA, Principal in RKL’s Business Consulting Services Group

 

 

 

 

 

 

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Posted on: May 16th, 2017

ESOP 101: What is an ESOP and Is It Right for Your Business Succession Plan?

ESOPs 101: What is an ESOP and Is It Right for Your Business Succession Plan?There are more than 6,700 employee stock ownership plans (ESOPs) across the country, which cover 14 million participants and hold assets of more than $1.3 trillion, according to the U.S. Department of Labor’s most recently available data.

Despite these statistics, however, many family owned or privately held business owners have no direct experience with an ESOP and only a basic understanding of how one could benefit their companies. Given this limited awareness of ESOPs, we rounded up some of the most common questions about the structure, details and advantages of this business transition and employee benefit tool.

What is an ESOP?

An Employee Stock Ownership Plan, or ESOP, is a qualified defined contribution employee benefit plan authorized under the Employee Retirement Income Security Act (ERISA).

An ESOP is similar to a profit-sharing plan, but a key difference is that the ESOP invests primarily in the stock of the sponsoring employer. It can be a beneficial transition strategy to help exiting owners achieve their retirement goals and give back to loyal employees.

What kind of company is right for an ESOP?

ESOPs are used across a variety of industries and business types, but there are some overarching characteristics of companies that implement them. While there is no minimum size or annual revenue requirement to set up an ESOP, companies with approximately 20 or more employees and annual revenues of at least $10 million generally fare best with this model.

The key to ESOP success is spreading out the formation and annual administration costs over a broad employee base. Reasonably consistent profitability, the ability to leverage the business with debt and a strong management team are other important factors.

What are the tax advantages of an ESOP exit strategy?

An Employee Stock Ownership Plan can provide a ready market for the shares of an exiting owner of a privately held company. While limited by adequate consideration rules (the ESOP can pay no more than fair market value), ESOPs have tax advantages that benefit the selling shareholder and the corporation.

For instance, the owner of a C Corporation can defer capital gains taxes on the sale indefinitely provided that they elect and meet the provisions of section 1042 of the Internal Revenue Code. While S Corporations do not have this benefit, they can essentially operate income tax free if the ESOP owns 100 percent of the stock. Consult your tax advisor for guidance related to your particular tax situation.

How much stock can an ESOP own?

An ESOP may own a portion or all of the stock in a company. Partial ownership by an ESOP is a great option for family owned businesses that wish to retain family control but also want to reward and build additional incentives for an employee base considered to be part of the family.

Do the employees actually own the company?

No, the ESOP is structured as a trust, which has governance requirements. The employees are beneficiaries of that trust. A trustee administers the plan and makes the majority of shareholder decisions; however, major corporate actions have pass-through voting rights to participants.

Are there other benefits of using an ESOP?

Beyond the financial advantages an ESOP offers, there are also cultural and motivational benefits. Forming an ESOP allows the company’s ownership to reward or invest in its employees. Giving employees an ownership stake ties them directly to the company’s overall performance, which is often a motivating factor to improve their personal job performance.

Employee Stock Ownership Plans also provide stability to the other stakeholders of a company by limiting the transition disruption to customers, suppliers and the community in which the business is located.

For more information on ESOPs or to decipher if it is the right tool for your family owned or privately held business, contact me at rhurst@rklcpa.com or 610.376.1595.

Ryan P. Hurst, ASA, Manager in RKL's Business Consulting Services GroupContributed by Ryan P. Hurst, ASA, Manager in RKL’s Business Consulting Services Group. Ryan serves the valuation, investment banking and consulting needs of clients in a wide variety of industries. His expertise includes performing valuations for gifting, estate planning and administration, employee stock ownership plans (ESOPs), buying or selling a business, buy/sell agreements, fair value accounting and GAAP reporting, litigation support for shareholder disputes and strategic alternatives analyses.

 

 

 

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Posted on: March 7th, 2017

Here’s How Your Company Can Fight Alternative Payment Fraud

Here’s How Your Company Can Fight Alternative Payment FraudAlternative payment methods – like Square, PayPal, Stripe and Payoneer – represent a convenient and flexible way for businesses to accept payments from customers. On the flip side, however, allowing your employees to pay vendors through these methods can be a risky proposition.

Because these payment methods are still relatively new, there is often confusion around the unique risks associated with them. However, once you understand these risks and common fraud schemes, you can institute a few best practices to prevent your company from falling victim to alternate payment fraud.

Know who is receiving your payment

One of the most concerning aspects of alternative payment methods is the anonymity that these methods provide to the fraudster. While most companies have strong policies for cutting checks or making ACH payments, few have updated these policies to expand controls related to alternative payment methods. Fraudsters know this and are happy to exploit this weakness.

For instance, a standard component of credit card or ACH electronic transactions is the identification of the payee on the credit card or bank statement. Alternative payment methods usually mask these payment details. Instead, the processor name, such as “Square” or “PayPal,” will first appear on your bank statement. In some cases, however, the payee name will only appear on the statement if the vendor has set up their account to do so. In alternate payment schemes, the fraudster vendor will omit their name or use a misleading company name to hide the true payee identity.

To avoid falling prey to a crafty fraudster, companies should institute a policy of tracking down the supporting documentation relating to any payment that has been processed through an alternative payment method. The goal is to verify that the payment was properly approved and is being made to a legitimate vendor. Supporting documentation can include purchase orders or original invoices.

Restrict access to company accounts and cards

Another best practice concerning alternative payment methods includes restricting the number of employees that have direct access to company bank accounts and credit card numbers. Alternative payment method fraud relies upon the fraudster having access to the company accounts; otherwise, he’ll need to devise a different scheme. Restricting employee use of company accounts is also important in investigating any suspicious activity. With limited users, it is much easier to quickly uncover the fraudster and stop them in their tracks.

Monitor your vendor approval process

While alternative payment fraud is still relatively new, it has quickly gained popularity with enterprising fraudsters due to the ease of the scheme and the high dollars involved. RKL’s fraud and forensic accounting team recently investigated a significant fraud where an employee created a fake vendor and used both Square and PayPal accounts to divert company funds to his bank account. In that case, the fraudster was successful because he was able to circumvent the company’s process for approval of new of vendors, had access to the company credit card and was a “trusted” employee.

Time is on your side

Perhaps the best thing to remember is that sometimes it pays to not be on the cutting edge.  While these new payment technologies are exciting and can be great ways for smaller businesses to get paid, there is no need for most companies to pay their vendors through these methods. It is much safer to continue to use traditional payment methods (check, ACH or credit card) until you are comfortable that your policies and procedures are ready. In other words, don’t be afraid to take it slow.

It is also important to remember that as the customer, you hold all the cards during the vendor evaluation process. Specifically outlining accepted payment methods in your company’s vendor approval policy will help eliminate the possibility that a vendor will try and seek payment through an alternative processor, like Square.

Finally, it is important to remember how fast technology can change. For that reason, you will need to continually revisit your policies and procedures to ensure that you have controls in place over new payment methods as they are developed.

Whether it’s crafting stronger payment and vendor policies, strengthening internal controls or investigating suspicious payments, RKL’s team of fraud consultants and forensic accountants can help you protect your business against alternative payment method fraud. Contact your RKL professional or one of our local offices today for more information.

 

Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services GroupContributed by Jeremy L. Witmer, CPA, CVA, CFE, Senior Consultant in RKL’s Business Consulting Services Group. He provides forensic accounting, litigation support and business valuation services to companies and organizations across a number of industries. Jeremy’s expertise includes reconstruction of financial records, employee theft investigation, damage calculations for litigation purposes, and valuation of stock for gifting, buyouts and marital settlement. 

 

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