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Valuable Insights Hiding In Plain Sight

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Tax return preparation and financial statement audits represent a missed opportunity for companies who view them as nothing more than an exercise in compliance.


Background Insight

For all intents and purposes, companies engage a CPA to prepare an income tax return for the sole benefit of the public sector (United States Treasury and/or its counterparts the State Treasuries). Furthermore, many also engage a CPA to prepare audited financial statement or regulatory audits to meet the mandates placed on them by either a counter-party to a contract or a regulatory agency.

Potential Impact

On its surface, companies may feel an income tax return and financial statement have very little direct value and are merely an obligatory exercise in compliance. However, when properly leveraged, these products can provide valuable peripheral insights that form the basis for essential strategic conversations with their CPA. Companies should not miss out on the opportunity to capitalize on the value hidden in these products. They can and should be used as instruments to identify opportunities to enhance business performance, effectuate growth and improve profitability as well identify inefficiencies, risks and shortcomings in a company’s policies, procedures and practices.

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Technology Management & Monitoring for Nonprofits

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Anytime a nonprofit entrusts technology with sensitive information, it becomes imperative that careful management and monitoring of the technology takes priority.


Background Insight

More nonprofits are adopting technology to automate and standardize in an effort to advance their mission. At the same time, technology and cybersecurity risks continue to evolve, resulting in clear and present dangers for nonprofits of all types – but particularly for those that manage and store sensitive customer or donor information. Unfortunately, many organizations often fall short in their responsibility to safeguard sensitive data, finding it challenging to balance making smart investments in technology and controlling costs.

Potential Impact

As nonprofits invest in new systems and software platforms to streamline operations, it is imperative to implement sound policies and practices regarding oversight and control of technology and data. Among other things, nonprofits should consider (i) documenting access control; (ii) creating formal processes for data backup and disaster recovery, including contingency plans; and (iii) formulating detailed incident response plans. At a minimum, nonprofits should decide which individuals at the organization actually require access to personal and confidential information. Should management have the same access as staff? Consider varying levels of access control to ensure only those who need access to information get it – and document these levels thoroughly to ensure all employees understand their roles and responsibilities. If a nonprofit’s customer portal goes down, the organization will need a contingency plan to ensure personal and confidential information remains protected. Said contingency plan should also to include a plan of action for a smooth return to operations following an event. And with a more serious incident – such as a cybersecurity breach at the organization or via one of its software platforms – nonprofits will need a detailed incident response plan in place to coordinate a return to normal operations. Well before a serious incident, processes should be established to address, among other things, (i) how to communicate with customers and donors if sensitive information is compromised; (ii) when to notify authorities; and (iii) how the organization will manage the reputational harm it may suffer.

Let's Talk More About Information Security Risks.
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Technology Management & Monitoring

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Anytime a company entrusts technology with sensitive information, it becomes imperative that careful management and monitoring of the technology takes priority.


Background Insight

More companies are adopting technology to automate and standardize in an effort remain competitive. At the same time, technology and cybersecurity risks continue to evolve, resulting in clear and present dangers for businesses of all types – but particularly for those that manage and store sensitive customer information. Unfortunately, many organizations often fall short in their responsibility to safeguard sensitive data, finding it challenging to balance making smart investments in technology and controlling costs.

Potential Impact

As companies invest in new systems and software platforms to streamline operations, it is imperative to implement sound policies and practices regarding oversight and control of technology and data. Among other things, companies should consider (i) documenting access control; (ii) creating formal processes for data backup and disaster recovery, including contingency plans; and (iii) formulating detailed incident response plans. At a minimum, companies should decide which individuals at the organization actually require access to personal and confidential information. Should management have the same access as staff? Consider varying levels of access control to ensure only those who need access to information get it – and document these levels thoroughly to ensure all employees understand their roles and responsibilities. If the company’s customer portal goes down, companies will need a contingency plan to ensure personal and confidential information remains protected. Said contingency plan should also to include a plan of action for a smooth return to operations following an event. And with a more serious incident – such as a cybersecurity breach at the company or via one of its software platforms – companies will need a detailed incident response plan in place to coordinate a return to normal business. Well before a serious incident, processes should be established to address, among other things, (i) how to communicate with customers if sensitive information is compromised; (ii) when to notify authorities; and (iii) how the organization will manage the reputational harm it may suffer.

Let's Talk More About Information Security Risks.
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Sales Tax Compliance for Nonprofits

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Although each state has different rules and requirements related to the taxation of nonprofits, The Supreme Court’s decision in South Dakota v. Wayfair has implications that could profoundly change a nonprofit’s sales and tax compliance obligations – particularly those selling goods and services remotely via e-commerce sites.


Background Insight

The Wayfair decision and the state reaction to it is by far one of the greatest changes to happen in state and local taxes in decades. The states have been pushing for change for a long time and federal legislation has been put forth for years trying to make this change. Before the Wayfair decision, the threshold test for whether an out-of-state vendor had to collect and remit sales taxes in a state was physical presence. Physical presence could include having solicitors, service providers and others in the state, even for one day, engaging in activities on the out-of-state vendors behalf. Without such physical presence, the in-state consumers not being charged sales tax on their taxable purchases were responsible for paying a use tax. Now, because of Wayfair, states can impose a sales tax collection obligation when a remote vendor (whether for-profit or nonprofit) has over a certain receipts threshold and/or number of transactions annually in the state. In Wayfair specifically, Wayfair was found to have nexus and therefore a sales collection obligation in South Dakota because it had sales over $100,000 or 200 or more transactions in the state annually.

Potential Impact

The state reaction to the Wayfair decision has been swift and it has changed the sales tax collection obligation requirements not only for businesses but for certain nonprofits as well. Approximately 33 states already have rules in place with potentially actionable steps in those states relative to economic nexus and requirements to collect and remit sales taxes. The state rules vary in a multitude of ways, including enactment date; the threshold test and number of transactions; what is considered for the threshold test (is it gross receipts or taxable receipts); and the look-back period. Nonprofits selling tangible goods, digital products and services unrelated to the purpose for which nonprofit status was granted, should understand their nexus posture, understand the taxability of their revenues, identify exposure and/or where it may have sales tax collection and remission obligations and identify resources to ensure their continued compliance (e.g., sales tax automation). Failure to do so can have unforeseen consequences.

Let's Talk About Your State Sales Tax Obligations.
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Investment Concentration Risk

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The opportunity to acquire company stock can be a lucrative employee benefit. But having too much of your retirement plan assets or net worth concentrated in your employer’s stock could be disastrous if the company or sector hits hard times and the stock price plummets.


Background Insight

As an employee, your compensation may include stock options or bonuses paid in company stock. Shares may be offered at a small discount through an employee stock purchase plan, where they are typically purchased through payroll deductions and held in a taxable account. Company stock might also be one of the investment options in your employer’s tax-deferred 401(k) plan, and maybe your employer may match contributions with company stock instead of cash.

Potential Impact

The possibility of heavy losses from having a large portion of portfolio holdings in one investment, asset class, or market segment is known as concentration risk. With company stock, this risk can build up gradually. If you have built up large positions in company stock, you should pay attention to the concentration level in your portfolio. Look closely at your holdings and consider regularly undergoing a concentration risk checkup to determine the percentage of your total assets that are company stock. There are no set guidelines but holding more than 7% to 10% of your assets in company stock could upend your retirement plan and your overall financial picture if the stock suddenly declines in value. An appropriate allocation of company stock will largely depend on your goals, risk tolerance, and time horizon. From there, formulate a plan for diversifying your assets. This may involve liquidating company shares systematically or possibly right after they become vested. However, it’s important to consider the rules, restrictions, and timeframes for liquidating company stock, as well as any possible tax consequences. For example, special net unrealized appreciation (NUA) rules may apply if you sell appreciated company stock in a taxable account, but not if you sell stock inside your 401(k) account and reinvest in other plan options, or if you roll the stock over to an IRA.

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Internal Controls for Nonprofits

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The core of any organization’s fraud-prevention program is strong internal controls. Yet too many nonprofits either fail to develop controls that address common risks or, if they establish controls, neglect to enforce them.

Your nonprofit must do both if it wants to mitigate occupational theft and fraud perpetrated by outsiders.


Background Insight

Nonprofits tend to devote the lion’s share of their budgets to programming, leaving little money to the enforcement of internal controls. This can be especially problematic when the “tone at the top” is lax and executive directors or board members don’t give priority to preventing fraud prevention efforts. Nonprofit boards may also inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike for-profit companies, nonprofit boards may lack members with financial oversight experience, which means they may miss important warning signs that something is amiss. Trust is an Achilles’ heel throughout many nonprofits. Organizations often regard their staff members as family and skip such important fraud-prevention measures as conducting background checks. In some cases, managers are allowed to override internal controls without recourse and volunteers are trusted to accept cash donations or keep the books without the oversight of a staff member — both very risky activities.

Potential Impact

Most nonprofits have at least a rudimentary set of controls, but those bent on fraud can usually find gaps in the fence. Billing fraud, check tampering and expense reimbursement fraud are three common types of employee theft found in nonprofit organizations. But proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is a relatively easy and effective method of preventing such fraud.

Every Nonprofit Is Unique. Let’s Talk About Yours.
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Connecting Organizations to Retirement (CORE) Plan for Nonprofits

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Attracting and retaining top talent is a big challenge for nonprofits, particularly small nonprofits. Limited budgets and resources often make it difficult to offer competitive salaries and benefits like a 401(k) plan.

If you are a small Massachusetts nonprofit, consider the CORE Plan, a state-sponsored 401(k) plan, as a way to attract great talent and support your nonprofit’s mission.


Background Insight

The Connecting Organizations to Retirement (CORE) Plan was launched in late 2017 as a 401(k) option for Massachusetts nonprofit organizations. It is a state-sponsored program that was developed in collaboration with the Massachusetts Nonprofit Network using the best practices of large retirement plans but designed to keep costs low for both employers and employees. The CORE Plan is structured as a 401(k) Multiple Employer Plan (MEP) under which the Office of the State Treasurer acts as the CORE Plan Sponsor and assumes many of the administrative and investment responsibilities on behalf of the participating employers and employees. The investment structure of the CORE Plan is developed and monitored by an independent investment consultant acting as a fiduciary under ERISA. As an employer, you may be eligible to offer the CORE Plan to your employees if (i) you are registered as a 501(c) organization with the IRS; (2) your registered address is in Massachusetts; (iii) you are registered as a nonprofit corporation with the Secretary of the Commonwealth of Massachusetts; (iv) your organization in “good standing” as determined by required annual filings (M.G.L.A. c180 § 26A; 950 CMR § 106.13) with the Secretary of the Commonwealth of Massachusetts; (v) you have 20 or fewer employees; and (vi) your payroll is administered by an eligible third-party payroll service (e.g., Paychex, ADP, etc.).

Potential Impact

The CORE Plan gives nonprofits the ability to focus their time and energy on the primary goals of their organization while offering a comprehensive program to current and prospective employees including (i) ERISA protection for employees; (ii) higher contribution limits compared to an IRA; (iii) automatic features that encourage participants to start saving early; (iv) a dedicated representative available to consult with employers; and (v) a diversified portfolio.

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Written Information Security Program (WISP) for Nonprofits

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Under Massachusetts regulation 201 CMR 17.00, applicable businesses, including nonprofits, must develop reasonable and effective administrative, technical and physical safeguards for the protection of personal information belonging to residents of Massachusetts.


Background Insight

While past Massachusetts breach-notification laws have addressed what must happen in the wake of a security breach, Massachusetts regulation 201 CMR 17.00 is intended to prevent personal information from being breached in the first place. The focus of the current regulations center on implementing security measures designed to “prevent” intentional wrongdoing and inept internal data handling protocols. As such, applicable nonprofits are required to develop, implement, maintain and monitor a comprehensive, written information security program (WISP) to ensure the security and confidentiality of the personal information of Massachusetts residents in both physical and electronic format. If you are a nonprofit that manages information on your employees, clients, donors or others, then you must have a WISP.

Potential Impact

The ramifications of non-compliance become quite real should an information breach occur. In such a case, if it is determined at the examination that the law’s compliance requirements have not been met, the Massachusetts Attorney General can file suit with the nonprofit. In addition, civil penalties could be imposed for noncompliance with Massachusetts’ data breach notification statute (Massachusetts General Law 93H.) A civil penalty of $5,000 may be awarded for each violation of 93H. Furthermore, under the portion of 93H concerning data disposal, nonprofits can be subject to a fine of up to $50,000 for each instance of improper disposal. Other “softer” consequences of failure to comply include damages to a nonprofit’s reputation as well as the time and resources required to determine the cause and extent of a breach, notifying affected individuals of a breach, and implementing corrective action to ensure a breach does not occur in the future.

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Health Savings Account (HSA)

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Expand your retirement portfolio and invest accordingly, as a Health Savings Account (HSA) can be a powerful wealth accumulating tool.


Background Insight

Health savings accounts (HSAs) are a popular type of tax-advantaged medical savings account available only to individuals who are enrolled in a high deductible health plan (HDHP) to pay for current and future qualified health expenses using monies that otherwise would have been sent to the insurer or the United States Treasury and most State Treasuries. HDHPs have a much lower insurance premium than traditional health insurance plans (e.g. $1,000 saving for a married couple + tax savings of an illustrative $2,500 or total annual savings of $3,500) but with that savings comes higher annual deductibles and out-of-pocket maximum limits (e.g. $2,500 per married couple). For 2019, the maximum HSA contribution is $3,500 for individual coverage and $7,000 for family coverage (individuals who are age 55 or older may also make an additional $1,000 “catch-up” contribution). Annual contributions can be made until you start claiming Medicare and the account balance, if not used, can grow indefinitely. Important to note is that your HSA belongs completely to you, so your funds follow you wherever you go. Even if you change health plans, switch jobs or retire, your HSA goes with you – it’s yours for life.

Potential Impact

Money you put into your HSA is not subject to income tax, and you won’t pay taxes on money you withdraw from your HSA for qualified medical expenses. And, if you invest some of your HSA funds, any interest that money earns is tax-free, so you keep 100 percent of the value of your HSA. Essentially, an HSA is like an individual retirement account (IRA) for your health care expenses by providing you a triple tax advantage with contributions, investment earnings and amounts distributed for qualified medical expenses exempt from federal income tax, Social Security/Medicare tax and most state income taxes. If your health expenses are relatively low, an HSA can be a powerful wealth accumulation tool. There is no time limit on when to spend any of your HSA funds. At the end of each year, any dollars you haven’t used remain in your account. You can let your account balance grow for long-term savings, and even invest some of the money to earn interest.  Accumulated HSA funds can eventually serve as an additional source of retirement income to help you pay for a multitude of qualified medical expenses including some not so obvious expenses such as Medicare premiums, long-term care insurance and long-term care services, in-home nursing care, nursing home fees, and more.

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Written Information Security Plan (WISP)

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Under Massachusetts regulation 201 CMR 17.00, applicable businesses must develop reasonable and effective administrative, technical and physical safeguards for the protection of personal information belonging to residents of Massachusetts.


Background Insight

While past Massachusetts breach-notification laws have addressed what must happen in the wake of a security breach, Massachusetts regulation 201 CMR 17.00 is intended to prevent personal information from being breached in the first place. The focus of the current regulations center on implementing security measures designed to “prevent” intentional wrongdoing and inept internal data handling protocols. As such, applicable businesses are required to develop, implement, maintain and monitor a comprehensive, written information security program (WISP) to ensure the security and confidentiality of the personal information of Massachusetts residents in both physical and electronic format.

Potential Impact

The ramifications of non-compliance become quite real should an information breach occur. In such a case, if it is determined at the examination that the law’s compliance requirements have not been met, the Massachusetts Attorney General can file suit with the company. In addition, civil penalties could be imposed for noncompliance with Massachusetts’ data breach notification statute (Massachusetts General Law 93H.) A civil penalty of $5,000 may be awarded for each violation of 93H. Furthermore, under the portion of 93H concerning data disposal, businesses can be subject to a fine of up to $50,000 for each instance of improper disposal. Other “softer” consequences of failure to comply include damages to a company’s reputation as well as the time and resources required to determine the cause and extent of a breach, notifying affected individuals of a breach, and implementing corrective action to ensure a breach does not occur in the future.

Let's Talk About Ways to Minimize Your Risk.
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Donor Advised Fund

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A donor-advised fund offers an easy way for a donor to make significant charitable gifts over a long period of time. It is similar to a private foundation but is not subject to the same legal restrictions and it offers greater potential tax advantages than a private foundation.


Background Insight

A donor advised fund is a charitable giving account administered by a public charity created to manage charitable donations on behalf of organizations, families or individuals. Contributions may be tax deductible in the year they are paid to the fund, subject to the usual limitations. The fund owns the contributions and has ultimate control over grants, but the donor can make recommendations to the fund as to how much, when, and to which charities fund should be made.

Potential Impact

A donor can generally take an immediate income tax deduction for contributions of money or property to a donor-advised fund if the donor itemizes deductions on his or her federal income tax return. The amount of the deduction depends on several factors, including the amount of the contribution, the type of property donated, and the donor’s adjusted gross income (AGI). Generally, deductions are limited to 50 percent of the donor’s AGI. For 2018 to 2025, the limit is increased to 60% for charitable contributions of cash to public charities. If the donor makes a gift of long-term capital gain property (such as appreciated stock held for longer than one year), the deduction is limited to 30 percent of the donor’s AGI. The fair market value of the property on the date of the donation is used to determine the amount of the charitable deduction. Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years. There are no federal gift tax consequences because of the charitable gift tax deduction, and federal estate tax liability is minimized with every contribution since donated funds are removed from the donor’s taxable estate.

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Grantor Retained Annuity Trust (GRAT)

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A grantor retained annuity trust (GRAT) is an irrevocable gifting trust that can make for a compelling estate planning tool for those looking to pass significant wealth to the next generation with little or no wealth erosion nor gift and estate tax cost.


Background Insight

In a GRAT, you transfer property to a trust, but retain a right to annuity payments for a specified number of years. After the trust term ends, the annuity payments stop, and the remaining trust property passes to the persons you’ve named in the trust document as the remainder beneficiaries (e.g., your children), or the property can remain in trust for their benefit. The value of the gift of the remainder interest is discounted for gift tax purposes to reflect that it will be received in the future. Also, if you survive the trust term, the trust property is not included in your gross estate for estate tax purposes. If the rate of appreciation is greater than the IRS interest rate, a higher value of trust assets escapes gift and estate taxation. Consequently, the lower the IRS interest rate, the more effective this technique can be.

Potential Impact

A GRAT is not without risk including the risk you may not outlive the annuity term. If you die during the GRAT term, the property in the trust will be included in your gross estate for federal estate tax purposes and the advantages of the GRAT will be lost. Because of this one may wish to consider shorter-term GRATs rather than longer ones.

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Life Insurance

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Life insurance is a crucial part of many estate plans as it mitigates financial instability to survivors, providing, for example, children’s education, the paying off of a mortgage, and simplification when it comes to the transfer of assets.

Life insurance can also replace wealth lost due to the expenses and taxes that may follow one’s death, and to make gifts to charity at relatively little cost.


Background Insight

There are four main types of life insurance: whole life, universal life, private and term life insurance. (i) Whole life insurance provides permanent coverage that lasts a life time. This financial instrument is effectively a closed box wherein so long as the premiums are paid the policy face value will be paid out. (ii) Universal life insurance also provides permanent coverage and has a cash surrender value (like whole life), but it is more of an open financial instrument wherein the owner has the discretion to reduce the policy face value and premiums to the then present life need. (iii) Private placement life insurance (PPLI) is for those with significant wealth who want to develop their own investment strategies within the policy. (iv) Term life insurance, which has term durations (typically 10, 15, 20, or 30 years), carries a lower premium than whole and universal life insurance.

Potential Impact

You can create or preserve your developing wealth by shifting part of the financial risk to a counter-party (e.g., insurance company) who will hedge the risk of death. The specific life insurance instruments best suited for an individual will largely be determined by their long-term needs, timing and extent of their personal net worth development and other financial considerations. As insurance is a financially engineered instrument, it should be considered as part of a holistic financial plan; as any redirection of wealth should be understood relative to the timing and degree of that wealth shift and when it is longer warranted or economically justified.

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Expense Optimization

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A low-cost structure is competitively advantaged to every company, no matter what that company or organization’s circumstances; but there is a question: What is the difference between cost and investment?


Background Insight

Expenses can be deemed to be outlays that simply erode revenues. Today, however, companies must invest in their profit and loss statements (which probably should be labeled the “investment statement”), as we are investing in a world of intellectual capitalism. So, the question might not be, “how do I reduce cost?”, but rather, “what kind of economic growth should I expect from these outlays?”

Potential Impact

Consider Company A who invests in a new CRM system and as part of the installation process enters all its existing customer data into the new CRM; data that will expand as the company travels through time. This data expansion causes the CRM to eventually become so vast (and corrupted) that it overwhelms all efforts by the company to leverage the data; which inevitably causes company personnel to not use the system properly (e.g., failure to make timely updates or they stop using the system altogether). Result: Investment fails to be leveraged for economic growth and, therefore, becomes merely a cost. An alternative case in point: Company B installs a new CRM system, but before data is entered into the system, the company determines annual revenues it expects to generate from the new CRM system, broken down by (i) new customers and (ii) all existing customers. Assuming these annual revenue targets are $5.0 million and $2.0 million respectively, under these strategic economic parameters (which are measurable) the company would design into the CRM system only those data records that align with this objective. As each data record has a direct economic purpose, the company can now use the CRM to scan its customer populace; targeting and ensuring each customer receives the same services/products. This approach aligns and focuses the company’s investments in payroll, telecommunication and other peripheral matters (including wasted activities) on ensuring they are productively utilized for the efficient generation of economic growth. By aligning analytical analysis to a company’s vision of their future state, enterprises can take every outflow in their profit and loss statement and turn them into competitively advantaged investments. Viewed in the wrong light mitigates the value of this strategy. Change the perspective and discover what is otherwise hiding in plain sight.

Every Business Is Unique. Let’s Talk About Yours.
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GDPR Compliance for Nonprofits

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If you are under the impression that the European Union’s (EU) General Data Protection Regulation (GDPR) doesn’t apply to your nonprofit, there’s a good chance you could be mistaken.


Background Insight

The EU’s new privacy regulation, GDPR, was first approved by European Parliament in April 2016 and formally went into effect May 25, 2018. GDPR replaces the EU’s Data Protection Directive which was originally adopted in 1995 and is now considered outdated given the advances in technology and the growing risks associated with personal data. GDPR states companies, including nonprofits, must provide a “reasonable” level of protection for the personal data of EU citizens, but “reasonable” is not specifically defined, leaving much in the way of compliance open to interpretation. Adding to the vagueness, GDPR’s definition of what qualifies as personal data is broad: “any information relating to an identified or identifiable natural person”. Unlike other recent data privacy regulations we’ve seen implemented – Massachusetts’s 201 CMR 17, for example – which more clearly define personally identifiable information (PII), the scope of GDPR’s reach remains somewhat unclear given the vague parameters. As such, nonprofits required to comply will need to take expansive steps to ensure any information that could potentially be considered “personal” is protected.

Potential Impact

The impact of GDPR extends far beyond nonprofits based solely in Europe. In fact, the regulation applies to any nonprofit that solicits, controls or otherwise uses or comes to possess the personal data of EU citizens. US-based nonprofits who collect or store personal data about an EU resident, such as donors, members, grantors, or grantees, or those who collect website behavior from EU residents, are considered to fall under the compliance restrictions of GDPR. The EU is taking GDPR very seriously, and as such, the penalties for non-compliance are quite severe. Failing to adhere to GDPR directives can lead to significant fines – up to $20 million euros (equivalent to $24.9 million USD) or 4% of global annual turnover, whichever is greater.

Let's Talk More About Your Nonprofit's Obligation to Protect Personal Data.
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GDPR Compliance

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If you are under the impression that the European Union’s (EU) General Data Protection Regulation (GDPR) doesn’t apply to your company, there’s a good chance you could be mistaken.


Background Insight

The EU’s new privacy regulation, GDPR, was first approved by European Parliament in April 2016 and formally went into effect May 25, 2018. GDPR replaces the EU’s Data Protection Directive which was originally adopted in 1995 and is now considered outdated given the advances in technology and the growing risks associated with personal data. GDPR states companies must provide a “reasonable” level of protection for the personal data of EU citizens, but “reasonable” is not specifically defined, leaving much in the way of compliance open to interpretation. Adding to the vagueness, GDPR’s definition of what qualifies as personal data is broad: “any information relating to an identified or identifiable natural person”. Unlike other recent data privacy regulations we’ve seen implemented – Massachusetts’s 201 CMR 17, for example – which more clearly define personally identifiable information (PII), the scope of GDPR’s reach remains somewhat unclear given the vague parameters. As such, companies required to comply will need to take expansive steps to ensure any information that could potentially be considered “personal” is protected.

Potential Impact

The impact of GDPR extends far beyond companies based solely in Europe. In fact,the regulation applies to any company that solicits, controls or otherwise uses or comes to possess the personal data of EU citizens.  US-based companies, particularly those within e-commerce, software, travel and hospitality, are considered to fall under the compliance restrictions of GDPR given that they operate wide-scale online platforms and solicit personal data via their websites. The EU is taking GDPR very seriously, and as such, the penalties for non-compliance are quite severe. Failing to adhere to GDPR directives can lead to significant fines – up to $20 million euros (equivalent to $24.9 million USD) or 4% of global annual turnover, whichever is greater.

Let's Talk More About Your Company's Obligation to Protect Personal Data.
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Financial Ratio Analyses for Nonprofits

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Performing financial ratio analyses can help assess a nonprofit’s overall financial condition and liquidity and flag patterns that might not be conducive to its success.


Background Insight

Financial performance measurement is a strategy a nonprofit organization can use for evaluating operations, programs, services and financial stability. One of the key measurement tools is financial ratio analysis. It involves taking data from the organization’s financial statements, using it to calculate ratios appropriate for the nonprofit, and then benchmarking those ratios against past performance, management objectives or other organizations. For example, certain liquidity measures can be used to ensure an organization has a sufficient level of cash flow for continued programmatic operations and growth. Financial ratios nonprofits should consider when measuring their liquidity include: (i) Current ratio which equals current assets divided by current liabilities. A 2-3 ratio generally indicates that the organization has adequate liquid funds to pay its current obligations. (ii) Quick ratio which equals current assets (less any inventory amounts) divided by current liabilities. A ratio of 1 – 2 generally indicates an organization has adequate liquid funds to pay its current obligations without selling inventory. (iii) Organizational liquidity funds indicator which equals expendable net assets (net assets less restricted endowments, fixed assets and prepaid expenses) divided by average monthly total expenses. This indicator measures how many months the organization has before it will consume its liquid assets, if no additional revenue flows into it. The higher the ratio, the better the liquidity.

Potential Impact

Conducting monthly, quarterly or even yearly financial ratio analyses can help a nonprofit to understand its liquidity and provide valuable insight into the organization’s financial future. Nonprofits will be able to identify strengths and weaknesses of the organization and take appropriate actions to improve its liquidity.

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Personal Guarantees on Business Indebtedness

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Most business owners view personal guarantees to secure credit as obligatory, rendering them with little consideration, even when the borrowing enterprise no longer needs their signature.

They are dangerous and should be avoided as they can, when called, have severe personal financial implications.


Background Insight

A personal guarantee is a common type of credit enhancement that lenders often request from business owners when a company does not have the assets or track record to borrow on its own. Since it is an unsecured written promise guaranteeing payment on a loan if the business does not pay, the guarantor’s personal assets are at risk. While sometimes necessary to secure needed capital, as a business evolves, personal guarantees should be mitigated or avoided.

Potential Impact

There is a false impression among most companies that personal guarantees (when called) come into play only when the lending institution exhausts the liquidation of the company’s assets. That is not true. Personal guarantees can be called at any time (including for technical or financial defaults or other material adverse conditions). If exercised, the bank can move against the guarantor’s liquid assets, primary residence and all other assets; leaving the guarantor’s assets at risk and the company’s assets untouched. As to other forms of indebtedness, e.g. real estate leases, the landlord’s claim in bankruptcy court is a lot less powerful and most likely will be limited to one year of lease commitment payments. That limited amount of money most likely will be classified as unsecured liability of the bankrupt estate (which puts the landlord’s claim on the same footing as vending machine supplier). To avoid this plight, property owners are highly motivated to attain personal guarantees. Under economic theory, all buyers and suppliers (banks, property owners, borrowers and tenants) have a surplus capacity to which they will give/pay. The only way to determine this economic surplus is to negotiate for the avoidance, removal or step-down of these credit enhancements, and the best time to do so is at inception or upon restructuring of the agreement (either at renewal or otherwise).

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SOX 404 Compliance

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Sarbanes-Oxley (SOX) changed the way companies approach internal controls over financial reporting, and today its demands go well beyond issuing financial statements.


Background Insight

The Sarbanes-Oxley (SOX) Section 404 was enacted in 2002. Although there have been numerous updates to the 2002 regulation, the burden of ensuring accuracy of your financial statements alongside the internal control oversights remains on management. Annually, management of public companies must attest to their internal controls over financial reporting.  In actuality, it goes beyond that. SOX requires an ongoing effort that includes creating, testing and maintaining compliance, and these elements must be carefully calibrated to ensure investor confidence remains high. The reality, however, is many companies do not have an internal audit department or compliance personnel due to costs, lack of internal expertise or other reasons. Proper internal control oversight suffers as companies lack the ability to address basic compliance issues, never mind tackling initiatives designed to uncover and mitigate specific risks and activities within their organization’s control environment.

Potential Impact

SOX compliance is not going away, and senior management must address its effectiveness within its company’s annual 10-K filing. If your organization lacks the internal time and resources necessary to properly address the requirements of SOX, management must then consider other alternatives to help with this annual requirement, including the outsourcing of your compliance oversight to a third party with the experience to guide you in the creation and maintenance of the internal controls over financial reporting. Failure to focus on internal controls can seriously affect an organization’s bottom line. For example, should your financial statements need to be re-issued due to a breakdown in your control environment, your company’s reputation with investors and customers could become irreparable. And the development, maintenance and testing of the business process environment increases employee awareness of the importance of the company’s financial statements being accurate and helps to mitigate potential fraud that could occur in an uncontrolled environment.

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Accounts Receivable: Strategic Pricing Review

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A price too high or too low can cause serious problems for sales and cash flow which limits business growth.


Background Insight

One can discuss ad nauseam different treasury methodologies to affect the speed of cash collections and cash outlays to enhance a company’s cash flows. However, the first step right in front of most companies is ensuring you are billing enough for your products and services. Perhaps you’ve cut costs and become more efficient in delivering your products, but if you don’t charge market rates for them, you’re imposing a self-inflicted wound on the company by giving away margin, profitability, cash flow and, ultimately, shareholder value. There’s value to be had in conducting a complete self-exam of each customer’s pricing agreements and methodologies. Companies may discover that product quality needs improvement, the sales team confidence in the company’s products is lacking, some customers would be better served elsewhere, and/or customers love doing business with the company because you’ve been underbilling against market for years. Whatever the discoveries companies owe it to the future of the organization to get in front of it.

Potential Impact

If companies are willing and able to identify and solve underlying issues causing under-billings, or can get past uneasiness with price increases, it will be the simplest way to contribute not only to the company’s margins and cash flows, but to its future ability to take risks to support its growth. A self-assessment can guide companies on where and when to test enhanced or differing pricing methodologies. You’ll likely find that the cost/benefit of such an endeavor is a no brainer. Think about the companies private equity firms look for – those that are successful, but haven’t yet reached their full potential. Why sell the company before it has reached it’s potential? Be there for it now and keep that enhanced value on your side of the ledger.

Every Business Is Unique. Let’s Talk About Yours.
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Financial Planning & Analysis for Nonprofits

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Innovative nonprofits use a variety of tools and models to assess possible outcomes for the organization.

Leveraging the right tools and models can generate accurate data, reports, and analyses to enable better management decisions including decisions to redirect capital to initiatives that advance their mission.


Background Insight

Financial statements provide insight as to what has already happened at an organization, leading many nonprofit leaders to make decisions based only on historical financial performance. In a competitive environment where conditions never remain constant, nonprofits stand to differentiate their organization by leveraging forward-looking information to make optimal mission-driven decisions.

Potential Impact

Transparent information on both current and future financial performance, presented in a meaningful and concise manner, is the foundation upon which nonprofit leaders engineer growth in order to fulfill their mission. Utilizing the right financial planning tools that accurately capture an organization’s business model is key. Within the correct financial planning and analysis framework, nonprofits stand to benefit by gaining insight into the impact of various business strategies. And if presented effectively, nonprofits can use forward-looking information to improve relationships with key donors and serve as a critical component of an organization’s communication to its constituents.

Let's Talk About Advancing Your Mission.
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Self-Insured Health Plan for Nonprofits

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To counter the relentless forces of rising health care costs, while improving health care coverage for its employees, nonprofits with over 100 employees may want to consider a self-insured plan.


Background Insight

Year over year increases in the cost of health care insurance, which erodes a nonprofit’s ability to grow and stay focused on its mission, are created by the oligopolistic nature of insurance carriers and the perverse nature of procedural reimbursements built into the United States healthcare system. Health care insurance is the most inflationary expense interfering with a nonprofit’s competitive use of its own resources. Under the right circumstances, the adoption of a self-insured plan can be an attractive option for employers looking to both save costs and improve health care coverage.

Potential Impact

A well-designed, self-insured plan could equate to a potential cost per participant of $7.00 to $11.00 per day (total insurance premiums divided by number of lives covered divided by 365 days). The pricing of a self-insured plan is typically not complex, but they are somewhat oblique in the areas of drug reimbursement and subsidized premiums. By working with a well-informed provider, and through careful comparison of premium prices to actuarial modality as well as knowledge of the mark-ups on drugs by the Pharmacy Benefit Manager, informed nonprofits should be well equipped to engineer out otherwise significant inefficiencies in their health care plans. In both health care coverage and prescription drug reimbursement, savings of 10% to 15%, per year (or one-year worth of free health insurance coverage for every 8.33 years on average), would not be beyond the realm of reasonable.

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Employee Retirement Plan Optimization for Nonprofits

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Retirement planning is a significant concern for working professionals at every stage in their careers — and those nonprofit organizations who fail to offer a top-quality retirement plan may be passed over for an organization that does.


Background Insight

Retirement benefits such as 401(k), 403(b) or defined benefit plans are becoming more and more important in recruiting and retaining employees. According to a Towers Watson study, 35% of respondents cited retirement benefits as a key factor in their decision to accept a position with their employer while 47% said retirement benefits were an important reason to stay with their employer.

Potential Impact

A healthy, robust retirement plan can aid in the hiring process, potentially reducing cycle times while attracting the industry’s most sought-after employees. It can also help mitigate unnecessary turnover and the costs associated with talent replacement. Leveraging that plan as a tool for attracting and retaining talent in today’s competitive market requires continual evaluation of the plan design against industry best practices and the competing landscape in order to drive plan optimization, improve participant outcomes and create a cohesive relationship with institutional hiring objectives.

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Floating vs. Fixed Rates

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In seeking capital to fund business growth, it is important to determine where on the fixed – floating interest continuum a borrower belongs.

If you’ve been utilizing the same philosophy for more than a year, it may be time to reassess your fixed-floating mix to ensure your business is not taking unnecessary risk.


Background Insight

Companies should assess whether they should manage their own interest rate risk (e.g. floating rate) versus paying a premium to a third party to manage the risk for them (e.g., via an Interest Rate SWAP). This analysis should consider, without limitation: (i) comparing the proposed floating interest costs to the company’s overall profitability (e.g., EBITDA) now, in the future and cumulatively; (ii) how fast the underlying debt amortizes; (iii) the basis point difference between the proposed fixed and floating rate; (iv) un-systemic sensitivities/risks to the company’s financial covenant; and (v) other contractual commitments/events of financial default. This analysis, which should be stress-tested under different hypothetical interest rate environments, will avoid the knee jerk reaction of wanting to steer clear of possible negative consequences (e.g., the potential of higher interest rates) while not allowing the company’s own numbers to speak for themselves.

Potential Impact

Let’s assume: $10.0 million of new debt with a five-year amortization, a 100-bps fixed rate premium, EBITDA per year of $3.0 million and a systematic doubling of the base interest rate (30 Day LIBOR at, for example’s sake, 2.25%) over the five-year period (to say 4.50%). At the end of the five-year period, the company’s EBITDA will aggregate to $15.0 million, its floating interest costs to fixed cost would be, for all intents and purposes, breakeven. Reason: as the debt amortizes, the interest risk in absolute dollar exposure declines, ergo the reason hedge funds and others underwrite the other side of the Interest Rate SWAP trade.

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Credit Enhancement

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Most business owners view personal guarantees to secure credit as obligatory, rendering them with little consideration, even when the borrowing enterprise no longer needs their signature.

They are dangerous and should be avoided as they can, when called, have severe personal financial implications and distract from the running of the business.


Background Insight

A personal guarantee is a common type of credit enhancement that lenders often request from business owners when a company does not have the assets or track record to borrow on its own. While sometimes necessary to secure needed capital, as a business evolves, personal guarantees should be mitigated or avoided.

Potential Impact

There is a false impression among most companies that personal guarantees (when called) come into play only when the lending institution exhausts the liquidation of the company’s assets. That is not true. Personal guarantees can be called at any time (including for technical or financial defaults or other material adverse conditions). If exercised, the bank can move against the guarantor’s liquid assets, primary residence and all other assets; leaving the guarantor’s assets at risk and the company’s assets untouched. As to other forms of indebtedness, e.g. real estate leases, the landlord’s claim in bankruptcy court is a lot less powerful and most likely will be limited to one year of lease commitment payments. That limited amount of money most likely will be classified as unsecured liability of the bankrupt estate (which puts the landlord’s claim on the same footing as vending machine supplier). To avoid this plight, property owners are highly motivated to attain personal guarantees. Under economic theory, all buyers and suppliers (banks, property owners, borrowers and tenants) have a surplus capacity to which they will give/pay. The only way to determine this economic surplus is to negotiate for the avoidance, removal or step-down of these credit enhancements, and the best time to do so is at inception or, alternatively, upon restructuring of the agreement (either at renewal or otherwise).

Every Business Is Unique. Let’s Talk About Yours.
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Self-Insured Health Plan

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To counter the relentless forces of rising health care costs, while improving health care coverage for its employees, companies with over 100 employees may want to consider a self-insured plan.


Background Insight

Year over year increases in the cost of health care insurance, which erode the earnings capacity of every American company and citizens, are created by the oligopolistic nature of insurance carriers and the perverse nature of procedural reimbursements built into the United States healthcare system. Health care insurance is the most inflationary expense interfering with a company’s competitive use of its own resources. Under the right circumstances, the adoption of a self-insured plan can be an attractive option for employers looking to both save costs and improve health care coverage.

Potential Impact

A well-designed, self-insured plan could equate to a potential cost per participant of $7.00 to $11.00 per day (total insurance premiums divided by number of lives covered divided by 365 days). The pricing of a self-insured plan is typically not complex, but they are somewhat oblique in the areas of drug reimbursement and subsidized premiums. By working with a well-informed provider, and through careful comparison of premium prices to actuarial modality and knowledge of the mark-ups on drugs by the Pharmacy Benefit Manager, informed companies should be well equipped to engineer out otherwise significant inefficiencies in their health care plans. In both health care coverage and prescription drug reimbursement, savings of 10% to 15%, per year (or one-year worth of free health insurance coverage for every 8.33 years on average), would not be beyond the realm of reasonable.

Let's Talk More About Ways to Improve Profitability.
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Outsourced Recruitment Management for Nonprofits

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Recruiting and retaining top talent is a challenge for nonprofits regardless of their mission, particularly during peak growth periods when finding the right people is the key to a vibrant and sustainable future.

Winning the war for talent requires not only continuous dedication and persistence but also innovative talent acquisition strategies.


Background Insight

“War for talent” and “candidate-driven market” are just a few of the phrases heard on a daily basis in this increasingly competitive era of historically low unemployment. A McKinsey Global Institute Study suggests that employers in both Europe and North America will require 16 to 18 million more college educated workers in the year 2020 than are actually available for work.

Potential Impact

Organizations should consider alternative approaches to recruitment, in particular, outsourced recruitment services based on a fixed fee model versus the more traditional transactional, fee-based searches. A fixed fee model to facilitate all or parts of the recruitment / hiring process – job profiling, candidate sourcing and identification, interview process facilitation, references, offers and ongoing talent planning – can quickly prove to be a cost-effective means for securing top-notch talent. In a typical recruiting model, a staffing firm doesn’t get paid unless they fill the role. Under a fixed fee arrangement, the economics, and thus the incentives, are different. Nonprofits are given a fully engaged partner who can invest as much time as necessary to find the right candidate versus a candidate only being placed so the staffing firm can get paid. Plus, nonprofits can turn the monthly fixed fee on and off. There’s no commitment or penalty – the recruitment resource is always there and can be dialed up or down as needed.

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Cost of Capital

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Companies should seek the optimal mix of financing – a mix that provides adequate funding while minimizing the cost of capital.

Doing so will provide for a more financially aligned balance sheet that allows excess non-operational cash to be returned to the company’s investors via a systematic dividend payment policy.


Background Insight

Cost of capital is directly related to its contractual usage of that capital. For example, senior bank debt typically has the lowest after-tax cost of capital. Reason: senior bank debt is restricted to a contractual purpose such as supporting a company’s working capital or to acquire long-lived operational assets. On the other side of the cost of capital continuum is equity capital. Equity capital (either retained through internal profits or raised capital) can be used for any purpose that management sees fit (e.g., fund losses, venture into undeveloped markets, research and development, etc.).

Potential Impact

Having a properly structured balance sheet means carrying the right mix of financial capital.  When a company has enough cash or standby working capital lines of credit to hedge intra-year and inter-year operational volatility, they may want to consider releasing the enterprise’s excess non-operational cash. Keeping excess non-operational cash on the balance sheets will interfere with investor’s returns, operational efficiencies of the enterprise and subjects otherwise distributable capital to corporate level operational and legal risks.

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Financial Statement Enhancement for Nonprofits

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Accurate, transparent and complete financial statements provide nonprofit leaders with an objective gauge of their organization’s financial position and stability.


Background Insight

It is not uncommon for a nonprofit to account for grants and contributions in a manner which is not entirely compliant with accounting principles generally accepted in the United States (GAAP). The result of such treatment is financial statements which present an inaccurate depiction of liquidity, profitability and cash flows of the organization.

Potential Impact

Working capital is the most readily-available, interest-free source of cash for a nonprofit. Having the liquidity of an organization trapped in uncollected accounts receivables or excess inventory can critically diminish the cash available to a nonprofit to fund growth and advance its mission. Adequate working capital can reduce the need to seek funding from an outside source. Accurate and complete financial data provides the basis for an effective working capital strategy.

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R&D Tax Credit

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The R&D Tax Credit was designed to stimulate growth in the U.S. economy by allowing companies to capture and claim valuable tax incentives.


Background Insight

Most companies in the United States, ranging from manufacturers to software engineering companies, are involved in some qualified research and development activities. Under existing federal and state income tax legislation, certain companies can qualify for these activities both retroactively (i.e., back three years) and prospectively. Unfortunately, many sizable R&D Tax Credit opportunities go unnoticed or unclaimed because taxpayers are often uncertain whether their activities qualify and the rules for calculating the credit can appear to them to be cumbersome and complicated.

Potential Impact

The cumulative impact of this tax enhancement can be significant, potentially measuring in the hundreds of thousands of dollars, if not millions of dollars, depending on a company’s specific circumstances. Based on present federal and state income tax laws, every dollar that has been or will be spent by an eligible company on qualified domestic labor, supplies and other expenses related to productivity enhancements or discoveries, could generate upwards of a 13% recoupment of capital. Thanks to the PATH Act, companies also now have the option to claim the R&D Tax Credit against the employer portion of social security tax (capped at up to $250,000 per year).

Let's Talk About the Applicability of the R&D Tax Credit for Your Business.
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Fraud Examinations & Forensic Accounting for Nonprofits

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Without a strong internal control structure across both operations and information technology, nonprofits are at risk of fraud occurring.


Background Insight

Fraud is often committed against an organization by its own officers, directors, or employees. Time and again, this type of attack against an organization occurs from within, by the very people entrusted to protect its assets and resources. Contrary to popular belief, nonprofit fraud is rarely committed by seasoned criminals; it is most commonly committed by individuals with no prior criminal history. Once fraudulent activity is detected, immediate action should be taken to stop the perpetrator and recoup stolen assets. Said actions should include having a fraud examination performed to determine the value of the loss, how it occurred and what internal controls failed. Recoupment of losses should be addressed through legal avenues with forensic accountants assisting litigators and/or ensuring your internal control structure is fortified to mitigate future risk.

Potential Impact

Annually, fraud equates to $4 trillion dollars globally, as compared to the global GDP. Most fraud goes undetected for an extended period of time (typically more than a year). It is most often perpetrated due to a lack of internal controls, the override of existing controls, lack of management review, poor tone at the top and/or lack of competent personnel in oversight roles.

Let's Talk About Ways You Can Mitigate the Risk of Fraud.
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Massachusetts Security Corporation (MSC)

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Establishing a subsidiary as a Massachusetts Security Corporation (MSC) to hold invested securities can be a valuable tool for shielding invested capital from the standard Massachusetts corporate income tax rate of 8.0% and the added tax on net worth.


Background Insight

To qualify as an MSC, an entity must engage exclusively in buying, selling, dealing in, or holding securities (except securities of a DISC) on its own behalf and not as a broker. As an MSC, the entity would not be subject to the Massachusetts corporate income tax rate of 8.0% on its net income and the corporate excise of 0.26% on its net worth (or tangible property). Instead, an MSC would generally be taxed at 1.32% of its gross income.

Potential Impact

Massachusetts C corporations may want to consider forming a Massachusetts Security Corporation subsidiary if the parent corporation holds or is anticipated to hold invested securities. Through this design, the taxable income on realized gains can be lowered by an effective 83.5%.

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Revenue Recognition

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The new revenue recognition standard was effective for private companies with reporting periods beginning after December 15, 2018. Are you ready?


Background Insight

In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers in virtually all industries in U.S. GAAP, including those that followed industry-specific guidance such as the real estate, construction and software industries. The new standard establishes a single, comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer.

Potential Impact

If reporting requirements require you to prepare financial statements under U.S. GAAP then you need to be concerned about this new standard. The potential impact of the new standard for revenue recognition should not be taken lightly. It could have far-reaching implications throughout an organization – affecting everything from financial and operational processes to system and governance change. Calendar-year entities must implement the new requirements as of January 1, 2019. Securing expert outside assistance is highly recommended for those companies still trying to assess the changes’ true impact on revenue and struggling to come to terms with the scope of their implementation needs and the degree to which they may need to modify their revenue accounting processes.

Let's Talk About What Impact the New Rev Rec Standard Will Have on Your Organization.
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Nonprofit Audited Financial Statements

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Every nonprofit should have a comprehensive plan for minimizing risk.  Audited financial statements should be an essential part of that plan. Background Insight It is not uncommon for a nonprofit to account for grants and contributions in a manner which is not entirely compliant with accounting principles generally accepted in the United States (GAAP), resulting in inaccurate and incomplete financial information. Financial statements audited by a reputable CPA firm minimize risk from both internal and external perspectives. Potential Impact Poor management of working capital, the most readily-available, interest-free source of cash for a nonprofit, is one of the key risks that needs to be minimized. Audited financial statements provide nonprofit leaders with accurate financial data which enables effective decision making for the proper management of working capital. Audited financial statements provided to third parties, such as vendors, lenders or investors, immediately increase a nonprofit’s credibility with such parties.  Nonprofits who present audited financial statements to potential financing sources generally secure optimal financing terms, such as (i) lower interest rates; (ii) no or minimal personal guarantees; and (iii) appropriate financial covenants.

Let's Talk More About the Value of Audited Financials.
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Insights & Information for Nonprofits

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Work backwards – prioritize what information and insights you feel are critical for your role and then demand them from within your nonprofit organization.


Background Insight

As the saying goes, if I had a penny for every person wanting to sell me some form of dashboarding tool, I’d be rich…  Not that such tools aren’t valuable and nice to have. But doesn’t it make more sense, regardless of the management role you play in the organization, to stop and take stock in what information is missing in order to make the best decisions for your nonprofit? An infinite number of books have been written about leadership and strategy, setting visions and determining the best way to execute on those visions. Heck, let’s have a management retreat to assess all this. Shouldn’t the execution part assume you have all the information and insights you need? Or are you starting in a wounded position destined to fail on that execution? Try this: Take a self-retreat for a half day or a day, without interruptions, and assess where you regularly have or should have the most day-to-day impact on your organization. Then assess your information needs — what information do you need to succeed in your role, what information is available and what is missing. And for available information, what is not in quality form or arrives too late to be of any real value.

Potential Impact

Consider this example relative to treasury. Say you are the lead finance person within your organization responsible for the management of working capital and cash. Outside of timely financial reporting, do you receive regular cash collection reports, DSO statuses, mid-month aging reports, and overdue receivable collection effort statuses, just to name a few? With that information provided to you in an accurate and timely format, would you now be better equipped to make decisions that can change outcomes for your nonprofit?

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Audited Financial Statements

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Well-prepared, audited financial statements can ease the burden of financial reporting requirements while simultaneously building the financial credibility of the business.


Background Insight

Financial statements prepared under accounting principles generally accepted in the United States (GAAP) are often required in a variety of contractual and regulatory arrangements, whether bank financing, investor reporting, or government funding. Having accurate and informative financial statements prepared with an in-depth understanding of how financial statements are utilized by these various users can alleviate the burden of a business’s reporting requirements.

Potential Impact

Financial statements presented to a lender or investor offer insight into the financial health of a business. The presentation of the liquidity, profitability and cash flows in an accurate and clear manner is imperative to mitigate the credit risk of a business with investors, banks and other third parties. Businesses who present a history of audited financial statements build financial credibility and create increased negotiation power for their next refinance or capital raise.

Let's Talk More About the Value of Audited Financials.
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Mega Backdoor Roth IRA Strategy for Nonprofits

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Optimization of a nonprofit’s 401(k) plan to include the ability for participants to make after-tax contributions in an “after-tax account” affords high-income individuals a way to build tax free assets.

This strategy is commonly referred to as a Mega Backdoor Roth IRA.


Background Insight

As of 2019, individuals can contribute up to $19,000 annually to a 401(k) plan ($25,000 for those over age 50). Each individual can select pre-tax contributions and defer taxes until the money is withdrawn in retirement or Roth contributions where money is put into the plan on post-tax and grows tax free. And anyone can contribute to traditional IRAs. The maximum contribution in a traditional IRA or Roth IRA is $6,000 ($7,000 if you’re age 50 or older). Traditional IRAs, like 401(k)s, offered tax deferred growth. Roth IRA’s are funded with after-tax dollars and grow tax free, but for those who fall within specific income guidelines, contributions to a Roth IRA are not allowed. This is where an “after-tax account” comes in. Due to a 2014 IRS ruling, if the plan allows, individuals can “super” fund a Roth IRA by making after-tax contributions to their 401(k) plan (subject to IRC guidelines). Those after-tax contributions can be rolled directly into a Roth IRA when employees are still employed with the company or leave the company. Doing so can generate significant tax-free income in retirement. Far more than compared to the standard method of funding a Roth IRA.

Potential Impact

The funding of after-tax contributions into a 401(k) plan enables individuals to accumulate more assets in a tax-efficient manner. This added benefit serves to attract and retain top talent, in particular senior-level management and executives with high income levels.

Let's Talk More About Ways to Help Your Employees Save for Retirement.
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Cybersecurity Assessment

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Any company handling confidential or sensitive information is a target for cybercrime because the data can, and is, being monetized.

This harsh reality underscores the critical need for well-defined controls around the security of this type of information.


Background Insight

No industry or organization can fully shield themselves from the number one growing risk to its business, cybercrime. New attacks and widespread breaches have led to an increase in regulatory controls prompting organizations to scramble to establish risk management programs. And more Boards of Directors are being tasked with understanding and monitoring their cybersecurity policies and practices.

Potential Impact

A data breach is one of the most serious incidents that can befall a company. Losing customer data, personal or sensitive information, can lead to large fines, damage to a company’s reputation and the potential loss of customers. Research suggests the global cost of cybercrime will reach $2 trillion by 2019, with the average cost per breach at the organization level being approximately $7 million in the United States. As a first step in safeguarding cyber assets, organizations should perform a cybersecurity assessment. Performed in conjunction with a cybersecurity professional, management and their Boards can gain a better understanding of their current cybersecurity environment and will be better equipped to refine existing strategies and enhance their overall cybersecurity preparedness.

Let's Talk About Data Protection Measures for Your Company.
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Depreciation of Long-Lived Assets

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Long-lived assets provide a company with a future economic benefit beyond the current year or operating period, but their depreciation method should be carefully considered as reported profits are directly affected by the selected method and term.


Background Insight

In countenance of United States generally accepted accounting principles (GAAP), many companies are incorrectly depreciating long-lived assets over time periods significantly shorter than the earnings accumulation process related to those assets.

Potential Impact

By continuing to follow non-reflective economically based depreciation methods and timing, companies are unintentionally lowering their earnings and are contemporaneously depressing their reported stockholders’ equity. This combination is inconsistent from GAAP and it inadvertently and adversely inflates the company’s debt to tangible net worth leverage ratios and deflates its profitability and other discernible economic matrices to its key stakeholders. Given that companies compete for resources based in part on their financial statements including, without limitation, bank debt and related terms, companies may want to consider realigning their depreciation methods to the economics of their own asset lives.

Every Business Is Unique. Let’s Talk About Yours.
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Patriot Act: FBAR Requirement

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Any United States persons with a financial interest in or signature authority over foreign bank and financial accounts, and any company engaged in foreign activities, must file an annual FBAR or face massive penalties.


Background Insight

The Foreign Bank Account Report (FBAR) requirement for United States residents and citizens was established under the Bank Secrecy Act of 1970. Its intent is to aid the IRS and the United States Treasury in tracing funds used for illicit purposes or identifying unreported income maintained or generated abroad. Initially, the reporting requirements were loosely enforced, however with the enactment of the Patriot Act of 2001, the Treasury was tasked with providing Congress with improved methods of FBAR compliance.

Potential Impact

Any company or individual engaged in foreign activities may be required to file the FBAR by April 15th of each year if the aggregate value of all foreign bank accounts owned by the company or its foreign subsidiaries exceeds $10,000 on any given day during the tax year. In addition, company officers with signature authority over a financial interest in the accounts must file an FBAR with the IRS before April 15th of each year. (Note: the FBAR filing deadline follows the Federal income tax due date guidance, meaning when the Federal income tax due date falls on a Saturday, Sunday, or legal holiday, the due date is delayed until the next business day.) Significant civil and criminal penalties now exist and are being enforced for failure to comply with the FBAR requirements. These penalties are no less than $10,000 per violation and if there is a willful failure to report foreign earnings, the penalties can be the greater of $100,000 or 50% of the account balance at the time of the violation.

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Payables Management for Nonprofits

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Much is frequently said about the importance of receivables management relative to the enhancement of working capital. However, how nonprofits manage the payment of their bills to vendors can also have a dramatic impact on their working capital and cash flow.


Background Insight

What is your organization’s culture and style relative to paying its bills?  Styles range from having virtually no payables other than accrued payroll because bills are effectively paid immediately, to stretching out every payable to where vendor relationships are damaged. Obviously, neither end of the spectrum is ideal for nonprofits. Why would a nonprofit prepay all its bills and borrow on its line of credit to do so? Conversely, why would a nonprofit make its vendors distrust them because they stretch payment of their bills beyond reason? In the same way nonprofits ensure they have appropriate credit and collections policies in place, they should have payment and procurement policies in place to support the ability to negotiate the best terms. Possible measures to consider in developing sound payables management processes, include, among many others, (i) tracking each vendor’s “standard” terms relative to payment due dates and paying no sooner than necessary and (ii) negotiating standard terms, sometimes, aggressively. A nonprofit’s largest vendors may negotiate 45 or 60-day terms rather than 30 days due to the volume of business your organization does with them. These terms and negotiations should be standard policy in an organization, other than situations where discounts are offered for early payment. With that said, the discount payment days can also be negotiated off standard vendor provisions.

Potential Impact

If you’ve never or infrequently sought to negotiate better payment terms with your vendors, you will be surprised at the impact negotiated terms can have on a nonprofit’s cash flow. If organizations can squeeze 15 to 30 days out of their payable days outstanding on all or much of their non-payroll related expenditures by simply negotiating better, the effect on available cash is likely greater than one might think. Taking advantage of these possible enhancements can serve to increase cash flow and, potentially reduce interest costs. Moreover, even if a nonprofit doesn’t currently borrow, these dollars may instead be available for new mission-driven initiatives or for simple cushion to strengthen the balance sheet.

Let's Talk About Ways to Fuel Your Nonprofit's Growth.
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Revenue Recognition for Nonprofits

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The new revenue recognition standard was effective for nonprofits with reporting periods beginning after December 15, 2018. Are you ready?


Background Insight

In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers in virtually all industries in U.S. GAAP. The new standard establishes a single, comprehensive framework which sets out how much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for those goods or services. Revenue will now be recognized by a vendor when control over the goods or services is transferred to the customer.

Potential Impact

If reporting requirements require you to prepare financial statements under U.S. GAAP then you need to be concerned about this new standard. The potential impact of the new standard for revenue recognition should not be taken lightly. It could have far-reaching implications throughout a nonprofit organization – affecting everything from financial and operational processes to system and governance change. Calendar-year nonprofit entities must implement the new requirements as of January 1, 2019. Securing expert outside assistance is highly recommended for those organizations still trying to assess the changes’ true impact on revenue and struggling to come to terms with the scope of their implementation needs and the degree to which they may need to modify their current revenue accounting processes.

Let's Talk About What Impact the New Rev Rec Standard Will Have on Your Organization.
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SOC 2 Report

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Today’s security-concerned environment is translating into a fast-growing customer need for information and assurance regarding the structure and procedures of the systems used by an organization to process user entities’ data.


Background Insight

More and more, service providers are finding prospective customers demanding proof that adequate controls are in place to protect their sensitive and/or confidential data before signing a contract and engaging in business with them. The solution to this is known as a System and Organization Controls (SOC) Report. A SOC 2 report is an attestation from a CPA firm providing assurance in the areas of security, confidentiality, availability, processing integrity and privacy. Often, this report can also be referenced for requests for a security questionnaire.

Potential Impact

It is becoming more common for prospective customers to expect audited controls statements or reports that address their need for assurance on the confidentiality and privacy of the information processed by a service provider’s systems before contracting to do business. Failure to produce such assurance can cause loss of potential revenue, possible loss of existing customers and/or a barrage of inquiries from customer auditors seeking assurance for their clients.

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Fiduciary Risk Management for Nonprofits

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Faced with increasing litigation and heightened regulatory scrutiny, many retirement plan sponsors seek to mitigate or otherwise transfer their risk, particularly in the area of investments where they are often not comfortable making the plan’s investment decisions themselves.


Background Insight

The Pension Protection Act of 2006 (PPA) requires evidential matter regarding fiduciary responsibilities. Under this Act, a company, as plan sponsor, along with organization executives as plan fiduciaries, are liable for failing to follow administrative procedures in compliance with a vibrantly changing ERISA regulatory environment. This includes everything from managing plan fees and expenses and choosing and monitoring the appropriate investments to complying with reporting and disclosure requirements and conducting employee educational meetings. The Department of Labor (DOL) and lawyers across the U.S. are taking this law seriously and are actively opening investigations and bringing about lawsuits against plan sponsors and plan fiduciaries for non-compliance. These claims have resulted in regulatory penalties, class action lawsuits, a destabilized workforce and, in certain instances, an increased risk of collective bargaining among employees.

Potential Impact

For many plan sponsors, the inherent risk they carry as it relates to plan investments is heightened as they lack in-house investment expertise. As such, many seek outside assistance from a 3 (21) investment advisor or a 3(38) investment manager. A 3(21) investment advisor is a co-fiduciary role. They present investment recommendations to a plan sponsor for consideration and possible implementation. The actual execution of plan investment changes, and its associated risk, still, however, falls squarely on the shoulders of the plan sponsor. Conversely, a 3(38) investment manager is not simply an “advisor” as they are given authority to select, monitor and remove/replace investment options offered in the plan. They can execute plan investment changes as they see fit because the plan sponsor has legally transferred the fiduciary liability associated with the investment plan to the investment manager, thereby reducing their own risk and placing it squarely upon the investment manager.

Let's Talk About Your Fiduciary Risk.
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Lease Accounting for Nonprofits

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The new lease accounting standard affects all nonprofits that lease assets, and the implications on an organization go beyond just accounting, with the potential to affect everything from contract negotiations to business processes and controls.


Background Insight

In early February 2016, the Financial Accounting Standards Board (“FASB”) issued a new leasing standard (Topic 842) for both lessees and lessors. Under its core principle, the new standard requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Nonprofits organizations must implement the new requirements as of January 1, 2020. The deadline is looming, and the implications are significant. Nonprofits may need to devote significant time to implement the guidance to ensure they comply with the new requirements.

Potential Impact

By far, the biggest impact of the new standard is the requirement that ALL leases be recognized on the balance sheet of the lessees’ financial statements (except those for which the short-term lease exemption has been elected). Under prior U.S. GAAP, the key determination was whether a lease was an operating lease or capital lease as that drove whether a lease was recognized on the balance sheet. There were no major differences in accounting between an operating lease and an executory contract, and entities may not have historically put significant focus on the prior lease definition. Under the new standard however, the key determination will be whether a contract is or contains a lease as that will drive whether a contract is recognized on the balance sheet.

Let's Talk About What Impact the New Leasing Standard Will Have on Your Organization.
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Entity Structure: S Corp to LLC

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For companies structured as S corporations, consideration should be given to converting to an LLC as it provides more flexibility in how the company is managed.

From a tax perspective it is a mine field, yet if you know the intricacies of the conversion, it can be a gold mine worth excavating.


Background Insight

S corporations, which were formed in 1958 and which provide a pathway to after-tax investor wealth, are (by comparison to an LLC) restrictive relative to (i) optimizing that after-tax wealth and (ii) accessing equity in today’s capital formation markets. They subject their shareholders to the default provisions of state security protection laws including, without limitation, judicial and statutory minority dissension and oppression rights. They are also less than flexible relative to today’s need for entrepreneurial agility including, without limitation, (i) limiting the company’s treasury to one class of stock; (ii) limiting the number of shareholders a company can have; (iii) restrictions on who can be a shareholder; (iv) inadvertent risk of revocation; and (v) various tax loss sheltering limitations.

Potential Impact

Forming an LLC from the beginning or reorganizing as parent/wholly-owned LLC eliminates the S corporation restrictions and replaces them in their entirety. Accentuating the major differences are: (i) the operating agreement of the LLC effectively becomes the codification of the laws among the investors which can avoid  minority dissension and oppressing rights; (ii) allows for a multi-dimensional capitalization table to recruit, reward and retain talent; (iii) provides the ability for step-up asset values on a cross purchase (e.g. on death, termination of employment, sales transaction, etc.); (iv) allows for joint venture structures with other enterprises; and (v) allows investments by venture capital, private equity or corporate sponsors. The economic impacts can be significant and varied. For example, operational losses funded via bank debt can flow through to the members of an LLC, but not those of an S corporation. This flow-through tax shelter can offset other income from most other sources, making the United States Treasury and its State Treasury counterparts true partners in your future.

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RIA Surprise Exam

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If a Registered Investment Advisor has custody of clients’ assets, annual Surprise Examinations are an unavoidable regulatory requirement.


Background Insight

In 2010, the SEC promulgated regulations that required all Registered Investment Advisors (RIA) having “custody” of their client’s’ assets to undergo an annual surprise examination performed by an independent accountant. The regulation was adopted in the wake of the Bernie Madoff scandal through which his RIA firm fraudulently misappropriated tens of billions of dollars of client assets while providing them with doctored statements showing exorbitant returns through a down market. The extent of Madoff’s fraudulent activities was unprecedented and debilitated the financial livelihood of his clients who entrusted him with their money.

Potential Impact

Registered Investment Advisors are charged with a great deal of trust and responsibility in managing their client’s’ life savings. Annual Surprise Examinations are an SEC regulatory requirement for RIA’s that have “custody” under Rule 206(4)-2 of their clients’ assets and are intended to validate that client accounts are intact and accounted for. Violations of the Custody Rule and avoidance of a surprise examination come with steep monetary fines and other penalties including, cease and desist orders and long-term suspensions for the RIA. If the RIA chooses not to comply, eventually, their non-compliance will be discovered during an SEC audit.

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Treasury Methodologies: Payables

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Much is frequently said about the importance of receivables management relative to the enhancement of working capital. However, how companies manage the payment of their bills to vendors can also have a dramatic impact on their working capital and cash flow.


Background Insight

What is your company’s culture and style relative to paying its bills?  Styles range from having virtually no payables other than accrued payroll because bills are effectively paid immediately, to stretching out every payable to where vendor relationships are damaged. Obviously, neither end of the spectrum is ideal for businesses. Why would a company prepay all its bills and borrow on its line of credit to do so? Conversely, why would a company make its vendors distrust them because they stretch payment of their bills beyond reason? As companies ensure they have credit and collections policies in place, they should have payment and procurement policies in place to support the ability of their purchasing personnel to negotiate the best terms. Possible measures to consider in developing sound payables management processes, include, among many others, (i) tracking each vendor’s “standard” terms relative to payment due dates and paying no sooner than necessary and (ii) negotiating standard terms, sometimes, aggressively. A company’s largest vendors may negotiate 45 or 60-day terms rather than 30 days due to the volume of business your company does with them. These terms and negotiations should be standard policy in an organization, other than situations where discounts are offered for early payment. With that said, the discount payment days can also be negotiated off standard vendor provisions.

Potential Impact

If you’ve never or infrequently sought to negotiate better payment terms with your vendors, you will be surprised at the impact negotiated terms can have on a company’s cash flow. If companies can squeeze 15 to 30 days out of their payable days outstanding on all or much of their non-payroll related expenditures by simply negotiating better, the effect on cash is likely greater than one might think.  For example, assume a company does $50 million in revenues and has gross product margins of 30%. Each 15-day enhancement of payable days outstanding represents $1.4 million. Taking advantage of these possible enhancements can increase cash flow and, potentially reduce interest costs. Even if a company doesn’t borrow, these dollars may instead be available for further distribution to stockholders or for simple cushion to strengthen the balance sheet. Likewise, a potential acquirer would typically require a company to leave “normal working capital” in the business at the time of sale. If companies can change the “normal” payable days by 15 or 30 days well before a sale, the impact of those enhancements will effectively be a dollar for dollar increase on the purchase price.

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Fraud Examinations & Forensic Accounting

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Without a strong internal control structure across both operations and information technology, companies are at risk of fraud occurring.


Background Insight

Corporate fraud is often committed against an organization by its own officers, directors, or employees. Time and again, this type of attack against an organization occurs from within, by the very people entrusted to protect its assets and resources. Contrary to popular belief, corporate fraud is rarely committed by seasoned criminals; it is most commonly committed by individuals with no prior criminal history. Once fraudulent activity is detected, immediate action should be taken to stop the perpetrator and recoup stolen assets. Said actions should include having a fraud examination performed to determine the value of the loss, how it occurred and what internal controls failed. Recoupment of losses should be addressed through legal avenues with forensic accountants assisting litigators and/or ensuring your internal control structure is fortified to mitigate future risk.

Potential Impact

Globally, annual corporate fraud equates to $4 trillion dollars, as compared to the global GDP. Most fraud goes undetected for an extended period (typically more than a year). It is most often perpetrated due to of a lack of internal controls, the override of existing controls, lack of management review, poor tone at the top and/or lack of competent personnel in oversight roles.

Let's Talk About Ways You Can Mitigate the Risk of Fraud.
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Roth IRA Conversion Strategy

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Converting a 401(k) or an IRA account into a Roth 401(k) or Roth IRA account is a unique opportunity to build wealth for those who qualify.


Background Insight

Unlike an IRA, 401(k) or other qualified retirement plans, distributions from Roth accounts are free from federal and state income taxes. They are also not subject to minimum distributions upon reaching the age of 70 ½. As a tax-exempt structure, A Roth IRA not only benefits individuals, but it can also leave a legacy of wealth to one’s successors – a dynastic economic opportunity only few Americans possess.

Potential Impact

While tax-deferred growth offered by 401(k) and IRA accounts is meaningful, the ability to enjoy tax FREE growth is exponentially more beneficial on many levels. You not only retain 100% of your Roth distributions for spending during your retirement, you also pay less tax on your other income and benefits during retirement, for a true double tax savings. And the lack of forced distributions provides tax-free accumulations and income to your heirs far exceeding regular retirement accounts. It’s not necessary to convert all of your 401(k) or IRA to a Roth account during a conversion. Careful planning enables you to optimize both the amount and particular investments to be converted at any time, over several years if desired, allowing for even greater tax savings over the long haul.

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Financial Statement Enhancement

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Transparent, informative and accurate financial statements are an essential tool in establishing the financial credibility of a business and can lead to greater access to external financing and/or investment.


Background Insight

Financial statements prepared under accounting principles generally accepted in the United States (GAAP) are a powerful tool in establishing financial credibility and optimally positioning a business owner when dealing with banks, investors and other third parties.  Accurate and informative financial statements also enhance and optimize the presentation of the economic value drivers of the business.

Potential Impact

Financial statements presented to a lender or investor offer insight into the financial health of a business. The presentation of the liquidity, profitability and cash flows in an accurate and clear manner is imperative to mitigate the credit risk of a business with investors, banks and other third parties.  Businesses who present audited or reviewed financial statements to potential financing sources generally secure optimal financing terms, such as (i) lower interest rates; (ii) no or minimal personal guarantees; and (iii) appropriate financial covenants.

Every Business Is Unique. Let’s Talk About Yours.
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Capital Structures

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An optimal capital structure and proper levels of standby credit resources can significantly influence a company’s competitive prowess, financial stability and investor rates of returns.


Background Insight

Non-widely held owner managed companies are often under-leveraged or over-leveraged. Issues and the risk associated with being over-leveraged are self-evident however, the issues and risk associated with being under-leveraged are subtler. Companies that are under-leveraged overly rely on equity and, therefore, (i) are not properly designed for optimizing investor returns or (ii) have little needed financial capital for expansion and contraction to properly adjust to changing market conditions and strategic initiatives. Companies that hold excess non-operational cash balances are inadvertently suppressing investor returns while increasing operational inefficiencies (e.g., a company with excess non-operational cash is less apt to reduce cost, increase cost effectiveness, optimize customer sales and take timely corrective actions to change market conditions). Excess, non-operational cash looks like an economic shock absorber, but can quickly become a management pacifier.

Potential Impact

By having a properly designed capital structure and standby credit resources, a company’s capital can be better allocated and, therefore, more productively used – including allowing for the systematic distribution of excess cash to the investors of a well-defined dividend policy. Key structural considerations include the cost and terms of that capital, the corresponding impact on investor returns and a company’s ability to weather ever-changing economic conditions.

Every Business Is Unique. Let’s Talk About Yours.
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Employee Retirement Plan Optimization

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Retirement planning is a significant concern for working professionals at every stage in their careers — and those companies who fail to offer a top-quality retirement plan may be passed over for an organization that does.


Background Insight

Retirement benefits such as 401(k), 403(b) or defined benefit plans are becoming more and more important in recruiting and retaining employees. According to a Towers Watson study, 35% of respondents cited retirement benefits as a key factor in their decision to accept a position with their employer while 47% said retirement benefits were an important reason to stay with their employer.

Potential Impact

A healthy, robust retirement plan can aid in the hiring process, potentially reducing cycle times while attracting the industry’s most sought-after employees. It can also help mitigate unnecessary turnover and the costs associated with talent replacement. Leveraging that plan as a tool for attracting and retaining talent in today’s competitive market requires continual evaluation of the plan design against industry best practices and the competing landscape in order to drive plan optimization, improve participant outcomes and create a cohesive relationship with institutional hiring objectives.

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Cybersecurity Assessment for Nonprofits

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Any nonprofit handling confidential or sensitive information is a target for cybercrime because the data can, and is, being monetized.

This harsh reality underscores the critical need for well-defined controls around the security of this type of information.


Background Insight

No industry or organization can fully shield themselves from the number one growing risk to its livelihood, cybercrime. New attacks and widespread breaches have led to an increase in regulatory controls which are prompting organizations to scramble to establish risk management programs. And more Boards of Directors are being tasked with understanding and monitoring their cybersecurity policies and practices.

Potential Impact

A data breach is one of the most serious incidents that can befall a nonprofit. Losing customer or donor data, personal or sensitive information, can lead to large fines, damage to an organization’s reputation and the potential loss of donors and other supporters. Research suggests the global cost of cybercrime will reach $2 trillion by 2019, with the average cost per breach at the organization level being approximately $7 million in the United States. As a first step in safeguarding cyber assets, organizations should perform a cybersecurity assessment. Performed in conjunction with a cybersecurity professional, management and their Boards can gain a better understanding of their current cybersecurity environment and will be better equipped to refine existing strategies and enhance their overall cybersecurity preparedness.

Let's Talk About Data Protection Measures for Your Nonprofit.
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Tax-Exempt Life Insurance

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Tax-exempt life insurance is a financial instrument. It should be viewed as an asset allocation as it can expand the continuum of one’s asset allocations with greater durability and rate of return precision, thereby creating a tax-exempt worm hole into the future.


Background Insight

Typically, life insurance falls into two simplified categories: Term and Permanent. The name permanent life insurance is not only a misnomer, it is a serious mislabeling of one of the most powerful and complex financial instruments within the realm of American wealth creation. Although the word life and permanent is involved, neither is accurate.

Potential Impact

Permanent insurance is a complex, tax-exempt contractual agreement between several parties-in-interest. Whole life is a financial instrument that turns the policyholder into a stockholder receiving guaranteed tax-exempt dividends, and universal life insurance is a financial product that makes the policyholder a creditor receiving guaranteed tax-exempt credit ratings. Not only are the dividends and credit ratings from these financial instruments tax-exempt, policyholders can transfer their standby general cash reserves (cash held in banks or financial institutions or bonds in rising interest rate environments), either in whole or in part, into these tax-exempt financial instruments, thereby offering the potential to earn higher rates of return while maintaining liquidity equivalency and enjoying rising interest rates via the insurance company’s operating reserves. To leverage this strategy, designing a policy upfront to optimize insurance as an investment device is critical. For existing policies there might be provisions (that are now no longer allowed within insurance contracts) that allows the policyholder virtually unlimited excess cash infusions.

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Fiduciary Risk Management

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Faced with increasing litigation and heightened regulatory scrutiny, many retirement plan sponsors seek to mitigate or otherwise transfer their risk, particularly in the area of investments where they are often not comfortable making the plan’s investment decisions themselves.


Background Insight

The Pension Protection Act of 2006 (PPA) requires evidential matter regarding fiduciary responsibilities. Under this Act, a company, as plan sponsor, along with company owners and potentially the CEO/CFO/HR as plan fiduciaries, are liable for failing to follow administrative procedures in compliance with a vibrantly changing ERISA regulatory environment. This includes everything from managing plan fees and expenses and choosing and monitoring the appropriate investments to complying with reporting and disclosure requirements and conducting employee educational meetings. The Department of Labor (DOL) and lawyers across the U.S. are taking this law seriously and are actively opening investigations and bringing about lawsuits against plan sponsors and plan fiduciaries for non-compliance. These claims have resulted in regulatory penalties, class action lawsuits, a destabilized workforce and, in certain instances, an increased risk of collective bargaining among employees.

Potential Impact

For many plan sponsors, the inherent risk they carry as it relates to plan investments is heightened as they lack in-house investment expertise. As such, many seek outside assistance from a 3 (21) investment advisor or a 3(38) investment manager. A 3(21) investment advisor is a co-fiduciary role. They present investment recommendations to a plan sponsor for consideration and possible implementation. The actual execution of plan investment changes, and its associated risk, still, however, falls squarely on the shoulders of the plan sponsor. Conversely, a 3(38) investment manager is not simply an “advisor” as they are given authority to select, monitor and remove/replace investment options offered in the plan. They can execute plan investment changes as they see fit because the plan sponsor has legally transferred the fiduciary liability associated with the investment plan to the investment manager, thereby reducing their own risk and placing it squarely upon the investment manager.

Let's Talk About Your Fiduciary Risk.
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Buy-Side Due Diligence

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Whether your proposed deal is strategic or financial in nature, you must uncover the accounting, tax and IT information critical to the transaction to maximize deal value and minimize risk.


Background Insight

Due diligence is a key aspect in the overall evaluation and assessment of a target business. It enables companies to obtain a complete picture of the financial and operational realities of a target business by reviewing critical facets of the target business including quality of earnings and assets, risks and liabilities, management, the IT environment and employee benefit plans.

Potential Impact

The intent of a buyer’s due diligence efforts is to obtain a full picture of the target business including any risks related to corporate governance, financial reporting and the accounting environment in general. A well thought out due diligence process should focus on facts, trends and behaviors critical to the success of the deal, as well as risk factors that may preclude its success. You will want to substantiate valuation assumptions, confirm the sustainable run-rate of the business and gain insight into a wide variety of financial and operational factors of the target company. From a financial standpoint, it’s important to verify financial results and gain an understanding of the underlying performance of the organization as your offer should be based on. For starters, buyers should evaluate quality of earnings, identify overvalued, undervalued and unrecorded assets and liabilities, review forecasts and budgets, and assess prospective future operating results and cash flows. Regarding taxes, you not only want to conduct a historical analysis to identify tax risks and opportunities associated with the target company, but you also want to understand the tax implications of the proposed deal and determine the deal’s optimal tax structure. And last but not least, you will want to assess the issues and financial implications of the target’s technical environments and controls and review their retirement plan offerings to mitigate post-transaction issues and fiduciary risk.

Every Deal Is Different. Let’s Talk About Yours.
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Bank Financing: Credit Facility Design

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In a highly competitive commercial loan environment, aggressive negotiations or even initiating new banking relationships ensures the economics of the business environment align with a company’s improving bank financing qualifications.


Background Insight

A properly designed credit facility will (i) optimizes the company’s after-tax capital structures; (ii) increase its standby financing resources; (ii) free-up collateral and unwarranted guarantees; and (iv) provide management with the right facility that allows them the discretion they need to design and meet their business, investor and market strategies and objectives.

Potential Impact

From time to time, companies should consider running a competitive bank process. The purpose of such a process would be to vet out competitively advantageous debt structures thus affording a company the agility to act on opportunities as the arise and without the hesitancy of waiting on bank approval. In a typical competitive bank process, a company would outline its desired terms and conditions for its bank financing including, without limitation: (i) establishing key definitions relative to borrowing advances and financial covenants; (ii) changing the amortization methodology (a ramp-up versus self-leveling methodology); (iii) addressing the extent of or, more important, elimination of personal guarantees (including the use of marshaling agreements, where appropriate); (iv) making the company’s access to its credit facilities signature ready; (v) giving full discretion to management as to the extent of floating and fixed alternative rate structures; (vi) defining length and duration of draw commitment periods; and (vii) establishing automatic rolling renewals.

Let's Talk About the Terms & Conditions of Your Bank Financing.
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Stock Option Valuation

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For early stage and other privately-owned companies, the issuance of stock options is a strategic move that can help attract and retain the best employees at a minimal cost—if you can navigate the complexities of compliance with IRC 409A.


Background Insight

Section 409A of the Internal Revenue Code applies to all companies that offer nonqualified deferred compensation plans to employees. Stock options, restricted shares, and other instruments whose economic characteristics mirror equity instruments, such as stock appreciation rights (“SARs”), can all fall within the scope of Section 409A. The concern of the IRS at it relates to Section 409A is the issuance of stock options that are “in the money” (that is, with a strike price below the fair market value of the underlying stock), which effectively delays compensation by shifting it to a future tax year. Companies need to demonstrate that options are issued with a strike price that is no less than fair market value. One way a company can obtain “safe harbor” protection under Section 409A is by having its valuation conducted by a qualified, independent appraiser. The resulting deliverable of a 409A valuation is a formal report that sets the current value of a company’s common stock and the strike price to exercise an option to purchase that stock.

Potential Impact

Both employees (“service providers”) and employers (“service recipients”) could face steep penalties for failure to comply with Section 409A. Employees could face immediate (i.e., in the current tax year) ordinary income taxes due on the difference between the company’s actual fair market value at the time of grant and the “incorrect” strike price, plus a 20% penalty on such difference and interest for any prior tax underpayments. Employers, who are responsible for normal tax withholding and reporting obligations associated with amounts that should have been included in the employee’s gross income, could find themselves responsible for a significant un-withheld and unpaid tax burden associated with previously unreported income triggered by non-compliance with Section 409A. Issuing stock options is a great way to attract and retain the best employees but doing so without engaging a qualified, independent appraiser is a risk that’s likely not worth taking. A 409A valuation can provide more than just a safe harbor from IRS scrutiny; it can also support GAAP (Fair Value) reporting for stock-based compensation expense and serve as a useful benchmarking tool by providing critical insight regarding the changes to and drivers of the value of an organization.

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Strategic & Corporate Planning Valuation

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There are many circumstances in which knowing the value of your business before choosing a new strategic direction for your company will help you make the best decision for your circumstances, improve your negotiating position, or calibrate expectations.


Background Insight

Your business is at a crossroads—you’ve achieved more than you ever thought possible when you started on the journey of owning and operating your own business. Yet, you know significant capital, more space, and a more robust management team are all necessary to grow your business to the next level.  You’re excited by the growth potential you know your business still has. You know the task is tall, and you’ve sacrificed much to make it this far. Do you keep going? Or is it time to “cash in your chips?”

Potential Impact

As companies mature and progress through various stages of development, their needs change. In evaluating the range of potential strategic alternatives, business owners and management teams may find it useful to obtain the opinion of an independent business appraiser as to the value of their business. Whether you’re trying to decide if it’s the right time to sell your business, move assets to a new tax jurisdiction, or negotiate a new round of financing, having a baseline sense of what your company’s value is today will better inform your judgment and provide a sense of confidence about what you can expect.

Let's Talk About the Value of Your Business.
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Sales Tax Compliance

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The Supreme Court’s decision in South Dakota v. Wayfair has implications that will profoundly change a businesses’ sales and use tax compliance obligations.

Businesses that may have only had to collect and remit sales taxes in one or more states due to employee presence in those states may now need to file in over 33 states.


Background Insight

The Wayfair decision and the state reaction to it is by far one of the greatest changes to happen in state and local taxes in decades. The states have been pushing for change for a long time and federal legislation has been put forth for years trying to make this change. Before the Wayfair decision, the threshold test for whether an out-of-state vendor had to collect and remit sales taxes in a state was physical presence. Physical presence could include having solicitors, service providers and others in the state, even for one day, engaging in activities on the out-of-state vendors behalf. Without such physical presence, the in-state consumers not being charged sales tax on their taxable purchases were responsible for paying a use tax. Now, because of Wayfair, states can impose a sales tax collection obligation when a remote vendor has over a certain receipts threshold and/or number of transactions annually in the state. In Wayfair specifically, Wayfair was found to have nexus and therefore a sales collection obligation in South Dakota because it had sales over $100,000 or 200 or more transactions in the state annually.

Potential Impact

The state reaction to the Wayfair decision has been swift and it has changed the sales tax collection obligation requirements for businesses forever. Approximately 33 states already have rules in place with potentially actionable steps in those states relative to economic nexus and requirements to collect and remit sales taxes. The state rules vary in a multitude of ways, including enactment date; the threshold test and number of transactions; what is considered for the threshold test (is it gross receipts or taxable receipts); and the look-back period. Businesses should understand their nexus posture, understand the taxability of their revenues, identify exposure and/or where it may have sales tax collection and remission obligations and identify resources to ensure their continued compliance (e.g., sales tax automation). Failure to do so can have unforeseen consequences including, but not limited to, jeopardy assessments; negligence penalties; property liens; referrals to collection agencies; referral for criminal action to the state’s Attorney General; notices to the public regarding the tax delinquencies; and/or deduction from other state tax refunds. Many states also have personal liability provisions whereby the state can seek collection from those with a duty to administer sales/use taxes, such as officers, directors, or employees, in their individual capacities.

Let's Talk About Your State Tax Obligations.
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Asset Allocation & Staying Invested

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For confidence that your investment portfolio is well positioned to combat short-term market turbulence, your long-term strategy should be based on staying invested in an appropriate asset comprising investments that participate on the upside and protect on the downside.


Background Insight

Economic cycles are just that, cycles. They begin at a trough leading to a period of expansion followed by a peak giving way to a contraction and back to a trough. Although it’s simple to recognize the stages in hindsight, it’s impossible to consistently time when each stage will begin. Luckily for investors, they don’t have to precisely time markets to garner the rate of return to accomplish reasonable financial goals.

Potential Impact

There are three important components one should consider when looking to immunize their portfolio from the short-term vicissitudes of the markets to ensure long-term success. First, one should determine the appropriate long-term asset allocation to garner the rate of return needed to achieve their goals. Asset class returns are impossible to predict over the short-term, but they do follow long-term trends over full market cycles that make estimating a portfolio’s expected return possible. Second, individuals should utilize investments that protect on the downside and participate on the upside. One must be prepared to accept an investment that captures 80% of an up market move if the same investment will capture 60% of a down market move. And finally, investors should stay invested. According to J.P. Morgan Asset Management, investors in the S&P 500 over the last 20 years would have garnered an annualized return of 7.20% had they stayed fully invested. Had the investor missed 30 of the best days their annualized return would have dropped to -0.91%. A mere 30 days out of roughly 7,300 would have taken a positive long-term rate of return and dropped it to a negative rate of return.

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Financial Planning & Wealth Management Interplay

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Proper financial planning and an asset management structure that aligns goals with reasonable long-term rates of return is often an effective approach to building, growing and protecting wealth.


Background Insight

Every individual is different as is their financial situation. The process of financial planning involves examining your situation, setting financial goals, and aligning an investment portfolio with an appropriate rate of return and level of risk to achieve one’s goals. It’s also important to have a method for systematically measuring your progress.

Potential Impact

To quote the venerable Peter Drucker, “If you can’t measure it, you can’t improve it.” With a wealth strategy that employs a targeted rate of return and risk level aligned with a well thought out financial plan, an individual, assisted by a licensed, professional wealth management advisor, would be well-positioned to effectively manage their assets. Under this structure a trained professional is better able to determine the likelihood of success in achieving goals and can provide an invaluable system of checks and balances to ensure the individual remains on track.

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Getting Sale-Ready

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Before considering the sale of your business many internal and external considerations need to be evaluated and addressed in order to maximize value and ensure a successful transaction.


Background Insight

In today’s market, business owners are reporting strong earnings, especially for small, family-owned businesses.  Corporate balance sheets remain flush with cash enabling larger publicly-traded companies to grow via acquisitions. Also, private equity firms have a lot of capital they need to deploy.

Potential Impact

It’s never too early to prepare for the sale of your business and building your team of trusted advisors. Whether you are restructuring your company, buying out certain aging shareholders or family members, considering an exit, or you have been approached by a buyer – your team of advisors is pivotal. The right team of seasoned professionals have collectively been through many different transactions over their careers and as such can provide valuable advice and insight in matters that privately-held companies or family-owned businesses may be experiencing for the first time. Also, it’s never too early to get your house in order. Are you optimally structured from a tax viewpoint to generate maximum deal value? Do you understand the investment considerations which will come into play when positioning your company for sale? Trends need to tell a story to maximize value, so understand your growth trajectory, recurring revenues, and profitability – what kind of story do they tell? Are your operations well maintained and in good standing? Eliminate related party and personal “piggy bank” expenses, if possible. Clean up any personal expenses that may be running through the business. Do you have a stable and experienced management team? Businesses owners can’t have all the knowledge and relationships. Consider transitioning key relationships to the management team, thus ensuring a smoother transition of the business upon an event. These are just a few important things to consider and for important decisions like these, it’s wise to consult qualified advisors such as attorneys, accountants and investment bankers who can bring significant value by helping you understand all options, avoid making emotional decisions, and protect your best interests.

Let's Talk About Getting Your Company "Sale-Ready".
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Handling Unsolicited Offers

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Often when business owners receive unsolicited offers from potential acquirers, they are mesmerized by the underlying dollar amount and end up making a move that might not be in their best interests.


Background Insight

The resulting flattery and thrill of an unsolicited offer can cause even the most unemotional business owner to quickly accept or reject the initial offer. Business owners would, however, be wise to stop and take a deep breath. Many internal and external considerations need to be evaluated. Although perhaps you were not thinking about selling your company, it’s possible that now could be the right time to pull the trigger. For example, if your industry is consolidating or if the competitive landscape is likely to intensify, you may be well served to make a timely exit.

Potential Impact

Even if you determine a timely exit would be in your best interest, it’s important to remember that the devil is in the details. Before pulling any trigger, time and care should be taken to have a professional evaluate any unsolicited offer to determine if the offer is fair, and, in doing so, assist in preparing normalized financial information with appropriate add backs to reflect your true business earnings. This is critical for business owners looking to maximize value. Beyond examination of the value of the offer, it’s important to understand the contractual terms of the deal. Acquirers will always encourage a company to execute a non-binding Letter of Intent (LOI). Although this letter is non-binding and the valuation seems significant enough, you lose all negotiating leverage by providing the buyer with exclusivity. You’ve essentially capped your purchase price and you’ve also failed to document important nuances of the potential deal such as conditions to close, working capital adjustments, escrow, representations and warranty exposure, etc.

Let's Talk About How to Evaluate and Respond to Unsolicited Offers.
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Tax-Optimized Investing

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Are your investments and tax strategies working together or against one another?


Background Insight

Individuals sometimes engage with multiple professionals for different services. One example of this is having a tax advisor for tax-related services and an investment advisor for wealth management services. Each advisor provides guidance and advice in their respective areas of expertise. However, at times, an investment decision can lead to an unnecessary tax liability due to a lack of tax planning coordination and/or lack of communication among both advisors. Having a game-plan that capitalizes one’s wealth in both areas (investment return and tax savings) is essential to achieving overall financial success. Appropriate collaboration is necessary among all advisors to minimize tax and maximize wealth opportunities and solutions.

Potential Impact

A situation where strategic tax and investment planning cohesiveness can yield additional savings to an individual can be demonstrated by combining portfolio review with year-end tax planning. For example, a familiarity with the income thresholds that cause long-term capital gains to be taxed at a 20 percent rate instead of a 15 percent rate can result in an additional 5 percent tax savings. Likewise, being aware of the income level which causes one to be subject to the Net Investment Income Tax (NIIT) can prevent imposition of an additional 3.8 percent surtax. Quantifying the tax spread for the above two taxes, a $100,000 long-term capital gain would result in an additional $8,800 of income tax liability (if not for the additional 5% and 3.8% tax rates.) Being unaware of the additional tax ramifications of portfolio-related investment decisions can result in an unwarranted tax liability, which ultimately reduces overall wealth accumulation.

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Transaction Consideration

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When selling your business on a perceived value, the seller should clearly understand the value they are receiving as consideration and the related risk associated with the form(s) of consideration being offered.


Background Insight

Buyers who prefer a seller to have “skin” in the game post-transaction will often offer either (i) stock to the buyer or (ii) seller financing as a component of consideration in a transaction.

Potential Impact

Stock consideration can cloud the value of a deal in several important ways: (1) Is the stock received in the transaction in line with the value of the company you are selling? What is the short, medium, and long-term potential of the buyer’s stock? It is imperative you know and are comfortable with the answers to these questions as it could have a substantial dollar impact. (2) What do you know about the financial stability of the buyer? Sellers should review the financials of the buyer and the buyer-related value. This is important if the buyer is not a public company. Determining private company values is complex and should be reviewed by professionals with experience and access to data in the market space of the buyer. Not knowing the financial stability of the buyer could negatively affect the likelihood of the deal closing. (3) Is a seller note in your best interest? Taking “paper” back in a transaction adds risk to the transaction. You, as the seller, effectively become the banker in this transaction and now must consider the credit worthiness of the buyer. When banks extend credit to customers they often perform their own diligence. Your diligence process should not differ from that which a bank would conduct. Not knowing the credit worthiness of the buyer can negatively affect your final deal value by unknown, potentially substantial amounts.

Every Transaction Is Unique. Let’s Talk About Yours.
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Charitable Remainder Trust

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Using a Charitable Remainder Trust (CRT) is a highly effective opportunity to build wealth through tax deferral.


Background Insight

Unlike other tax deferral strategies such as retirement plans and life insurance, Charitable Trusts have NO funding limitations. This ability to harness the power of tax-deferral on an unlimited basis is unrivaled for building wealth for one’s retirement.

Potential Impact

Funding limitations imposed on tax-deferred strategies leave all your other assets subject to annual income taxes, greatly eroding your wealth. CRT’s allow a far superior solution whereby you only pay tax as you withdraw funds from the trust. The trust assets otherwise grow tax-deferred. Unlike most retirement plans, on which you pay ordinary taxes on distributions, CRT distributions also retain any tax-favored nature of the trust investments, such as capital gains or tax-free bond income. You not only pay less tax on these distributions, you may also pay less tax on your other income and benefits during retirement, for a true double tax savings. And the trust assets enjoy asset protection and estate exclusion benefits where most retirement plans do not. It’s important to note that it’s not necessary to receive distributions in the CRT’s earlier years. Careful planning when funding the trust enables you to super-charge a CRT’s already powerful tax-deferral by customizing the trust’s payment terms and investment holdings to optimize both the amount and timing of distributions, allowing for even greater tax savings over the long haul. Lastly, if it wasn’t good enough already, you can also enjoy a tax deduction for contributions to the CRT.

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529 Education Savings Plan

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529 plans are well known for the significant income tax savings, but did you know they can also serve as a powerful asset protection, wealth accumulation and estate transfer strategy?


Background Insight

529 plans are tax-advantaged programs that allow individuals to gift money to an account for a designated beneficiary’s qualified education expenses. 529 plans are sponsored by the states, with each state then designating a single investment company to oversee the plan. As there is one investment company per state, selecting the state of domicile is a very important consideration. Monies in a 529 plan can grow tax free when used for tuition, books, and other education-related expenses at most accredited two- and four-year colleges and universities, U.S. vocational-technical schools, and eligible foreign institutions. Per the 2017 tax reform changes, 529 plan distributions can now also be used to pay up to $10,000 of tuition per beneficiary each year at an elementary or secondary (K-12) school. This applies to public, private or religious schools of the beneficiary’s choosing.  This is the part most people readily understand.

Potential Impact

529 plans are cost effective and powerful financial platforms; with little administrative burden, that can serve triple duty, yielding not just income tax savings, but also estate tax savings and asset protection. In terms of estate tax savings, married couples can transfer $30,000 annually per beneficiary; coupled with a special five-year advance funding allowance applicable only to 529 plans, to remove $150,000 per beneficiary from their estate, in one shot. For example, a couple targeting 7 beneficiaries could remove $1.05M from their estate at once, without even using their estate credits. Combine this tremendous gift leverage with funds growing tax-deferred in 529 Plans for 30 years from the time the beneficiary graduates high school, and you start to see the real benefits. A beneficiary might even be a newborn child or grandchild, deferring taxes for about 50 years. If the beneficiary does not use all the funds for education, the funds can rollover to their siblings, children, or other family members. If the funds drop down a generation, generation skipping taxes could apply. If the money is withdrawn for non-education purposes or on the plan’s expiration, income taxes and a 10.0% penalty on the deferred gains (but not the original contributions), could be incurred, but the tax-deferral benefits have endured. Regarding asset protection, 529 plans are truly unique. Each beneficiary enjoys their own accounts, yet they remain under the control of the donor, including the right to take the funds back. Despite this important right, the plans are generally beyond the reach of the donor’s creditors and are excluded from the estate of both the donor and their spouse. The donor also retains to right to name a successor owner, so that upon the owner’s or spouse’s death, the ownership (but not the assets) could transfer to the beneficiary, or with grandchildren, their parent.

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Lease Accounting

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The new lease accounting standard affects all companies that lease assets, and the implications on an entity go beyond just accounting, with the potential to affect everything from contract negotiations to tax strategy to business processes and controls.


Background Insight

In early February 2016, the Financial Accounting Standards Board (“FASB”) issued a new leasing standard (Topic 842) for both lessees and lessors. Under its core principle, the new standard requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Calendar-year public companies must implement the new requirements as of January 1, 2019 while all other calendar-year organizations must implement as of January 1, 2020. The deadline is looming, and the implications are significant. Companies may need to devote significant time to implement the guidance to ensure that they comply with the new requirements.

Potential Impact

By far, the biggest impact of the new standard is the requirement that ALL leases be recognized on the balance sheet of the lessees’ financial statements (except those for which the short-term lease exemption has been elected). Under prior U.S. GAAP, the key determination was whether a lease was an operating lease or capital lease as that drove whether a lease was recognized on the balance sheet. There were no major differences in accounting between an operating lease and an executory contract, and entities may not have historically put significant focus on the prior lease definition. Under the new standard however, the key determination will be whether a contract is or contains a lease as that will drive whether a contract is recognized on the balance sheet.

Let's Talk About What Impact the New Leasing Standard Will Have on Your Organization.
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Mega Backdoor Roth IRA

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The funding of after-tax contributions into a 401(k) plan, a strategy known as the Mega Backdoor Roth IRA, enables high-income individuals to circumvent the Roth IRA’s income limits and build tax-free assets.


Background Insight

As of 2019, individuals can contribute up to $19,000 annually to a 401(k) plan ($25,000 for those over age 50). Each individual can select pre-tax contributions and defer taxes until the money is withdrawn in retirement or Roth contributions where money is put into the plan post-tax and grows tax-free. And anyone can contribute to traditional IRAs. The maximum contribution in a traditional IRA or Roth IRA is $6,000 ($7,000 if you’re age 50 or older). Traditional IRAs, like 401(k)s, offered tax-deferred growth. Roth IRA’s are funded with after-tax dollars and grow tax-free, but for those who fall within specific income guidelines, contributions to a Roth IRA are not allowed. This is where an “after-tax account” comes in. Due to a 2014 IRS ruling, if an individual’s 401(k) plan allows, individuals can “super” fund a Roth IRA by making after-tax contributions to their 401(k) plan (subject to IRC guidelines). Those after-tax contributions can be rolled directly into a Roth IRA when employees are still employed with the company or leave the company. Doing so can generate significant tax-free income in retirement. Far more than compared to the standard method of funding a Roth IRA.

Potential Impact

The funding of after-tax contributions into a 401(k) plan enables high-income individuals to significantly accumulate more assets in a tax-efficient manner.

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Spousal Lifetime Access Trust (SLAT)

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Even though an individual (doing nothing) can shield approximately $11M of assets from federal estate tax, that same individual could be exposed to a significant state estate tax liability.

A Spousal Lifetime Access Trust (SLAT) is a compelling consideration as it serves as an asset protection vehicle yet also plays a key role in estate tax planning.


Background Insight

The Spousal Lifetime Access Trust (SLAT) was an important estate planning consideration for married individuals at the end of 2012. At the time, the estate tax exemption (over $5M) was at risk of being reduced to $1M. A SLAT strategy provided individuals with the ability to gift assets to a trust and take advantage of the higher estate tax exemption while not giving up complete control of the assets. The estate tax exemption was ultimately not reduced and has increased since 2012. As of today, the estate tax exemption is greater than $11M, but that does not diminish the effectiveness of a SLAT strategy.

Potential Impact

Utilizing a SLAT for asset protection purposes is an appropriate planning consideration for a high net worth couple. Besides asset protection, a SLAT offers federal (and state) estate tax savings. Although the federal estate tax exemption was recently increased to more than $11M per person, many states have decoupled from the federal estate exemption. By decoupling, each state imposes its own separate estate tax based on an exemption amount (typically) much smaller than the federal exemption amount. For example, the Massachusetts estate tax exemption amount is only $1M. (Massachusetts estates over $1M pay a graduated MA estate tax that tops out at 16% for estates valued at greater than $10M.)

Let's Talk About Ways to Grow and Protect Your Wealth.
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Foreign Sales: IC-DISC

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Interest-Charge Domestic International Sales Corporation (IC-DISC) is a tax incentive that has been around for over 45 years. Its intent is to provide a tax break to businesses that make or distribute U.S. products for export.


Background Insight

Sales outside the United States or its territories (e.g., Puerto Rico, Guam, etc.), depending on a company’s tax structure (e.g. flow-through), can be taxed at the capital gains tax rate (e.g., 23.8% versus the highest rate of 37.0%) or with a C corporation, the taxes on foreign sales can be deferred into the future for funds equal to the one-year Treasury bill rate.

Potential Impact

The impact of converting federally taxable income to capital gains rates or borrowing at the same interest rate as the United States Treasury and having the Treasury be your bank (unlimited credit) is self-evident. Although the rules for an IC-DISC may seem complex, assisted by a seasoned CPA consultant, certain U.S. exporters can quickly realize the tremendous benefits.

Let's Talk About Easing Your Tax Burden.
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Prepaid Elections

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Adopting or changing tax elections and methods should be explored as they can potentially reduce, defer or eliminate taxes.


Background Insight

It’s not uncommon for businesses to be unaware of unused annual federal and state income tax deductions associated with a tax election.

Potential Impact

The prepaid election, which can be made by any enterprise when filing their income tax return, allows an accrual basis taxpaying enterprise to deduct expenses when they are actually paid versus when incurred. Prepaid elections are a valuable instrument that allow accrual basis tax paying enterprises to fine-tune their effective tax rates at year end.  For example, if a flow-through enterprise is targeting a 20.0% to 25.0% long-term tax rate corridor, this strategy can move the needle to fine-tune into the target.

Let's Talk About Reducing Your Tax Burden.
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Work Opportunity Tax Credit (WOTC)

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The Work Opportunity Tax Credit (WOTC) is a highly lucrative incentive for businesses, particularly those in high turnover environments, where the United States Treasury will effectively supply your enterprise with free and substantial capital.


Background Insight

The Work Opportunity Credit (WOTC) offers a tax credit to businesses for the hiring of certain target groups within the U.S. who have consistently faced significant barriers to employment including military veterans, summer youth employees, SNAP recipients, etc. Its intention is to foster economic well-being by enabling these individuals to move from economic dependency to gainful livelihood, while compensating participating employers in the form of tax credits.

Potential Impact

Businesses hiring certain target individuals have the potential to receive dollar for dollar credits that can add up to $9,000 per year per eligible person (the credit is earned dollar for dollar from the first dollar paid to the employee). The cumulative capital benefit is driven by a company’s total employees, anticipated new hires, and turnover.

Let's Talk About Reducing Your Tax Burden.
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Cost Segregation Study

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Many businesses who lease, build, acquire or otherwise own commercial property can take advantage of a cost segregation study to reduce their income tax liability. The benefits are substantial, immediate and enduring.


Background Insight

A landmark 1992 court case validated engineering-based cost segregation studies as a viable method to differentiate real and personal (business) property.  To this very day, enterprises still have not fully utilized this court ruling that allows for the preservation of capital and the recoupment of millions of their dollars sitting with the U.S. Treasury; all of which can fuel their future ambitions.

Potential Impact

Although all cases are different, enterprises can expect an immediate tax sheltering or capital recoupment (depending on the facts and circumstances) of between 25.0% to 75.0%+ of monies spent on leasehold improvements and/or acquisition/construction of commercial, manufacturing, healthcare and other income producing real estate (whether the money was spent this year or in years past). By exercising this option (including purchase price allocations within transactional activities), an enterprise (based on actual examples) could conceivably stand to shelter up to $370,000 for every $1 million reallocated.  The tax benefit/after-tax cost ratio is typically measured in multiples (e.g. 20 to 1). The real impact, however, is having the United States Treasury as a partner in your future.

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Repatriate Capital Sitting with the U.S. Treasury

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Most, if not all companies, have capital inadvertently sitting with the U.S. Treasury that can be repatriated either retrospectively or prospectively. The process is easy, and the cost/benefit is determinable.


Background Insight

The United States Treasury and its counterparts, the State Treasuries, are, in effect, preferred shareholders in every single company in America (whether flow-throughs or C corporations). They have a 37.0%+ preferential interest in all profits and a 20.0+% interest in all future capital transactions. Knowing these shareholders’ agreement (the Internal Revenue Code, its regulations and that of its counterparts), could enable companies to defer or arbitrage their preferential positions so that the enterprise’s capital is preserved not only as a competitive advantage, but as an attractant to optimizing shareholder value.

Potential Impact

The capital preservation or recoupment of monies at the United States Treasury can lead to manifestations of capitalist thought for all companies including, without limitation, (i) investments to improve production and time to market; (ii) building of brand awareness; (iii) expansion of customer service and product offering; (iv) investment in sales and other key corporate functions; and (v) increased borrowing capacity from senior lenders due to influences on debt leverage ratios, senior debt coverage and fixed charge ratio to adjusted EBITDA and equity.

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Child Leverages

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Children of working age have their own graduated tax rates as well as tax credits and wealth accumulation strategies that, if properly leveraged, can result in significant capital preservation for business owners with children.


Background Insight

The new 2018 standard deduction allows children to work income tax free for up to $12,000 in wages while providing a valid tax deduction for a business. This, combined with the ability to set aside money each year in Roth IRAs and possible qualification for annual college education credits, can produce significant capital preservation for the entrepreneurial parent.

Potential Impact

Assuming the entrepreneurial parent employs their children above a certain age at their enterprise, the children work income tax free for up to $12,000 in wages and are taxed at 10.0% on the next $9,000. The tax rate arbitrage (37.0% versus the child’s effective tax income tax rate), the eligibility to fund a Roth IRA for up to $5,500 annually; and if such employment were to continue into college, the children would potentially be entitled to education income tax credits of $2,500 per year. While employing children of working age in a parent’s business is a viable strategy for minimizing taxes and preserving capital for both the business and the family, it can also serve to showcase to one’s children what entrepreneurism is all about. Transferring entrepreneurial knowledge can foster an environment where the children (as they become adults) immerse themselves in entrepreneurial wealth creation. The importance of assimilating any child into business seems at some point appropriate to the further amalgamation of any entrepreneurial family and its children’s future. People often inadvertently focus on money but fail to realize the qualitative importance of entrepreneurial knowledge that can be inadvertently left behind.

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Operating Agreements

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Operating agreements are scaffolds to the future and are foundational to the business and its investors financial and economic well-being.

It’s important to have an agreement in place that addresses items such as decision-making, salaries, distributions, death/disability and dissolution to avoid negative consequences later.


Background Insight

Operating agreements are effectively a set of laws (established by the Limited Liability Company’s members) governing the company and protecting the company’s investors; typically, these agreements by-pass state laws. They serve an array of purposes, including, without limitation: (i) encoding contractual agreements between the Members that supersede the default provisions as provided for under the applicable state’s Limited Liability Company Act, as amended; (ii) serving as a platform with which to attract, reward and retain valuable talent/intellectual capital; and (iii) ultimately enhancing and protecting the rights and obligations of the Limited Liability Company itself, its Members and their heirs.

Potential Impact

Unfortunately, many operating agreements are mass produced with little strategic thought or consideration. Having a strategically designed operating agreement allows a company to mitigate negative consequences associated with certain situational circumstances. For example, an investor’s death can create, via intestate or a will, a situational circumstance that can create unintended consequences of disparate interests and, therefore, misaligned economic perspectives and interests. Other circumstances that could have unintended consequences, and thus operating agreements should mitigate their negative effects, include, but are not limited to: (i) acts discreditable to the Membership (indictment for, conviction of, plea regarding a felony; willful or deliberate disloyalty or dishonesty against the Company or any of its Affiliates); (ii) material breach of internal or third party contracts; (iii) acts that materially interfere with the business, its reputation or goodwill; and (iv) one member, the company’s Tax Representative, unconditionally binding the other members to tax exposures leaving those member with no audit defensive rights to IRS claims (that otherwise would have existed under prior law).

Every Business Is Unique. Let’s Talk About Yours.
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Entity Structure: Flow-Through vs. C Corp

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There are many tax benefits associated with flow-through enterprises, yet there is an allure to the C corporation’s 21.0% federal income tax rate.

Before selecting or changing one’s business entity structure, careful consideration should be given to the implications of a flow-through structure versus a C corp structure.


Background Insight

The Tax Cuts and Jobs Act (TCJA) of 2017 has significantly changed the U.S. tax code and consideration should be given to how it may affect your choice of legal entity and the impact your entity structure can have on your business tax burden, current and future cash flows, your overall ability to fuel the growth of your business and, ultimately shareholder wealth.

Potential Impact

Flow-through enterprises provide for a single point of taxation, while allowing for increasing investment basis. For example, let’s assume a hypothetical sale of flow-through entity, Company XYZ. The buyer, for tax purposes, prefers an asset transaction (either directly or via a deemed asset transaction), as they can step-up the purchased asset values (tangible and intangible) to fair market value for tax purposes. In doing so, this provides them with tax sheltering future cash flow that can be used for their competitive advantage or recoupment of capital. In contrast, let’s assume Company XYZ is a C corporation and all other above facts are the same except that an investor in Company XYZ does not otherwise qualify for the Qualified Small Business Stock (QSBS) election. Under this scenario, said investor would suffer significant dilution to the United States Treasury equal to 40.6% (combined effective tax rate of the 21.0% corporate tax rate and the 23.8% dividend tax rate). Assuming these same set of facts and an active status, an investor in this same enterprise (with the same risks, opportunities and returns) but organized as a flow-through enterprise, would dilute to the United States Treasury at a rate as low as 20.0%.

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Financial Statements, GAAP & Economic Value

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Financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) are a powerful tool in establishing financial credibility and optimally positioning a business with banks, investors and other third parties.


Background Insight

All companies compete for credit and equity capital. The one portal of insight to which all companies allow banks and other creditors to see their financial performance and stability/instability is the obligatory financial statements. On the contrary, financial statements are anything but obligatory. They are transparent and informative financial instruments and they are an essential tool in establishing the financial credibility of a business and effectively competing for capital. A common mistake that companies make is not considering the economics of what they are presenting through their financial statements. For example, rapid depreciation (which is not reflective of economic lives) can competitively deplete the company’s equity and artificially deflate the company’s historical earnings capacities. This results in: (i) bank leverage ratios becoming excessive; (ii) earnings yield to revenues are affected, resulting in operational efficiency used to measure performance by internal and external constituent interest holders being distorted (artificially low in early years and higher in later); (iii) sinking fund dollars needed to replace depleted assets are misaligned; and (iv) borrowing costs are increased and terms shortened.

Potential Impact

None of this would matter if a company wasn’t competing for capital (financial, intellectual, tangible and intangible) or interested in how well it is performing, whether intra-year or inter-year. But as we know, capitalism is dynamic. Companies need to know competing is a holistic perspective, and the importance of accurate and informative financial statements that enhance and optimize the presentation of the economic value drivers of the business should not be overlooked. The presentation of the liquidity, profitability and cash flows in an accurate and clear manner is imperative to effectively compete for capital and mitigate the credit risk of a business with investors, banks and other third parties. It also aids in securing optimal financing terms such as (i) lower interest rates; (ii) more flexible repayment terms; (iii) greater borrowing capacities; (iv) reduction or elimination of personal guarantees; and (iv) less restrictive financial covenants.

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Trusts

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The use of trusts for certain types of businesses in high-income tax states can reduce tax obligations and maximize after-tax cash flows.

And if business owners are serious about developing wealth beyond their own life, then a trust can create personal dynasties which only few Americans ever dream of.


Background Insight

An unfortunate result of tax reform is that state income tax deductions have been reduced to just $10,000. This can take a real bite out of a business’s after-tax cash flow, and it sets up a scenario where it’s more favorable to be domiciled in certain states than in other states. All is not lost though, as there are ways to avoid those taxes even though your business may be in a high-income tax state. One such way is through residency or, less obviously, using certain types of trusts. There are 50 states in the Union, each of which is subject to different state tax laws. Some of these states are, in effect, tax havens providing income tax-free exclusions or categorization of taxable income (e.g., capital gains). Many also offer incredible asset protection in the event of marital dissolution, child support and general creditor claims.

Potential Impact

New Hampshire, Nevada, South Dakota and Delaware provide tax-free exclusions or categorizations for trusts established and maintained under their state trust laws. For example, a Maine resident and a California resident are subject to state income tax on both ordinary income and capital gains in the amount of 7.15% and 13.3%, respectively.  Fortunately for these state residents, and all other United States citizens, there are ways to mitigate this chronic erosion of wealth.  To exemplify, let’s assume a California resident sells his/her company and earns K-1 income of $1.0 million, per annum, on the after-tax proceeds for several years.  Assuming no other information, this resident could potentially avoid upwards of $7.05 million in state income taxes through a trust.

Let's Talk About Ways to Reduce Your Tax Obligations.
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Financial Planning & Analysis (FP&A)

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Innovative organizations use a variety of tools and models to assess possible outcomes for the business.

Leveraging the right tools and models can generate accurate data, reports, and analyses to enable better management decisions including decisions to redirect capital to initiatives that increase the value of the business and net after-tax cash flow.


Background Insight

Financial statements and tax returns provide insight as to what has happened at an organization, leading many business owners to make business decisions based only on historical financial performance. In a competitive environment where conditions never remain constant, entrepreneurs stand to differentiate their enterprise by leveraging forward-looking information to make optimal business decisions.

Potential Impact

Transparent information on both current and future financial performance, presented in a meaningful and concise manner, is the foundation upon which entrepreneurs engineer growth. Utilizing the right financial planning tools that accurately capture an organization’s business model is key. Within the correct financial planning and analysis framework, entrepreneurs stand to benefit by gaining insight into the after-tax impact of various business strategies. And if presented effectively, business owners can use forward-looking information to improve relationships with key stakeholders and serve as a critical component of an enterprise’s communication to the capital markets.

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Treasury Methodologies: Pricing

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Many factors can affect an organization’s cash flow, one of which is right in front of you if you would dare to challenge your company’s brand – raise your prices! 


Background Insight

One can discuss ad nauseam different treasury methodologies to affect the speed of cash collections and cash outlays to enhance a company’s cash flows. However, the first step right in front of most companies is ensuring you are billing enough for your products and services. Perhaps you’ve cut costs and become more efficient in delivering your products, but if you don’t bill market rates for them, you’re imposing a self-inflicted wound on the company by giving away margin, profitability, cash flow and, ultimately, shareholder value. Companies also spend an inordinate amount of time and money pursuing, closing and onboarding new customers to enhance revenues, but, again, if pricing is below market rates, then it’s like putting more damaged goods into your machine. It’s worth the effort to do a complete self-exam of each customer’s pricing agreements and methodologies. Companies may discover that product quality needs improvement, the sales team’s confidence in the company’s products is lacking, some customers would be better served elsewhere, and/or customers love doing business with the company because you’ve been under billing against market for years. Whatever the discoveries, companies owe it to the future of the organization to get in front of it.

Potential Impact

If companies are willing and able to identify and solve underlying issues causing under-billings or can get past the uneasiness associated with price increases, it will be the easiest way to contribute to not only to the company’s margins and cash flows, but to its future value and ability to withstand downturns.

Every Business Is Unique. Let’s Talk About Yours.
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Treasury Methodologies: Information & Insights

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Work backwards – prioritize what information and insights you feel are critical for your role and then demand them from within your organization.


Background Insight

As the saying goes, if I had a penny for every person wanting to sell me some form of dashboarding tool, I’d be rich…  Not that such tools aren’t valuable and nice to have. But doesn’t it make more sense, regardless of the management role you play in the organization, to stop and take stock in what information is missing in order to make the best decisions for your company? An infinite number of books have been written about leadership and strategy, setting visions and determining the best way to execute on those visions. Heck, let’s have a management retreat to assess all this. Shouldn’t the execution part assume you have all the information and insights you need? Or are you starting in a wounded position destined to fail on that execution? Try this: Take a self-retreat for a half day or a day, without interruptions, and assess where you regularly have or should have the most day-to-day impact on your organization. Then assess your information needs — what information do you need to succeed in your role, what information is available and what is missing. And for available information, what is not in quality form or arrives too late to be of any real value.

Potential Impact

Consider this example relative to treasury. Say you are the CFO or lead finance person within your organization responsible for the management of working capital and cash flow (assuming there is no separate treasury function or personnel). Outside of timely financial reporting, does your A/R department provide you with regular cash collection reports, DSO statuses, mid-month aging reports, and overdue receivable collection effort statuses, just to name a few? With that information provided to you in an accurate and timely format, would you now be better equipped to make decisions that can change outcomes (e.g., early address of problem receivables, preventing receivables from becoming ineligible on your line of credit borrowing base, changing credit or collection policies, adding or removing resources, etc.)? A second example, outside of treasury, involves a manufacturing plant manager. Constantly tasked by the CEO and Board to improve margins, does the plant manager have access to appropriate reporting on manufacturing efficiencies (machine down-time, scrap rates, changeover times, number of changeovers, utility usage, overtime usage, etc.) and, if yes, is it timely?  The list of information required by management in this environment might be endless, but the plant manager should know what is most important.  As a plant manager, if you had timely manufacturing efficiency metrics for the most impactful areas of concern, would you then be able to make better, quicker decisions to enhance throughput, reduce costs and improve margins?

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Financial Statement Enhancement

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Accurate, transparent and complete financial statements help business owners to effectuate growth by providing them with an objective gauge of their company’s liquidity, profitability and effective use of working capital.


Background Insight

It is not uncommon for a business to account for transactions in a manner which is not entirely compliant with accounting principles generally accepted in the United States (GAAP). The result of such treatment is financial statements which present an inaccurate depiction of liquidity, profitability and cash flows of the business.

Potential Impact

Working capital is the most readily-available, interest-free source of cash for a business. Having the liquidity of a business trapped in uncollected accounts receivables or excess inventory can critically diminish the cash available to a business to fund growth.  Adequate working capital can reduce a company’s need to seek funding from an outside source.  Accurate and complete financial data provides the basis for an effective working capital strategy.

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Accounts Receivable: Collections

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For a company that would otherwise have a 20% EBITDA margin, lackadaisical collection policies resulting in a 2% revenue loss represents a 10% loss in company profit.


Background Insight

Your sales team works painstakingly to bring in business, and your operations team executes on delivery better than any competitor. Then why do you leave the collection of receivables to chance? Revenue is only a “theory” unless you collect it. Treating receivable collections as a part-time passive duty of the finance team is like trying to fire the company’s engine on half its cylinders. Undoubtedly, the longer you wait to follow up on overdue receivables, the more likely it will be that the receivable will be written-off – internal delivery team memories fade on underlying issues, documentation is lost, etc. Further, a message is being sent to customers that collections or the timing of collections aren’t important to your organization, in which case, why wouldn’t they just pay other vendors chasing them more diligently? Even if you could otherwise collect all receivables, timing of collections affects your bottom line in a variety of ways including what you pay for interest on your lines of credit and the inability to take advantage of early payment discounts. It can also strain relations with important vendors if you cannot pay them on time.

Potential Impact

On top of prioritizing your active collections activities, underlying policies are the best preventive medicine. For example, having policies for accepting the right customers, limiting credit, being clear on due dates and being stringent about them, can have a massive impact on your DSO and your cash flow.  Better still, would be to require deposits or retainers in the right circumstances.  At a company with $50 million in revenues, lowering DSO from 90 to 60 days has the potential to yield $4 million more in available cash or fewer borrowings (plus the interest expense savings on those borrowings). Moreover, upon the sale of the company, a buyer will otherwise assume normal collections are 90 days, requiring you to fund working capital at closing under that assumption and effectively reducing the purchase price by $4 million dollars – a gift to the buyer if the buyer can make the improvements in collections after the sale.

Every Business Is Unique. Let’s Talk About Yours.
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Bank Financing: Getting Financial House In Order

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Do your homework to understand what lenders are looking for then get your financial house in order and prepare a strong presentation to solicit the best and most creative financing offers.


Background Insight

In seeking financing, companies are selling the strength of their organization’s borrowing capacities, its ability to remain compliant with lending standards and its ability to repay the loan. But before heading down the financing path, it’s important to first get your “financial house” in order. This means having clean and professional records and financial statements, so a bank can appropriately assess your business against their credit underwriting standards. Annual audits, timing monthly closings, strict budget to actual monitoring, and good receivable and inventory reporting are often important factors in a bank’s assessment. Getting your financial house in order may also lead to assessing whether the business is being operated in the best way to meet a lender’s financial covenants and to enhance borrowing capacities. For example, taking excessive distributions from the business could affect the company’s ability to meet cash flow coverage and debt-to-equity ratio covenants. Also (outside of a cash flow lending acquisition financing scenario), a lender may assess your borrowing capacities against your available collateral (your borrowing base). The bigger the borrowing base, the more credit they can often provide you. So, for example, if your borrowing base includes “eligible accounts receivable” under 90 days old, then being lax about your collections will only hinder your borrowing capacities. Once your financial house is in order, the next step as you go to market for credit, like selling a business, is to ensure you have a strong presentation document demonstrating (i) your strength as a debtor into the future; (ii) a clear and concise explanation for the borrowings; and (iii) the depth of the company’s management team. On the financial side, besides your basic historical financial statements, your presentation should include full forecasted financial statements along with your forecasted borrowing capacities and compliance against potential covenants. Using this information to then solicit financing from a reasonable number of potential lenders will create healthy competition to help ensure you’re getting the best offer in both pricing and structure.

Potential Impact

Getting a company’s financial house in order along with taking the upfront time to prepare a complete and professional picture of the company for potential lenders will not only allow them to easily understand and evaluate the overall business and management’s vision, but it can also potentially open the door to more creative financing offers.

Let's Talk About Ways to Get Your Financial House in Order.
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Audited Financial Statements

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Every business should have a comprehensive plan for minimizing risk and audited financial statements should be an essential part of that plan.


Background Insight

It is not uncommon for a business to account for transactions in a manner not entirely compliant with accounting principles generally accepted in the United States (GAAP), resulting in inaccurate and incomplete financial information. Financial statements audited by a reputable CPA firm minimize risk both from both internal and external perspectives.

Potential Impact

Poor management of working capital, the most readily-available, interest-free source of cash for a business, is one of the key risks that needs to be minimized. Audited financial statements provide business owners with accurate financial data which enables effective decision making for the proper management of working capital. Audited financial statements provided to third parties, such as vendors, lenders or investors, immediately increase a business’s credibility with such parties.  Businesses who present audited financial statements to potential financing sources generally secure optimal financing terms, such as (i) lower interest rates; (ii) no or minimal personal guarantees; and (iii) appropriate financial covenants.

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Transaction Readiness

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The merger and acquisition market is red hot. Public companies are flush with cash and after record breaking fund raises, private equity funds are sitting on a lot of “dry powder” but are you ready for a transaction?


Background Insight

When companies contemplate the sale of their business, it’s not unusual to find themselves unprepared for the intense financial scrutiny a transaction brings with it. For example, most businesses only concern themselves with the quality of their financial reporting at or near year-end for audit and/or tax planning purposes, but unanticipated accounting issues and a multitude of unidentified financial issues and risks can not only slow down the transaction process but, more important, negatively affect the final valuation of a company. Prior to bringing a business to market, it is imperative to first get the company “sale-ready”. Companies should always be in a “sale-ready” state as you never know when an offer may present itself.

Potential Impact

Business transactions occur not only at year-end. As such, delays in reporting interim or trailing twelve-period numbers can make a buyer question the quality of the numbers and affect their purchase offer. Consider, for example, a company in growth mode that has experienced an increase in headcount during the year. This company’s practice is to wait until year-end to true up their vacation accrual. By only reviewing the accrual at year-end, the company has, in fact, been over reporting net income and EBITDA on an interim basis. Assuming, for illustrative purposes, the vacation accrual is under accrued by $100,000, on a multiple of 6 times EBITDA, this would cause a $600,000 potential reduction in a buyer’s offer price. With focused diligence on such things as month-end close, a company can be one step further on the path to being “sale-ready”. This, along with the design and execution of a plan to mitigate and/or remediate issues before taking the business to market, can increase the likelihood of a successful transaction that derives maximum value and minimizes risk.

Let's Talk About Getting Your Company "Sale-Ready".
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Financial Due Diligence / Seller Quality of Earnings Analysis

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While the buyer generally completes a quality of earnings report as part of its due diligence process, it can be highly advantageous for the seller to undergo due diligence on itself before the sale of the company as it can increase the likelihood of a successful transaction that derives maximum value and minimizes risk.


Background Insight

When companies contemplate the sale of their business, it’s not unusual to find themselves unprepared for the intense financial scrutiny a transaction brings with it. What will the buyer find and how will it impact the ultimate value of the offer? More investment bankers are recommending reverse or “self” due diligence, including an analysis of quality of earnings (QofE), for companies considering going to market. A QofE report is an integral part of the sale of a business. Unlike an audit, which focuses on the balance sheet, a QofE analysis focuses on the income statement and presents the sustainable earnings of a company.

Potential Impact

There are several advantages to the seller commissioning a QofE report and performing self-due diligence before going to market including (i) optimizing your company’s value; (ii) providing important insight into potential issues a buyer may have with your company; (iii) giving opportunity to mitigate and/or remediate issues before going to market; and (iv) helping to anticipate buyer objections thus enabling you to negotiate from a position of strength. For example, if the QofE analysis uncovers sales tax collection issues, you will have time to either clear up the issue or understand the dollar impact of the liability. Without this process and the immense insight it yields, the buyer may require a special escrow for the potential sales tax liability that may far exceed the actual liability.

Let's Talk About Getting Your Company "Sale-Ready".
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Outsourced Recruitment Management

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Recruiting and retaining top talent is a challenge for businesses across all markets and industries, particularly during peak growth periods when finding the right people is the key to a vibrant and sustainable future.

Winning the war for talent requires not only continuous dedication and persistence but also innovative talent acquisition strategies.


Background Insight

“War for talent” and “candidate-driven market” are just a few phrases heard daily in this increasingly competitive era of historically low unemployment. A McKinsey Global Institute Study suggests that employers in both Europe and North America will require 16 to 18 million more college educated workers in the year 2020 than are actually available for work.

Potential Impact

Organizations should consider alternative approaches to recruitment, in particular, outsourced recruitment services based on a fixed fee model versus the more traditional transactional, fee-based searches. A fixed fee model to facilitate all or parts of the recruitment / hiring process – job profiling, candidate sourcing and identification, interview process facilitation, references, offers and ongoing talent planning – can quickly prove to be a cost-effective means for securing top-notch talent. In a typical recruiting model, a staffing firm doesn’t get paid unless they fill the role. Under a fixed fee arrangement, the economics, and thus the incentives, are different. Companies are given a fully engaged partner who can invest as much time as necessary to find the right candidate versus a candidate only being placed so the staffing firm can get paid. Plus, companies can turn the monthly fixed fee on and off. There’s no commitment or penalty – the recruitment resource is always there and can be dialed up or down as needed.

Let's Talk More About Attracting and Retaining Top Talent.
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Mega Backdoor Roth IRA

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Optimization of a company’s 401(k) plan to include the ability for participants to make after-tax contributions in an “after-tax account” affords high-income individuals a way to build tax free assets.

This strategy is commonly referred to as a Mega Backdoor Roth IRA.


Background Insight

As of 2019, individuals can contribute up to $19,000 annually to a 401(k) plan ($25,000 for those over age 50). Each individual can select pre-tax contributions and defer taxes until the money is withdrawn in retirement or Roth contributions where money is put into the plan post-tax and grows tax free. And anyone can contribute to traditional IRAs. The maximum contribution in a traditional IRA or Roth IRA is $6,000 ($7,000 if you’re age 50 or older). Traditional IRAs, like 401(k)s, offered tax deferred growth. Roth IRA’s are funded with after-tax dollars and grow tax free, but for those who fall within specific income guidelines, contributions to a Roth IRA are not allowed. This is where an “after-tax account” comes in. Due to a 2014 IRS ruling, if the plan allows, individuals can “super” fund a Roth IRA by making after-tax contributions to their 401(k) plan (subject to IRC guidelines). Those after-tax contributions can be rolled directly into a Roth IRA when employees are still employed with the company or leave the company. Doing so can generate significant tax-free income in retirement. Far more than compared to the standard method of funding a Roth IRA.

Potential Impact

The funding of after-tax contributions into a 401(k) plan enables individuals to accumulate more assets in a tax-efficient manner. This added benefit serves to attract and retain top talent, in particular senior-level management and executives with high income levels.

Let's Talk More About Ways to Help Your Employees Build Wealth.
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Equity Compensation Planning

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You spend an enormous amount of time, energy and money recruiting and training key members of management to be major contributors to your business.

So you don’t lose them, consider tethering a portion of their compensation to growth in the equity of your business.


Background Insight

Above and beyond base salaries and annual variable compensation plans, many organizations provide additional compensation in the form of company equity or phantom equity type plans. These plans can be a grant of actual stock in the company, stock options, stock appreciation rights, phantom equity, or an abundance of other variations in and around these forms. Most plans will provide for vesting, which can be based on time (e.g. it vests 25% per year over four years), reaching some level of performance (e.g. meeting certain annual sales or EBITDA goals), or contingent on an event (e.g. a sale of the company).

Potential Impact

A properly designed equity compensation plan can align an organization’s vision for growth and shareholder value with those members of management who execute on the vision every day. As they help grow the value of the business, they will do so knowing they are participating in the upside. Depending on the design of the plan, the value to be received by your team (or a portion of it) may be tax deductible. And aside from the dollar impact, participating in the ownership of the organization can have an unquantifiable intangible impact on job satisfaction as they feel they are part of something bigger and are in lockstep with the owners in the business. With that said, there are a number of complexities to achieving the desired equity compensation designs including strict and onerous tax rules and valuation and accounting requirements. However, with the right design process, these complexities can be balanced with the desired outcomes to achieve a plan that make sense for your particular situation.

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