The Importance of a Current Business Valuation

by: Lisa Matuszny, CPA and Lawrence DeBaltzo, CPA, CGMA, CVA

The American Society of Appraisers (ASA), among the founding members of the field of business valuation, recommends that every company, whether publicly traded or not, have a current business valuation.

In fact, in an article from iPFrontline in November 2015, Bruce Bingham, ASA, senior managing director with Trenwith Valuation LLC in New York says that “Every CEO or President of a company should have a current business valuation in his or her desk drawer. It is the only way to make informed decisions about the direction your company should take.”

The benefits of getting a current and accurate valuation of your business are many and include; knowing what your business is worth, understanding where your business fits within your industry, getting a pulse on your financial condition and being able to quickly take advantage of acquisitions, sales, capital investment or mergers.

The need for business valuations has increased recently and we wanted to spend time diving deeper into this topic with two of our Partners, Lisa Matuszny, CPA, and Lawrence DeBaltzo, CPA, CGMA, CVA, who are heavily focused on helping our clients determine the right valuations for their businesses.

Lisa and Lawrence, what are the most common reasons clients are asking you for business valuations?

We are seeing clients coming in for current business valuations for the following reasons:

  • Sale or purchase of an existing business
  • To value a business in the case of divorce
  • Shareholder issues (including entry/exit of owners and buy-sell agreements)
  • Gifting and Estate issues

So, I am thinking about buying a business.  What are the important questions I need to ask or areas I need to consider?

When clients come to us indicating their interest in buying an existing business, we try to learn more about their intentions by asking the following qualification questions:

  • Are you looking to become involved in a particular industry?
  • Are there industry barriers or certifications needed?
  • Do you have any experience in that industry?
  • Are there funds available or the availability to borrow to finance a deal?
  • Are you looking for a job or an investment?
  • Do you have an appropriate group of trusted advisors to assist in the transaction?

Why is a current valuation important when buying a business?

Our biggest reason for pushing towards a current valuation of their business is that in many cases buyers and sellers have different ideas of what the business is worth which often leads to a stalemate in the acquisition process. A third party valuation lends credence to the asking price and what a buyer is willing to pay.  A valuation provides the basis for starting negotiations related to the transaction and assists in the due diligence process by the buyer.

Lisa, you focus a lot on the due diligence process with our clients.  What is due diligence anMatuszny_Lisad how does it work?

When a buyer is prepared to purchase an existing business they want to know that the business is sound and that any financial data provided is accurate which is the purpose of due diligence. Professionals are engaged by the buyer (often a CPA and attorney) to review:

  • All of the seller’s financial information
  • Business structure
  • Tax situation
  • Potential legal issues
  • Large contracts and partnerships
  • Employees / benefits and a myriad of other issues

A due diligence engagement can be structured as a top level review or a very detailed review – but, it is up to the buyer!

What if I am selling a business?

You will want a valuation to determine what your business is worth and to help set an opening price for negotiations.  A buyer will expect certified financial statements for 2-3 years (and for as many as 5 years) that were prepared by a CPA – audited financial statements are ideal; reviewed or compiled financial statements may be acceptable depending on the size and nature of your business; failing that, a CVA may be able to use tax returns provided that additional data to “normalize” the tax information is available.

Lawrence, you are a CVA.  What does this designation mean and what do you do?

A Certified Valuation Analyst (CVA), like myself, is an individual that has specific training in valuation methods and analysis as certified by the National Association of Certified Valuators and Analysts (NACVA).  We have completed rigorous testing and case study work to be able to identify the most appropriate valuation techniques for your transaction. We can perform valuation engagements for individuals or companies that need them for a variety of business, legal and personal issues.  

Even if you are not actively looking to buy, sell or merge with an existing business, you should have a current understanding of what your business is worth.  When you have that need, it is important to work with a valuation expert, like Lisa and Lawrence, who will spend the time understanding your business to make sure you receive a fair valuation.

If you are interested in finding out the value of your business or maybe you are thinking about a buy/sell transaction, contact Lisa at lisam@hobe.com or Lawrence at lawrenced@hobe.com or call our main office at 216.524.8900.

Grow Your Business through Benchmarking

by: Kevin Stedman

Experience counts when choosing an accounting firm. Not only should you trust that your accounting firm understands the rules and regulations that apply, but more importantly, that they understand your business and industry.

We have years of experience offering traditional accounting services like tax planning and preparation, accounting and auditing and business consulting. Perhaps one of our most valuable service offerings is leveraging our vast experience to help you understand and grow your business through benchmarking.  Benchmarking is the process of comparing your business’s performance metrics with those of competitors and/or the entire industry.

Over the years, we’ve gained extensive familiarity with various industries and business structures and have seen how powerful benchmarking is as additional support in managing your business. Being able to share that information with you to give a snapshot of how you stack up to your competition is one of the most important services we can provide.  We answer some of those hard questions, like:

  • Are your margins where they should be?
  • Are your employee wages competitive with your peers?
  • Are you paying too much for materials?

Getting answers to these questions is important to understanding your place in the industry, especially if you’re looking to grow.  Our benchmarking service is comprised of 6 simple steps:

  1. Define the focus areas – Look at a few areas of your business or a comprehensive review.
  2. Collect data from your company and your industry – Identify the trends and use our extensive resources and experience to define the industry standards.
  3. Analyze the data – Focus on the areas most critical to your growth that need improvement.
  4. Define an improvement process and establish goals – Create improvement goals and lay the foundation of how to achieve them.
  5. Implement and measure – Track your results and measure whether your goals are being achieved.
  6. Continuous improvement – Monitor and seek to improve the practices defined throughout the benchmarking process to communicate any issues should they arise.

Benchmarking may be a one-time practice, but we treat it as a continuous process at Hobe & Lucas. Using our resources and benchmarking services, we strive to make this process a little easier than you may have thought.

Not all businesses are the same, but understanding your industry can be a critical factor in your success. We know it can be difficult to take a step back when the daily grind is happening, so let’s work on it together.  We have the tools and experience to help you benchmark your performance the right way and find new opportunities to grow.  Contact us today to see if you would be a great candidate for our benchmarking service.  Fill out our form, call us at  216.524.8900 or contact your Hobe staff member to start unlocking this valuable information and get your edge back on the competition.

Every small business should be aware of these 5 IT security risks

by: Louis Loparo, CPA, CITP

As the latest news stories have shown, no company is safe from security breaches and data risks.  Even small businesses are susceptible to hackers looking for easy ways to dig into company databases.  However, many small and midsize businesses make the mistake that they are too small to be a target.  

So, the question remains as to why we are writing about IT security risks? The answer is two-fold… first, small businesses have to focus even more on the protection of their data, and second is because CPA firms have access to the most valuable information in your organization. It is up to us to ensure it is protected.  Below is our list of the top 5 IT security concerns that every small business owner should know:

  1. Where is my data?

Business owners need to have a firm understanding of where all the company data is housed, how it is protected and how it is backed up.  The current trends of utilizing cloud providers and allowing staff to “Bring Your Own Device” can make these tasks a challenge. Our recommendations to minimize your risk of data loss or security breaches are to:

  • Do your due diligence when selecting cloud providers, if you are not technically equipped to handle it, hire someone who is.
  • Do not rely on written company policies to protect your data.  While written policies are important to have, you should also have safeguards in place to protect your data with less reliance on the end users compliance.  For instance, if it is a company policy to encrypt all  data that is emailed from your business, you should have a tool that will automatically encrypt the data instead of relying on the end user to do it.
  • Have a disaster recovery plan and test it.  A disaster plan includes everything from accidentally deleting data to the building burning down.  Have a written plan in place.  By documenting the plan, it will force you to really think about where your data is stored, how it is backed up and how long it will take you to restore it.
  • Have security measures in place to protect your data onsite including firewalls, spam filters and antivirus software.
  • Buy a Cyber Insurance Policy.  While you want to have security measures in place to prevent data loss, if it still occurs, it can be very costly.  A Cyber Policy is the last layer of protection to help business owners limit their costs in the event a significant data loss event occurs.
  1. Don’t Click on That!

To prevent malware and virus threats teach your employees to ask before they click.  If a user gets a pop-up that says they need to install a new antivirus that they have never heard of, chances are it is malware.  Last year we saw malware hidden on reputable websites disguised as advertisements.  In addition to user education you need to invest in a good antivirus software.

  1. Social Engineering

Social engineering is the manipulation of people in order to get confidential information from them.  This could be everything from the Nigerian prince scam, to a fraudster impersonating IT staff attempting to get a user’s password.  This past year some of the ugliest social engineering scams we have seen were:

  • Imposter emails that appeared to be sent from management to the accounting department to try to get them to forward sensitive information or wire money.
  • Phone calls from the “IRS” trying to collect taxes due.
  • New “customers” sending fraudulent bank checks overnight  to companies in exchange for inventory to be sent immediately before the check clears.    

Scammers have been around forever.  They are more prevalent today because the advancements made in technology have given them a platform to hit a large number of people in a short period of time.  There is only one solution to avoid these scams and that is to educate your staff.  You should have regular training and communication to the staff to avoid anyone being compromised by a fraudster.

  1. Unpatched Devices

HP’s 2016 Cyber Risk Report stated that, the top 10 vulnerabilities exploited overall continue to be those that are more than a year old and 48% are five or more years old.   

What does this mean?   

It means that if the computers that were exploited were patched regularly there would have been no occurrence.   

How do you fix it?    

You need to use an enterprise tool to ensure all the computers on your network are patched properly.  At Hobe & Lucas, we contract with an excellent managed services provider to insure this is done.

  1. Disposal of Old Devices

When it is time to buy new devices and dispose of the old, you should think twice about giving away or selling old devices.  A not so savvy tech person can retrieve data from a hard disk, even if it has been reformatted.  The best practice is to destroy the hard drives from the old devices, then dispose of or recycle the remaining carcass.

In many cases, we have seen “operator error” as the biggest risk a company faces.  It is important to continually educate your staff and put in place the proper precautions and policies to avoid unnecessary security breaches.  We have been involved in numerous engagements assisting clients after a data loss and it is usually very costly.  Minimize your exposure now so you don’t have to scramble when something does happen.  

We are one of the very few accounting firms to have a Certified Information Technology Professional.  Our team has the expertise to guide your IT roadmap and recommend strategies that will help your business operate faster and better.  Prepare for the technology of tomorrow by partnering today.  Contact us or give us a call at 216.524.8900.

Great news for Ohio Small Business

by: Devin Cunningham

Great news for the Ohio small business owners is in store for 2016! Currently, Ohio small business owners are able to deduct 75% of the first $250,000 of Ohio net business income. This Ohio Small Business Deduction is limited to $187,500 for married couples filing jointly and $93,750 for single filers and is taken on the Ohio individual income tax return. In 2016, the percentage deduction will increase to 100% of the first $250,000 of net business income. And, the 100% deduction will be permanent for the foreseeable future!  

This deduction results in significant tax savings for Ohio small business owners, specifically for those investing in pass-through entities.  Small business owners owning at least 20% of a Partnership, Subchapter S Corporation (S-Corp), Limited Liability Company (LLC) or a Schedule C can now retain a greater percentage of income from their Ohio business investments.  

The only entity type not eligible to receive the Ohio Small Business Deduction are Subchapter C Corporations (C-corps). In some cases, it may be beneficial for these entities to convert to S-Corps in order to capture these tax savings.  

Are you taking advantage of this deduction?

If you have questions or want to talk about planning for next year, give us a call at 216.524.8900.

Small Business Owners: Avoid these payroll tax pitfalls

by: Yvonne Chmielewski

If you are a business owner, you have payroll taxes. As the Internal Revenue Service has intensified its payroll tax compliance program focusing on small businesses, it is not wise to take this responsibility lightly.

What taxes should you pay? Every employer must account for federal income tax, federal and state unemployment tax, social security, and Medicare. There also may be additional taxes depending in what state you operate. We cannot overstress the importance of accurately calculating, reporting and depositing these monies from your employees’ paychecks.

Here are the top pitfalls of employer payroll taxes:

  • Incorrectly paying unemployment taxes
  • Borrowing monies withheld from employees’ paychecks to cover cash flow
  • Making late deposits
  • Incorrectly classifying employees as independent contractors (1099’s)
  • Confusing depositing with reporting

Why are we mentioning these common pitfalls? The answer is simple. Because the consequences can be severe and could lead to high penalties and possible jail time:

Payroll tax penalties can add up quickly and generate potentially huge tax liabilities. The penalties that can be assessed on delinquent payroll tax deposits or filings can dramatically increase a small business’ payroll tax bill. Whether the small business is operated as a sole proprietorship, corporation, S-corporation or LLC, the tax penalties assessed can cause a business owner to lose his/her business. There are three major penalties that can be assessed–failure to file, failure to deposit and failure to pay.

The IRS pursues you for payroll taxes owed. In addition to the penalties above, the IRS can access the Trust Fund Recovery Penalty (TFRP) that can hold a responsible person accountable for 100% of the unpaid trust fund taxes. A person is liable for the TFRP if two statutory requirements are met: (1) the person is “responsible” — had the duty to account for, collect, and pay over the trust fund taxes to the government; and (2) the person “willfully” failed to collect or pay over trust fund taxes to the government. The IRS is able to “pierce” the corporate veil and pursue individual shareholders (even corporate officers) provided those individuals meet the requirements to be assessed the TFRP.

You could lose your business. As mentioned above, you have to remember that as an employer you are withholding taxes from your employees and that you are entrusted to pay those taxes to the IRS on behalf of those employees. The IRS takes a business owner’s trust obligation very seriously. The IRS has the power to padlock your doors. They have the further power to seize your inventory, machinery and equipment. They can also seize your funds and bank accounts through their levying authority. As a business owner, you should react immediately to any notices concerning your payroll taxes. Failure to do so can cost you your business.

Not filing or paying can be considered a federal crime. If the IRS cannot satisfy a small business’ payroll tax debt through its ordinary methods, it has the power to refer a business owner’s case to the Criminal Investigation Division and then on to the Department of Justice if it can be proven that there was intent not to file or pay the payroll taxes.

How can you avoid these pitfalls and make sure you are withholding the correct amounts? Work with a payroll company who knows the guidelines and regulations. GreenSmart Payroll Solutions, an affiliated company backed by Hobe and Lucas, offers customized and flexible payroll services combining all the capabilities of national payroll firms, but backed by a certified professional accounting firm you trust. Trust us to handle your tax payments, withholding and filings accurately and on time while providing the reporting you need to run your business.

Don’t wait until 2016, give us a call at 216.524.8900 to discuss your individual situation or fill out our contact form.