ExIT AND SUCCESSION PLANNING

Transcription

horizons
A publication by RubinBrown LLP
FALL 2014
exit and
succession planning:
HOW ORGANIZATIONS ARE PREPARING
FEATURING
Business Exits: Considerations for a Successful Outcome
The Importance of Valuation in Exit Planning
Key Findings from a Global Survey on Succession Planning
Significant Tax Savings Opportunities with the Tangible Property Regulations
TABLE OF CONTENTS
horizons
A publication by RubinBrown LLP
FALL 2014
Chairman
James G. Castellano, CPA, CGMA
Managing Partner
John F. Herber, Jr., CPA, CGMA
Denver
Managing Partners
Michael T. Lewis, CFA
Gregory P. Osborn, CPA
Kansas City
Managing Partner
Todd R. Pleimann, CPA
Editor
Dawn M. Martin
Art Director
Jen Chapman
Horizons, a publication of RubinBrown LLP,
is designed to provide general information
regarding the subject matters covered. Although
Features
1
2
5
6
8
14
20
24
27
68
Welcome from the Managing Partner
RubinBrown News
Chairman’s Corner
Remembering Mahlon Rubin
Business Exits: Considerations for a Successful Outcome
The Importance of Valuation in Exit Planning
Key Findings from a Global Survey on Succession Planning
Significant Tax Savings Opportunities
with the Tangible Property Regulations
Upcoming RubinBrown Seminars
Timely Reminders
Industry-Specific Articles
28
life sciences &
technology
Intellectual Property and
42
healthcare
Succession Planning for
prepared by professionals, its contents should
Exits: Tips to Maximize
Medical Practices and
not be construed as the rendering of advice
and Protect Value
Physicians
regarding specific situations. If accounting, legal
or other expert assistance is needed, consult
with your professional business advisor. Please
call RubinBrown with any questions (contact
information is located on the back cover).
31
private equity
Strategic Buyers and
Financial Buyers:
Any federal tax advice contained in this communication (including
(iii) may not be relied upon to avoid penalties.
Readers should not act upon information presented without
individual professional consultation.
manufacturing
& distribution
Transitioning Your
Business and Knowledge
58
transportation
& dealerships
Transitioning Your
The Next Generation of
Auto Dealership or
Business Officers
Transportation Company
One Size Does Not Fit All
any attachments): (i) is intended for your use only; (ii) is based on the
accuracy and completeness of the facts you have provided us; and
45
colleges &
universities
55
34
construction
Valuation Strategies for
48
public sector
An Aging Public Sector
Workforce
law firms
In the Face of Natural
52
Losses
gaming
A Post-Acquisition
Proactive Succession
Integration Checklist for
Planning for Your Law
Gaming Operators
Firm
real estate
Tax Credit Recapture
Disaster and Casualty
Construction Companies
38
62
64
not-for-profit
Fiduciary Responsibilities
of Not-for-Profit
Investment Committees
WELCOME FROM THE MANAGING PARTNER
Remembering Mahlon Rubin
It is with sorrow that we remember one of our firm’s founders,
Mahlon Rubin.
Mahlon died on September 4, 2014. Please see our story about
Mahlon on page 6.
We have received a remarkable number of cards, notes, and other
condolences since Mahlon’s passing. It’s abundantly clear that
Mahlon not only had a tremendous impact on our firm, but also on
the St. Louis community in general and the accounting profession as
a whole.
Mahlon’s spirited focus on client service, excellence, and managing
an effective accounting practice became well known throughout
the business community. He shared his business acumen often,
whether it be to us internally or to others in the profession and the
business community.
John F. Herber Jr., CPA, CGMA
Managing Partner
Mahlon continued to come into our office every day. We all
enjoyed his stories about the “old days” and daily visits as he
walked our halls and taught us the importance of relationships and
integrity. He and co-founder Harvey Brown regularly presented to
our interns and new hires about the history of the firm and evolution
of our profession.
This issue of Horizons is focused on succession planning—a fitting
theme as we remember Mahlon and his lessons of managing an
accounting practice. The baton may have been passed to the next
generation at RubinBrown more than 20 years ago…but we are all
living the core values and guiding principles that he and Harvey
Brown created for us.
We will always remember Mahlon for his tremendous career, his
legacy as a family and business man, and, most of all, for the
insightful life lessons he taught us all.
Pleasant reading,
www.RubinBrown.com | page 1
RUBINBROWN NEWS
RubinBrown Opens Office in St. Louis Cortex Business District
RubinBrown will
open an office
suite in St. Louis’
new Cambridge
Innovation Center
(CIC@4240).
Located in the
CORTEX innovation
district, CIC initially is
home to 21 startup,
emerging and
industry leading
companies.
“This move is a joint initiative of our Life
Sciences & Technology and Entrepreneurial
Services groups,” said Steven Harris,
CPA, partner-in-charge of RubinBrown’s
Entrepreneurial Services Group. “We wanted
to put valuable resources in the middle of
this innovation center as we assist emerging
companies build their businesses.”
“We work to help emerging businesses
establish successful financial platforms,
processes and strategies that will get them
to the next level,” said Jason Mannello, CFA,
vice chair of RubinBrown’s Life Sciences &
Technology Services Group. “Then, down
the road, we will be there to assist them
with mergers and acquisitions, networking,
valuations, and other consulting services as
they continue to grow their businesses.”
Founded in 1999, CIC is home to more than
600 companies, most of them startups.
Since 1999, more than 1,400 companies
have chosen CIC as their home. More than
$1.8B of venture capital has been invested
in companies that were headquartered at
CIC. CIC@4240 represents its first expansion
outside of Cambridge, Massachusetts.
For more information, visit: http://stl.cic.us.
RubinBrown Sponsors St. Louis Regional Chamber Arcus Awards
RubinBrown will serve as presenting sponsor for the second annual Arcus Awards on November
25, 2014. The Arcus Awards is presented to one company in each of four economic clusters
that has demonstrated an exceptional commitment to advancing the St. Louis region’s global
strength.
RubinBrown Manager Named St. Louis Business Journal 30 Under 30
Hannah Castellano, CPA, a manager in RubinBrown’s Assurance Services Group was named
one of the St. Louis Business Journal’s 30 Under 30. Castellano serves clients in a variety of
industries, including gaming, life sciences, colleges and universities, manufacturing and
distribution, and not-for-profit.
RubinBrown Manager Selected to AICPA Leadership Academy
Chris Tkach, CPA, manager in RubinBrown’s Assurance Services Group, has been selected as
one of 38 young CPAs to participate in the American Institute of CPA’s 6th Annual Leadership
Academy. Tkach joins an exclusive group of rising stars in the accounting profession to learn
strategic planning techniques and develop personal success skills for handling complex
management challenges.
page 2 | horizons Fall 2014
RubinBrown Talent Promotions
Partners
Kristin Bettorf is a
partner in RubinBrown’s
Tax Services Group where
she provides tax consulting
services. Bettorf specializes
in corporate tax, providing
tax planning, preparation
and reporting services to clients primarily in
the manufacturing and distribution industries.
David Collet is a
partner in RubinBrown’s
Assurance Services and
Manufacturing and
Distribution Services Groups.
He has vast experience
in performing large
multinational audits, audits of internal control
over financial reporting, income taxes and
revenue recognition.
A partner in RubinBrown’s
Assurance Services Group,
Matt Finke is also partnerin-charge of the recently
formed Law Firms Services
Group. Finke provides audit
and accounting services
for professional services firms, construction
contractors, and colleges and universities.
Jeff Sackman serves as
a partner in RubinBrown’s
Assurance Services Group
and is vice chair of the
Private Equity Services Group.
He conducts audit and other
assurance-related services for
companies primarily owned by private equity
and family office groups, and has experience
providing transaction due diligence services.
With 15 years’ experience
working in the financial
services industry, Tom Tesar
is a partner in RubinBrown
Advisors, where he provides
investment advisory services
and financial planning to
high net worth clients.
With more than a decade
of experience, Ken Van
Bree serves as partner in
RubinBrown’s Entrepreneurial
Services Group and vice
chair of the Construction
Services Group. He
specializes in financial and operational audits
and provides general business advisory
services, including tax planning.
Managers
Tim Anderson works in
RubinBrown’s Tax and Real
Estate Services Groups,
providing tax consulting and
compliance services to clients.
Robert Cascio works with clients
in industries including not-forprofit and the public sector.
Cascio specializes in employee
benefits, risk-based audit
planning and plan audits.
Dan Besmer serves clients in the
manufacturing and distribution
industries. He provides audit,
internal accounting controls,
business performance analysis
and SEC reporting.
Ted Clifton serves tax and
wealth management clients,
specializing in retirement
and estate planning, as well
as high net worth individual
taxation.
RUBINBROWN NEWS
RubinBrown Talent Promotions
Managers (continued)
Susie Dartt serves clients in
the public sector and not-forprofit industries and also has
experience in payroll, benefit
plans, and sales and income
tax preparation.
Grazyna Lewkowicz
provides tax compliance and
consulting services for real
estate, manufacturing and
distribution, and professional
services industry clients.
Chris Daues works with clients
in various industries including
construction, manufacturing
and distribution, not-for-profit,
and public sector.
Ryan Meesey provides
clients with business valuation
services as well as litigation
support, financial modeling,
and mergers and acquisitions
consulting services.
Matt Hartman serves clients
through RubinBrown Advisors,
an investment advisory firm,
providing comprehensive
financial planning and investment
management services to clients.
Patrick Miller primarily serves
clients in the colleges and
universities, construction, and
manufacturing and distribution
industries.
Dan Healey provides audit,
internal accounting controls
and business performance
analysis services to clients
in the manufacturing and
distribution, construction and
not-for-profit industries.
Jessica Mueller serves clients
in the not-for-profit, public
sector and financial institution
sectors.
Chris Janis serves in
RubinBrown’s Tax Services
Group, focusing on clients
distribution and not-for-profit
industries.
Donna Krier provides services
to clients in the construction
and manufacturing and
distribution industries.
Justin Lee is a member of
RubinBrown’s Entrepreneurial
Services Group and serves
clients in the manufacturing,
not-for-profit, real estate, and
transportation industries.
Casey Pohl provides clients
distribution industry with plan
auditing, internal accounting
controls, and risk-based audit
planning.
Chris Tkach serves clients in a
variety of industries, including
manufacturing and distribution,
real estate, and not-for-profit,
specializing in SEC reporting and
Sarbanes-Oxley compliance
testing and reporting.
John Zaegel works with
clients in a variety of industries
including professional
services, public sector, real
estate, manufacturing and
distribution, and construction.
CHAIRMAN'S CORNER
The RubinBrown Succession Story
by Jim Castellano, CPA, CGMA
S
eptember 4th was a sad day for the
RubinBrown family...the day we lost
one of our founders, a mentor and friend,
Mahlon Rubin. While the theme of succession
planning for this issue of Horizons was set
months in advance, it seems ever more
appropriate now in light of Mahlon’s passing.
RubinBrown has grown over the years to
become a highly respected, nationally
prominent professional services firm, and
that, of course, makes me very proud.
However, the accomplishments that bring
me the most pride are the successful
transition of our firm to a third generation of
leadership, and the solid plans we have to
take it to the fourth generation.
Realizing this is a unique accomplishment
since so many professional services firms
end with the retirement of their founders, I
thought our readers might enjoy hearing our
story of succession and perhaps inherit a few
ideas from the lessons we have learned.
Succession begins with a stewardship culture.
Our culture of stewardship began with our
founders who created a great foundation for
us to build upon. As stewards of our firm, we
believe in our obligation to leave the firm in a
better position for the next generation.
Vision is one of our core values at
RubinBrown. Read about our core values on
our website where we commit to “…invest
significant resources in things that will provide
benefit to our clients, our team members and
ultimately our firm in the future.” Describing
our desired future, then building plans to
take us from here to there, has long been a
powerful planning exercise for us.
The clearest vision, however, cannot be
achieved without outstanding talent.
Our talent planning process is rigorous
and disciplined, resulting in a deep and
extraordinarily talented
team, quite capable of
carrying our firm well into
our fourth generation of
leadership.
Having clear and fair
financial arrangements
to enable the transition
of ownership from
one generation to the
next is a key factor for
succession results. It is a
core competency of ours
Jim Castellano, CPA, CGMA
to develop such financial
Chairman
arrangements with clients,
so it’s not surprising that we have long ago
created plans for ourselves that have stood
the test of time.
Finally, a process of orderly transition must be
implemented. Culture, vision, talent planning
and clear financial arrangements alone will
not do the job. Success is achieved in the
implementation of the process.
Succession planning is not an event, but
rather a process requiring ongoing focus
and commitment. Ours includes continuous
attention to the orderly transition of client
relationships, technical capabilities,
management responsibilities and community
relationships.
Starting well in advance of any partner’s
retirement has contributed significantly to the
sustainability of our firm.
If succession planning is on your mind
and you would like further guidance or
assistance, I invite you to contact your
RubinBrown engagement partner who will
bring the proper talent and resources to help
you through the process.
Thanks for your confidence in us.
RubinBrown Founder
Mahlon Rubin Passes Away
It is with deep sadness that RubinBrown reports the
passing of one of our firm’s founders, Mahlon Rubin.
Mahlon died on Thursday, September 4, 2014. He was
89 years old.
According to Managing Partner, John Herber, CPA, even
after retirement, Mahlon remained very engaged in
the firm as retired partner of counsel and came into the
office every day as he had for the past 62 years.
When Mahlon, along with Harvey Brown and Sidney
Gornstein formed Rubin, Brown, Gornstein & Co. in St.
Louis in 1952, they only dreamed that their firm would
evolve into a national leader in the accounting and
business consulting profession.
Mahlon was steadfast in his dedication to superior client
service. It was his passion for totally satisfied clients that
built the foundation of RubinBrown and the core values
that the firm’s team members live by every day.
To honor Mahlon’s leadership and unwavering
commitment to client service, RubinBrown created
an annual award named after Mahlon several years
ago. The Mahlon Rubin Award is given every year
to a RubinBrown team member who demonstrates
extraordinary client service.
In 1996, Mahlon received the gold medal for
Distinguished Service from the American Institute of
Certified Public Accountants. In 1990, he was awarded
Outstanding Businessperson of the Year by the city of
Clayton and Outstanding Businessperson of the Year
by St. Louis County. Washington University bestowed
him with a Distinguished Alumnus Award and St. Louis
University with a Distinguished Accounting Award. He
also was named the Best Tax Practitioner by Money
Magazine and Accounting Advocate of the Year, State
of Missouri, by the Small Business Administration.
He remained active in the profession, serving as a
member of the Missouri and New York Societies of
Certified Public Accountants and the AICPA. He was a
former member of the board of directors and governing
council for the AICPA, and a former member of the
editorial board of the Journal of Accountancy. He was
past president of the St. Louis Chapter of the MSCPA and
former chairman of the Mid-America Tax Conference.
Mahlon was very active in charitable and community
work, serving as a member of the board of directors,
Barnes-Jewish Hospital Foundation and as Honorary
President, member of the board of directors and past
president of the Jewish Center for Aged. He was a
former member, board of directors, treasurer and
member of the executive committee for Jewish Hospital
of St. Louis and served on the board of directors and
treasurer of the Jewish Federation of St. Louis. He also
was a member of the Washington University Alumni
Association Executive Committee; and served on
the Accounting Advisory Board for Southern IllinoisEdwardsville University. He was a member of Temple
Israel’s board of directors and the Library Board for
University City. In 1991, he received the Guardian of the
Menorah award from the B’nai Brith Foundation of the
USA. Mahlon was also a former Commander of Jewish
War Veterans for the State of Missouri.
“Mahlon set high values for all of us,” said Herber. “He
was steadfast in his dedication to superior client service.
It was his passion for totally satisfied clients that built the
foundation of our firm and the core values we live by
every day. There’s no doubt that we wouldn’t be the
firm we are today without him. He will be missed greatly.”
Mahlon is survived by his wife Maurine, his sons Larry, Rich
and Ken and many other loving family members.
Mahlon Rubin Tribute Fund
If you would like to make a tribute in memory of Mahlon,
the RubinBrown Charitable Foundation established the
Mahlon Rubin Tribute Fund in his honor. Donations can be
made at www.RubinBrown.com/Mahlon-Tribute.
FEATURE
Business Exits:
Considerations for a
Successful Outcome
by Kyle Murphy, CFA, CPA
For a middle-market business, especially one in the first generation
of family ownership, the owner’s exit is often the last item on a
lengthy priority list.
And it often remains untouched until advancing age, a health issue, or another inopportune
event forces the issue.
This can be a recipe for value destruction. Just as a prudent business executive would not ignore
the phone calls of its largest customer, a business owner, who likely has the bulk of his or her net
worth tied up in said business, should not put off the necessary planning for his or her eventual exit.
Successful exits take discipline, focus, effort, and—perhaps, most of all—time. But all of the
dutiful preparation is worth the investment, as being prepared to sell your business when you
don’t have to, can put you in a powerful position to dictate the timing and terms of your exit.
Therefore, business owners should begin planning for their exits years ahead of time and, if you
have not already begun so, perhaps today is the time to start thinking about your exit strategy.
Build a Capable Management Team (That Can Run the Business Without You)
A saleable business is one that can operate independent of its founder/owner, whether now or
after a transition period post-exit.
Many first generation businesses are highly intertwined with their founders, who maintain the
bulk of customer relationships and who can operate the business successfully without many of
the checks and balances present in businesses which have changed hands.
These situations often present challenges to prospective buyers. After all, a prospective buyer is
not looking to acquire a business in which one person is the key cog keeping it all together.
In the years ahead of a potential exit, it is advisable to entrust employees with increasing
responsibilities, such that over time you build a team of trusted employees that can make
critical business decisions without you.
This does not mean that an owner shouldn’t be involved in the business by the time he or she
is ready to sell; rather, it means that he or she has created a business that can succeed on its
own merits.
Optimize Your Tax Positioning
Often, the terms of a sale agreement will dictate how an exit will be taxed. While there is plenty
of room for negotiating these finer points, it is advisable to first put the business in an optimal
structure for an eventual exit.
The legal structure of a business can significantly impact the taxation of a proposed sale
transaction. If the business is organized as a C Corporation, the owner may prefer to sell stock
in the corporation in lieu of the underlying assets.
This is because a sale of C Corporation assets will produce two levels of tax—one level of tax at
the C Corporation on the sale of the assets, and another level of tax at the shareholder level
when the sale proceeds are distributed.
FEATURE
In contrast, a sale of C Corporation stock will
only be taxed once at the shareholder level.
It is important to note, however, that buyers
often prefer asset acquisitions to purchases
of stock because it subjects them to less
risk after the transaction from pre-existing
liabilities, conditions, etc.
can be particularly advantageous if the
company’s value is expected to appreciate.
Sophisticated strategies using trusts and
family limited partnerships can help to
maximize the estate tax benefits derived
from these types of transfers.
If the business is organized as a flow-through
entity (i.e., an S Corporation), most prefer to
sell business assets in lieu of company stock. S
Corporations are usually subject to only one
level of tax, which is at the shareholder level.
In most cases, this can produce significant
tax savings versus C Corporation structures
by eliminating the corporation level tax.
Clean Up Your Business’
Financial Records
Therefore, if the business is organized as a
C Corporation and the sale horizon is still
some years from now, it might be worth
considering converting from a C Corporation
to an S Corporation. It should be noted that
any appreciated property transferred at the
time of the C to S conversion will be subject
to the built-in-gains tax if sold within 10 years
of the date of transfer (which preserves some
of the entity level tax). Any appreciation
on company assets that occurs after the
conversion escapes the corporate level tax.
Other considerations may include deferral of
sale proceeds (and gains) via an installment
sale structure.
Your company leadership will also want
to consider opportunities to reduce future
estate tax liabilities through planning
in advance and in conjunction with a
contemplated sale.
Current rules allow each taxpayer to gift,
generally tax free, up to $14,000 per year
per recipient (the “Annual Exclusion”) and
$5,340,000 over the taxpayer’s lifetime (the
“Lifetime Exemption”).
Future appreciation on gifted assets and
proceeds from the future sale of such assets
usually escape taxation as part of the estate
of their original owner. Business owners
often transfer company stock, especially
nonvoting stock, utilizing these rules, which
If your business is already receiving an audit
or review, then you have demonstrated a
commitment to enhancing the perceived
integrity of your business’ financial records.
This is a great step forward in being able
to withstand the scrutiny of a prospective
buyer’s financial due diligence.
Having an audit or review sends a signal
to a prospective buyer that your company
is keeping orderly financial records and
supporting documents (e.g., invoices,
receipts, and account statements), the
business’ accounting methods are consistent
from month-to-month and year-to-year, and
that management can articulate why the
business’ accounting methods and estimates
are reasonable.
Having audited or reviewed statements is also a
plus from a valuation perspective as anecdotal
evidence suggests that a business may lose a
half turn to a full turn of EBITDA valuation if a
financial statement audit is not available.
However, having financial statements
audited or reviewed by a third party is not
the only step to consider when cleaning up
your business’ financial records.
Founder/owner-run businesses often contain
some level of discretionary, non-operational
expenses. While there are ways in which a
prospective buyer can get comfortable that
certain of these amounts are truly discretionary
or non-operational in nature, there are often
many questionable amounts for which a
prospective buyer may not give you full value.
Examples include higher-than-market
wages paid to family members, meals and
entertainment, travel expenses, sports tickets,
and even vehicle payments and insurance.
By eliminating the questionable amounts in
the years ahead of potential exit, you can
ensure that you capture maximum value for
these “add-backs.”
Consider Developing an Information
Technology (IT) Strategy
IT can be a source of competitive advantage
for many middle-market businesses.
After all, IT is a foundational, value-added
resource on which nearly all business
functions rely. However, all too often,
organizations view resources deployed in
IT infrastructure as expenses instead of as
investments.
By taking the time to develop an IT strategy
that provides for a stable, secure, and
scalable IT environment, you will demonstrate
to a prospective buyer that IT is a core driver
of your business’ performance rather than
just a “cost of doing business.”
Why invest in IT infrastructure? Consider data
security. The loss or corruption of critical data,
whether through a failed server, unauthorized
employee access, or a security breach,
can have devastating consequences on
your business’ ability to continue as a going
concern.
Similarly, consider employees that are
duplicating efforts at two different locations
because they are working on different
systems. Surely these human resources could
be better deployed. With fewer systems, the
IT environment becomes easier to secure
and service.
These disparate examples quickly show
how dependent organizations are on their
IT infrastructure. In the first example, the
business will likely experience a financial
cost to recover from the loss event, while in
the second example the business is already
incurring a financial cost but does not fully
realize it.
Thus, while middle-market businesses may
believe that they lack the resources to make
IT investments, when confronted with these
types of scenarios (and there are quite a
few possibilities) it becomes evident that
developing an IT strategy and creating a
more robust IT infrastructure will benefit you
not only at the time of your exit, but also in
the years preceding your exit.
Document and Protect Your
Intellectual Property (IP)
IP assets are of increasing importance in the
global economy, and as a result, prospective
buyers are dedicating greater resources to
IP due diligence. For sellers, this is an often
overlooked opportunity.
Why? For one, getting ahead of (and
addressing) potential gaps or weaknesses
in your business’ use of IP can provide for
a smoother due diligence process and,
ultimately, greater exit proceeds. See article
on page 28 for more on protecting IP value.
Understand What It Will Take to Retain
(Key) Employees Post-Exit
Transitions create uncertainty, and
uncertainty can be perceived negatively by
employees. While it may make sense to keep
some or most all of your employees in the
dark until a transaction is consummated, it is
important to a prospective buyer that your
key employees understand what is occurring
and what it means for them.
Recall the first takeaway from this article
—build a capable management team
(that can run the business without you). As
these individuals will likely be the leaders
for the business going forward, you need to
understand what it will take to have your
employees’ buy-in during the sale process
(to keep their incentives aligned with your
exit objectives) and post-exit (to keep them
motivated under new ownership).
In fact, a prospective buyer will often
want key employees to sign employment
agreements as a condition to the
FEATURE
transaction, and may even be willing to offer
employment terms post-transaction that are
more favorable than their current terms.
It is advisable that, if not already in place,
you have key employees sign employment
agreements with confidentiality, noncompetition, and like clauses if for no other
reason than to make this a customary
process and reduce the surprises to your key
employees when your prospective buyer
requests such in the weeks prior to closing.
Now is also the time to resolve any informal
agreements or perks previously agreed to
with existing employees and/or family. These
issues can disrupt exit processes and scare
away a prospective buyer.
Document Your Customer, Supplier, and
Vendor Relationships
Organize Your Business’ Corporate
Governance Documents
A prospective buyer and its legal counsel
will want to see your business’ corporate
governance documents.
These will likely include articles of
incorporation, by-laws, operating agreements,
filings and certificates of good standing with
various federal, state, and local governments,
an entity organizational chart, a current
capitalization table/evidence of ownership,
documents evidencing historical stock and
ownership transactions, and board and
shareholder meeting minutes, among others.
Chances are slim that a prospective buyer
will want to acquire a business that is
operating on a series of handshakes, even if
such arrangements represent strong, longterm relationships.
Many organizations spend considerable
time during a transaction process locating
these documents and, after locating them,
struggling to identify whether the versions
located are the most current.
It is imperative that you document (and
receive executed copies of) all third-party
agreements and arrangements so that your
prospective buyer is clear on the terms under
which it is bound with customers, suppliers,
and vendors going forward.
This is not a situation you want to be dealing
with while managing your business and being
responsive to your prospective buyer’s other
requests.
After all, these on-going commitments
will become your prospective buyer’s
commitments, assuming that such
agreements are transferable post-transaction.
In addition, it is advantageous to have these
agreements ready-to-go when the multiple
rounds of document requests begin.
When negotiating the terms and conditions
to these agreements, be aware of how
built-in price increases, volume discounts,
and unusual termination clauses may be
perceived by a prospective buyer.
Finally, as you go through this process, make
certain that these agreements are current
and that your business is in compliance
with these agreements. It is not unusual to
find outdated agreements, as well as fact
patterns indicating companies are in violation
of one or more material agreements.
While it is always a best practice to keep
corporate governance documents organized
and accessible, it is especially important to
keep ahead of this task in the months and
years leading up to a potential exit.
Ensure the Business Is Properly Licensed
and Current On Its Regulatory Filings
No prospective buyer wants to walk into a
situation in which the business they have just
acquired is lacking the proper regulatory,
environmental, or other permits it requires for
its operations.
This is a sure way to sell your business at a
discount, if you can sell it at all. But, these
situations are more common than you think.
Most often, the proper licenses or filings have
lapsed and the business can re-obtain its
good standing after some effort, additional
cost, and perhaps rounds of inspection.
It goes without saying that your exit process is
not the time to find about shortcomings in your
business’ licensing and permitting. Therefore,
as you prepare for the exit, it is advisable to
ensure that the business is properly licensed
and current on its regulatory filings.
Know Your Value
According to the International Business
Brokers Association, the greatest hurdle
to deal completion is a seller’s value
expectations, so it is worth examining the
basis of your expectations.
Have you arrived at your value from an
independent appraisal, research, word-of-
mouth, a professional service provider, or
another source? A business owner should
know that there are a number of factors
in every transaction which can impact
the sales price, and that comparable
transactions—while relevant—should be used
only as guides and not direct indications of
what can be achieved in any given situation.
Having a realistic value in mind, knowing the
absolute minimum proceeds you are willing
to accept, and keeping top of mind your
key negotiating points will allow you to better
respond to the offers received, and help you
quickly decide whether to move forward
with a prospective buyer.
Lastly, a knowledgeable team of financial,
tax, and legal advisors, as well as a reputable
business broker or investment banker, can
improve the outcome of any exit.
RubinBrown’s Mergers & Acquisitions Services Group
RubinBrown’s team of Mergers & Acquisitions professionals has the experience to help your organization successfully
navigate the transaction process. From the initial thought of buying or selling to the critical post-closing and integration
activities that must occur, our comprehensive approach will provide you with superior quality and service.
Ben Barnes, CPA — St. Louis
Sunti Wathanacharoen — Kansas City
Partner-In-Charge
Mergers & Acquisitions Services Group
314.678.3531
ben.barnes@rubinbrown.com
Partner
913.499.4462
sunti.wathanacharoen@rubinbrown.com
Tim Farquhar, CFA, CPA — St. Louis
Jason McAdamis, CPA — St. Louis
Partner
314.290.3281
tim.farquhar@rubinbrown.com
Manager
314.290.3227
jason.mcadamis@rubinbrown.com
Dale Lash, CFA — Denver
Kyle Murphy, CFA, CPA — St. Louis
Partner
303.952.1261
dale.lash@rubinbrown.com
Manager
314.678.3511
kyle.murphy@rubinbrown.com
FEATURE
The Importance of
Valuation in Exit Planning
by Tim Farquhar, CFA, CPA
A common mistake that business owners often make is not fully
understanding the value of their company.
Business owners tend to rely on anecdotal information, such as what their neighbor sold his
business for or what a competitor was sold for recently, to determine the value of their business.
Sometimes, business owners don’t even engage in that limited level of “research” and, instead,
allow the amount that they need to sell their business for to bias their opinion of what their
company is actually worth.
A poor understanding of the valuation of a business can lead to disappointment at the exit
or even the late realization that an exit is not even possible given the inability to fund one’s
retirement with the lower than expected proceeds from an exit.
These are all reasons why it’s critically important to regularly value your business. In fact, it is
strongly recommended that you consider having an independent valuation performed on
your business prior to marketing your business for sale.
It is an unfortunate situation when business owners enter the sale process, incur significant
attorney and investment banker fees, and then discover that the value they thought the
business had (and what they had been told by the investment banker) was nowhere close to
what the market was willing to offer.
At that point, the business owner has two choices:
∙ Sell for significantly less than he thought entering the process
OR
∙ Continue to run the business and lose any potential benefit from the sunk attorney and
investment banker costs
Neither choice is desired and could be avoided by having an independent valuation
performed prior to entering the sale process.
While RubinBrown can’t provide a set of hard and fast rules that you can use to value your
business, this information is an overview of the methodologies most commonly used in
practice. If you decide to have an independent valuation performed, this information will help
you more fully understand the process. You can also benefit from exploring these common
methodologies if you make the decision to forgo a valuation.
The three primary approaches to valuing a business are described in the following pages.
Income Approach
The income approach determines the value of a business by capitalizing its future cash flows.
The basic premise of this approach is that the price a willing buyer would pay is based on the
economic benefits of ownership that are available to the buyer, namely, the cash flows which
the business generates.
The cash flows in this context are defined as net operating income after tax, plus depreciation,
less capital expenditures and working capital needs. These are the cash flows available to all
FEATURE
stakeholders (i.e. equity and debt holders),
as they are before any payments on debt or
dividends.
The value of the business is determined by
computing the present value of:
∙ Forecasted future net cash flows over an
appropriate period, normally 5 to 10 years
AND
∙ Forecasted value of the business at the
end of that period
A discount rate (present value factor) is
selected that is commensurate with the risk
involved in receiving the future cash flows.
Typically, the discount rate used is the
company’s weighted average cost of
capital (WACC), which represents the cost
of equity and debt financing. The WACC is
calculated by determining the company’s
cost of equity and after-tax cost of debt
and then estimating the company’s optimal
capital structure.
The cost of equity can be developed using a
technique called the build-up or summation
method. This method involves adding rates of
return and return premiums based on market
factors and a qualitative risk analysis of the
subject company.
stocks is based on historical returns of the S&P
500 Composite, with dividends reinvested.
The risk premium for size is an incremental
addition to the cost of equity to reflect
additional returns to stocks of companies
smaller than those included in the S&P 500.
The risk premium for the subject company
is a judgmental factor that recognizes the
general risks associated with an investment in
a closely held business and the specific risks
related to the subject company.
General risks inherent in a closely held
business include a lack of diversification,
access to capital, management depth,
and supplier pricing leverage. Specific risks
include the company’s financial structure,
earnings stability, competitive position, and
future growth prospects.
The cost of debt is the rate at which the
company can borrow money from a bank
or in the open market. The optimal capital
structure considers factors such as the
amount of assets the company has to borrow
against and the company’s cash flow.
The formula for a discounted cash flow
calculation is shown in Figure 1 on page 17.
Market Approach
The cost of equity is calculated using the
formula shown below.
Risk free rate
+
Risk premium for large company
common stocks
This approach examines factors such as:
+
Risk premium for size
∙ Guideline businesses which have recently
been sold
+
Risk premium for subject company
=
COST OF EQUITY
The risk-free rate is typically based on the
current yield of a 20-year treasury bond. The
risk premium for large company common
In using the market approach, the value of a
business is determined by using one or more
methods that compare the subject company
to either similar businesses or to securities of
similar businesses that have been sold.
∙ Publicly traded stocks of companies which
participate in the same general line of
business
The company or security used for
comparison must have a reasonable basis for
the comparison. Factors that are considered
Figure 1
DISCOUNTED CASH FLOW CALCULATION
when assessing comparability include the
industries in which the company operates,
its size, capital structure, profitability, growth
prospects, and risk factors.
When employing the market approach,
the ratios commonly used for comparison
are Enterprise Value (“EV” or the sum of a
company’s equity and net debt) to revenue
and EV to EBITDA (earnings before interest,
taxes, depreciation, and amortization).
The EV/Revenue and EV/EBITDA multiples
of recent transactions and publicly traded
companies are used to determine what
the appropriate multiples for the subject
company should be. EV/Revenue multiples
are typically used as they are more
generally available than EV/EBITDA multiples,
particularly for transactions.
For instance, companies in the same industry
can still have significantly different levels of
debt (and thus different levels of interest
expense), different effective tax rates (based
on tax jurisdiction), and different levels of
asset intensity (and thus different levels of
depreciation and/or amortization expense).
EBITDA removes all of these potential
differences by focusing on earnings
before interest, taxes, and depreciation /
amortization.
Figure 2 on the following page is a chart
that shows historical EV/Revenue and EV/
EBITDA multiples for all middle market M&A
transactions since 2009. Middle market is
defined as businesses with values between
$1 million and $1 billion.
However, there are usually large ranges in
EV/Revenue multiples within an industry, and
small changes to the multiple applied to the
subject company can cause large changes
in the resulting value.
Asset Approach
In this case, EV/EBITDA multiples are more
commonly used and most transactions are
referred to in terms of the EV/EBITDA multiple.
Under this approach, each component of
the business is valued separately. The values
are totaled and reduced by outstanding
liabilities to determine the net asset value of
the company.
The main reason that EBTIDA multiples are
commonly used is that EBITDA is a measure
that removes many of the differences
between comparable companies.
In using the asset approach, the value of a
business is determined by considering the
value of the business’ individual assets and
liabilities.
In the most commonly used method, the
company’s balance sheet is adjusted to
FEATURE
Figure 2
MIDDLE MARKET M&A TRANSACTIONS
Source: S&P Capital IQ
reflect differences between book value and
known or estimated market values.
the period of liquidation, represent the
liquidation value of the business.
Adjustments are also made for assets and
liabilities that may, for one reason or another,
not be recorded on the company’s books.
In liquidation, assets are typically sold for
less than the value determined on a going
concern basis. While the liquidation value
is not applicable in many cases, it is often
used to determine the minimum value of a
business.
Under this approach, assets can be valued
under two fundamental bases:
∙ Going concern value
Factors That Can Increase Value
∙ Liquidation value
Going concern value assumes the company
remains in business and is able to realize the
full fair market value of its assets in the normal
course of business. Going concern value is
based on the cost concept (i.e., the cost of
replacing the individual assets and liabilities
of the business given their age, condition,
and use).
Liquidation value assumes that all assets are
sold off individually or in bulk in an orderly
liquidation. The net proceeds available after
the payment of all liabilities and expenses
of sale, including administrative costs during
Regardless of the approach used, there are
several factors that can cause an increase in
the resulting value of a company:
Growth – Companies that have consistently
achieved higher growth or are expected to
achieve higher growth will typically enjoy a
premium valuation.
Profitability – Companies that enjoy higher
profitability will also achieve a higher
valuation.
Size – Larger companies will typically receive
higher valuations as larger size tends to be
correlated with lower risk.
Lower Volatility – Companies with consistent
operating performance and low volatility will
typically enjoy higher valuations.
Synergies – When several potential buyers
can achieve synergistic benefits from the
purchase of a company, the company will
achieve a higher valuation, all else equal.
Interest Rate Environment – In a low interest
rate environment, potential alternative
investments such as fixed income investments
are less attractive, and this causes equity or
company valuations to increase.
RubinBrown typically employs an income
and a market approach when valuing a
business, and the asset approach is only
used when the resulting values of the first
two approaches are low and approaching
the valuation “floor” provided by the asset
approach (i.e. the company is worth more
“dead” than “alive”).
The advantages of a market approach
are that it is fairly quick to employ, is easily
understood, and is based on observable
market data. The primary limitation of the
market approach is that it can be difficult
to find information on relevant, comparable
companies and transactions to help one
understand the differences between the
subject company and the comparable
companies.
The advantages of the income approach
are that it can give a business owner insight
into what specific factors in his business are
driving value. The limitations are that the
income approach is only as good as its
underlying assumptions, and to the extent
that the assumptions prove to be incorrect,
the resulting value can also be incorrect.
Because of the positive and negative attributes
of the various approaches, we generally
prescribe the use of more than one.
RubinBrown’s Valuation Services Group
The valuation professionals at RubinBrown are specialists that focus on the valuation of public and private businesses
and business interests as well as intangible assets.
Dale Lash, CFA — Denver
Michael T. Lewis, CFA — Denver
Partner
Valuation Services Group
303.952.1261
dale.lash@rubinbrown.com
Partner
303.698.1883
michael.lewis@rubinbrown.com
Tim Farquhar, CFA, CPA — St. Louis
Sunti Wathanacharoen — Kansas City
Partner
314.290.3281
tim.farquhar@rubinbrown.com
Partner
913.499.4462
sunti.wathanacharoen@rubinbrown.com
FEATURE
Key Findings from a
Global Survey on
Succession Planning
by Steven Harris, CPA
As many organizations begin the process to establish their visions
and strategies for 2020 and beyond, a major revelation in the
transition of leadership is becoming increasingly apparent.
It’s believed that by 2020, a significant number of the baby boomer generation
who owned businesses will have or be in the process of transitioning ownership and
leadership of their respective businesses. For those companies that have an already
established succession plan, this change will serve as an opportunity. For those that
don’t, they could experience significant risk.
Succession is a journey that preferably commences the day you start your business,
but often only begins when a business owner decides it is time to sell or transfer
control of the business. As many owners are contemplating the next phase of their
involvement with their respective companies, it is important to understand that
succession does not equal retirement, but instead it equals business evolution.
Many owners have trodden the path of business succession and discovered the
hard way that improper planning can foul the journey, and in some instances, even
inflict significant costs, both financial and personal.
Through our membership in Baker Tilly International, RubinBrown LLP has participated
in a global research study that has taken a closer look as both the sociological and
economic implications of the family business succession process. The results from
1,650 business owners across 55 countries provide businesses with a common sense,
practical guide on how you should view and conduct your succession process.
To address the structures of family businesses, the findings of the research have been
condensed into eight principles of succession which are intended to be a practical
guide to how family businesses should view and conduct their succession process.
Key findings from the research include:
Baker Tilly International
Global Succession
Research Study
The survey focused solely
on the issue of succession
and is not part of a
general family business
survey. It is structured to
focus on the dynamics,
barriers and success
strategies experienced in
a succession process.
The findings in the
November 2013 survey
are interim results and will
continue to be refined
and explored as this
survey continues.
To access the interim
findings, as well as find
other succession planning
resources, please visit
RubinBrown.com/BTI-Survey
Principle 1: Succession Is Not Retirement
If you believe succession is about retirement, growing old or stepping down, then you have lost
the process before you have commenced. Succession is truly about growth, opportunity and
building the future while you are there today. It is about future proofing the capital value of
your business by ensuring its continuity and evolution.
FEATURE
Principle 2: Start With Readiness
Preparation is a must for any journey, including succession. The incumbent and next generation
teams must be ready for the time, commitment and motivation it takes. As shown on page 21,
the most common trigger for commencing succession was the readiness of both these groups.
Principle 3: Set Your Goals Before The Journey
The importance of establishing and setting your goals before you commence your journey
cannot be overemphasized. When respondents considered or looked back on the process to
identify the main outcomes achieved, there was a change across the dimensions of before,
during and after, as shown below.
Principle 4: Harmony Is A Must
Creating, sustaining and enhancing harmony through the succession process is a must. The
importance of family harmony is illustrated below, as it remained an important consideration
across all three dimensions.
Principle 5: Price Is Not First – Key Considerations
As can be seen above, the focus of the succession process across all phases is on ‘continuity
of the business’ and ‘ongoing jobs for employees’. No matter what your intent is, whether to
sell, retain or transfer the business, these goals do not change. Getting the best sale price is not
the first consideration, rather it is an outcome of the focus on continuity and jobs.
Principle 6: Plan Early, Start Earlier
For effective succession, the business has to be able to meet the combined needs of the exiting
and incoming generations. The process of building the financial capacity of the business to cater
for these needs takes time and must be understood, planned for and acted on, well in advance
of these needs materializing.
Principle 7: Equality Is Not Equal – Challenges
If you have family, one of the key challenges you will face is finding the right balance of
participation, ownership and distribution of wealth in your succession process. Achieving a fair
distribution of assets among family members was the single greatest challenge faced in succession.
Principle 8: Ask Before You Get Lost
Succession can be a complex process and one where you may need independent professional
advice. Seek your succession advisor wisely and allow him/her to work with you to achieve the
best blend of succession expertise and knowledge of both your business and family.
RubinBrown’s Entrepreneurial Services Group
Business owners partner with RubinBrown because we help them improve and grow their businesses. We are not just
accountants or tax professionals. We are trusted business advisors — from entering the marketplace to deciding it is time
to exit, through retirement, selling the business or transitioning to the next generation.
Steven Harris, CPA — St. Louis
Mary Ramm, CPA — Kansas City
Partner-In-Charge
Entrepreneurial Services Group
314.290.3265
steven.harris@rubinbrown.com
Partner
913.499.4406
mary.ramm@rubinbrown.com
Greg Osborn, CPA — Denver
Ken Van Bree, CPA — St. Louis
Partner
303.952.1250
greg.osborn@rubinbrown.com
Partner
314.290.3429
ken.van.bree@rubinbrown.com
FEATURE
Significant Tax
Savings Opportunities
with the Tangible
Property Regulations
by Jason McAdamis, CPA, Chris Coleman, CPA & Henry Rzonca, CPA
All taxpayers that have capital expenditures or incur repair and
maintenance costs will be impacted by the tangible property
regulations that go into effect for tax years beginning on or after
January 1, 2014. Savvy taxpayers will, in many cases, be able to
utilize these regulations to realize significant tax savings.
For calendar year taxpayers, the last quarter of 2014 is a great time to take action to make the
changes required by the regulations and take advantage of opportunities that they provide.
These new regulations make major changes to the rules related to the determination of
whether expenditures for tangible property must be capitalized or expensed. In addition, they
refine and in many ways broaden the definition of deductible repairs.
Compliance Considerations
Additional compliance will be necessary to apply these regulations as required on your 2014
tax return. If your business owns tangible property, this additional compliance burden cannot
be avoided. There will be additional forms and elections that need to be filed. This is the case
even if you want to keep treating your property as you always have.
Beyond Compliance
In taxation, where there is change, there is opportunity. The time is now for you to capitalize
on that opportunity. Below is a sample of the potential tax benefits available from a proactive
approach to the application of these regulations to your business:
De Minimis Capitalization Policy and Election
With the expiration of the higher level of bonus and Section 179 depreciation limits in 2013,
the de minimis expensing provisions afforded by the regulations are one of the few remaining
mechanisms to quickly write off your expenditures on tangible property. For tax purposes, you
can follow written book policies and expense up to $5,000 per item per invoice for audited
financial statements or $500 per item per invoice for non-audited financial statements.
Deduction of Prior Capitalized Repair and Maintenance Costs
The rules have changed. Many types of expenditures previously required to be capitalized now
fit the definition of deductible repairs and, with proper planning, are eligible for immediate
write-off on your 2014 tax return.
Definition of a Unit of Property
Again, the rules have changed. 2014 presents an opportunity for you to define (or re-define)
your units of property for optimal tax benefit. Generally the larger the unit of property, the more
likely an individual expenditure upon that unit of property will be treated as a deductible repair
for tax purposes.
Routine Maintenance
Do you perform similar expenditures on a routine basis more than once over the expected life
of a unit of property? These expenditures, which can be significant in dollar amount, are now
eligible for immediate write-off on your 2014 and future tax returns.
FEATURE
Partial Asset Dispositions and Removal Costs
Have you replaced a piece of property (i.e. a
roof)? Whether such replacement occurred
in 2014 or a previous year, mechanisms
exist under the regulations to write off the
remaining basis and the costs to remove the
replaced property (i.e., the old roof).
Since many of the above opportunities
apply to both current and prior year
expenditures, the expected tax benefits may
be considerable depending on your industry
and the size and nature of your business.
Many of these changes are one-time
opportunities which must be seized in 2014 to
avoid additional costs to do so in later years.
So what action should you take?
Don’t let this one-time opportunity to save
significant taxes pass you by. Contact your
RubinBrown advisor today for a detailed
consultation regarding the application of
these new regulations to your business, and
see how these changes may benefit you by
reducing your income tax liability.
RubinBrown’s Tax Compliance & Consulting Services Group
Our proactive tax expertise, combined with our objective of forming and maintaining personal, long-term relationships
with our clients, are hallmarks that distinguish RubinBrown’s tax compliance and consulting services.
Steve Brown, CPA — St. Louis
Chris Coleman, CPA, CCIFP — St. Louis
Partner & Tax Chairman
Tax Compliance & Consulting Services Group
314.290.3326
steve.brown@rubinbrown.com
Partner
314.290.3263
chris.coleman@rubinbrown.com
Tim Sims, CPA — St. Louis
Henry Rzonca, CPA — St. Louis
Partner
St. Louis Tax Practice Leader
314.290.3434
tim.sims@rubinbrown.com
Partner
314.290.3350
henry.rzonca@rubinbrown.com
Jason McAdamis, CPA — St. Louis
Partner
Denver Tax Practice Leader
303.952.1250
Manager
314.290.3227
jason.mcadamis@rubinbrown.com
Partner
Kansas City Tax Practice Leader
913.499.4406
UPCOMING RUBINBROWN SEMINARS
Understanding & Implementing the
Tangible Property Regulations
Denver
RubinBrown Office
October 21, 2014
Kansas City
RubinBrown Office
October 23, 2014
St. Louis
RubinBrown Office
October 16, 2014
Business Exits & Acquisitions:
Considerations for Successful
Outcomes
Kansas City
Overland Park Convention Center
October 29, 2014
2014 International Business Summit
St. Louis
Donald Danforth Plant Science Center
October 31, 2014
Ethics 2014: Corporate
Governance: What You
Need to Consider
Denver
RubinBrown Office
November 6, 2014
Kansas City
November 11, 2014
St. Louis
November 12, 2014
Affordable Housing
Tax Credit Conference
Denver
RubinBrown Office
December 2, 2014
Big Changes in Store for Single
Audits & Federal Grants –
How They Will Impact You
MARK YOUR CALENDARS
Denver
RubinBrown Office
December 3, 2014
Kansas City
Overland Park Chamber of Commerce
December 9, 2014
St. Louis
RubinBrown Office
December 2, 2014
Life Sciences & Technology Seminar
Kansas City
RubinBrown Office
February 26, 2015
St. Louis
St. Louis Cortex Office – CIC@4240
December 4, 2014
Glean insight into the latest tax
legislation. Learn more about how
new accounting rules will affect
your business. Find out how your
organization can benefit from
business strategies and innovative
ideas. Throughout the year,
RubinBrown is an excellent source
for learning and insight.
Registration will be available
5 weeks prior to each event at
www.RubinBrown.com/Events
Year-End Accounting & Tax Update
Not-For-Profit Update
Denver
RubinBrown Office
December 10, 2014
Denver
RubinBrown Office
January 28, 2015
Kansas City
December 11, 2014
Kansas City
Sheraton Overland Park
January 27, 2015
St. Louis
December 9, 2014
St. Louis
January 22, 2015
Employee Benefit Plan Audit Survival
Public Sector Seminar
Denver
RubinBrown Office
December 9, 2014
Denver
RubinBrown Office
February 6, 2015
SEC Update
Kansas City
February 3, 2015
Denver
RubinBrown Office
January 7, 2015
St. Louis
January 6, 2015
St. Louis
RubinBrown Office
January 29, 2015
LIFE
LIFE
SCIENCES
SCIENCES
& TECHNOLOGY
& TECHNOLOGY
Intellectual Property and Exits:
Tips to Maximize and Protect Value
by Jason Mannello, CFA
A
n exit or other type of liquidity event can
occur anytime during the lifecycle of a
company. It pays to be aware of this and to
prepare ahead of time.
The more prepared a company is for an
exit, the more success it will have in getting
a deal done and maximizing the seller’s
proceeds. Due diligence preparedness is
critical—potential acquirers or investors will
want to “kick the tires” on your company’s
financial information, information technology
infrastructure, and other critical areas.
For companies operating in life sciences and
technology related industries, intellectual
property (IP) due diligence is critical as well.
The responsibility of performing due
diligence, including IP due diligence, is
often thought to rest solely on the acquirer
of a potential target. However, this does not
preclude a company from performing its
own IP due diligence as part of its overall IP
strategy.
IP due diligence is about understanding
a company’s IP portfolio. It is also about
understanding and ensuring the protection
of IP value. This requires knowledge of the
risks associated with the IP and what is being
done to protect the IP that the company
relies upon to operate and maintain a
competitive advantage. IP due diligence is a
critical component of the overall IP strategy.
Being proactive and developing a
comprehensive IP strategy that includes
internal IP due diligence provides many
benefits, including:
∙ Identifying gaps in the IP portfolio (e.g.,
freedom-to-operate issues)
∙ Identifying weaknesses in IP strategy (e.g.
weaknesses in internal protections)
∙ Creating a strategy to mitigate risks to the
IP portfolio (e.g. internal controls)
If the issues or risks are serious enough, it may
lead to the investor walking away from the
transaction altogether. Thus, a thorough
IP strategy, which includes in-house IP due
diligence, is an important consideration for
any company with a heavy reliance upon IP.
∙ Maximizing the effectiveness of the IP
strategy to maximize IP value
An internal IP due diligence process should
be closely related to a company’s overall
IP strategy. So what should a company be
doing as part of its IP due diligence process?
∙ Streamlining an acquirer’s or investor’s due
diligence process
While there is not a one-size fits all strategy,
there are certain IP areas to focus on:
∙ Assessing the cost and benefit of the mode
of protection (e.g. patent v. copyright v.
trade secret)
∙ Inventory – A comprehensive listing of all
IP assets owned and/or licensed, including
patent/trademark/copyright expiration
dates and any owned but unused IP (Note:
If your company utilizes provisional patents,
you will want to make sure to keep a close
eye on the deadline for filing a full patent)
Failing to adequately incorporate IP due
diligence into your IP strategy has costs, such
as the risks of:
∙ Failing to properly maintain legal registrations
and protections around your IP portfolio
∙ IP misappropriation
∙ Liability for infringement of others’ IP
These risks, left unmitigated, can result
in damage to your IP portfolio and your
company’s value. In addition, in the context
of a potential exit (such as an acquisition
or IPO) or another liquidity event (such as
an additional financing round), failing to
be proactive in your own internal IP due
diligence could result in:
∙ Records – These might include patent
applications and other filings, patent
and trademark registrations, history of
infringements, history of prosecution and
awarded damages, lost value of IP based
on infringements, etc.
∙ Controls – Policies and procedures and
other internal control infrastructure that are
designed to protect your IP portfolio
∙ Assessments – IP overviews and other
reports that provide context such as stage
of development and commercialization,
potential market opportunities, and
competitive assessments
∙ A lower valuation
∙ Delayed consummation of the deal
∙ Failure to execute the deal entirely
If a potential acquirer or investor identifies
gaps in your IP portfolio or other potential
risks or issues, it may delay the liquidity event
as additional follow-up due diligence is
performed, which also has the potential
to reduce the valuation placed on your
company or IP.
∙ Agreements and documents supporting
freedom to operate – This will include all
technology in-licensing and out-licensing
agreements and amendments and
documents supporting ownership of, or
rights to, assets
∙ Valuations – Internal and external
valuations of the IP portfolio or assets
comprising the portfolio
LIFE SCIENCES & TECHNOLOGY
∙ Product-patent (or Product-IP) matrix – An
identification of what IP supports what
products currently commercialized or in
development to be commercialized. This
should include IP that is owned outright as
well as licensed technology
A potential investor or acquirer will want
assurances that your IP portfolio is strong and that
you have taken adequate measures to protect
the value of that IP. Ownership of IP assets
and freedom-to-operate will be two critical
considerations for any transaction involving a
company with a heavy reliance upon IP.
In addition, having a well documented and
well mapped out IP portfolio and IP strategy
can help assure potential counterparties
that there is not considerable unforeseen
risk, possibly help them identify value or
opportunities they may not have considered,
and potentially bridge a valuation gap.
You may ask “Do I have an IP strategy?”
and “Is IP due diligence part of my IP
strategy?” If the answer is “No” to either of
those questions, then you may benefit from
adopting an IP due diligence process.
The benefits of such a process will help you
identify and mitigate risks surrounding your
IP portfolio, maximize the benefits of your
overall IP strategy (or help you develop one if
it’s currently non-existent), and streamline an
external IP due diligence process during an
exit or other liquidity event.
The more prepared your company is, the
more success you will have in closing a deal
and maximizing the seller’s proceeds.
RubinBrown’s Life Sciences & Technology Services Group
RubinBrown has a dedicated Life Sciences and Technology Services Group specializing in serving life sciences and
technology based companies.
Steve Hays, CPA — St. Louis
Todd Pleimann, CPA — Kansas City
Partner-In-Charge
Life Sciences & Technology Services Group
314.290.3336
steve.hays@rubinbrown.com
Partner
913.499.4411
todd.pleimann@rubinbrown.com
Jason Mannello, CFA — St. Louis
Rodney Rice, CPA — Denver
Manager & Vice Chair
314.290.3216
jason.mannello@rubinbrown.com
Partner
303.952.1233
rodney.rice@rubinbrown.com
Felicia Malter, CPA — St. Louis
Partner
314.290.3249
felicia.malter@rubinbrown.com
PRIVATE EQUITY
Strategic Buyers and Financial Buyers:
One Size Does Not Fit All
by Jeff Sackman, CPA
P
reparing to sell your business is a decision
that can bring about both anxiety and
excitement.
And the selling process itself can be stressful,
in many ways rekindling emotions similar to
those you encountered when first starting
your business. For many business owners,
educating oneself on the universe of
potential buyers is a daunting task with no
clear starting point.
One of the first things to consider when you
have decided to sell is to decide on who
is the likely buyer of the business. There are
many factors to consider when selecting
a potential buyer such as cultural fit,
operational expertise, competition, and who
might pay the highest price, among others.
No matter why you’re selling, whether for
retirement, diversification or general liquidity,
there are many different buyer types for you
to consider. Potential buyers primarily fall
into two categories—strategic buyers and
financial buyers.
Strategic Buyers
Strategic buyers, by definition, are operating
companies and often competitors, suppliers
or customers of your business.
They can also be non-competitive to your
company but looking to grow in your market to
diversify their existing revenue sources. The goal
of a strategic buyer is to identify companies
whose products or services can synergistically
integrate with their existing operations to
create incremental long-term value.
PRIVATE EQUITY
Their evaluation of your business will focus
less on the strength of your business’
management team and “back-office”
because these will often be eliminated during
the post-transaction integration phase.
Strategic buyers also tend to have more
industry expertise and lower costs of equity
capital than financial buyers, and they intend
to own the acquired business indefinitely,
thereby fully integrating the company into
their existing business. As a result, strategic
buyers may have the ability to pay more for
your business than financial buyers.
Financial Buyers
Financial buyers are non-operating
companies which can include private equity
groups (PEGs), family investment offices
and high net worth individuals, among
others, which are in the business of making
investments in companies and realizing a
return on these investments.
The goal of financial buyers is to identify
businesses with attractive future growth
opportunities and competitive advantages,
invest capital, and realize a return on their
investment with a sale or IPO. While there are
many different types of financial buyers, this
article will primarily focus on the differences
with PEGs.
Private Equity Groups (PEGs) as
Financial Buyers
The perception of most PEGs is that they
are savvy financial engineers that invest in
a company, slash
head count and
costs, dramatically
change the culture,
and then flip the
investment five
years down the
road to the highest
bidder.
While those types
of PEGs still exist, a
significantly different
approach is being employed by PEGs that
operate in the middle and lower-middle
market.
Most financial buyers have a well-defined
strategy as to the type and size of businesses
in which they invest, how they structure their
deals, their investment time horizons and their
management styles.
A traditional PEG will have institutional
investors that have provided capital to invest
for a superior return (relative to other asset
classes, such as publicly traded companies)
over a stated period of time. Under the
typical structure, a PEG will have five years
to invest committed capital and five years to
realize a return on that capital.
Given the pressure to deliver return within a
stated period of time, traditional PEGs will
typically invest for a controlling interest in
your business and seek to make significant
cost and top-line changes, as well as
management changes, before selling it to
realize a return for their investors.
Today’s PEGs can look very different than
what is described above. This is particularly
true in the middle and lower-middle market.
The difference in approach is primarily driven
by fund structure and a true desire to partner
with management.
Middle Market Private Equity Firms
So how is the fund structure of many middle
market PEGs different and why is that
important? A significant number of PEGs
in the middle market utilize a more patient
capital approach. These PEGs can be
patient because their fund structures allow
them to do so.
Oftentimes, the fund structure might have
looser time frames, the composition of
investors in the fund might be more friends,
family and local investors as opposed to
institutional investors, or the fund might not
really be a fund at all. This type of patient
capital can be more attractive to a business
owner.
In addition to fund structure, middle and
lower-middle market PEGs have a significant
interest in partnering with an existing
management team. Most of these PEGs
have a high degree of interest in allowing
the owner to roll-over equity, which can
create alignment of financial interests such
that the original owner has the opportunity
to participate in a second sale event, the
proverbial “second bite of the apple.”
Oftentimes, that second bite is larger than
the first. Allowing a PEG to take a controlling
interest in your business can allow you to
realize some of your business’ value while
also giving you the risk tolerance to pursue
certain aggressive business objectives that
you may not have otherwise pursued when
you were the sole owner.
This can be tremendously freeing for a
business owner. One of the drawbacks is that
there is now another owner who has input
into business decisions. This can be mitigated
by thoroughly vetting the PEG that buys a
controlling stake in your company.
There are also PEGs that will do minority
interest deals. This can be a great option
if you are looking for additional capital.
Additionally, partnering with this type of
PEG can give you additional resources
and connections that may enable you to
accelerate the growth of your business.
Bottom line, there is
no longer a one-size
fits all approach
for private equity,
especially in the
middle and lowermiddle market. The
opportunity to partner
with the right firm may
represent a significant
opportunity for
you as the business
owner to take some
chips off the table
while maintaining
significant ownership in your business to allow
for that lucrative second bite.
As you are thinking about your own strategic
growth, general liquidity or exit plan, private
equity and all of its various forms should be
considered.
Private equity involvement in your business
can give you the risk appetite to pursue
those opportunities which you may not have
felt comfortable pursuing alone, potentially
adding significant value to your business.
When the time is right for you to pursue your
exit and liquidity options, it’s important to
take a look at all of your options to give
yourself the best possibility of achieving your
desired result.
RubinBrown’s Private Equity Services Group
RubinBrown offers private equity firms and their portfolio companies an integrated suite of business services aligned
across the entire private equity life cycle.
Ben Barnes, CPA
Jeff Sackman, CPA, CGMA
Partner-In-Charge
Private Equity Services Group
314.678.3531
ben.barnes@rubinbrown.com
Partner & Vice Chair
Private Equity Services Group
314.290.3406
jeff.sackman@rubinbrown.com
CONSTRUCTION
Valuation Strategies for Construction Companies
by Tim Farquhar, CFA, CPA
T
he valuation methodologies described
on pages 15-18 can be applied to
companies in the construction industry.
However, typical companies in the
construction sector exhibit much greater
volatility in operating performance than
companies in general, and as a result,
it can be much harder to predict future
performance.
Because of these differences, the
approaches discussed on pages 15-18 will
be slightly different for construction-related
companies, as described over the following
pages.
Income Approach
A discounted cash flow, as described on
page 16, is not as useful or commonplace
in construction valuation. The construction
industry is very sensitive to the prevailing
interest rate environment and the business
cycle and tends to experience more
frequent and more volatile boom and bust
periods than the economy as a whole.
Because of these unique aspects of the
construction industry, it is very difficult
to predict financial performance more
than one year into the future. Therefore,
when applying an income approach to a
construction-related company, RubinBrown
generally uses an income capitalization
method rather than a discounted cash flow.
The income capitalization method involves
two variables:
∙ Income or cash flow stream to be
capitalized
∙ Capitalization rate that is used to convert
the cash flow stream to a value
ALL ENGINEERING AND ARCHETICURAL SERVICES
This method is based on the following
formula:
EBITDA
the nature
The lower multiples are due to
Margin
Net Sales
EBITDA
(LFY)
(LFY)
Close Date
MVIC
Price
of the work,
which
is project
based,
and(LFY)
Count
23
23
23in the
20
20
the
volatility caused
by
fluctuations
1/20/09 $
220,000 $
23,625 $(12,120,000)
-2555.8%
Minimum
1
number
of1/21/14
projects
and
the
project
size.
EBITDA
418,000,000 598,776,000
10,471,206
23.2%
Maximum
Average Close Date
- 23
Median
Count
Minimum
Maximum
Average
Median
The cash flow stream in this formula is stated
as a single dollar amount that is assumed to
be consistent each year. Recent historical
results are often used to indicate cash flow
levels that can reasonably be expected in
the future.
Historical financial statements are analyzed
and “normalized” by making adjustments
for nonrecurring, extraordinary, and nonoperating items. In addition, certain
discretionary expenses are typically adjusted
to better reflect the earning potential of the
business.
Market Approach
EV/Revenue and EV/EBITDA multiples, which
are discussed on page 17, are also important
metrics in the construction industry.
As shown in the following tables, the multiples
typically observed in the construction
industry are much lower than those observed
for other industries.
1/20/09 $
220,000
1/21/14
418,000,000
37,593,620
Close Date
Net Sales
46,163,763
(LFY)
6,559,182
23
EBITDA
709,419
(LFY)
46,163,763
Net
Sales
6,559,182
(LFY)
709,419
EBITDA
299,768
(LFY)
Margin
-122.0%
(LFY)
299,768
5.4%
20
20
$
23,625 $(12,120,000)
-2555.8%
All General Contractors
ALL
GENERAL CONTRACTORS
598,776,000
10,471,206
23.2%
3,984,192
MVIC Price
-122.0%
EBITDA
Margin
5.4%
(LFY)
Count
29
29
29
25
25
ALL GENERAL CONTRACTORS
9/25/09 $
55,000 $
139,488 $
(128,318)
-20.7%
Minimum
EBITDA
3/24/14 1,594,580,000 427,777,000
2,018,184
47.6%
Maximum
Margin
Net Sales
EBITDA
58,529,541
22,886,430
163,046
11.9%
Average Close Date
(LFY)
(LFY)
(LFY)
MVIC
Price
- 29
400,000
812,472
54,780
11.1%
Median
Count
29
29
25
25
9/25/09 $
55,000 $
139,488 $
(128,318)
-20.7%
Minimum
ALL SUBCONTRACTORS
3/24/14 1,594,580,000 427,777,000
2,018,184
47.6%
Maximum
Average
Median
-
Close Date
Count
Minimum
152
2/1/09 $
Minimum
2/1/09 $
5/22/14
Maximum
Average Close Date
-152
Median
Count
Maximum
Average
Median
Once historical financials have been
“normalized,” weightings should be
applied to the historical results (as well
as the projection for the upcoming year
to incorporate existing backlog) and the
weighted average of the results is used as
the cash flow stream to be capitalized.
A capitalization rate is selected which
represents an investor’s required rate of
return on an investment with a similar degree
of risk. This capitalization rate is developed
by estimating the company’s weighted
average cost of capital (“WACC”) and then
subtracting the expected rate of future
growth.
37,593,620
MVIC
Price
3,984,192
23
58,529,541
22,886,430
Net812,472
Sales
(LFY)
400,000
MVIC Price
152
30,000 $
502,478,000
5,983,332
MVIC
Price
400,000
152
30,000
5/22/14
-
All Subcontractors
152
144
ALL SUBCONTRACTORS
112,182 $
(482,000)
218,699,527
Net Sales
5,875,412
(LFY)
$
163,046
EBITDA
54,780
(LFY)
1,033,350
152
112,182 $
45,100,000
EBITDA
863,384
(LFY)
131,429
144
(482,000)
11.9%
EBITDA
Margin
11.1%
(LFY)
143
-19.1%
EBITDA
57.5%
Margin
13.5%
(LFY)
11.9%
143
-19.1%
MVIC/
Sales
(LFY)
MVIC/
EBITDA
(LFY)
23
16
0.1x
2.1x
MVIC/
MVIC/
168.6x
100.0x
Sales
EBITDA
8.0x
15.6x
(LFY)
(LFY)
0.7x
8.5x
23
16
0.1x
2.1x
168.6x
100.0x
8.0x MVIC/
15.6x
MVIC/
Sales
0.7x EBITDA
8.5x
(LFY)
(LFY)
29
23
0.1x
0.6x
MVIC/
MVIC/
3.7x
113.9x
Sales
EBITDA
0.6x
11.8x
(LFY)
(LFY)
0.4x
3.9x
29
23
0.1x
0.6x
3.7x
113.9x
0.6x MVIC/
11.8x
MVIC/
Sales
0.4x EBITDA
3.9x
(LFY)
(LFY)
152
126
0.1x
0.6x
MVIC/
MVIC/
6.4x
141.0x
EBITDA
Sales
0.5x
5.8x
(LFY)
(LFY)
0.4x
3.3x
152
126
0.1x
0.6x
502,478,000
5,983,332
218,699,527
5,875,412
45,100,000
863,384
57.5%
13.5%
6.4x
0.5x
141.0x
5.8x
400,000
1,033,350
131,429
11.9%
0.4x
3.3x
All Architectural & Engineering Services
Close Date
Count
Minimum
Maximum
Average
Median
MVIC Price
Net Sales
(LFY)
EBITDA
(LFY)
EBITDA
Margin
(LFY)
23
23
23
20
1/20/09 $
220,000 $
23,625 $(12,120,000)
1/21/14
418,000,000 598,776,000
10,471,206
37,593,620
46,163,763
709,419
-
3,984,192
6,559,182
299,768
MVIC/
Sales
(LFY)
MVIC/
EBITDA
(LFY)
20
-2555.8%
23.2%
-122.0%
23
0.1x
168.6x
8.0x
16
2.1x
100.0x
15.6x
5.4%
0.7x
8.5x
ALL GENERAL CONTRACTORS
Sales Value
EBITDA
In the above schedules, MVIC Net
(“Market
(LFY)
(LFY)
Close Date
MVIC Price
of Invested Capital”) is the consideration paid
Count
29
29
29
25
to the seller9/25/09
and includes
any cash,139,488
notes,$and/
$
55,000 $
(128,318)
Minimum
or securities3/24/14
that were
used as a form of payment
1,594,580,000 427,777,000
2,018,184
Maximum
plus any interest-bearing
liabilities
assumed by 163,046
the
58,529,541
22,886,430
Average
buyer, and LFY
fiscal year.
- equals last
400,000
812,472
54,780
1
Median
Source: Pratt’s Stats
Close Date
MVIC Price
EBITDA
Margin
(LFY)
MVIC/
Sales
(LFY)
MVIC/
EBITDA
(LFY)
25
-20.7%
47.6%
11.9%
29
0.1x
3.7x
0.6x
23
0.6x
113.9x
11.8x
11.1%
0.4x
3.9x
ALL SUBCONTRACTORS
Net Sales
(LFY)
EBITDA
(LFY)
AsCount
shown in the
general 144
152 preceding
152 tables, 152
2/1/09
30,000 $
112,182
Minimum
contractors
and$ subcontractors
tend $to (482,000)
5/22/14
502,478,000 218,699,527
45,100,000
Maximum
transact at significantly
lower 5,875,412
multiples than
5,983,332
863,384
Average
architectural
(“A&E”) firms131,429
do.
- and engineering
400,000
1,033,350
Median
EBITDA
Margin
(LFY)
MVIC/
Sales
(LFY)
MVIC/
EBITDA
(LFY)
143
-19.1%
57.5%
13.5%
152
0.1x
6.4x
0.5x
126
0.6x
141.0x
5.8x
11.9%
0.4x
3.3x
CONSTRUCTION
There are several reasons for this difference
and the key ones are as follows:
∙ Architectural and engineering firms tend to
have more diversification among projects
in a given year, and as a result, individual
projects make up a smaller percentage
of their total revenue versus general
contractors and subcontractors.
As a result, A&E firms generally have
less volatile revenue and earnings, and
reduced volatility means that a potential
buyer will be more comfortable paying a
higher multiple for the underlying cash flow
stream, as the buyer understands that his
downside is more limited than with a more
volatile business.
∙ General contractors and subcontractors
also tend to have more competition than
A&E firms, and competition tends to drive
down excess profits and reduce the value
of intangible assets such as brand names.
Understanding this, a potential buyer will
be more willing to pay a higher multiple for
a business with a strong brand name in an
industry with less competition.
∙ In general, there is also greater litigation risk
for general and subcontractor firms versus
A&E firms, and the higher risk leads to lower
transaction multiples as well.
may be more relevant, particularly if the
subcontractor in question does not have a
history or expectation of consistent profitability.
Factors That Can Increase Value
In addition to the factors described on page
18, which can be applied to all companies,
the following factors are specific to
construction-related companies:
∙ Backlog – As the lead times on
projects can be fairly significant for
construction-related companies, backlog
is an important factor to consider in
construction-related company valuation. A
higher backlog will potentially increase the
long-term growth rate used in the income
capitalization approach or increase the
revenue or EBITDA multiple applied—either
of which will increase the resulting value.
∙ Brand strength/reputation – A potential buyer
will be willing to pay more for a constructionrelated company with a long track record
of, and reputation for, quality work in its
respective market. This is particularly true
if the buyer plans to continue to operate
under the traditional brand name.
∙ Diversification – Diversification among
geographies served or industry focus
can serve to reduce the volatility of a
construction-related company’s earnings,
and, therefore, increase value.
Asset Approach
The asset approach as described on page
17 is usually not very applicable in the
construction industry. This is particularly true
for general contractors and A&E firms that
have little tangible value outside of net
working capital.
In fact, for profitable general contractors
or A&E firms, the asset approach should
only be used as a reasonableness check,
or minimum, that the resultant value from
an income approach or market approach
should not go below.
For certain types of subcontractors that are
more equipment-intensive, the asset approach
∙ Specialty focus – This somewhat
contradicts the previous point on
diversification. However, if a constructionrelated company has significant
experience and a strong brand in a niche
area, that can lead to above-industryaverage profits on projects in that niche,
and potentially, a higher valuation.
There is risk of being too specialized
in one area, which leads to reduced
diversification and higher volatility, but
if a construction-related company can
specialize in several uncorrelated niches,
it can earn excess profits, maintain
diversification, and increase value.
∙ Strong client relationships – A constructionrelated company that has strong client
relationships will be more attractive to
a potential buyer. Construction- related
companies with strong client relationships
will tend to have more negotiated bid,
rather than competitive bid, projects as
well as longer histories of serving their
respective clients.
These factors will usually lead to more
sustainable, recurring work with clients and
a more stable earnings stream, both of
which reduce risk and increase value.
∙ Point in the business cycle – As
construction-related companies are
very economically sensitive, where the
economy is in the business cycle at a given
moment has a great impact on expected
performance and valuation.
When the overall economy is approaching,
or in the midst of, an expansion, the longterm growth rate used in the income
capitalization approach will be higher and
the revenue or EBITDA multiple applied will
increase, resulting in a higher value.
The volatility and economic sensitivity of
companies in the construction industry can
make them difficult to value.
For this reason, it is important to have a good
understanding of the valuation framework
that should be used to value a constructionrelated company and/or consult with a
business valuation expert that has
construction experience.
RubinBrown’s Construction Services Group
We provide services to general contractors, specialty subcontractors, home builders, architects and engineers and
related companies in the construction industry.
Frank Hogg, CPA — St. Louis
Matt Beerbower, CPA — Denver
Partner-In-Charge
Construction Services Group
314.290.3413
frank.hogg@rubinbrown.com
Partner
303.952.1252
matt.beerbower@rubinbrown.com
Ken Van Bree, CPA — St. Louis
Michael Fox — Kansas City
314.290.3429
ken.van.bree@rubinbrown.com
Manager
913.499.4434
michael.fox@rubinbrown.com
LAW FIRMS
Proactive Succession Planning for Your Law Firm
by Matt Finke, CPA & Lynnae Robinson, CPA
he picture of retirement looks different for
each of us. The one thing that we
all have in common when it comes to
retirement is that we can’t ignore it.
T
changes is through extensive planning, a
recent Altman Weil survey revealed that
approximately only 27% of law firms have a
formal succession plan in place.
It’s no surprise that the number of people
approaching retirement age is ever increasing
as, in the next few years, the youngest baby
boomers will be in their 50s while the oldest will
be in their 70s. This means a record number
of people will be leaving the work force or
significantly reducing their hours.
There are a number of reasons firms and
individual partners avoid planning for the
future. This same survey asked respondents
to identify firms’ hindrances to succession
planning.
These pending transitions will have a major
impact in nearly all industries, and the legal
industry is no exception. Baby boomers have
been instrumental in building, managing and
leading their firms.
∙ Partners not willing to retire
The top reasons included:
∙ Partners not willing to forfeit compensation
by transitioning client work
∙ Lack of adequate successor partners
Despite widespread agreement that the
best way to prepare for such leadership
∙ Avoiding awkward conversations
Demographic Assessment
If your firm has not begun to consider
succession planning, one starting point might
be to assess the current demographics of
your attorneys.
Once there is a general guideline for firm
leaders to follow, more specific plans can be
made to address individual transitions.
Discuss Individual Partners’ Intentions
∙ How many are nearing retirement age?
∙ What key positions do those individuals
hold?
∙ What percentage of revenue is generated
by these partners?
This assessment, which can be done at the
firm, office, and/or practice group level, will
help to identify what gaps will need to be
filled in the near future either from lateral
hiring or the grooming of younger attorneys.
Develop a Plan
Having a thorough and forward-thinking
plan for succession within the firm makes
addressing potentially awkward or difficult
conversations easier.
If your firm is one of the many without a
formal plan for succession, consider a
brainstorming session among firm leadership
to consider succession issues, including:
∙ Determine where the firm will be in 3, 5, 10
years.
This isn’t about putting anyone out to
pasture but about planning for an inevitable
vacancy, providing opportunities to recruit
and retain talent, and safeguarding the
future of a firm partners have worked so hard
to build.
While addressing these concepts can be
difficult, ignoring the issues only puts the
firm, its clients, and attorneys at risk. Any
partner within 5 years of retirement should
be communicating his/her intentions and
working with firm leaders to implement a
plan for transition.
Once discussions have happened with
individual partners, the firm can develop a
timeline of potential transitions. This will help
to identify the urgency of recruiting, training,
and grooming for future transitions.
For firms wanting to implement an approach
to discuss partners intentions, a “doubleteam” concept has been successful for
many. In this approach, two partners
interview a partner that is considered to be
“in-transition” from work into retirement.
∙ What (or who) will it take to make that
happen?
∙ Should there be a mandatory retirement
age?
∙ What contact should retired partners have
with clients to ensure retention?
∙ In what situations is it acceptable for
retiring owners to consider working for the
firm in a counsel-type or similar role?
∙ Are there situations that would trigger
forced retirement of an owner?
LAW FIRMS
The interview’s agenda is engineered to
brainstorm ways to ease the partner into
retirement by addressing issues related to
client relationships, partner compensation,
and the impact on overall firm leadership.
While it may seem counterintuitive, by using
this “double-team” concept, the meeting’s
tone is more likely to be collaborative in
nature and less likely to turn confrontational.
It is recommended that one partner in the
“double-team” be a key member of firm
management (i.e. the managing partner or
another partner that serves in an executive
capacity).
Identify Young Attorneys to
Fill Future Gaps
Client relationships will be key to the firm’s
continued success and must be transitioned
carefully to foster client retention and
satisfaction. However, retiring partners also
serve important roles in firm leadership,
practice development, and general
management.
It’s necessary to include younger attorneys in
these matters as well as client relationships.
Assign committee responsibilities or office
management duties to these successors to
further identify strengths and to increase their
experience.
Recognize those who have the
entrepreneurial spirit to successfully run a
business. Also, do not underestimate the time
needed to develop younger talent into a
successor. Depending on the situation, it may
take as many as five years for a new leader
to obtain the necessary experience and skills
to succeed in his/her new role.
As the Altman Weil survey noted,
senior partners do not want to give up
compensation as they begin to transition to
retirement. It’s important for firms to develop
a compensation plan that rewards partners
transitioning clients and training successors.
The firm’s plan should support the overall firm
goals and succession plan.
With a compensation plan that encourages
the development of future leaders
while motivating staff to take on new
responsibilities, the firm will have built-in
support for its strategic plan.
Encourage Your Partners to
Develop Their Own Plans
Encourage your partners to consider the
following:
∙ What does retirement mean to you?
∙ Do you still enjoy going to work?
∙ Will you leave law altogether?
∙Relocate?
Each partner’s idea of retirement will vary,
but until you have determined and voiced
your preferences, the firm cannot support
your goals and help you achieve them.
It’s never too early to consider what shape
the next phase of your life and career will
take. Early planning also allows more time to
explore your options.
Your plan may change over the years as
changes occur in the economy, your health
or your family. The sooner you can identify
successors and begin grooming them, the
easier the transition will be, not just for you,
but for the successor attorneys and your
clients as well.
As a successful professional, you’ve likely had
ample opportunity to save for the future. This
should allow you to have a healthy financial
position as you enter retirement. If you
haven’t already, engage a financial advisor
who can offer additional insight.
Consider the advice of professionals not
only with regard to saving and planning for
retirement, but also in how and when to
receive the savings you’ve worked hard to
accumulate.
You may have heard the phrase, “Failing to
plan is planning to fail.” While there is wisdom
in that statement, planning is only the first step
in thriving successions. The firm’s plan should
be implemented, followed, and consistently
monitored to identify necessary changes.
Managing partners and key leaders should
be actively involved and must ensure the
plans are executed. Partners need to be
held accountable for communicating their
retirement goals, transitioning client work and
relationships, training and mentoring younger
staff and partners, and adhering to partner
agreements.
By encouraging dialogue, generating plans,
and monitoring implementation, firms can
allow for healthy transitions for all involved:
retiring partners, successor partners, clients
and the overall law firm itself.
RubinBrown’s Law Firms Services Group
RubinBrown has a dedicated business unit to serve the unique needs of law firms staffed with professionals experienced
in working with service-focused organizations.
Matt Finke, CPA — St. Louis
Ken Rubin, CPA — St. Louis
Partner-In-Charge
Law Firms Services Group
314.290.3365
matt.finke@rubinbrown.com
Partner
314.290.3417
ken.rubin@rubinbrown.com
Don Esstman, CPA — Denver
Matt Wester, CPA, CFE — Denver
Partner
303.952.1284
don.esstman@rubinbrown.com
Partner
303.952.1277
matt.wester@rubinbrown.com
Lynnae Robinson, CPA — St. Louis
Partner
913.499.4406
Manager
314.290.3381
lynnae.robinson@rubinbrown.com
HEALTHCARE
Succession Planning for Medical Practices
and Physicians
by Tom Zetlmeisl, CPA, CFE, CFF
S
uccession planning is an often overlooked
aspect of long-term planning for nearly all
professions – and medical professionals are
no different.
Physicians spend their careers building
their medical practices, yet many do not
adequately plan for their futures or the
futures of their practices.
Almost half of all physicians are over the age
of 50 and approaching retirement, and most
would list a comfortable retirement as an
important financial goal.
However, many physicians and physician
groups do not have a clear plan as to how
to leverage the value of their practices when
a physician decides to exit or reduce his/her
responsibilities.
Succession planning requires physicians to
plan their futures, as well as the futures of
their practices, and then implement these
plans. It cannot be accomplished last
minute. It must be put in place many years
before succession actually takes place.
Components to the Plan
Succession planning is essential to maximize
the value of the practice and smoothly
transition patients to new providers without
compromising care.
As a physician practice begins the
succession planning process, it is important
that senior management is involved and
supports the plan. This will also help ensure
there is consistency and transparency
in the plan. The physician team should,
obviously, also be engaged to facilitate
implementation of the plan.
There are many components to succession
planning for a physician practice and many
crucial decisions that need to be considered.
Some items that need to be addressed are:
∙ Determine the number of physicians the
practice will need.
To answer this, consider how many
physicians will be retiring and the expected
timeline for retirement. Also, consider
how many physicians are projected to
be needed by the practice taking both
practice-specific factors (desire to grow
vs. stay same size) as well as macro factors
(how big is the growth opportunity for that
specialty) into consideration.
∙ Develop and implement a
recruitment plan.
On average, it takes over a year to recruit
a physician depending on the specialty
and location, so a plan should be in place
for the recruitment of physicians. This plan
should state the milestones or metrics
that, when met, signal the need for an
additional physician. By having this plan
in place and starting your recruitment
efforts early, you are more likely to realize a
smooth transition and greater consistency
in care.
∙ Create an on-boarding strategy for
new physicians.
When a new physician comes into a
practice and an existing physician leaves
a practice, the importance of a smooth
transition for both patients and colleagues
cannot be overlooked.
Overall, it takes time to transition patients
and knowledge to the physicians taking over,
so there should be a semi-retirement period
for the transition to take place. This period
can serve as a “bridge” that allows the next
generation of physicians to get up to speed
with patients, referral sources, and systems.
Selling or Transitioning Your Practice
Planning for retirement can be an exciting
but stressful time for a physician. During the
exit process, physicians will often be faced
with a variety of options and will need to
make some difficult decisions. By planning
ahead of time, the transition process to
retirement becomes much smoother.
Numerous considerations should be made
when making the decision on how to sell
or otherwise transition your practice. For
instance, key factors may include the
economy, physician supply and demand,
the value of fixed assets and intangibles
(including goodwill), and the overall appeal
of your practice.
Physicians should consider being purchased
by a hospital or merging with another
practice as a key component of their
succession plan. Sometimes these are the
better alternatives.
When beginning the journey of succession
planning, physicians and physician practices
should work with advisors who are practical
and understand how medical practices
operate. This does not have to be a difficult
process, but it does need to be thorough.
∙ Draw up a contingency plan.
You must have a plan in place for dealing
with the sudden, unexpected loss of a
physician. It may be beneficial to have
formal training or mentoring already in
place to assist in the transition. This plan
should include many elements such as a
strategy for distributing patient case loads
until a replacement is retained.
HEALTHCARE
Once a succession plan is implemented, it
should be reviewed periodically and revised
if necessary.
Although many physicians find it emotionally
challenging to retire from a rewarding career
of caring for patients, succession planning
can make the process less painful.
The physicians should be left feeling
confident about the ongoing care of their
patients while also making headway toward
a rewarding retirement.
RubinBrown’s Healthcare Services Group
RubinBrown’s Healthcare Services Group provides a broad array of services to a diverse group of clients in the
healthcare industry including hospitals, physician practices, multi-site medical groups, and not-for-profit health
organizations.
Tom Zetlmeisl, CPA, CFE, CFF — St. Louis
Partner-In-Charge
Healthcare Services Group
314.290.3395
tom.zetlmeisl@rubinbrown.com
Partner
913.499.4406
Kristin Bettorf, CPA — St. Louis
Ken Rubin, CPA — St. Louis
314.290.3416
kristin.bettorf@rubinbrown.com
Partner
314.290.3417
ken.rubin@rubinbrown.com
Partner
303.952.1250
COLLEGES & UNIVERSITIES
The Next Generation of Business Officers
by Brent Stevens, CPA
uccession planning in the finance,
accounting, and/or business office
department (collectively, the business
function) at a university is a critical issue that
most institutions of higher education are
currently facing.
S
Over 60% of the respondents indicated
that their chief business officer intends to
leave his/her position in the next 5 years.
More importantly, 97% of these institutions
indicated that a succession plan was not in
place to address this issue.
Many universities have been extremely
fortunate to retain a tremendous amount of
knowledge, expertise and institutional “know
how” for the last 20 to 30 years with very
little turnover. Unfortunately, a large wave
of retirements is quickly approaching the
business function in higher education.
At many institutions, this wave of forthcoming
retirements spans to multiple levels below
the chief business officer (e.g. the controller,
business office manager, financial reporting
manager, etc.).
A recent study by TIAA-CREF and the
National Association of College and
University Business Officers (NACUBO)
provided some alarming results to the
industry.
Despite this startling trend, most institutions
of higher education are uniquely situated
to address the issue of succession planning
effectively compared to organizations of
similar size in different industries.
COLLEGES & UNIVERSITIES
step to developing a solid succession plan
with internal resources is the continual
training, development and cross training
of employees within the various business/
accounting/finance functions at a university.
The most important component of a solid
succession plan is that it is formalized,
transparent (to the extent possible) and
constantly assessed, addressed and revised.
The succession plan should include a list of all
positions in the applicable department, and
a depth chart for each position. The plan
should also provide for a listing of resources
(i.e. industry associations, professional
recruiters, etc.) that could be utilized to fill
the position with an individual not currently
working at the institution.
The presence of a formalized and complete
plan will not only assist the institution for
projection of future needs and addressing
eventual retirements, but will also be of great
benefit if a sudden or unplanned departure
occurs.
While most institutions lack a formal
succession plan, many institutions may
already be taking steps to address
succession planning inadvertently. A key
Training staff through facilitated sessions and
practical experience performing the roles
and responsibilities of other employees on a
periodic basis is a proven method for not only
enhancing the technical competency of
your team, but further, generating personal
interest of the team members to be inspired
to advance their careers at the university.
Again, the key is coaching the members of
your staff that cross training of roles is not
just to ensure that the university can cover
responsibilities during vacations and illnesses,
but more importantly, is a viable component
of each employee’s long-term career path
and your department’s succession plan.
Individuals who work in the business function
at a university are incredibly fortunate to
have a vast amount of resources, thought
sharing and training forums at their disposal.
While many of these resources and forums
are focused on technical accounting
and finance matters, many of the industry
membership associations have recently
stepped up to offer leadership development
training for the future leaders of the industry.
A small sample of future events and providers
is listed below:
∙ NACUBO Leadership Series, which is an
annual seminar with multiple tracks to
help current and future business officers
increase their organizational, personal, and
technical competencies.
∙ CACUBO 2014 Leadership Institute,
designed to offer the participants
continued professional growth,
enhancement and expansion of their
knowledge, sharpening of leadership skills,
and an in-depth knowledge on how to be
successful in their positions.
∙ College Business Management Institute
(CBMI), which is a program that offers an
intensive course of study in business and
financial management for administrators of
colleges and universities.
Finally, and perhaps most unique to
institutions of higher education when it
comes to succession planning, a large
breadth of internal resources is available for
your team to utilize.
Whether it is an undergraduate course in
management, or a formal graduate program
on business management and effective
leadership, you should be encouraging those
employees in the succession plan to continue
to build their professional skill set with these
resources and educational experiences that
are available to them at your institution.
A succession plan should be a crucial
objective for business officers at all institutions
of higher education. In order for your
institution to successfully cultivate the next
generation of business officers, your
succession plan should be formalized and
transparent, and further should leverage all
of the outstanding resources available in the
higher education industry.
RubinBrown’s Colleges & Universities Services Group
RubinBrown provides assurance, tax and management consulting services to colleges and universities, both public
and private.
Brent Stevens, CPA — St. Louis
Kaleb Lilly, CPA — Kansas City
Partner-In-Charge
Colleges & Universities Services Group
314.290.3428
brent.stevens@rubinbrown.com
Partner
913.499.4417
kaleb.lilly@rubinbrown.com
Matt Finke, CPA — St. Louis
Rodney Rice, CPA — Denver
314.290.3365
matt.finke@rubinbrown.com
Partner
303.952.1233
rodney.rice@rubinbrown.com
PUBLIC SECTOR
An Aging Public Sector Workforce
by Chester Moyer, CPA
T
he U.S. Bureau of Labor Statistics, U.S.
Office of Personnel Management and
the ADP Research Institute all agree: at an
average age of 47, those working in the
industry of “public administration” are the
oldest of all industries measured.
Accordingly, those in public administration
are presumed to be closer to retirement
than those in other industries. Losing a
wave of employees who are often the most
competent in their performance areas and
who set the tone for the operating culture
is not an attractive proposition. What is a
government to do?
“Important, Not Urgent”
In Steven Covey’s best seller The 7 Habits of
Highly Effective People, Covey reminds us
of the importance of doing things that are
important, but not urgent.
Addressing the potential issues that
accompany a wave of employee
retirements that might not occur for 5
years or more falls in Covey’s category of
important, but not urgent.
The great thing about governments is that
they consistently work on important, but
not urgent matters. Two examples include
assessing long-term capital project needs
and designing building ordinances to
facilitate the development of a vision of
what the city might look like in 30 years.
At the same time, developing a long-term
plan to address substantial impending
retirements is not a normal occurrence,
and as a result, is not already built into the
strategic planning a government typically
performs. Like other important but not urgent
activities, time to develop the strategy to
address a government’s employee age
demographics is something that should be
addressed.
they can be replaced?) but speaking in
this manner is in the best interests of the
organization.
Understand the Age Demographics of
Your Organization and Involve Others
Perhaps reporting layers in the organization
can be eliminated altogether, or reporting
and oversight of an area from a soon-todepart employee can be given to another
especially driven and competent employee.
To understand the potential impact of
turnover from retirements, the government
should map out the organizational units and
age composition of key members in those
organizational units.
Color the units green where there are no
significant pending retirements, yellow for
those with moderate concern, and red for
those where there is a concern of significant
retirements in the next 5 years. This visual
aid will help focus on the areas of the
organization that need the most attention.
In order to properly address the impact
from retirements, there must be involvement
in the analysis from other key members of
management and from governance. The
other key members of management know
the severity of the impact of the loss of a
particular individual who reports to them as
well as how deep the talent is in that portion
of the organization.
Involving governance in the discussion
makes the retirement issue more transparent,
and will allow for the development of
an understanding of what is going to be
needed from them (approvals of resource
allocation or organizational chart changes,
for example) prior to the retirements actually
taking place and forcing a hurried process.
While there otherwise might be a pay
freeze at the government, giving a strong
employee additional responsibilities can
allow the government to justify creating a
“new” position that would pay more than the
previous position paid.
Overall, the government would incur less in
payroll expense by increasing one person’s
salary than if it had to hire another person.
Other opportunities for job redesign often
begin by identifying a desired output (for
example, pay a bill) and determining if there
are technological solutions to streamlining
the current process of paying a bill.
Often a thorough analysis of technological
solutions will require outside consultants who
can explain the details of different options.
Sometimes redesigning a specific job to fit
a current employee is not the best solution,
but outsourcing the function altogether is.
A large number of support functions can be
outsourced to skilled private contractors.
Organizational Reporting and
Job Redesign
Understanding where there will be significant
retirements can provide an opportunity
to reconsider the organizational reporting
structure. Effective analysis requires candid
discussion among management, and may
even require the participants to imagine
transitions in their own positions.
Talking about “letting go” of responsibilities
might feel awkward (who wants to admit
PUBLIC SECTOR
In one of the most cited studies on employee
engagement, psychologist Frederick
Herzberg published his findings on what
motivates employees. Herzberg found that
three of the most important motivators
for employees are challenging work,
responsibility, and recognition.
Ted Williamson, CPA, primarily serves public sector clients and presented
on GASB’s Fair Value Initiative during the GFOA National Conference in
Minneapolis.
Transitions that result from retirements
can create opportunities which provide
employees challenging work and additional
responsibilities. Recognition can come
in the form of identifying high potential
employees and providing them with unique
leadership development opportunities such
as formalized mentoring relationships with
key personnel in the organization, attending
outside trainings, and assigning them to be
part of a team for an important project.
Common areas that are outsourced include:
∙ Human resource functions (screening for
hiring, payroll, benefits, and health and
wellness programs)
∙ Aspects of accounting and financial
reporting
∙ Internal audit
∙ Significant portions of information
technology and data warehousing
∙ Litigation support
∙ Public works
∙ Parts of parks and recreation programs
(especially golf courses and recreation
center management)
Development of Current Employees
A positive result of turnover in the senior ranks
is the opportunity for younger employees
to fill those positions. For employees who
are driven to reach more senior roles in an
organization, it can be demoralizing to feel
like there is limited or no upward potential in
an organization.
An equally important outcome from
demonstrating the “recognition” of high
potential employees by providing these
types of leadership opportunities is, of
course, the benefit itself of the mentoring,
trainings, and experience from working on an
important project.
The development of current employees also
requires an understanding of the desired
characteristics of leaders in the organization.
Additionally, it would be in the best interests
of most organizations to promote those
who have demonstrated those desired
characteristics over a long period of time
and in challenging circumstances.
Organizations can find themselves in
difficult situations if they find that they have
promoted someone based on a skill set that
was projected on an individual rather than
validated (for example, she attended the
same graduate school as me, and we have
a lot in common and I like her, so she will be
a good fit for the job).
Likewise, having to hire outside the organization
can also prove to be disruptive if the
experiences and behaviors of the new hire do
not mesh well with the established employees.
Techniques for Finding New Talent
Replacing retiring members of the workforce
can require a different recruiting strategy
than what has previously existed.
Hiring in public administration roles is
notoriously slow, and candidates who have
been selected are often held in limbo due to
budget constraints (the position is approved,
but the budget is not).
If private companies can hire in a matter
of weeks, a government is at a significant
disadvantage if its hiring process takes any
longer.
In addition, private companies make use
of technology such as LinkedIn, Facebook,
and Twitter to reach candidates, especially
candidates on college campuses, ways that
many governments need to implement to be
attractive.
Recognizing the potential for significant
turnover of critical employees due to
retirements and understanding the
ramifications should lead governmental
organizations to build this concept into their
strategic analysis, much like governments
currently do with long-term capital projects
analysis and ordinance development.
If planned well, this turnover of personnel need
not be entirely disruptive; rather, it can provide
unique opportunities for organizational
redevelopment and promotions of existing
talented employees.
RubinBrown’s Public Sector Services Group
Through our extensive list of clients, including many cities and governmental entities, we understand the issues unique
to the public sector.
Jeff Winter, CPA — St. Louis
Ted Williamson, CPA — St. Louis
Partner-In-Charge
Public Sector Services Group
314.290.3408
jeff.winter@rubinbrown.com
Partner
314.678.3534
ted.williamson@rubinbrown.com
Kaleb Lilly, CPA — Kansas City
Chester Moyer, CPA — Kansas City
913.499.4417
kaleb.lilly@rubinbrown.com
Manager
913.499.4445
chester.moyer@rubinbrown.com
Cheryl Wallace, CPA — Denver
303.952.1288
cheryl.wallace@rubinbrown.com
GAMING
A Post-Acquisition Integration Checklist for
Gaming Operators
by Brandon Loeschner, CPA, CISA
T
he news is disappointing for the U.S.
gaming market. Through June, gaming
revenue decreased 1.4%, or approximately
$269.9 million. Gaming revenue is being
redistributed between the mature (such as
Atlantic City) and new gaming markets (such
as Pennsylvania) throughout the United States.
Another trend is the continued consolidation
among gaming companies.
From 2012 through the first six months of
2014, there have been numerous high-profile
acquisitions in the industry, which have included
names such as IGT, Bally Technologies (Bally’s),
Scientific Games, GTECH, Aristocrat, VGT, Poker
Stars, The Cosmopolitan of Las Vegas, Ameristar,
Pinnacle, Boyd, and WMS Industries.
the world being acquired by lottery companies
GTECH and Scientific Games, respectively.
GTECH acquired IGT in 2014 for $6.4 billion and
Scientific Games is buying Bally’s for $5.1 billion.
Speculation of more acquisition activity
continues as Isle of Capri is rumored to be in
talks with Gaming Leisure Properties (GLPI).
Since 2013, GLPI, a Real Estate Investment
Trust (REIT), has been active in acquiring
casino and racetrack properties such as
an Illinois riverboat casino and a Pittsburgh
racetrack. Once these transactions reach
their integration milestones, the impact will
be felt across the gaming industry worldwide.
Planned Synergies
The acquisitions in 2014 are headlined by the first
and second largest slot game manufacturers in
With revenue in decline, gaming companies
are making acquisitions to access new
markets, acquire new products, and realize
back-end cost savings.
Analysts covering the industry have been
positive on the consolidation, and everyone,
including RubinBrown’s Gaming Services
Group, is eagerly watching to see if the
planned synergies are realized. For example:
∙ International organizations are looking to
accelerate growth in the U.S., which has a
relatively high level of recurring revenue. In
Aristocrat’s acquisition of VGT, it is gaining
exposure to the Class II Tribal Gaming
market and increasing installed gaming
machines to 28,400 in North America.
The access to the North American market
will not only boost Aristocrat’s revenues,
but offers growth opportunities for VGT
too. As Jamie Odell, CEO and Managing
Director, said, “this combination also offers
exciting growth opportunities for VGT by
leveraging premium Aristocrat games
and systems products, as well as national
distribution opportunities for VGT’s Class II
products.”
∙ In Scientific Games’ (SGI) acquisition of
Bally Technologies, SGI diversified its slot
offerings. In addition, SGI management is
expecting cost savings of approximately
$220 million a year ($33 million from cost
of goods sold, $144 million from selling,
general, and administrative costs and $43
million in annual savings from R&D).
The annual cost savings will not be realized
right away, though, as SGI expects to
incur approximately $75 million in one-time
integration expenses and another $40
million in capital investments during the
integration of the two companies.
∙ In both GTECH’s acquisition of IGT and
Scientific Games’ acquisition of Bally’s,
the lottery companies obtained social
gaming products – a potential new
source of revenue. Additionally, it positions
both companies to lead the way in the
expansion of the online/internet gaming
environment.
As these examples show, big savings are
anticipated with almost any merger and
acquisition. However, such savings are far
from certain, as many planned synergies
often fail to be realized. The integration
process is where most of the attention in a
transaction must be focused.
The following list of integration topics and
activities draws upon the experience of
RubinBrown’s Merger & Acquisition Services
Group providing due diligence and postacquisition integration services. It is not
meant to be an exhaustive list of integration
topics and activities and should be adapted
for the specifics of each transaction. Plan for Integration
∙ Assemble a team and define decision
makers.
∙ Agree upon an integration timeline and
communication plan.
∙ Identify what assets are being acquired
and what liabilities are being assumed.
∙ Understand what “Day 1” looks like, and
address any anticipated challenges.
Operations
∙ Create organizational charts for “Day
1” post-acquisition and “Day x” postintegration.
∙ Identify interim leadership and potential
redundancies for overlapping business units.
∙ Ensure employee access to appropriate
facilities.
∙ Modify signage and images as
appropriate.
∙ Facilitate knowledge transfer, such as best
practices, between the entities.
Human Resources
∙ Understand differences in culture, and
address any anticipated challenges.
∙ Identify / address employee retention issues.
∙ Ensure no gaps in employee payroll
remittance.
GAMING
∙ Consider differences in compensation,
benefits, and other perks, and streamline
as appropriate.
∙ Identify differences in employee manuals
and business policies, and streamline.
∙ Implement training as appropriate.
Vendors and Supply Chain
∙ Consolidate vendor lists.
∙ Identify differences in contracts, terms,
and relationships, and streamline as
appropriate.
∙ Transition employment and non-compete
agreements across entities.
∙ Understand how business-facing systems
may (need to) change and the impact on
vendors.
∙ Address personnel redundancies, and
scale the combined workforce to
appropriate levels.
Accounting & Finance
∙ Facilitate accounting and budgeting
processes for the combined entity.
Legal
∙ Assemble all employee, customer, vendor,
debt, and equity agreements.
∙ Organize all insurance policies, and scale
coverage to appropriate levels.
∙ Understand and mitigate potential
segregation of duties issues and conflicts of
interest.
∙ Identify differences in A/R collections and
A/P and payroll payments, and streamline
as appropriate.
Assets and Facilities
∙ Assemble listings of all assets, including IP,
and liabilities, and manage as appropriate.
Information Technology
∙ Address facility redundancies, and scale
capacity to appropriate levels.
∙ Determine what software will be used, and
ensure versions are current and licenses
are sufficient.
Customers and Sales & Marketing
∙ Verify access for employees to perform
their jobs.
∙ Consolidate customer lists.
∙ Identify differences in contracts, terms, and
relationships, and streamline.
∙ Understand how business-facing systems
may (need to) change and the impact on
customers.
∙ Consider infrastructure strengths and
weaknesses, and address issues. Including,
but not limited to, security, storage,
backup/recovery, communication portals,
help desk, and facilities.
∙ Transition and train sales reps.
RubinBrown’s Gaming Services Group
Many gaming operations throughout the nation seek out RubinBrown’s accounting, consulting, and tax services.
Brandon Loeschner, CPA, CISA
Daniel Holmes, CPA, CIA
Partner & Gaming Practice Leader
Gaming Services Group
314.290.3324
brandon.loeschner@rubinbrown.com
Manager & Gaming Practice Leader
Gaming Services Group
314.290.3346
daniel.holmes@rubinbrown.com
MANUFACTURING & DISTRIBUTION
Transitioning Your Business and Knowledge
by Jim Mather, CPA
S
uccession planning often is thought of as
the transfer of financial ownership to the
next generation.
A closely held family business can take
years to plan and execute a change in
the financial ownership of the business to
family members or other key members of the
management team.
organization. Succession also encompasses
the transfer of responsibility and knowledge
to the next generation of management or
ownership of the key business processes and
responsibilities.
Think of the last time one of your key
management team members was on
With a coordinated effort by the owners,
the company’s attorney, and wealth
management/tax planning team, this
process can often help preserve the estate
of the existing ownership and facilitate a taxefficient transfer to the successors.
Plan For Knowledge Transfer and Sharing
The other part of succession planning that
seems to be overlooked too often is a
succession plan for the key players within the
MANUFACTURING & DISTRIBUTION
vacation and the panic button was pushed
because only she or he had the answer to a
critical question raised by another employee,
customer or vendor.
∙ CFO or controller who handles many key
roles and relationships
What would the company do if that same
person was away due to an extended
medical condition? Have you cross-trained
others to take over the responsibilities of your
key employees to avoid critical missteps
that could paralyze your business for several
hours, days or weeks?
Ideally, your team would be able to handle
such a short-term and long-term loss with
no disruption to your business. Failure to
develop a short-term emergency succession
plan, as well as a long-term succession plan
could leave your business vulnerable to your
competitors.
With that challenge in mind, take a few
minutes to imagine those opportunities
that might unfortunately impact business
and think about how your company and
management team will react.
What if you lost one of the following key
personnel?
∙ Key salesman/relationship manager with
your top customer
∙ Production supervisor
∙ Research and development team leader
∙ Procurement manager who interacts daily
with your entire supply chain
∙ CEO or owner of the business
Make Sure You Have Short- and
Long-Term Plans
A short-term plan is essentially a survival
phase to make sure all of the critical
processes and responsibilities run smoothly
in the days and weeks ahead until the key
owner of the responsibilities either returns or is
replaced with someone that will fulfill the role
on a permanent basis.
What are the key issues that need to be
addressed? The best person to answer the
question is the current owner of the issue
and process. They should have ownership of
outlining how someone might fill their “boots”
while they are away including training others
and sharing knowledge about critical tasks
and responsibilities.
The long-term succession plan may not be as
easy because not every organization has the
next person’s successor on board, hired or
identified. Too often a long-term succession
plan is not in place or is not possible with
higher level management positions.
A long-term succession process should
include:
∙ Identification of the key responsibilities and
coaching and mentoring of the successors
of each critical position
∙ Determine potential successors or
recognition that there is not currently
someone in house that can fill the positions
∙ A definitive timeline up through the
incumbent’s retirement or planned
departure
Those who execute such a plan and
successfully transition should be rewarded and
recognized by the organization. This type of
behavior must be a top down, cultural initiative
embraced by the company leadership and
encouraged on a regular basis.
Think about the key customer relationships,
the critical vendors, the outside service
providers, and the many key internal
processes that are critical to the daily
execution of the company’s core business
and then start developing a succession plan!
Transferring shares of stock or ownership
in the partnership requires your legal and
accounting professionals’ assistance, but
ultimately it is relatively easy to execute.
The real challenge in succession planning is
transferring all of the critical knowledge that
has made your organization successful to the
next “generation” through a planned and
intentional process.
Businesses that execute the transfer of
financial ownership along with knowledge
ownership are the organizations that will
have the best chance of making it to the
next generation.
RubinBrown’s Manufacturing & Distribution Services Group
RubinBrown’s Manufacturing & Distribution Services Group is nationally recognized for superior assurance, tax and
consulting expertise coupled with solid international business knowledge, exceptional inventory management and
process improvement services.
Jim Mather, CPA — St. Louis
Todd Pleimann, CPA — Kansas City
Partner-In-Charge
Manufacturing & Distribution Services Group
314.290.3470
jim.mather@rubinbrown.com
Managing Partner, Kansas City Office
913.499.4411
todd.pleimann@rubinbrown.com
Rick Feldt, CPA — St. Louis
Russ White, CPA — Denver
314.290.3220
rick.feldt@rubinbrown.com
Partner
303.952.1247
russ.white@rubinbrown.com
Mike Lewis, CPA — St. Louis
314.290.3391
mike.lewis@rubinbrown.com
TRANSPORTATION & DEALERSHIPS
Transitioning Your Auto Dealership or
Transportation Company
by John Butler, CPA
T
he majority of dealerships and
transportation businesses are owned and
operated by individuals or families that run
their businesses so lean that they do not have
back up.
As a result, almost every individual in the
business is a key employee. The speed and
complexity of change in today’s business
environment makes it imperative for every
business to have a succession plan to ensure
its survival.
Large publicly traded companies typically
have highly developed plans and processes
to maintain their momentum, so when there
is a change in leadership they can continue
operating for a significant period of time
without significant damage to the business.
Unfortunately, this is not often the case
for most dealerships and transportation
companies. The absence of a key employee
can wipe out a company in less than a
month. For that reason, it is even more critical
that they have a succession plan.
Succession plans are not something that are
easily done, put in a drawer and checked
off a “to do” list. They take time and careful
thought to create, implement and must
be continually reevaluated and revised as
circumstances change.
Lack of time and avoidance of tough family
issues are often huge obstacles to working
on succession plans. For this reason, it is often
intimidating and difficult for family members
who work together in the family business to
discuss.
Sometimes a family member who leads the
business is so critical to the success of the
company it is difficult to imagine what to
do without him or her. If that person does
become incapacitated, even temporarily,
it could cause the failure of the company
while employees and other family members
scramble to try and fill the void.
When that happens emotions and tensions will
be running high and mistakes will be made.
Start Small
One way to overcome this obstacle is to
start small by developing an emergency
succession plan. Pick one key leader
and assume that they suddenly become
disabled and are unable to fulfill their regular
responsibilities.
The most important responsibilities of that
key leader need to be identified so that
plans can be made to make sure those
responsibilities are taken care of. Other
members of management should be
involved.
Emergencies can bring out the best in people
and employees will want to know how they
can help. Since this is a hypothetical exercise
no one should feel threatened to discuss
changes that might occur and should be
more likely to contribute and express their
unbiased thoughts.
Natural Gas Fueled Versus Gasoline Fueled Vehicles
Since 1994, natural gas used as a transportation fuel has
been sold in Gasoline Gallon Equivalent (GGE) units to
allow consumers to compare the cost of natural gas fueled
vehicles to that of gasoline fueled vehicles.
Because of the increased usage of natural gas by
heavy vehicle operators, industry and governmental
regulatory groups are debating whether to create a Diesel
Gallon Equivalents (DGE) units standard to facilitate the
comparison of natural gas to diesel fuel or even scrap the
current system and use one standard based on the metric
system which would use kilograms.
There is also discussion about the need to update the GGE
unit of measurement, if it were to continue, to compensate
for new blends of gasoline which have changed energy
content by adding ethanol and other additives.
Supporters of the metric system argue that using GGE &
DGE units imply that comparisons of the cost and quality
of gasoline and diesel fuels with natural gas can be made
which is not accurate or realistically possible.
Of course, taxes are involved. Fuel taxes go into the
Highway Trust Fund which pays for highway repairs and
improvements. This creates a direct connection between
the users of the highways and the cost to expand and
maintain them.
The system has worked well for decades but the growth in
the use of alternative fuels is rapidly making that method of
taxation for highway use obsolete.
Natural gas and diesel fuels are currently taxed at 24.3 cents
per gallon even though 1.7 gallons of natural gas contain
the same amount of energy as a gallon of diesel fuel.
This means the trucks powered by natural gas will pay more
taxes into the Highway Trust Fund than trucks fueled by
diesel. A different aspect of the same problem is growing as
more consumers are purchasing electric passenger vehicles.
Under the fuel tax system, electric vehicles will never pay
taxes into the Highway Trust Fund even though they use the
same streets and highways as vehicles whose fuel is taxed
at the pump.
It will probably become apparent that
no one person will be able to completely
TRANSPORTATION & DEALERSHIPS
Emergency succession plans can also
help identify future leaders and facilitate
the discussion of what they need to do to
prepare them which can then provide a
clear picture of what the business needs to
ensure its longer-term success.
If the members of the current management
team do not have the right set of skills and
potential to be ready as successors when
the time comes, the company can begin to
focus on finding potential successors outside
the company or even other exit strategies.
take responsibility for all the key leaders’
responsibilities.
Some members of the management team
may have the skills necessary for some
responsibilities but others may not, so it may
be necessary to assign some responsibilities
to more than one member of the team or
engage trusted advisors from outside the
company.
Many small businesses fail to survive the
transition to the next generation because
the individual stepping into the role of the
successor is unprepared.
Any successor, family member or not, must
be the right person for the job for the business
to survive. Genetics alone do not qualify
individuals as successors.
RubinBrown’s Transportation & Dealerships Services Group
RubinBrown assists the transportation industry through accounting, income tax, retirement, estate and benefit planning.
John Butler, CPA — St. Louis
Partner-In-Charge
Transportation & Dealerships Services Group
314.290.3333
john.butler@rubinbrown.com
Partner
913.499.4406
Aaron Pollard, CPA — St. Louis
Russ White, CPA — Denver
Manager & Vice Chair
314.290.3457
aaron.pollard@rubinbrown.com
Partner
303.952.1247
russ.white@rubinbrown.com
HIRING
Accounting and
Business Professionals?
ABACUS Recruiting, an affiliate of RubinBrown, can help. Our specialty includes both permanent and temporary
placement in the following areas:
∙ Accounting/Financial Management
∙Marketing
∙Bookkeeping
∙Operations
∙Administrative
∙ Information Technology
ABACUS Recruiting’s reputation for quality service
stems from our industry knowledge, commitment to
personalized service, confidentiality and dedication
to maintaining the most ethical standards in the
recruiting industry.
Having successfully placed financial and business
professionals in positions at Fortune 1000 companies,
regional businesses and entrepreneurial firms,
ABACUS Recruiting has become one of the most
respected names in our industry.
Whether you are a company in search of high caliber
professionals or a candidate searching for a job
change, ABACUS Recruiting is uniquely qualified to
assist you.
Tamara Tucker
President
314.878.5522
tamara.tucker@abacusrecruiting.com
Paul Iadevito
Recruiting Manager
314.878.5522
paul.iadevito@abacusrecruiting.com
Visit us at
www.abacusrecruiting.com
ABACUS RECRUITING IS AN AFFILIATE OF RUBINBROWN LLP
REAL ESTATE
Tax Credit Recapture In the Face of Natural
Disaster and Casualty Losses
by Peter Aje, CPA
W
ith the numerous natural disasters that
have plagued various areas of the
country over the past several years, ranging
from Hurricanes Katrina and Sandy to the
Joplin, Missouri tornadoes, many affordable
housing projects and their stakeholders have
felt the physical and financial effects left in
the wake of these events.
Among these effects is the possibility of tax
credit loss and even recapture. However,
there are key differences in the rules
surrounding credit loss and an owner’s ability
to claim credits depending on the type of
casualty event that occurs.
Overall, tax credit recapture implications
are primarily contingent on the timing of the
restoration of the damaged building or units.
Provisions of the Internal Revenue Code
Located in Section 42(j)(1) of the Internal
Revenue Code, the general rule regarding
the recapture of Low Income Housing Tax
Credits provides that if at the end of the tax
year in a compliance period, the amount
of a building’s qualified basis is less than the
amount of such basis as of the end of the
previous year, then the taxpayer’s tax will be
increased by the recapture amount.
However, Section 42(j)(4)(E) also provides
that, in all cases, “the increase in tax under
section 42(j) shall not apply to a reduction
in qualified basis by reason of a casualty
loss to the extent such loss is restored by
reconstruction or replacement within a
reasonable period established by the
Secretary.”
Timing
Major Disasters
So what does this mean? Simply put, the
occurrence of a casualty loss alone does
not cause recapture. The affected buildings
or units will typically be subject to recapture
in instances in which the affected buildings
or units are not restored within a reasonable
period of time.
For projects located in major disaster areas,
more favorable rules apply. In these cases,
credits may continue to be claimed even
during the restoration period.
Under Revenue Procedure 2007-54, the
state credit agency has the responsibility of
determining what constitutes a reasonable
period. Yet, this reasonable period shall not
exceed two years from the close of the year
in which the casualty loss occurred.
For projects not located in a governmentdeclared major disaster area, failure to
restore the property to original condition by
the end of the tax year in which one casualty
occurs will result in the loss of credits on the
damaged buildings/units for that tax year
(i.e. the owner will not be allowed to claim
credits in the year of the casualty).
Also, in this instance, there is no recapture
of credits previously claimed as long as the
qualified basis is restored within a reasonable
period.
Again, for these projects, there is an
assumption that the qualified basis must be
restored within 24 months after the end of the
calendar year in which the President issues
a major disaster declaration. And, in general
no credits will be lost or subject to recapture.
In the event a project is faced with
recapture, the maximum amount of credits
to be recaptured at any given time during
the credit period is limited to one-third of
previous credits claimed.
This limit decreases for years after the credit
period but during the compliance period. It is
important to note that the increase in tax not
only is comprised of the credit
amount, but also the interest
Learn and Connect
associated with the credits
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taken in prior years – the latter
@RubinBrownRE
of which can be much more
financially burdensome than
RubinBrown Real Estate E-News
the credits themselves.
www.RubinBrown.com/RE-News
RubinBrown’s Real Estate Services Group
RubinBrown has developed a strong reputation nationally as a leader in accounting and advisory services for real
estate companies. Today, we provide specialized services to more than 2,000 real estate entities.
Bryan Keller, CPA
Jeff Cunningham, CPA
Partner-In-Charge
Real Estate Services Group
314.290.3341
bryan.keller@rubinbrown.com
Partner
303.952.1257
jeffrey.cunningham@rubinbrown.com
Dave Herdlick, CPA
Peter Aje, CPA
314.290.3383
dave.herdlick@rubinbrown.com
Manager
314.290.3246
peter.aje@rubinbrown.com
NOT-FOR-PROFIT
Fiduciary Responsibilities of Not-for-Profit
Investment Committees
by Mike Ferman, CPA
D
o you know your fiduciary duties? Whether
you have been serving on an investment
committee for a long time or you are newly
appointed, it is important to understand the
significant responsibility you are undertaking
for the non-profit organization involved.
Members of the investment committee are
entrusted with the stewardship of important
assets that can help grow and enhance the
organization, or help it weather difficult times.
The work of your committee may affect an
important charity or Better Business Bureau
rating, or factor into the decisions of savvy
donors seeking well-run not-for-profit partners.
Who is a Fiduciary?
A person is a fiduciary to the extent that they
exercise discretionary authority or control
over fund assets, render investment advice
for a fee, or have discretionary authority in
the administration of the fund. As a fiduciary,
you must operate the fund for the exclusive
benefit of the organization.
Second, a fiduciary must carry out their
duties with the care, skill, and diligence that
would be exercised by a reasonably prudent
person familiar with such matters (known as
the Prudent Man Rule).
A fiduciary also must diversify the investments
of the fund to minimize the risk of large losses,
unless under the circumstances it is clearly
prudent not to do so.
Finally, a fiduciary must operate the fund
in accordance with the documents and
instruments governing the fund, including
an Investment Policy Statement (IPS) board
directions, trust or other legal requirements
such as the Uniform Prudent Management of
Institutional Funds Act (UPMIFA).
followed. Guidelines for overall risk tolerance
also can be very helpful.
Role of the Investment Committee
The most important takeaway is to
understand that meeting your fiduciary
duties is more about the process rather than
the actual results. What you do and how you
document that you did it is most important!
The primary objectives of an effective
investment committee are as follows:
∙ Establish and follow an IPS
∙ Set minimum investment standards
∙ Select and monitor investments
Investment Policy Statement
∙Report
An IPS setting out guidelines for an
endowment fund’s operation, that is
reviewed and approved by the full board
of directors, is the single most important
document that you can have to demonstrate
that you are meeting your fiduciary duties
over investments. Once adopted, it will
provide an all-important framework for the
work of your investment committee.
∙ Provide access to appropriate investment
management services
∙ Manage and control costs
∙ Avoiding conflicts of interest
∙ Oversee fund administration
The investment committee also is responsible
for retaining an investment advisor, as needed.
The best investment policy statements
identify:
∙ Purpose and objectives of the fund
∙ Responsible parties and their roles
∙ Role of the investment committee
∙ Desired asset allocation
∙ Approach to selection and monitoring of
investment managers
∙ Watch list criteria
∙ Benchmarks for success
∙ Spending policy
∙ Required reporting
∙ Criteria for rebalancing
∙ Compliance with any laws and regulations
Approach for Selection and
Monitoring of Investments
One of the key responsibilities of the
investment committee is to establish an
approach for selecting and monitoring the
investments in the fund that are consistent
with its purpose, objectives, risk tolerance,
and spending policy.
The following are some of the important
quantitative and qualitative criteria the
committee might employ to evaluate the
investments in the fund to demonstrate they
are being prudent, assuming they have not
retained an independent investment advisor
to assist them.
Quantitative criteria might include:
If you want to exclude certain types of
investments because they are contrary
to the mission of your organization, those
guidelines should be clearly outlined in your
IPS, i.e. investments in certain products,
countries or controversial practices.
Also, make sure that any restrictions
presented by donors for use of their funds are
∙ Asset size
∙ Risk adjusted returns (has leverage been
utilized?)
∙ Style and consistency
∙ Performance vs. peer groups and vs.
industry benchmarks
NOT-FOR-PROFIT
∙ Consistency of performance
∙ Minimum performance history
∙ Upside/downside capture
∙ All expenses and fees
Qualitative criteria might include:
In addition, it is always a best practice to
avoid any conflicts of interest with members
of the investment committee, board,
and staff of the organization. Consider
establishing a conflict of interest policy and
asking all individuals acting as fiduciaries to
sign a conflict of interest agreement.
∙ Is the investment registered with the SEC
∙ Its legal structure
∙ Whether the portfolio managers invest in it
∙ Which outside professionals are used (legal
and accounting)
∙ Independent board of directors and the
stability of the organization
∙ The role the investment plays in the portfolio
∙ How are assets valued
∙ Redemption restrictions or limitations,
manager tenure and experience,
investment philosophy
∙ Where are the assets held in custody
∙ Tax and financial reporting implications
Structure
The investment committee may serve as a subcommittee of the finance committee, or as
a separate stand-alone committee reporting
directly to the board. It is recommended
it be an odd-number group (5-7) whose
members include those familiar with the
organization’s mission, and have experience
in business, finance and/or investments. It
also can be useful to have both an attorney
and accountant serving on the committee.
How to Select an Investment Advisor
If the investment committee decides it does
not have the time or experience necessary to
select and monitor the fund’s investments, it
may decide to retain and investment advisor.
Fiduciary Liability
As fiduciaries of your organization’s assets,
you could face severe penalties for a breach
of fiduciary duties. Civil damages and
penalties could be imposed, and in the most
egregious cases, criminal penalties could be
imposed, even jail.
There are ways to limit the potential for
liability. And, remember, process and
documentation matters greatly. Establishing
and following clearly defined investment
policy guidelines is always a good idea.
When the committee meets, create and
distribute meeting minutes and clearly define
responsibilities for future actions. Provide
close oversight and monitoring, and report
to the executive committee or full board on
those results on a regular basis.
And, finally, you may want to consider
insurance for any potential losses or events.
Selection of a capable investment advisor
and monitoring his or her performance is one
of the most important assignments for the
investment committee. Your advisor will help
identify, prioritize and achieve the Investment
Committee’s goals and objectives and
develop the IPS.
Look for someone who can function
independently and provide objective advice
and who will provide a high level of service
with frequent client communication. For
best results, we believe it is best to work with
someone who can provide a systematic and
disciplined approach to investing without
trying to time the market in reaction to shortterm market volatility.
Through experience, we have found the
best investment professionals demonstrate
a willingness to educate clients about
investments and are almost always relationship
oriented, and not driven by transactions.
Inquire about the following:
∙ Credentials and experience of the advisor
∙ The ability to build a portfolio or menu of
funds to meet your goals and objectives at
a risk level you can tolerate
∙ Help in formulating an investment policy
statement for the investment committee
and the advisor
∙ Reputation of the firm
∙ All fees and expenses
∙ Do you have a fiduciary duty to me?
(Registered investment advisors vs. brokers)
∙ Are you limited to the products/managers
that you can recommend, or do you have
an open architecture format?
∙ Are there any conflicts of interest regarding
the products you recommend?
∙ How will you design, implement and
manage the investment plan?
∙References
Serving on your not-for-profit organization’s
investment committee can be a truly
rewarding experience. You will have the
privilege of seeing the fund grow over time
to help fulfill the important mission of the
organization.
Your work can help propel your programs
and services forward, attract new donors
because of exceptional stewardship, and,
ultimately, ensure the long-term sustainability
of the organization.
RubinBrown’s Not-For-Profit Services Group
As a recognized leader in the not-for-profit sector, we have the resources essential to serve arts and cultural organizations,
foundations, private schools, religious organizations, social service agencies and trade and membership associations.
Judy Murphy, CPA — St. Louis
Sharon Latimer, CPA — Kansas City
Partner-In-Charge
Not-For-Profit Services Group
314.290.3496
judy.murphy@rubinbrown.com
Partner
913.499.4407
sharon.latimer@rubinbrown.com
Amy Altholz, CPA — St. Louis
Evelyn Law, CPA — Denver
314.290.3369
amy.altholz@rubinbrown.com
Partner
303.952.1245
evelyn.law@rubinbrown.com
Michael Ferman, CPA — St. Louis
Partner-In-Charge
RubinBrown Advisors
314.290.3211
mike.ferman@rubinbrown.com
TIMELY REMINDERS
October 15, 2014
February 2, 2015
February 16, 2015
Individuals. If you have an
automatic 6-month extension to file
your income tax return for 2013, file
Form 1040, 1040A, or 1040EZ and pay
any tax, interest and penalties due.
Individuals. If you did not pay any
required last installment of estimated
tax by January 15, you may choose
(but are not required) to file your
income tax return (Form 1040) for
2014 by February 2. Filing your return
and paying any tax due by February
2 prevents any penalty for late
payment of the last installment. If
you cannot file and pay your tax by
February 2, file and pay your tax by
April 15.
Individuals. If you claimed
exemption from income tax
withholding in 2014 on the Form W-4,
Employee’s Withholding Allowance
Certificate, you gave to your
employer, you must file a new Form
W-4 by this date to continue your
exemption for 2015.
December 15, 2014
Corporations. If filing on a calendar
year, deposit the fourth installment of
estimated income tax for 2014.
December 31, 2014
Individuals and Cash Basis
Corporations. Pay amounts intended
to be deducted on 2014 tax
returns. An example includes the
fourth quarter state estimated tax
payment, which is due January 15,
2015 but may be deductible in 2014
if paid on or before December 31.
January 15, 2015
Individuals. If you are not paying
all of your 2014 estimated income
tax through withholding, pay the
fourth installment of your 2014
estimated tax using Form 1040-ES
and applicable state form(s).
All Businesses. Provide annual
information statements to recipients
of certain payments you made
during 2014 on the appropriate
2014 Form 1099 or other information
return. Form 1099 can be issued
electronically with the consent of
the recipient. This due date does not
apply to all payments reported on
Form 1099-B, Proceeds From Broker
and Barter Exchange Transactions,
all payments reported on Form
1099-S, Proceeds From Real Estate
Transactions and substitute payments
reported in box 8 or gross proceeds
paid to an attorney reported in box
14 of Form 1099-MISC, Miscellaneous
Income as the due date for these
filings is February 16.
All Employers. Provide your
employees their copies of Form W-2
for 2014. If an employee agreed
to receive Form W-2 electronically,
have it posted on a website and
notify the employee of the posting.
Federal Payroll Tax. File Form 941 for
the fourth quarter of 2014. Deposit or
pay any undeposited Social Security,
Medicare and withheld federal
income tax.
Federal Unemployment Tax. File
Form 940 for 2014. If you deposited
the tax for the year in full and on
time, you have until February 10 to
file the return.
All Businesses. Provide annual
information statements to recipients
of certain payments you made
during 2014 on the appropriate
2014 Form 1099 or other information
return. Form 1099 can be issued
electronically with the consent of
the recipient. This due date only
applies to all payments reported
on Form 1099-B, Proceeds From
Broker and Barter Exchange
Transactions, all payments reported
on Form 1099-S, Proceeds From Real
Estate Transactions and substitute
payments reported in box 8 or
gross proceeds paid to an attorney
reported in box 14 of Form 1099MISC, Miscellaneous Income.
February 17, 2015
All Employers. Begin withholding
income tax from the pay of any
employee who claimed exemption
from income tax withholding in
2014, but did not provide Form W-4,
Employee’s Withholding Allowance
Certificate, to continue the
exemption in 2015.
March 2, 2015
March 31, 2015
April 30, 2015
All Businesses. If not filing
electronically, file 2014 information
returns (Form 1099) for certain
payments you made during 2014.
There are different forms for different
types of payments. Use a separate
Form 1096 to summarize and transmit
for forms for each type of payment.
If you file Forms 1099 electronically,
your due date for filing them with the
IRS will be extended to March 31.
All Businesses. If filing electronically,
file 2014 information returns (Form
1099) for certain payments you made
during 2014. There are different forms
for different types of payments. Use
a separate Form 1096 to summarize
and transmit for forms for each type
of payment. If you do not file Forms
1099 electronically, your due date for
filing them with the IRS is March 2.
Federal Payroll Tax. File Form 941 for
the first quarter of 2015. Deposit or
pay any undeposited Social Security,
Medicare and withheld federal
income tax.
All Employers. If not filing
electronically, file 2014 Form W-3,
“Transmittal of Wage and Tax
Statements,” along with Copy A of
all the Forms W-2 you issued for 2014.
If you file Forms W-2 electronically,
your due date for filing them with the
Social Security Administration will be
extended to March 31.
March 16, 2015
Corporations. File a 2014 calendar
year income tax return (Form 1120)
and pay any tax due. If you want
an automatic six-month extension of
time to file the return, file Form 7004,
Application for Automatic Extension
of Time to File Certain Business
Income Tax, Information, and Other
Returns, and deposit what you
estimate you owe.
S Corporations. File a 2014 calendar
year income tax return (Form 1120S)
and pay any tax due. Provide each
shareholder with a copy of Schedule
K-1(Form 1120S), Shareholder’s Share
of Income, Deductions, Credits,
etc. If you want an automatic sixmonth extension of time to file the
return, file Form 7004, Application
for Automatic Extension of Time to
File Certain Business Income Tax,
Information, and Other Returns, and
deposit what you estimate you owe.
Federal Unemployment Tax. Deposit
the tax owed through March if more
than $500.
All Employers. If filing electronically,
file copies of all Forms W-2 you issued
for 2014. If you do not file Forms W-2
electronically, your due date for
filing them with the Social Security
Administration is March 2.
April 15, 2015
Individuals. File a 2014 income tax
return (Form 1040, 1040A or 1040EZ)
and pay any tax due. If you want
an automatic six-month extension of
of Time to File U.S. Individual Income
Tax Return.
Individuals. If you are not paying all
of your 2015 estimated income tax
through withholding, pay the first
installment of your 2015 estimated
tax using Form 1040-ES.
Partnerships. File a 2014 calendar
year income tax return (Form 1065).
Provide each partner with a copy of
Schedule K-1 (Form 1065), Partner’s
Share of Income, Deductions,
Credits, etc. If you want an
automatic five-month extension of
of Time to File Certain Business
Income Tax, Information, and Other
Returns.
Any federal tax advice contained in
this communication (including any
attachments): (i) is intended for your use
only; (ii) is based on the accuracy and
completeness of the facts you have
provided us; and (iii) may not be relied upon
Corporations. If filing on a calendar
year, deposit the first installment of
estimated income tax for 2015.
to avoid penalties.
Readers should not act upon
information presented without
individual professional consultation.
RubinBrown is one of the nation’s largest
accounting and business consulting firms, with
more than 500 team members working from
offices in Denver, Kansas City and Saint Louis.
Founded in 1952, the firm’s award-winning team
members hold leadership roles in both
national and local accounting organizations
and have worked to establish best practices in
accounting within specific industry segments.
RubinBrown is an independent member of
Baker Tilly International, a network of
161 independent firms in 137 countries.
RubinBrown LLP
@RubinBrown
Denver Office
Kansas City Office
St. Louis Office
St. Louis Cortex Office
1900 16th Street
Suite 300
Denver, Colorado 80202
10975 Grandview Drive
Building 27, Suite 600
Overland Park, Kansas 66210
One North Brentwood
Suite 1100
St. Louis, Missouri 63105
4240 Duncan Avenue
CIC@4240, Suite 200
St. Louis, Missouri 63110
ph: 303.698.1883
fax: 303.777.4458
ph: 913.491.4144
fax: 913.491.6821
ph: 314.290.3300
fax: 314.290.3400
ph: 314.290.3300
fax: 314.290.3400
For more information, visit www.RubinBrown.com

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