Business Record - Iowa Biz

Alternatives to EBITDA Multiples

On a regular basis, we seem to be driven to want to know the current Earnings before interest, taxes, depreciation and amortization (EBITDA) “multiples” that apply to businesses in various sectors. We strive to find comparables that we can use to provide a prospective seller with an expectation range of price that he or she can anticipate for the sale of the business that they have worked a lifetime to create. We want them to believe that we will be able to find the right buyer, at the optimum price and that they will not be made to look foolish in the eyes of their peers... who are always parlaying the latest Industry scuttlebutt as to what Joe got for his business and why they think they deserve more. I would like to visit several aspects of price as there is much analysis to insure the optimum value. 

The first aspect to address when speaking to our potential sellers is the tax liability that is being created when the business is sold. If he or she sells assets, they will likely have recaptured depreciation – which is ordinary income. It can be taxed as high as 53% when combining various state and federal taxes. The allocation of purchase price could assist them here. If the purchase price allocation were to set out only the depreciated value for assets that they have taken depreciation, the seller may not have to endure the ordinary tax rate on recapture. This is highly unlikely, as the purchaser wishes to take the tax shelter on those assets acquired in the future. So, the current market value will likely be reflected in the allocation.

If the seller sells the shares of his firm, they can be assured of only paying the capital gains tax. This is a distinct tax benefit and will result in a materially larger after tax proceeds for the seller.

One must consider the advantage of using 1042 Election for the proceeds which will defer all taxes. This is the methodology, wherein you use an ESOP as the acquirer and as a result any and all proceeds that are reinvested in an eligible investment. The proceeds carry the old tax basis and are tax deferred. What an incredible win for the seller in that his net proceeds will likely have grown by 30% or more now that there is not a tax bite. Talk about blowing the EBITDA multiples!

Further consideration should be focused on dividing the sale into real estate and operating assets by using a 1031 Election. Exchanging the real estate for a like property, the seller can defer any recapture of depreciation and capital gains tax as they take this basis to the new property. The purchase price may be funneled into the real estate perhaps through the purchaser paying down or paying off mortgages, etc. on the real estate. A significant portion of the purchase price may now be tax deferred.

Conversely, one must be careful if acting for the seller that any employment agreements that are taken as a portion of the purchase price. Employment income is at the ordinary rate (as opposed to capital gain rate generally half that of ordinary). If we are acting as a buyers’ agent, we would certainly encourage as much of the purchase price in the form of employment agreements as all of this consideration is tax deductible. So, in effect it is almost halved as to net after tax cost. In this instance, we can also pay a very hefty EBITDA multiple (if that is important to the seller) as that portion of the purchase price that is allocated to the employment agreement is tax benefited by at least 30%.

Another significant contributing factor to the EBITDA multiple that can be achieved for a seller is the historical Compounded Annual Growth Rate (CAGR). Revenue, earnings, market share, etc. represent a significant value indicator that allows a purchaser to pay at the top of the range if for example, a 15% CAGR has been achieved over the past three to five years and the marketplace appears to accommodate that continued growth. Compare that against an entity that has demonstrated a 3 to 4% CAGR. Historical growth is a huge factor in determining value. However, it is really the purchaser’s belief that that growth rate can be sustained that truly drives the premium multiple. If the industry is growing, it is merely a matter of stepping on to that moving train and participating in the growth. If the industry is flat or contracting, then all growth has to come from taking business away from the competition...a much more challenging task. So the position of the business in the industry and the growth of the industry has a huge impact on the multiple that can be achieved.

Good Luck,

Steve Sink

You don't know what you're missing

It's an expression you've heard a million times: "You don't know what you're missing."

I think of that expression often when I think about many retailers' reluctance to get serious about business-to-business relationships.

Let's face it: Many retailers only focus on walk-in traffic. That's great, because you want to do everything you can to make sure those customers have a unique shopping experience that keeps them coming back to your business day-in, day-out, year after year.

But it's not enough if you're serious about bringing as much revenue as you can to the bottom line of your balance sheet each year. (And, every small business should be dead serious about its bottom line.)

You really need to be asking yourself, Do I have a product or service that works for business-to-business relations? And, can I grow my business that way?

Get creative. You'll be surprised how far your reach can -- and should -- be. For instance, say your business is custom-made baby clothes. You're probably thinking there's absolutely no business-to-business opportunity whatsoever. Especially not on the local level. But, you'd be wrong.

I was talking to a friend not too long ago who said her law firm is constantly buying baby gifts for associates who are having children. So, why wouldn't you, as a retailer, target a business-to-business opportunity like that? The result would be a steady stream of business and, more than likely, plenty of referrals coming your way.

The truth is, almost every retail business can have a robust business-to-business component.

So, jump in with both feet this year. And do it sooner rather than later.

You won't believe what you've been missing!

-Kelly Sharp

Tough tax return choice for 2012: Pay more now to save later?

When taxpayers have an option to deduct an expense sooner than later, it's usually an easy choice -- sooner! Why give the government money now instead of later? A no-brainer.

It's a brainer this year. The steep increase in tax rates for 2013 might make you less eager to take all the deductions you can in 2012. There are two important increases in tax rates this year. The "Fiscal Cliff" legislation increases the top effective "regular" income tax rate for individuals to 40.78%. Many business owners will also have to pay an additional 3.8% "Net Investment Income" tax in addition under Obamacare. That combined rate of more than 44% compares to a 35% top individual rate for 2012. That means deductions will be worth a lot more in 2013.

That leaves businesses with some perplexing choices on their 2012 tax returns. For example, the Fiscal Cliff bill increased the "Section 179" deduction maximium to $500,000 in 2012 and 2013. That means taxpayers can deduct up to $500,000 in expenditures that would otherwise have to be capitalized and depreciated over a period of years. The natural reaction is to deduct as much as you can as fast as you can. The new higher rates could make that costly.

For example, assume a taxpayer places a $500,000 computer system into service into 2012. If a top-braket taxpayer takes a Section 179 deduction in 2012, the tax benefit of the deduction is about $175,000, ignoring state taxes. If the taxpayer instead depreciates the system over its usual five year life, it will get a $100,000 deduction in 2012 and the remaining $400,000 over 2013-17, for a total tax benefit of about $211,000.

That means the taxpyer can reduce taxes from 2013-17 about $31,000 by not taking the biggest possible deduction this year. Is it worth paying less now to pay more later? That depends. If you are short of cash now, you might take the big deduction anyway -- you don't care about future taxes if you can't stay in business until then, and that big deduction might be the difference between staying alive and not. 

But the implied cost of funds for getting smaller tax benefit now for a bigger one later works out to over 11%. That's pretty expensive money.

Bottom line? Every taxpayer is different. You should discuss with your tax advisor whether it's worth paying extra 2012 taxes to save taxes in future years. The Section 179 deduction is just one instance where you might have to make that choice.

-Joe Kristan

Incorporate 5 new trends into your PR plan

While it's imperative for any company to have a PR professional on staff or on call, it's equally important to know what trends are driving engagement across your entire enterprise. In layman's terms..."How does your customer consume their information?" Knowing where to place your message and how to do it is an essential piece of business intelligence.

Fear not. Some of the best trends are practical, and achievable for the average company.

1. Content marketing:

There is a lot of buzz about content marketing. First a definition. Content marketing is creating written content about your business or industry that will attract new customers or retain current customers. Creating your own content can be a tall task, but don't be tempted to use content from other sources. Create your own. Why? Several reasons. 

• Thought leadership: Why would you highlight the expertise of others when you could showcase your own?
• Share the spotlight: Give your employees a chance to shine.
• Tell your story: Writing your own content gives you the ability to infuse it with your own style, humor and history.

2. Storytelling:

Storytelling goes hand-in-hand with content marketing. Stories can be about your customers, employees or the company itself. Every once in a while, let people see what goes on behind the scenes. Here is some more inspiration from companies that have used storytelling successfully.

3. Vanity metrics are OUT. Engagement metrics are IN.

Forget number of followers. Forget silly Facebook "get more followers" contests. Concentrate on the followers you have. Engage. This could be scary or it could be a game-changer for your business. Respond to customer requests on Facebook and Twitter just like you would if they called your customer service rep, or if they walked in your front door. Who cares if 5,000 unengaged and ignored people are following you?

4. Visual communication:

Whether it's a video or an infographic, telling your story in a visual format will help you expand your content offerings to a new audience. Pinterest, the new darling of social media, in based almost solely on images as opposed to text. And YouTube, owned by Internet giant Google, treats video content very favorably in its search engine results. As they say, a picture is worth a thousand words.

5. Social and mobile dominance:

After all the hype over social media dies down, and we all have smart phones, then what? The smaller screens have implications as to how we deliver content to our audiences. While we used to do platform testing across different browsers on a PC, we should now be asking our audience what device they prefer instead. Also, we should critically examine the need for apps when a mobile site may be more user-friendly.

It's pretty amazing that the ancient art of storytelling is still playing such a prominent role in our modern communications, isn't it? I'd love to see some examples of how Central Iowa Companies are telling their stories. Please leave a comment.

 

Claire Celsi is the Director of Public Relations at Lessing-Flynn in Des Moines, Iowa.

 

To work well with others, understand yourself

Linkware Freebie Image Teamwork Puzzle Concept. Photo credit to: thegoldguys.blogspot.com/ or www.lumaxart.com/ (Photo credit: Wikipedia)

Group work is a delicate thing.

From classroom groups to workplace groups to extracurricular groups, how you behave and the ways you interact can make or break the outcome. To make your work more successful and productive, it’s important to realize that people work differently, and those differences make us more creative.

I recently learned about the “Four Essential Working Styles” of a group. It’s a way to identify a your personal working style, to learn about the personal working style of the other members of your team and to understand how being aware of these differences can improve your group’s interactions.

Here’s how it works: The activity is based on a compass, and you pick the compass point that you most identify with. As you read the descriptions below, think about which style most suits you:

North - Action: Just get it done! Like to act, try things out, plunge in. People are apt to say, "Enough talk. Let's move on this!"

South - Community: Consider everyone's feelings. Like to hear and honor all voices before acting. People often check to see if everyone is OK. They may speak up when a break is needed.

East - Vision-Making: Look at the big picture. People will often inquire about why something is being done, what the purpose is or if an idea has implications that haven't been considered.

West - Structure: Pay attention to the details. People often ask when, how, who says, how long, what time?

Once you’ve identified your personal working style, the next step is to analyze yourself a bit further. What are the strengths of that personal working style? What benefits do you bring to a group? On the other hand, what are your limitations? What challenges might you bring to a group? And lastly, what do people need to know about working with you to make work more productive?

Thinking this in-depth about your own style can be quite eye-opening, but it’s especially effective when you do it as a team.

The last time I did this activity was with the 2013 Young Professionals Connection board, and as we went around the room, the differences between the groups were plainly apparent. The West group (Structure) said, “We need all of the details. Send us bullet-pointed emails,” while the East group (Vision-Making) said, “Don’t bog us down. We prefer phone calls to long emails.” The South group (Community) said, “We want everyone to feel comfortable, and we take criticisms personally,” while the North group (Action) said, “Give it to us bluntly.”

At this point, I suggest looking around the room and taking note - especially of the people on the opposite side of the room. Once you recognize your different preferences, working together becomes much more productive. We don’t all work the same, but we can work together.

-Emilee Richardson

Five ways to reduce your office electrical consumption

Office buildings consume nearly 20% of the electrical consumption in the USA. About 50% of all the energy consumed by office buildings is for lighting (25%), space heating (13%), and space cooling (11%). Certainly energy usage for our businesses affects our bottom line. How can that change?

Faryal Dotani of MODUS, a mechanical and electrical engineering company in Des Moines, offers five ways to reduce your electrical usage at the office.

Provide occupancy sensors which turn off the lighting when no one is present. In new buildings this is almost standard practice but can also be retrofitted to existing buildings.

Use LED fixtures and lamps. An LED lamp uses less wattage and provides more light. The lamp can also last nearly seven to eight years compared to two to three years for a fluorescent lamp.

Add windows or skylights to harvest the sunlight and reduce your lighting by as much as 50%. Most of the time the lights are off at MODUS.

Install photovoltaic panels and generate electricity. Faryal completed the design for the Franklin library where all the lighting during the daytime is generated by roof top panels. Although paybacks range from 15-40 years depending on the system, she says every year less expensive and better systems are on the market.

Provide demand based HVAC controls similar to occupancy sensors for lighting which turns on and off motors and fans for the heating and cooling system.

-Rob Smith

How the media failed us, and Lance Armstrong

English: Cyclist Lance Armstrong at the 2008 Tour de Gruene Individual Time Trial, 1 November 2008 (Photo credit: Wikipedia)

The media is sometimes referred to as the fourth estate of government. That is how truly powerful it is. But sometimes the media meets its match in power, stature, intrigue, and hope. Let me tell you how the media failed us in the Lance Armstrong debacle. It's a cautionary tale that has happened before. Think WWII, Te'o, and a number of other stories. Sometimes the media WANTS to believe so badly that the story will have a good ending that it misses the obvious, skips fact checking and YES... even wantonly disregards the real story. Lance Armstrong's fall from grace was one of those epic stories.

First of all, Lance's story is great, if you believe all the hype. Cyclist recovers from near-fatal disease to win an epic 7 straight Tour De France titles. Then he starts a famous cancer foundation that raises of millions of dollars to help cancer patients. And all the while, Lance is fighting off constant attacks on his sterling reputation. Rare was the negative mainstream media article. The sports media fell over themselves (sometimes literally) to get time with him. The dark side and perhaps most insidious side of Armstong's personality was to demand 100% loyalty to the myth and legend of Lance. Any journalist who came around asking funny questions was immediately banned from ever talking to him again.

So the media - whose job depends on access to Lance - had a decision to make. Either cover him in a positive light, or lose the right to write about him in an authoritative manner. It was like choosing between a rock and a hard place.

Journalism works under the supposition of a thing called the Master Narrative. The narrative is built over time and is a premise somewhat based on what has happened in the past. Once the narrative is built and is repeated time after time, it's hard for anyone, even members of the media, to dislodge it from their subconscious thinking. The Lance Master Narrative was well-known and famous. Since no one with any more credibility than Lance was accusing him of wrongdoing for so long, Lance Armstrong had years to refute any statements that might arise against him. He even got the chance to paint the opposition with the brush of his choosing. In this case the brush was named "You have no proof."

It was only when mainstream journalists who had no connection with Armstrong (or his merry band of thug protectors)  - started writing about his coverup that people began to doubt Armstrong's story. It took a huge number of people speaking up against him to even nudge public opinion against him. Lance Armstrong's master narrative was so powerful that even the U.S. Justice Department barely put a dent in it.

Citizen journalism and the sworn testimony of his former teammates were the only things that finally did Lance in. The great and all powerful Oz had been exposed, once and for all.

Lance's master narrative included the belief that he was a super-being. A survivor. A determined athlete. A humanitarian. A good person. Anything that did not fit with that narrative was ignored by the media for a very long time. Even when it was reported on by the mainstream media, for the longest time the reporters went to great lengths to report Lance's sometimes implausible side of the story.

It was only when a critical amount of evidence and confessions piled up into an irrefutable  and well-documented tattle, that the media stopped using the Lance Armstong master narrative. It came unceremoniosly crashing to the ground.

The media does indeed play an important role in our society. When the media builds a master narrative built on "persona" of one charismatic individual,  that is where is becomes dangerous. The media allowed itself to become mesmerized with Lance Armstrong. That is why his fall was no long and hard. There was absolutely nothing big or strong enough to break his fall.

Claire Celsi is the Director of Public Relations at Lessing-Flynn in Des Moines, Iowa.

Taking inventory

If you're a retailer, you're probably still catching your breath from the holiday season. And, you should be -- because it won't be long before you're already going to be committed to whatever you strategy is for the next holiday season.

But it's also a critical time to take inventory -- physically and mentally -- for the year ahead.

I'm doing both this month. Between closing the books on 2012 and taking in a quick vacation, I'll also be refining my business plan for 2013 (which you should be developing and analyzing throughout the entire year) by taking a realistic look at what worked and what didn't in the past year.

I start with a simple, direct question: Am I relevant? (In other words, I want to know if my store is providing the goods, services and unique experience my customers want.)

And, I ask myself other questions, too.

Is my business focused on what it does best?

Where am I really making my money? (This is where I should be spending most of my time, energy and money.)

What can I better delegate and outsource to maximize the dollar value of my time?

What did I sell last year? And what didn't sell? (Seems simple, but many times we get so busy with the day-to-day tasks that we don't really take a good look -- we just reorder the same as we did last year.)

What inventory is just taking up space -- and how am I going to move it?

Is my website absolutely up-to-date and user friendly? And, am I making the most of what technology has to offer?

How can we improve the customer's experience?

What lessons can I take from other retailers, even the stores, while still keeping the uniqueness of my own store?

What am I going to do this year to increase my business-to-business sales?

Those are the smart questions to be asking no matter if you're a retailer or in any other profession. So, whether you're already back at work or still unwinding, the remainder of this month is the right time to take inventory of all your assets and obstacles to success in the coming year.

-Kelly Sharp

January: the month to start your 2013 year-end tax planning!

With tax rates going up this year, the tax planning stakes for 2013 have increased. Many taxpayers wait until December to get serious about their tax planning. They ask too much of one month.

If you really want to get a handle on your 2013 tax bill, the time to get serious is now. What to do? For starters: 

Maximize your 401(k) contribution.  This is the easiest way to save money -- by taking it out of one pocket and putting it away in another.  If your employer matches, so much the better. Remember, though, that if you are the employer, your contribution may be limited by employee participation. The maximum 401(k) contribution for 2013 is $17,500 ($23,000 for taxpayers who will be 50 by year-end).

Reconsider your withholding. Taxes have gone up, folks, and not just for "millionaires and billionaires." While the new highest rates kick in at $400,000 for single filers and $450,000 for joint taxpayers, other tax increases apply at much lower levels, including the hidden tax from the phase-out of itemized deductions and the new 3.8% "Net investment income" tax enacted with Obamacare.

Make your other tax-advantaged savings contributions now. Many of us wait until the last minute to fund Individual Retirement Accounts, Health Savings Accounts, and Section 529 plans. That's disorganized thinking. The sooner you fund these tax-deferral vehicles, the sooner the earnings escape the grasp of the tax man. The 2013 limits for these plans:

• IRA: $5,500 ($6,500 for taxpayers age 50 or older during 2013).
• HSA: $3,250 for single coverage, $6,450 for family coverage.
• College Savings Iowa: $3,045 per donor, per donee.

Finally, if you use your car for business, start keeping a mileage log. The IRS is examining more small businesses every year, and car expenses are one of their favorite targets. Keeping track of your business mileage can make the difference between a "no change" and an ugly audit.

None of this will make your tax problems go away, but they are a good start. Consult your tax advisor to make sure you are doing it right.

-Joe Kristan

Hunt down your brand advocates

Who doesn't love those customers who rave about us?  Every business -- big or small -- has fans. And those fans generate word of mouth buzz that is marketing gold.  Do you know who is most likely to be your brand advocate?  

Check out this infographic from BzzAgent to see if you can recognize your best prospects for recruiting and retaining those people who will shout your praises.

 

 

New Year's resolutions for young professionals

 (Photo credit: Wikipedia)

I’ve never been big on New Year’s resolutions.

But I am big on lists. And since 2013 is a big year for me, I decided to combine the two and give it a shot.

First, though, a little background. I’m Emilee Richardson, 25, and the Marketing & Communications Coordinator for the Science Center of Iowa. I’m a native of Clarinda, Iowa, and a graduate of Drake University. I’ve been in Des Moines for almost eight years, and 2013 is a big year for me because I am assuming the role of president-elect for Young Professionals Connection (YPC).

YPC is a focused extension of the Greater Des Moines Partnership, and our mission is to attract and retain young professionals to Greater Des Moines through through social, civic, charitable and professional development endeavors. 2013 is also a big year for YPC, because we recently surpassed 700 members. That means the impact we can have on the community is... big.

This list of resolutions is mostly a series of challenges I’ve set for myself, but I’m hoping other young professionals can relate. So without further ado, here are my BIG resolutions for 2013:

1      I resolve to be better at remembering names and faces. More than anything I’ve found while networking my way around Des Moines is that people really notice when you remember their name. And doesn’t it feel great when someone remembers yours? There are plenty of tricks for name memory. One is to repeat the name immediately after you’re introduced and again before you end the conversation. Another I’ve tried already this year is to have the person spell their name. I’m a visual person, and since my name has an odd spelling, I like to know whether Caitlyn is spelled with a C or a K and if Stephen is with a ph or a v. Find what works for you.

2      I resolve to listen more intently. When you’re talking to someone at a networking event, where there are crowds of people and distractions all around, it’s hard to devote your full attention to a conversation. But to get to know someone, you have to listen to them - and not just superficially. Really focus on listening intently. First and foremost, listen with you’re introduced (see #1). Then, if your conversation has to be interrupted, promise to follow-up (see #3). Ask for a business card or, if you already know the person, plug a reminder into your smartphone to send an email later (see #5).

3      I resolve to follow-up. Following-up can take many forms... Maybe it’s following up on a conversation you had when you met someone. Maybe it’s following-up on one of those to-do items from your meeting. Maybe it’s following-up on an email that’s been sitting in your inbox. Even if it’s a simple, “Got your message. I’ll get back to you by X date,” it at least shows initiative and gives you a deadline. Following-up makes you look more professional and more personal all at once... It’s a win-win!

4      I resolve to make real-life connections. Des Moines is full of smart, engaging, interesting people, and you can learn something from every single one of them. The good news is that there are far fewer than seven degrees of separation for most people in the city. So reach out. Connect. Meet people. Another great way to make real-life connections is to connect other people. (No, I’m not suggesting you play matchmaker.) Connecting people you know - whether they have similar interests or business ideas that align - can be rewarding, too.

5      I resolve to use my smartphone and tablet for good. Our generation gets chastised for having our noses in our phones all the time. But who says you can’t use your iPad to learn a new language, manage your time better or read articles and news while you’re on the go? Go beyond the call, text and game features. Use your calendar to add that event you just heard about or schedule a reminder to email that new contact. You know the saying... There’s an app for that. Use it!

These are my resolutions for the new year. Can you relate? Can these five little tips can make a big difference in your personal and professional life?

Shameless plug: Test out these skills at YPC’s Kick-Off Party on January 25 at The Exchange. There will be 300+ young professionals to meet, listen to, follow-up with and remember their names. Put it in your smartphone now so you don’t forget!

Cheers to a big year - Happy 2013!

-Emilee Richardson

NEW YEAR’S SUSTAINABLE RESOLUTION

The people and businesses of the USA produce 220 million tons of garbage per year.  That’s 82,000 football fields piled six feet high.  Closer to home would be to cover every square foot of Polk County’s 592 square miles with 15 inches of garbage. 

New Year brings New Year’s sustainable resolutions.

1. Never, ever, ever, discard computers into the trash.  Did I say never?  They are not biodegradable but more importantly they contain mercury.  It gets into the water system and ends up in the fish we eat.  Instead contact Computers With Causes and give new life to your computer.  When our office computers do not have enough horsepower for new software, they still have enough for many other uses.
2. Reduce your garbage to the landfill.  Our office of 11 fills a 96 gallon recycle container about each week.  We are going to monitor how many garbage bags of trash still go to the dumpster and try to cut that in half by recycling more.
3. Reuse paper you printed. Just for fun I started to keep a pile of paper which I printed and no longer needed.  I would use the back side for notes, draft letters, my to-do lists, etc.  The paper was reused before it was recycled and I did not use new paper. Don’t be surprised if you get a note from me on the back of a cost estimate.

Ownership transitions are not slowing down

The 4th quarter of 2012, according to my professional network, saw the busiest ownership transition period they have had in their careers. Yes, it was driven by the potential increase in capital gains and the reduction in the estate tax exemption, but the bigger issue was the log jam that was created by the recession. Many business owners put their business transitions on hold due to the fallout in company values.

2013 is looking just as busy and smart business owners are beginning their due diligence right now. The hardest part of an ownership transition is what structure will be used that meets the business owner's needs after the sale. It is much more than the final number of the deal. It is items such as:

• Control of the business after the sale
• Legacy issues
• How will the transition impact the employees?
• Do I want to continue to work?
• Do I need the cash now or later?
• Do I want to get some cash off the table?
• Do I want the maximum value I can get and what are the consequences?

Business owners should be having robust discussions with their service providers on what is the best solution for their ownership transition. Is it a merger, sale, ESOP, management buyout, or some other vehicle that meets the needs of all stakeholders? Exploring all the options takes time and finding the right partners is critical. The sale of a business can be as significant as a marriage or having a child.

If 2013 is the year for your ownership transition, then now is the time to start the conversations!

-Victor Aspengren

Using discounted cash flow for valuations

Discounted Cash Flow Calculator - is a tool to help estimate the present value of a stream of free cash flows discounted to the present. (Photo credit: Wikipedia)

If you used or will be using DCF (Discounted Cash Flow) in the valuation of a company you may want to consider a recent federal bankruptcy court decision court (N.D. Ill.): the “wide” and “striking” disparity between experts “lends credibility to the concept that the DCF method is subject to manipulation and should be validated by other approaches.” In particular, that by taking a discretionary approach to DCF, “a skilled practitioner can come up with just about any value he wants.”

The court cited experts who begin with the same cash projections but end with values nearly $8 million apart for a relatively small, family-owned company. In this case, the experts’ disagreement largely came down to how each calculated the weighted average cost of capital (WACC) thereby impacting: the debt-to-equity ratio, the equity risk premium (ERP), and the size premium—as well as the terminal value. Each expert cited various models and experts to defend their points but “each expert generally selected parameters that pushed his valuation in the direction he wanted to go,” the court says.

The court ruling essentially fell back on “real world” evidence at the time of the company’s acquisition to find that it was solvent, including its lack of debt, its substantial cash in excess of working capital, and its ability to keep current on accounts payable.

Good Luck

Steve Sink, CBI, M&AMI

ss@phxaffiliates.com

The 'fiscal cliff' bill and Iowa entrepreneurs

Congress changed the rules of the tax game for 2012 after time expired. About two hours into 2013 they passed HR 8, the "Fiscal Cliff" legislation, finally settling the tax law for 2012 and 2013. The bill raises the top federal tax rate on profitable S corporations to more than 40% starting in 2013, as expected, but it could have been much worse. It fixes two huge flaws in the tax law, and it provides some unexpected benefits to buyers of fixed assets in 2012 and 2013. 

First, the bad news. The bill raises the stated top individual income tax rate to 39.6%. This rate will apply to taxable income more than $400,000 for single filers and $450,000 for joint filers. The top rate had been 35%.The bill also raises the top dividend and capital gain rate from 15% to 20%, for taxpayers in the new 39.6% top bracket. 

The new tax law also re-enacts the "phase-out" of itemized deductions and personal exemptions for higher-income earners. This has the effect of increasing the top rate an additional 1.188%, to 40.788%.

It's even worse than that, though, with the 3.8% new "net investment income" tax enacted separately with Obamacare also taking effect for 2013. This tax applies to interest, dividends, most capital gains, rental income and "passive" K-1 income. Considering all of these taxes, and taking deductions for taxes paid into account, an Iowa taxpayer could face a marginal rate -- the rate on each additional dollar earned -- as high as 47.6%.

There is good news. The bill permanently "patches" the alternative minimum tax, retroactive to 2012. Without the patch, some taxpayers could have had additional 2012 taxes of more than $9,000. 

The bill also permanently sets the estate tax lifetime exemption at $5 million, though it raises the rate on taxable estates to 40%. The rate in 2012 was 35%.

The bill also omits some terrible ideas that had been thrown out, including a hard dollar cap of $25,000 or $50,000 for itemized deductions. This limit would have hit Iowa pass-through owners hard, as it would have restricted their deductions for state taxes paid on business income.

Bonus good news. The bill retroactively increases the "Section 179 deduction" maximum for 2012 to $500,000. That will also be the maximum deduction for 2013. This deduction, which lets taxpayers deduct all of the cost of equipment that would otherwise have to be capitalized and deducted over several years, had been set at $139,000 for 2012 and $25,000 in 2013. 

The bill also extends 50% "bonus depreciation" on new fixed assets through 2013. It had been set to expire in 2012.

These silver linings come with their own Iowa cloud. The Section 179 changes and bonus depreciation won't apply in computing Iowa income tax unless the legislature enacts conforming legislation. The legislature has not conformed with bonus depreciation. It has conformed with the federal Section 179 limits in recent years, but Iowa won't accept returns with the new limits until the legislature acts. Depending on how fast the legislature acts, it could delay filings of Iowa returns where Section 179 is an issue.

The bill also extends a raft of "expiring provisions" for another year, including the research credit and the wind energy production credit. It doesn't extend the 2% reduction in employee Social Security tax and self-employment tax.

Be sure to visit with your tax professonal to see how these provisions will affect you and your business.

Additional coverage:

Tax Update Blog, Senate passes fiscal cliff bill in wee hours; House acts today.

Taxgirl,  House Passes Senate Budget Bill Convincingly: We Have A Tax Deal!

A great way to start 2013

I can't think of a better way to kick off the new business year than with my first blog about the retail sector, because it's an opportunity to connect with more people. And ultimately, that's what business is all about -- connecting with people who need or want what you have to offer.

In the retail sector, that means offering goods, services, and if we're doing it right, a unique customer experience. That's something I've strived to do throughout my career. Before purchasing Heart of Iowa, I had a variety of experiences both in marketing and operations in many different fields, including construction, architecture, development and even a sports park.

My most recent position was the as the vice president of retail operations at Hubbell Realty Company. That role gave me a wide variety of experiences from understanding franchise systems, to identifying retail solutions for real estate issues and managing the day-to-day operations for businesses that have very different customers and a variety of unique challenges. Some those businesses included Copper Creek Golf Club, Woodland Hills Golf Course, Brilliant Sky Toys and Books at the Kaleidoscope, Johnny's Hall of Fame Restaurant & Bar, and Maximum Fitness Centers.

It was challenging, rewarding work, but owning my own business was something I had always wanted to do and in late 2010, I realized that goal with the purchase of Heart of Iowa.

I liked that the Heart of Iowa had a strong brand, wonderful history, loyal customers and a real market niche. I also bought it with a clear plan to build on its success by increasing its business-to-business sales, growing online sales and putting a sharper focus on marketing.

The fact is, you can't talk about retail without talking about marketing. Of course, there are so many more aspects of retailing that are all too often overlooked or forgotten by business owners -- and reconnecting with them is where so much opportunity awaits.

In the weeks ahead, I look forward to sharing ideas on customer experience, value of sampling, business-to-business sales and relationships, evaluating inventory, the return on catalogs, trading products for services, successful retailer marketing, learning from mistakes, technology and social media in the retail sector, the work/personal life balance, building a brand, leveraging client relationships, customer feedback, the pros and cons of coupons and more. And I look forward to hearing from you, too, with your questions and perspectives.

Kelly Sharp 

Owner - Heart of Iowa Market Place

Your marketing resolution for 2013

I know, I know -- you're going to work out for 2 hours every day, quit smoking, volunteer every weekend and bring about world peace.

Tis the season for New Year's resolutions. They shouldn't just be about your personal life and they should be a bit more realistic than we tend to make them. 

As you think about what resolutions you might possibly make about your business for 2013 -- what if I told you that you could get everything you want from your customers?  Sounds pretty awesome, doesn't it?

It's actually not as difficult as it sounds.  I've often said that I wish marketing were more like rocket science because then I could sell the secrets for billions of dollars.  But the truth is -- marketing is pretty straight forward.  Here's the recipe for getting everything you want for your business in 2013.

Offer something of value for a fair price -- marketing can't solve anything if what you sell stinks.  Be awesome or shut down until you can be.

Have a plan -- it's better to do a few things well, than a ton of things every so often or half-baked

Be consistent -- marketing should happen every day, no matter how busy you are

Invest the most in your employees and current customers -- they've already bought and will keep buying if you make sure they know they're special.

Know what your customers actually want/need and do everything you can to get them there -- as Zig Ziglar used to say, "You can have everything in life that you want if you just help other people get what they want."

Stay the course -- don't let what your competition is doing pull you away from your own plan.

Be human -- we choose to do business with people and companies that we know, like and trust.  The more of your genuine self you extend to the marketplace, the quicker we can get to know, like and trust you. We can't get there through corporate mumbo jumbo.

That's it.  99% of businesses out there won't follow that simple formula.  Which is great for you -- because if you actually do, you'll be miles ahead.  Put the steps above into action and I promise -- 2013 will be a year to remember!

~ Drew

 

Year-end techniques from the edge of the Fiscal Cliff.

With less than two weeks left in the tax year, the politicians haven't reached a "fiscal cliff" deal. The latest rumors combine some version of a tax increase for higher incomes with a cap on the value of itemized deductions.  For example, a dollar of income might face a 39.8% tax rate, while a dollar of charitable contributions might save you only 28 cents.  Other proposals would simply cap the amount of itemized deductions allowed, perhaps at $50,000.

While you should consult your tax advisor about your year end planning moves, some thoughts to keep in mind:

• If you want your itemized deduction to count this year, to be sure you get a full benefit, you should have it mailed and postmarked this year if you pay it by check.  Timely mailed, timely paid is the rule here.

 

• A charitable contribution or tax payment made with a credit card counts this year, even if you don't pay your credit card bill until next year.

 

• Additional itemized deductions for state and local taxes won't reduce your 2012 federal tax bill if you are subject to alternative minimum tax this year.

 

• If you choose to recognize a capital gain this year to avoid the pending tax increases, the trade date is considered the date the gain is taxed, even if the settlement date is later.

 

• If you aren't planning to sell an asset in the next two or three years anyway, it might not make sense to pay tax on the gain now to avoid a future tax increase.

The politicians may not settle on the tax law until the last minute, so stay in touch with your tax advisor and stay flexible.

-Joe Kristan

Be prepared for the worst day of your professional life

What is a crisis? My definition: Any scenario where people or animals are injured or killed, or where a financial breach has occurred that needs an immediate response. That's it. 

As I watch the tragedy unfold in Newtown, Connecticut, I'm keenly observing the clues to what sort of crisis communications plan was in place for the unlikely scenario that ultimately occurred.

So far, I've been impressed by what I've observed. Parents were informed quickly by text message via the "campus alert system" to come to pick up their children. The Sandy Hook Elementary School website - though somewhat overloaded now - functioned to give quick bios of the teachers and principal when there wasn't much information available for reporters.

What exactly is a crisis communications plan? It's not a disaster evacuation plan or a physical escape scenario. Every business and organization should have a plan on how to evacuate a building due to a disaster, or how to hide from an intruder. A crisis communications plan is different. It's how you respond to the outside world after the disaster happens.

The media is a voracious creature after a disaster happens. It serves many functions: to inform others of a pending threat, to report on the unfolding scenario, and to summarize the facts of the case to the public. Communications professionals should lead the effort within their organization to write and implement a crisis communications plan. 

The Connecticut State Police have been disciplined in their messaging and have obviously been trained to mete out messages in a particular, legalistic order. For example, the shooter's name was not officially released until he had been methodically identified, even though some media outlets had already released his name hours earlier. For communicators in the private sector, saying "no comment" is not advisable.

The essence of crisis communciations planning is thinking of the worst disaster scenario ahead of time, and getting as many communications vehicles in place as possible. In this situation, it appears that parents were informed by emergency robo-calls, giving directions to what had happened and where to pick up their children.

Communicators should lead a team of professionals in your organization to create a very simple plan to follow in case of an emergency. The basics are as follows:

1. Preparation: Create key messages, web pages, calling trees, etc. ahead of time, to be used after the emergency occurs.
2. Control: It should be decided in advance who is the spokesperson to the victims and the media. It doesn't help anyone if unauthorized spokespeople without the latest information are allowed to speak to the media.
3. Access to the plan: Create the plan and give everyone a copy so that it may be accessed remotely. Better yet, hold emergency drills to assure that everyone knows their role. Include passwords to all website content management systems and social media passwords. 
4. Backup plans: Think in terms of Plan A and Plan B. If you are thwarted in trying to execute Plan A, you will be prepared. For example, if you cannot gain access to your computers at work to make website updates, make sure people know how to access the site remotely.

To create a crisis communications plan, gather your most senior staff members together and get started. It should take a least a few weeks to write and refine a plan. When it's done, use every communications channel available to get the plan out to everyone involved. It's especially important to let everyone know that it exists and to practice using it regularly. If you need help getting started, or don't have time to coordinate the plan, hire a public relations professional to get you started. 

Claire Celsi is the Director of Public Relations at Lessing-Flynn in Des Moines, Iowa.

 

You need to go APE!

One of the most popular marketing tactics today is to really demonstrate in a tangible way that you are in fact an expert in your field.  By showing us, rather than telling us, that you really know your stuff -- you allow us to come to that conclusion all by ourselves, which makes it much stickier.

Some people are demoing their expertise through a blog or podcast. Others are guest lecturing or speaking at conferences.  But perhaps the most daunting and most coveted version of this marketing tactic is -- authoring a book.

As if actually writing the dang thing isn't intimidating enough, then you have to find someone who wants to rep it, be your publisher and then there's the marketing of the book.  No wonder most people say they want to (or are in the middle of one) write a book, but so few do.

I'm pretty sure that's why Guy Kawasaki and Shawn Welch wrote their new book, APE: Author, Publisher, Entrepreneur-How to Publish a Book. 

APE is literally a step-by step, oops, watch out for that land mine guide on how to write, publish and sell your own book. Authors Guy Kawasaki and Shawn Welch have written a tell all book that walks you through each step of the process. There's not a lick of theory or "I suppose" in this book. It is a nuts and bolts procedural that goes into incredible detail -- offering tons of resources, options and tools.

There are 29 chapters and 22 of those chapters start with the words How to. That pretty much says it all. From how to actually write to book to how to market your book -- it's all there.

The only people who won't be thrilled to see/read this book are CEOs of traditional publishing houses. If that's not you -- get a copy today and get your book out there tomorrow!

And let your expertise begin to show through!

 

~ Drew 

Don't lose your sustainability sanity to Santa

Oh the hustle and bustle of the holidays. The month of December is when we sometimes surrender our sustainability sanity to Santa. Here’s my TOP FIVE THINGS YOU CAN DO TO BE MORE SUSTAINABLE DURING THE HOLIDAYS!!

1. Re-gift a gift. Maybe someone on your list would love the gift you got two years ago which is just sitting on your shelf. I have a set of screw drivers I don’t need so someone else gets them.
2. Plan your trips to the stores to reduce gasoline consumption. Better yet, shop on-line at your favorite store and have them ship it to your home.
3. Why not wrap in your newspaper? Even if you put the wrapping paper in the recycle bin much ends up in the landfill. Too much tape, high concentration of ink, and very little fiber make it a poor paper to recycle. I am going to use the holiday promos from my Sunday paper!
4. How about company Christmas cards?  I’ve gotten cards from some companies for 20 years and never done business with them nor have they ever contacted me. Instead, have a holiday lunch with your best clients and stop sending cards to people you are not in contact with. No one will do business with you because they got a card.
5. Buy gifts made locally. You can pick them up at numerous church bazaars, downtown holiday market, or non-chain stores. I found some great soaps made in Iowa in the East Village.

One last idea: What if Santa stopped going to each house?  Think of the gas he would save …. but wait, he uses reindeer!  NEVER MIND.

Not "To-Do's" when selling

BACKGROUND
An owner decides to retire and sell the business with $20 million of annual revenues. The company owns some locations and leases other locations utilizing the owners' entity. The business is profitable.

IMMEDIATE PROBLEMS
At the initial meeting the following items quickly became issues.

1. Confidentiality: The owner had not planned to bring the CFO into his confidence by implementing a "stay" agreement. With all the ensuing financial updates and analysis, it would be impossible to expect the selling process to be achieved through due diligence without informing the financial offers of the imminent company sale.
   
   The logical potential buyers would be local competitors, which would sign a non-disclosure but there would be no assurance that there would not be a leak. The owner intended to talk to interested acquirers one at a time, thus prolonging the process and increasing the likelihood of a confidentiality leak.
2. LOI (Letter of Intent): The LOI, which the Seller provided, was incomplete and did not require a significant retainer.  
3. Transaction Attorney: The proposed Seller’s attorney had no experience in business transactions.
4. Financial and Business Information: The financials and information regarding the business were incomplete and unprofessional making it difficult to get a true picture of the business, which will result in lower offers or no offer.
5. Lawsuit: The owner wanted to bury a law suit in the fine print.

 

Summary
Many business owners do not appreciate either the complexities of doing a deal or appreciate the benefits of hiring a first-class team (Attorney, CPA and Intermediary) to conduct the sale process. The initial effort is well worth the back-end reward. Watch out for inexperienced dealmakers, they can ruin deals.

Enjoy the Holidays!

Steve Sink, CBI, M&AMI

ss@phxaffiliates.com

 

 

'Fiscal Cliff' follies: Why it may pay to take deductions early

With the potential "fiscal cliff" tax rate hikes looming, the math tells us that deductions will be more valuable to top-bracket taxpayers next year. The top federal individual tax rate is scheduled to rise to 39.6% next year, from the current 35%.  A $100 deduction is worth $39.60 next year, vs. $35 this year.

Yet the math may be deceiving. The politicians may end up with a fiscal cliff compromise that can make many deductions worthless after this year.  Republican negotiators, including Iowa's Senator Grassley, have floated a $50,000 cap on allowable itemized deductions.  

Such a cap would pose a huge problem for entrepreneurs whose income is taxed on their 1040s via S corporations or partnerships. State income taxes on their business income are itemized deductions on the owner 1040s. When combined with home mortgage interest and charitable contributions, many reasonably successful entrepreneurs would shoot past a $50,000 cap.

Nothing has been enacted yet, and such a cap may never happen. But it may happen effective for 2013, and prudent taxpayers should keep this in mind. Possible self-defense steps include making sure state income tax liabilities are paid in 2012, rather than waiting until 2013. Taxpayers with big charitable pledges may want to be ready to make them this year, possibly via a donor-advised fund; the Des Moines Community Foundation sponsors one. 

Whatever you do, make any moves only in consultation with your tax advisor. Each tax situation is different. Taxpayers who owe alternative minimum tax this year will get no benefit from prepaying state income taxes, for example. Be ready and stay flexible. 

More reading on this issue here.

Related: What the fiscal cliff looks like from the back side of the election.

Don't let December pass you by

It's officially here. The holiday season. It's an odd 30 days. On the one hand, you're busy wrapping up the year. On the other, your head and heart are thinking family, shopping, spiked egg nog, snowflakes and the company party.

It's easy to get so distracted by the holidays that in a blink -- it's January 2nd and the last 30 days was just a blur of less than productive efforts.

Don't let December get the best of you. No matter how busy the last month of the year is your for business, you can get some big marketing projects both started and finished before the big ball drops in Time Square.

I wrote a post about the 5 Marketing To Dos to get done before 2013 and I want to elaborate on one of them here.

The 3rd item on that To Do list was:

Call it quits: Look back over the past 12-24 months. What’s the one marketing tactic that you have really dedicated yourself to but it just hasn’t caught on fire. This has to be something that you feel you really implemented well, thoroughly and can’t imagine what you could have done better. If you can say that and it’s not delivering results — it’s time to let it go. Make December 2012 the last time you invest in it.

It's so easy to keep doing something. Especially if you think it should work but it isn't yet. Or you've been doing it long enough that it's just habit. But that doesn't mean it's a good use of your resources. 

December is a great time to really be honest with yourself and your team. Be brutal as you go through your 2012 marketing efforts and prune those efforts that haven't panned out. But here's the criteria you should use to decide if it's time to shuttle the effort.

1. You've been doing it for at least 12 months
2. You're confident that you've done it well (best practices and all that)
3. There is no change in your business, industry trend etc. that suggests this tactic would be significantly more successful in 2013
4. It's not tied to other tactics that are working (you're not pulling the proverbial thread that unravels the sweater)

I hope you'll check out the 5 To Dos post and tackle all 5. But if you can only make time for one -- it's time to call it quits.

~ Drew

 

Plug Load = Bad!

Homes are using less and less electricity for conventional purposes such as heating, cooling, and water heating due to better insulation and appliance efficiencies. However, the plug load is increasing greatly; those TV’s, DVR’s, chargers, and small transformers or anything with the little green light. Some estimates say vampire power accounts for 40% of home power.

If 40% seems like a lot, think of those nice spring days when most of the lights are off and the furnace is not running. All those devices are still sucking electricity. You just cannot see it! 

MODLET to the rescue. The device plugs into any outlet and controls whatever you plug into the modlet. The great thing about the device is, through a local WIFI, information is sent to your computer where you can monitor the electrical consumption at any modlet. You can even program each device to cut off the flow of electricity to your energy-stealing appliances. Chances are you won’t be turning your TV on at 3 a.m., so why not cut the power from 11 p.m. to 8 a.m.?

At $55, each you may think the cost sounds pretty crazy. I did some analysis on what it could do for my house. My 2,700 square foot house used 8,400 kilowatt hours of electricity per year, costing $850. If we are average, then 40% of the cost ($340) was for all those things that are always using electricity.  I could buy 5 Modlets for my TV’s (3), computer and printer (1), and charger location (1) at the cost of $275.

After one year I would recoup my investment and save money from then on.

What the fiscal cliff looks like from the back side of the election

The election results have cleared away some of the fog from the tax planning scene for year end, but visibility is still poor. 

What we know  

There will be a tax increase on "investment income" and wage and self-employment income starting next year. Investment income for taxpayers with adjusted gross income over $200,000 (single filers) or $250,000 (joint filers) face a new 3.8% Obamacare surcharge on their investment income. "Investment income" is broadly defined and includes taxable interest, dividends, capital gains, rental and royalty income, and "passive" income from K-1s. 

Taxpayers with wage and self-employment income face a new .9% Medicare surtax for wages or self-employment income exceeding $200,000 (single filers) or $250,000 (joint filers). This is the first time a Medicare tax rate has depended on joint income. Because employers can't know what a spouse makes, this will require many taxpayers to pay additional Medicare tax when they file their 2013 returns. Employers will withhold the .9% tax on wages over $200,000.

What we don't know

We don't know what the tax rates will be for 2013. If Congress and the President fail to agree on a plan for next year, the tax rates effective in 2000 will return, with a 39.6% top rate for ordinary income. The top rate on capital gains would rise from 15% to 20%, and the top rate on dividends would rise from 15% to 39.6%. Of course the 3.8% tax on investment income would also apply. You can see a state-by-state map of the effects of going off this "fiscal cliff" here.

We don't even know what the Alternative Minimum Tax rules are for this year 

Congress has not yet "patched" the AMT by increasing the annual exemption amount. If they fail to do so, some taxpayers may be surprised by an additional tax bill of more than $8,000 this coming April.

What to do? 

You should consult your tax advisor before you do anything. Some steps advisors will be discussing in the coming weeks with their clients include:

• Reversing the usual tax planning by accelerating income and deferring deductions. If rates are going up, deductions will be worth more next year, while income taxed this year will be treated more kindly.
• Examine the timing of capital gain income. For taxpayers who are going to be selling a stock or other capital asset anyway, this year may well be the time to do so. While that's true for taxpayers in top brackets for obvious reasons, it's also possibly true for taxpayers in lower brackets; the zero rate for capital gains for lower bracket taxpayers will expire this year.
• Consider electing out of installment sales. The tax law lets taxpayers choose to be taxed on 2012 installment sales in 2012, even if the payments on the sales will be made in later years.
• Dividend distributions. C coporations and S corporations with old C corporation earnings will contemplate whether to distribute earnings to be taxed without the 3.8% Obamacare surtax. If cash is tight, they will consider making distributions in the form of notes to get the income out this year.
• Fixed asset elections. Taxpayers usually choose to write off fixed assets as fast as possible through "bonus depreciation" and "Section 179" expensing. If rates go up, that may be counterproductive.
• Family gifting. The current $5 million lifetime gifting and estate tax exclusion will decline, perhaps all the way to $1 million. Advisors will be looking at ways to move wealth to the next generation before year-end.

Above all, stay flexible, be ready to act fast, and stay in touch with your tax advisor. The politicians may or may not change the tax picture in the coming weeks, so flexibiltiy is important.

-Joe Kristan

Leading In ESOP Company

Leadership is critical in all organizations, but when you add the element of employee ownership it elevates the importance. When a company shifts the mindset of its workers from employee to employee owner, the scrutiny of leaders is more pronounced.

When everyone is asked to step up and act like an owner, then the top leaders better be prepared for valid questions and challenges to the status quo. This shift can happen in a very short period of time and many leaders are not prepared to handle this shift in organizational and individual behavior. There are many programs and books that focus on leadership development, but not in an employee owned company context.

The good news is that there is a program that has been around for several years that focuses on leadership in an ESOP company. The program is conducted by the University of Pennsylvania and is called "Leading in Ownership Setting - Program for CEO's". It is a stellar program and I can personally speak to the value of the program as I was member of the planning committee and a participant in the first class.

The program challenges individuals in how they view leadership in multiple ways. More importantly, participants create a peer group that they can stay connected to for ideas and help with future challenges.

If you are looking to implement employee ownership in your company, this program can help you prepare for the challenges and joys of leading a company of employee owners. Make the investment in yourself and you will receive payback for the rest of your career.

-Victor Aspengren

Reuse a Shoe

In 1990 Nike wondered what the company could do to be more sustainable. An obvious solution was to keep athletic shoes out of landfills since they may never decompose. Voila, the Reuse-A-Shoe program, was started.

About 1.5 million pairs are recycled at Nike recycling centers each year. Since its beginning nearly 28 million pairs have been recycled into other products rather than going to the landfill.

The only drop off center in Iowa is the Nike Factory Store at the outlet mall in Williamsburg. The store manager says they get about 200 pairs a month placed in the drop off bin. You can also mail shoes directly to a Nike recycling center.

The shoes are separated into three parts. The hard outer sole is ground up and used in sport court tiles, track surfaces, and even new shoes. The midsole or the cushion part is used for outdoor basketball and tennis courts. Finally, the shoe’s upper fabric is used in the cushioning pads under floors made of rubber or wood. Nike even came up with a new product called Nike Grind which is synthetic sport flooring.

Maybe the day will come when no new shoes will be made with virgin materials; instead all our athletic shoes will be in a never ending loop of use and rebirth.

-Rob Smith

Raising Capital for an Acquisition

When raising capital to acquire a business, or expand an existing business, you’ll need to view the investment from the perspective of the investor. To do so, you will need to know about investment risk vs. return, as every investment has risk. Federally insured certificates of deposits and interest-bearing bank savings accounts have risk.  Not necessarily principal or interest payment risk, but inflationary risk. If you are receiving 3% on your money in a two-year CD at the bank and you are in a combined state and federal marginal tax bracket of 33%, then you are netting out about 2% after tax. If inflation were to rise to 5%, you would actually be losing 3% on your money in the form of purchasing power.

Conversely, one may view lower-priced publicly traded stocks on the Over the Counter Bulletin Board as a high-risk, high-return investment. These investments generally have a higher principal risk but also have higher return potential. In general, risk and potential return go hand-in-hand. The higher the risk one takes on an investment the higher the potential return should be.

Any new company or venture will generally be viewed as very high risk by most savvy investors; therefore, a very high return potential must accompany that risk, but not too high, otherwise it becomes unbelievable if a "too good to be true" scenario. The trick to attracting capital for start-up and early-stage companies is using different deal structures to reduce the risk components of the securities being offered for the investor while maintaining the high return potential.

One attractive deal structure is to use a security such as a note, which is convertible to a participating preferred stock. This changes the risk return continuum for the benefit of the investor. A "marketable" deal structure allows for maximum upside while minimizing the downside... by utilizing creative financing structures buyers can create an attractive investment which can effectively compete for funding from individuals.

Simply think of yourself as an investor. How would you like to invest $100,000 in a new company or venture in the following manner: You purchase a $100,000 first mortgage note, with a 10% interest rate, and a first lien position on 100% of the assets of the company? Once the notes are ready to mature, you roll over the $100,000 into a participating-preferred stock being offered by the company that returns 10% in stated dividends and participates in 20% of the net profits of the company. By selecting this combination as your company deal structure, you would have reduced risk while maintaining a high potential return.

Good Luck,

Steve Sink

CBI, M&AMI

ss@phxaffiliates.com

Tax stakes for entrepreneurs next Tuesday

When entrepreneurs cast their votes next Tuesday, they will be choosing between presidential candidates with very different approaches to tax policy. 

President Obama has made increasing taxes on incomes over $200,000 the centerpiece of his tax policy. He would allow the Bush-era tax cuts, which he has extended though his first term, to finally expire. This would raise the top rate of income tax to 39.6%. The 3.8% "Obamacare" tax on investment income and other provisions he supports would increase the top marginal tax rate to more than 44%. The 3.8% tax, scheduled to take effect for 2013, would also apply to interest, dividends, and many capital gains. It would not apply to business income when the taxpayer "materially participates" in the business.

Mitt Romney's tax plan is built around a 20% across-the-board individual tax rate cut, to be paid for by a eliminated deductions and tax breaks. He would also repeal the 3.8% investment income tax. 

These individual rates are important to entrepreneurs because most business are now organized as "pass-throughs" -- typically as S corporations or LLCs taxed as partnerships. Income of pass-through businesses is taxed on their owners' 1040s, so the top individual rate is also the top rate on business income. The Romney approach, with its 28% top rate, takes the tax law in a very different direction than the Obama 44%+ top rate.

How much does the top rate matter?  Quite a bit. A lot of business income is taxed on 1040s showing over $200,000 in business income, as this chart from the Tax Foundation shows:

The two candidates are closer in their approach to corporate income taxes. Both support a reduction in the top corporation rate -- Romney to 25% and Obama to 28%. 

The Tax Policy Center has posted excellent summaries of the two candidates tax plans:

What is Mitt Romney’s Tax Plan?

What Is Barack Obama’s Tax Plan?

Happy voting!

-Joe Kristan

Marketing = purposeful story telling

No one is drawn to boring marketing. That seems pretty easy to wrap our arms around. But what makes for interesting marketing that consumers (B2B and B2C) would choose to listen to and act upon?

Everyone from Forbes to Seth Godin has been telling us so often that they've created a buzzword status for the idea of storytelling. And you'll get no argument from me. We need to tell stories to:

• Capture interest
• Communicate our expertise and offerings
• Create a sense of "they could help me" confidence
• Move someone to act

The trick is understanding what kinds of stories to tell (hint: they should be all about you!), how to tell them and where to tell them. 

The first step is to appreciate the value of story telling.  Check out this infographic on the power of stories. (click it to see it full-sized)

 

 

In my next blog post -- we'll take a look at how and where to tell stories.  So stay tuned!

 

~ Drew

Toilets are a funny thing

It was 1991 when Kevin Nealon and Victoria Jackson debuted the “Love Toilet” on Saturday Night Live. I laughed and was amused at the riduculousness of such an idea. Funny how comedy can be a precursor to the future. 

Twenty years later Caroma from Australia makes a toilet with a sink on top of the tank. The simple idea uses waste water while washing your hands to help fill the tank for the next flush. After flushing, the toilet directs cold water to the faucet to wash yours hands. No faucet to mess with!

The toilet also features a dual flush system. Notice the buttons on either side of the faucet for “number one” or “number two”. The great thing about the toilet compared to other low flow toilets is a larger outlet that is touted to have less blockages than other toilets.

So this is a great idea to recycle water right at the fixture, but I laugh when I think of people using it sort of like the “Love Toilet”. I can visualize straddling the toilet after use to wash my hands and feeling yucky. What if I am not done washing my hands when the water goes off? Do I flush again? On the other hand it does limit my water use like those automatic faucets at the airport.

Or how about your three year old standing on the lid because they cannot yet reach the sink?  Let me know if this new sustainable design toilet works for you or if you think of Kevin and Victoria.

~Rob Smith, AIA, LEED AP rsmith@smithmetzger.com

Payroll taxes: Once is enough

The recent news about a local payroll tax provider falling behind on remitting client payroll taxes should be a wake-up call to businesses that outsource their payrolls. The good news is that the payroll service's attorney says that all taxes entrusted by the clients for transmission to the government will get to the government, eventually. 

Cases in other states have not had such a happy ending. In 2006, for example, clients of a New York payroll service learned that $3 million of payroll taxes sent to the service had not been remitted, and the money was gone. The firm's clients had to pay their payroll taxes a second time -- first to a thief, and then again to the government. That can be a ruinous expense.

Outsourcing payroll administration is common for good reasons, but most taxpayers don't realize how much risk they are taking when they make that decision. That's why even when you outsource your payroll taxes, you should still monitor the provider. 

Fortunately, you can do so. Taxpayers enrolled in the Electronic Federal Tax Payment System (EFTPS) can go online and check that their payroll taxes are being remitted by the third-party payroll service. It looks like this (details obscured for obvious reasons):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Is it a hassle? A little, but not compared to paying payroll taxes a second time. And if your payroll service provider says the way they do business doesn't let you check your deposits on EFTPS, you need to ask whether you are taking a risk that you can't afford.

-Joe Kristan

 

Are you building your "friend of mine" awareness?

Last week, I was a speaker at the BOLO conference, which is a conference that focuses on helping agencies wrap their heads and hearts around all things digital.

It was a fascinating few days and one of the perks of being a speaker is that I got to listen to all of the other speakers.

One of the most thought-provoking was my friend Jay Baer, from Convince and Convert. Jay's presentation was sort of a mini preview of the book he's in the middle of writing on the power of  a phrase he coined -- Youtility.

If you've attended any of the MMG social media workshops or talks we've given over the last couple years -- you will recognize a common theme in Jay's thinking. We could not agree more!

Jay's core point was that as our personal and professional lives intertwine through social networks and our on and offline connections -- word of mouth becomes the new currency for buying market share. Jay suggested that we need to all have a strategy in place to move from top of mind awareness to what he calls "friend of mine" awareness.

Jay shared some great facts/stats that showed how "friend of mine awareness" is built on these truths:

• Our personal and professional lives are now woven together
• We are more distrustful of marketing spin than ever before
• We have lots of tools/tricks for tuning out advertising if we want to
• We now access 10.4 pieces of information before we make a buying decision
• We talk to a real person as a last resort (60% of a B2B buying decision is made by the time a sales rep is contacted)
• We act on the word of our "friends," be they people we've met or people we're just connected to online

I think it's time for you to look at your marketing plan. Which tactics help you connect to and share information (useful info… not sales info) with potential buyers?

If you can't rattle off a pretty good list, it sounds like it is time to revisit that marketing plan and start building in elements that will take you from top of mind to friend of mine status.

 

~ Drew

Breaking the numbers barrier

Before the recession, I would ask the audience in my presentations how many people shared financial information with their employees. Typically I would get a yes response from around 40% of the audience. Today when I ask the question I get around a 90% yes response.

Why the difference? The great recession forced owners, managers, and leaders of companies to share financial information with the employees to survive. When the company's back was put to the wall they looked to the employees for help. A sinking ship can sometimes be the best way to initiate new ideas and tactics. The real fear of going out of business replaced the many false fears that have been in place about sharing financial information with employees like the following:

• They do not have the knowledge to understand the financials
• They will share it with competitors
• It will create issues because of compensation related numbers

These false fears are easily discounted:

• They know how to spend their own paycheck to survive
• A good competitor knows your numbers
• People talk about wages all the time. There are multiple ways to share the information without sharing individual salaries

In the new economy, companies that do not share financial information will find it even more difficult to compete against companies that do. Sharing financial information with your employees allows them to understand why the company makes the choices it does. It is not about complete agreement; it is about sharing the action behind the numbers. Everyone likes to know why - the two year old still exists in all of us!

-Victor Aspengren

What is this "Fiscal Cliff," and why are we in this handbasket?

The financial press says we are heading to the edge of a fiscal cliff at year-end. Is there any way to keep from going over it, and if not, is there any way to soften the landing?

The "Fiscal Cliff" is the potential expiration of a series of federal tax breaks that will occur absent new legislation on January 1, 2013, combined with the Obamacare tax increases that take effect then. There are dozens of tax rules affected; the biggest include:

- An increase in the top rate on ordinary income -- the rate on most income passing through on shareholder and partner K-1s -- from 35% to 39.6%.  For "passive" investors, the top rate will be 43.4%.

- An increase in the top rate on most capital gains from 15% to 23.8%. 

- An increase in the top rate on dividends from 15% to 43.4% -- nearly tripling the second tax on C corporation earnings.

- A reduction in the lifetime estate and gift tax exemption from $5 million to $1 million, combined with an increase in the top estate tax rate from 35% to 55%. 

There will also be a new .9% tax on single W-2 income over $200,000 or joint W-2 income over $250,000, as well as a 3.8% tax on "passive" or "investment" income (this tax is included in the top rates listed above). 

What to do?  Everybody's situation is different. It's unwise to take action ahead of the fiscal cliff without talking to your tax advisor. Here are some of the ideas that advisors will be discussing with their clients in the coming months:

• Pre-emptive dividends. Some taxpayers may consider paying dividends out of their corporations by December 31 to take advantage of the current 15% federal rate. Some of these taxpayers will be S corporations purging old C corporation earnings.

• Close out some capital gains. If you are going to be selling an asset soon anyway, selling this year may save some some money.

• Make large family gifts.  For taxpayers with enough assets to make where the diffence between a $5 million, this is an obvious thing to look at. Not everybody can or should make gifts that big, but if you are ever going to do so, this is a good time to do it.

• Accelerate income and defer expenses. This reverses the usual strategy of deferring income and accelerating expenses, but if rates go up, it makes sense. It's silly to defer income just to see it taxed at a higher rate, and deductible expenses are worth more as deductions when rates are higher.

Of course, all of this is contingent on politics. In general terms, an Obama victory makes a trip over the fiscal falls much more likely, while a Romney victory increases the chances of an extension of the current tax rates. Of course, the composition of Congress also matters. The politicians may extend some provisions while letting others expire.  Whatever happens, it makes sense to stay flexible pending the election outcome, but to start to prepare for a big tax increase. 

-Joe Kristan

Related:

A step away from the fiscal cliff?

Journal of Accountacy Tax and fiscal cliff resources

How social are you?

As social media continues to evolve our communications styles, expectations and channels -- businesses scramble to sort out how and where they should be active. There's a misperception that social media is the playground for companies that sell direct to consumers (B2C) but not businesses that target other businesses (B2B). 

So wrong. Many B2B companies are enjoying incredible success as they leverage social media and content marketing as a part of their media mix.  This infographic developed by InsideView spells out the specific channels that (as of today) are enjoying the  most B2B activity.

Part of what B2B companies need to realize is that it's not just about brand awareness or name recognition.  When used well, social is driving lead generation and sales.

Best of all -- social escalates the sales cycle and you can close the deal faster. Check out this infographic and then tell us -- where are your social efforts in relation?

 

~ Drew

Metal shavings to countertops

It seems not a month goes buy and the recycle industry comes up with another stunning and interesting countertop material. Renewed Materials makes a sheet full of waste aluminum flakes. Flakes are the result of making aluminum bars and other shapes into machine parts, windows, or anything else made of aluminum.

Founder Demir Hamami says “What makes Renewed Materials different from other companies is the initial quest to make a recycled product. Other companies make recycled products as a result of figuring out what to do with a waste stream from the manufacture of a core product or how to add recycled content to a core product.”

The aluminum flakes are encapsulated in polyester or acrylic resins and used for tabletops, and countertops. Make sure when you shop for a countertop you know about the basic differences of polyester and acrylic.

Polyester resin makes for a hard surface but is not very transparent and cannot be melted for future reuse (thermoset). Acrylic resin is very transparent. They make eyeglasses of acrylic; it provides great visual depth and can be melted (thermo plastic) for future use, but is a much softer material.

Demir also shared important insight on the general public’s take on recycling. Demir commented “The focus seems to be on post-consumer waste recycling. What I see are huge opportunities in recycling pre-consumer waste from the manufacturing process. That is where much waste resides.”

-Rob Smith

Timing is everything: capital investments for the last quarter of 2012

Year-end capital investment could make more of a difference than usual this year.  Two important tax provisions favorable to capital investments expire at the end of 2012.  That means it can make a big difference in your tax bill whether you get those assets in place by the end of this year.

Bonus depreciation is scheduled to go away after this year.  The tax law normally requires businesses to deduct the cost of capital expenditures -- equipment, software, etc. -- over a period of years.  "Bonus" depreciation allows taxpayers to deduct some or all of those costs in the year the capital asset is placed in service.  For 2012 taxpayers can deduct 50% of the cost of "new" assets (though not most buildings) in the first year; the remaining 50% of the cost is recovered over the asset's normal tax life. 

Secition 179 is even more important to most entrepreneurs than bonus depreciation.  Qualifying investments can be fully deducted under Section 179 in the year they are placed in service.  Section 179 has two important advantages to Iowa taxpayers.  First, it can be used on purchases of used equipment, unlike bonus depreciation.  Second, Iowa recognizes Section 179, but not bonus depreciation, so it provides a state tax break that bonus depreciation doesn't. 

Taxpayers can deduct the cost of assets under up to $125,000 for tax years beginning in 2012.  That number is scheduled to decline to $25,000 in 2013. 

Section 179 is subject to some important limits.  The abiity to take the Section 179 deduction phases out dollar for dollar in 2012 as fixed asset purchases for the year exceed $500,000.  Also, unlike with bonus depreciation, you cannot create a loss with a Section 179 deduction, so you can't use it to generate a loss carryback to recover prior-year taxes.

To claim either a Section 179 deduction or bonus depreciation for an asset, a calendar-year taxpayer has to have the asset "placed in service" by December 31.  That doesn't mean ordered by year end, or sitting in a box on the loading dock when you close for New Years.  It means hooked up and ready to run.

Year-end planning this year is even more fraught with uncertainty than usual.  Top federal tax rates are scheduled to increase from 35% to 39.6% after this year -- and to 43.4% for "passive" investors in business.  Depending on the outcome of the elections, that increase may or may not happen.  If the tax increase happens, many taxpayers will be better off not taking bonus depreciation or 179; they may even want to delay placing assets in service. 

It's unwise to buy an asset you don't really need just for the tax break.  For assets you will need for your business anyway, it's best to have the flexibility to place the asset in service this year.  Depending on politics and your business needs, you can decide whether you want to plug in that new asset, and qualify for bonus depreciation and Section 179, closer to year end.  You can also wait until you file you return to decide whether to opt out of bonus depreciation and Section 179, in case you want to use the deductions in years with higher tax rates.

With so much uncertainty, it's more important than ever to consult your tax advisor on these decisions.  So do that.

When is bad good?

As you are looking at your product or service and identifying those elements that make it unique (you are doing that, right?) remember that sometimes what makes it unique is not an inherently good thing.

Which isn't a bad thing.

Confused?  

Take original flavored Listerine. One of the things that made it completely unique was its disgusting taste. Instead of explaining it away or ignoring it - they took the bad and made it good. It tasted bad because it was powerful enough to kill the germs. (check out this TV spot from the 70s with Judd Hirsch)

In fact -- they built an entire advertising campaign around how awful it tastes.

Look at your product or service a bit differently. What's bad about it? How can you use that attribute to your advantage?

 

~ Drew