Charitable Giving and Tax Law by Guest Blogger Harry I. Harelik, CPA, CFRE, CGMA

Benjamin Franklin once wrote, “Nothing is certain except death and taxes.” The tax law passed in December 2017, the Tax Cuts and Jobs Act, may just be the law that proves that reference to taxes. Though there were a number of thought-to-be positive parts of the new law, some of the changes may, indeed, actually increase one’s tax bill without proper planning.

Two areas should be of concern to many. The first is the elimination of the personal exemption, formerly $4,050 per person. The standard deduction for individual income tax filers was raised substantially, from $12,700 to $24,000 for married couples filing jointly and for surviving spouses, from $6,350 to $12,000 for single filers and for married filing separately, and from $9,350 to $18,000 for heads of household. A family of four, therefore, would be losing personal exemption deductions of $16,200 while picking up only $11,300 more in the standard deduction (not considering possible extra tax reductions for the child tax credit).

This change could result in an increase in income tax liability. Earlier this year, employers were given lower income tax withholding tables without considering this issue, meaning some employees are paying in less now, but could be owing more than they did in a prior year. All employees should certainly analyze their situation to be sure they aren’t caught by surprise when their tax return is filed.

A second area of concern and an even bigger change with respect to the standard deduction may catch upper income tax filers by surprise. Those taxpayers who normally itemize deductions may no longer have enough to itemize, considering the higher standard deductions above. Without planning, that would mean that one’s home mortgage interest expense, sales and property tax deductions, as well as charitable contributions may no longer specifically provide income tax relief.

Income tax advisors should be consulted about all strategies that might helpfully affect one’s income tax liability, but there are three potential strategies for making the most of potential income tax deductions.

  1. Deduction bunching: For most taxpayers who itemize, this may be the simplest strategy for all potential itemized deductions. Keeping in mind that miscellaneous itemized deductions, such as employee business expenses, moving expenses, tax preparation expenses, brokerage account expenses, etc., are no longer deductible. There may be some saving grace for property taxes, sales tax on large purchases (automobiles, boats, etc.) and charitable contributions. By “doubling up” on deductions in these categories every other year, postponing or advancing big ticket purchases from one year to another or moving one year’s deductible expenses into or out of the next tax year (and, therefore, paying two years’ deductions in one year), some deductible itemized deductions may be salvaged every other year.

For instance, rather than paying property taxes and charitable donations in December annually, push the current year’s expenses into January of the next year and then pay the next year’s expenses in December of that next year, which results in a doubling up of deductible itemized deductions. (One important caution here: the new law limits one year’s deductions for sales, income and property taxes to $10,000.)

  1. Strategy #2, a little more complicated, is using a donor-advised fund in a community foundation, such as the Waco Foundation, for charitable donations. By giving two or more years’ of donations to the donor-advised fund, the multiple-year charitable donation may allow a large itemized deduction in one year and then the community foundation can distribute the funds to the donor’s charities in the following years as the donor directs.
  2. Strategy #3 would be restricted to individuals over 70½ who are being required to take distributions (Required Minimum Distributions or RMDs) from their Individual Retirement Accounts (IRAs). Such RMDs normally add to taxable income; however, if the retired taxpayer directs the administrator of his/her IRA to distribute some or all of his/her IRA directly to the charity in the form of a Qualified Charitable Distribution (QCD), the distribution will NOT be taxable to the individual. If the taxpayer had taken the distribution into his/her personal income and THEN given to charity, he/she would have income to report and would also have a charitable deduction, but if the taxpayer is not able to itemize deductions, he/she would be accounting for taxable income without an offsetting deduction.

By using the QCD, the taxable income is avoided. With that avoidance comes reduced income and income tax, and the reduction could reduce future Medicare premiums, which are based on a taxpayer’s prior year’s income. Reducing reportable income could also result in increased deductions (which must exceed a percentage of reportable income) and tax savings from reducing the amount of Social Security income subject to tax.

Not every charitable organization is qualified to receive a QCD from an IRA or a donation from a donor-advised fund in a tax-advantaged way. For instance, organizations such as supporting foundations may not be able accept these types of donations, and taxpayers and their IRA administrators should be wary of this small wrinkle. Also, year-end paperwork from the IRA administrator may not clearly indicate the nature of the IRA distribution, so taxpayers need to be cautious about clearly explaining IRA charitable distributions to their tax preparers.

The bottom line “takeaway” from the issue of higher standard deductions is that taxpayers should review their 2018 tax situation well before year end and consult their tax advisors for the best tax minimization strategy. Though fees paid to personal tax advisors are no longer deductible, the potential tax savings from a careful review of the new law’s impact on one’s personal situation could be well worth the  advisor’s time and fee.

We may not be able to avoid death, but there is still a way to avoid, or at least legally minimize, personal income taxes.

Harry Harelik, CPA, CFRE, CGMA

Harry Harelik is a graduate of the University of Texas at Austin, where he earned his BBA in accounting in 1971 and his MPA in taxation in 1972. He earned his CPA designation in 1974. In addition to previously being a 30 year local self-employed CPA, he began work as the Executive Director of the McLennan Community College Foundation in 2001. He earned his CFRE (certified fund raising executive) certification in 2006 and was designated as a chartered global management accountant (CGMA) in 2014. He served as executive director of the McLennan Community College Foundation for almost 16 years until his retirement in 2017.

Harry has continued his work in the nonprofit community as a consultant to nonprofit organizations in fundraising and governance  and is teaching courses at Baylor University as part of their Continuing Education nonprofit management offerings and, as well, is an adjunct accounting faculty member at McLennan Community College. He also continues to consult in the community on income tax and financial planning issues. He has spoken on various nonprofit topics at the Nonprofit Network and is a frequent contributing columnist for the Waco Tribune Herald. Harry is a member and past president of The Central Texas Chapter of CPAs, and is a member of the Texas Society of CPAs, the American Institute of CPAs and the Heart of Texas Estate Planning Council. He is president of the Waco Symphony Association; a life member of the board of Keep Waco Beautiful; and a patron of the Waco Civic Theatre, the Waco Community Band, the MCC Visual and Performing Arts and the Baylor Theatre, with a strong interest in the cultural life of McLennan County and the city of Waco.

 

Advertisements

Transitioning from Corporate World to Business Owner by Guest Blogger Bob Fox, CPA

Many people go through career transitions during various parts of their life, learning new and leveraging existing skills. After a 40-year career in the corporate world with great companies having both financial and operational roles, I decided to look at various options of owning my own business.

When one decides to start down the business ownership trail, there are three options:

  1. Start a business from scratch – This was the highest risk option given the number of new businesses that fail in the first two years
  2. Buy an existing business and improve it – After research, I found the prices of existing businesses to be too high based on the cash flows those businesses were generating
  3. Buy a business system and process called a franchise – I spent much time looking at various products and services in the franchise world and decided to buy into a shared office and co-working brand titled Office Evolution out of Colorado

Why the shared office and co-working space business? My focus, besides turning around businesses, is helping those companies grow. This business model allows that business-to-business customer base with providing the atmosphere for growth for small and mid-sized companies. There was also an opportunity with this franchise to just have one employee – coming from managing up to 300 people globally, that was really attractive to me.

So what about the shared office market?

  • Flexible office space market demand is currently 1 percent of the commercial real estate market, but it is projected to triple in size in the near future
  • Some projections have this market growing to 5 percent and 10 percent of the market
  • Small businesses are the primary driver, which are the job creators in the economy
  • The gig economy plays right into this market
  • Even larger companies avail themselves of available project demand space, as well as decentralizing their office footprint

The industry was dominated for years by Regus, which has over $2.7 billion in revenue. Recent entries into this market of WeWorks, Premier Business Centers and Office Evolution round out the top four companies in the space.

I opened my first Office Evolution location in Southlake, Texas in April 2018, and am pleased with the demand I have seen in the market. Learning a lot from this first location, I’m now looking at applying that learning to future locations.

I would encourage people who are about to enter into career transitions to look for opportunities to invest and grow. There are many different avenues out there to pursue. One of the keys is to be patient to search for what it is you would really like to do and then review the available options of getting there.

Robert Fox, CPA

Bob Fox, CPA, is a strategic advisor, turn around strategist and growth consultant who transitioned to entrepreneurship after 30 years with Halliburton. He is an active member of TSCPA’s Fort Worth Chapter and co-chair of the chapter’s Members CPE Day Committee. His Office Evolution location is on State Street in Southlake, Texas.


A Day in the Life of an Internal Auditor by Guest Blogger Marylyn Byrd, CPA

When I got the chance to enter the internal auditing world with our local university (my alma mater) and colleges, I jumped on it. In my mind, I remember thinking it would be just like external auditing, but with less hours and a more family friendly schedule. As a working mom, having good work-life balance is crucial. I wouldn’t say any day since I started internal auditing is a typical day. Every day is different. To be successful in this profession, you must be comfortable with priorities constantly changing.

In our office, we have a team of five internal and IT auditors who are responsible for four campuses. We perform legislatively required audits, risk-based audits (both financial and compliance), investigations, ongoing risk assessments, special projects for management and we assist external auditors coming in. Below is an example of what one of my days may look like, but remember every day is different.

 8 a.m.

I just arrived at work and breathe a sigh of relief as I’ve successfully gotten my two young sons off to two different schools and made it to the office on time. Most people would put on the coffee to brew, but I’m not a coffee drinker. I say good morning to my coworkers, sit down at my computer, and start going through any emails and voicemails I’ve received.

 8:30 a.m.

I’m done responding to emails and voicemails and start on an audit. The work for this audit could include any number of things, including completing or reviewing workpapers, reading laws, policies and/or procedures, writing or reviewing audit reports, completing fieldwork, doing data analytics, making phone calls, sending emails requesting documentation, etc.

 9:15 a.m.

I receive a call from management indicating a concern that fraud may be occurring in a certain area. After obtaining the relevant details, I put my audit work to the side and lock it up, then head out to campus to meet with the person voicing the concern. If needed, I schedule additional interviews with any relevant party who has information on the concern. Our team then launches an investigation if we determine there is a need. These investigations are highly confidential and on a need-to-know basis. Investigations move very quickly at first, but then slow down as we get into the detail. Typically, when we have an investigation, depending on the nature of it, we will notify the president of the university or college, as well as the campus police chief. If we need to get data from an employee’s computer or email account, we get authority from the ISO to do so.

 11 a.m.

Our team has gotten approval to take images of an employee’s laptop. We head over to their office (while they are away at lunch) and use our tools to take an image of it. We head back to the office and use our forensic tool to target specific codewords or topics to help search through all of the files and/or emails on their computer. The forensic tool is time consuming, so once we start that running, we head back to our office to prepare workpapers of the interview that has taken place. Our IT auditors now create a new project file on our server and I set up the project in our audit workpaper system.

 12 p.m.

I head to lunch. Yes, I’m back to getting an entire hour lunch (most days) and it is amazing!

 1 p.m.

I’m back in my office. I’ve done all I can do on the investigation. The forensic tool is still working, so now I’m back to the audit I was working on this morning.

 3 p.m.

I get a phone call from management asking me to sit in on a last-minute meeting with an external auditor. I head to campus for the meeting.

 4:30 p.m.

I’m back at my office and my boss calls the team together for a team meeting. We go over all our projects that we are currently working on and then brainstorm on the new investigation and what we think our approach will be, as well as begin to assess the risks the university or college is facing.

 5 p.m.

I’m done for the day. I head out to pick my boys up from school and move on to my favorite activity – 1st grade homework! I’m completely exaggerating on my excitement level.

Every day is different and can be more or less eventful than the day described above, especially during risk assessment time in the summer when we are working on our audit plan for the next year. During that time, we have three or four meetings per day across the campuses and I’m still working on my other audits and projects.

Key Takeaways from My Time as an Internal Auditor

  • Internal auditors need good people and communication skills. You will be working with individuals who serve in different departments and come from various backgrounds. You are in and out of meetings, on phone calls, sending emails, and constantly interacting with a wide variety of individuals.
  • Internal auditors must always be ready to ask questions and more questions and more questions. You also have to anticipate what your Board (or whoever you report to) is going to ask you.
  • Internal auditors must be knowledgeable of every aspect of an organization, not just the financial or compliance side.
  • Some people still tend to view us as the enemy or the “gotcha police” even though we are internal. It’s the stigma that comes with the auditor title. Once employees realize the value of your department, you become a trusted advisor and resource.
  • In my case, internal auditing has allowed me to continue doing what I love (auditing of any sort) without working tons of extra hours. It’s a great choice for your career and your work-life balance.

Marylyn Byrd, CPA, is an internal auditor with the Texas State University System responsible for the four Lamar components – Lamar University, Lamar Institute of Technology, Lamar State College – Port Arthur and Lamar State College – Orange. Byrd is a member of TSCPA’s Board of Directors and former president of the Southeast Texas Chapter.


Get Past Presentation Anxiety by Reframing by TXCPA2B Blogger Rachel McKenna

Public speaking: a phrase that strikes fear in the hearts of otherwise confident people is something that seems natural for some, and feels like punishment for others. Still, public speaking is something that we all need to get comfortable with in our profession of choice.

More and more, accountants are serving in an advisory role for companies, and that job responsibility is not likely going away any time soon. As a student who myself wondered when public speaking would ever become comfortable, I thought I would share some of the reframing tools I have used to help me survive (and maybe even enjoy) presentations.

The audience wants you to succeed

From my experience, people have interesting things to say; you just have to listen! For the audience, this is a chance to gain a new perspective on a topic they might not know much about. Since you are the presenter, you have put the time and effort in to become well-informed on the topic you are covering. As the subject-matter expert, the audience is not actively looking to point out your faults as much as they are seeking to understand where you are coming from as the presenter.

Use that idea to your advantage in developing your presentation and see if that makes the preparation process more enjoyable for you. Positive thinking allows you to claim the power to decide how you will approach the situation and shows that you are willing to make the best of the uncomfortable circumstances.

You can turn your anxiety into excitement

Nervousness is a natural physiological response to standing in front of a crowd. We are human after all! How anxiety affects you is entirely up to you, though! Feeling nervous typically makes people more alert and aware of their surroundings. This is something that can be used to your advantage when delivering a message to an audience.

Try asking yourself: “Why am I nervous?” Oftentimes, the reasons we feel nervous are fleeting and will not be relevant in the long-term. If you think about the bigger picture of your purpose in delivering your presentation, you can form an idea of why your message matters to you. Ultimately, uncovering your motivations behind public speaking allows you to take a step back and realize that your presentation is tied to meaningful goals that you set for a reason, and that can propel you to envision a positive outcome.

Think of the value you are adding

Rather than wishing your presentation to be over, consider why you have been asked to speak in front of an audience in the first place. Chances are, you have completed the time-consuming part of doing your research to prepare for a speech. You want your preparation and knowledge to shine. The best way to do that is to forget about how many people you are speaking to and to think about what are the main desired takeaways for them.

If you take your research further and consider who your audience is, you can gauge what their objectives are from sitting in on your presentation and cater the message to them. When you do this, you are ensuring that they feel they have gained something from the experience and you are adding value in the process.

This is a learning opportunity

Just as the audience wants to learn from you, you should keep an open mind about learning from the audience, too! Think about it – which classes have been the most enjoyable for you? Chances are, the most memorable classes are those that you actively participated in.

Whether your reason for participating in class discussions was to pass the time or because you were genuinely interested in the topics mentioned, this is the type of environment an effective presentation inspires. As a speaker, you should leave the door open for audience interaction and signal to them that you care and want to learn from them as much as they can learn from you.

Are you uncomfortable? That is great—that is a sign that you are growing as an individual and stretching your limits in a positive way! By reframing your thoughts and giving them a positive spin, you will be well on your way to becoming a more effective and confident public speaker. Like with anything else, believe that you can and you’re halfway there!

Student Blogger: Rachel McKenna

TXCPA2B is a blog written by Texas students in pursuit of the CPA certificate. The views expressed here are those of the authors and not necessarily held by TSCPA or our members.


Long-Term Financial Planning by Guest Blogger Olivia Riley, CPA

For years, best practices have recommended long-term planning for organizational operations, upkeep of major assets and healthy continuity of business operations. A common caveat to long-term planning warns that forecasts exceeding 10 years may yield incorrect results. Hence, it is better to calculate forecasts for a 5 to 10 year period.

The market offers many tools for developing and maintaining a solid model to help with long-term planning. The tool one uses is not as important as the ability to insert all the crucial data needed to properly plan for the future. Most models consist of an Excel workbook with linked sheets and assumptions used in the calculation of future activities. An important task to remember is the gathering of all the available data that needs to be considered as one plans for future revenues and related costs.

The initial step needs to include a complete list of revenues generated by the organization. All revenues commonly generated by operational activities should be considered in the long-term plan model. In calculating the 5 to 10 year revenue projections, gathering 3 to 5 years of actual results and calculating an average amount per year is a good start.

Once all demographic and economic impacts have been determined, assumption ratios can be calculated. These assumption ratios will be helpful in growing revenue and costs amounts from year to year for up to 10 years.

Next step, information of all operational expenses needs to be gathered. Actual operational expenses for a 3 to 5 year period will help with the preparation of the long-term plan related to operational costs. As stated above, a yearly average for each type of expense should be calculated for the base year and the assumption ratios will similarly be applied to the base expense year to calculate expenses for the 5 to 10 years projections.

Final step, major improvements and replacements need to be considered for the same period of time that operational expenses are projected. It is highly recommended that an organization spread the cost of replacements over a period of time. Annual amounts should be calculated and a reserve should be funded annually to accumulate the amounts needed for these major purchases.

Once all the above information has been gathered, it’s time to create the plan. Start with a description of all revenues and costs to be forecasted. Separate operating costs from capital replacements and improvements so that operating net revenue can be displayed separately from reserve balances. Columns need to include actual results of activities for comparison with the forecasted amount.

Finally, your plan is created so the fun begins to see how actual results match up to your forecasts. GOOD LUCK!

Olivia Riley, CPA is CFO of the Town of Addison. Before joining the Town of Addison, Riley worked for the City of Cedar Park and spent 20 years in public accounting where she worked as an auditor for counties, school districts and cities. Riley is a member of TSCPA’s Board of Directors and former president of the Austin Chapter.


Issues of a Millennial Workforce Reporting to Baby Boomer Bosses by Guest Blogger Staci White, CPA

While some Baby Boomers are starting to retire, there are many that are still filling upper management positions. As more and more Millennials graduate and settle into their careers, they are bringing different outlooks on life to the workforce. These two generations working together highlight the differences between Baby Boomer bosses and Millennial employees that can stir up conflict.

Baby Boomers have a distinct mentality about work and their positions within their organizations. Many Baby Boomers have an ambitious work ethic that can appear to a Millennial to be a workaholic attitude or a “live to work” attitude. Baby Boomers are also very loyal to the organizations that they work in, more so than their subsequent generations. This loyalty is beneficial because organizations require Baby Boomers to provide their vast array of experience, knowledge, and ethical leadership. However, with their work ethic and experience, Baby Boomers can get critical of, or frustrated with, those who do not share their same attitudes and qualities regarding work.

The fact of the matter is that Millennials have a different attitude surrounding work and how it fits into the grand scheme of life. First off, Millennials prefer to have a work-life balance that accommodates their pursuits of personal hobbies or interests. This attitude of “working to live” can come across as lazy to their bosses. Second, Millennials tend to want more frequent, open communication and feedback from their supervisors than preceding generations have. Supervisors may see this desire for more positive support as burdensome. Also, the Millennials’ inclination to want to talk about everything, even information that is more sensitive or reserved for senior management can be taken as a sign of disrespect. Third, unlike the Baby Boomers who are loyal to the company, Millennials are usually more loyal to an individual or supervisor that they admire. This creates a willingness to leave if the supervisor moves on or no longer works with them on a frequent basis.

Although all of the above Millennial traits can strain relationships with Baby Boomer bosses, Millennials bring some great qualities to an organization. First, Millennials are more accepting of diversity which leads to better communication and the ability to work in groups. Second, they have unique perspectives and can be a great asset when trying to solve problems. Lastly, they have grown up surrounded by technology. Millennials are great at mastering new technologies as they emerge. Organizations can use the unique attributes of both the Baby Boomers and Millennials to minimize the risk of clashing viewpoints.

There are three great ways a company or an organization can satisfy the new attitudes of Millennials while preserving the great qualities of Baby Boomers. First, organizations can encourage communication and problem solving by creating a more open work environment. This can be done through on-boarding processes with new hires to help assimilate them into an organization’s culture. Also, continued socialization after the on-boarding process fulfills the communication desire of Millennials while decreasing the differences that Baby Boomers’ perceive (Anderson, Baur, Griffith & Buckley, 2017). Second, when organizations are willing to add some flexibility into their structure they are likely to see many advantages in relation to their employees such as lower turnover, higher job satisfaction, and greater synergy with Millennials (Myers & Sadaghiani, 2010). Lastly, organizations can build on the technological savvy of Millennials by using the idea of reverse mentoring. Reverse mentoring is the idea of pairing a Millennial with a Baby Boomer to help the Baby Boomer learn how to more efficiently use the technology within the organization. This creates a sense of importance and positive interaction for the Millennial while at the same time allowing the Baby Boomer to teach the Millennial more about how the organization works and what is expected.

At the end of the day, whether you are a Baby Boomer or a Millennial, we should all be thankful because we help define each other, build off of each other’s strengths, and fill in each other’s areas of weakness to create well-rounded organizations and communities. We need to learn how to interact with the purpose of understanding our differences instead of criticizing them.

Anderson, H. J., Baur, J. E., Griffith, J. A., & Buckley, M. R. (2017). What works for you may not work for (Gen)Me: Limitations of present leadership theories for the new generation. The Leadership Quarterly,28(1), 245-260. Retrieved from https://doi.org/10.1016/j.leaqua.2016.08.001.

Myers, K. K., & Sadaghiani, K. (2010). Millennials in the Workplace: A Communication Perspective on Millennials’ Organizational Relationships and Performance. Journal of Business and Psychology,25, 225-238. doi:10.1007/s10869-010-9172-7

Staci White, CPA, is an accountant for Howard, Cunningham, Houchin, & Turner, LLP in Lubbock, Texas. She is a member of the South Plains Chapter and currently serves on the TSCPA Board of Directors.


How to Ensure an Effective Exit Strategy for Private Company Owners by Guest Blogger Janae Chamblee, CPA, BCB, CBI

Selling a company is three parts art, seven parts science with a little sprinkle of luck, but it is 100 percent process oriented. It is critical to begin with strategic planning to posture the company in its best operational and financial light. Sellers commonly fail to consider exit strategies when things are going well for their company, and tend not to focus on an exit strategy or transfer process until an unforeseen external event triggers an awakening or they decide to retire or reach burn-out. Knowledgeable sellers understand that to exert control over internal forces (employees, accounting and operational processes) and external forces (economic turbulence, industry downturn, changing competition, illness, etc.) they must clearly examine all aspects of their business, define their personal goals and objectives, and begin exit preparation yesterday. A transaction has three characters; a seller, a buyer and a financing source. Sellers should take a critical look at their company from the prospective buyer’s or lender’s viewpoint. If sellers manage their company with an “End in Mind” decision-making outlook, then they will always be in a continuous process of preparing their company for sale.

Seller’s Goals and Objectives

How do sellers begin to define their goals and objectives? Sellers must delineate specific objectives for financial goals (liquidity, sale price, taxation/estate planning) and non-financial goals (succession, legacy and reputation, employee, stakeholder concerns and other special interests). Decision-making questions include: To whom do I want to sell/transfer the business (family, financial investors or competitors)? How long, post-closing, do I want to be involved? Do I want to accept some upside/risk? Are there employees or others whom I want to protect/reward? What is my after-sale tax position? What are my financial alternatives post closings?

Assemble and Communicate with Trusted Advisor Professionals

Sellers should not try planning their exit strategy alone. Running a company is a full-time job. Sellers shouldn’t take their eye of the ball. Sellers should assemble their advisory team early in the exit-strategy planning process and clearly communicate their exit goals and objectives. Sellers must listen to their advisors’ advice, understand their options and implement the agreed upon suggestions. Advisors who must be in position early in the planning process include: certified public accountant, transactional attorney, financial advisor, merger and acquisition advisor.

Market Value and Transaction Structuring Alternatives

A prerequisite of a comprehensive exit plan is to understand the current market value range of the company. A comparison of market value to the seller’s financial objectives will indicate if the right time to exit is now. If market value is too low a seller needs to contemplate how they will increase their company’s value. Deal structuring, tax structuring and financial engineering can significantly impact the seller’s transactional proceeds. Sellers that understand the implications of transaction structuring alternatives will be prepared when they elect to take their company to market.

Influence Value — Develop Credible Financial and Operational Projections

“Buyers analyze the past but buy the future”.  A persuasive growth strategy is a key element of exit planning. In a sale, to maximize the transactional value of a company, sellers must provide potential buyers with a compelling story of future growth opportunities and profitability. Sellers should develop a credible set of detailed financial projections and key operational drivers for the next three to five years which will, in part, define the buyer’s perception of the company’s future and management’s ability to deliver.

A Company’s Financial Profile Via a Buyer’s/Lender’s Perspective

Owners should let their CPA perform the heavy lifting but having a thorough personal knowledge of the company’s financial performance is sage advice when preparing to sell your company. Buyers will want a transparent understanding of the target company’s historical performance. It is best to have three years of audited financial statements plus interim year-to-date financials. Very clean, compiled/reviewed statements with their accompanying tax returns will suffice in some cases. The validation of the “the numbers” via audited financials will engender confidence with the buyer. Accurate historical financial information will allow the buyer to focus on the future with a better understanding of the risks and rewards associated with their potential acquisition. Sellers and their CPAs should focus on:

  • Evaluating the company’s current corporate structure.
  • Eliminating personal expenses and over generous benefits to friends and family.
  • Cleaning up the balance sheet by:
    • Selling excess or non-producing assets;
    • Recognizing all on and off-balance sheet liabilities such as customer prepayments, work in process billings, warranty obligations etc. openly; and
    • Taking any necessary “write downs” for uncollectable accounts receivable (A/R) or unusable inventory.
  • Eliminating any unrelated “side” activities intermixed with the company.
  • Maintaining an accurate inventory and current inventory value.
  • Understanding the company’s key performance indicators and how they compare in the industry.
  • Improving the quality of earnings.

A Company’s Operational Profile Via a Buyer’s/Lender’s Perspective

Buyers will spotlight the key operational drivers of the target company. A seller should review and be prepared to give accurate details regarding the prior, current and future status of the:

  • Size of the Company
  • Location of the Company
  • History of the Company
  • Management of the Company
  • Employee Resources
  • Barriers to Entry
  • Manufacturing Processes
  • Market Share
  • Client Base
  • Business Growth
  • Pricing Policy
  • Inventory Levels
  • Competition

Conclusion

Owners who have prepared their exit strategy will begin the marketing of their company in a position of strength. Clear goals and objectives will place the seller in the optimal position to negotiate favorable price and terms, or, if necessary, to walk away.

Janae Chamblee, CPA, BCB, CBI, is a Director of the TSCPA and the Dallas CPA Society. As the owner of First Business Resources, Inc.*, a merger and acquisition services company, Janae has twenty years of experience in providing hands-on guidance to her clients in helping them buy or sell their company.

*This firm is not a CPA firm.