April 18, 2017

In This Edition
Financial Management Q&A with Lance Campbell, CPA
5 Growth Strategies for Today's Businesses
Reviewing Your Company's Buy-Sell Agreement

Financial Management Q&A with Lance Campbell, CPA
April is National Financial Literacy Month. Today, the majority of consumers are experiencing some sort of financial difficulty causing a significant impact on their everyday lives. According to financialliteracymonth.com, Americans carry more than $2 trillion in consumer debt, and 30 percent of consumers report having no extra cash, making it impossible to escape the burden of living paycheck to paycheck.
Corenne Gutierrez, marketing coordinator, sat down with Lance Campbell, CPA, partner-in-charge of the Hawkins Ash CPAs Rochester office, to get his thoughts on financial management.
What is the biggest mistake people make when it comes to personal finances?
People spend, spend, spend and just do not save enough. Many people do not have long-term goals when it comes to savings.  
I've done nothing with financial planning or wealth management. Where do I even begin?
When I have clients such as individuals or business owners with this problem, the first thing I do is discuss the best options from a tax standpoint. Afterward, I refer them to financial advisors that can help get a game plan implemented. I like to work with the advisor so we can best serve the client from a tax and investment standpoint.
Give me three reasons why a person should hire a professional?
First, it is time consuming for an individual to manage and execute a personal financial plan.  Second, if you are a business owner, you have many retirement options to assist you and your employees. You need to work with a tax CPA and financial advisor to maximize your retirement plan.  Third, as a CPA I work closely with financial advisors. I see how they help individuals and business owners. Even though I deal with finances as a tax CPA, I hire a professional to manage and invest my finances.

What are some questions every prospective client should ask when searching for a professional?
When my clients look for referrals, I recommend they interview a handful of financial advisors.  They need to feel comfortable with the advisor's personality and values.  Ask how the financial advisor charges for services. Find out what type of professional credentials the financial advisor holds, such as a Certified Financial Planner (CFP.) Ask what the advisor's past performance history has been and what type of investment strategies the professional likes. 
Give us three basics you've learned, the quick lessons you stress to your family and friends.
First, start investing early. You may think retirement is many years away, but starting early allows the magic of compounding interest to work. Second, s et a budget. By having a household budget in place, you can manage your finances and control your spending. 
Third, don't watch the market every day. You are saving for a long-term goal. The markets will go up and down, but if you stay the course, you can build up a nice nest egg over time.  I emphasize to my kids that everything comes with a price tag and that you have to make decisions on what you actually need vs. want today. As a CPA, I tend to be more on the saver side. 
The AICPA has an easy-to-follow four-week financial fitness challenge. Read more about the four-week challenge.
Contact: Lance Campbell, CPA
5 Growth Strategies for Today's Businesses
It's probably safe to say that nearly every business owner wants his or her company to grow. The question is how? As you ponder your company's ideal strategic direction, here are five common business growth strategies to consider:
  1. Creating and delivering new products and services. This is probably the most obvious growth strategy, but that doesn't mean it's easy. Conduct market research to determine not only which new products and services will appeal to your customers, but also which ones will be profitable.
  2. Tapping into new markets and territories. The idea here is to market and sell your existing products and services to different customer niches or to customers in different geographic areas. Extensive market research is again one of the keys to success for this growth strategy.
  3. Penetrating your existing markets. This strategy involves selling more of your existing products and services to your current customers. Start by performing a market segmentation analysis to determine which customers to target with marketing messages designed to increase specific product and service sales.
  4. Developing new sales and delivery channels. The Internet is the best example of a new sales and delivery channel for products and services. Talk with your sales and marketing executives about ways you can use the Internet or another alternative channel to grow your sales and revenue.
  5. Mergers and acquisitions (M&A). Growing through M&A is very different from the other more organic growth strategies we've covered. This strategy can result in rapid growth overnight, as well as the realization of valuable synergies between the merged companies. But performing thorough due diligence on acquisition candidates is absolutely key to successful growth via M&A.
Contact: Abe Leis, CPA
Reviewing Your Company's Buy-Sell Agreement
If you own a business and follow professional advice, you've likely established a buy-sell agreement in case you or a co-owner voluntarily or involuntarily leaves the company. Assuming this is true, remember that it's not enough to draft an agreement and put it in a safe place. You need to review and perhaps revise the document periodically.

Problems Solved
The primary purpose of every buy-sell agreement is to legally confer on the owners of a business or the business itself the right or obligation to buy a departing owner's interest. But a well-crafted agreement can also help ensure that control of your business is restricted to specified individuals, such as current owners, select family members or upper-level managers.

Another purpose of a buy-sell agreement is to establish a price for the ownership interests. You should engage a qualified appraiser to estimate the value of those interests when first making a buy-sell agreement, and periodically thereafter to ensure the price keeps up with the growing (or shrinking) value of your company.

Estate planning is also a priority for many buy-sell agreements. If your agreement was drafted more than a few years ago, you may need to update it based on recent gift and estate tax changes. For 2017, the top rate for the gift, estate, and generation-skipping transfer (GST) taxes is 40 percent, and the exemption limit is $5.49 million. However, also keep in mind that the President and Republicans in Congress have indicated a desire to repeal the estate tax, which might happen later this year.

Standard and Unusual Triggers
Most buy-sell agreements lie dormant for years. What can quickly bring one to life is a "triggering event," such as when an owner:
  • Dies,
  • Becomes disabled, or
  • Retires or voluntarily leaves the company.
But you may want to make sure your agreement also covers triggers such as changes in an owner's marital status. And to prevent fraud or inappropriate behavior, many agreements include "conviction for committing a crime, losing a professional license or certification, or becoming involved in a scandal" as a triggering event.

3 Options
Buy-sell agreements typically are structured as one of the following agreements:
  1. Redemption, which permits or requires the business as a whole to repurchase an owner's interest,
  2. Cross-purchase, which permits or requires the remaining owners of the company to buy the interest, typically on a pro rata basis, or
  3. Hybrid, which combines the two preceding structures. A hybrid agreement, for example, might require a departing owner to first make a sale offer to the company and, if it declines, sell to the remaining individual owners.
In choosing your buy-sell agreement's initial structure, consider the tax implications. They'll differ based on whether your company is a flow-through entity or a C corporation. 

Sources of Funds
Buy-sell agreements require a funding source so that remaining owners can buy their former co-owner's shares. Life insurance is probably the most common, but there are alternatives. 

If your company is cash-rich and confident in its ability to remain so, you could rely on your reserves. However, this would leave many businesses vulnerable to an unplanned cash shortfall. Another option is to create a "sinking fund" by setting aside money for paying out the agreement over time. Again, if your cash flow ebbs more than flows, you may not have enough funds when they become necessary.

Worth the Effort
Keeping your buy-sell agreement updated requires some effort. But the effort will more than pay off in saved time and prevented conflicts should a triggering event occur.  And if you haven't yet established an agreement, now is the time to do so.

Contact: Randy Juedes, CPA