Monthly Archives: March 2017

The Business Valuation as an Incentive Management Tool

valuation_bannerWikipedia defines a business valuation as a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. A valuation or appraisal is the means to determine the price transacted to affect a sale of a business.

A significant tool in building business value should be to annually measure its value. So true and often said is: if you can’t measure it, you can’t manage it! Small business value is determined by the ability of the entity and its management to generate cash income after all expenses for the benefit its owners. Business value is then a prophesy of the future as a basis to project cash flows, subject to specific inherent, economic and non-controllable risks. A business appraiser will value the projected cash flow and measure the risk of not achieving that projected owner benefit. The risk is determined and considered as part of the development of a return of capital rate applied to a future benefit stream.

Factors that affect future owner benefit risk are indeed plentiful. They cover:

Some inherent risks encompass the type of industry in which the entity operates, competition, entity leadership, business management, ease of market entry by competition, technology and innovation, product obsolescence, scalability, patents, trademarks, copyrights, strong branding, and all other known or knowable events affecting the risk that the entity will fall short of its projections.

Some economic risks relate to inflation, money supply, interest rates, employment, strikes, housing, tax policies and all other known or knowable events affecting the risk that the entity will fall short of its projections.

Other non-controllable risks that may be considered are natural disasters, war, disease, global warming, severe weather patterns, only some of which may be of some level of concern and because of location(s) of entity.

A professional business valuator will answer pointed questions and provide a benchmark for enhancing growth.

Besides monitoring value growth, such enhancement may be considered for incentive compensation plans. What can be better resource to set goals for the senior management team than that which results in the entity building value? And some of that enhanced value can be incentivized to motivate the team.

Once a baseline valuation is established, annual updates should be relatively efficient.

I you have any questions.or would like to discuss this topic further please call GKG and speak to our valuation professionals.

 

 

Timing the Gift of Company Stock

Consider yourself lucky if you sold a stock at or near its high point or jumped in when it was near its bottom. As difficult as that is to accomplish, taking action at the ideal time is much easier to do when you’re considering the gift of your own company stock.

realestatetimingSome business owners are not aware that gifts of their company stock to their children or siblings need to be reported to the IRS. In most cases, those gifts do not result in any current tax being owed because the gifts are below the annual thresholds or the donors have plenty of lifetime gift and estate exclusion remaining, but the gifts could have future tax implications to the donors or recipients. In most situations, it is more advantageous for the value of a gift to be as low as possible, but sometimes the opposite is true. Therefore, not only should donors recognize which applies to them but they should also understand how best to time their gifts.

Those that will likely never fully utilize their lifetime exclusion and expect the value of their company stock to grow should hold on to it, if possible, and let it pass to the intended beneficiaries upon death and with a stepped-up basis. Lower gift values might be sought if such growth is not expected, the exclusion will likely be fully utilized, or if the donor prefers to make gifts while alive. With that in mind, timing those gifts should be considered. How is that done?

Business owners have the luxury of hindsight. They can look back to determine when the company was performing at its best or worst. Changes in ownership via gifts can be done as long as the corporate tax return for the year of the gift has not been filed. If the year started off poorly but ended strong, a gift can be made effective at the beginning of the year to capitalize on the lower value. If the year started off well but ended poorly, an end of year gift should be considered. Conditions that occurred after the effective date of the gift and were not known or knowable when the gift was made are not factored into the determination of the stock value.

If this still seems complicated, don’t struggle through your options. Please call GKG and speak to one of our qualified tax or valuation professionals for advice.

Steven Fultonberg, CPA, CVA

 

Assessing the Impact of ASU No. 2014-09
 Revenue from Contracts with Customers

AAEAAQAAAAAAAAPdAAAAJDE3ODliM2NjLWYxOWMtNGY4ZS1hN2M0LWVkNTgzNjg3ZmY4NANow is the time to start analyzing the impact of the new revenue recognition accounting standard and begin to take the next steps toward implementation for annual periods beginning after December 31, 2018 (2017 for public companies). Since this standard requires either a full or modified retrospective method of implementation for all years presented on your financial statements. Anyone presenting comparative financial statements will want to start their assessment in 2017.

The Core Principle of this standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to receive in exchange for goods or services. This is accomplished by a five-step process:

  1. Identify the contract with a customer.
  2. Identify the performance obligations in the contract.  Determine if goods/services are separately identifiable from the other promises in the contract (warranties, service contracts, performance, other goods/services, etc.).
  3. Determine the transaction price. Consideration expected in exchange for satisfying its performance obligation. The transaction price is not always clear and can include other factors (performance incentives, rebates, volume discounts, consignments, royalties, etc.).
  4. Allocate the transaction price to the separate performance obligations.
  5. Recognize revenue with the entity satisfies each performance obligation.

As you might guess each of these steps may require significant analysis.  Even if revenue recognition changes are not expected to materially impact your financial statements the new disclosure requirements can be extensive which could require new systems, processes, and internal controls to gather this information. This may not be too difficult for some of you, but if you wait until the last minute you may find yourself unable to provide accurate financial information needed for your financial statements, budgets, forecasts and any other financial reporting obligations you may have.

GKG suggests starting to identify and analyze all of your company’s different revenue streams now.  Review a sample of those contracts related to your different revenue streams and begin to map out what your performance obligations may be in those contracts. Determine transaction prices for the contracts as a whole and analyze how you will allocate the transaction price to the separate performance obligations. Once you have allocated your transaction price to the separate performance obligations you can assess how this will impact current and deferred revenue going forward.

Contact GKG to learn more about how we can advise and assist with your implementation concerns and challenges.

Paul P. Conniff, CPA, CGMA