Member of Russell Bedford International, a global network of independent professional service firms.
Member of Russell Bedford International, a global network of independent professional service firms.
In the not-for-profit world, maintaining strong internal controls can be a challenge, especially when working with limited budgets, small teams and basic account software. Watch our video and learn more about common internal control issues, practical workarounds like compensating controls and strategies to strengthen financial oversight, even with limited resources.
Transcript
I’m Carl Thomas, I’m a manager at Cray Kaiser focusing on the assurance line of business. In my experience working with not-for-profit organizations, a big challenge is internal controls and segregating duties and making sure that the process is well protected from error and mistakes and things.
A couple of reasons these challenges may exist is limited budget constraints and limited staffing in the finance office. Another challenge is that a lot of smaller and not-for-profit organizations use off-the-shelf accounting software, which may not be able to limit access controls in terms of who can do what in the system. With a small finance office, there’s also limited FTEs. So you can’t necessarily break a process up amongst three, four people if your finance office is maybe only two people. So that’s also a challenge.
A good way to work around these limitations is what we call compensated controls in the industry. Now, compensated controls would be something that is outside of that process. So it could have a time lag where it happens after it, or it could be someone even outside of the finance office looking at something. An example would be after payroll was run, the president or CEO may run a report for what we call an exception report, for example, where they’re looking for paychecks that may be populated for a plus or minus 10 percent different than the last period. This would really target the review by someone who is not familiar with the usual finance processes and make it very efficient. And since that person, in general, does not have access to assets or the accounting system, it would provide sort of an independent check on that process. In this case, this would be a pretty good control for payroll. However, it is important to understand that that person, again, should not have access to any of the accounting system or assets. Otherwise, it kind of negates the value of that process because controls could be overridden. We call that management override in our business.
Another good compensated control is keeping the board of directors engaged. Now, the board should be reviewing financial information regularly. Balance sheet, investment reports, profit and loss statement, and potentially even cash flow statements. This helps the board be informed about operations and how the organization is performing. It’s very important that the board assess performance. Now, it’s also interesting because this is a control. And so it’s important to keep the board engaged because the board being engaged is actually a great control.
Other good things to have in process are what we would call entity level controls. And when we talk about these, we’re talking about things that are outside of that transactional process. For example, good tone at the top is actually pretty important. If there’s a good tone at the top with the board of directors and management, it cascades down. And this is actually very paramount in our industry. If we do not have a good tone at the top, it can lead to problems in the organization. So that is actually a very good control and that is very hard to quantify, but it is something that organizations should be thinking about. It’s very important.
Going along with the entity level concept, too, it’s really important to have well-defined policies and procedures. For example, employee handbook, perhaps a code of conduct can also be quite helpful. People operate better when they have a framework of what’s expected, I think, and that’s also another great entity-level control. Something from a blocking and tackling standpoint could be maybe a tip line. All right, tip line. If you see something, say something.
Going again with the entity-level control, something that organizations may also wish to think about is keeping their employees and their stakeholders engaged. And a great way to do this could be something what we call maybe a suggestion box or a way to keep engaged where there’s a two-way communication between employees, management, and the board of directors. In this way, certain things that may not be visible at some levels of the organization may be apparent if there’s good two-way communication. Two-way communication is also a foundational principle of auditing. Auditors have to have good two -way communication with our boards of directors so that everyone is informed of matters that are relevant.
These challenges and issues are inherent to many small, medium, and even large-sized not -for-profit organizations. If some of these challenges are resonating with you, feel free to give us a call. Cray Kaiser is a full-service CPA firm with a dedicated team to not-for-profits, and we’d be very happy to hear from you.
Deanna Salo, Managing Principal at Cray Kaiser, shares valuable insights for business owners navigating the complex process of selling their company. She discusses the various payment structures sellers might encounter and the tax implications of each. Deanna also highlights common pitfalls that can be encountered throughout a merger or acquisition. Whether you’re beginning to explore a sale or already deep into negotiations, this video offers practical guidance to help you make informed decisions.
Transcript:
My name is Deanna Salo and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.
When a seller receives a letter of intent and is trying to understand how much money am I going to get and when am I going to get it, you know, in the current market we’ve seen a lot of private equity firms coming in and they’ve got a lot of cash to spend on new investments. And so they’ll come in and provide a full cash deal at closing. The seller looks at that and says, “Wow, that’s fantastic.” That also might indicate a lower value for your company because they’re willing to absorb that risk of what might happen after they purchase your company. We do see sometimes that in private equity deals while I might get all my cash up front, what happens if my company grows exponentially because I’m still here with maybe an employment agreement, maybe I’m helping them around the corner of maybe some existing big deals that I’ve had already in the hopper when I sold them my company. In that situation, I may want some additional cash on the on the prospect of me getting additional profits in the company and I might even want an earn out what might be some future compensation to me as the seller for me doing really great work while I’m still hanging around. So the benefit of getting all the money at closing is that the seller can turn around and reinvest that and kind of look to retirement. Some sellers want to stick around for a little longer. Some buyers need the sellers to stick around a little longer. So in that case, you’ll want to make sure that you, as the seller, have some uptick, up game, on the back end of maybe some of these deals. When private equity, excuse me, when a privately held company comes in to buy another privately held company, oftentimes we see that they don’t maybe have as much liquid cash. They may be financing it with a bank and maybe they need the seller to finance a little bit more of that. In that situation, the seller has a little bit more risk. What if I don’t get all my money at closing? I then, as the seller, am bearing the risk of maybe not getting paid the rest of my money over the set amount of time that I was told that I was going to be able to receive my money. So, in either situation, cash at close, cash at close plus earn up, or maybe the seller has to take financing on the proceeds of the sale of their company. Each one of them have different tax effects to the seller. Each one of them may adjust the value of the company because there’s a risk and reward element of timeliness of getting all my money up front versus timeliness of getting my money a little bit over time versus me having to wait as the seller for five to seven years before I get my money. We often see our sellers, our clients not wanting to wait very long for their full cash outlay of their sale of their company. But again that might also indicate a risk of the buyer that they have to come up with all the money at closing and it might affect the value of the of the company and might reduce it a little bit more too. So there’s a lot of numbers that play into a fact of do I get my money all at closing? Do I get my money at closing with some additional uptick on an earn out? And lastly, will I get some money at closing and maybe get the rest of my money over a period of time?
A common mistake I see is going too fast. This is a process and with due care and listening to your advisors in each of the phases of a transaction is really important. If a buyer is really eager and wants to go really fast through the transaction, you as the seller might be really excited and want to go as fast with them, But we really need to be thoughtful in each phase of a transaction because it affects the future of your company, the future of your people, as well as the future of your customers and vendors that you’ve been serving for the many years you’ve been in business. So I think sometimes, you know, people want to get the deals done, they want to get the deals done quickly. There is a point of it’s taking too long versus it’s going too fast and somewhere in between is probably the right speed by which these transactions are best processed.
I think the red flags that companies need to look at is if you’re looking at a buyer, I would suggest that you’re looking at more than one buyer before you sign a letter of intent. If you have multiple buyers that are courting you to sell your business to them, I think that is a good position for the seller to be. If you really only have one buyer in the market for yourself, it may not be the right time to sell your company. Again, sellers get really excited because they may be done. They may be mentally, physically ready to be out of their business and they may want to go too fast, as I mentioned before, going too fast through the process. Jumping into the wrong conclusion is one of the red flags I see and that’s even on the buyer and the seller side.
So, in terms of the communication and what role we play in the very large group of advisors as we talked about, the buyer is going to have its group of advisors and the seller is going to have its group of advisors and you don’t want to be tripping on one another. So, having a clear line of roles and responsibilities in the process of selling your company is really important. Somebody needs to take the lead. Sometimes Cray Kaiser is called upon to set up the data room, which is an electronic space for all the information that’s going to be shared. There’s folders set up in there so it really identifies the attorney’s lane, the accountant’s lane, maybe payroll and HR lane. And so being very organized in this process and making sure that people are communicating. At the very front of all of this, the owners are going to be overwhelmed. The sellers, our clients, are usually very overwhelmed. So we typically have weekly calls with them just to make sure that we’re on pace, information is being shared. Both the buyer and the sellers use a lot of checklists to make sure all the work is getting completed and we can have a timeline for which the transaction is supposed to transpire. So making sure you’re organized to get set up. The attorneys, they’ll talk to one another. The accountants typically are the ones talking to one another. We, Cray Kaiser, get involved. Sometimes talking to the attorneys, we’ll get drafts of the agreements as they’re getting drafted by the buyer to just make sure that it makes numerical sense. But clearly the attorneys are used to make sure that the companies are protected from any of the things that we need to be protected on in the seller’s position. So if everybody does what they’re supposed to do and communicates at a high level, stays in their lane to the extent that they are hired to do a specific task. But certainly raising their hand during the course of these conversations as well as, you know, having some memorial timeline points that we each have to come and connect on to make sure we’re moving through the transaction as efficiently as possible. So being organized, a timeline of communication, setting forth the roles and responsibilities of your advisors, the data room is super helpful. It’s an electronic place to keep everybody organized to what they’re looking at, and, again, keeping the owners involved as much as they need to be. But also they’re relying on us as professionals to get the work done and get to the goal line.
All of this process, there’s lots of phases to this process, and at Cray Kaiser, you know, we’re here to help our clients, again, to and through their transactions at whatever point in their life cycle they’re at. And if you need any further assistance on that, please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.
In this video, Deanna Salo, Managing Principal at Cray Kaiser, shares the story behind the firm’s relationship with Russell Bedford International, a global network of independent accounting and consulting firms. Deanna explains how Cray Kaiser’s commitment to supporting clients with international needs led them to seek out a network that offered trusted partnerships across the globe. From cross-border transactions to international tax planning, Russell Bedford has empowered Cray Kaiser to expand its reach while staying true to its values. Learn how this collaboration has deepened the firm’s bench, strengthened its global perspective, and enhanced the services offered to clients both locally and internationally.
Transcript:
My name is Deanna Salo and I’m the managing principal here at Cray Kaiser, Limited CPAs. I’m here today to talk to you about our relationship with Russell Bedford International Network and basically how we came to find this network and how it serves us in assisting us to serve our clients. So about 15 years ago, our clients were starting to grow in shape and size, dipping their toes if you will across the pond in deciding where they’re going to do business globally. Many of our clients have been doing business globally, but we’ve been able to serve them by leaning on attorneys or other affiliations. Through other networks, we were able to serve them. Our tax department has always done an exemplary job in being able to look up treaties and determine tax treatments and making sure that our clients were compliant in all the necessary pieces of their annual filing, whether they were doing business here in the States or whether they were doing business afar.
About 10 years ago, we decided to join a different group, another network, an international network that was based in the Chicago land area that we felt very aligned with. We were going to help them when they needed it, and they were going to help us when we needed it. About two years into that relationship, that organization ended up rolling up into a national firm. And it was very soon thereafter that we basically did not feel the same connection, access, and just compliance and alignment of how we wanted to serve our clients and our access to those technical things we needed when dealing with international business.
So, we received a phone call with a British accent on the other side of it asking us if we’d like to join an international network and we were surprised because of the very lovely British accent on the other line of the phone. At the same time, he said, “I’ll be in Chicago. Would you like to have a chat?” And we said, “Of course, come on by.” So, we met with the membership development person at Russell Bedford International. It was in September of that year in 2017. And they were having their annual meeting in New York City in October of that same year. And we said, “Sure, let’s go try it out. Let’s go meet and greet.” This is their global annual meeting. So people are coming from all over the world to attend this annual meeting. So I got the wonderful opportunity to hit New York City Times Square and meet what were some of the most amazing, relatable, independently owned and operated CPA firms from across the globe. And it was almost love at first sight. We had collaboration, sharing stories, sharing skills, determining how we could do business with one another without feeling a need to tit for tat and give and take, which is kind of how we felt in these other relationships we’ve had.
So since 2018, fast forward to now, we have received a number of referrals from Russell Bedford, which was not the reason why we joined. We specifically joined our intent was always to deepen our bench in our understanding of international tax law. So when I have a client who’s buying a property in Tuscany, Italy, I could pick up the phone and have somebody on the other end willing and ready to technically assist my client, language, find attorneys, find land surveyors, find whatever I needed, you know, time zones away from where I’m sitting. And so the ability to do that, the ability to serve, even though it was no increased billings for Cray Kaiser, the ability to provide resources to our clients in their moments of need, transactionally, educationally, networking-wise.
It’s been a profound impact not only to our ability to serve our clients but also even with our staff. When we’re recruiting for employees and to be able to say you’re working in our size of our firm in Chicago at an international CPA firm and you will be doing some international work is a really interesting thing for many people. They like to savor international tax law, or just the opportunity to be talking with people, networking with people from not just your area, but literally from across the globe. So our reason to join was really to deepen our bench. Certainly from a recruiting perspective, it was a fantastic roadmap to getting new staff here. And we also had the opportunity to have exchange students, some college graduates from Spain that were coming to the United States and wanted to intern with us. We’ve had those opportunities to exchange some personnel and again fast forward to 2019, I was asked to be on the board of Russell Bedford International and so since then I’ve had the opportunity to sit amongst some extremely brilliant individuals. My perspective of how we do business here in the United States has been enhanced globally by really understanding boots on the ground, what’s happening in the world, in business, as these other practitioners are trying to serve their clients amidst economic downturn, war, social responsibility, global warming, all the various impacts that other parts of the world are far more sensitive to than what we might be here in the United States. So, the perspective gained by this relationship has profoundly impacted how I’m able to serve our clients here at Cray Kaiser.
Some of the statistics that I just want to share a few of just to understand the size of Russell Bedford International because here in the United States it’s not as well-known as some of the other global alliances which are typically supported by the big four CPA firms. They rank in the top 20 global networks around the world. This past year, we ranked 17th among the top 20. I have 110 countries that I can call upon literally picking up the phone or dropping an email and having what is otherwise real-time or next-day responses if those folks can help my clients. There are 375 offices around the world and almost 10,000 people at these other firms globally that are ready and waiting to assist us. Conversely, one of the new things that we’ve been able to do, not really new, but it’s been a wonderful enhancement to our relationship, is we’re getting called upon to assist their clients here in the United States. There’s a lot of business that wants to be done here in the United States, so we have clients that are now ours from Ireland. We have clients that are now ours from Spain, from the UK. And while those other CPA firms host the relationship, we’re used to assist in getting those companies set up here in the United States to do business here in the United States. And so we not only have the referral from that other firm in those other countries, but we now get the opportunity to work alongside them to help secure their relationship as well. Because on both sides we want to keep our clients happy and well served as well with the resources that they need to keep their businesses going. So it’s a win-win across the board.
One of the other things that I think felt very in well-alignment with our firm was really their vision and their mission and their vision is why we exist, to be the global network of choice for independent professional service firms committed to sharing core values and to enable their clients to do better business globally. And that’s really what we’re all trying to do, is do better business globally. Not every one of Cray Kaiser’s clients needs a global representative, but at some point in time, they might and we’ll be ready by being able to leverage our relationship with Russell Bedford.
Their mission is also to take clients further to a better future and that again, similar to Cray Kaiser, we want a better future for our clients and we want to see them to and through their transactions. So Russell Bedford for Cray Kaiser has been a fantastic alignment, very resourceful, growing our business, growing our people, and certainly growing relationships abroad.
Russell Bedford has empowered Cray Kaiser to serve our clients domestically and globally in an enhanced position than we’ve ever had before. And as I said earlier, it’s because of the commitment to serving each other, whether it’s a tax question, a transactional question, I need somebody, do you have the resources, and trusting that the person on the other end of that email or phone call is going to deliver. It’s no different than how we make referrals here in the states, but having an international alliance network to deepen our bench, to enhance our employees’ experiences in doing the work that they do here, enhance our education, our perspectives, our awareness of what’s happening globally and locally is really why Russell Bedford has been such an amazing colleague and companion to Cray Kaiser over the past handful of years. In summary, if you want more information about how we can help you with your international or local accounting or tax or advisory services, you can check us out at www.craykaiser.com and Russell Bedford and Cray Kaiser’s team would be welcome to have you give us a call.
If you’re a business owner considering a sale or acquisition, understanding the key differences between mergers and acquisitions is crucial. In this third installment of our series about mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser, breaks down these concepts in simple terms and shares essential advice for navigating the transition. Deanna offers insights that can help make your transaction smoother. She also highlights the critical role an accountant plays in guiding business owners through financial readiness, due diligence, and post-sale planning.
Transcript:
My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.
There’s probably thousands of definitions on mergers and acquisitions if you Google it, and I think the best way that I like to quantify it is with a math problem. A merger is A plus B equals C. That’s where two joining companies come together and they decide to create something brand new. So C is the new company. An acquisition is a little bit different math problem. It’s A plus B equals A or B. And this is where somebody’s relayed the buyer and somebody’s the seller of the company. And whoever survives the acquisition is who absorbs the target. So, you know, I think in today’s environment, we really don’t see very many mergers going on anymore. They’re pretty much acquisitions where somebody at the end is absorbing the target or the selling company and they become part of the existing or the buyer’s company.
I think the best piece of advice I have actually given to most of my clients who have gone through the process of thinking about selling their business is keep your eyes on your business. This effort to sell your business, while it might only be 45 to 60 to 90 days, it may take much longer than that. Certainly the readiness of getting ready to sell your company is a long and can be a longer process, if you take your eyes off of the business, you may fall upon economic hardship. You may not be pressing all the different strategies that you have within the company. So keeping your eyes on the business to keep it running successfully while you’re taking a lot of energy and time to this acquisition sale process is really the best piece of advice. It’s easy to get rolled up in the acquisition process because it’s an exciting time. A lot of people ask in your questions about a lot of things but keeping your eyes on the business is probably the single best piece of advice that I have actually given clients and they look at me and they say oh yes we definitely need to keep our eyes on the business during this process.
In sharing the news with your organization, I would suggest a best practice is you start with your C-suite in terms of understanding what this process is going to be because many of the executive team will need to be a participant in the due diligence. So start small. What happens sometimes is the deals don’t go through. We actually had a client who went all the way up until a week or two. I think it was 10 days before the actual closing was to happen and the seller decided not to sell their business and they were wise to only really include the ownership team and some executive team members within the journey that got them even there. They did not tell the entire company. What happens oftentimes is there’s going to be little, mini tornadoes in your company of information being shared and so you could lose employees, you could lose customers, you could lose vendors if there would be a word on the street that you could be sold. So keeping the information, which is super hard to do because most owners are very excited with this new opportunity and they want to share it with everybody, that keeping the information to the tight group until such time as it’s appropriate to tell the rest of the organization about the great new news is a best practice. I think in smaller organizations where everybody knows everybody’s birth dates and anniversaries and they know when they’re feeling well and they know when they’re not feeling well it’s much more difficult to hold back the news when there’s an opportunity to acquire another business. I think as owners and businesses we have to let our employees know that we’re constantly looking to improve our organizations and we may be looking at acquiring another firm, another practice, another group of professionals. I think that’s a growth mindset and so if that’s part of the tenor of the company to tell the team that you’re looking to acquire other businesses, other practices, other specialists. I think when it does in fact happen, it’s an easier conversation because it’s already part of the strategic plan that’s been shared within your existing small organization that we’re constantly looking to buy and acquire other companies, other specialties. And then when it does happen, It’s not really new news, it’s just, oh, we have these new team members that are going to be coming to join us. And I think that’s really, if it can be set the course in your strategic plan, which you’re sharing with your existing smaller company, I think it becomes less of a hurdle once the target is identified and once the target is acquired and you’ve got new people joining the firm or your organization, it’s just an easier transition because everybody was already in the know that you are already out seeking this opportunity.
As the seller, when that needs to be announced to your team, when it is really time to tell your team, it’s a very delicate matter. And I think if ownership has been clear with their team that they are selling, that we are looking to connect ourselves with other resources so that we can deploy our services and goods at a much more efficient pace and have a lot more resources. And yes, I’m here to ensure that the transition is going to take place between where we’re at now and when we join the new company, giving them some conversations around it, meeting individually. Sometimes it takes meeting individually with people to let them have a surety that you will be with them throughout this next process is an important part of that conversation.
I think for a company who’s looking to sell, again, there’s a lot of what I call head and heart. Head knows that it’s time to sell, I’m ready, but the heart is my people, my clients, my customers, my vendors, all the people that got me to here, I need to make sure that they’re well taken care of. And if you start those conversations a little bit earlier on, meaning you’re not going to tell them you’re going to be getting that you’re going to be sold, but you’re letting them know that we need to be, we can be better and bigger and greater by aligning ourselves with another organization and start that in your own strategic plan that we may be acquired, we may merge into another company because I want all of us to have the benefit of being able to do bigger, better, bolder work going forward. I think that that’s an important message to give to your existing employees so that they know that they want to stay with you for that next great opportunity and put some really positive energy around it is an important part of transitioning your company from who you are to the next owner.
The role Cray Kaiser plays in a merger or acquisition process is really one of a consultant first. We really want to make sure that the client is ready for the transaction, that they’ve gotten their checks and balances with their financial warehouse, that they understand that the value is not going to be how much the seller needs to retire. It’s really providing them the consultancy piece, the reality check of what this next process is going to be. It’s kind of phase one. Phase two is really when we become the financial advisors and help them review the letter of intent before they sign it and sure it’s got all the right pieces that we believe are important. Certainly, we are not attorneys and we let legal counsel take care of the legalese of these letters of intent. And then we participate in the third phase, which is really the due diligence phase, supporting their internal accountants, controllers, CFOs and helping them provide the buyer with whatever information they need, making sure that the information is scrubbed in a great format so that the buyer has an ease of looking through it efficiently and with accuracy. And then lastly, we assist with the after-tax cash flow. We, you know, sometimes we start that at the beginning. Clients say, “Well, if I sell my company for X dollars, how much money am I actually going to be able to keep?” And we’ll help our clients provide those proformas, those projections of if I sell my company for $10 million, how much will I receive after tax? And what’s my actual cash flow? Which also helps the investment advisors understand how much money is that owner actually going to receive out of that 10 million when everything comes to close. So we are there from the beginning to help get them, get their mind and their mindset around the sale of their business. And we also help them through each of the phases as much or as little as they need us. And certainly in the life thereafter, many of our clients who have in fact sold their companies, we’re helping them in their next level of enterprise. Some of them become real estate enthusiasts and we help them with their accounting and tax on the real estate side. So we’re here to help clients throughout the entire cycle, life cycle of their existing business, and even in the life cycle after their business. All of this process, there’s lots of phases to this process, and at Cray Kaiser, you know, we’re here to help our clients, again, to and through their transactions at whatever point in their life cycle they’re at. And if you need any further assistance on that, please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.
In this second installment of our series on navigating business mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser Ltd., shares valuable insights on preparing your business for a successful transition. Whether you’re planning to pass your company to the next generation, sell to a third party, or position your business for future growth, preparation is crucial. Join us as we delve into the foundational practices that set the stage for a smooth and strategic process.
Transcript:
My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser, Limited CPAs and Advisors.
The next point is probably where people get really close to signing something, and that’s a letter of intent, also known as an LOI. My next part here is to talk about what really needs to be in that letter of intent. Our clients receive letters of intents from prospective buyers and they can be very vague. And in the vagueness, they may feel that it’s giving each party a balance of opportunity to future, to negotiate in the future on these various points. I see the letter of intent, the LOI, as the framework of your purchase agreement. So I believe the letter of intent does need to be far more specific in terms of what it needs to include and I believe they need to include the following items.
The purchase price and the purchase structure definitely is the first line of every letter of intent. I’m going to give you X dollars for your company and this is going to be an asset purchase or it’s going to be a stock purchase. The difference between an asset purchase and a stock purchase is probably its own audio blog at its own time, but often people understand when they go into selling their business that those are the two structural options that they have in terms of how the purchase of their company may be transacted.
How much is going to be paid in cash? Sometimes if I’m going to be selling my company for X dollars, I may get a certain percentage of it in cash at closing, and the rest of it might be paid to me over time in an earn out with interest or with not interest with a promissory note. So being very specific as to what is the dollar amount for sure, what is the structure of the deal for sure, and then more importantly is how much am I going to get at close. So if the buyer needs to finance this purchase, you as the seller need to know that very early in the conversations.
An escrow, similar to selling a house, there might be an escrow requirement. Most deals that I’ve seen in the last five to six years, they all have escrows. And an escrow is effectively a certain percentage of the purchase price that’s held in a separate account in the name of the buyer and the seller for a certain period of time, until such time is all of the post-closing adjustments have been handled by the post-closing activities. It’s really to keep money aside for some of those loose ends of the deal, and then at the end of the period, the escrow is finally released to the seller. Another important part of the escrow is to understand how long do I have to wait for this escrow to be released. We see anywhere from six months to twenty-four months on these escrows. So it’s really important for the buyer to understand that the seller needs to know how long is that escrow going to need to be in place.
The networking capital requirement is also a very important part of a definition in a letter of intent. Networking capital is really current assets, less current liabilities. If you can picture the first day of operations of the new buyer with your company. They open on day one and they need operating assets to operate. They need receivables to be coming in and they certainly still might have some of your net payables that they need to pay out. So understanding how much of the networking capital component requirement will be of the buyer is another important part of the LOI in terms of specifying what that would be. Most times we just see that there will be a networking capital requirement, and most times the buyer may not yet be ready to understand what that amount might be because they haven’t completed their due diligence. But I would say that at the very least, it should say that there is going to be a networking capital component, and it will be agreed to by both parties. So this way, you as the seller, make sure that you have a voice to that final amount of what might be needed in that networking capital component.
The letter of intent should also be very specific as to how much time the buyer has to complete their due diligence. You know as a seller time can be in your favor and time can be your worst enemy. With economic conditions changing so very quickly, if the buyer takes way too long to do their due diligence within the LOI framework, you may have economic conditions that will hamper the company’s ability and might actually reduce the value of your company. So making sure that the buyer has a specific period of time, we’ve seen it as few as forty-five days to complete their due diligence, all the way up to ninety days to complete their due diligence. Understand that letter of intent is an exclusivity arrangement between you and the buyer meaning at the time you sign the LOI, you are precluded from talking to anyone else. While an LOI is not binding, it does keep you both kind of on the same course to be honoring that LOI and being good stewards of the process to ensure that it gets completed in the right amount of time.
One of the other things that I see in LOIs that sometimes is missed is the transaction costs, professional fees. Professional fees should be taken on and each of the parties, the buyer and the seller, should take care of their own bills. As the seller, you can’t control how much attorney costs, advisory costs, will be generated by the buyer. And conversely, the buyer doesn’t have any control of the seller’s professional services from their accountants and attorneys. Ensuring that the transactional costs are paid for by each of their own parties and kept separate also commits to the letter of intent that should this deal not get done, meaning either party decides to walk away, that each party takes care of their own transaction costs at the end of the transaction.
The Non-Compete Agreement. Most times, the buyer will want to make sure that the seller, once they sell their company, they can’t turn around the next day and go open up a competing company down the block. So a non-compete is a very common additional bullet point in the letter of intent to suggest there will be a non-compete agreement, there will be a dollar amount assigned to the non-compete, and the seller will be precluded from operating in this industry for a certain sum of time. Perhaps a year, two years, three years, but it should be commented on that you as the seller will be committed to a non-compete. There’ll be a compensatory amount assigned to it and that you don’t want to have this non-compete to be for five or ten years. You want it to be a reasonable amount of time because if something goes wrong, you sell the company, the buyer is not really doing well with your company and you see it happening, you may want to open up your company again and having the non-compete understanding in the letter of intent protects both parties from doing the right thing during that period of time after the closing of the sale of your business.
Each company has key executives in their company, we wouldn’t get to where we are without having key personnel and ensuring that your key personnel are taken care of, I think is one of the head-to-heart conversations that most of our clients have. You know when you’re selling a business it’s a very emotional process and you’ve worked your lifetime to create the value, to create the place that you’ve created for your employees and your customers and your vendors and making sure that your key personnel are taken care of is very important to most sellers. So in the letter of intent, it’s another important part to have that the key executives in the company will be executing their own employment agreements with the buyer. So this ensures that you as the seller have a place for each of your key employees in the new company.
So we’ve talked a lot about mergers and acquisitions today mostly on the acquisition side and getting ready to be sold. Again, I think it’s important for any company in their strategic planning process to have many of these tools in their toolbox, being ready for a transaction, whether you’re going to buy a company or whether you’re positioning yourself to close, getting your financial warehouse in check, and getting ready operationally with your organizational structure to ensure that you have all the pieces laid out, the footprint of your company, understanding what should be included in a letter of intent, whether you’re buying again or selling your business, and making sure that your people at the end of the day are going to also be taken care of through employment agreements and be part of the team even in the in the new company if you’re selling your company.
All of this process there’s lots of phases to this process and at Cray Kaiser you know we’re here to help our clients again to and through their transactions at whatever point in their life cycle they’re at and if you need any further assistance on that please feel free to give us a call. Cray Kaiser is here for you during any part of this transaction.
In this first installment of our series on navigating business mergers and acquisitions, Deanna Salo, Managing Principal at Cray Kaiser Ltd., shares valuable insights on preparing your business for a successful transition. Whether you’re planning to pass your company to the next generation, sell to a third party, or position your business for future growth, preparation is crucial. Join us as we delve into the foundational practices that set the stage for a smooth and strategic process.
Transcript:
My name is Deanna Salo, and I’m the Managing Principal here at Cray Kaiser Limited CPAs and Advisors. In the Cray Kaiser family of clients, we’ve had a lot of activity in the mergers and acquisitions front, mostly where clients are looking to succeed their companies to what might be the next generation of their family business or privately held space, or they sell to a third party and look to a buyer, e company, and somebody to succeed their company and exit the company accordingly. The readiness of being acquired is a process and it’s best practice to start early and get the right procedures and get the right people in place to move your strategic plan to an acquisition, meaning whether you’re acquiring another company or you’re being acquired. In most cases, as I mentioned before, our clients are looking to be acquired to exit their company and to fulfill their strategic plan of retirement.
Some of the shared experiences and one most recent client experience that we’ve had is in six to seven points, which I think are the most important things about getting ready for an acquisition or being acquired.
Making sure that your financial warehouse is in check. Your financial department, the procedures, the accounting department really needs to be updated and looked at in a very granular sense, meaning you might be getting monthly financial reporting from your internal accounting department, but really what else is there? And that’s documenting the procedures around your financial reporting system. Even documentation of your general operating procedures is an important part of getting your financial warehouse in check. There’s three different levels of financial assurance that your CPA can provide to you. One is a compilation, which is really no assurance. It’s the lowest level of assurance. The next is a financial review, and the highest level of financial assurance is an audit. We see clients actually moving through a compilation to a review to a financial audit to really get integrity to their financial statements, get those auditors in their offices to check and balance the financial operations of the company. And when you’re looking to be sold, being able to provide a buyer or a third party a financial audit provides integrity to the financial statements, reliability to the financial statements really shows the audience that you are ready for a financial acquisition. So getting your financials in place and on check is the first step in that direction.
The next point is understanding your organizational structure. And many owners look to me and say, I know my organizational structure. I know where the hierarchy lies in my company. And then I look at them and I go, but have you mapped it out? Being able to put your organizational chart in a framework to show a buyer that here’s our C-suite of leadership. These are the folks below them and not necessarily listing out the people’s names, but just their titles, their roles and responsibilities. Being able to document your organizational structure is really important to provide the footprint, the mapping of your company to a third party, so they know that you know how your operations actually work and who are the most important people or the most important jobs and roles within the organization. Your people, your process are two very important parts of the value of your company. So being able to document that organizational chart with the roles of the folks that you have in your company is one of the other next steps in getting ready to be acquired.
Getting your team of advisors together and people, you know, clients of ours look to us and say, “Well, you’re my advisor, Deanna, so you’re part of the team.” And I said, “Yes.” And we need to make sure we have the proper legal counsel. Your corporate attorney might be a great person to help you with this deal, but perhaps you may want to have somebody else who maybe specializes in mergers and acquisitions from a corporate legal counsel assist. Your wealth management advisor who should be ready to receive potentially your after-tax cash flow from the sale of your business should also be part of your advisory group. And the current operations of the company may already have a banker involved where you might have loans and obligations to that bank, and they too need to be part of that team of advisors. Getting ready to sell your company, you need all of these people to provide you counsel through the journey of selling your business. And most importantly, the banker, if you do have obligations with the bank, you know, any change of ownership, any look to sell your company, they need to be definitely included in that conversation early rather than later.
Understanding the value of your company. Here we see lots of our clients look and say, okay, I think my company is worth X dollars. If we go to the marketplace, this is how much I should get for my company. This is the multiple of EBITDA that I might need. Earnings before interest, taxes, depreciation, and amortization. A key role in determining value in the marketplace sometimes is a multiple of your EBITDA. Well, that might be true. However, we have clients that come to us and say, oh, I need Cray Kaiser to do a business valuation so you guys can tell me how much I’m worth so that I can go pedal my company out in the public market. And I would say, I’m not sure we really need a business valuation. The business valuation may be a great educational tool for owners so that they can decide how much a third party might look to their company and value them at, but it’s an expensive cost to have where markets, fair market value is probably mostly looked at in terms of what will the market provide. There’s lots of different factors that a buyer might look to you. You may have a certain product or service that they don’t have in their company. So there’s synergetic reasons for that other company to look at you and provide you a higher value than might be what you’re looking for. There’s other reasons that somebody may want to come and buy you from a demographic perspective. They don’t have a business in Chicago and they want to have a footprint in Chicago. Therefore it gives you even a higher value than what you might even compute in a business valuation. So I guess, you know, out of the value, I would say, you know, understanding what and how somebody might look at you as an important part of your process. What I can tell you, your value is not. It’s not what the owners need to retire. We often hear from clients, “Well, I need X million dollars so that I can retire and have my life after my business.” And I would say, “Okay, that might be a number, but it probably isn’t the number.” What the fair market value will bring to you, you really do need to start that process of going out into the market and getting a couple of different buyers potentially interested parties in your business. You know, only selling to one business is probably where you’ll end, but as you work through the process, it’s probably in your best favor to have multiple companies looking at you to create a competitive environment to drive up that value perhaps, or just to become a little bit more popular in that space to really determine for yourself what is the value that you might need for your company.
One of the next points that I think is really important, as business owners get excited to the idea of selling their company, they’ve kind of come to their crescendo, if you will. It’s time for me to exit my company. It’s time to sell, they get really excited, and when people are interested in them, they get even more excited. And when you get excited, oftentimes I see clients letting the horse out of the barn way too early. So don’t let the horse out of the barn. And what I mean here is, don’t give away so much financial information before you have a non-disclosure agreement. A non-disclosure agreement is also known as an NDA. It is fine to have great conversations over drinks, over dinner. It’s important for the buyer to get that information from you, all the tribal knowledge, all the history of the company, and that can be done in lots of different conversations. But as soon as you start providing them financial information, historical financial statements, historical tax returns, that’s where you really need to get that NDA out there in front of any of that financial reporting. I would also say that if a buyer wants to start getting copies of customer lists and vendors’ lists and sales by customer and wages by employee, all of that information will be shared with them, but during due diligence. And that’s long after you’ve already signed a letter of intent and I’ll talk about that in just a minute. But in terms of not letting the horse out of the barn, that’s really keep your information guarded. Certainly give them all the intelligence about your company, the story, the history, the products, the people, the energy around the company. You can give them the financial information and the tax return information, however only start giving them some tangible information after you have a non-disclosure agreement signed.
In this video, Kayla Daniels, an assurance supervisor at CK, explains the importance of Employee Benefit Plan Audits, emphasizing their role in ensuring compliance with Department of Labor regulations and internal revenue codes. She discusses the audit process from risk assessment to financial statement preparation. Kayla also offers recommendations for improving plan management and oversight to enhance compliance and operational efficiency.
Transcript:
My name is Kayla Daniels. Employee Benefit Plan Audit is an audit that is required by the Department of Labor to be filed with your 5500 annual filing. So Employee Benefit Plan Audit is a compliance audit, so we are making sure that plan processes and plan transactions are in agreement with the plan provisions in the plan documents. Generally employee benefit plan audits are required for any plan that has a hundred people with balances in the plan.
The purpose of an employee benefit plan audit is very compliance based. It is to make sure that your plan is operating in compliance with Department of Labor regulations, internal revenue codes, and a lot of the time those regulations and codes will be built into the plan document. So our audit is actually going to focus on making sure that your plan activities and transactions are in line with those plan provisions. The value that can be added from an Employee Benefit plan audit is related to identifying places in your plan that might have a weakness or could be improved in some way. So our audit will definitely look at those areas that might be a little bit more complex or areas that have a lot of room for error.
So during our audit we’ll bring it to the attention of management, any areas that we see that could be improved and that will help your plan operate more efficiently, more effectively, and will make sure that you’re in compliance. One of the key risks associated with employee benefit plans is the remittance of employee funds. So there is a requirement that plan sponsors have to permit funds in a timely manner. So that’s as soon as feasibly possible or as soon as the assets can be segregated, those assets need to go from the employer to the plan. And we’ll see many times that there are delayed remittances. So it took a lot of time between when it was withheld in payroll and when the plan actually received it. And that’s something that the DOL will definitely look at if you’re ever subjected to an audit. And when you do have delayed remittances it is your responsibility to correct that by calculating lost earnings and remitting those lost earnings to the participant to make them whole because a lot of our audit is going to focus on making sure that employee funds are being used in a proper manner in accordance with the DOL regulations.
Another deficiency that we sometimes see in plans is improper definition of compensation, which the definition of compensation is used when you’re calculating employee or employer contributions. And in the plan provisions, this can be kind of complex where certain types of compensation are excluded for certain types of contributions. So these things can be easily missed and fall through the cracks or maybe the payroll system isn’t set up correctly and is calculating contributions on the wrong compensation. So that’s also something that we look at during our audit and something that we see quite commonly and it’s something that we can fix and make sure that it’s right in the future.
And then another common deficiency that we see is deferral elections for employees not being followed. So when they sign up for the plan, they’ll tell you I want 5 % of my pay being withheld to the plan. And as a plan sponsor, you are required to do what a person wants you to do. And then after that point, they can change your deferral. So it’s important that there’s a process in place to track those changes, to track those new enrollments, to make sure that the employee’s authorization is being followed with their payroll funds.So the first place you want to start when you’re going to perform an employee benefit plan is with our planning and risk assessment. So we will set up a meeting with the client, we will discuss any changes that happened during the year that would include plan amendments, any new plan documents, agreements, and then that’ll serve as the foundation for our risk assessment. And during that process, we’re going to make sure that we identify all the risky areas of the plan and we’ll look back at prior years too to make sure that we’re including anything specific to the plan, where we will modify our audit procedures to ensure that we’re covering all of those areas and that our audit has great audit results. And from that step, we’re going to perform detailed testing of all the significant areas of the plan. And those generally will be related to contributions, distributions, loans and expenses. So we’ll do individual testing of all those areas to make sure that everything is in compliance with the plan documents. And lastly we’re going to prepare our financial statements which will be attached to the 5500.
Some of the discrepancies that you’ll see in the financial statements of plans will be supplemental schedules so that is required by the DOL. If there’s any delay remittances, those need to be identified and recorded in the 5500, in the financial statements. Also, you may see inconsistencies between the financial statement and the 5500. And either the 5500 will have to be revised so that it matches the audited amounts or will have to include a financial statement disclosure to make sure that those match up with each other for the filing.
The number one recommendation I would have for any plan that wants to improve their financial reporting in relation to their employee benefit plan would be to have a member of management or a team of management for proper oversight. That would be a person who does not perform the everyday activities of the plan but a person who knows the plan very well and can be involved in all the processes to make sure that everything is in compliance with the plan. When you are overseeing the process of your plan, you’re going to want to make sure that you have proper personnel documentation in place so that would be signed I -9 forms, anything from the personnel file that will support the important demographic information. So you’ll want to have those available to your auditors because we’re going to want to look at those to make sure that everything’s right. Also if you use paper forms for loans, distributions or deferrals you’re going to want to gather those. Make sure that they’re organized in a place where you can access them.You need to have an employee benefit plan performed every year that you have over 100 participants with balances and also you can have an audit done if you believe that your plan is going to go over 100 participants in the near future.
One of the more complicated issues that can come up when administering an employee benefit plan is when you realize that you haven’t followed employee deferral instructions. So you’ll find out a person originally deferred 5% and then they increased it to 15% and you didn’t implement that in a timely manner. So how you would fix that is you would remit them the extra that they missed out on and then you would calculate any missed earnings. If the market head gains and they missed out on those, you would calculate them and send them over to the participant to essentially make them whole again.
And another issue that you might come across in plans is issues with vesting. If there is employer contributions where it takes years of service for the participant to become fully vested. Sometimes when a participant takes a distribution, the vesting can be calculated incorrectly, which means that the person might not receive their full distribution. And in that circumstance, you would have to make an additional distribution to that participant to make them whole again.
So annually, the plan is required to have discrimination testing, and that is a series of testing that will ensure that highly compensated employees are not being favored over non-highly compensated employees and this is testing that will be performed either by the plan personnel or a third-party administrator. And the results of those plans will let you know if you need to make any refunds back to highly compensated employees and you need to remit those excess contributions within two and a half months after year-end or else you will have to pay a penalty. So it’s important to get those done in a timely manner and to make sure that you’re keeping track of your compliance testing every year.
One thing that I’ve learned while doing employee benefit plans is just the attention to detail that’s needed that you can carry over into other areas of your work life, where you really need to pay attention to what’s the intention, what is written into this agreement, and pay attention to those small details that really make a big difference.
In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, delves into the intricacies of sales tax nexus, taxable items and customer exemptions. She also talks about the invaluable lifeline offered by the voluntary disclosure programs offered by some states.
Transcript:
My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Each of the states really wants to get a piece of their pie from taxpayers.
There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes, we have personal property taxes and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.
So, a business needs to determine whether or not they’re required to collect sales tax in the various states where they ship product or they do services and determining whether that business has nexus for sales tax is different from determining nexus for income tax.
In the past, if the business didn’t have any physical presence in the state, they really didn’t have to worry about sales tax, but that all changed in 2018 when the Supreme Court ruled on South Dakota versus Wayfair.
And now the states, all of the states, have enacted economic thresholds, whereby if you have sales into that state over a certain threshold, even if you don’t have any physical presence there, you are required to begin collecting sales tax from your customers in that state. And this has been an area over the past few years that businesses have really had to keep a close eye on. So, this is something that each year, you know, we’re taking a look at that to see where our clients have exceeded those nexus thresholds.
Once a business decides that they are subject to collecting sales tax in a state, then the next step is to really determine what of their products or services are taxable. And this varies again from state to state. So, in some states, services across the board, you know, pretty much are not taxable and other states only specific services might be taxable. And then in this day and age, we have additional considerations like computer software. You know, when is that software considered a taxable product? Or when is it considered a non-taxable service?
So, there’s a lot to consider there just in determining what items are taxable. Once that’s determined, you also need to take a look at your customers and find out who of your customers are taxable because you may have resellers who you don’t have to charge tax to because they’re taxing the end customer that they sell to and so another really big aspect of protecting your business is to collect those exemption certificates, make sure that you have those on hand, and also make sure that they’re current. You know, if it’s been a few years since you’ve collected one, it’s always a good idea to go back to your customers and request an updated certificate from them.
But a business discovers that they have nexus in a state for income tax or for sales tax and that that nexus has existed for the last several years. There is a way that they can go to the states and get some protection and this is called voluntary disclosure. So many of the states offer a voluntary disclosure program where the taxpayers are coming forward and saying, you know, we recognize that we should have been filing income tax or collecting sales tax in your state. We’d like to make it right and the states in response to that coming forward place a limit on the look back period, so they may only go back three or four years to collect tax and then also they often will waive penalties. So it is it’s a great program to protect the business from back audit exposure because it limits those years and the states are very willing to work with taxpayers to get them into compliance.
In this video, Maria Gordon, Tax Supervisor of State and Local Taxation, sheds light on the crucial topic of tax incentives offered by states and localities to businesses. From empowerment and edge credits to research and development incentives, she underscores the vast array of opportunities available.
Transcript:
My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation. Businesses should really be thinking about tax incentives that many states and localities offer to them.
The states really want to see economic development in their state and even certain areas, and so often they will offer empowerment, credits, edge credits where your business is employing people there, investing in capital. And these credits are very specific. You apply for it with the state. And then it helps businesses to really expand and get some credit, some benefits there. And some states offer, you know, research and development credits. You can get that at the federal level, but if you are also doing research and experimentation in a state, you may be able to receive a state -level credit as well.
And then there’s even states that have credits that have to do with your activities such as the Wisconsin Manufacturing Tax Credit, that’s a credit against income tax. So, there is an awful lot out there with respect to state incentives and if a business isn’t thinking about these things, they really could be missing out on some benefits.
One benefit that business owners have had had for the last couple years is taking advantage of the pass-through entity tax, which is a tax whereby the business can pay state income tax at the entity level rather than having it paid at the individual level for partnerships and s-corporations where the income would generally flow through to the owners.
Now as a workaround to the state and local tax deduction cap, businesses can pay those at the entity level and get a state tax deduction against the business income. For most states, this is set to expire after 2025. So, we’re doing all we can to take advantage of those deductions right now.
I think the hope is that some of these states will extend that provision, but as of now for most of them it’s expiring 2025 and this is just an issue that we’re going keep up on and make sure we know all the changes that are happening over the next couple of years.
In the complex landscape of state taxation, businesses face a myriad of challenges as they navigate the ever-evolving requirements imposed by each state. Watch the above video where CK Tax Supervisor of State and Local Taxation, Maria Gordon, talks about the broad spectrum of activities that can establish nexus and the critical roles played by services, vehicle presence, and employee locations when it comes to paying state income tax.
Transcript:
My name is Maria Gordon. My title is Tax Supervisor of State and Local Taxation.
Each of the states really wants to get a piece of their pie from taxpayers. There’s lots of different types of taxes that businesses need to be concerned about. Income tax is an obvious one, but also requirements for sales taxes are continually changing with the states. And then we have local income taxes. We have personal property taxes, and even gross receipts taxes based upon total receipts collected in a state and franchise taxes.
Businesses need to be concerned about whether or not they have enough connection with the state to be required to file income tax and that connection is called nexus. Each state has their own specifics about what creates nexus within their state, but very generally speaking for income tax, if a business is performing any sort of services in a state, then they’re going to be required to file income tax there. If they are driving their own vehicles into a state, then they would have nexus. Really, the one instance when a business does not have to worry so much about income tax is if they’re merely shipping products to customers in the state, and that’s their only activity. They may have salesmen in the states, but as long as those salespeople don’t do any services, then generally speaking, the business won’t have nexus with the state. We often ask our clients each year, what the activities look like in states where they have employees, and then we make that determination on a state-by-state basis.
The landscape of workers has changed a lot over the past 10 years. A lot of companies now have remote workers in states where they may or may not have filed in past years and so it is something to be concerned about and it all depends upon what activities the employee is doing for that business as to whether or not that’s going to trigger a nexus with the state. So it is very important to be mindful when you’re adding new employees in states or if an employee who works from home is moving to another state, you always want to take a look at those state requirements to find out if the business would suddenly be responsible for income tax filing.
So if a business determines that they have nexus within a state for income tax, then they need to determine what is their taxable income in that state. And we start with federal taxable income and then each state has their own modifications that they make to federal taxable income. Some really common ones are depreciation of fixed assets. States have different methods of depreciating than what’s allowed on your federal tax return. The states do not allow certain deductions like state income tax deduction. So once you make those modifications to the federal taxable income, then at that point you need to decide which portion of this is going to all of these different states. And there are formulas that the states use for that. Most of the time, it’s just looking at sales to that state versus everywhere.
But there are also states that take a look at the amount of payroll that you have in each state and property. So once you come up with that percentage, you’ve got your state taxable income.
It’s important to remember that when you add a state filing responsibility, if you kind of look at the whole pie, you’re not necessarily paying more state tax, it’s just a question of which state are you paying that tax to. And certainly there are some states with higher tax rates that it’s less favorable to file in those states but it’s best to kind of think of it as a pie and as long as you’re filing where you’re required to then that protects the business going forward.
