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The discover stage: Value acceleration series part two (of five)

02.15.19

We are two for two when choosing value acceleration presentation dates that align with winter storms. It turns out we may be a more reliable indicator of winter weather than Punxsutawney Phil, who has a track record of 36 percent accuracy over the last 50 years.

After a last-minute rescheduling due to the weather, we held our second discussion in the value acceleration series on Friday, February 15th. Value acceleration is our process of helping clients increase the value of their business and build liquidity into their lives. In the first session, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In our conversation on Friday, we took a closer look at the first stage of the value acceleration process: the Discover stage, aka the “triggering event.”

In our first session, we walked through a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

© Exit Planning Institute

In the Discover stage, business owners take inventory of their personal, financial, and business goals, noting ways to increase alignment and reduce risk. The objective of the Discover stage is to gather data and assemble information into a prioritized action plan, using the following general framework.

 

Every client we have talked to so far has plans and priorities outside of their business. Accordingly, the first topic in the Discover stage is to explore your personal plans and how they may affect business goals and operations. What do you want to do next in your personal life? How will you get it done?

Another area to explore is your personal financial plan, and how this interacts with your personal goals and business plans. What do you currently have? How much do you need to fund your other goals?

The third leg of the value acceleration “three-legged stool” is business goals. How much can the business contribute to your other goals? How much do you need from your business? What are the strengths and weaknesses of your business? How do these compare to other businesses? How can business value be enhanced? A business valuation can help you to answer these questions.

A business valuation can clarify the standing of your business regarding the qualities buyers find attractive. Relevant business attractiveness factors include the following:

  • Market factors, such as barriers to entry, competitive advantages, market leadership, economic prosperity, and market growth
  • Forecast factors, such as potential profit and revenue growth, revenue stream predictability, and whether or not revenue comes from recurring sources
  • Business factors, such as years of operation, management strength, customer loyalty, branding, customer database, intellectual property/technology, staff contracts, location, business owner reliance, marketing systems, and business systems

Your company’s performance in these areas may lead to a gap between what your business is worth and what it could be worth. Armed with the information from this assessment, you can prepare a plan to address this “value gap” and look towards your plans for the future.

Next up in our value acceleration blog series is all about what we call the four C's of the value acceleration process. 

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Read this if your company is seeking assistance under the PPP.

The rules surrounding PPP continue to rapidly evolve. As of June 22, 2020, we are anticipating some additional clarifications in the form of an interim final rule (or IFR) and additional answers to frequently asked questions (FAQ). The FAQs were last updated on May 27, 2020. For the latest information, please be sure to check our website or the Treasury website.

A few important changes:

  1. The loan forgiveness application, and instructions, have been updated.
  2. There is a new EZ form, designed to streamline the forgiveness process, if borrowers meet certain criteria.
  3. Changes now allow for businesses to use 60% of the PPP loan proceeds on payroll costs, down from 75%.
  4. Businesses now have 24 weeks to use the loan proceeds, rather than the original eight-week period (or by December 31, 2020, whichever comes earlier).
  5. The rules around what is a full-time equivalent (FTE) employee and the safe harbors with respect to employment levels and forgiveness have been clarified.
  6. Entities can defer payroll taxes through the ERC program, even if forgiveness is granted.

These changes are designed to make it easier to qualify for loan forgiveness. In the event you do not qualify for loan forgiveness, you may be able to extend the loan to five years, as opposed to the original two years.

The relaxation on FTE reductions is significant. The reductions will NOT count against you when calculating forgiveness, even if you haven’t restored the same employment level, if you can document that:

  • you offered employment to people and they refused to come back, or
  • HHS, CDC, OSHA or other government intervention causes an inability to “return to the same level of business activity” as of 2/15/2020.

As of June 20, 2020, there was still an additional $128 billion in available funds. The program is intended to fund new loans through June 30, 2020. 

We’re here to help.
If you have questions about the PPP, contact a BerryDunn professional.

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PPP loan forgiveness: Updates

Read this if your company is seeking assistance under the PPP.

With additional funding for the PPP pending, we’re updating this blog post with more recent information.


This information is current as of April 21, 2020.

The Treasury Department has issued guidance and answers to Frequently Asked Questions that alters some of the original assumptions around PPP:

  1. At least 75% of the forgiven amount should be used for payroll (changed due to anticipated high demand for program)
  2. Repayment of non-forgiven amounts are now repaid over 2 years at 1.0% interest (not 2 years and 0.5% as previously stated or 10 years and 4% as in the CARES Act)

Although the “covered period” is February 15, 2020 to June 30, 2020, forgiveness of the loan is based on expenses (primarily payroll) during the eight-week period after the loan is received. Loan amounts should be disbursed within 10 calendar days of being approved.

Important to note:

  1. Questions around size:
    1. 500 employees. The SBA has clarified that it measures employees consistent with the existing 7(a) loan program guidance. See CFR Section 121.106 for details.
    2. The SBA has also clarified that if a business meets both tests in the “alternative size standard”, it qualifies to participate in the program
      1. Maximum tangible net worth of the business is not more than $15 million.
      2. Average net income after Federal income taxes for the two full fiscal years before the date of application is not more than $5 million. 
    3. If the existing SBA definition of a small business for your industry (found on SBA websites) has over 500 employees, your business may qualify if you meet that expanded definition. 
  2. The CARES Act states that loans taken from January 31, 2020, until “covered loans are made available may be refinanced as part of a covered loan.”
  3. People may want to tap into available credit now. If they are granted a covered loan (PPP loan), they can refinance. Given anticipated demand, it may take time to get the PPP loan processed.
  4. Participation in PPP (Section 1102 and 1106 of the CARES Act) precludes participation in the Employee Retention Credit (Section 2301).
  5. The IRS clarified that companies may still defer Payment of Employer Payroll Taxes (Section 2302) even if participating in PPP until a decision on forgiveness is reached by your lender. This is a change from our prior understanding.

Economic Injury Disaster Loans (EIDL)

EIDLs are available through the SBA and were expanded under section 1110 of the CARES Act. Eligible are businesses with 500 or fewer employees, including ESOPs, cooperatives, and others. Up to $2 million per loan. Up to 30 years to repay. Comes with an emergency advance (available within 3 days) of $10,000 that does not have to be repaid – even if your loan application is turned down. This $10,000 does not impact participation in other programs/sections of the CARES Act. Some portion of the EIDL may reduce your loan forgiveness under PPP, but receiving an EIDL does not preclude you from participating in the PPP.

From the Treasury: Small business PPP

The Paycheck Protection Program provides small businesses with funds to pay up to 8 weeks of payroll costs including benefits. Funds can also be used to pay interest on mortgages, rent, and utilities. More details at treasury.gov.

Fully forgiven

Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees.

Must keep employees on the payroll—or rehire quickly

Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

All small businesses eligible

Small businesses with 500 or fewer employees—including nonprofits, veterans organizations, tribal concerns, self-employed individuals, sole proprietorships, and independent contractors— are eligible. Businesses with more than 500 employees are eligible in certain industries.

When to apply

Starting April 3, 2020, small businesses and sole proprietorships can apply. Starting April 10, 2020, independent contractors and self-employed individuals can apply.

How to apply

You can apply through any existing SBA 7(a) lender or any federally insured depository institution, federally insured credit union, or Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program. You should consult with your local lender as to whether it is participating. All loans will have the same terms regardless of lender or borrower. Find a list of participating lenders and additional information and full terms at sba.gov.

The Paycheck Protection Program is implemented by the Small Business Administration with support from the Department of the Treasury. Lenders should also visit sba.gov or coronavirus.gov for more information.

BerryDunn COVID-19 resources

We’re here to help. If you have questions about the PPP, contact a BerryDunn professional.

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Updated: Funding for the Paycheck Protection Program (PPP)

In a closely held business, ownership always means far more than business value. Valuing your business will put a dollar figure on your business (and with any luck, it might even be accurate!). However, ownership of a business is about much more than the “number.” To many of our clients, ownership is about identity, personal fulfillment, developing a legacy, funding their lifestyle, and much more. 

We explored the topic of what business ownership means on Wednesday, May 8th, in the final presentation of our value acceleration series, exploring how to increase business value and liquidity. In this final installment, we discussed the decision of whether to grow your business or exit, and which liquidity options are available for each path. 

While it may seem counterintuitive, we find that it is best to delay the decision to grow or exit until the very end of the value acceleration process. After identifying and implementing business improvement and de-risking projects in the discover stage and the prepare stage (see below), people may find themselves more open to the idea of keeping their business and using that business to build liquidity while they explore other options. 

Once people have completed the discover and prepare stages and are ready to decide whether to exit or grow their business, we frame the conversation around personal and business readiness. Many personal readiness factors relate to what ownership means to each client. In this process, clients ask themselves the following questions:

  • Am I ready to not be in charge?
  • Am I ready to not be identified as the business?
  • Do I have a plan for what comes next?
  • Do I have the resources to fund what’s next? 
  • Have I communicated my plan?

On the business end, readiness topics include the following:

  • Is the team in place to carry on without me?
  • Do all employees know their role?
  • Does the team know the strategic plan?
  • Have we minimized risk? 
  • Have I communicated my plan?

Whether you choose to grow your business or exit it, you have various liquidity options to choose from. Liquidity options if you keep your business include 401(k) profit sharing, distributions, bonuses, and dividend recapitalization. Alternatively, liquidity options if you choose to exit your business include selling to strategic buyers, ESOPs, private equity firms, management, or family. 

In our discussion about liquidity, we addressed several other topics that audience members were curious about. One of these topics was the use of earn-outs in the sale of a business. In an earn-out, a portion of the price of the business is suspended, contingent on business performance. The “short and sweet” on this topic is that we typically find them to be most effective over a two- to three-year time period. When selecting a metric to base the earn-out on (such as revenue, profit, or customer retention), consider what is in your control. Will the new owner change the capital structure or cost structure in a way that reduces income? Further, if the planned liquidity event involves merging your company into another company, specify how costs will be allocated for earn-out purposes. 

We also discussed rollover equity (receiving equity in the acquiring company as part of the deal structure) and the use of warrants/synthetic equity (incentives tied to increases in stock price). Here are some of the key points from this discussion:

  • Make sure you know how you will turn your rollover equity into cash.
  • Understand potential dilution of your rollover equity if the acquiring company continues to acquire other targets. 
  • Make sure the percentage of equity relative to total deal consideration is reasonable.
  • Seller financing typically has lower interest rates and favorable terms, so warrants are often attached to compensate the seller. 
  • Warrants are subject to capital gains tax while synthetic equity is typically ordinary income. As a result, warrants often have lower tax consequences.
  • Synthetic equity may work well for long-term incentive plans and for management buyouts. 

We enjoyed talking with business owners, management, and their advisors during this five-session series. We have found that through the value acceleration process, clients are able to increase business value and liquidity, giving them control over how they spend their time and resources.

If you are interested in learning more about value acceleration, please contact me. I would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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Decide: Value acceleration series part five (of five)

So far in our value acceleration series, we have talked about increasing the value of your business and building liquidity into your life starting with taking inventory of where you are at and aligning values, reducing risk, and increasing intangible value.

This month, we focused on planning and execution. How these action items are introduced and executed may be just as important as the action items themselves. We still need to protect value before we can help it grow. Let’s say you had a plan, a good plan, to sell your business and start a new one. Maybe a bed-and-breakfast on the coast? You’ve earmarked the 70% in cash proceeds to bolster your retirement accounts. The remaining 30% was designed to generate cash for the down payment on the bed-and-breakfast. And it is stuck in escrow or, worse yet, tied to an earn-out. Now, the waiting begins. When do you get to move on to the next phase? After all that hard work in the value acceleration process, you still didn’t get where you wanted to go. What went wrong?

Many business owners stumble at the end because they lack a master plan that incorporates their business action items and personal action items. Planning and execution in the value acceleration process was the focus of our conversation with a group of business owners and advisors on Thursday, April 11th.

Business valuation master plan steps to take

A master plan should include both business actions and personal actions. We uncovered a number of points that resonated with business owners in the room. Almost every business owner has some sort of action item related to employees, whether it’s hiring new employees, advancing employees into new roles, or helping employees succeed in their current roles. A review of financial practices may also benefit many businesses. For example, by revisiting variable vs. fixed costs, companies may improve their bidding process and enhance profitability. 

Master plan business improvement action items:

  • Customer diversification and contract implementation
  • Inventory management
  • Use of relevant metrics and dashboards
  • Financial history and projections
  • Systems and process refinement

A comprehensive master plan should also include personal action items. Personal goals and objectives play a huge role in the actions taken by a business. As with the hypothetical bed-and-breakfast example, personal goals may influence your exit options and the selected deal structure. 

Master plan personal action items:

  •  Family involvement in the business
  •  Needs vs. wants
  •  Development of an advisory team
  •  Life after planning

A master plan incorporates all of the previously identified action items into an implementation timeline. Each master plan is different and reflects the underlying realities of the specific business. However, a practical framework to use as guidance is presented below.


The value acceleration process requires critical thinking and hard work. Just as important as identifying action items is creating a process to execute them effectively. Through proper planning and execution, we help our clients not only become wealthier but to use their wealth to better their lives. 

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Planning and execution: Value acceleration series part four (of five)

What are the top three areas of improvement right now for your business? I asked this question of 20 business leaders and advisors on Wednesday morning (March 13th) during the third session of our value acceleration series. In this discussion, we focused on how to increase business value by aligning values, decreasing risk, and improving what we call the “four C’s.”

To back up for a minute, value acceleration is the process of helping clients increase the value of their business and build liquidity into their lives. Previously, we looked at the Discover stage, in which business owners take inventory of their personal, financial, and business goals and assemble information into a prioritized action plan. On Wednesday, we focused on the Prepare stage of the value acceleration process.

Aligning values may sound like an abstract concept, but it has a real world impact on business performance and profitability. For example, if a business has multiple owners with different future plans, the company can be pulled in two competing directions. Another example of poor alignment would be if a shareholder’s business plans (such as expanding the asset base to drive revenue) compete with personal plans (such as pulling money out of the business to fund retirement). Friction creates problems. The first step in the prepare stage is therefore to reduce friction by aligning values.

Reducing risk

Personal risk creates business risk, and business risk creates personal risk. For example, if a business owner suddenly needs cash to fund unexpected medical bills, planned business expansion may be delayed to provide liquidity to the owner. If a key employee unexpectedly quits, the business owner may have to carve time away from their personal life to juggle new responsibilities. 

Business owners should therefore seek to reduce risk in their personal lives, (e.g., life insurance, use of wills, time management planning) and in their business, (e.g., employee contracts, customer contracts, supplier and customer diversification, etc.).

Intangible value and the four C's

Now more than ever, the value of a business is driven by intangible value rather than tangible asset value. One study found that intangible asset value made up 87% of S&P 500 market value in 2015 (up from 17% in 1975). We Therefore, we focused on how to increase business value by increasing intangible asset value. Specifically, we talked about the “four C’s” of intangible asset value: human capital, structural capital, social capital, and consumer capital. 

We highlighted a couple of strategies to increase intangible asset value. First of all, do a cost-benefit analysis before implementing any strategies to boost intangible asset value. Second, to avoid employee burnout, break planned improvements into 90-day increments with specific targets.

At BerryDunn, we often diagram company performance on the underlying drivers of the 4 C’s (below). We use this tool to identify and assess the areas for greatest potential improvements:

By aligning values, decreasing risk, and improving the four C’s, business owners can achieve a spike in cash flow and business value, and obtain liquidity to fund their plans outside of their business.

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The four C's: Value acceleration series part three (of five)

We held our first discussion on value acceleration on January 9th as the first of a six-part series. If you were unable to attend (because the weather was not in your favor, or if you are outside of the Portland, Maine area), or are a business owner or executive interested in increasing the value of your business, read on to see what you missed.

One of the statistics that really caught participants’ attention was this one: 12 months after selling, three out of four business owners surveyed “profoundly regretted” their decision. Situations like these highlight the importance of the value acceleration process, which focuses on increasing value and aligning business, personal, and financial goals. Through this process, business owners will be better prepared for business transition, and therefore be significantly more satisfied with their decisions.

In our first session, we walked through a high-level overview of the value acceleration process. This process has three stages, diagrammed here:

© Exit Planning Institute

The Discover stage is also called the “triggering event.” This is where business owners take inventory of their situation, focusing on risk reduction and alignment of their business, personal, and financial goals. The information gleaned in this stage is then compiled into a prioritized action plan utilized in future stages.

In the Prepare stage, business owners follow through on business improvement and personal/financial planning action items formed in the discover stage. Examples of action items include the following:

  • Addressing weakness identified in the Discover stage, in the business or in personal financial planning
  • Protecting value through planning documents and making sure appropriate insurance is in place
  • Analyzing and prioritizing projects to improve the value of the business, as identified in Discover stage
  • Developing strategies to increase liquidity and retirement savings

The last stage in the process is the Decide stage. At this point, business owners choose between continuing to drive additional value into the business or to sell it.

Through the value acceleration process, we help business owners build value into their businesses and liquidity into their lives.

Read more! In our next installment of the value acceleration blog series, we cover the discover stage.

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The process: Value acceleration series number one (of five)

Consider the implications of the following statistics:

While a massive number of people are retiring each year and counting on the value of their business as part of their retirement plan, many are unable to actually generate any liquidity beyond normal compensation. They may even have a very valuable business, but can’t convert any of that value into cash. What a terrible situation! They may feel like a sailor stranded on a desert island—surrounded by water, but dying of thirst.

Attaining liquidity from your business and increasing business value are two topics that go hand in hand. Factors that increase business value often also increase the ease of selling the business. Even if your plan is to never sell, increasing profitability and liquidity will make planning easier. In this blog post, we will identify five ways business owners can improve business value and increase the likelihood of selling the business at a desirable price.

Businesses are often valued by using an income metric (such as earnings before interest, taxes, depreciation, and amortization, or EBITDA) and a valuation pricing multiple.


To increase business value, business owners can increase the valuation pricing multiple, increase income, or both. Focusing on improving the multiple is often a more effective way to increase business value.

Business risk is the key driver of the multiple. Five effective ways to improve the multiple are:

  1. Reduce reliance on the owner of the business
  2. Incentivize key employees to sign long-term employment contracts
  3. Diversify the customer base
  4. Create sustainable recurring revenue 
  5. Maintain immaculate financial statements

By planning ahead and implementing the above steps, business owners may be in a much better position for retirement.

P.S. We host a regular value acceleration presentation series. Please contact me or visit our event calendar to learn more. We would love to have you attend. These presentations focus on the process to increase the value of your business and build liquidity into your life.

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Value acceleration—The gas pedal for the value of your business

Executive compensation is often a contentious issue in business valuations, as business valuations are often valued by reference to the income they produce. If the business being valued pays its employees an above-market rate, its income will be depressed. Accordingly, if no compensation adjustments are made, the value of the business will also be diminished.

When valuing controlling ownership interests, valuation analysts often restate above- or below-market executive compensation to a market level to reflect what a hypothetical buyer would pay the executives. In the valuation of companies with ESOPs, the issue of executive compensation gets more complicated. The following hypothetical example illustrates why.

Glamorous Grocery is a company that is 100% owned by an ESOP. A valuation analyst is retained to estimate the fair market value of each ESOP share. Glamorous Grocery generates very little income, in part because several executives are overcompensated. The valuation analyst normalizes executive compensation to a market level, thereby increasing Glamorous Grocery income, the fair market value of Glamorous Grocery, and the ESOP share value.

Glamorous Grocery’s trustee then uses this valuation to establish the market price of ESOP shares for the following year. When employees retire, Glamorous Grocery buys employees out at the established share price. The problem? As mentioned before, Glamorous Grocery generates very little income and as a result has difficulty obtaining the liquidity to buy out employees.

This simple example illustrates the concerns about normalizing executive compensation in ESOP valuations. If you reduce executive compensation for valuation purposes, the share price increases, putting a heavier burden on the company when you redeem shares. The company, which already has reduced income from paying above-market executive compensation, may struggle to redeem shares at the established price.

A second issue is whether control-level adjustments are appropriate in ESOP valuations. A company might be 100% ESOP-owned, but an owner of an ESOP share may not actually be able to reduce executive compensation.

Interested in learning more? Please leave a comment below, or contact me. For additional discussion of the shareholder/executive compensation federal tax statutes and historical judicial precedents and sources of executive compensation data, please click here.

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Executive compensation: Making or breaking an Employee Stock Ownership Plan (ESOP)

Read this if you are a business with employees working in states other than their primary work location.

The COVID-19 pandemic has forced many of us to leave our offices to work remotely. For many businesses, that means having employees working from home in another state. As telecommuting become much more prevalent, due to both the pandemic and technological advances, state income tax implications have come to the forefront for businesses that now have a remote workforce and employees that may be working in a state other than their primary work location. 

Bipartisan legislation known as the Remote and Mobile Worker Relief Act of 2020 (S.3995) was introduced in the US Senate on June 18, 2020 to address the state and local tax implications of a temporary or permanent remote workforce. The legislation addresses both income tax nexus for business owners and employer-employee payroll tax responsibilities for a remote workforce. Here are some highlights:

Business income tax responsibility

The legislation would provide a temporary income tax nexus exception for businesses with remote employees in other states due to COVID-19. The exception would relieve companies from having nexus for a covered period, provided they have no other economic connection to the state in question. The covered period begins the date employees began working remotely and ends on either December 31, 2020 or the date on which the employer allows 90% of its permanent workforce to return to their primary work location, whichever date comes first.

The temporary tax nexus exception is welcome news for many business owners and employers, as a recent survey by Bloomberg indicated that three dozen states would normally consider a remote employee as a nexus trigger. Additional nexus would certainly add further income tax compliance requirements and potentially additional tax liabilities, complications that no businesses need in this already challenging environment.

Employee and employer tax responsibility

The tax implications for telecommuting vary wildly from state to state and most have not addressed how current laws would be adjusted or enforced due to the current environment. For example, New York implements a “convenience of the employer” rule. So if an out-of-state business has an employee working from home in New York, whether or not those wages are subject to New York state income tax depends on the purpose for the telecommuting arrangement. 

New York’s policy is problematic in the current environment. Arguments could be made that the employee is working for home at their convenience, at the employer’s convenience, or due to a government mandate. It is unclear which circumstance would prevail and as of this writing, New York has not addressed how this rule would apply.

If enacted, the Remote and Mobile Worker Relief Act would restrict a state’s authority to tax wage income earned by employees for performing duties in other states. The legislation would create a 90-day threshold for determining nonresident income tax liability for calendar year 2020, enhancing a bill in the House which proposes a 30-day threshold.

The 90-day threshold applies specifically to instances where the employee work arrangement is different due to the COVID-19 pandemic. For future years, the bill would put in place a standardized 30-day bright-line test, making it easier for employees to know when they are liable for non-resident state income taxes and for employers to know which states they need to withhold payroll taxes. 

What do you need to do?

With or without legislation, the year-end income tax filings and information gathering will be very different for tax year 2020. It’s more important than ever for business owners to have proper record keeping on where their employees are working on a day-to-day basis. This information is crucial in determining potential tax exposure and identifying a strategy to mitigate it. The Remote and Mobile Worker Relief Act would provide needed guidance and restore some sense of tax compliance normalcy.

If you would like more information, or have a question about your specific situation, please contact your BerryDunn tax consultant. We’re here to help.
 

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The remote worker during COVID-19: Tax nexus and the new normal

Read this if your organization, business, or institution has leases and you’ve been eagerly awaiting and planning for the implementation of the new lease standards.

Ready? Set? Not yet. As we have prepared for and experienced delays related to Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases, and Governmental Accounting Standards Board (GASB) Statement No. 87, Leases, we thought the time had finally come for implementation. With the challenges that COVID-19 has brought to everyone, the FASB and GASB recognize the significant impact COVID-19 has had on commercial businesses, state and local governments, and not-for-profits and both have proposed delays in effective dates for various accounting standards, including both lease standards.

But wait, there’s more! In response to feedback FASB received during the comment period for the lease standard, the revenue recognition standard has also been extended. We didn’t see that coming, and expect that many organizations that didn’t opt for early adoption will breathe a collective sigh of relief.

FASB details and a deeper dive

On May 20, 2020, FASB voted to delay the effective date of the lease standard and the revenue recognition standard. A formal Accounting Standards Update (ASU) summarizing these changes will be released early June. Here’s what we know now:

  • Revenue recognition―for entities that have not yet issued financial statements, the effective date of the application of FASB Accounting Standards Codification (ASC) Topic 606, Revenue Recognition, has been delayed by 12 months (effective for reporting periods beginning after December 15, 2019). This does not apply to public entities or nonpublic entities that are conduit debt obligors who previously adopted this guidance.
  • Leases―for entities that have not yet adopted the guidance from ASC 842, Leases, the effective date has been extended by 12 months (effective for reporting periods beginning after December 15, 2021).
  • Early adoption of either standard is still allowed.

FASB has also provided clarity on lease concessions that are highlighted in Topic 842. 

We recognize many lessors are making concessions due to the pandemic. Under current guidance in Topics 840 and 842, changes to lease contracts that were not included in the original lease are generally accounted for as lease modifications and, therefore, a separate contract. This would require remeasurement of the new lease contract and related right-of-use asset. 

FASB recognized this issue and has published a FASB Staff Questions and Answers (Q&A) Document, Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. Under this new guidance, if lease concessions are made relating to COVID-19, entities do not need to analyze each contract to determine if a new contract has been entered into, and will have the option to apply, or not to apply, the lease modification provisions of Topics 840 and 842.

GASB details

On May 8, 2020, GASB issued Statement No. 95, Postponement of the Effective Dates of Certain Authoritative Guidance. GASB 95 extends the implementation dates of several pronouncements including:
•    Statement No. 84, Fiduciary Activities―extended by 12 months (effective for reporting periods beginning after December 15, 2019)
•    Statement No. 87, Leases―extended by 18 months (effective for reporting periods beginning after June 15, 2021)

More information

If you have questions, please contact a member of our financial statement audit team. For other COVID-19 related resources, please refer to BerryDunn’s COVID-19 Resources Page.
 

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May 2020 accounting standard delay status: GASB and FASB

Read this if you are an employer looking for more information on the Employee Retention Credit (ERC).

If you are an employer who did not qualify for or request a Paycheck Protection Plan (PPP) loan, the ERC provisions of the CARES Act may be available to you.

The ERC is a fully refundable tax credit for eligible employers equal to 50 percent of qualified wages (including allocable qualified health plan expenses) an eligible employer pays their employees. This ERC applies to qualified wages paid after March 12, 2020, and before January 1, 2021. The maximum amount of qualified wages (including allocable qualified health plan expenses) taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an eligible employer can receive on qualified wages paid to any employee is $5,000.

Eligibility

Eligible employers for the ERC carry on a trade or business during calendar year 2020, including tax-exempt organizations, that either:

  • Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19; or
  • Experience a significant decline in gross receipts during the calendar quarter.

Self-employed individuals are not eligible for this credit for their own self-employment earnings, though they may be able to claim the credit for wages paid to their employees.

If an eligible employer averaged more than 100 full-time employees in 2019, qualified wages are limited to wages paid to an employee for time that the employee is not providing services due to an economic hardship, specifically, either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts. If the eligible employer averaged 100 or fewer full-time employees in 2019, qualified wages are the wages paid to any employee during any period of economic hardship described in (1) or (2) above.

As with most provisions of the CARES Act, very limited formal guidance has been issued by the IRS. Instead, the IRS issues and updates FAQs on the IRS website. 

One area where eligible employers have been seeking advice is what qualifies as wages and allocable health insurance costs. Qualified wages include an allocable portion of the qualified health plan expenses paid or incurred by an eligible employer to provide and maintain a group health plan. For purposes of the ERC, this also includes employee pre-tax contributions. 

IRS FAQs

The IRS recently updated the Employee Retention Credit FAQs to indicate an eligible employer can claim the ERC for qualified health plan expenses, regardless of whether the employee is paid qualified wages. Updated FAQs 64-65 clarify that health plan expenses paid to laid off or furloughed employees are considered qualified wages for purposes of the ERC. This is welcome news since most employers continue to a pay their share (if not the full amount) of the health insurance premiums for employees who have been laid off or furloughed. 

Read specific examples in the updated FAQs here.

How are qualified health plan expenses determined and allocated?

Qualified health plan expenses are determined separately for each plan sponsored by an employer. For employers sponsoring more than one health plan, for example a group health plan and a health flexible spending arrangement, expenses for each plan are allocated to the employees who participate in that plan. Allocated expenses will be aggregated for those employees who participate in more than one plan. 

Qualified health plan expenses may be allocated using any reasonable method by those employers sponsoring a fully-insured group health plan, including (1) the COBRA applicable premium for the employee, (2) one average premium rate for all employees, or (3) a substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage. An eligible employer allocating expenses using the average premium rate for all employees may determine a daily rate as detailed in FAQ 67.

Example

An employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to have 260 work days a year (5 days/week for 52 weeks). The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. Using the one average premium rate method, the annual premium rate is $13,000 ($5.2 million divided by 400 employees). For each employee expected to have 260 work days a year, the resulting daily average premium is $50 ($13,000 divided by 260 days). The $50 daily rate represents qualified health plan expenses allocated to each day of the qualified wages per employee.

For those employers sponsoring self-insured group health plans, qualified health plan expenses may be allocated using any reasonable method, including (1) the COBRA applicable premium for the employee, or (2) any reasonable actuarial method to determine the estimated annual expenses of the plan. 

An eligible employer sponsoring a self-insured group health plan and allocating expenses using a reasonable actuarial method to determine estimated annual expenses may determine a daily rate similar to the rules for fully-insured plans—that is, taking the estimated annual expenses, dividing by the number of employees covered, and then dividing by the average number of work days during the year by the employees. 

For both fully-insured and self-insured plans, paid-time off days are considered work days when determining the average daily rate.

FAQs 69 and 70 provide that qualified health plan expenses do not include eligible employer contributions to health savings accounts (HSA), Archer medical saving accounts (Archer MSA), or a qualified small employer health reimbursement arrangement (QSEHRA). 

However, qualified health plan expenses may include contributions to a health reimbursement arrangement (HRA), including an individual coverage HRA, or a health flexible spending account (FSA). To allocate contributions to an HRA or a health FSA, eligible employers should use the amount of contributions made on behalf of the particular employee.

Additionally, qualified health plans expenses do not include health plan expenses allocated to any sick leave and family medical wages under the FFCRA (FAQ 71). 

Summary

For those eligible employers with 100 or more employees, the guidance that can be inferred from the available FAQs appears to be the following:

  • If an employer is paying an employee for more than the hours the employee is actually working then a credit would be available for the difference between wages paid and the wages for the hours worked.
  • If an employer has decreased the hours worked by an employee but continues to pay the same (or greater) cost for health insurance, a credit would be available for the allocable health insurance costs while the employee is not working. For example, if an employee is only working 60% of the his/her normal hours, an employer would be able to receive a credit equal to 40% of the health insurance costs paid for that employee.

For more information

If you have more questions, or have a specific question about your particular situation, please call us. We’re here to help. 

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Employee Retention Credit―Updated IRS FAQs provide clarification

Read this if you are a business owner or advisor to business owners.

With continued uncertainty in the business environment stemming from the COVID-19 pandemic, now may be a good time to utilize trust, gift, and estate strategies in the transfer of privately held business interests.

In simple terms, business valuation is a function of future cash flow and the risk in achieving those cash flows. As uncertainty in the ability to achieve future cash flow rises, risk rises at the same time. The value of a business is driven by risk. Holding all else equal, as risk continues to increase, the value of a business decreases. Similarly, if all else is equal, a continuing decline in anticipated cash flow results in decreased business values. An increase in risk, coupled with growing uncertainty and decline in cash flow may create a compounding effect of depressing business values. 

Cash flow challenges

Even if the cash flow of a privately held business has held up thus far, there is great uncertainty as to future cash flow. The duration of this uncertainty is a major concern for many business owners in the current environment. It was not long ago that many were anticipating the pandemic impact would be short-lived, resulting in a v-shaped recovery. Those expectations have given way as national unemployment numbers continue to climb. This continued uncertainty may lessen the value of privately held businesses. Depending on the company, its expectations, and impact from industry and economic factors, the effect on future cash flow may be significant.

With these elements in mind, the current and near-term may serve as an advantageous time to consider the transfer of interests in a privately held business. Increased risk and lowered future expectations will combine, resulting in lower values—particularly as compared to performance during the recent strong economy. 

Further opportunities exist if you are considering transferring a non-controlling interest in a company. Discounts applicable to minority or fractional interests typically include discounts for lack of control and lack of marketability, and in some cases discounts for lack of voting rights. These discounts may serve to further reduce the overall value transferred through a given strategy. 

What strategies can be used to capitalize in this environment?

From a federal perspective, gift and estate tax lifetime exemption amounts are at all-time highs; currently, $11.58 million per individual in 2020. With portability, a married couple can gift or transfer over $23 million in value without incurring a federal gift or estate tax.

Coupled with the ever-increasing annual gift tax exclusion amount of $15,000 per recipient in 2020, executing a succession plan could not come at a better time. Individuals should be aware of the scheduled sunset of the above referenced amounts in 2025 with reversion back to previous levels of $5.0 million (adjusted for inflation).

Building on future uncertainty, the 2020 presidential election is quickly approaching, as well as budget concerns from federal and state administrative agencies resulting from COVID-19. As it is unknown whether the current estate gift and estate tax exemptions will remain at these all-time highs, it may be an opportune time to leverage the current lifetime exemption or annual gift tax exclusion. 

Given the likely decline in value of closely held business interests or marketable securities combined with historically low interest rates currently, transferring assets now that will likely rebound in value later will provide transferors/donors with the most bang for their buck. 

Certain trust vehicles are often beneficial in a low-interest rate environments and provide varying forms of flexibility to the grantor or donor. When combined with the increase in the charitable deduction limits for taxpayers who itemize their deductions, this is an optimal time for transferring assets.  

One of the most important aspects of estate planning is to review and update your estate plan regularly for changes in your financial or family situation. Estate plans are not static and should be periodically reviewed to ensure they achieve your goals based upon your current situation.

Our mission at BerryDunn remains constant in helping each client create, grow, and protect value. If you have questions about your unique situation, or would like more information, please contact the team.

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2020 estate strategies in times of uncertainty for privately held business owners

Read this if you are a business owner.

While recent articles within the exit planning community have noted a slowing of business transitions and exits, during times of uncertainty it may be even more important to focus on the opportunity at hand. Rather than waiting it out, we recommend that business owners try to be active, involved, and focus their efforts on improving their business.

The situation is similar to the ebb and flow of the tide. The current economy is the tide at an extreme low point. We know that the economy will recover, so what can be done in the meantime to take advantage of opportunities, and be ready to succeed when the tide rises?

Changing of tides

Suddenly, there has been a rapid and seismic shift in the landscape. Weaknesses and threats, rocks and hazards, may have emerged. How you choose to approach these perils will make a difference in the long term. Will you take the opportunity to discover, identify, assess, shore up, and mitigate these elements?

It is important to view this current state in the context of the larger, long-term perspective. Once the tide comes back, will you be able to set full sail ahead having built resiliency, redundancy, and strength into those areas while you had the opportunity? While the water is low, it presents a great opportunity for business owners to discover and understand: 

  • What broke first and why? 
  • How can you shore it up for better operations in the days ahead?
  • What weak spots you didn’t know about are now apparent?
  • How can you address those weaknesses?
  • How can you leverage existing resources differently to chart a path forward?

Models of priority

There are various stages or hierarchies of priority in thinking about the progress of a business. 

Each priority model features bases and pinnacles. The pinnacles of each model are realized in a long-term setting, after the remaining bases have been solidified. While continued development of a clear vision for your business is paramount, dynamic shifts in the landscape call for reassessment of the bases. In the long-term, self-fulfillment manifests from properly executed strategy, but in the near- and mid-term, these various frameworks force strategic planning back to assess and address the base components. 

The bases of each model should serve as safe havens for reversion. When facing uncertainty and failure, have you made your base strong enough to redirect your efforts in an actionable plan for the long-term?

Action Planning Pyramid and Value Maturity Index

Action Planning
Five Stages of Value Maturity

The Value Maturity Index, broken into five stages is a stepwise assessment of active exit and business strategy. Inherent in the value acceleration framework are the concepts of resiliency, redundancy, disaster recover, and actionable planning.

While we may have been fully entrenched in the build phase, setbacks due to dynamic changes in the landscape force us back to protect mode—the assessment and methodical shoring up of weaker points of the operation to protect against future downside risks.

Though this stepwise progression is linear in nature, keep in mind that flexibility and adaptability are paramount in changing course to address needs of your current state.

When we look at action planning, parallels can be drawn to the various models. Certainly, we are focused on continuing sales, marketing, and customer relationships, but it becomes a question of reversion to meeting the basic needs and serving client’s pain points rather than  beginning ground-breaking efforts. 

The current climate forces us to the base, with a focus on solidifying the exposed areas that may have been made apparent, and likely compounded, by the current realities. Concerns on management, metrics, core values, and priorities serve as the bases in need of coverage.

Maslow’s Hierarchy of Needs
 

Maslow's Hierarchy of Needs

Maslow’s Hierarchy of Needs1 is a well-known motivational theory in psychology that comprises a five-tiered model of human needs, whereby each successive tier must be fulfilled (beginning at the base) before rising to the next tier. It can be used to view similar information from a psychological perspective.

Value acceleration and creating successful outcomes are largely tied to a clear long-term vision. We typically reside in the Self-actualization level of the hierarchy of needs when undertaking the high-level view of the framework.

Based on the adaptability and call for sudden directional changes in today’s climate, we are not as concerned with these top levels. We have them in our back pocket for easy recall, but they are not the pressing issue staring us in the face.

If we think about shoring up bases (the Protect Stage), in considering this psychological model, our focus is on the “basic needs” level. That is, keeping people (self, family, and employees) safe and remaining connected for immediate continuity.

McKinsey & Company Event Horizons

McKinsey & Company Event Horizons

Many others in related fields are viewing the current situation in similar terms. In the McKinsey & Company Events Horizon view2:

  • Resolve addresses those immediate hurdles and challenges a business is currently facing.
  • Resilience focuses on near-term items to be addressed once the initial base is covered. 
  • Return views the mid-term horizon in understanding how to return to scale by focusing on understanding metrics and increasing the frequency of measurements for informed decision making. 
  • Reimagination and Reform typically go hand in hand, but without covering bases of needs, crafting a dynamic shift in operations to incorporate new environments may be counterproductive. 

However, once these bases have been clearly assessed and addressed, the path forward may appear dramatically different, in which case creative solutions to enhance opportunity should begin to form. Examples of this may include newly emerged revenue streams and opportunity areas, fully integrated systems and dashboards to capture timely decision making data points, or pivots in your business model adaptable and reactive to new environments.

One example that has been in the news recently involves CEOs being pleasantly surprised that productivity of employees has not dropped even though people are working from home. How sustainable is this productivity? What implications might this have for corporate real estate and office settings? The answers will vary widely, depending on your business and competitive environment.

Exposure, discover, and control

Back to our tides analogy for a moment. As the water receded, what new rocks were exposed or what existing challenges became more apparent? What is your plan to address these areas? Is this the time to make large investments in your company or the right investments? Now that the tide is out, it is time to shore up, move the rocks, and address elements of your business to prepare for long-term successes. Through our assessments, risk profiling, and benchmarking analyses, we help business owners discover the largest gaps across the company, prioritize the most impactful problem areas to address, and implement changes to enhance business value through continuous improvement. 

Taking stock of your company’s future through the incorporation of lessons learned will bolster value in the long-term by de-risking and developing new opportunities, methods, work, shifts in productivity, and shifts in mentality. That approach also brings lots of questions: If there are no early warning signs, why not? What should your indicators be? What metrics are crucial in identifying the pulse of your current situation? What is your business reliant on? How can you build information and indicators for rapid shifts in decision making? How strong are your current controls and how integrated are your management and information systems?

To answer these questions, you need to quantify and develop metrics that will aid in the early identification of future challenges, thus increasing your responsiveness with data-driven decision mechanisms. Having your fingers on the pulse of your company and understanding the impact of each input to your strategy will focus your attention on the information that matters most. This allows you to understand, position, and adapt to changes in your business and community environment in a proactive and agile manner. Measurements, forecasts, and dashboards should provide you with regular, valid, and relevant information you can use to take informed action in decision making.

Historical look backs during various points of time will allow you to key in on pivotal data indicators and inflection points. When looking at this from an operational view, industry and economic factors impacting your company can serve as corroborating pieces of evidence to further support data metrics analyzed.

As you perform look backs, it is also best practice to regularly study and update development, pipeline, and reliance metrics for feedback and information discovery with data integrated throughout your operations. This helps avoid lag time in reporting on stale information towards real-time actionable data points.  

Each metric is specific to your business and can be directly mapped back to increases in shareholder value. Understanding these drivers of business value will focus your attention and intention on improving in the right areas, while avoiding distracting and less impactful pain points.

Don’t fret over precision, rather build in flexibility and adaptability with scenario- and sensitivity-based criterion to understand changes, implications, and reliance of each input. Understanding these relationships in a broader scheme aid you in quick, impactful decision making guiding you towards enhanced value.

Resilience until the tides rise

This approach allows opportunity to fully assess the known and unknown problem areas, weaknesses, perils, and hazards your business may be facing. From that base you can begin to address these issues to scale effectively with lower overall risk when activity picks up.

Management metrics, core values, and priorities drive resilience for long-term continuity by shoring up the foundation to build for the future. Assembling evidence in troubled times provides opportunity to capitalize on and fulfill core values. Documenting these decisions and improvements memorialize your decision making, impact on value enhancement, and should serve as a playbook for future events.

What you make of the time you have now through identification, assessment, and addressing newly emerged risk areas provides the opportunity to increase success once the economy rebounds. We are here to help. If you have questions about your particular situation, or would like more information, please contact the business valuation consulting team

1Maslow’s Hierarchy of Needs, Saul McLeod, updated March 20, 2020. SimplyPsychology. www.simplypsychology.org/maslow.html.
2Beyond coronavirus: The path to the next normal, Kevin Sneader and Shubham Singhal, McKinsey & Company, March 23, 2020.  www.mckinsey.com/industries/healthcare-systems-and-services/our-insights/beyond-coronavirus-the-path-to-the-next-normal. COVID-19: Briefing note, March 30, 2020, Our latest perspectives on the coronavirus pandemic. Matt Craven, Mihir Mysore, Shubham Singhal, Sven Smit, and Matt Wilson. McKinsey & Company. www.mckinsey.com/business-functions/risk/our-insights/covid-19-implications-for-business.

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Value acceleration in times of uncertainty

Read this if your organization, business, or institution has leases and you’ve been eagerly awaiting and planning for the implementation of the new lease standards.

Ready? Set? Not yet. As we have prepared for and experienced delays related to Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 842, Leases, we thought the time had finally come for implementation. With the challenges that COVID-19 has brought to everyone, the FASB recognizes the significant impact COVID-19 has brought to commercial businesses and not-for-profits and is proposing a one-year delay in implementation, as described in this article posted to the Journal of Accountancy: FASB effective date delay proposals to include private company lease accounting.

But what about lease concessions? We all recognize many lessors are making concessions due to the pandemic. Under current guidance in Topics 840 and 842, changes to lease contracts that were not included in the original lease are generally accounted for as lease modifications and, therefore, a separate contract. This would require remeasurement of the new lease contract and related right-of-use asset. FASB recognized this issue and has published a FASB Staff Questions and Answers (Q&A) Document,  Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic. Under this new guidance, if lease concessions are made relating to COVID-19, entities do not need to analyze each contract to determine if a new contract has been entered into, and will have the option to apply, or not to apply, the lease modification provisions of Topics 840 and 842.

Implementation of the lease accounting standard will most likely be delayed for Governmental Accounting Standards Board (GASB) entities as well. On April 15, 2020, the GASB issued an exposure draft that would delay most GASB statements and implementation guides due to be implemented for fiscal years 2019 and later. Most notably, this includes Statement 84, Fiduciary Activities, and Statement 87, Leases. Comments on the proposal will be accepted through April 30, and the board plans to consider a final statement for issuance on May 8. More information may be found in this article from the Journal of Accountancy: GASB proposes postponing effective dates due to pandemic.

More information

Whether you are a FASB or GASB entity, you can expect a delay in the implementation of the lease standard. If you have questions, please contact a member of our financial statement audit team. For other COVID-19 related resources, please refer to BerryDunn’s COVID-19 Resources Page.

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FASB and GASB news: Postponement of the lease accounting standards

Read this if you want more information about the Paycheck Protection Program (PPP).

Most likely you have heard of the PPP within the Coronavirus Aid Relief and Economic Security (CARES) Act that was passed into law March 27, 2020. Below, we’ve shared some of the questions we have heard from many of our clients. If you need more information or have questions regarding your specific question, please contact us

Question #1: What was the PPP designed for? 
Answer:
The PPP was designed with the goal of keeping American workers paid and employed. It aims to accomplish this by issuing loans to qualified businesses so that they can continue paying employees and other qualified expenses.

Question #2: Do you or your business qualify for this? 
Answer: There are several considerations when determining whether or not a business qualifies. For more information, see this recent blog post from Seth Webber, which address a number of these considerations. 

Question #3: What should the PPP loan be used to cover in your business?
Answer: The intent of allowable uses includes: (i) payroll costs, including (a) employee salaries, commissions, or similar compensations, (b) group health care benefits, (c) paid vacation, parental, sick, medical, or family leave, (d) allowances for dismissal or separation, (e) retirement benefits, and (f) state or local tax assessed on the compensation on employee;  (ii) payments of interest on any mortgage obligation, but not prepayment or payment of principal amounts; (ii) rent (including rent under a lease agreement); (iv) utilities; and (v) interest on any other debt obligations incurred before February 15, 2020. However, certain payroll costs are excluded, including salaries and wages which annualized amounts would result in compensation over $100,000 and sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act.  

Additionally, you should consider the time period your allowable expenses are designated for. The Small Business Administration (SBA), in consultation with the Department of the Treasury (Treasury) issued a list of frequently asked questions (FAQs) and responses to these FAQs as of April 10, 2020, Paycheck Protection Program Loans FAQs. Within these FAQs, Question 20 asked, “The amount of forgiveness of a PPP loan depends on the borrower’s payroll costs over an eight-week period; when does that eight-week period begin?” The SBA and Treasury noted, “The eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower. The lender must make the first disbursement of the loan no later than ten (10) calendar days from the date of loan approval.” 

Question #4: What portion of the loan, if any, can be forgiven?
Answer:
The Treasury Department issued guidance on March 31, 2020 indicating that at least 75% of the forgiven amount should be used for qualified payroll costs. Although the covered period is specified as February 15, 2020 through June 30, 2020, forgiveness amounts of the loan are based on expenses (primarily payroll) during the eight-week period following the receipt of the loan. There are other aspects of the forgiveness provisions that impact the actual amount forgiven, including maintaining or quickly rehiring employees and maintaining salary levels, with the overall forgiveness amount being reduced if full-time headcount declines, or if salaries and wages decrease more than 25%.

Question #5: What about the portion of your loan that is not forgiven?
Answer:
For the portion of loan not forgiven, the life and terms of the residual loan appear favorable. Current guidance indicates a repayment period of two year loan at 1% interest. Included within this is a six-month deferral period on principal repayment. The loan does not require collateral or a personal guarantee.

Question #6: How should you keep track of the funding and allowable costs?
Answer
: Best practice would be to set up a separate banking account. This will allow you to bifurcate the funding source and offset that amount by costs tracked over the covered period directly. This allows you to use other cash reserves and funding sources to meet other expense needs during the covered period. The funds need to be brought over (into that separate banking account) within 10 days of the application being approved.

Question #7: What other resources are available if the PPP is not a good fit for you?
Answer:
There are additional programs available through the Small Business Administration (SBA) including the Economic Injury Disaster Loan (EIDL) program, which features an advance amount (EIDL Emergency Grant) of up to $10,000. Guidance remains outstanding on exact implications of the EIDL Emergency Grant amount with some SBA offices pointing to $1,000 per employee up to a total max of $10,000. This EIDL Emergency Grant does not have to be repaid, but if you subsequently receive funding through the PPP, your forgiveness amount will be reduced by the EIDL Emergency Grant amount. The EIDL program also features a max life of 30 year loan with interest rates of 3.75% and 2.75% for entities that are for-profit and non-profit, respectively. More information on this is detailed in Dave Erb’s recent blog post.

If you do not need to make use of the PPP and EIDL programs, but still face significant downturns in your revenue base, tax relief in the form of the Employee Retention Credit (ERC) may also be an option. The provisions of the ERC within the CARES Act specify eligibility as, an employer that does not participate in the PPP and: (i) a complete or partial shutdown in operations; or (ii) at least a 50% decline in gross receipts, based on quarterly comparison from 2020 to 2019. The ERC allows for a tax credit of 50% of qualified wages (max wages of $10,000 per employee and max credit of $5,000 per employee). For more information on the ERC provisions, see Bill Enck’s blog post.

As developments continue to unfold and changes in guidance continue to emerge, the BerryDunn Recovery Advisory Team can help you stay informed through the BerryDunn COVID-19 Resource Center.

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Paycheck Protection Program: FAQs

Read this if you are a Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Chief Information Officer, or Controller.

While COVID-19 has forced many of us into a remote work environment, we also have to deal with the challenges that come along with it. The stark contrast between an office environment and one that potentially involves working in isolation can be a difficult adjustment. Office kitchen conversations have evolved into conversations with pets, our newest co-workers. A quick, in-person question has now turned into an email, phone, or video call. And job responsibilities expand as we try to not only juggle work but also ensure our children focus on school work―and don’t destroy the house. 

Not only has this forced environment caused social challenges, it has also opened the door for internal control challenges, as  internal controls designed to operate effectively in an office environment may not be ideal for a remote workplace. Even ones that are appropriately designed, may prove to be operating ineffectively in this new environment. Let’s take a look at some internal control challenges, and potential solutions, faced by working in a remote environment.

Establishing a remote control environment

Exercising appropriate tone at the top and establishing appropriate oversight can be challenging with a remote workforce. Ethics and governance policies play an important role in setting clear expectations about workplace behaviors. But, a workforce is much more apt to follow a leadership team’s example rather than a policy. All of those office conversations, even the conversations that are not work related, help set an expectation of appropriate and inappropriate behaviors. These conversations often happen naturally in the office via a quick conversation in passing in the hallway or a late-Friday happy hour with your department. However, these interactions do not naturally occur in a remote workplace. Leadership and department heads should make an active effort to maintain communication with their workforce. Some things to consider:

  • Send out weekly emails to the entire department and possibly more personal, one-on-one videoconferences or phone calls between your department heads or managers and individual members of their teams.
  • These department-wide emails should stress the importance of communication as well as continuing to produce high quality work and maintaining accountability. 
  • One-on-one meetings should be used to check in with employees to ensure their work needs are being met. 

Employees will most likely have many suggestions to improve their new work environment, including suggestions on how to improve communication amongst team members. 

The power of video

Videoconferencing also provides a great opportunity to stay connected. Virtual happy hours simulate an in-person happy hour. This is a great way to check-in with team members and show that, although people are out of sight, they are not out of mind. Town hall-type meetings can also be explored. Your leadership team can solicit open discussion. Agenda items may include office status updates, technological considerations, and an opportunity for employees to openly discuss current challenges due to working in a remote environment. Employees are going to have anxiety about the current environment. These meetings can help put employees at ease.

Risk assessment

Internal control environments are constantly evolving. Employees leave. Software is updated.  Offered services and products change. The list goes on. However, it is unprecedented that an internal control environment has changed so rapidly. Given these unprecedented times, there is potential for higher risk of fraud, internally and externally. Those responsible for designing internal controls (control owners) should reassess your company’s environment. Although internal controls can be designed in a manner in which they operate effectively regardless of the circumstances, it is possible there are unintended changes to processes that have occurred. 

For instance, let’s say the employee responsible for reviewing loan file maintenance changes is now working an alternative work schedule due to personal obligations. This employee does not have the ability to make loan file changes; therefore, segregation of duties has never been an issue. An employee within loan servicing has agreed to take some of the employee’s responsibilities and is now reviewing some of the loan file maintenance changes, which has put this employee in a position to review some of their own changes. 

Furthermore, some internal controls that require employees be at a physical location to operate may also be compromised, such as inventory cycle counts. If these controls are unable to operate, control owners will need to consider the impacts on the affected transaction areas, and if there are compensating controls that can be designed to alleviate some of the control risk.

Control activities

Accounts payable and check signing

The accounts payable and cash disbursement process will most likely be upended as a result of your new remote environment. Bills received through the mail will need to be scanned to the accounts payable clerk for entry into the accounting system. Some offices have designated certain personnel responsible for checking mail on an infrequent basis, for instance, weekly. Check signing may also prove to be a challenge as blank check stock may be inaccessible. Electronic receipt of invoices and signing of checks, as well as the use of wire and ACH transfers, lend themselves as feasible solutions. Email approvals may suffice when multiple signers are needed to approve high dollar disbursements.

Segregation of duties

As mentioned above, it is possible processes have inadvertently changed, exposing certain internal controls to ineffectiveness. Segregation of duties may become difficult as employees shift to alternative work schedules or have other issues. Maintaining segregation of duties should be a top priority for control owners and is something that should be constantly assessed as circumstances change. Challenging times may make segregation of duties difficult and may force you to get creative by requesting employees perform duties they are not otherwise accustomed to performing.

Digital sign-offs

You should also consider the manner in which you document the completion of controls. Control owners should be cautious about the integrity of an employee’s initials simply typed onto a digital document, as any employee can perform this task. Digital signatures, which require an employee to enter credentials prior to signing, enhance the integrity of a sign-off and are often time stamped. Digital signatures may also “lock down” the document, prohibiting any changes to the signed document.

Timely review

Given the circumstances, it is not unreasonable that preparation and review may take longer than under normal circumstances. Even if additional time is granted for the preparation and review of documents, you should consider the implications this has on the transaction class as a whole. The longer it takes to complete a control, the greater the consequences may be if you identify an error. For instance, the impact of an incorrect change to a loan rate index can be substantial if not identified timely. If identified quickly, you can avoid consequences later.

Information and communication

For many companies that have moved from a paper to a digital environment, sharing of information should not be an issue. However, for those that still operate in a mostly paper environment, performing tasks and sharing information with team members may prove to be difficult. And, those without the capability of scanning and sending documents from home could compromise a specific internal control altogether. Being forced to work remotely may be the perfect excuse to move paper processes into a digital format.

Monitoring

Monitoring your internal control environment is of the utmost importance given these significant changes. Frequent conversations should be had with control owners to ensure changes to processes do not render controls ineffective. Identified gaps in internal controls should be addressed proactively. Provide control owners with the opportunity to discuss changes to control processes with Internal Audit or Risk Management so such departments can consider the impact of changes on internal control. This also gives these departments the opportunity to cover any resulting gaps.

Permanent changes

Once the remote workplace requirements end, the effects of working in such an environment will not. There are many benefits and efficiencies to be found in working remotely. As people have now been forced to work in such an environment, they will be more apt to continue to do so. Therefore, let’s take this opportunity to revise processes and internal controls to be “remote workplace” compatible. This will provide a long-lasting impact to your organization far beyond the pandemic. 
 

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How does your control environment look in a remote world?

Read this if you are an employer that may have to close, or has closed, due to COVID-19.

Here is a brief recap of definitions and explanations of employee retention credits found in the CARES Act. If you have questions about your specific situation, please don’t hesitate to contact us. We’re here to help.

Eligible employer

The term ‘‘eligible employer’’ means any employer: 

(i) that was carrying on a trade or business during calendar year 2020, and 
(ii) with respect to any calendar quarter, for which...
a.     the operation of the trade or business is fully or partially suspended during the calendar quarter due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID–19), or 
b. such calendar quarter where there is a significant decline in gross receipts...
i. beginning with the first calendar quarter in 2020, for which gross receipts for the calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in the prior year, and 
ii. ending with the calendar quarter for which gross receipts of such employer are greater than 80 percent of gross receipts for the same calendar quarter in the prior year.


For tax-exempt organizations described in section 501(c) of the Internal Revenue Code and exempt from tax under section 501(a) of such Code, clauses (i) and (ii)(a) shall apply to all operations of such organization.

Generally, all organizations treated as a single employer under the controlled group or affiliated service group rules will be treated as one employer for purposes of this section.

If an eligible employer participates in the Paycheck Protection Program, such an employer is not eligible for the employee retention credits.

Amount of credit

There shall be allowed, as a credit against applicable employment taxes for each calendar quarter, an amount equal to 50 percent of the qualified wages with respect to each employee of such employer for such calendar quarter.

The amount of qualified wages with respect to any employee which may be taken into account by the eligible employer for all calendar quarters shall not exceed $10,000 (i.e., the maximum credit is $5,000 per employee).

If the credit exceeds the applicable employment taxes on the wages paid for such calendar quarter, such excess shall be treated as an overpayment that shall be refunded.

Qualified wages

The term ‘‘qualified wages’’ means:

(i) in the case of an eligible employer for which the average number of full-time employees (as defined by the Affordable Care Act Employer Mandate Provisions) employed by such eligible employer during 2019 was greater than 100:
a. wages paid by such eligible employer with respect to which an employee is not providing services due to the suspension of the business or a drop in gross receipts circumstances, or 
(ii) in the case of an eligible employer for which the average number of full-time employees (as defined by the Affordable Care Act Employer Mandate Provisions) employed by such eligible employer during 2019 was not greater than 100:
a. all wages paid by an eligible employer when shut down and each quarter where there was a sharp decline in year-over-year receipts.


Wages do not include amounts paid under the expanded sick/family leave provisions of the FFCRA.

Qualified wages paid or incurred by an eligible employer with respect to an employee who is not providing services may not exceed the amount such employee would have been paid for working an equivalent duration during the 30 days immediately preceding leave.

The term ‘‘qualified wages’’ shall include so much of the eligible employer’s qualified health plan expenses as are properly allocable to such wages.


CARES Act: Payroll tax payment delay

An extension of time to remit payroll taxes for the period beginning March 27, 2020 and ending before January 1, 2021 over a two-year period is allowed, with half due by December 31, 2021, and the remainder due by December 31, 2022.

If an eligible employer participates in the payroll tax delay programs, such an employer is not eligible for the employee retention credits.
 

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CARES Act―Employee retention credits for employers subject to closure due to COVID-19

The President signed The Families First Coronavirus Response Act (hereinafter the “Act”) into law on March 18th and the provisions are effective April 2nd. You can read the congressional summary here. There are two provisions of the Act that deal with paid leave provisions for employees. Here are some highlights for employers.

The provisions of the Act are only required for employers with fewer than 500 employees. Employers with over 499 employees are not required to provide the sick/family leave contained in the Act, but could voluntarily elect to follow the new rules. The expectation is that employers with over 499 employees are providing some level of sick/family leave benefits already. In any case, employers with over 499 employees are not eligible for the tax credits. 

Employers with fewer than 500 employees are required to provide employees with up to 80 hours of paid sick leave over a two-week period if the employee:

  • Self-isolates because of a diagnosis with COVID-19, or to comply with a recommendation or order to quarantine;
  • Obtains a medical diagnosis or care if the employee is experiencing COVID-19 symptoms;
  • Needs to care for a family member who is self-isolating due to a COVID-19 diagnosis or quarantining due to COVID-19 symptoms; or
  • Is caring for a child whose school has closed, or childcare provider is unavailable, due to COVID-19.

These rules apply to all employees regardless of the length of time they have worked for the employer. The 80-hours would be pro-rated for those employees who do not normally work a 40-hour week. 

Employees who take leave because they themselves are sick (i.e., the first two bullets above) can receive up to $511 per day, with an aggregate limit of $5,110. If, on the other hand, an employee takes leave to care for a child or other family member (i.e., the last two bullets above), the employee will be paid two-thirds (2/3) of their regular weekly wages up to a maximum of $200 per day, with an aggregate limit of $2,000.

Days when an individual receives pay from their employer (regular wages, sick pay, or other paid time off) or unemployment compensation do not count as leave days for the purposes of this benefit.

Family and Medical Leave Act

Employees who have been employed for at least 30-days also have the right to take up to 12 weeks of job-protected leave under the Family and Medical Leave Act (FMLA). The Act requires that 10 of these 12 weeks (i.e., after the sick leave discussed above is taken) be paid at a rate of no less than two-thirds of the employee’s usual rate of pay. Any leave taken under this portion of the ACT will be limited to $200 per day with an aggregate limit of $10,000.

Exemptions

The Secretary of Labor has the authority to issue regulations exempting: (1) certain healthcare providers and emergency responders from taking leave under the Act; and (2) small businesses with fewer than 50 employees from the requirements of the Act if it would jeopardize the viability of the business.

Expiration

The provisions of the Act are set to expire on December 31, 2020, and unused time will not carry over from one year to the next.

Tax credits 

The Act provides for refundable tax credits to help an employer cover the costs associated with providing paid emergency sick leave or paid FMLA. The tax credits work as follows:

  • A refundable tax credit for employers equal to 100 percent of qualified family leave wages paid under the Act.
  • A refundable tax credit for employers equal to 100 percent of qualified paid sick leave wages paid under the Act. 
  • The tax credits are taken on Form 941 – Employer’s Quarterly Federal Income Tax Return filed for the calendar quarter when the leave is taken and reduce the employer’s portion of the Social Security taxes due. If the credit exceeds the employer’s total liability for Social Security taxes for all employees for any calendar quarter, the excess credit is refundable to the employer.

For more information

We are here to help. Please contact our benefit plan consultants if you have any questions or would like to discuss your specific situation. 

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Highlights of the recently passed paid sick and family leave act: What you need to know

Best practices for financial institution contracts with technology providers

As the financial services sector moves in an increasingly digital direction, you cannot overstate the need for robust and relevant information security programs. Financial institutions place more reliance than ever on third-party technology vendors to support core aspects of their business, and in turn place more reliance on those vendors to meet the industry’s high standards for information security. These include those in the Gramm-Leach-Bliley Act, Sarbanes Oxley 404, and regulations established by the Federal Financial Institutions Examination Council (FFIEC).

On April 2, 2019, the FDIC issued Financial Institution Letter (FIL) 19-2019, which outlines important requirements and considerations for financial institutions regarding their contracts with third-party technology service providers. In particular, FIL-19-2019 urges financial institutions to address how their business continuity and incident response processes integrate with those of their providers, and what that could mean for customers.

Common gaps in technology service provider contracts

As auditors of IT controls, we review lots of contracts between financial institutions and their technology service providers. When it comes to recommending areas for improvement, our top observations include:

  • No right-to-audit clause
    Including a right-to-audit clause encourages transparency and provides greater assurance that vendors are providing services, and charging for them, in accordance with their contract.
  • Unclear and/or inadequate rights and responsibilities around service disruptions
    In the event of a service incident, time and transparency are vital. Contracts that lack clear and comprehensive standards, both for the vendor and financial institution, regarding business continuity and incident response expose institutions to otherwise avoidable risk, including slow or substandard communications.
  • No defined recovery standards
    Explicitly defined recovery standards are essential to ensuring both parties know their role in responding and recovering from a disaster or other technology outage.

FIL-19-2019 also reminds financial institutions that they need to properly inform regulators when they undertake contracts or relationships with technology service providers. The Bank Service Company Act requires financial institutions to inform regulators in writing when receiving third-party services like sorting and posting of checks and deposits, computation and posting of interest, preparation and mailing of statements, and other functions involving data processing, Internet banking, and mobile banking services.

Writing clearer contracts that strengthen your institution

Financial institutions should review their contracts, especially those that are longstanding, and make necessary updates in accordance with FDIC guidelines. As operating environments continue to evolve, older contracts, often renewed automatically, are particularly easy to overlook. You also need to review business continuity and incident response procedures to ensure they address all services provided by third-parties.

Senior management and the Board of Directors hold ultimate responsibility for managing a financial institution’s relationship with its technology service providers. Management should inform board members of any and all services that the institution receives from third-parties to help them better understand your operating environment and information security needs.

Not sure what to look for when reviewing contracts? Some places to start include:

  • Establish your right-to-audit
    All contracts should include a right-to-audit clause, which preserves your ability to access and audit vendor records relating to their performance under contract. Most vendors will provide documentation of due diligence upon request, such as System and Organization Control (SOC) 1 or 2 reports detailing their financial and IT security controls.

    Many right-to-audit clauses also include a provision allowing your institution to conduct its own audit procedures. At a minimum, don’t hesitate to perform occasional walk-throughs of your vendor’s facilities to confirm that your contract’s provisions are being met.
  • Ensure connectivity with outsourced data centers
    If you outsource some or all of your core banking systems to a hosted data center, place added emphasis on your institution’s business continuity plan to ensure connectivity, such as through the use of multiple internet or dedicated telecommunications circuits. Data vendors should, by contract, be prepared to assist with alternative connectivity.
  • Set standards for incident response communications 
    Clear expectations for incident response are crucial  to helping you quickly and confidently manage the impact of a service incident on your customers and information systems. Vendor contracts should include explicit requirements for how and when vendors will communicate in the event of any issue or incident that affects your ability to serve your customers. You should also review and update contracts after each incident to address any areas of dissatisfaction with vendor communications.
  • Ensure regular testing of defined disaster recovery standards
    While vendor contracts don’t need to detail every aspect of a service provider’s recovery standards, they should ensure those standards will meet your institution’s needs. Contracts should guarantee that the vendor periodically tests, reviews, and updates their recovery standards, with input from your financial institution.

    Your data center may also offer regular disaster recovery and failover testing. If they do, your institution should participate in it. If they don’t, work with the vendor to conduct annual testing of your ability to access your hosted resources from an alternate site.

As financial institutions increasingly look to third-party vendors to meet their evolving technology needs, it is critical that management and the board understand which benefits—and related risks—those vendors present. By taking time today to align your vendor contracts with the latest FFIEC, FDIC, and NCUA standards, your institution will be better prepared to manage risk tomorrow.

For more help gaining control over risk and cybersecurity, see our blog on sustainable solutions for educating your Board of Directors and creating a culture of cybersecurity awareness.
 

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Are your vendor contracts putting you at risk?

I leaned out of my expansive corner office (think: cubicle) and asked my coworker Andrew about an interesting topic I had been thinking about. “Hey Andrew, do you know what BATNA stands for?” I asked. Andrew, who knows most things worth knowing, indicated that he didn’t know. This felt good, as there are very few things that I know that Andrew doesn’t. 

BATNA, which stands for “best alternative to no agreement”, is very relevant to business owners who may at some point want to sell their business. It’s a relatively simple concept with significant implications in the context of negotiations, as the strength of your negotiating position depends on what happens if the deal falls through (i.e., if there is no agreement). Put another way, your negotiating position is dependent on your "next best alternative", but I’m pretty sure the acronym NBA is already being used.

If you have 100 potential buyers lined up, you have a strong negotiating position. If the first buyer backs out of the deal, you have 99 alternatives. But if you have only one potential buyer lined up, you have a weak negotiating position. Simple, right?

BATNA is applicable to many areas of our life: buying or selling a car, negotiating the price of a house, or even choosing which Netflix show to watch. Since I specialize in valuations, let’s talk about BATNA and valuations, and more specifically, fair market value versus investment value.

Fair Market Value

The International Glossary of Business Valuation Terms defines fair market value as “the price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm’s length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

Think about fair market value as the price that I would pay for, for example, a Mexican restaurant. I have never owned a Mexican restaurant, but if the restaurant generates favorable returns (and favorable burritos), I may want to buy it. Fair market value is the price that a hypothetical buyer such as myself would pay for the restaurant. 

Investment Value

The International Glossary of Business Valuation Terms defines investment value as “the value to a particular investor based on individual investment requirements and expectations.”

Think about investment value as the price that the owner of a chain of Mexican restaurants would pay for a restaurant to add to their portfolio. This strategic buyer knows that because they already own a chain of restaurants, when they acquire this restaurant, they can reduce overhead, implement several successful marketing strategies, and benefit from other synergies. Because of these cost savings, the restaurant chain owner may be willing to pay more for the restaurant than fair market value (what I would be willing to pay). As this example illustrates, investment value is often higher than fair market value.

As a business owner you may conclude “Well, if investment value is higher than fair market value, I would like to sell my business for investment value.” I agree. I absolutely agree. Unfortunately, obtaining investment value is not a guaranteed thing because of… you guessed it! BATNA. 

Business owners may identify a potential strategic buyer and hope to obtain investment value in the sale. However, in reality, unless the business owner has identified a ready pool of potential strategic buyers (notice the use of the plural here), they may not be in a negotiating position to command investment value. A potential strategic buyer may realize if they are the only potential strategic buyer of a company, they aren’t competing against anybody offering more than fair market value for the business. If there isn’t any agreement, the business owner’s best alternative is to sell at fair market value. Realizing this, a strategic buyer will likely make an offer for less than investment value. 

If you are looking to sell your business, you need to put yourself in a negotiating position to command a premium above fair market value. You need to identify as many potential buyers as possible. With multiple potential strategic buyers identified, your BATNA is investment value. You will have successfully shifted the focus from a competition for your business to a competition among strategic buyers. Now, the strategic buyers will be concerned with their own BATNA, rather than yours. And that’s a good thing.

We frequently encounter clients surprised by the difficulty of commanding investment value for the sale of their business. BATNA helps explain why business owners are unable to attain investment value. 

At BerryDunn, we perform business valuations under both the investment value standard and the fair market value standard.

If you have any questions about the value of your business, please contact a professional on our business valuation team

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BATNA: What you need to know

All business owners need to consider a business valuation, ideally updated annually. A current business valuation is important for your company’s financial health as it can:

  • Give you an accurate picture of what your company is really worth — and how transferable that value can be — this provides a realistic picture of your company’s value should you decide to sell. It also provides a window into your ability to grow the business and how much money a bank would be willing to lend to support that growth.
  • Help you to plan for a faster sale — proper planning delivers more lucrative and successful sales of small businesses, as it gives a business owner time to increase the company’s worth before the sale, and to sell quickly.
  • Protect your family if something happens to you. John Warrillow, founder of The Value Builder System, writes that illness is the number one event that forces business owners to sell. A business valuation analysis can identify ways to create a more transferrable business in the event of illness or death.

Overall, a business valuation professional can provide you with an exact value of your company and help you develop a long-term plan to increase its value. Valuation strategies can help you increase profitability by helping you:

  • Identify prospective opportunities for sales growth
  • Implement cost-cutting strategies that maximize profits
  • Increase employee retention and save money on hiring and training
  • Develop systems and processes to increase the odds of a successful transition to the new owners, whoever they may be

If you or your client is interested in increasing a company’s value, please contact Seth Webber 

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Why a business valuation analysis is important to your company's value