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Accounting for carbon offsets: What to do when the rules are vague

By: Michael Jurnak,

Menglu is an assurance manager in BerryDunn’s commercial practice group. She provides audit, accounting, and consulting services for clients in a variety of industries, including natural resources, hospitality, and technology.

Menglu Cai

There is a growing interest in the business world for companies to reduce their Greenhouse Gas Emissions (GHG), particularly as Environmental Social Governance (ESG) initiatives become more commonplace. Many organizations have come to realize that their shareholders or other stakeholders are interested in knowing the extent of the organization’s social or environmental impacts. One step some organizations are taking to contribute to social and environmental responsibility is to reduce their carbon emissions—either through directly changing their business practices, purchasing carbon offsets, or both.

What can companies do to reduce their carbon footprint?

There are several ways that businesses can reduce their overall environmental impact. Companies often begin this journey by understanding what their carbon footprint is, which is the amount of emissions related to an organization’s direct and indirect activities. Generally, these emissions are measured in tons (for example, driving 2,500 miles generates a ton of carbon dioxide.) Since this process is voluntary, a company can consider measuring their footprint based upon a scope:

  • Scope 1 relates to what the organization directly emits, such as through exhaust in automobiles used for business purposes.
  • Scope 2 relates to carbon emissions specifically from energy production needed for the organization’s use, such as the electricity used to power their office.
  • Scope 3 includes all other indirect carbon emissions, including all the participants in the supply chain of a product the company sells.

Regardless of the scope used, a company will generally set a goal of reducing their overall carbon footprint by a certain amount. They may choose to address this goal through a number of methods, such as switching to renewable energy or implementing other energy-reduction strategies. This is a great first step; however, most companies realize that gains in energy efficiencies can bring a company only so far toward their goal. It is generally at this point that companies consider using carbon offsets as a tool toward achieving their goal of reducing GHG.

What is a carbon offset?

A carbon offset, also called a carbon credit, is created when one company removes a unit of carbon from their business activity and is deemed to have generated an offset. Once certified, that offset can then be purchased by another company as a means of reducing its own carbon footprint. The carbon offset market is huge, and growing rapidly. In 2020, the market was estimated at approximately $2 billion, and it is expected to grow to $50B or much more by 2050.

Carbon offsets operate in a voluntary marketplace. While there are some exchanges available for purchasing offsets, most companies purchase credits through organizations that facilitate the certification of projects and determine the number of carbon credits produced. Common projects that generate offsets include reforestation, the capture and destruction of greenhouse gases, and renewable energy projects.

As expected with a rapidly emerging practice of using carbon offsets, the market is far from perfect. There are even reports that some carbon offsets may be worthless and actually contribute to increases in GHG. Given the complexities, it is important that the buyer conduct their own research in order to have an overall understanding of how the market works

Accounting for the purchase of carbon offsets: Two options

Once a company has set a goal for reducing their carbon footprint, has researched the carbon offset market, and purchased offsets to help meet their goal, then what? How are carbon credits accounted for on the company’s financial statements?

Regulating agencies are beginning to issue some guidance around carbon offsets, including:

  • The SEC has proposed rules to enhance and standardize climate-related disclosures for investors for public traded companies.
  • FASB recently added a project to its technical agenda to improve the recognition, measurement, presentation, and disclosure requirements for participants in compliance and voluntary programs that result in the creation of environmental credits and for the nongovernmental creators of environmental credits.

However, when it comes to accounting for offset credits, there is very little official guidance on how a company should account for the accumulation of carbon offsets and their use.

For companies acquiring carbon offsets, the accounting choices, at this point, boil down to either the purchase of an intangible asset or the purchase of inventory.

Carbon offsets as intangible assets

Per the ASC 350-30-20 glossary definition, intangible assets are "assets (not including financial assets) that lack physical substance." (The term intangible assets is used to refer to intangible assets other than goodwill.)”

The carbon credit does not have a physical form but could be treated as an asset. Therefore, it meets the definition of an intangible. For accounting record keeping, the acquisition of these would be at fair value, which in most cases would be the cost or price paid by the company. Since carbon offsets generally have an indefinite life, as intangible assets, they would not be subject to amortization in the event that the credit was held and not used for more than one operating cycle. Once the offset is claimed by the company, it is “decertified,” meaning it is removed from the registry and therefore no longer certified as an offset credit. At this point, the company would write off the value of this intangible asset and recognize an expense.

Carbon offsets as inventory

Alternatively, a company could consider the acquisition of carbon offsets as inventory.

Per US GAAP, inventory is defined as "the aggregate of those items of tangible personal property that have any of the following characteristics:

  • Held for sale in the ordinary course of business
  • In process of production for such a sale
  • To be currently consumed in the production of goods or services to be available for sale."

While carbon offsets are not tangible personal property, they are tradable and could be held for sale in the event that the company wanted to speculate on trading these carbon credits rather than use them.

As inventory, their costs may be determined under any one of several assumptions as to the flow of cost factors, such as First-In-First-Out (FIFO), average, and Last-In-First-Out (LIFO). The major objective in selecting a method should be to choose the one which, under the circumstances, most clearly reflects periodic income.

If considered inventory, the cost would be subject to neither impairment nor amortization. As inventory, however, there would be a lower of cost or net realizable value consideration at each reporting deadline. Once de-certified and therefore used, the company would report a reduction of inventory and a debit to expense.

Once the company selects its accounting method as either intangibles or inventory, it should use the same method when retiring or selling off the carbon offset credit.

How to choose a method for accounting for carbon offsets

In the absence of specific accounting rules, the accounting policy used by a company will generally come down to the specific facts and circumstances of the arrangements giving rise to these carbon offset credits and how the company plans to utilize the carbon offset credits.

Through thoughtful financial statement disclosures, a company can keep the readers of their financial statements informed of their practice and how those practices impact its overall financial statements.

In conclusion, carbon offsets offer companies a way to meet their ESG goals by purchasing credits from other companies that are reducing their carbon emissions. These steps can help a company claim social and environmental responsibility. But, on the accounting side, the rules are vague. BerryDunn’s Commercial Team has extensive experience working with clients who have purchased carbon offsets and can advise you on the best approach for your business. Contact our team to schedule a conversation.

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Retiring Baby Boomers and the competition for skilled workers of any age mean employers need to use new strategies to transfer institutional knowledge and maintain a thriving workforce.

Construction companies in New England have an increasing number of projects to keep them busy, but face a shortage of skilled workers who can take on the work. As a result, a lot of new development is on hold. And it’s not just New England. By 2020, it is estimated there will be a global shortfall of 85 million high-skilled workers.

A national survey released by The Associated General Contractors of America reveals that this is a larger problem, as two-thirds of contractors are having a hard time finding qualified workers to keep up with construction demand. And while firms are changing their workplace policies to increase pay and efficiency, it is still difficult to find enough people with the right skills to fill critical roles. Add to that the number of Baby Boomers leaving the workplace—and taking their institutional knowledge with them—and you have a situation that can directly affect how, and if, a company grows and succeeds.

Attracting and retaining a new generation of talented and skilled workers continues to be a struggle for companies across the country, not just in construction. Millennials—soon to be more than half of all workers—are a new breed; they tend to stay in jobs for approximately three years, making long-term knowledge transfer to them a challenge. At the same time, a large portion of Baby Boomers are looking to retire or reduce their workload.

How do you attract and maintain an effective workforce as the workers themselves come and go?

Business owners and executives have options and can do a better job of both holding onto aging professionals, and hiring younger ones. There are a lot of stereotypes describing millennials (and baby boomers for that matter). Look beyond them. Consider some of the ways to address finding and keeping the skills and knowledge your workforce needs:

  • Focus on shared knowledge across the organization (your business leaders can do a knowledge and skills inventory); make knowledge sharing easy with cloud software tools and accessible technology; understand that “transferring” knowledge to other workers may be seen as a threat to people who have that knowledge.
  • Create and formalize opportunities to transfer knowledge. Make sure that you have a succession plan in place for senior leadership. Will employees looking to retire want to cut back to part-time before they do so? Can they stay with you a bit longer to train and mentor younger team members and share their knowledge? Not only is their knowledge valuable, they may also feel inspired to teach a new generation, and your company can save money in training costs.
  • Rethink processes. What technologies are available to help take some of those duties and automate or streamline them? Making your employees more comfortable shifting to different approaches will encourage buy-in, boost morale, and make cultural change less threatening. 
  • Make your workplace more appealing for current and potential employees: look to industry leaders and larger, bellwether companies to address vacation policy, community service, fringe benefits like lunches, social activities, wellness programs and other incentives. Many have added sabbaticals to reward employees for 10 or more years or service.

Beyond focusing on retention strategies, when is the last time you looked at how, when and where you recruit new employees? Here are some things to consider:

  1. Amp up your recruiting strategies. Think about what you want to offer candidates to walk through the door. Think about how you write your job descriptions, the words you choose, the salary being offered as compared to the role. Think about where you are going to find new employees, what job boards you are using, what your process is for onboarding. Have you tried social media? Find out where the millennials are looking and active online, and meet them there.

    All of these elements are critical in being an attractive workplace, especially if you are seeking younger workers. Millennials and/or Generation Y’ers want to know their work is going to make a difference. They want work/life balance along with perks like a gym membership discount, plenty of days off, and the ability to work remotely when needed. They also want to be mentored and learn. Are you able to provide those things? If not, how do you plan to make your company an enticing place for young people to work?
  2. Think remotely. More employees want to work from home and on their own schedule. It’s not just millennials who want flexibility. It’s becoming an intergenerational issue. Are you set up for your employees to work remotely? According to a TINYPulse survey, “What Leaders Need to Know about Remote Workers,” 91 percent of remote workers say they are more productive when working out of the office. 
  1. Cultivate diversity. Encouraging difference and recognizing diversity doesn’t just mean hiring workers with different ethnic backgrounds (though that will certainly help in creating a high-performing and culturally enhanced work environment). It means making room for a variety of different work styles and preferences, and being more flexible. For example, if you have a 59-year-old manager who loves her job, but wants to work a compressed work week or go part-time, will you be able to accommodate her? Often changing an individual’s work configuration can re-energize their commitment to the job. Or, if a millennial was about to say yes to your job offer but wanted to work remotely one day a week, would you be able to accommodate her? Your ability to be flexible and nimble is important.
  1. Hire outside your scope. It’s time to look beyond the approaches you typically take and widen your net. You can do this in many ways, but here are two to help you get started:
  • Look to social media to find qualified candidates. Did you know that the use of social media for recruitment has grown 54 percent in the past five years? According to a recent Society for Human Resource Management study, 84 percent of organizations are now recruiting on social platforms. On the flip side, 79 percent of job seekers use social channels in their job search, according to Glassdoor, with one in five applying for a job they learned about through social. New mobile applications are making finding qualified candidates easiereven those who are passive in their job search. Twitter has become an important tool for many hiring managers, as well as LinkedIn, Glassdoor, and other tools. Start experimenting.
  • Don’t overlook hidden populations. According to the Maine’s Labor Shortage report, new immigrants and their children are expected to account for 83 percent of the growth in the U.S. workforce from 2000 to 2050. Many immigrants come with degrees in technology, engineering, science and math. Many have business experience. Don’t let cultural differences be the reason why you don’t hire someone. Be creative and get your staffing needs met.

Our workforce is changing and it’s time to take a long hard look at how to best adapt. Embrace the future and the people who will help you get there. There is a lot of opportunity to make positive changes in management, employees, and business models. There will be challenges. There will be victories. There will be questions and yes, some growing pains. Just remember, you’re not alone. 

How to attract and retain workers in a seller's market

Executive compensation, bonuses, and other cost structure items, such as rent, are often contentious issues 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, for example, its income will be depressed. Accordingly, if no 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 items (compensation, bonuses, rent, etc.) to a fair market level to reflect what a hypothetical buyer would pay. In the valuation of companies with ESOPs, the issue 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. This increases Glamorous Grocery’s income, and by extension the fair market value of Glamorous Grocery, ultimately resulting in a higher 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.

While control-level adjustments may be common, it is worth considering whether they are appropriate in an ESOP valuation. It is important that the benefit stream reflect the underlying economic reality of the company to ensure longevity of the company and the company’s ESOP.

Questions? Our valuation team will be happy to help. 

BerryDunn’s Business Valuation Group partners with clients to bring clarity to the complexities of business valuation, while adhering to strict development and reporting standards. We render an independent, objective opinion of your company’s value in a reporting format tailored to meet your needs. We thoroughly analyze the financial and operational performance of your company to understand the story behind the numbers. We assess current and forecasted market conditions as they impact present and future cash flows, which in turn drives value.

Compensation, bonuses, and other factors that can make or break an Employee Stock Ownership Plan (ESOP)

Do you know what would happen to your company if your CEO suddenly had to resign immediately for personal reasons? Or got seriously ill? Or worse, died? These scenarios, while rare, do happen, and many companies are not prepared. In fact, 45% of US companies do not have a contingency plan for CEO succession, according to a 2020 Harvard Business Review study.  

Do you have a plan for CEO succession? As a business owner, you may have an exit strategy in place for your company, but do you have a plan to bridge the leadership gap for you and each member of your leadership team? Does the plan include the kind of crises listed above? What would you do if your next-in-line left suddenly? 

Whether yours is a family-owned business, a company of equity partners, or a private company with a governing body, here are things to consider when you’re faced with a situation where your CEO has abruptly departed or has decided to step down.  

1. Get a plan in place. First, assess the situation and figure out your priorities. If there is already a plan for these types of circumstances, evaluate how much of it is applicable to this particular circumstance. For example, if the plan is for the stepping down or announced retirement of your CEO, but some other catastrophic event occurs, you may need to adjust key components and focus on immediate messaging rather than future positioning. If there is no plan, assign a small team to create one immediately. 

Make sure management, team leaders, and employees are aware and informed of your progress; this will help keep you organized and streamline communications. Management needs to take the lead and select a point person to document the process. Management also needs to take the lead in demeanor. Model your actions so employees can see the situation is being handled with care. Once a strategy is identified based on your priorities, draft a plan that includes what happens now, in the immediate future, and beyond. Include timetables so people know when decisions will be made.  

2. Communicate clearly, and often. In times of uncertainty, your employees will need as much specific information as you can give them. Knowing when they will hear from you, even if it is “we have nothing new to report” builds trust and keeps them vested and involved. By letting them know what your plan is, when they’ll receive another update, what to tell clients, and even what specifics you can give them (e.g., who will take over which CEO responsibility and for how long), you make them feel that they are important stakeholders, and not just bystanders. Stakeholders are more likely to be strong supporters during and after any transition that needs to take place. 

3. Pull in professional help. Depending on your resources, we recommend bringing in a professional to help you handle the situation at hand. At the very least, call in an objective opinion. You’ll need someone who can help you make decisions when emotions are running high. Bringing someone on board that can help you decipher what you have to work with and what your legal and other obligations may be, help rally your team, deal with the media, and manage emotions can be invaluable during a challenging time. Even if it’s temporary. 

4. Develop a timeline. Figure out how much time you have for the transition. For example, if your CEO is ill and will be stepping down in six months, you have time to update any existing exit strategy or succession plan you have in place. Things to include in the timeline: 

  • Who is taking over what responsibilities? 
  • How and what will be communicated to your company and stakeholders? 
  • How and what will be communicated to the market? 
  • How will you bring in the CEO's replacement, while helping the current CEO transition out of the organization? 

If you are in a crisis situation (e.g., your CEO has been suddenly forced out or asked to leave without a public explanation), you won’t have the luxury of time.  

Find out what other arrangements have been made in the past and update them as needed. Work with your PR firm to help with your change management and do the right things for all involved to salvage the company’s reputation. When handled correctly, crises don’t have to have a lasting negative impact on your business.   

5. Manage change effectively. When you’re under the gun to quickly make significant changes at the top, you need to understand how the changes may affect various parts of your company. While instinct may tell you to focus externally, don’t neglect your employees. Be as transparent as you possibly can be, present an action plan, ask for support, and get them involved in keeping the environment positive. Whether you bring in professionals or not, make sure you allow for questions, feedback, and even discord if challenging information is being revealed.  

6. Handle the media. Crisis rule #1 is making it clear who can, and who cannot, speak to the media. Assign a point person for all external inquiries and instruct employees to refer all reporter requests for comment to that point person. You absolutely do not want employees leaking sensitive information to the media. 
With your employees on board with the change management action plan, you can now focus on external communications and how you will present what is happening to the media. This is not completely under your control. Technology and social media changed the game in terms of speed and access to information to the public and transparency when it comes to corporate leadership. Present a message to the media quickly that coincides with your values as a company. If you are dealing with a scandal where public trust is involved and your CEO is stepping down, handling this effectively will take tact and most likely a team of professionals to help. 

Exit strategies are planning tools. Uncontrollable events occur and we don’t always get to follow our plan as we would have liked. Your organization can still be prepared and know what to do in an emergency situation or sudden crisis.  Executives move out of their roles every day, but how companies respond to these changes is reflective of the strategy in place to handle unexpected situations. Be as prepared as possible. Own your challenges. Stay accountable. 

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

Crisis averted: Why you need a CEO succession plan today

Read this if your CFO has recently departed, or if you're looking for a replacement.

With the post-Covid labor shortage, “the Great Resignation,” an aging workforce, and ongoing staffing concerns, almost every industry is facing challenges in hiring talented staff. To address these challenges, many organizations are hiring temporary or interim help—even for C-suite positions such as Chief Financial Officers (CFOs).

You may be thinking, “The CFO is a key business partner in advising and collaborating with the CEO and developing a long-term strategy for the organization; why would I hire a contractor to fill this most-important role?” Hiring an interim CFO may be a good option to consider in certain circumstances. Here are three situations where temporary help might be the best solution for your organization.

Your organization has grown

If your company has grown since you created your finance department, or your controller isn’t ready or suited for a promotion, bringing on an interim CFO can be a natural next step in your company’s evolution, without having to make a long-term commitment. It can allow you to take the time and fully understand what you need from the role — and what kind of person is the best fit for your company’s future.

BerryDunn's Kathy Parker, leader of the Boston-based Outsourced Accounting group, has worked with many companies to help them through periods of transition. "As companies grow, many need team members at various skill levels, which requires more money to pay for multiple full-time roles," she shared. "Obtaining interim CFO services allows a company to access different skill levels while paying a fraction of the cost. As the company grows, they can always scale its resources; the beauty of this model is the flexibility."

If your company is looking for greater financial skill or advice to expand into a new market, or turn around an underperforming division, you may want to bring on an outsourced CFO with a specific set of objectives and timeline in mind. You can bring someone on board to develop growth strategies, make course corrections, bring in new financing, and update operational processes, without necessarily needing to keep those skills in the organization once they finish their assignment. Your company benefits from this very specific skill set without the expense of having a talented but expensive resource on your permanent payroll.

Your CFO has resigned

The best-laid succession plans often go astray. If that’s the case when your CFO departs, your organization may need to outsource the CFO function to fill the gap. When your company loses the leader of company-wide financial functions, you may need to find someone who can come in with those skills and get right to work. While they may need guidance and support on specifics to your company, they should be able to adapt quickly and keep financial operations running smoothly. Articulating short-term goals and setting deadlines for naming a new CFO can help lay the foundation for a successful engagement.

You don’t have the budget for a full-time CFO

If your company is the right size to have a part-time CFO, outsourcing CFO functions can be less expensive than bringing on a full-time in-house CFO. Depending on your operational and financial rhythms, you may need the CFO role full-time in parts of the year, and not in others. Initially, an interim CFO can bring a new perspective from a professional who is coming in with fresh eyes and experience outside of your company.

After the immediate need or initial crisis passes, you can review your options. Once the temporary CFO’s agreement expires, you can bring someone new in depending on your needs, or keep the contract CFO in place by extending their assignment.

Considerations for hiring an interim CFO

Making the decision between hiring someone full-time or bringing in temporary contract help can be difficult. Although it oversimplifies the decision a bit, a good rule of thumb is: the more strategic the role will be, the more important it is that you have a long-term person in the job. CFOs can have a wide range of duties, including, but not limited to:

  • Financial risk management, including planning and record-keeping
  • Management of compliance and regulatory requirements
  • Creating and monitoring reliable control systems
  • Debt and equity financing
  • Financial reporting to the Board of Directors

If the focus is primarily overseeing the financial functions of the organization and/or developing a skilled finance department, you can rely — at least initially — on a CFO for hire.

Regardless of what you choose to do, your decision will have an impact on the financial health of your organization — from avoiding finance department dissatisfaction or turnover to capitalizing on new market opportunities. Getting outside advice or a more objective view may be an important part of making the right choice for your company.

BerryDunn can help whether you need extra assistance in your office during peak times or interim leadership support during periods of transition. We offer the expertise of a fully staffed accounting department for short-term assignments or long-term engagements―so you can focus on your business. Meet our interim assistance experts.

Three reasons to consider hiring an interim CFO

So far in our value acceleration article 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.

In this article, we are going to focus 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. 

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations. 

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

What are the top three areas of improvement right now for your business? In this third article of our series, we will focus on how to increase business value by aligning values, decreasing risk, and improving what we call the “four C’s”: human capital, structural capital, social capital, and consumer capital.

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. Here, we are going to focus 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).

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). Therefore, we look at how to increase business value by increasing intangible asset value and, specifically, the four C’s of intangible asset value: human capital, structural capital, social capital, and consumer capital. 

Here are two ways you can 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.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

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

This is our second of five articles addressing the many aspects of business valuation. In the first article, we presented an overview of the three stages of the value acceleration process (Discover, Prepare, and Decide). In this article we are going to look more closely at the Discover stage of the process.

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 toward your plans for the future.

If you are interested in learning more about value acceleration, please contact the business valuation services team. We would be happy to meet with you, answer any questions you may have, and provide you with information on upcoming value acceleration presentations.

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

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