Archive for May, 2013

The Cost of NOT Offering Health Insurance to Employees

May 30, 2013


ACA is here to stay, and employers, large and small, are assessing their workforce composition and the obligations or penalties which will kick in next year.  Businesses which are deemed to be small employers under the regulations are breathing a sigh of relief that the burdensome requirements of the new legislation do not apply to them.  Large employers, those employing 50 or more FTEs as defined by the law, are deciding whether to “play or pay”, meaning to offer health insurance or pay an IRS penalty for not doing so.  Whether an employer is exempt from the requirement or calculates that the penalty is less expensive than paying health insurance premiums, the consequences of not offering health insurance can hit the bottom line hard.

Unfortunately, the sensibility of offering health insurance is escaping many employers.  The 2013 Aflac Workforce Report examined issues impacting employee benefits.  As shown by the results below, a gap exists between employer and employee perceptions of the importance of benefits.


Employers believe benefits are extremely or very influential on:

Employees believe benefits are extremely or very influential on:

Job satisfaction – 56%

Job satisfaction – 79%

Loyalty to employer – 50%

Loyalty to employer – 66%

Willingness to refer friends – 39%

Willingness to refer a friend – 54%

Work productivity – 32%

Work productivity – 62%

Decision to leave company — 34%

Decision to leave company – 55%

Read the full study at

Employers who fail to recognize the value that employees place on benefits put their business at a disadvantage for talent attraction and retention.  Losing an employee who defects to a competitor for a more attractive benefit package creates costs which are no less important or real than the costs associated with paying vendors for goods or services.  These are very real costs to the employer, but rarely are they measured because no process is in place to tabulate the costs; such costs are not reported to top management; and many employers view turnover as an inescapable cost of doing business.

Numerous sources provide estimates of the cost to replace an employee.  The range is anywhere from $2,000 to $7,000 for an $8.00 per hour employee, or 30-50% of the annual salary of an entry level employee.  For middle level employees the replacement cost is estimated at 150%, and for specialized, high level employees or management the cost can be as high as 400% of their annual salary.   Consider the direct and indirect costs of hiring a new employee:

Terminating the Departing Employee

Processing a terminated employee includes:

  • ·         Conducting  an exit interview, stopping  payroll, and revoking passwords and other security privileges
  • ·         Processing the various forms needed to terminate an employee and updating personnel records
  • ·         Communicating the termination to the existing staff


Recruiting a Replacement Employee

Finding a replacement for the terminated employee requires:

  • ·         The internal or external recruiter’s time to understand the open position requirements and the desired qualifications
  • ·         Placing and paying for advertisements and job postings for the open position or incurring outsourcing costs for a search firm
  • ·         Conducting interviews, discussing assessments and selecting a finalist. Keep mind the multiples associated with this process                  as generally there are several candidates for a position.
  • ·         Incurring costs of educational, credit, criminal background, and other reference checks

Managing the Vacant Position

The time between the employee’s resignation notice and hiring of a replacement places additional burden on supervisors and staff which includes:

  • ·         Identifying and assessing the status of incomplete or pending work
  • ·         Re-assigning work to other employees, shifting the responsibility to supervisory personnel or hiring a temporary employee.   It may also be necessary to explain and review work assignments more carefully if the work has been assigned to someone who normally does not do it.
  • ·         Following up with customers to communicate change in personnel
  • ·         Assessing the impact on potential loss in sales, production delays or new product introductions

Orientation and Training of the New Employee

Once a new employee is hired, onboarding and training are required to:

  • ·         Add the new person to payroll, establish computer and security passwords, and issue  identification cards
  • ·         Establish an email account, telephone extension, and credit card accounts
  • ·         Assign  equipment such as a desktop, laptop, cell phone, or automobile
  • ·         Train the employee on duties, expectations and responsibilities
  • ·         Integrate the employee into the right team of peers
  • ·         Introduce the employee to the organization and  customers

Impact on Customer Relationships

When a knowledgeable employee leaves, taking experience and customer service ability with him or her, customer relationships can suffer if:

  • ·         The employee takes the customer with him or her to the new employer
  • ·         Customer commitments are not met after the employee leaves because of the intimate knowledge the employee had of a transaction or arrangement
  • ·         Customers become frustrated or annoyed dealing with trainees

Replacing key personnel, such as those with highly technical or industry knowledge or management experience, magnify many of the costs described above.   And the longer a specialized or management position is vacant, the potential harm to a business grows.

In light of the cost to replace an employee, is it a wise decision to not offer health insurance?  It hardly seems so when the actual costs to replace an employee can easily exceed the employer’s share of health insurance premiums.  And if administration costs of a group health plan are a concern, they will only be substituted by the administration of terminating and hiring replacements.  Failing to offer health insurance will not only cause employees to seek benefits elsewhere, but will also place a company at a competitive disadvantage in attracting new talent.  The best and brightest will find the employers with the most attractive benefit package, leaving those who do not with a mediocre workforce.

The complexity of the new healthcare requirements can be overwhelming, especially for an organization which does not have the resources in-house to deal with them.   But working with the right team of experts can assist a business in developing a strategy for managing costs and attracting and retaining the talent needed to support growth and long term viability.  A knowledgeable insurance broker and a healthcare reform consultant can help develop a workforce structure and benefits package to ensure a business has the human capital to meet its goals.

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Tax Tactics: Business Sellers, It Pays To Be Proactive

May 14, 2013

tax return

Selling a business is a lengthy, complex process.  Preparing a business for sale and structuring a deal that satisfies the buyer and the seller involves numerous steps and considerations.  One of the most important, but often overlooked issues is the tax consequence of a business sale.  No matter the size of the business, taxes influence, and can even control, the structure of a deal.  Ignoring or delaying tax considerations is a big mistake and can put the seller in an adverse negotiating position.  A business owner may face a significant tax bill upon the sale of a business. In fact, without skillful planning, a seller can wind up with less than half of the purchase price in his/her pocket, after all taxes are paid.  However, with preparation and the assistance of a tax advisor, it’s possible to minimize or defer at least some of these taxes.

When a sale produces income, owners have to pay taxes on at least part of their gain from the sale. How gains are taxed depends largely on the structure of the business, whether the business is being sold as a set of assets or as an entity, and the type of assets being sold.  The amount of tax that the seller will ultimately have to pay depends upon whether the money made from the sale is taxed as ordinary income or capital gains. What is good for the tax picture for the seller is often bad for the buyer and vice versa, so the allocation of price to various components of the deal is frequently an area for negotiation and compromises.

What Amount is Taxed?

The taxable amount at issue is the profit on the sale, i.e., the difference between the tax basis and the proceeds from the sale.  The tax basis is generally the original cost of the asset, minus depreciation deductions claimed, minus any casualty losses claimed, and plus any additional paid-in capital and selling expenses. The proceeds from the sale generally mean the total sales price, plus any additional liabilities the buyer takes over from the business owner.

What Influences the Taxable Amount?

This is an overview of the variables that can come into play when structuring a business sale.  A tax professional with experience in handling business sales transactions should be consulted early in the sales process to advise on minimizing the seller’s tax liability.

  1. Business Entity—Companies structured as a sole proprietorship, partnership, limited liability company or S corporation are the simplest entities to sell because there is only one level of tax involved.  These types of entities are tax reporting entities but the taxes are paid by the individual owners.  Tax consequences of the sale of these entities are paid by the owners.  If the business is a corporation the tax rules are more complex because the corporation is taxed on its income at the corporate tax rate, and corporate distributions are then subject to asecond tax to individual shareholders.
  2. Assets or Stock—Buyers prefer purchasing assets of the company, while sellers often wish to sell stock.   By purchasing assets, a buyer can realize a step-up in the basis of the asset creating future tax deductions, and avoid assuming liabilities of the seller.  When selling business assets, the federal tax rate on gains can vary from 15% (long-term capital gain) to 35% (ordinary income rates).  Sellers and buyers of assets need to reach agreement on the allocation of the total purchase price to the specific assets acquired.  By selling stock, a business owner benefits from the long term capital gains treatment of the sale of stock, however, would likely be required to give extensive representations, warranties and indemnifications to the buyer for liabilities that are not expressly assumed.
  3. Seller Financing and Escrows–If a buyer is allowed to pay the purchase price over some extended time period, not to exceed five years, the seller may be able to defer the overall gain on the transaction until payments (and interest) are actually received.  The risk in a seller-financed transaction is that the buyer may not operate the business successfully and be unable to fulfill the obligation to pay the installment note. Sellers who make an installment sale are permitted to pay all the tax related to the transaction up front. This may be desirable if the seller believes capital gain rates will increase significantly in the years when payments are to be made.  Buyers may also establish escrow amounts where a portion of the purchase price is put into escrow and paid to the seller when the warranty period is over.  The escrows can be structured to provide the seller with installment sale treatment so that the seller does not pay tax until the escrow is paid.
  4. Earnout—This situation provides for an up-front payment followed by additional earnout or contingent payments to the seller if certain milestones are met in later years by the business that was sold. Contingent payments are treated as imputed interest and taxable to the seller as ordinary income. The amount of imputed interest increases each year during the earnout period; consequently the tax effects can be substantial in the later years of the arrangement.
  5. Personal Goodwill/Consulting—Part of a company’s sale price may go toward paying the seller for training the new owners.  This work can be performed as an independent contractor or employee, but the tax paid on this compensation will likely be higher than the capital gains tax rate.  Allowing the buyer to make these types of payments has a cost to the seller, as compared to if they were added to the stock purchase price because the seller will have ordinary income taxation and possibly self-employment tax, rather than the capital gain rates available on a stock sale.
  6. Sale to a Family Member—Arm’s length deals with strangers are not usually questioned by the IRS because of the self interest of each party to receive the best tax treatment for their side of the transaction.  However, transfers of businesses between related parties look suspicious to IRS auditors.  The IRS may be concerned a business has been sold “below market”, and avoided full taxation.  Hence, the tax code imposes a rule that business transfers must be made for full and valuable consideration, and not have any element of a gift frequently inherent in family deals.

The tax consequences of a business sale have significant consequence to the buyer and seller.  A critical step in the selling process is obtaining tax advice on the strategies for making the company attractive to buyers, while minimizing the seller’s tax liabilities.  Only after the myriad of tax considerations are evaluated can a seller be positioned for meaningful negotiations with a buyer.

This is Part III of a four part series on selling a business.  Read C3 Advisors’ blog for Part I: Build for the Buyer, Part II: Process Pays and an upcoming article on Combining Cultures.

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