Expense Reimbursements: Are Your Employees Paying to Work?

September 11, 2013

employee expensesHow many times have you walked to your supply room because the printer ran out of paper, only to find that someone else took the last ream and didn’t bother to tell anyone to order more? Chances are you have had to make a run to the local office supply store on occasion, or better yet, you’ve had someone else in the office do it for you. When that happens, who pays the price for the trip?

 Whether they are buying uniforms, picking up random office supplies, or even driving to make the daily bank deposit, it is probably costing at least some of your employees to work.  So, the question becomes whether, when and for what costs employees should be reimbursed by the company. 

 Various internet sites are filled with questions posted by employees as to their “rights” when it comes to being reimbursed for business expenses.  Answers to questions vary, but for most employers the question basically boils down to a review of Fair Labor Standards requirements, state law and current policy statements on the subject.

 Federal Requirements – Minimum Wage Issues

 The Fair Labor Standards Act only requires expense reimbursements for employees when the expense offsets the employee’s hourly wage and results in an effective hourly rate that falls below the minimum wage standard. For example, a delivery driver making $7.25 an hour who is not afforded a company owned vehicle for deliveries, must receive a mileage reimbursement at the rate of at least $ 56.5 cents per mile. However, if that same driver makes $15 per hour and drives 15 miles in the course of a workday, an expense reimbursement is not required as the effective hourly wage (actual wages less calculated mileage) is $13.94 per hour.  For example: ($15 per hour * 8 hours) – (56.5cents per mile * 15 miles) = $13.94 per hour.

 State Requirements

 With only two exceptions, state law is silent on an employer’s obligation to reimburse business related employee expenses.  California requires employers to reimburse their employees for business related expenses; however, Massachusetts only requires mileage reimbursements. California’s covered expenses include, but are not limited to:

 ·         Travel required for making bank deposits,

·         The purchase of supplies,

·         Travel between business sites,

·         Travel required for the delivery of inventory or equipment.

 Best Practices

 Regardless of your business location or state wage and hour law, following best practices in the area of expense reimbursement may mean the difference between attracting/retaining talented employees or increasing other expenses related to high turnover rates. Expense reimbursement policies should detail which expenses are covered, and to what extent. For example, if your policy covers a computer case for those employees who frequently travel, a limit of $100 (or whatever your organization defines as “reasonable”) can be put in place.  Expense policies should include the use of proper documentation, authorization, and an appropriate time requirement for submitting the reimbursement request.

 Policy Considerations

 An expense reimbursement policy does not need to follow a “one size fits all” approach. Depending on the organization’s culture and the individual employee’s business travel or expenditure requirements, the policy can be tailored to fit business needs without causing the organization  undue hardship to the company.   Things to consider include:

 ·         Job responsibilities

·         Employee classification (executive, professional, etc.)

·         Company culture

 Additionally, expense reimbursements can be negotiated at the time of the employment offer. For some employees, reimbursement of out-of-pocket expenses may be an important consideration. For example, an executive level sales position may require a great deal of overnight travel which may require the reimbursement of meals. But, company expense for meals away from home can be limited by imposing a per diem limit.  Other expenses to consider include:

 ·         Cell phone reimbursements – Does the company issue cell phones for work purposes?  If not, what percent of an employee’s cell phone bill is the organization prepared to reimburse?

·         Internet – Which employees work from remote locations?  Is this a requirement of their position? How much of their internet expense is for work and personal use?

·         Travel Upgrades – Does the company want to pay for an upgrade to first class for those employees who spend most of their time traveling to client sites?

·         Personal Equipment – If it is used for work purposes, is the company willing to reimburse the expense of iPads or other personal electronics?  What about app’s that allow the employee to remotely access their computers?

Irrespective of the type of expenses the company is willing to reimburse, and for which employees, the key is to implement a policy that is well thought out and clearly communicated. The best approach in developing an expense reimbursement policy is to solicit feedback from multiple department managers including finance, HR and operations.

Learn more about C3 Advisors, LLC at www.c3adviors.com.  Find us on Facebook and LinkedIn.  Subscribe to our newsletter by emailing debd@c3advisors.com.


Five Reasons Why It Is Important for Business Owners to Prepare Financial Statements

July 16, 2013


As a business owner you may have a very good sense of the profitability of your business.  You are aware of revenue because you are intimately involved with your customers and the sales process.  You see the bills that come in from vendors and know the payment terms you have negotiated with them.  You purchased the assets owned by the company, and arranged for their financing.  And likely the most important factor by which you gauge your company’s financial health is the cash flow that comes into the business.  So why is it important to prepare financial statements on a monthly and quarterly basis?


Five Reasons to Prepare Financial Statements

Even though a business owner has deep insight into his company operations, financial statements can reveal a different picture of the company’s true profitability. Taking time to prepare financial statements each month and quarter equips the business owner with current information to make informed, intelligent decisions affecting the success or failure of day-to-day operations. The information is also important to outsiders such as lenders, investors, suppliers and customers who rely on financial information to make decisions about whether they will do business with a company.  Typically a company closes its books within a few days after month’s end.  Establishing a process for financial statement preparation and sticking to a regular schedule not only ensures that financial information is up to date but also that it is available when unexpected circumstances arise.   Scrambling to pull financial records together, especially if statements have not been routinely generated, can put the business at a competitive disadvantage in time sensitive situations such as when the need for working capital arises.  Here are five reasons to maintain current financial statements:

 1)      Banks require financial statements as a prelude to determining whether or not to loan money.  Current financial statements are used to determine the likelihood that the company can pay back current or future debt, either from expected future income or from the sale of assets.  Even with a history of successful loan repayment, it is a certainty that a lender will require updated statements before considering a new loan request.  And, once the loan is granted, the lender will require periodic financial statements in order to monitor the continuing creditworthiness of the business and to help spot potential barriers to prompt repayment.  

2)      Investors need financial statements to analyze investment potential in terms of the risk that is present in an investment opportunity as well as the kinds of rewards or returns that can be expected.  An investor who puts money behind a company with the intent of making a financial return needs assurance that it is investing in a quality company with a strong balance sheet, solid earnings and positive cash flows.

3)      Suppliers may require a company’s financial statement before committing to selling their product to a business. They use financial statements to ascertain the risk involved in receiving payment by understanding the value of their product to a company and by assessing the price that they are charging for the supplies.  Payment terms and delivery quantities are often dictated by the buyer’s financial risk profile as portrayed in its financial statements.

4)      Customers require financial statements to decide whether a company can meet their needs for product delivery. This is important where customers are dependent on the goods/services they buy from the business.  Financial statements reveal the viability of a business and likelihood of continued operations to produce supplies and services, as well as its capacity for order size.

5)       Nearly every business owner will, at some point, terminate his ownership of the company.  Often, that is accomplished through a business sale.  The single most important source of information a prospective buyer of a business will want is the seller’s financial statements, usually going back several years. The financial statements reveal financial/operational trends and will be a critical to negotiating a sale price and committing to the purchase.

A few more reasons for preparing financial statement include:

  • ·         They are necessary to prepare federal and state income tax returns. 
  • ·         In the event that claims for losses are submitted to insurance companies, accounting records are necessary to substantiate the original value of fixed assets.
  • ·         If business disputes develop, financial statements may be valuable to prove the nature and extent of any loss.

Preparing monthly, quarterly and annual financial statements on a timely basis provides internal and external sources with the information needed for decision making purposes and is critical to a business’ competitive advantage.

Learn more about C3 Advisors, LLC at www.c3adviors.com.  Find us on Facebook and LinkedIn.  Subscribe to our newsletter by emailing debd@c3advisors.com.



Combining Cultures: Business Sale Success Depends on People

June 17, 2013

new managementThe sale of a business always has implications for the seller and employees of the company being sold.  In some cases, employees will lose their jobs, while in others, they will have a new boss, new policies and procedures to follow, and new expectations.  An owner may have to make the transition from entrepreneur to employee.  The ease or difficulty of making the transition to new roles and reality, depends on the seller’s preparation for the hand-off to the new owner and the new team’s integration strategy.

How Will the Seller Fit In After the Sale?

A seller’s knowledge of his business is often critical to the continued success of the company, and for that reason, the seller’s role after the sale is a significant negotiating factor.  Sellers are kept on to help the new owners reach their goals, but typically without the control they are accustomed to.  It can be frustrating when new management ignores advice or overrules a decision.  Making the mental switch to being employee on a team can be very challenging for an entrepreneur who has had deep involvement with the management of operations, staff and customers.   The best way to overcome the pitfalls of this situation is to negotiate well and be prepared to play by someone else’s rules.   Compensation, vacation time, how long the seller is required to stay on,  revenue goals and decision-making authority should all be addressed in the contract.  Even when the seller believes there is clarity on how he will fit into the new owner’s plans, there are often surprises.    For this reason, a seller may decide not to be part of the transition and accept a lower sales price rather than work for someone else.

What Will Happen to Employees?

Often one of the trickiest aspects of a business sale is what will happen to the company’s employees.  Most business owners realize the professional and personal loyalty they owe to their employees.  After all, the success of the business would not have been possible without their hard work.   As a general rule, employees’ jobs are secure in a small business sale.  Smart buyers know that the ongoing success of and profitability of the business is highly dependent on the company’s employees who typically wear many hats and perform a variety of tasks that ensure operations run smoothly.  Additionally, they are intimate with customers and suppliers and have built solid relationships in these areas that are vital to the competitive advantage of a prosperous business.  A new owner is most likely to keep employees if the seller has taken steps to ensure the company team is working at their highest level even before an owner looks for a sales opportunity.  Lean, efficient operations reduce the likelihood that headcount will be trimmed after a business sale.  Developing a solid management structure that requires accountability will provide the new owner with a team who can make decisions in the absence of the seller.

But when and how to disclose a pending sale to employees can be one of the most difficult decisions a seller must make.  Business owners and experts are divided on the best approach to take when it comes to addressing the subject with employees.   Some assert transparency throughout the process is the wise choice, while others contend that revealing sales intentions to employees will adversely affect the outcome of the sale.  Here is a look at both options.

Keep People Informed

The rationale for this course of action is that the nature of business sales negotiations make it nearly impossible to keep them a secret.  It does not take long for employees to realize that a sale is planned.  Rather than risk rumors which cause a mass exodus, morale problems, distractions which impact productivity, or unnecessary stress on staff, an open-book culture will allay employees’ concerns and keep them engaged in their work.  The likelihood of a successful sale increases if the owner can assure the buyer that the team will remain intact.  Such guarantees are not possible if employees are kept in the dark.  Additionally, an owner can emphasize that consistent high quality work will encourage the new owner to keep staff after the sale. 

Keep Plans Quiet

·        News of a possible sale can cause confusion, anxiety and staff departures.  Sales negotiations are far too volatile and discussing a deal with employees can put them on a roller coaster when things fall apart at the last minute.  The length of time it takes to complete a sale—2 years is not uncommon—can create a long period of uncertainty.  If a large number of employees or key individuals leave during sales negotiations, the buyer may walk away, or the seller may have to accept a lower sales price.  Another risk of disclosing sales plans is that employees may tell customers about it.  Apprehension about the changes may trigger the loss of business at the time when it is most important to keep sales strong.

Successful businesses typically have key employees who would need to stay on to assure a smooth transfer of ownership.  Sharing confidential information with these individuals about the sale is necessary in order to provide assurances to the buyer that the knowledge and skills of these employees will remain with the company, for at least a period of time.  Retaining these employees is a point of negotiation with the seller who can offer bonuses and compensation packages to encourage employees to work for the new owner.  Creative retention plans that provide incentives for employees to stay on through the transition period reduce the risk of declining morale, decreased productivity, loss of employees, and possibly, customers.   The seller must use his best judgment as to the ideal time to bring these employees into the confidence of sales discussions.

Even when the buyer shares his staffing plans during the sales process, the eventual outcome may be different than what was contemplated.  Some employees may lose their jobs, or the new owner may bring in new employees.  It is up to the buyer to manage the integration of all employees into the new culture.  A seller and his employees who continue to work for the new owner should be prepared for change.

This is Part IV 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 Part II:  Tax Tactics.

Learn more about C3 Advisors, LLC at www.c3advisors.com.  Find us on Facebook and LinkedIn.  Subscribe to our newsletter by emailing debd@c3advisors.com.

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.

Learn more about C3 Advisors, LLC at www.c3adviors.com.  Find us on Facebook and LinkedIn.  Subscribe to our newsletter by emailing debd@c3advisors.com.

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.

 Learn more about C3 Advisors, LLC at www.c3adviors.com.  Find us on Facebook and LinkedIn.  Subscribe to our newsletter by emailing debd@c3advisors.com.

Balancing Business Strategies: Workforce Realignment Considerations Under ACA

April 30, 2013

ERISA510Like most employers, you’ve probably spent the last several months wading through a sea of information on the Patient Protection and Affordable Care Act (“ACA”). You may have even begun devising a strategic plan that addresses the Employer Shared Responsibility rules released earlier this year by the Department of the Treasury dubbed as the “Play or Pay” provisions.  But just when you think you have it all figured out, there is another set of potential issues to consider before implementing an ACA compliance strategy; the provisions of the Employee Retirement Income Security Act (ERISA).

Most employers are familiar with ERISA when it comes to vested benefits such as retirement plans, but ERISA also applies to non-vested benefit plans including health insurance coverage.  Section 510 of ERISA specifically prohibits certain actions that could interfere with an employee’s attainment of a right to a benefit. The statute provides, in part, that “it shall be unlawful for any person to  . . . .  discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.”  And, that is where the rub comes in.

ERISA §510 and Workforce Restructuring

In 2014, under the ACA, large employers (those with 50 or more full time equivalent employees) will be required to either offer affordable health coverage to full time employees (classified by ACA as those working 30 or more hours per week) or be subject to a “No Coverage” excise tax as codified in §4980H of the Internal Revenue Code.   The ACA’s mandate is an either/or proposition and this key point should not be overlooked during ACA compliance planning.

Many large employers have indicated that they will consider adopting financial strategies aimed at minimizing their exposure to Play or Pay penalties through workforce realignment initiatives designed to replace full time employees with part time workers and further limit hours worked by part time employees to fewer than 30 hours per week.   This is a strategy that may be particularly attractive to employers with variable, per diem workforces; high turnover and/or lower paid workers.   In certain cases, however,  workforce restructuring efforts may open up ERISA §510 exposure and, as a result, employers considering realignment strategies will want to tread carefully and ensure that their actions to minimize exposure to penalties under the ACA don’t end up creating replacement liability under ERISA.

To bring an action under ERISA §510, an employee is required to demonstrate that his employer interfered with an ERISA guaranteed right to participate in the employer’s health plan.   However, since health benefits are not considered vested for purposes of ERISA, employers are free to periodically modify coverage provided as well as eligibility for benefits under an existing health plan without interfering with rights guaranteed to employees.   Thus, modification of the health plan or modification of an employee’s work requirements does not, in and of itself, constitute a problem under ERISA.    On the other hand, if an employee is eligible for health care benefits under an existing plan and the employer curtails working hours specifically to create ineligibility for attainment of coverage and/or avoid a potential “Play or Pay” penalty, an ERISA complaint may be actionable.

Consider the following examples:   The employer currently offers healthcare coverage to all of its full time employees who work 40 hours per week and their dependents.  Part time employees who work fewer than 40 hours a week are not eligible for coverage.  In 2013, as a means of avoiding the 2014 No Coverage penalty, the employer adopts a workforce realignment plan that effectively reduces the hours for all current non-covered, part time employees to less than 30 hours per week by the close of the year.  Because the employer has not interfered with any part-time employee’s current or attainable right under the employer’s health plan, the realignment action would not be considered an ERISA violation.

On the other hand, if the employer goes further and similarly reduces the hours of full time employees who are either currently covered or who expect to be covered after satisfaction of a plan waiting period, a §510 claim would likely survive because, in this instance, the employer has interfered with a current or attainable benefit under the plan.

Alternatively, consider the employer who has traditionally offered healthcare coverage to all of its employees who work at least 4 days, or 32 hours, per week.  After performing an analysis of anticipated premium increases, the employer concludes that it must limit its offer of coverage to a smaller employee group working at least 40 hours per week because it simply cannot afford to continue benefits for an expanded portion of its workforce.  Thus, the employer modifies the eligibility provisions of the plan to require at least 40 hours per week as the threshold for coverage eligibility and changes other coverage provisions of the plan to reduce the impact of the expected premium increase while also, subsequently, cutting the hours of current employees who work fewer than 40 hours per week, limiting them to no more than 24 hours/3 days per week to avoid exposure to the “Play or Pay” penalties.  In this case, an affected employee who loses hours but who is no longer eligible for coverage due to the changed eligibility requirements would likely have no claim under §510 of ERISA.

In all cases, it is imperative that employers considering realignment strategies that could result in plan changes and/or workforce changes should consult with qualified counsel to determine the risk associated with HR strategies in the face of the ACA requirements.  2013 will be a year of careful planning and analysis of what the ACA means to employers and it is not too soon to start thinking about compliance strategies that will minimize risk as well as financial impact.  And, as always, when dealing with issues related to ERISA rules, consult with qualified counsel.

Process Pays: Know The Path Before You Start

April 16, 2013


Consider these statistics:

• Only 20% of all of the businesses listed for sale actually sell.
• 75% of all anticipated business sales fail to close.
• The average time it takes to sell a business is 225 days, but 2 years is not uncommon.
• Failure to perform pre-sale planning is the #1 reason why deals fail.
Business owners who take the time to prepare their business for sale are much more likely to sell the business, sell it in less time, for a fair amount, and with better terms. What does that preparation involve? Understanding the sales process will go a long way toward beating the odds against successful completion of the sales transaction.
Timeline–Owners commonly sell their businesses for any of the following reasons: retirement, partner disputes, illness and death, becoming overworked, or boredom. Preparing for the sale as early as possible provides the seller an opportunity to improve financial results, business structure and customer base to make the business more profitable and, therefore, more attractive to a buyer. An owner who has the time to plan for a sale should begin to do so at least one to two years ahead of his/her expected exit.
The Team—Professionals with experience in handling issues involved in the sale of the business are critical to the process. A business broker, business valuation expert, CPA, attorney and other trusted advisors should work as a team to navigate the sale from the time it is listed to closing.
Business Valuation—Before an owner lists the business for sale, it’s worth must be determined. This is important to ensure that the asking price is not too high or too low. A business valuation expert will draw up a detailed explanation of the business’s worth. The document will add credibility to the asking price and can serve as a gauge for the listing.
Marketing—The Selling Memorandum (also called a Deal Book) is essentially the formal sales listing. It is an advertisement of a business’s strengths without giving too many of its trade secrets away to competitors. It includes financial information, growth potential, the company’s history, a description of the customer base, marketing strategy, how the business differs from its rivals in the market, where it is located, number and nature of employees and management staff, details of the ownership structure, and why it is for sale.
Letter of Intent—Effective marketing efforts will ideally identify serious, qualified buyers. A potential buyer submits a letter of intent (LOI), which serves as the starting point for negotiations. The LOI serves to formalize the purchase process by setting out basic terms and conditions of the sale. It is a non-binding agreement that states the prospect’s thinking in terms of valuation, deal structure, post-sale plans, etc. It sets out what the transaction actually involves, explaining what will be paid and when, what assets the company has, the contractual obligations already in place, other liabilities, employment contracts, and precisely what the buyer expects to purchase. The LOI also usually includes a standstill or exclusivity clause for a certain period of time that prohibits the seller from seeking other purchasers while the standstill is in place. At the very least, the LOI establishes whether the buyer and seller are within negotiating range of a deal.
Due Diligence— This is the verification phase of the process and typically the least enjoyable, most stressful, part of selling a business. Due diligence is the buyer’s opportunity to verify that the information provided by the seller is indeed true and accurate. The process delves deeply into the business to allow the buyer to achieve comfort in committing to the purchase. The buyer generally brings in an accountant in to examine the financial records of the company and often a lawyer to review certain documents such as incorporation papers, corporate minutes, leases, and contracts the business may have in force. It is not uncommon for a buyer to conduct financial audits, environmental audits, IT audits, and interviews with key employees and other specialized due diligence activities that may be industry specific. Unfortunately, half of all deals fall apart in the due diligence stage because of facts and/or circumstances discovered during due diligence. It is not rare to discover financial reporting issues or previously undisclosed facts that could affect the price or even salability of the business. For some, it simply boils down to the fact that the seller may not be able to provide the documentation that the buyer needs to complete the deal.
Final Negotiations and Deal Structuring— Concurrent with the due diligence activities is when the last phase is entered– final negotiations and deal structuring. Here is where additional agreements are drafted including exhibits, schedules, consulting agreements, leases, assignments, and third party consents. The final agreement will basically state what is being sold and for how much, what exactly happens upon closing, how existing contracts and debts are transferred, and any warranties or indemnities. It could also include a restrictive covenant preventing the seller– within a particular time period and/or geographic area – from competing with the business once it is sold. It also arranges for escrow, which is where a third party holds the purchase money until all conditions of the sales agreement have been met, such as the actual transfer of the assets to the buyer. Usually, the agreement goes through many drafts, and it’s not finalized and signed until closing.
There are a number of factors that can arise at any point in the process which will impede the negotiations or kill a deal entirely. It is not uncommon for a buyer to walk away because the seller is slow in getting information. Being prepared for the process will help eliminate the deal breakers which are avoidable, and allow the owner to focus on the elements which will result in an ideal transaction.
This is Part II of a four part series on selling a business. Read C3 Advisors’ blog for Part I on Build for the Buyer, and future articles on Combining Cultures, and Tax Tactics.

New Form I-9: Employers Must Use It Now

March 26, 2013



What Is New?

The United States Citizenship and Immigration Services (USCIS) introduced the new Form I-9, on March 8. Employers must use the Form I-9 to verify an employee’s work authorization in the US.  Employers should begin using the new form immediately for all new hires, re-hires and reverification.  The new Form I-9 is a two-page document with seven pages of instructions. The flow and content of the form are similar to the previous version; however, the revision provides additional space and is designed to minimize errors in form completion.  The key revisions to Form I-9 include:

  • Adding data fields, including the employee’s foreign passport information (if applicable) and telephone and e-mail addresses.
  • Improving the form’s instructions.
  • Revising the layout of the form, and expanding the form from one to two pages (not including the form instructions and the List of Acceptable Documents).

USCIS has also revised the Handbook for Employers, Form M-274 to complement the instructions and format of the new Form I-9.

When Must It Be Implemented?

Employers must use the new Form I-9 immediately; however, USCIS recognizes that some employers may need additional time in order to make necessary updates to their business processes to allow for use of the new Form I-9.  Prior Form I-9 versions will no longer be accepted after May 7, 2013. Using prior versions of the Form I-9 after May 7, 2013, will cause the employer to be subject to fines. The new Form I-9 will contain a revision date of 03/08/13. The revision date is located on the bottom left-hand corner of the form.

Employers should use the implementation of the new form as an opportunity to ensure that company policies and procedures are current and compliant. Best practices include a written policy regarding Form I-9 rules and procedures, yearly audits and training, and appointing and I-9 czar for your company.

What Are the Penalties?

I-9 inspections by the government are at an all-time high.  The number of I-9 audits multiplied over the past decade, rising from almost none—just three in 2004—to 500 in 2008 and 3,004 in 2012.   For knowing violations, penalties range from $375-$16,000 per offense.   For paperwork violations, the fines range from $110 to $1,100 per violation.

Where To Get More Information?

The new form can be found at http://www.uscis.gov/files/form/i-9.pdf in English and Spanish (for use in Puerto Rico only).  To order USCIS forms, employers can call a toll-free number (1-800-870-3676).  In addition, there are several free webinars hosted by USCIS covering completion and implementation of the new form. The dates and times of the webinars are located on the I-9 Central portal


Build for the Buyer: What Does Your Business Look Like to An Outsider?

March 12, 2013

Architect woman with a plan.Business buyers look at several elements in determining whether a business is attractive to acquire.  Competitive advantage, a large and loyal customer base, growth opportunity, along with stability and skill of employees are among the considerations.   Before these factors are evaluated, however, the business buyer is going to scrutinize the company’s financial track record and its ability to increase profits.  First and foremost, buyers acquire businesses for the income and cash flow they generate.  Two metrics are used to measure cash flow and profitability, and are also the basis for determining the sales price of a business.  Seller’s Discretionary Earnings (SDE) measures cash flow.  It is comprised of pre-tax earnings, depreciation, amortization, and interest; plus owner’s salary, owner’s perks, and non-recurring expenses.

Earnings Before Interest, Taxes and Amortization (EBITDA) measures profitability.  EBITDA is net income with interest, taxes and amortization added back.  The asking price for a business is calculated on multiples of SDE or EBITDA.  SDE is typically the method used for small to medium businesses valuations and ranges from 1 to 7 times SDE.  Market data for similar industries, intangible assets and risk influence the multiple for any given business.  So, what can a business owner do to increase the multiple?

Start Now.  Every business owner will eventually want to exit, and very often that is accomplished by selling the company.  The selling process takes anywhere from six to twelve months, but preparing a business for sale should begin well in advance of the decision to sell.  Business owners who plan to sell in the near term have less time to implement improvements but can still take steps to increase SDE.   The building blocks that create solid SDE and deliver increased profits and cash flow also influence business risk.   And the advantage to planning ahead when selling is not a short term goal, is improved earnings for the owners.  It’s never too early to build for the buyer.

Build Infrastructure.  A solid framework to support business operations is crucial to optimal productivity and profitability.  Three key areas are:

  •  Finance/Accounting—The first and most critical test in a business sale transaction is passing the financial review.  Accounting processes and policies must be in place to ensure invoicing and collections are timely and consistent; accounts payable and debt payments are on schedule; tax payments are current; inventory is managed for obsolescence; and depreciation and amortization schedules are proper.   Internal controls are necessary to ensure the accuracy of the transactions and safeguard the company’s assets.  Financial reporting integrity is the cornerstone of a business sale.  Adequate documentation of all transactions must exist as demonstrated by timely preparation of financial statements.  A prospective buyer cannot verify cash flow or earnings if financial records are poor, and as such, have no basis for determining SDE.
  • Operations—Business processes that are efficient and lean will yield the highest results.  Creating systems that eliminate duplication of effort and reduce risk by closing process gaps are the key to operational efficiency.  Implementing and optimizing appropriate business software improves internal communication, provides information for well thought out management decisions, and supports a good customer service program.  A tight, well run operation with low risk not only enhances SDE but also shows that a company is disciplined and sophisticated with readily available information for analysis and planning purposes.
  • Human Resources—Human capital management and risk reduction are achieved through a comprehensive HR program.  Attracting and retaining the best possible employees who are appropriately matched with job responsibilities are critical to the delivery of any company’s product or service.  Organizational development is optimized by compensation analysis, wage rate determination and process implementation.  Programs to ensure regulatory compliance reduce the risk of adverse actions for incorrect employee status determinations, contractor issues, immigration law infractions, and diversity issues.

Selling a business is not easy.  The process of determining the value, finding a buyer and negotiating the transaction is complex and time consuming.  Optimizing sales price is much less a function of the sales process than value that has been built up over the long term.  So, look at your business from the outside and build for the buyer.

This is Part I of a four part series on selling a business.  Read C3 Advisors’ blog for future articles on Process Pays, Combining Cultures, and Tax Tactics.

Is Your Business Affected by “Blackberry Overtime?”

February 26, 2013

BlackberryWith a glance around the office (or anywhere else, for that matter) one quickly realizes that it is easier to count the number of people without smart phones than it is to count those who use one. A PEW internet survey reported that more than 45% of all adults in the United States are smart phone owners. That number jumps to more than 66% among adults between the ages of 18 and 29. Smart phones are here to stay, and so, perhaps, are the problems that they pose for businesses.

No one could have predicted in 1992, when the first PDA functions were combined with cellular phones, that the rate of FLSA lawsuits would be heavily impacted by the new technological changes on the horizon. Since then, the release of the Blackberry, iPhone and other smartphones has cost employers thousands of dollars in overtime pay and legal fees under the Fair Labor Standards Act (FLSA); a law that has gone relatively unchanged over the past 75 years.

In 1993 there were 1,457 wage and hour lawsuits filed under the FLSA. Compare that to the record breaking 7,064 lawsuits filed in 2012. The vast majority of these lawsuits are the result of misclassification of employees and the failure to pay overtime.  One reason cited for the large increase is the use of smartphones to increase employee productivity, but that increase has come at a price for many employers. Employees complain that the lines between work and personal time have become blurred. They are now expected to work evenings, weekends and even while on vacation without being compensated for their time; a practice that has not gone unnoticed.

An employee of the Chicago Police Department’s (CPD) Bureau of Organized Crime, Jeffrey Allen, filed a FLSA complaint for unpaid overtime that was the direct result of “Blackberry overtime” while off duty. Allen alleges that he would receive e-mails and one to two calls per day while he was off duty. Due to the nature of his job, these calls and e-mails were not ones that could go unanswered yet the time he spent on them went uncompensated. While the suit was initially filed in 2010, the US District Court (Northern District of Illinois’ Eastern Division) recently allowed Allen to send notice to participate in a class action to other similarly situated employees (those with the rank of Lieutenant and below).

New technologies will continue to change how we work and operate businesses. There are those who debate whether or not the FLSA is an outdated law, but until it changes, the law stands. So what can employers do to protect themselves?

Exempt or Non-exempt Classification

The first course of action is to ensure that all employees are correctly classified as exempt or non-exempt. The FLSA has certain criteria that must be met in order to make these determinations. Each employee should be aware of their classification and understand what that status means in terms of hours worked and their compensation. For those employees who are non-exempt, employers must ensure time tracking processes are firmly in place.

Unauthorized Overtime Policies

Many employers have policies in place to deter employees from working overtime without prior authorization. While the FLSA is clear that all overtime, regardless of authorization, must be paid to any and all non-exempt employees, employers can use these policies to help curb overtime abuse. Organizations that adopt these policies are legally permitted to take disciplinary action including suspension and termination. As in any case of disciplinary action, it is important that the company  implement a consistent and progressive disciplinary process.

For more information regarding FLSA classification or overtime policies, contact C3 Advisors, LLC at kristenh@c3advisors.com.