May 19, 2015

Ten Ways a Startup Can Enhance Its Value

Business owners, whether they are owners of startup businesses or mature businesses, are always thinking about how to enhance their company’s value. Startups are particularly focused on the value of their company for capital raising purposes. One advantage a startup has over a mature business is the opportunity to adopt certain practices from day one rather than struggling, logistically and financially, to catch up years down the road. Here are ten ways an entrepreneur can enhance the value of his or her startup:

  1. Get your books in order – This has implications beyond business value, so begin working with a reputable business advisor from the beginning to ensure your accounting records are accurate and reliable. It’s no secret that potential investors will review your books and records, and the “cleaner” they are, the higher likelihood the investors will place a higher value on your company.
  2. Document business systems and procedures – Be sure to keep important records, such as original copies of shareholder agreements, stock certificates, etc., in a safe, but readily available space. It is also important to document employee job responsibilities, department procedures, organizational charts, and internal controls (it is never too early to implement strong internal controls). You do not want to have to scramble to find these documents when you’re going through a due diligence process.
  3. Maintain a neat, clean, up-to-date business environment – Think of this as the business’ “curb appeal.” Continually invest in your facilities to ensure all codes and safety standards are met. A potential buyer will place a lower value on a company whose facilities are in any state of disrepair.
  4. Effective use of technology – As with the last item, continually invest in up-to-date technology, including the company’s website and its financial information system.  As the world quickly becomes more technologically and digitally driven, high value companies will be those that stay ahead of the technology curve.
  5. Proven business development process – Throw your support behind the company’s sales and marketing specialist(s) (and maybe, for now, that employee is you). Potential investors not only want to see a viable product, they want to see a proven sales process that can move products from the shelf to the paying customer.
  6. Diversify – Diversification in your customer base, vendors, suppliers, and products/services lowers the risk of the company imploding  from the loss of any of these parties. Having too much reliance on one or just a few customers, for example, can cause the company great financial distress if the customer decides to use the product or services of a competitor instead of yours.
  7. Plan for the future – You may have in your head where you’d like to see the business in 3-5 years, but have you considered writing it down? Or better yet, writing down where you’d like to see the business in 10-15 years? Create a written strategic plan and vision, along with reasonable annual budgets or forecasts If you don’t know your companies vision and future goals, potential investors will not either.
  8. Depth of management – This may be the most difficult step for a startup because the owner usually ends up wearing a lot of hats. It is important, with time, to build a leadership team that is capable of making cohesive decisions that move the business in the same direction.
  9. Identify and overcome industry risks – Every industry has risk, though some have more inherent risk than others. It is important for the company to identify its competitive advantage in the industry and identify the forces that shape its industry’s competition. Potential investors not only expect you to know your company in-and-out, but they also expect you to know your industry and competitive landscape with the same detail.
  10. Grow revenues and profits – You know better than anyone else that “cash is king.” This is especially true considering the business’ value today is driven by its future cash flows, and the best way to increase cash flow is to increase revenue while reducing costs. How you choose to do that is what makes your company unique.

While  many startup companies, along with their more established counterparts, focus solely on the growth of revenues and profits to increase their company’s value, there are many other non-quantitative measures they can take to increase the value. There is no secret formula as to which factors are more important than the others, so the more of these factors that can be incorporated into the business, the higher the likelihood of increasing your company’s value.

To discuss how these factors can increase the value of your startup, contact an Anders valuation expert.

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May 15, 2015

Implemented an IC-DISC for the Export Sales of a Manufacturer

After being engaged to work with a local manufacturer on their S Corporation tax return, we recognized large portion of their products were being shipped to customers overseas. We recommended and implemented an IC-DISC, which will save the owner of the company approximately $40,000 annually in taxes.

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May 12, 2015

Claiming Casualty Losses for Your Home or Business

Living in the Midwest comes with plenty of perks. One of these perks is experiencing every season: gorgeous Autumns, frosty Winters, serene Springs, and blistering Summers. Unfortunately, Midwesterners also know severe weather all too well.

It seems that every year, a storm of epic proportions hits too close to home. While there is certainly no complete remedy for the despair these disasters cause, taxpayers may be able to take a tax deduction for their losses. These losses are considered casualty losses, and there are two categories:

Personal

Non-business, or “personal”, casualty losses are deductible in the year incurred. First, it is important to note that casualty losses must be sudden or unexpected. Once this criteria is established, the amount of loss must be determined. The loss is the lesser of the adjusted basis of the property or the decrease in the fair market value (FMV) due to the casualty, less any insurance proceeds. This amount is then reduced by $100, and the remaining amount in excess of 10% of adjusted gross income (AGI) is the deductible amount.

To illustrate, let’s look at an example: A large storm rolls into town and rips off the roof of your house. The roof has an adjusted basis of $10,000 and the decline in FMV is $7,000. The loss would be the lesser of the adjusted basis or the decrease in FMV; $7,000 in this case. The insurance company reimburses $1,000 of the loss, and your AGI is $50,000.

The calculation of the potential casualty loss deduction is: $7,000 loss – $1,000 insurance proceeds – $100 – $5,000 (10% x $50,000 AGI) = $900 casualty loss.

While the ability to deduct these losses is good news, casualty losses for individuals are included in itemized deductions. If you do not itemize your tax deductions, you are not eligible for this deduction.

Business

Casualty losses on business assets are 100% deductible- no $100 reduction and no 10% AGI reduction. There are two kinds of business casualty losses: a “total” loss and a “partial” loss.

A total loss occurs when business property is completely destroyed. When this is the case, the loss deduction is: The adjusted basis of the property less any salvage value less insurance proceeds. As an example, let’s say a tornado hits the city and completely destroys a truck used in your business. The truck has an adjusted basis of $25,000, $0 salvage value, and the insurance company reimburses $12,000.

The calculation for this business casualty loss is: $25,000 adjusted basis – $0 salvage value – $12,000 insurance proceeds = $13,000 casualty loss.

A partial loss occurs when business property is only partially destroyed. With a partial loss, the amount of loss is the lesser of the adjusted basis of the property or the decrease in FMV, less any insurance proceeds. Again, let’s use an example to illustrate: A tornado hits the city and destroys a portion of your business building. The building’s adjusted basis is $100,000 and the decrease in FMV is $20,000. The amount of the loss is the lesser of the adjusted basis or decrease in FMV, which is $20,000. The insurance company reimburses $5,000 of the loss. Thus, the business may take a casualty loss of $20,000 less the insurance proceeds of $5,000 or $15,000.

For more information on casualty losses, and whether or not a loss may be deductible for tax purposes, contact an Anders tax advisor.

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May 5, 2015

Why Business Owners Choose Not To Sell

Some owners make a choice not to sell their companies for very legitimate reasons.  These owners typically, still have the desire to fuel their business investment with both time and money, or are grooming interested family members or employees to take the reins.

But there are also owners who prepare their business for sale and then hesitate. Why? These owners typically don’t sell when they should because they, procrastinate, fear the unknown, or fear losing the known.

Procrastination Is Not Uncommon
Procrastination has many causes. Here are three.

  1. Some owners don’t know where or how to start. If you are one of those owners, read on. The next step is to begin the process of creating an Exit Plan to allow you to cash out of your business and leave in style when you are ready to do so.
  2. These owners think that they can always sell later. They overlook the demographic evidence indicating that when most Boomers reach retirement age, the glut of companies in the marketplace may drive prices down. Other owners in this group understand that the level of activity in the Mergers & Acquisition market can have a huge affect on the sale price of a company. Their strategy is to wait until the market recovers.
  3. The third group believes that because they have “good” businesses, their exits require no significant planning. When they think about selling, they assume that there isn’t much for them to do because when the time is right, the right buyers will appear and pay them great prices for their companies.

It does happen, albeit quite rarely, that the right buyer appears and pays a great price for a great company. However, it makes more sense to prepare for the biggest financial transaction of your life than to entrust the success of your business exit to Lady Luck.

Fear of the Unknown
Owners who suffer from the fear of the unknown usually think the business is worth enough to satisfy their financial needs and objectives; are worried employees will quit if they find out the business is for sale; believe they are indispensable to the company and don’t want to work for the new owner, or simply think the sale process will take too long and cost too much.

Fear of Losing the Known
On the other hand, for those who fear losing the known , they think they will feel lost with the business because it has been their life; the government will take too much in taxes from the sale; or the have no idea what to do after selling and leaving the business.

See yourself in any of these scenarios?  If so, it’s time to see an Exit Planner to remove or minimize these common roadblocks, and to plan a successful exit.

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