Kane Forensic Accounting

Succession Planning: Ignore it at Your Peril

If someone were to walk in to your office and place a huge stick of dynamite in your reception area and then tell you that it was guaranteed to explode sometime in the next 40 or 50 years, what would you do?

You’d likely call the police, try to get the explosive out of your office, try to track down the culprit—but there’s one thing I can promise you: You won’t simply ignore it.

Yet, many business owners do choose to ignore a “ticking time bomb” of their own. The reality is that every company, at some point, is going to go through a period of succession. It may be because the owner gets sick or dies. It may be because he or she decides to take an early retirement. It may be because the current owner is no longer capable of effective leadership. Whatever the cause, it will happen – that’s a guarantee.

Yet, most business owners fail to address this reality. New Zealand’s Business Day examines this trend, referring specifically to businesses in New Zealand. But I can assure you, business owners here in the US have the same attitude:

Kiwi companies are poor at succession planning, says a new survey that showed more than half of company executives were ill-prepared for the business to operate without them.

A survey by Board Dynamics found that almost 20 per cent of New Zealand businesses would be forced to shut down immediately if the head was struck down by illness or death. About 30 per cent could function for a few months before having to close.

Ernst & Young tax partner Jo Doolan said succession planning was absolutely critical.

“Some business owners just don’t actually think it through enough and they also expect that the heir-elect will have the necessary skills … People don’t want to look at their own vulnerability, the fact they might die.

“They really should…..

Continue reading at http://www.kaneforensic.com/articles/succession-planning-ignore-it-at-your-peril.php

Succession Planning: It’s Not Optional

We have been talking about succession planning in depth recently. As I have mentioned, one of the biggest reasons that business owners put off succession planning is because they just don’t feel the urgency. Of course, by the time they do feel the urgency, it’s too late.

Today I’d like to highlight a helpful piece that was published in the Idaho Business Review. While the author is focusing on succession planning specifically from the point of view of a Board of Directors, the points he makes are relevant to every business:

Over the last five years, average tenure of a CEO (based on a survey of public and private companies) shrank from 7.3 years to 4.4 years. Focus on CEO succession is becoming more important to boards. Half the members of boards surveyed believed that their succession planning was inadequate; only 33 percent had a well-documented succession planning process.

It is not clear why boards, at least of larger and public companies, don’t do a better job with CEO succession.

First, it is clearly the task of the board, identified as such in all the popular “Board of Directors” literature.

Second, logic should tell directors that there is nothing more important than having the right CEO.

Finally, it should not be a secret that CEOs impact enterprise value. Because of reputational risk, and the speed and completeness with which media (including social media) spread bad news, boards are quick these days to remove CEOs who present potential public relations taint.

When you add today’s quick firing trigger to the usual reasons for CEO turnover, including poor performance, retirement, moving to a better job, illness, death or merger, the lack of board focus on CEO succession is incomprehensible.

What are the elements of a robust succession plan? The starting point should be an evaluation of the company. How does the board define its strategic future? What substantive qualities and personal characteristics are most likely to be needed over the next five years in a CEO who can effect that strategy? […]

Further, a CEO succession plan should not be viewed in a vacuum. Senior management form part of the executive team, and management should be looked at as a whole. Who are the key managers? Do any of them rise to the level of candidate for CEO? Alternately, is the political environment in a company sufficiently established so as to accept a CEO sourced from the outside?

As a business owner, you typically serve as the CEO and the Board of Directors. Therefore, your job is…

Continue Reading at http://www.kaneforensic.com/articles/succession-planning-its-not-optional.php

Don’t Get Audited: Watch Out For These Common Tax Blunders

We are approaching the end of “tax season”, and most business owners can’t wait to have the onerous chore behind them. Unfortunately, for a small percentage of taxpayers, tax season won’t be over when they think it is… because they’ll be selected for an audit months or years from now.

An audit notification from the IRS is something no business owner looks forward to. And while it is impossible to completely avoid the risk of an audit, there are red flags that significantly increase your likelihood of being audited. Fox Business recently published an article identifying seven of these common mistakes. Here are three of them that will get you into trouble every time:

1. Making errors. When the IRS starts investigating, “oopsy” isn’t going to cut it. Don’t make mistakes. This applies to anyone and everyone who needs to file taxes. Don’t accidentally write a 3 instead of an 8. Don’t get distracted and forget to include that final zero. Mistakes happen, but make sure you double- and triple-check your numbers if you’re doing your own taxes. You’ll be hit with fines regardless of whether your mistake was intentional. If you’re math is a little shaky, using an automated program or tax professional can help you avoid unfortunate errors. Remember, the IRS has an eye for funny business. Supply the correct information, and you should have no complications.

2. Failing to include a 1099 or additional income. Easy way to score an audit? Don’t report part of your income. The IRS will be on you like buzzards on a gut wagon. Always include your 1099. Let’s say, for example, you’re employed part time…

Continue Reading at http://www.kaneforensic.com/articles/dont-get-audited-watch-out-for-these-common-tax-blunders.php

Succession Planning: Cross Training is the Key to Success

Succession planning is too important to ignore. And yet, that is precisely what thousands of small businesses across the country do every single year—ignore it. And most of them get away with it, year after year… until their luck runs out. The owner passes away. A partner becomes severely ill. A critical manger retires.

All of a sudden, it’s a crisis.

And for many businesses, it can literally force them to close their doors.

So why do so many business owners ignore succession planning? In part because it is intimidating. It’s something that nobody wants to think about or deal with. For that reason, I found this article published onTimes-Standard.com to be helpful:

Succession planning is not just a formal document collecting dust on a shelf. Succession planning is also not limited to thinking about what might happen if you or another key person in your organization were to retire or die. What happens if something suddenly good befalls? Your key production leader suddenly wins the lottery and buys an island in the Caribbean. You may be happy for the lucky winner, but you still have to deal with the upheaval in your business.

What about something even more common — like illness? What happens to your employees if your payroll processor gets the flu? The paychecks are still due,[ and must be] on-time and accurate. Most payroll bookkeepers can attest to coming to work with a cold (or worse!) to generate payroll because no one else knows how. Manufacturing, retail sales, customer-service, accounting, and management: every function of a business can suffer if multiple folks (or even just one or two key people) are out sick at the same time.

Even knowing all this, “succession planning” sounds intimidating and disturbing — maybe what we need is another term; one that encompasses the action solution to the problem. Maybe the expression we need is “cross-training.” This can be formal or informal, and doesn’t have to be complicated. The idea is that there should always at least one other person who can make an important decision or do a critical task. Deadlines won’t be missed just because someone is sick or gone. Small business owners may be the world’s best problem solvers, but wouldn’t it be better to solve problems like “how do we tap growing markets out of state” or “what costs can we save with that new production process” rather than “so-and-so went to the hospital with chest pains this morning — does anyone know how to run the payroll?” And what if “so-and-so” is you? Will the entire business fall apart before you get out of the hospital if you are not there to make key decisions?

Don’t think of succession planning as a big, intimidating task. Think of it simply as creating a plan to cross-train key leaders and key employees. Then, you can slowly work your way into the more complex legal and financial issues. This process doesn’t have to be unpleasant, and it doesn’t even have to be difficult. Give us a call today to learn more!

http://www.kaneforensic.com/

Succession Planning: Here’s What Happens if You Don’t Have a Plan

We have talked quite a bit recently about the importance of creating a succession plan for your business. Obviously, business owners and managers who are planning to leave (or sell) the business in the immediate future must have a plan. But what too many business owners don’t realize is that they too need a succession plan—even if they don’t intend to leave the business anytime soon. Why is this? Quite simply, because life is unpredictable. Health problems, financial issues, marital problems—there are a multitude of factors that can necessitate selling or leaving your business. And if you don’t have a plan, the results can be disastrous.

A recent article published on Financial-Planning.com illustrates this reality:

The husband and wife team had lots of experience. They had worked at large mutual fund shops, then struck out on their own.

She handled the client service role for their advisory firm. He was the portfolio manager, chief compliance officer, the marketer.

They got to $20 million in assets, mostly from friends and family.

Then, he died.

“She was going through a lot of grief,” said John Lively, a principal with the 1940 Act Law Group, at the Huntington Client Services Forum here. “But the grief had to be postponed.”

Instantaneously, in addition to handling her despair, she had to run the firm.

“Everything you could possibly think of that affects your firm, she had to deal with, almost in an instant,” he said.

Including reaching out to clients.

Friends and family understood. But assets that didn’t fit into that category, they lost. Immediately.

She had to explain what her plan was. But “there was not much of a plan,” Lively said.

Welcome to the difficulties-and dearth-of succession planning at small advisory firms that make up much of the sales force of mutual funds.

You’ve heard the expression “plan for the worst, hope for the best.” That’s the approach that every business owner should take with regards to their succession plan. Obviously, we all hope for good health. We all hope that our businesses remain profitable and continue to provide the necessary income to support our lifestyles. But the truth is that none of these things are guaranteed. Embrace that reality and continue to live each day hoping and even expecting the best—but don’t risk being caught unprepared in the event that something goes wrong.

One of the main reasons that business owners put off succession planning is because it can be an intimidating task. It requires significant planning and attention to detail—and when you’re busy, the last thing you want to do is spend valuable time planning for the distant future. We understand, and we can help. At Kane Forensic, our team works hard to make the process as easy as we possibly can for you. If you’d like to learn more about what we offer, or if you’re ready to begin the essential process of succession planning, please get in touch with us today!

http://www.KaneForensic.com

Five Keys to Effective Succession Planning

We have been talking about succession planning quite a bit recently—and for good reason. It is one of the most important functions of a business owner… but too often, it’s ignored. And the results are usually disastrous.

Today, let’s take a look at some practical steps towards creating an effective plan. InvestmentNews.com has several valuable tips:

Think strategically: Advisers need to think beyond the conventional task-oriented approach to succession planning — i.e., the need to create a transaction. Properly understood, succession planning is a long-term effort focused on creating value within the business and then transferring ownership to a new generation of owners who can sustain and build on that legacy. That is a strategic challenge, not a transactional one, and it should be managed accordingly.

Plan broadly: Though most firms cite “internal transition” as their ideal succession option, data show that some firms end up having to settle for less than their ideal option. Think through all the options, even the ones that may seem less appealing, as they may become more realistic and viable as the time approaches to execute your plan.

Use broad criteria for candidates: As one adviser told us: “If your only criteria for new owners is who can afford it, then you’re probably not going to get the best candidates.” Well-prepared firms use a broad range of criteria to judge new owners, but the most important were leadership and vision — not who could afford it, and not who was the best business developer. Leadership and vision gain in importance as firms execute their succession plans, so firms would be well-advised to build those criteria into their recruitment and development plans for employees.

Focus on transferability: Firms that have been through an ownership transition are least optimistic about transferability of value to a firm’s new owner(s). When planning for succession, pay close attention to elements of transferability — i.e., how well the business can run without you in areas such as daily operations, new-client growth and client retention. The more independently the business can operate, the more easily it can be to transfer to new owner(s) and the higher its potential value.

Get external advice: The most common roadblock to succession planning among 57% of firms was a lack of expertise. In addition, firms that have executed an ownership transition are over 40% more likely to use outside experts, compared with firms that have a plan ready to implement; and more than twice as likely, compared with firms with a plan that needs refinement. Based on this data, we believe that third-party specialists can be a valuable and important resource during both the planning and implementation phases of a transition.

Here’s the good news: succession planning doesn’t have to be difficult. You’ve already managed to create and/or run a profitable business—that’s the hard part! Creating a plan for the future of your business can actually be fun. If you’d like to learn more about the process, please don’t hesitate to get in touch with us today!

http://www.kaneforensic.com/

Succession Planning: How to Pass the Torch

I’ve seen it over and over again: a thriving, profitable business that has been in existence for decades suddenly falling apart, simply because management or ownership chose to move on to another venture or another stage of life.

The culprit, 99% of the time, is the lack of a succession plan. Every business must eventually change hands- the only question is whether it will be done in an orderly, well-planned manner or not.

CNN Money recently published a helpful article by Jack Mitchell on this subject, and below are four keys that I believe will be particularly valuable to any business considering the challenge of succession, particularly so for family businesses:

Ask for help

My father gave us a wonderful phrase that my brother and I adopted: “I need your help.” To shape a successful succession plan, we needed help. We didn’t know everything about family businesses and so we agreed to study successful ones. In 1979, we joined the Forum, a networking group of a dozen or so similar family businesses. At a 1985 meeting, David Bork, a family business consultant, gave a talk that resonated with us. The next day, we hired him. Bill and I worked with him for several years on our plan. We also set up an outside advisory board to assist with this and other strategic issues.

No guarantees

A family member was not entitled to a job simply because their name was Mitchell. They needed to be qualified, possessing both the skills and the passion to grow within their area of responsibility. Our sons ended up choosing different areas: one picked finance and administration, another sales and merchandising, another marketing, and several managing newly acquired stores. Our outside advisory board and our consultant David Bork supported this policy.

And now, after 20 years, our sons and nephews hold leadership positions within our company. Two of them are co-presidents and will soon become co-CEOs.

Pass the equity early

When our oldest sons, Russ and Bob, were 29 and 27, and Tyler, Bill’s youngest son, was only 13, my brother and I gave them a large percentage of the equity of the business. Sixteen years later, the remaining stake was transferred. We trusted them with our business early, and they became much more responsible and accountable because they were owners. They stuck by the guiding principles and values that had served us well, building relationships with each and every associate, customer, and vendor by treating them as friends, and measuring every facet of our business.

Provide financial security to the senior generation

A solid succession process requires a financial plan that allows the older generation to retire with enough assets outside the business to ensure that “money” is not the reason to remain in control forever. Often, when all of their assets are in the business, the owners not only tend to stay active too long and block the next generation from leading, but they also become too conservative, unwilling to take bold risks out of fear that they might cripple the entire business.

If you’d like to learn more about the challenging but vitally important process of succession planning, please don’t hesitate to get in touch with us today!

Considering a Charitable Contribution? Start with an Appraisal

The US tax code is designed to encourage charitable contributions. Most of us would agree that this is a good thing. Unfortunately, today I have a story to share with you of a couple who wanted to do a very good deed, but who walked into a financial nightmare because of a simple mistake.

The lesson? Before making a charitable contribution, seek an appraisal. Here is a very good lesson as to why, courtesy of double-taxation.com:

Joseph Mohamed made his millions in real estate; as a broker and certified appraiser, he amassed a fortune in real property. Mohamed and his wife wanted to share their considerable wealth, so they established a charitable remainder unitrust — or CRUT — to facilitate the transfer of some of their properties to charitable organizations.

During 2003 and 2004, Mohamed donated six properties to his CRUT, claiming $4.2 million in charitable contribution deductions, with another $15 million limited by AGI and carried forward to future years.

Mohamed is a bright guy with one fatal flaw: he ventured to prepare his own tax return. In doing so, he filled out Form 8283 — Noncash Charitable Contributions — without reading the instructions, because it “seemed so clear that he didn’t think he needed to.” This would prove to be a costly mistake.

Before we go any further, a quick primer on the specific substantiation requirements for property contributions in excess of $5,000 is in order. These requirements are found in Treas. Reg. §1.170-13.

A qualified appraisal must be made not more than 60 days before the gift and no later than the due date of the return;

It must be signed by a qualified appraiser, who cannot be the donor or taxpayer claiming the deduction or the donee of the property.

The qualified appraisal must contain scores of information required by the regulations, including a description of the property, the basis of the property, and the appraised FMV of the property.

Having read neither the regulations nor the form instructions, Mohammed knew not of these requirements. Instead, he took a rational approach when completing Form 8283: he was a real estate appraiser, he knew the value of the contributed properties, so he filled out the form with the information as he saw it. As a result, Mohamed failed to comply with IRS regulations.

The IRS began auditing Mohamed in 2005, and sought to strike down the full amount of his charitable contribution deductions . To combat the IRS scrutiny, Mohamed obtained an independent appraisal in 2005, which verified that the values actually exceeded the amounts claimed on the return. Undeterred, the IRS then shifted its attack to the substantiation requirements, arguing that since Mohamed failed to satisfy the rules of Treas. Reg. §1.170-13, the deductions must be denied in full.

Unfortunately, there is no happy ending to this story. The IRS ultimately disallowed the couple’s deduction—and charged them accordingly.

Obviously, this is a situation none of us would want to experience, or see a loved one experience—so spread the word. If you are planning a charitable donation, start with a qualified appraisal. If you’d like to learn more, get in touch with us today!

Kane Forensic Accounting

Going Through Divorce? Electronic Discovery Can Ensure That You Receive a Fair Settlement

While the divorce process is never pleasant, it is important that you receive the settlement that you are entitled to. Fortunately, the digital world that we live in today makes it possible for forensic accountants to pore through thousands of documents in order to paint an accurate financial picture. And this ability is invaluable—as a sneaky husband or wife could easily conceal tens of thousands of dollars worth of assets (if not more.) 50 years ago, it may have been impossible to uncover the truth—but that is no longer the case!

The Wall Street Journal reports:

Suspicious spouses might dig around in their partners’ Web-surfing history and social networks to find traces of hidden bank accounts and business deals. They might install software on home computers that records every keystroke their spouses make—whether it’s secret stock trades or cash transfers to paramours—and use smartphone and GPS tools to show when they’ve been making sneaky withdrawals from ATMs.

Meanwhile, divorce lawyers and forensic experts are employing new strategies of their own. Instead of having to sift through reams of paper records to find irregularities, they’re now able to use advanced search tools to analyze thousands of digital bank statements, credit-card bills and other files in the blink of an eye.

“While in the past a paper trail might be hidden by a second set of books or the shredding of documents, the trail left by files on a computer is etched onto a hard drive somewhere, just waiting to be discovered,” says Ken Altshuler, president of the American Academy of Matrimonial Lawyers.

Is it legal for spouses to use these methods to find electronic evidence? That’s another matter entirely. The law is still evolving, and there are still gray areas about what practices are acceptable.

It’s legal, for instance, to do a Google search on a spouse. But it’s potentially illegal to hack into a spouse’s personal password-protected smartphone or Facebook page, or to secretly install a GPS in their car or to install keystroke monitors on somebody’s computer.

There are also gray areas about what’s admissible in court—it can vary not only from state to state but also from court to court within a state. Generally, though, information that is obtained illegally is inadmissible in court.

Even if spouses can’t use the information in court, the lawyers say, the knowledge empowers them in negotiations. And once they know about the assets, they sometimes can look for legal ways to ferret out the same information.

If you are considering or going through the divorce process, here’s the bottom line: You can’t afford to take your spouse or his/her attorneys at their word. It’s essential that you hire a qualified forensic accountant in order to uncover the truth. In today’s digital world, this decision can dramatically increase the size of your settlement.

The team at Kane Forensic is standing by to help you through this difficult time. Give us a call today and let us help you receive the divorce settlement that you deserve.