Services industry service offerings
- Using leveraged ESOPs in a corporate financing strategy
- Evaluating the requirements of new consolidation rules (FIN 46)
- Benchmarking to improve performance
- Managing staffing costs
- Identifying opportunities to improve cash flow
- Constructing effective growth strategies
- Reducing healthcare costs
- Avoiding exempt vs. non-exempt staff issues
- Providing personal wealth services to owners
- Developing reward & share plans
- Analyzing pension plans for improvement
Using leveraged ESOPs in a corporate financing strategy
An outstanding opportunity may exist for private company manufacturers who are looking to sell all or part of their company, while keeping it within the extended family of existing owners, management and/or employees. It involves using a leveraged Employee Stock Option Plan (ESOP) and applies specifically to private C corporations, or S corporations that can be converted to C corporations.
A leveraged ESOP is a specialized form of tax qualified retirement plan that may invest up to 100% of its assets in securities of a company and acquire the shares with funds borrowed from, or on the credit of, the company. In a typical leveraged ESOP transaction, the ESOP borrows funds from a bank or other third party lender and uses the proceeds to purchase shares of company stock from existing shareholders or the company. If the ESOP acquires at least 30% of the outstanding shares (by vote or value), and the selling shareholder(s) reinvests the proceeds within one year in "qualifying replacement property" (e.g., securities of a domestic operating company) there is no current recognition of capital gain on the sale.
Subsequent to the share acquisition, the company makes annual contributions to the ESOP in an amount sufficient to service the ESOP loan. Because such contributions are fully deductible (within certain limits), the transaction has the effect of allowing the company to deduct the entire principal and interest on the loan repayment. Dividends paid on the ESOP shares may also be tax deductible. As the loan is paid down, shares are allocated to participants accounts within the ESOP. Eventually, as employees retire or leave the company, the shares are repurchased at fair market value, thereby funding the employees' retirement benefit. Employees may be able to treat a substantial portion of their distributions as long-term capital gain rather than ordinary income.
The leveraged ESOP may yield a number of benefits for private company manufacturers:
- Gain liquidity and diversification
- Buy out minority shareholders
- Sell a portion of the company to a friendly buyer
- Secure tax efficient financing
- Establish a valuable stock-based incentive and retirement benefit for employees
- Defer or eliminate recognition of capital gain on the sale of shares to the ESOP
- Receive significant tax benefits unavailable with other forms of corporate financing
To find out more on how a leveraged ESOP may play a role in your corporate financing strategy, contact Lou Joseph, Alan Lee or Joe Gattone.
Evaluating the requirements of new consolidation rules (FIN 46)
A recent FASB ruling, FIN 46R, mandates that many service-related companies will need to consider whether to consolidate in the financial statements of their business, the financial statements of the related enterprises which may be holding real estate used in the business—whether separately owned or controlled by the service company's shareholders—or other entities, which may be related through common ownership and have cross loan guarantees.
Service companies have a relatively short timeframe to review these new developments and determine whether they have viable alternatives to these new financial statement requirements. Our audit and accounting professionals are available to assist you in evaluating the implications and determining which alternatives may benefit your company.
Benchmarking to improve performance
Managing staffing costs
Identifying opportunities to improve cash flow
Effective cash flow management is crucial to competitiveness. A key value differentiator is our approach to this goal. In addition to tax, assurance and advisory services designed to meet the needs of companies in your industry, we also bring to our clients potential opportunities to improve cash flow.
For example, overpayments of invoices can cost a service business a significant portion of its annual profits, thus adversely affecting the financial statements. Accounts payable technology is continuously enabling new and diverse payment methods that allow accounts payable systems to handle increases in volume and scale. However, this same technology may also inadvertently establish operational practices that cause accounts payable system inefficiencies and overpayments. We has developed software to search for and address these issues.
In addition, many service companies are not taking advantage of available sales/use tax exemptions—especially those operating across multiple jurisdictions. As a result, they may be overpaying sales/use tax to state and local taxing authorities. In other circumstances, companies may have improper sales/use tax remittance procedures—resulting in state and local sales/use tax audit assessments.
Lastly, many service companies prepay certain fees, licenses, insurance premiums and other similar expenses. These prepaid expenses typically cover a 12-month period spanning two taxable years which, therefore, may result in capitalizing the costs and deducting them ratably over the 12-month term of the item rather than expensing them when paid. At the same time, many service companies prepay various services, like advertising, marketing, dues and subscriptions, seminars, education, and professional services, and deduct these costs when the services are provided. Under current IRS regulations, these prepayments are deductible at the time of payment if the company reasonably expects the services to be provided within 3-1/2 months of payment. Service companies that are capitalizing and ratably deducting these expenses should consider accelerating such deductions on a quasi-permanent basis.
Constructing effective growth strategies
Our Transaction Services practice, comprised of a select team of senior deal professionals, assists clients in identifying, evaluating and executing various strategic alternatives. Our professionals have deep experience on both the buy-side and the sell-side of various types of transactions, including divestitures, mergers, strategic/corporate acquisitions, joint ventures, corporate restructurings and leveraged buyouts. As appropriate, they facilitate and help prepare clients for introductions to leading private investment firms. This tailored function may be used to provide informational feedback well in advance of a capital need, as well as facilitate formal introductions germane to a proposed investment request.
Additionally, many services companies use franchising as a vehicle for expansion and growth. To the extent that franchising is your growth medium, we have professionals specifically focused on key franchising issues. This includes recommendations for reporting systems designed to help franchisors measure the current status of a franchisee business (e.g., start-up costs, available funds, projected income, projected balances, projected cash flow, break even analysis, etc.) and federal, state and local tax planning assistance in jurisdictions containing franchisee businesses.
Reducing healthcare costs
Healthcare costs have escalated to become the second or third highest expense for US businesses. What does this mean for service companies? For many, the pressure is on to introduce more efficiency into the buying power of healthcare.
One of the first steps towards controlling healthcare costs is to see how yours compares to your industry. Another tactic is to reduce inefficiencies associated with your healthcare dollars. By reviewing your vendor contracts, renegotiating the pharmaceutical benefits contract and conducting vendor performance reviews, you may reduce costs associated with your employee benefit program. Costs may also be reduced by reviewing and addressing the specific cost drivers (e.g., health risks) impacting your specific business. You may be able to trim costs through coaching and lifestyle change programs. Efforts in these areas may yield higher quality benefits for your employees and greater cost savings for all.
The above is just a short description of some of the actions you can consider and does not encompass all options. Furthermore, for purposes of retaining employees, you should understand their healthcare needs before trying to reduce the associated costs.
Avoiding exempt vs. non-exempt staff issues
The Fair Labor Standards Act (FLSA), created by the US Department of Labor, regulates minimum wage, overtime, equal pay, recordkeeping and child labor for employees engaged in interstate or foreign commerce. It defines what is an "exempt" and "non-exempt" employee and sets specific pay standards for each.
FLSA has great implications to the Services industry. For example, if you have exempt employees doing non-exempt work or vice versa, you could be fined for non-compliance with the Act. Or you could face a lawsuit by one of your employees.
We work with clients to help avoid these pitfalls. Our professionals are well familiar with FLSA and provide clients with fresh, third-party analyses of employee positions and practices to help evaluate risk exposure. When appropriate, we also make recommendations for increased FLSA compliance.
Providing personal wealth services to owners
As an owner of a services company, there are many demands on your time. You may not always have time to devote to planning and administration of your personal financial and business affairs. What would be the effect to your personal wealth should anything happen to your business?
Our personal financial services team helps business owners enhance and preserve wealth by helping to manage risk and improve performance. We utilize a customized approach designed to reflect who you are and where you want to go.
Developing reward & share plans
Services companies are increasingly developing more sophisticated reward and share plans/programs to help attract, retain and motivate the right people. Well-drafted plans/programs may align the interests of management with those of the company and, therefore, help increase company performance.
The need for sound plans and programs is even more apparent in service companies operating across multiple states and countries. The complexities are increased—both in terms of coping with the different tax and legal systems and the varying practices on remuneration policy. At the same time, service companies are further challenged to develop a method for effectively communicating the plans/programs to managers throughout the organization.
We are available to help develop efficient reward and share plans/programs with the overriding goal of increasing management efforts, decreasing operating costs and mitigating company risk. We take a holistic approach to planning that considers both implementation and communication.
Analyzing pension plans for improvement
Qualified pension plans may be a powerful tool for partners/shareholders of service companies to increase income deferral opportunities and accumulate substantial retirement savings on a tax-favored basis. Qualified defined contribution plans have been used for this purpose by many partnerships, but in many cases, additional opportunities remain. Moreover, many companies have not recognized the greater potential that qualified defined benefit plans may provide. For many plan sponsors, there is an opportunity to increase annual individual partner deferrals by as much as $100,000 through a qualified defined benefit plan. While recent tax legislation creates additional deferral opportunities for partners, there are complex compliance requirements to follow.
To address partner/shareholder deferral opportunities associated with qualified pension plans as well as the corresponding compliance issues, we offer a partnership/shareholder pension plan analysis. As part of the analysis, we assess the impact of new legislation on current plans, the potential for additional deferrals, and the potential costs of alternative approaches. In short, we help prioritize benefit plan goals and assist in the design and implementation of private equity pension plans.