Accounting & Finance

Think you have all your “Risk” Covered? Time for a Review?

While driving home from the Network Magazine event at Boos Rock last week, I was sharing my thoughts with Kelly on what I wanted to write this article about.  As an insurance professional in my 4th decade of practice, I am increasingly alarmed at the “commoditization” of auto insurance.  Very few companies advertise protection; it […]

While driving home from the Network Magazine event at Boos Rock last week, I was sharing my thoughts with Kelly on what I wanted to write this article about.  As an insurance professional in my 4th decade of practice, I am increasingly alarmed at the “commoditization” of auto insurance.  Very few companies advertise protection; it is all about low price. Now don’t get me wrong, everyone wants the best quality at the lowest price, but I suspect the majority of drivers have no idea what stacked underinsured coverage really protects or the difference between limited tort and full tort and the hundreds of thousands of dollars of protection that are in play for pennies of premium per day.

As Kelly and I continued this conversation, we heard sirens coming from all directions.  Next, the Upper Macungie Police cruiser flew by.  Then the Fogelsville Fire police and first responders flew by.  I always get nervous when I hear sirens, hoping and praying it’s not someone I know or insure.  As it turns out, I did get THAT call the very next morning.  It was a near-fatal auto accident, involving one of my clients, actually the son who is in his 20’s. He was completely innocent in this accident, just a simple case of being at the wrong place at the wrong time. We proceeded to set up the claim, and I invited the family to come to the office to review their auto policy in person. They were distraught with many questions.  Hopefully, I was able to offer some semblance of assurance that they will be well protected if litigation is brought.  As it turns out they have high levels of liability protection, plus a personal liability umbrella in place.  We discussed how the repairs would be handled once the car is released from impound and set them up in a rental car.  Finally, we explained how the medical transport and other medical bills would be handled.

The competition for Auto insurance has never been fiercer.  Advertising is directed at a low price, minimum coverage.  The minimum liability limits in PA are 15,000 per person/ $30,000 per occurrence for bodily injury and $5,000 of property damage liability. The state legislature set these limits in 1974.  In 1974 the average price of a new car was $3,500.  In 2019, the average price of a new car is tenfold; $34,000.  Back in 1974, when you bought your first car, your father took you by the hand to his Insurance Agent.  That Agent gave you the protection you needed, and you forged a life-long relationship.  Today, the first time car buyer, typically Googles “cheap car insurance,” absent an insurance professional, finds a low-cost coverage minus consideration of inflicting serious bodily injury upon others, or giving up rights if injured by someone else. I get the feeling that there is a lot of underinsured drivers with misguided priorities based on irresponsible advertising.

Another major shift in transportation is the advent of rideshare, i.e. UBER and LYFT.  There are an estimated 1.5-2 million UBER drivers in the US and 41.8 million UBER users.  Total UBER usage is about 15 billion trips since its inception a decade ago.  Complicating matters, personal auto policies specifically exclude coverage when the vehicle is being used for livery (hired for pay).  UBER has contracted with a third party to pick up when the personal auto policy excludes coverage.  However, those limits are obscure at best and vary by state.  Typically, there is a low level of liability protection when the UBER driver is “App On” minus riders. Limits of $50,000 / $100,000 per person/per occurrence for bodily injury liability and $25,000 for property damage liability is common.    When transporting riders, the liability limits increase to $1,000,000.  So, at any given moment, various companies are insuring a vehicle at various levels of protection all in a matter of seconds. A claims and litigation nightmare. This topic alone should make everyone increase their Underinsured Motorist coverage and stack it!  And don’t be so quick to delete the collision coverage on your 10-year-old sedan.

In the past five years, the auto insurance landscape has changed dramatically based on new technology and a shift in advertising.  Now more than ever it’s important to take inventory of your insurance portfolio to assure you are protecting your assets if you just happen to be the one who is at the wrong place at the wrong time.  For a professional giving advice to clients, please ask your clients to sit down with their Insurance Agent to make sure adequate protection is in place.  What was adequate last decade may not adequately protect you today.

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2019-CEO-Challenges

CEO Challenges for 2019

As we enter into a new year, we face a new era of challenges with no clear resolutions.  2019 presents a combination of hurdles never before faced by businesses.  CEO’s are now faced with an unstable economy, global unrest, legalization of marijuana, and tax law changes; coupled together, these challenges leave us to merely shake […]

As we enter into a new year, we face a new era of challenges with no clear resolutions.  2019 presents a combination of hurdles never before faced by businesses.  CEO’s are now faced with an unstable economy, global unrest, legalization of marijuana, and tax law changes; coupled together, these challenges leave us to merely shake our heads and wonder how we got here.  The most significant hurdles which challenge CEOs on a daily basis are a tight workforce and advances in technology.

The United States is currently facing a tight labor market that unfortunately shows no signs of easing.  The latest data shows the December unemployment rate at 3.9%; a rate we have not seen since 2000.  The tight labor market has skyrocketed recruiting and retaining talent to the top of the hot button issues for 2019.  Every business leader knows that personnel is a company’s greatest asset and the biggest key to achieving corporate goals.  Finding workers that are highly skilled and experienced and then holding on to them is becoming increasingly problematic.

Employers in every industry are expressing the same concern – the inability to attract and retain qualified employees.  Losing qualified employees can have devastating effects on a corporation.  During a discussion with one business executive in the Lehigh Valley, he commented that his company has experienced a spike in turnover which has affected efficiency, and ultimately profits.    Another manufacturer indicated that they have not been able to replace experienced workers. Thus they have been forced to pay a large amount of overtime to existing employees, which again, impacts the bottom line.

With all of the advancements in technology, CEO’s are faced with either attracting new talent with the latest skills or reskilling their existing workforce.  Business leaders must make training a priority in order to prepare their workforce to compete in a highly competitive market. However, training requires planning and commitment.  With existing time constraints due to the tight market, there is little time available after a worker has performed his primary job responsibilities.  Business leaders need to remember that although training is not revenue generating in the short term and can be costly during implementation, it will positively affect the bottom line in the long term.

The key is to be proactive in training and advancement.  Training should be structured based on both the employer’s and employees’ needs.  Personalized training, while costly, is the most beneficial method in the long run.  When filling the gaps in your workforce, evaluate workers for advancement not only based upon leadership skills but also on their willingness to get involved in technological advancements.  The trend has been to advance employees who could not only take leadership roles but also had soft skills.  In the new era, executives also need to target employees willing and capable of developing technology skills.

During these changing times, business leaders are forced to make long-term decisions based upon predictions and presumptions.  The combination of technology, automation, and a tight labor market will force business leaders to be creative with their workforce planning. In order to provide exceptional customer service in this fast-paced digital era, business leaders will need to offer more comprehensive employment packages in their recruitment of new talent or provide the necessary training to their current workforce in order to stay viable for the next 10 to 15 years.

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healthcare

Medicare as your employer plan?

Are your employer health insurance costs getting out of control?  Medicare may be an answer you’re not thinking about. Medicare is a federal health insurance program that is offered to American citizens turning 65 and other eligible individuals.  The two parts of original Medicare are parts A & B.  You can choose to add on […]

Are your employer health insurance costs getting out of control?  Medicare may be an answer you’re not thinking about.

Medicare is a federal health insurance program that is offered to American citizens turning 65 and other eligible individuals.  The two parts of original Medicare are parts A & B.  You can choose to add on a Supplement (options A – N; sometimes called Medigap) with a drug plan (Part D) or a Medicare Advantage (Part C) plan to cover additional costs not covered by original Medicare.

Medicare does work with employer coverages, and you should enroll in Part A when you turn 65 as it’s free for most people.  Part A helps cover the hospital portion of the benefit, and Part B is the medical portion.  Part B does have a cost and is determined by your income.  The option to waive Part B is available if you have employer coverage on your own or through a spouse.  If you don’t have other health coverage deciding to waive Part B will cause a penalty if you don’t sign up when you’re first eligible.  Part A is primary if you work for an employer with less than 20 employees participating in the health plan and you must enroll when you turn 65 to avoid a penalty and delays in acquiring Part A.  If your employer has more than 20 employees on their health plan than you could also decide to waive Part A.

Some employers may make you take full Medicare benefits when you turn 65.  Why do they do this?  The Affordable Care Act that was established in 2010 and took effect in 2014 with many changes happening before that.  It created a different group and individual health plan coverages costing the employer and employee more money to cover older employees.  Moving employees age 65 and older to Medicare helps to control the out of pocket costs the employers and employees pay including deductible costs and costs when visiting the doctors, hospitals, surgeries, treatment, etc.  Many times, the Medicare benefits offer better coverage with low or no deductibles and low or no out of pocket costs making this a great alternative to traditional employer plans.

A review of current employer plans versus Medicare Benefits is established before deciding to move off of your work benefits.  We look at health, how often you go to the doctors, and what medications do you take regularly.  Second, we take a look at your budget and determine what the costs would be for each choice.  Finally, we look at your health network preferences like doctors, hospitals and pharmacies.  How important is it to have coverage when you travel?  Medicare supplements and advantage plans do have domestic travel coverage options that vary based on plan choice.  Medicare plans can also offer ancillary benefits and can include things like dental, vision and even gym memberships to an approved facility.

Employers can typically save money on employee benefits by moving their 65 and older employees off the group coverages.  The costs associated with older employees tend to be more per month than for younger employees.  The savings can be hundreds to thousands of dollars per month if the employee workforce is older.  Employers can reimburse employees for their Part B, Part D, and Medicare Supplement policies but IRS rules apply.  The Medicare benefit plan arrangements must be integrated with other group benefit plans.

*Medicare reimbursement arrangements will be considered to be “integrated” with another group health plan if:

  • The employer offers a group health plan other than the employer payment plan that does not consist solely of excepted benefits and offers minimum value coverage;
  • The employee participating in the employer payment plan is actually enrolled in Medicare Parts A and B;
  • The employer payment plan is available only to employees who are enrolled in Medicare Part A and B, or Part D; and

The employer payment plan is limited to reimbursement of Medicare Part B or D premiums and excepted benefits, including Medigap premiums.*

When age 65 is looming, it’s best to meet with a Medicare Planning Specialist who can take the anxiety off employers as well as employees and help decide and determine the best course of action for their health insurance coverages.  Good health coverage and saving money can be accomplished.

*Excerpt taken from IRS Notice 2015-17—Employer Payment Plans and the ACA’s Market Reforms 03.30.15*

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Year-End Tax Planning for Small Business

As year-end approaches, each business should consider the many opportunities that might be lost if year-end tax planning is not explored. A business may want to consider several general strategies, such as the use of traditional timing techniques for delaying income recognition and accelerating deductions. A business should also consider customized strategies tailored to its […]

As year-end approaches, each business should consider the many opportunities that might be lost if year-end tax planning is not explored. A business may want to consider several general strategies, such as the use of traditional timing techniques for delaying income recognition and accelerating deductions. A business should also consider customized strategies tailored to its particular situations.

For the 2018 tax year, taxpayers have relative clarity with respect to available credits and deductions. With the exception of a handful of industry-specific tax credits and deductions that expired at the end of 2017, most temporary credits and deductions were permanently extended several years ago. A few others were extended for 5-years through 2019.

Clarity is a new concept for federal taxes, as several years’ worth of promises of impending tax reform finally resulted in the Tax Cuts and Jobs Act (TCJA). The Act made several high profile changes to the tax code, notably reducing tax rates for businesses and individuals, but also created new tax benefits and made several other business-friendly tax benefits even friendlier.

The last few months of the year provide an important “last chance” to change the final course of your business’s tax year before it closes for good. Among the reasons why year-end tax planning toward the end of 2018 may be particularly fruitful are the following:

Business credits and deductions. Many business-related tax credits and deductions that were periodically scheduled to expire were permanently extended in 2015. Others were twice extended one year for both 2016 and 2017, and are not available for the 2018 filing season unless extender legislation is enacted. A few were extended for a five-year period. Some others were modified and extended by TCJA. Taking inventory of what deductions and credits your business has been using and whether they remain available or will be removed in the near future can significantly impact your bottom line. Many of the provisions now periodically extended relate to energy-related activities or specific industries, but it is important to make sure that any credits are considered in light of their availability.

Depreciation and expensing. TCJA made some significant changes to encourage business to expand and invest in new property. First-year depreciation allowances on certain business property, or bonus depreciation, has fluctuated over the last few years, but TCJA provides for 100 percent bonus depreciation for property placed in service before 2023. Additionally, the limitation on expensing certain depreciable assets has been increased to $1 million, with a $2.5 million investment limitation. While 2018 is not necessarily the last time these benefits will be available, there has been no better time than 2018 to take advantage of them

Qualified business income deduction. Beginning in 2018, business owners to deduct up to 20 percent of their qualified business income (QBI) from sole proprietorships, partnerships, trusts and S corporations. This is one of the centerpieces of TCJA and broadly applies to many taxpayers. The IRS has released comprehensive guidance on the deduction, which provides a great deal of clarification on the requirements of the deduction. This is an entirely new deduction, with new documentation requirements, which may require a year-end review of records.

Cash method of accounting. Another provision arising from TCJA was a more permissive adoption of the cash method of accounting. Beginning in 2018, corporations with gross receipts up to $25 million can use the method, which is up from $1 million in prior years. Many of the traditional end-of-year planning techniques relating to timing, such as income deferral or income acceleration, are made easier where the cash method of accounting is used.

Employee benefits. TCJA made a large number of changes on the individual side relating to benefits that could impact employers. Employees can no longer claim miscellaneous itemized deductions, cannot generally exclude moving expense reimbursements, and the deduction for business meals and entertainment was also impacted. Employers should review their internal policies to determine if they need to be changed to reflect the changes.

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7 Essential Autumn Home Maintenance Checks

As the leaves change and the days get shorter, take the time this autumn to prepare for winter. By making this fall home maintenance into a tradition, you’ll have peace of mind in the winter and more time to hibernate. Indoor Tasks Heating system checkup Be sure to change the air filter in your furnace […]

As the leaves change and the days get shorter, take the time this autumn to prepare for winter. By making this fall home maintenance into a tradition, you’ll have peace of mind in the winter and more time to hibernate.

Indoor Tasks

Heating system checkup
Be sure to change the air filter in your furnace and check its efficiency before the cold weather begins. Call in an HVAC contractor to test the heating output and give the system a tune-up. This technician can also check for and correct possibly hazardous carbon monoxide levels generated by your heating system. Stock up on several air filters for the winter and change them every month. If you don’t have a programmable thermostat, purchase one for the system to help lower your energy costs.

After your furnace has been tuned up to its maximum efficiency, take a moment to inspect your heating ducts and vents. Dust them off and clear away anything that may have gotten into them over the summer. Then check your windows for any leaks that may compromise your heating efficiency. If you feel cold air coming in, purchase a plastic sealing kit from the hardware store and place the plastic around the window to keep the heat from escaping. Be sure to check your doors as well and fix their weather-stripping if needed.

Check the fireplace and chimney
Most chimney sweeps recommend an annual sweeping, but depending on how often you use the fireplace, you might be able to wait on a full sweep. But if you will be using the fireplace often, call a chimney sweep for an inspection.

Hopefully, you will have your older, seasoned firewood now ready for use after sitting for the spring and summer. It’s recommended to keep the firewood at least 30 feet from the house and covered. Seasoned wood is best for fires, as it burns cleaner and longer.

Review home fire safety
The introduction of the heating season brings new potential for fire hazards, so take a moment to review fire safety in your home. Check and replace fire extinguishers if necessary and change the batteries in your smoke detectors. Also, go over the home fire evacuation plan with your family.

 

Outdoor Tasks

The gutters
It’s best to inspect and clean the gutters a few times during the fall, especially if there are many leafy trees around your house. If gutters remain clogged, water will spill over them and onto the ground next to the foundation, which may cause damage to the foundation. Gutters and downspouts should be kept clean and should direct water away from the foundation, as well as from walkways and driveways so that they do not become slippery or icy.

Yard maintenance
The orange, yellow, and brown colors of the autumn leaves don’t look as nice on the ground as they do on the trees. Rake the leaves into piles and scoop them into yard waste bags. Most areas have ordinances about burning leaves, so check with your local area government first. When sweeping the leaves off your patio, don’t forget to clean, pack up, and store any patio furniture for the winter. Disconnect garden hoses and, if practical, use an indoor valve to shut off and drain water from pipes leading to outside faucets. This reduces the chance of freezing in the section of pipe just inside the house.

In the garage
It is recommended that you empty out unused fuel from any gas-powered equipment stored in the garage, such as a lawnmower because sediment can build up and clog the fuel lines. Store gasoline in tanks out of children’s reach and have it ready for use in your snow blower or emergency generator if need be.

Test your emergency generator
It’s a good idea to have an emergency generator if you live in an area that sees a lot of ice storms, as these are a major cause of blackouts during the winter. So, if you have one, haul it out and give it a test run to see if it is in good working order. Make sure you never run the generator in any enclosed space – like your garage – as it will present a carbon monoxide hazard. If you are looking to purchase a generator, talk to your insurance agent about exclusive offers such as those offered on Generac generators by State Farm® for its customers.

State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates) is not responsible for and does not endorse or approve, either implicitly or explicitly, the content of any third-party sites hyperlinked from this page. State Farm has no discretion to alter, update, or control the content on the hyperlinked, third-party website. Access to third party sites is at the user’s own risk, is being provided for informational purposes only and is not a solicitation to buy or sell any of the products which may be referenced on such third-party sites.

The information in this article was obtained from various sources not associated with State Farm®. While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. These suggestions are not a complete list of every loss control measure. The information is not intended to replace manuals or instructions provided by the manufacturer or the advice of a qualified professional. Nor is it intended to effect coverage under our policy. State Farm makes no guarantees of results from use of this information.

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A Financial Success Story

Earlier this year, I began working with a new client, a 61-year-old male who just lost his wife to a long battle with cancer. He was emotionally distraught in addition to confused and frustrated with thinking through what to do financially. He spent weeks sorting through documents, updating records, and speaking with pension and retirement […]

Earlier this year, I began working with a new client, a 61-year-old male who just lost his wife to a long battle with cancer. He was emotionally distraught in addition to confused and frustrated with thinking through what to do financially. He spent weeks sorting through documents, updating records, and speaking with pension and retirement plan specialists at her former employer, her life insurance provider, and bank representatives, all while planning a funeral. We finally had the opportunity to get together three months after her passing, and he came prepared with the following information: bank and credit union statements, his IRA statement, her lump-sum pension quote, and retirement plan statement, and his permanent life insurance policy statement.

His request was simple and common, “I want to be sure I have enough to live on in retirement, and I want to leave a legacy for the children.” They were adults now; he had two kids of his own, and she had one. He wanted her child to inherit most of her retirement plan and pension, however, he also knew he needed to use these assets when he retired in a few years. He already had taken care of his children by making them 50/50 beneficiaries on his life insurance and IRA. The two issues he wanted me to help with were his retirement income and taking care of her son financially.

This client is very conservative with no desire of account values decreasing, outside of pulling income, so investing into a growth-oriented portfolio was out of the question. My recommendation for the client began with shifting some of the inherited retirement assets into an annuity that guarantees him a minimum $1,200 per month income when he retires. The remainder we invested into a very conservative bond portfolio with half in government-backed bonds. I also recommended applying for a permanent life insurance policy because if he can get approved, we fund the premium using the bond portfolio and name her son as the beneficiary. He did get approved, and we put a permanent death benefit in place which grows each year as premiums are paid. Meanwhile, we are only putting about 4.5% of the bond portfolio toward the premium each year. The premium is low enough as to not deplete the bond portfolio, yet the tax-free death benefit is enough that it will be worth almost as much as the wife’s inherited retirement assets. From the cash in the bank and credit union accounts, we used half to purchase a fixed annuity which matures just before retirement and guarantees a steady interest rate each year. We also added a portion of his IRA to the annuity we bought with part of the wife’s retirement assets, which guarantees at least another $2,800 per month to the client.

The client has now secured $48,000 annually of guaranteed1 retirement income in addition to Social Security and a pension. He also has secured a death benefit to pass to her child upon his death, while his kids are already taken care of. Lastly, he will have significant liquid assets to use in retirement as needed, not including what he is still able to save over the next few years while working. I share this story for two reasons; the first being to encourage everyone to always prepare for the unexpected. Life always brings challenges and throws us curve balls; the best we can do is be as prepared as possible. Second, create a financial plan early and review often. Work with a financial professional to establish goals and to guide you through changes in life, the ups and downs, and the financial impact of losing loved ones.

This client I wrote about now has clarity of his financial plan and is very confident moving forward. It has been extremely rewarding to assist him and see the weight being lifted off his shoulders. Working with clients every day to improve their situation is my “why” and if I can help a few people take some initiatives or seek a second opinion on what they are currently doing, then I consider that a big win.

1 Guarantees are based on the claims-paying ability of the issuing insurance company.
References to specific securities, asset classes, or portfolio models are for illustrative purposes only and do not constitute a solicitation, offer, or recommendation to purchase or sell a security. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries, and such opinions are subject to change without notice.

All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Past performance is not a guarantee of future results.

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Are you scared to retire?

Miriam Zettlemoyer, Consultant Alliance Planning  Transitioning from working years into retirement years can be difficult.  It can create great anxiety and people sometimes rather not deal with what retirement would look like financially and just continue to work.  It can seem like the easier option.  The thought of what might be on the other side […]

Miriam Zettlemoyer, Consultant
Alliance Planning

 Transitioning from working years into retirement years can be difficult.  It can create great anxiety and people sometimes rather not deal with what retirement would look like financially and just continue to work.  It can seem like the easier option.  The thought of what might be on the other side is too daunting a task but at some point, in their life age, health and life forces you to take a look.  I always tell my clients that it might not be as bad as you think.  We start with the budget and we look at current working year’s budget to moving into retirement budget – needs versus wants come into play. Next, we look at income current versus retirement income.

Predictable income can include social security income, pensions if available and other assets like retirement accounts, annuities that can produce income if there is a shortfall between budget and income.  After doing the math on both those items we can determine if there is money for variable cost items like travel, gifting, hobbies or other.  Healthcare can be a big cost if your current employer was paying for your coverage 100% but you may find that moving into a Medicare supplement plan option could reduce your annual out of pocket costs for deductibles, co-insurance, co-pays and other even if the premiums were 100% covered by your employer.  Working with an advisor can help you also get your “stuff” in order and make you think of things that you would normally not be on your mind.  Are your wills and powers of attorneys current and say what you want them to say?  Are your beneficiaries up to date on all your accounts and policies?  Should I keep paying on my life insurance and do I still need it?  Will my car last 20 years in retirement or is that an expense I should budget for?  Lots of questions that can be difficult to think about, but relief follows once answered.  Putting a plan in place to make sure you don’t outlive your retirement can include downsizing, determining a way to reduce necessary expenses, working an extra year to increase your social security income, rolling over some assets into an income producing product, moving in with family and keeping variable expenses to a minimum.

We haven’t addressed or talked about additional health needs and long-term care that can drain the assets quickly.  This is a concern as we age, and health deteriorates that our expenses could increase and use up our assets for care needs. Assisted living costs on average are $3,500+ per month and skilled nursing costs are averaging over $7,500 per month. One of the planning options available to help cover the cost is Long-Term Care insurance. You must however purchase this when healthy and be sure that costs for the insurance even if they increase are manageable into retirement. The markets have allowed for some hybrid life insurance and long-term care options as well as a one-time deposit into a life policy to be used in long-term care situations. These newer products avoid the use it or lose it mentality of the traditional long-term care products that you pay for and if you don’t use then you forfeit all the paid premiums but still include some underwriting/health requirements in order to qualify. Contrary to widespread belief Medicare will not cover long-term care situations. Medicare covers a very limited amount of care in a nursing home and with strict rules of being in a hospital for at least three days and then transitioning directly to a skilled facility for care.

A good advisor will be able to show you different options, plan your budget and income and give you peace of mind when moving into retirement to cover all your basis.  The baby boomer generation include people born from 1946 to 1964 and they started turning 65 in 2011.  Since then there were 10,000 boomers turning 65 per day that will continue for another 12+ years until year 2030.  Are you one of them?  Are you ready?  Meet with your advisor today to review and make sure you have all your ducks in a row. If they aren’t asking you some of these questions it might be time to look for another advisor.  The sooner you start the planning process the better chance you will have for financial success.

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Happily Ever After Retirement

When I first got into the business of Financial Planning, a mentor said to me, “People don’t plan to fail, they fail to plan.” In my view, the key to success for making that “happily ever after” retirement come true rests on one simple, yet overlooked area of planning, BUDGETING! I know that nobody likes […]

When I first got into the business of Financial Planning, a mentor said to me, “People don’t plan to fail, they fail to plan.” In my view, the key to success for making that “happily ever after” retirement come true rests on one simple, yet overlooked area of planning, BUDGETING!
I know that nobody likes to talk about budgeting, so, let’s use a friendlier term. We’ll call it a “spending plan.” The development of an efficient spending plan that adjusts to changes in your life over time will have your future self, thanking you for a well-planned retirement.
Developing a spending plan puts you in control of your money instead of your money controlling you. The activity of physically writing down your income vs. expenses, and then calculating what you have left at the end of each paycheck or month, will provide you with a huge eye opener to seeing your spending pattern. The goal is to spend what you have not what you don’t have. By avoiding credit cards and their outrageous interest on the debt, you will dramatically increase your chances of achieving a well-funded retirement.
Best-selling author, Greg Reid says, “A dream written down with a date becomes a goal. A goal broken down into steps becomes a plan. A plan backed by actions makes your dreams come true.” It is so important to write down your financial goals and look at them every day.  This simple action will implant them into your memory and be a constant reminder of what is important.
Save for the unexpected, or what we call your “emergency fund.” Your emergency fund should be 3-6 months of personal expenses.  It’s OK to start small, like $1,000. But, make it a point to build up to the full deal. You never know what life is going to throw at you!
Attack your debt by developing a debt reduction schedule. Elimination of debt, even at the smallest levels will give you immediate positive feedback that will build momentum. Then, use your new habits and inspiration to tackle the bigger debts. Soon, you’ll be addicted to the success of the debt reduction. Interest on debt is your enemy in saving money for a happily-ever-after retirement.
When you establish your spending plan, you’ll quickly see where your money goes: vacation, a new car, retirement, college for your children, and the list goes on. By saving some extra money every month, you’ll experience how the magic of compounding will increase your total savings and provide a positive incentive towards reaching your retirement goals.
I challenge you to develop a spending plan, give your money a name, spend it on paper before you spend it at the store. Speak to professionals about debt reduction and seek guidance on a comprehensive financial plan tailored to your goals. Build momentum while staying positive and you will achieve your Happily Ever After Retirement!

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Valuation of Closely Held Businesses: Part II

In a previous edition of this publication, we introduced the reader to the concepts and methodologies commonly employed by business valuation specialists to assist the owners of closely-held businesses to determine the value of their enterprises. In this second half of that discussion, we take a closer look at the income-based approaches to business valuation […]

In a previous edition of this publication, we introduced the reader to the concepts and methodologies commonly employed by business valuation specialists to assist the owners of closely-held businesses to determine the value of their enterprises. In this second half of that discussion, we take a closer look at the income-based approaches to business valuation and some of their nuances.
It is important to recall that income-based approaches to business valuation are predicated on the ability to approximate future cash flows. In many instances, lacking any detailed projections, historical financial information is used to forecast these future business returns. In order to approximate future cash flows, however, certain adjustments need to be made to the extent that the potential buyer of the company will conduct the business in a manner different from that under which it is currently operating. This concept called “normalization” refers to eliminating items that are either discretionary or simply above or below market values. For example, if the owner currently earns a salary of $250, 000 but can be replaced by an employee making $75,000, the cash flow will increase by $175,000 for the buyer. Similar adjustments would be made to adjust expense items to their market value such as rent, bonuses, etc. or to eliminate non-business related expenses such as personal travel and entertainment, automobiles, etc.
The next step is to determine the appropriate rate of return on investment. Typically, the valuation analyst may use a build-up model to determine the proper capitalization rate. This starts with a risk-free rate, commonly utilizing the Long Term (20-year) United States Treasury Yield. Next, a historical equity-based risk rate is applied based on historical data that has been accumulated from publicly traded companies. The capitalization rate is further adjusted to allow for the size of the entity, the risk of the industry in which it operates and may be further adjusted due to specific company risk such as reliance upon key employees, limited customer markets, reliance upon key vendors, etc. Conventional wisdom recognizes that the smaller the business enterprise, the larger the risk factor and therefore the larger the capitalization rate or rate of return required on the investment. The final step would be to divide the forecasted cash flow stream by the calculated capitalization rate to determine the approximate value of the company.
Business valuation literature also recognizes that there are specific recognized discounts that are applied to closely held business valuations. The first of these is referred to as the discount for lack of marketability. The discount for lack of marketability recognizes the fact that there is no readily traded public market for the closely held business. The discount for lack of marketability also reflects the fact that there is a time value of money for the period of time it will take to sell the enterprise. This discount also allows for brokerage or sales fees, etc.
The second discount that may be considered is a lack of control discount. These discounts recognize that the sum of the parts does not necessarily equal the whole. If an owner is selling less than a controlling interest in the business enterprise, the potential buyer of the business enterprise would be in a position where they would lack control. Lack of control would include lack of the ability to vote on critical corporate decisions such as acquisitions, expansion, purchase of substantial assets, etc. The common body of business valuation knowledge recognizes that the lack of the ability to control the direction of the enterprise has a significant discounting effect on the value of the underlying stock.
Ultimately, similar to real estate valuations or other asset valuations, the value determined by the business valuation specialists is subjective. The correct price to attribute to the closely-held business is the price that a willing buyer would pay a willing seller under the prevailing market conditions. However, a business valuation specialist can help the small business owner properly plan for business succession and have a better understanding of their family’s accumulated net worth.

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Valuation of Closely Held Businesses: Part I

A successful small business enterprise may be the culmination of a life’s work for a small business owner. A small business may even have successfully transitioned to the second or third generation of a family. Inevitably, the question often arises, “What is my business worth?” It is the role of the business valuation specialist to […]

A successful small business enterprise may be the culmination of a life’s work for a small business owner. A small business may even have successfully transitioned to the second or third generation of a family. Inevitably, the question often arises, “What is my business worth?” It is the role of the business valuation specialist to assist the client in helping to understand the approximate value of their closely held business. The need to value the business may arise from a buyout of a current owner, a family gifting strategy, estate settlement resulting from the death of an owner, marital dissolution, or a first step toward the eventual sale of the company in accordance with a succession plan. In this first of a two-part introduction to business valuation, we will take a look at the primary approaches utilized by business valuation experts to estimate the value of a small closely-held business.

Business valuation principles rely upon a number of recognized techniques widely accepted by experts in the field. The methods utilized to evaluate business enterprises are broken down into three distinct approaches; asset based, income based, and market-based. This article is intended to examine the three separate approaches briefly, but the reader should keep in mind that there are numerous methodologies contained within each approach that go well beyond the scope of this article.

The first, and probably best-understood approach, is the asset based approach. Included in the asset based approach are both going concern and liquidation methods; whereby the going concern value is predicated on the market value of the net assets and assumes the company continues as a going concern, whereas the liquidation method considers the market value of the net assets in contemplation of liquidation of the enterprise. These methods often require an independent third party to appraise the market value of specific assets.

The market-based approaches incorporate a number of methodologies as well. Among those is the company guideline method. The market-based approaches to valuation assume that if you can ascertain the value of a company with similar attributes to the one being valued, then you should be able to apply those same metrics to the subject company. For example, an analysis of closely held businesses recently sold with the same standard industrial classification code as the subject company and of similar size may yield important ratios that can be applied to the subject company including multiples of revenue, price to company earnings, price to seller’s discretionary earnings, etc. Those metrics can then be applied to the subject company to approximate value.

There are limitations in using market-based methods. Many closely held businesses are quite unique and are very difficult to compare to other companies. Some of the comparisons may result from transactions that are significantly older and less relevant.

Transactions may have taken place in other parts of the country that experience different market conditions than that of the subject company. Finally, it may be that the availability of companies that are comparable in many of the commercially available databases are quite limited, and therefore although seemingly a worthwhile tool, market-based methods can have a very limited application.

The third and most common approach to valuing a small business enterprise falls under the category of income based approaches. Income based approaches are based on the theory that a company is worth an amount that will yield the expected return on investment given an interest rate that allows for risk. By way of example, an investment of $100,000 at 5% will earn $5,000. Therefore, it holds that if you anticipate earning $5,000 with an expected 5% yield on the investment, you would need to invest $100,000, i.e., the business value. That is the underlying rationale behind an income based approach. Of course, the challenge in utilizing an income based approach is twofold. The first is to determine the appropriate risk-based return on investment. Second, the valuation analyst needs to understand the potential income and cash flow that the company will yield in the future.

In a future edition of this publication, we will look more in depth at the process by which the income based approaches to business valuation are utilized by business valuation specialists.

*Part 2 Coming Soon in the next edition of Network Magazine*

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