When you first started your company, both you and your business partner were crucial to its success and longevity. Fast forward to today, your business partner has decided to transition away from the company. This could be for a number of reasons. More commonly, the partner wants to move on to a new venture or they are looking to retire. In some instances, however, they are either no longer aligned with your company’s vision or there has been a falling out of some kind.
Whatever the situation, you now have to take the right steps to ensure that when you buy out your business partner, it is not only favorable for all parties involved, but that the buyout will not negatively impact the company in any way. Partnership buyouts are expected to increase with more baby boomers planning their retirements and younger generations looking to make more lucrative career moves, so make sure you are prepared when the time comes.
Determining the value of each partner
Even if the buyout began on friendly terms, disputes about the process can quickly make the partnership buyout less civil. The easiest solution would be to follow the terms outlined in the buy-sell agreement that both parties settled on when initially forming the partnership, assuming it was drafted in a fair manner. This agreement typically speeds up the buyout process and ensures there are fewer arguments and risks along the way. In some cases, there is no initial buy-sell agreement, which means that each partner will need to agree on the value of each other’s shares in the business. If one partner has been more involved in the company’s operations and growth, a higher payout could be expected.
It can get complicated if each partner establishes a valuation without professional knowledge or expertise and tries to buyout the other partner using the average of undervalued or overvalued numbers. Either the numbers will be vastly different, or both partners might not agree on a final number. This is why it is important to work with a third-party valuation company such as Appraisal Economics. We have an unbiased approach to every valuation we conduct, and the methodologies we use to determine value are fair and credible.
Getting back to business
When a partnership buyout can be settled quickly and with no animosity, it allows you to get back to business as usual. Knowing that the departing partner has received a fair share of the business, he or she is more likely to do what is necessary to ensure that business operations continue to run as harmoniously as possible during this transition phase. Contacting clients and updating them about the partner who is leaving prepares them for any upcoming changes. Detailing the responsibilities of the partner helps to decide what tasks you will take over and what potential staffing decisions you need to make to avoid any discrepancies in operations and performance.
The process of buying out a partner is faster and more preferable when you use a certified business valuation specialist. Keep this in mind as you consider forming another business partnership in the future. Initially establishing a buy-sell agreement with a new partner and a third-party valuation company will prove better for everyone in the long-term.
In an effort to protect your business, you registered your trademark with the U.S. Patent and Trademark Office. If approved, you were issued a federal registration number. Now that you have taken that necessary step in the preservation of your brand, your business is protected for the rest of your tenure, right? Not exactly.
Registering a trademark is just the beginning of the journey, not the final step. It ensures that you are legally protected against infringement, but it is possible to have your registration canceled. If this were to happen, your only option would be to file a new application and start the process over again from the very beginning. However, repeating the process does not guarantee that your trademark will be re-registered, even if it was approved the first time.
The only way to look after your brand is to maintain and defend your trademark in order to keep it alive. Here are a few best practices:
Know your renewal dates
Part of maintaining your trademark is to prove that you are actively using it. The U.S. Patent and Trademark Office (USPTO) actually requires you to regularly submit file renewals that demonstrate your continued trademark use. If you miss the renewal date by over six months, they will cancel your trademark. Since the USPTO only sends one email reminder, it is best to mark the renewal dates on your calendar:
- Your first renewal is due 5 years after your registration date
- Your second renewal is due 9 years after your registration date
- After that, every renewal is due 10 years after you submitted the second renewal
Monitor new trademark filings
Just as having a trademark is good for brand value, having other companies try to infringe on your trademark can actually have adverse effects on your overall brand. It is not under the USPTO’s purview to monitor all filings, so the responsibility of tracking new trademarks falls on your shoulders — or this can be done by a trademark attorney as well. Make it a point to regularly search the USPTO’s database and if you notice any that are too similar to yours, you can file an objection.
Your trademark should evolve with your brand
Just as you should never have a “set it and forget it” mentality towards your trademark, you should also never let your trademark fall stagnant. Registering your trademark early is the best strategy, but you should also be mindful of your future goals for new product development or any plans of expansion. If your company decides to modernize your current logo or packaging, for example, make sure those changes are also reflected in your trademark.
In addition to maintaining your trademark, it is also crucial to have your trademark valued as well. This not only gives you a competitive edge, it is also necessary when looking ahead and planning for other factors such as: trademark sale and/or purchase, tax reporting, determining royalty rates, and bankruptcy, among other reasons.
To comply with generally accepted accounting principles (GAAP), companies know there are a lot of rules to follow for financial reporting purposes. Are you planning to acquire or merge with another business? Business combinations and acquisitions is an area where adhering to GAAP requirements necessitates special attention.
These rules have evolved through a variety of names (the current being ASC 805), but these standards are more commonly known as purchase price allocations, where a company looking to acquire another company allocates the purchase price into liabilities and assets from the transaction. An acquirer must report the fair values of the acquired tangible and intangible assets, which must be reflected on the opening post-acquisition balance sheet. Tangible assets typically include equipment, property and inventory. Understanding what constitutes an intangible asset, however, is more mystifying to many business owners. Here is a framework to better categorize identifiable intangible assets:
- Marketing-related (trademarks, trade names, domain names, noncompete agreements)
- Customer-related (customer relationships, customer lists, production backlogs)
- Artistic-related (patents, literature, photographs)
- Contract-based (permits, franchise agreements, leases, employment contracts)
- Technology-based (copyrights, trade secrets, software)
These values are regularly adjusted to accurately reflect depreciation and amortization charges. Intangible assets that are not amortized, such as goodwill and in-process research and development, must be tested for impairment on at least an annual basis.
Why is accuracy so critical?
A purchase price allocation impacts the tax balance sheet, which is used as a basis for annual tax depreciation and amortization changes, but a PPA also impacts profits that determine the taxes paid and returned to investors and owners.
Depreciation and amortization can either be overstated or understated, which has a direct impact on whether net income is higher or lower. If a PPA is not entirely accurate, it can also result in a future impairment of intangible assets, which would be a loss on financial statements. Of these inaccuracies, some of the consequences can happen immediately, but others could happen years down the road. The company’s bottom line, an investor’s perception of the business, and future profit are all areas that stand to be affected by an inaccurate purchase price allocation. PPAs provide far greater transparency for investors, as well as a more detailed look into each component of a company’s value.
At Appraisal Economics, we have a deep understanding of the reporting requirements that will withstand SEC and audit scrutiny. If you want to make sure your purchase price allocation is accurate, choose the experienced professionals who have the requisite experience to provide accurate documentation.
If you run a large corporation, a business valuation is a critical part of your overall operations. The valuation process of a for-profit business is fairly straightforward, although some of the specifics of appraising assets and assessing income and debts to come up with a number that accurately represents the value of the business can make the process a bit more complicated. However, this process becomes even more complex when conducting a not-for-profit valuation.
The goals of a not-for-profit differ from for-profit companies. These businesses dedicate their services to making a difference in the community without focusing on turning a profit. While their goals vary, a business valuation is just as vital to their operations as it is for any company. Here are a few examples of organizations we have done not-for-profit valuations for and why these valuations are so important to their stature:
- Charities: Estate and tax considerations go into establishing Charitable Remainder Trusts, which means that the value of your stocks and other assets need to be appraised.
- Foundations: A valuation is necessary in order to obtain and maintain preferential tax treatment. If your foundation is bound by certain Treasury laws, you also need to know if you are required to distribute a specific percent of total assets annually.
- Healthcare Providers: In most cases, a not-for-profit valuation is required before one of these organizations can convert to for-profit status.
- Schools, Colleges & Academies: You need to value any donations that are contributed to your educational organization so that your records are accurate. This is not only important for your own records, it is also necessary to ensure that donors can receive their proper tax deductions.
Before a not-for-profit can make any important business decision, they need to know their overall financial condition. There may be instances where a not-for-profit can qualify for tax exemptions or preferred tax treatment that will benefit the organization’s margins. The only way to determine this is by completing a not-for-profit valuation. A valuation can also foster special financing options. For example, if you can prove your organization’s value to your bank, they are more likely to approve the funding you need to build a new center or expand your current operations. Similarly, a valuation can ensure you avoid any potential tax penalties. If you overstate the value of previous donations, your organization could owe money, which will depend on the severity of the infraction.
As you continue to look for expansion opportunities, keep in mind that a not-for-profit valuation can also strengthen your overall brand. If the community has a better understanding of your mission, they are more likely to offer their support, whether it is in the form of monetary donations or through volunteer opportunities.
When it comes time to choose an independent appraisal firm to complete a not-for-profit valuation for your business, make sure you are choosing the right professionals. The approach a firm uses to determine value depends on the goals and objectives of your not-for-profit organization. At Appraisal Economics, we have decades of experience appraising not-for-profit companies, and we understand what methods to use in order to determine fair market value.
As a business owner, your time is already mostly accounted for each week. When an additional task pops up, it is often difficult and inconvenient to try to navigate how to fit it into your schedule. There are some tasks that can be pushed around to other weeks, but others, like an equipment appraisal, require immediate attention.
Fortunately, desktop equipment appraisals can offer some flexibility so you do not have to worry about sacrificing your schedule during the process. Instead of scheduling an in-person visit with an appraiser, business owners can send pictures and specifications about their equipment to an expert who will analyze the items at their office. In addition to saving time, desktop equipment appraisals also have other benefits for companies.
A cost-effective option
For businesses that need to be cognizant of how and where they spend their budgets, a desktop equipment appraisal can provide value with less cost. Since the appraiser is not visiting your business to value a piece of machinery first-hand, it eliminates any travel expenses that would typically accrue otherwise. An owner will be able to obtain sufficient documentation of what their piece of equipment is worth, which can then be used for a number of reasons.
Process a larger amount of equipment
Since desktop equipment appraisals are beneficial for finding out the worth of more standard pieces of equipment, they can quickly help you understand the value of larger amounts of the same equipment. For example, if you bought multiple semi-trucks around the same time, you can use these appraisals to figure out the total worth without having to have someone come out to inspect them all. You will still need to provide the appraiser with certain information, like the mileage and ID numbers of each truck, since each one needs to be individually appraised, but it is a faster, more efficient way to get a ballpark figure on similar items.
What does the appraiser need from you?
As mentioned above, desktop equipment appraisals work better with standard equipment within your industry. When undergoing a desktop appraisal, you will need to provide your appraiser with as much information as possible. This includes a detailed description of the asset(s) you need appraised, so they can begin conducting the appropriate research on the item in question and high-quality photographs that accurately represent the condition of the equipment, among other information. You will also need to appoint someone who the appraiser can speak to if they have any additional questions about the equipment.
When is a desktop appraisal not appropriate?
Desktop equipment appraisals do not give a totally accurate representation of worth, which is fine in some cases, but not suitable in others. If your equipment is in question due to a contested court case, you will need to schedule an in-person site visit with a certified appraiser.
Every business owner understands the significance of protecting their growing company. Establishing a new business venture is a feat in an increasingly competitive market, but continuing to grow and become profitable is even more challenging. There are a significant number of factors that should go into protecting your business, and obtaining a trademark is one of the most important steps in the process.
In your company’s early stages, you should make sure to file the proper trademark paperwork with the United States Patent and Trademark Office, where you will eventually be issued a federal registration number. This is a necessary step, but it is not the final step. In fact, there is no final step, as keeping your trademark requires frequent action for as long as your company is around.
In order to keep and enforce your trademark, it must be continuously used. In the United States, you are required to file a declaration of use or excusable non-use between the fifth and sixth years of registration. Failing to file a Section 8 declaration during this time period will result in a cancellation of your registration. Additionally, you must also file a Section 71 declaration on or between the ninth and tenth year anniversary of your registration date, and then every ten years following. When you file these declarations, you must also file a specimen showing as well. Having a trademark, as well as having evidence you are actively using your trademark, ensures you are legally protected against anyone trying to infringe upon your trademark.
This happens more than you might think. McDonald’s recently lost their Big Mac trademark after a legal battle with Supermac’s, an Irish fast-food chain in Europe. In an effort to dissuade Supermac’s from using food names that closely resembled their own menu items (like their Mighty Mac burger) and to thwart their expansion plans, McDonald’s sued — and lost. The European Union Intellectual Property Office came to the conclusion that although McDonald’s used their trademark, they could not genuinely prove their use, so the legal battle ended in Supermac’s favor.
Immediately following the ruling, other big fast food chains started capitalizing on McDonald’s loss. Some Burger King locations in Sweden immediately started marketing their food with captions like “The Burger Big Mac Wished It Was” in an attempt to profit off the situation. Iwo Zakowski, CEO of Burger King’s Swedish operation, said: “It’s too much fun for us to stay away.”
While larger brands like McDonald’s are unlikely to take much of a hit when it comes to losing one of their trademarks, small businesses will not be so lucky. Just as you have worked so hard to make a name for yourself in your industry, you do not want that growth to be hindered by a failure to renew your trademark registration, or have insufficient evidence to prove that you are still using your trademark. A trademark is one of your most valuable assets, so make sure to protect it at all costs.
Periodically, institutional investors are required to report the values of their portfolio investments to their investors. The goal, of course, is to show an increase in the portfolio’s value. However, investing for growth while also managing risk is a tough equation.
Many strategies that seem balanced are too inflexible to optimize growth and minimize volatility long-term. As a result, many investors fall prey to strategies that increase risk over time, or, conversely, ones that do not allow additional risk allocation when it is advantageous. These five strategies can help institutional investors increase their portfolio valuations by embracing diversification and actively managing risk:
The rigidity and narrow focus of popular strategies (such as a factor-oriented, low-volatility equity strategy) can result in several challenges: underperformance in certain market conditions, crowding, and interest rate sensitivities. While such strategies are growth-oriented and designed with some protection relative to the market, they open the door to other challenges.
Institutional investors are better served by actively managing a growth portfolio with a set of diversifying, positive return positions that are tailored to work together to improve the overall portfolio’s return and risk characteristics. Smart investors use absolute return strategies to diversify, investing across capital markets.
Don’t rely on the past to dictate your investment decisions. Instead, concentrate on the future. Building a forward-focused, diversified strategy involves the participation of a team of various subject matter experts.
Investment strategies should be shaped by as many different perspectives as possible: economic and risk analysts, asset class-specific expertise, industry experts, and professionals with the necessary market and geographic know-how to form a complete picture of likely future risks and rewards. A holistic and informed approach allows investors to identify the strongest return-seeking ideas that can simultaneously reduce the risk of the overall portfolio.
Leverage Enhanced Analytics
Sophisticated risk analysis tools help inform investment strategies. Simulations are an excellent way to efficiently assess market outcomes across asset classes for potential worst-case scenarios and determine impacts to an overall portfolio. Advanced analytics allow institutional investors to make such processes scalable, as well as quickly respond to unforeseen events or market changes.
Embrace Diversity in All its Forms
Diversification of asset classes, industries, geographies, long- and short-term holdings, and risk profiles are so important for institutional investors. However, investing in diverse companies is important too. It’s now proven out that great corporate decision-making is based on the consideration of different points of view from people of different backgrounds, perspectives, and experiences. Gender diversity, racial diversity, sexual orientation diversity, and socio-economic diversity in leadership is a notable indicator of corporate success, and companies with a better inclusion strategy have a competitive edge in the marketplace.
Seek Independent Valuations
While many asset managers have the ability to perform portfolio valuation analyses themselves, that approach has largely fallen out of favor. Investors, funds, and regulators prefer the opinion of independent valuation experts to avoid conflicts of interest and ensure that a wide range of opinions and expertise have contributed to value assessments. Valuation firms also help investors assess a portfolio’s future outlook, informing their investments going forward.
Actively managing a diverse, flexible, and informed investment portfolio helps to ensure that your portfolio valuation increases, making those performance reports to management and investors go smoothly.
Sometimes a distressed business’ best path forward is to take advantage of the benefits of bankruptcy. Bankruptcy is a legal declaration of a debtor’s inability to meet and pay their liabilities, and it can play out in three ways. Chapter 7 involves a trustee liquidating the debtor’s assets for cash and making distributions to creditors. Chapter 11 allows a business to continue operations by following a court-approved reorganization that involves an incremental repayment to creditors. The third option, out-of-court restructuring, is an avenue that is less often publicly discussed because it unfolds behind closed doors. Out-of-court restructuring is a bankruptcy approach that is confidential, less expensive than a Chapter filing, and provides the debtor with more flexibility.
In an out-of-court restructuring, an informal creditors’ committee is formed and those participants define the parameters of the negotiation, including what payments can continue being made, allowance of interest, and other factors that would become more uncertain in a judicial process. As a result, the debtor maintains more control over its business. It also avoids public exposure, keeping its reputation and intangible value intact. Creditors benefit from the debtor’s ability to keep operating to the best of its ability, since creditors are relying on the business’ future earnings to satisfy debts. Out-of-court restructurings are designed to quietly stage a struggling company’s turnaround.
The process can be initiated by the debtor or by its financial creditors. Typically, the largest financial creditor will chair the steering committee. Each participating creditor must agree to refrain from taking action against the debtor that is outside of the restructuring process. These agreements, however, are short-term, allowing creditors to pursue other solutions if progress is not being made. As the restructuring and negotiations progress, non-financial creditors typically continue to get paid: employees, trade creditors, landlords, etc. The process is unaffected by the availability of court time and other judicial constraints, so it can move quickly.
Steering committees comprised of financial creditors typically engage accountants, financial advisors, and lawyers to assist. An out-of-court restructuring also requires an independent, third party to appraise assets and perform a business valuation that can withstand scrutiny. These resources help to facilitate restructuring negotiations and are crucial to maintaining the confidence of the creditors’ committee.
Whether you are a trustee, a member of a creditor committee, or head of a distressed company, no out-of-court restructuring proceedings should begin or proceed without regular valuations to support your efforts. Out-of-court restructurings often require more effort. There is a larger time commitment and negotiations involve many stakeholders. Asset appraisals and business valuations ensure that all parties feel comfortable working toward a solution that, despite its inherent complexity, ultimately protects everyone’s privacy and best interests.
Convertible securities come in many forms—convertible notes, convertible bonds, and convertible preferred shares, to name a few. Generally, they are interest-bearing, fixed-income debt securities that may also be converted into a predetermined number of common stock or equity shares, meaning they combine features of debt and equity. When a company is looking for alternative means of financing, convertible securities hold numerous advantages over common and preferred stock. Convertible securities can also be a compelling option for investors, but both parties should ensure that they are well-informed of the risks.
Companies offer convertible bonds at lower coupon rates, and because corporations only need to share operating income with the newly converted shareholders when performance is good, they benefit by holding onto more of their cash. In addition, bond interest is a deductible expense for the issuing company, meaning that the federal government will pay for a percentage of the interest charges on the debt.
Selling convertible bonds is also an advantage for organizations that do not want to lose voting control of the business. However, since bonds do convert to stocks eventually and stockholders are entitled to vote for directors, the benefit is usually temporary. Companies with weak credit ratings may also sell convertible securities to lower the yield necessary to sell their debt securities.
Companies should also be aware of the risks. Financing with convertible securities may dilute the earnings per share (EPS) of the issuer’s common stock. And, while convertible securities stave off yielding control of the company to others for a time, if a large part of the issue is purchased by an investment banker or insurance company, a conversion could shift voting control away from owners. Other disadvantages mirror those of utilizing straight debt, although convertible bonds do entail a greater risk of bankruptcy than preferred or common stocks, and the shorter the maturity, the greater the risk. If it does not convert, for example, the company may be forced to repay the money within a very tight timeframe.
Investors are drawn to convertible securities because they could yield the high returns associated with stocks, combined with the lower risk of bonds. By investing in debt, and essentially lending money to a company, investors are given more protections since they are technically considered creditors rather than owners and, if the company goes out of business, creditors are always paid before shareholders. These transactions also cost less than stock sales, making them a relatively safe and cost-effective way to invest.
Yet, investors are typically providing funds to unproven companies whose values are not yet known. Credit-worthy companies often issue convertibles to reduce the cost of obtaining capital. Sometimes, however, companies with poor credit ratings will issue them without the intention of ever converting the issues. Some corporations with weak credit ratings still have a high potential for growth, but investors must study the company’s performance and industry standing to make an informed decision about its likelihood for future success. The rate of return must be high enough to reward the risk.
Convertible debt has become a common financing tool, especially for entrepreneurs trying to fund start-ups, and it is a great way for investors to engage with this landscape with some built-in safety features. These transactions are quick, relatively easy, and beneficial for all involved, as long as everyone has done their homework.
Employee Stock Purchase Plans (ESPPs) are an excellent way to maximize employee compensation at a modest cost, but the benefits go well beyond remuneration. A well-structured ESPP also engages employees by helping to create an ownership culture. Employees will do what is best for shareholders because they are shareholders. Considerable benefits also exist for the issuing companies, which can better compete in tight labor markets, attract and retain high-quality talent, and even improve productivity and profits.
An ESPP allows employees to purchase shares of the company’s common stock at a discount, usually through after-tax payroll deductions. Typical plans offer a 10 percent purchase price discount, meaning that the moment employees purchase their shares, they are netting an immediate gain. Plans that include a lookback provision allow employees to purchase shares at the offering-date price or the purchase-date price, whichever is lower, yielding even higher gains. In cases where the purchase date stock price is lower than the offering date price, the employee is insulated from the decline by having the ability to purchase shares at the lower discounted price. Purchase discounts and lookback features are just two of the many options that employers can build into ESPPs to ensure that they are a valuable employee incentive.
ESPPs incentivize employees to work harder in the company’s best interests. By handing over a portion of their salary to an ESPP, employees have a higher stake in the company’s performance, and are willing to go above and beyond to ensure its share price appreciation. It has been proven that employees that participate in ESPPs work longer hours, are absent less frequently, and express greater job satisfaction.
When employees are more engaged due to an ownership culture, top talent begins to think and act as business owners. And why not? They actually are! When employees are taking advantage of a successful ESPP, it does not take them long to realize that each dollar they invest multiplies their wealth. This knowledge cultivates ownership, which in turn improves corporate performance.
The issuing company benefits by enhanced productivity, as well as lower turnover and greater efficiencies. There are, however, a number of harder financial benefits to be had. Regular payroll deductions provide a steady cash flow to the company. ESPPs also cost less than other equity compensation, and can substitute for more expensive benefits. Additionally, when companies offer discounted ESPP purchases, the company can take advantage of substantial tax deductions. According to the National Association of Stock Plan Professionals (NASPP), 52 percent of U.S. companies offer an ESPP. That figure might seem high, but given the benefits reaped by employees and employers alike, it should be higher.
ESPPs are a cost-effective tool for cultivating an ownership mindset among employees at all levels of an organization and can prove a powerful tool for hiring, retention, and productivity. Those organizations that have not yet considered developing one should do so, and those that have experienced lackluster results from an existing program should seek to restructure and revitalize it to its full potential.