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Happy Thanksgiving

November 20, 2018

Thursday is Thanksgiving, a day we enjoy with our family and hopefully give thanks for the blessings bestowed upon us. Just being with family is a blessing. We should also give thanks to our service men and women stationed here and all over the world who put themselves in harm’s way to maintain the freedom we have living in a country with security, liberty and justice for all.

Previous blogs on Nov 20, 2012, Nov 27, 2014 and Nov 22, 2016 share some thoughts about Thanksgiving. Today I want to share some words from the Book of Psalms that go back some 3000 years.

…we will give Thanks to Your name forever.
Psalm 44:8

It is good to thank the Lord and to sing praise to Your name…
Psalm 92:1

Enter His gates with thanksgiving and His courts with praise;
give thanks to Him and praise His name.
Psalm 100:4

Give thanks to the Lord, for He is good; His love endured forever.
Psalm 106:1

Have a happy Thanksgiving and remember why we are celebrating it!

Ed Mendlowitz

Task list for when you sell your business

November 15, 2018

Steps involved when selling your business. Buyers can also use this list as a time line and road map of the steps that are expected to occur and what is expected of them.

  • Be sure you want to sell
  • Be doubly sure you want to sell
  • Have your spouse or partner on board with what you will be doing
  • The seller needs to be made aware that they will have to provide information about their business and won’t be able to hold back anything
  • Engage a transactions based attorney
  • Notify your accountant and bring him or her on board as soon as you start the process
  • Prepare a transaction information sheet with some basic information about the business
  • Talk to buyer and determine interest level and if you think they are serious
  • Have buyer provide some sort of assurance they have funding available
  • Have your attorney prepare a confidentially or nondisclosure agreement letter for the prospective buyer to sign before you give them anything
  • Note: It has been our experience that keeping these negotiations confidential is very difficult at best, so be prepared to deal with questions from interested parties that tell you what they heard and ask for verification, or reassurance
  • Possibly engage an M&A advisor, investment banker, or business broker to either advise you or find a buyer or buyers
  • Have a valuation specialist determine the value and help you decide on the asking price and what you should settle for and the amount you should not go below, and the terms
  • In many transactions the terms can be more important than the actual transaction price, so pay attention to what you will be getting, and when
  • Your accountant should model out the tax methods and consequences of the sale
  • Engage your accountant to project what you would net after all costs and taxes from the sale and the possible cash flow you would end up with afterwards
  • Have the buyer give you a letter of interest laying out suggested terms – this is the start of the negotiation progress
  • Once the letter of interest is received you should start assembling the information the buyer would need to have the due diligence performed. Usually the buyer will give you a listing of what they would like, initially. Note that we have such a list that we usually give to our clients when the process starts
  • When a deal is agreed to have the buyer present you with a thorough letter of intent (“LOI”). This is the start of serious negotiations and should be handled with the upmost focus and interest
  • Your attorney would review the legalities with you and if necessary will suggest changes
  • Once the LOI is signed your attorney should start preparing the contract of sale.
  • While this is being done, issues will be raised that haven’t been previously discussed. These include the need for the buyer to review employment contracts, independent contractor and consulting arrangements, tax compliance filings, leases, licenses, trademarks and patents, vendor or customer contracts, warranties, regulatory issues and myriad other items that you likely haven’t thought about in years, if as all
  • You will need to discuss with the buyer whether any employees will be let go and the timing and who will be responsible for severance payments
  • The contract drafting will cause a new round of negotiations – not as serious as the previous negotiations, but the price could be affected by the results of this. Included in this will be the amount held in escrow and how payments would be released and then paid out
  • Other prospective buyers will need to be told that you are selling to someone else
  • You have to decide which of your personnel, if any, you will inform about what is going on, or if you will keep it secret from everyone
  • If there is an earn out or deferred payments or some ownership that is retained, that will be covered more thoroughly in the contract, and this is usually negotiated as part of the purchase price
  • If there are to be deferred payments, decide on the type of security or collateral
  • If there are deferred payments you should consult with an insurance agent to determine if a life insurance policy on the buyer is necessary and if it can be obtained. You will also need to know how those payments will be taxed
  • The interest rate on deferred payments will also need to be determined. If no interest is provided for, there would be imputed interest for tax purposes – make sure you understand how this would work
  • The buyer will commence the due diligence process. You will need a “team” to assist you with this
  • Some more negotiations and contract amendments
  • The contract could be signed before the due diligence starts, during the due diligence process or at the closing. This depends on the thoroughness of the letter of intent and timing of the sale
  • When the closing takes place, you will get your money, usually a certified check, attorney’s escrow check or a wire to your bank, and any notes for deferred payment
  • Pay all your professionals and those assisting you on your team
  • There likely will be some post-closing adjustments that will need to be negotiated.
  • Usually the contract would call for indemnification of undisclosed liabilities in excess of an aggregate amount – watch for this
  • If you sold the assets of the business, rather than the corporate stock or ownership interests, you will need to wind down and eventually liquidate that entity. This can take a few months or a few years depending on the circumstances. You will need your accountant and attorney to review this with you
  • If you sold the assets of an S corporation or another pass through entity, and had outside basis, you might need to liquidate that entity in the same year as the sale to be able to offset any gains with that basis. This is a very complicated tax move and you must be advised about this before the transaction is consummated
  • Don’t plan your vacation right away – you will need to hang around a while to assist in the transition to the new owners
  • Plan a nice long vacation about three months after the closing, and let the buyer know well in advance of your lack of availability during that vacation

Some deal point that come up that aren’t usually negotiated initially

  • Guaranteed net worth of the entity that is the buyer
  • Financial statements usually need to be on GAAP, but many companies use a modified GAAP or the income tax basis. It needs to be made clear what method the reports presented are on and that they should be acceptable as such, without GAAP adjustments
  • Software licenses for every computer

This is a pretty good list, but every deal is different and brings forth new sets of issues, things to do or what to provide to the buyer. Lou Young, director of client services and a valuation specialist and consultant, assisted in this blog and he can be reached at lyoung@withum.com. As always, contact me with any questions at emendlowitz@withum.com.

10 Do Nots

November 13, 2018
  1. Do not keep your pocket book, wallet or key chain visible on your desk or work area.
  2. Do not leave your house keys in your coat jacket when hanging it up anywhere not in your house.
  3. Do not put your office pass in your coat, sweater or jacket pocket that you might take off during the day.
  4. Do not save your bank and brokerage account passwords on your computer or smartphone.
  5. Do not (or seriously try not to) conduct banking or investment transactions on your computer or smartphone when out of the country.
  6. Do not subscribe to a journal or magazine unless you intend to read it – or peruse it as soon as it arrives.
  7. Do not skip a funeral, wake, Shiva or memorial service if you will be embarrassed about not going the next time you see the bereaved family member.
  8. Do not get stupidly upset at really selfish or inconsiderate meatheads when driving.
  9. Do not avoid confronting your physician, investment advisor, accountant, lawyer or any other professional when you are given advice you do not fully understand.
  10. Do not avoid owning up to an error you made with people you do business with or interact with or who depend on you for something or other, no matter the size or significance of the matter.

A “fool proof” never changing investment plan

November 8, 2018

There is no such thing.  Investment and financial plans are ever changing based on the economy, political climate, global interactions, tax changes, interest rates, dividend payout rates, stock prices, new products, innovation, technology including the Cloud, Blockchain, artificial intelligence and robotics, medical advances or the lack thereof, risk tolerances, your health, family relationships and responsibilities, individual circumstances and myriad other reasons.

Investments need to be looked at and monitored regularly.  However, once you have a financial plan and asset allocation program in place I do not believe that it should change precipitously.  Serious consideration should go into any changes.  And the changes should be only when your core issues are at risk or have changed.  Frequent changes will make you a trader which is not what long term planning for financial security is about.  Jumping to grab the next hot item or responding to sudden changes is not conducive to long term financial health.  The careful planning and thought given to your original planning should not be abrogated when there is a momentary shift in the wind.  Think, plan, consider and stay the course is a sensible to handle long term planning.

Quite some years ago I prepared a “gag” book titled “Investing and Financial Planning Rule Book” with a nice cover and a hundred pages.  Inside on the first page I wrote:  Rule #1 for financial planning and investing:  If you don’t understand the advice, assume the person telling it to you is wrong.  Don’t assume that because it is complicated and a specialty you do not have, that the advisor is correct.  Never be embarrassed to say you don’t understand.  If you don’t understand something about your finances, most likely it is the wrong thing for you to do.  Rule #2: See rule #1.  Rule #3: See rules #1 and #2.”  The next page had written in it: “There are no other rules.”  The rest of the pages were blank.  This is still great advice.  I don’t consider this a “gag” book – it could be the most serious investing and financial planning book you could ever read.

Things change and you need to be aware of the changes and react properly.  But sometimes it is better to not react than to over react.  Understand what you are doing as measured against your original plans and your current circumstances.

Transfer Pricing for Global Businesses

November 6, 2018

Transfer pricing applies to organizations that have transactions between multiple entities they own or control and is a mandatory process for United States businesses and not-for-profit organizations that do business outside of the U.S.

Transfer pricing refers to the prices charged between affiliated companies operating in different tax jurisdictions, usually around the world. This includes intercompany activities related to the sales or purchase of products and services; allocation of management, overhead and R&D costs; the use and licensing of intellectual property, technology, marketing or brand-related uses; and intercompany financing or cash pooling.

Transfer pricing tax issues have always existed but has recently become a hot topic simply because governments want additional tax revenue. When a company sets its internal pricing, there is incentive to recognize income where tax rates are lower and shift costs to where rates are higher. The transfer pricing rules prohibit such shifting if there is no economic basis or valid business reason. In effect, taxes can’t drive the reason for pricing between entities. All else being equal, the price of product by an affiliated foreign manufacturer should be the same regardless of where the related buyer is located.

In the last 20 years we’ve seen transfer pricing go from behind-the-scenes obscurity to become more upfront and mainstream. While many giant multinationals are in tax court fighting the IRS that is trying to get gazillions of dollars in transfer pricing adjustments, smaller companies are not safe either. The dollars at stake might be lower but smaller and mid-sized companies operating in more than one country are increasingly being fully expected to present their transfer pricing studies and calculations when asked by tax authorities during a tax audit.

Guidelines for these studies are set by the Organization for Economic Co-operation and Development (“OECD”) and the IRS requires “arm’s length” documentation to be included with each U.S. tax return. Steep penalties can be imposed on any transfer pricing adjustments proposed by tax authorities, and the annual documentation study offers penalty protection.

Arms-length pricing is the market rate pricing that usually results from a negotiation between two independent companies with no common ownership or affiliation or other economic interest. The ultimate question is: Would an independent company enter into this same deal that we just made with our related company? Further it is reasonable to expect that an independent company would not incur a loss on behalf of another company in providing a critical service to its operations nor would it operate at breakeven; it would expect to make a profit under normal business conditions.

Dividing the global profit (or loss) pie: Tax authorities around the world do not view a company that has affiliated entities as “one big happy family” but rather as independent stand-alone entities. Despite intercompany accounts being eliminated in consolidation for a global organization’s financial reporting purposes, the individual entities have a tax liability in each jurisdiction. This means that each entity must reflect its own pre-tax profit (or loss) in each respective tax jurisdiction that reflects the functions that company performs, the risks it incurs, and the tangible and intangible assets it employs relative to the other members of the global operations. Transfer pricing looks at the economic substance of a global organization and values the roles each member performs relative to the other members in driving the business, then determines the comparable profits or pricing for that activity. Thus, the role of transfer pricing is to divide the global profit (loss) pie among affiliated entities, telling the story of the economic or commercial reasons – i.e., the non-tax driven reasons – for the way the various members of the organization transact amongst themselves.

This brief description was substantially prepared by Marina Gentile who leads Withum’s global transfer pricing practice and you are welcome to call her for a no obligation consultation, Marina can be reached at mgentile@withum.com or (212) 829-3244. Alternatively you could contact me at emendlowitz@withum.com for a brief preliminary discussion.

Your vote does count

November 1, 2018

Voting is a right, privilege and honor and we shouldn’t shrug it off. On some level, every vote does count, and regardless of how we feel about one extra vote counting, we should step up to fulfil our constitutional duty. Here are some illustrations of close votes.

The Bush and Gore 2000 election was actually settled by one vote – the Supreme Court settled that contest with a 5-4 decision awarding Florida’s 25 electoral college votes to George W. Bush giving him a 271-266 victory. Al Gore won the popular vote that year 50,999,897 to 50,456,002. In the Florida recounts every single vote was recounted, examined and analyzed, somewhat contentiously and inconclusively, thus the Supreme Court decision. Very few shifts in the Florida votes or perhaps in some other states would have given a decisive win to Al Gore.

Similarly in 2016 Hillary Clinton with an almost 3 million lead in the popular votes could have won if a very small number of voters changed their votes, or if some of the Hillary supporters that stayed home voted. While Trump had a clear win in the Electoral College, 304 to 227, he won 4 states, Florida, Michigan, Pennsylvania and Wisconsin, by an aggregate total 190,655 out of 22,356,237 votes cast in those states. That is .85%. The four states had 75 Electoral College votes. A swing of 39 electoral college votes could reversed Trump’s win. Looking at the numbers that might have been difficult, but the point is that votes do count.

Four other presidential close ones were Kennedy’s 1960 win over Nixon where the difference was 118,000 out of 68 million votes; the 1876 election where Hayes with 250,000 fewer popular votes won the presidency over Tilden after Congress, in a joint session, declared Hayes the victor with a 185-184 final result; the 1800 election of Jefferson over Burr that was decided by Congress because of a tie in the electoral votes; and the 1796 John Adams win over Jefferson was with a 71-68 electoral margin. I could go on and on, but the point here, again, is that votes count.

Other important votes decided by small differences was Andrew Johnson escaping conviction at his impeachment trial by 1 vote in the Senate; Vice President Mike Pence has already cast nine tie breaking votes in the Senate while coincidentally Biden did not have to vote even once in his eight years as VP; Obamacare’s winning margin was razor thin; and the 2017 Tax Cut passed by 1 vote in the Senate. Many Supreme Court decisions prevailed by 1 vote in close 5-4 decisions. One vote within some state delegations in the Continental Congress permitted the Declaration of Independence to prevail, and across the pond Britain’s vote to exit the European Union was by a very small margin. Voting is important and all votes matter.

There are too many countries that do not have the free and open elections we have here and that opportunity should not be squandered. This Tuesday’s vote for Congress can effect a change in the makeup of our Government, or maintain the Republican majority. There is also a third party candidate – apathy – that should not be permitted to prevail. However you lean, it is important to participate. Vote on Tuesday – your vote does count.

Last Week’s Fund Raising Gala

October 30, 2018

EBPLF 100K check 102418

Last Wednesday we had a fund raising Gala for Children’s Literacy for the East Brunswick Public Library. It was sponsored by the EB Public Library Foundation of which I am treasurer and a board member. I was also on the Gala committee, and want to share some details of putting on such an event.

For starters, I was on the committee and had a specific job to do. This is the first time in a long while that I was on a committee rather than running the committee, and I have to tell you, it was eye opening. My job was involved and time consuming but it was a job. My only responsibility was to do it. When I was the chairman, it seems I was always busy, always checking up on everyone on the committee, always coordinating with the honorees and either charging them up or calming them down, always being asked to make decisions some of which were tough but most were the passing the buck upward types of issues, always worried we wouldn’t hit our numbers in journal ads and/or attendance, and always involved in some manner with everything that was being done. It was a lot easier this time without all of that, and while I originally thought that I should step up to chair it, our president Tracy Fink and fellow board member Cindy Schneider stepped up to co-chair the event, and they worked perfectly together. “Doing” is not the same as “managing or leading” – and I liked the doing part very well.

The Gala had 170 guests and was held at the classy Park Chateau in East Brunswick. The catering staff did a fantastic job and was also able to accommodate special dietary requests -Kosher, Gluten Free and vegetarian. The service was also extraordinary. This was coordinated with our committee, as was the beautiful fresh flower arrangement on each table, the sign-in of guests, and the very involved seating requests. The Journal was expertly designed by Jon Lee, a neighbor that volunteered and his talents made the Journal a true work of art. As with most Journals there were many last minute changes and additions and Jon handled it all with aplomb. The printer, MinuteMan Press of East Brunswick, “held the presses” until the last minute so we could get every last bit into the Journal and he actually delivered it earlier than promised removing some pressure from us. MMP also prepared a 4 foot long $100,000 check that was presented to the Library Board by our Foundation Board for the expansion and beautification of the children’s section.

Unsung heroes were the Library staff and in particular Daragh McAuley, Chris Barnes and Karen Violand. Also, Chris’ baby Charlotte cooperated fully by being born three weeks early so we had Chris’ full attention the last 10 days of the Gala.

The planning started in January and included forming a committee, coordinating with the library, obtaining the venue and negotiating the costs and setting the menu, reserving the date, developing a time line, lining up honorees and sponsors, compiling mailing lists, designing the invitation, inviting dignitaries, deciding on the color scheme and decorations, designing and ordering the plaques for the honorees, making decisions about other fund raising methods and myriad other tasks. Now we need to get the thank you and tax letters in the mail. We had plenty of good luck that was surrounded by a lot of hard work that appeared to be effortless, a great group of supporters and results that made everything we did very gratifying.

If you are planning an event, perhaps you can use this blog as a guide, and if you would like a copy of our checklist which is in the format of a timeline, email me at emendlowitz@withum.com.

Photo shows from left: Ed Mendlowitz, Wayne Christie, Library Board President, Jennifer Podolsky Library Director and Tracy Fink, Foundation President.