Archive for November, 2015

Do you use software tools for business value analysis? If so, be sure your software vendor keeps it up to date to meet the ever increasing demands in computer security, application performance, stability and new features release.

Major operating system vendors, such as Apple and Microsoft, are expanding the set of requirements modern software products must meet in order to provide secure and reliable experience for the users. For example, Mac OS X systems now require that software applications be signed by the Apple Developer ID digital signature.

This signature is issued by Apple to the software companies who participate in its Apple Developer program. Admission to this program is not free and Apple goes to considerable lengths to ensure that only legitimate companies are accepted. You as a Mac user can be assured that your software comes from a software firm that has been thoroughly checked out by Apple.

Windows programs must also be signed by a digital signature that is verified by the Microsoft Authenticode technology before installation can be allowed. Again, you benefit as a user because the signatures are issued only to bona fide companies. This is very important in order to prevent your computer from being compromised by malicious malware.

Don’t ignore the warnings issued by your Mac or Windows computer when installing a software application. If your vendor does not want to clearly identify itself, and participate in the Apple or Microsoft software developer programs, you should think twice before entrusting them with your or your client’s business critical data. Not to mention the risk of having your computer system being put out of commission by unwanted malware.

Software technology evolves very quickly. So you should expect your software provider to keep up by issuing regular updates. And don’t assume the web-based software vendors do it. Check to find out exactly what types of updates have been made available to you for all those subscription dollars. You might find to your amazement that the vendor keeps charging you while offering little or nothing in improvements or enhancements in return.

Web based software is especially prone to hacker attacks. The cloud software vendors also tend to oversubscribe their systems with too many customers supported by too few computing resources. As a result, you might find that you can’t get to your business valuation project at the time you need it.

Whenever you hand your business critical data to a software vendor, ask what guarantees they give you that the data will not be lost or sold to your competitors for an additional profit to the software company. You might be shocked to find that the ‘Terms of Use’ exclude any liability on the part of your software vendor for such data loss!

New technology updates, especially those required to comply with government or industry-wide regulations, are not easy or cheap. For example, there were literally dozens of e-commerce software companies in the early 2000’s. Now that the banking industry requires its e-commerce merchants to comply with the PCI DSS standard (Payment Card Industry Data Security Standard), only a handful of legitimate software companies continue to offer e-commerce solutions. The rest could not or would not invest to keep going.

ESOPs are growing in popularity these days as a way of transitioning ownership of a private company to its employees. The owners can sell any portion of the business in a series of transactions over time. ESOPs can serve as an effective financing tool and save business owners and the company quite a bit in taxes.

The idea behind the ESOP is to enable non-owner employees to acquire ownership in the company they work for. The ESOP plan is tax qualified to provide investment in company stock. As such an ESOP is subject to the Employee Retirement Income Security (ERISA) Act in the US.

The sponsoring company may contribute funds to the ESOP. The plan can use the money to buy stock from current shareholders. Alternatively, the company may decide to issue additional shares that are put into the ESOP. The advantage of this approach is that the fair market value of the stock handed to the plan is tax deductible. The ESOP allocates the shares in a way similar to other pension and profit sharing plans.

ESOP may also borrow money from creditors and transact deals with third parties to buy company stock in a way that would otherwise be prohibited under the ERISA and IRS revenue code.

The company can also put together a leveraged ESOP using borrowed funds to buy stock from the current company owners. The money to buy the shares is borrowed from a creditor, such as a bank, pledging the company assets as collateral. Again due to the tax deductible nature of ESOPs, both the principal and interest on the loan are repaid with pretax money.

Using other people’s money to fund some or all of company stock for an ESOP leverages company assets and is known as leveraged buyout. More and more small businesses opt for doing this especially when the interest rates are low and banks are willing to make such loans.

This tax advantaged way to buy newly issued company stock makes ESOPs an attractive financing vehicle. The company can raise equity financing without the need to pay out cash to company’s shareholders.

ESOPs are popular because they offer a number of financial advantages to the shareholders, the company and its employees.

The selling shareholders enjoy attractive tax benefits under the Internal Revenue Code Section 1042. In fact, a shareholder can defer the capital gains from stock sale indefinitely as long as:

  • The stock has been held for at least three years prior to its sale.
  • ESOP acquires at least 30% of the outstanding stock following the sale.
  • The sale proceeds are invested in a qualified replacement property, usually stock of a domestic firm.

Dividends paid out to ESOP members are deducted from the company’s taxable income. The same deduction rule applies to the dividends used to make the loan repayments of a leveraged buyout ESOP.

It comes as no surprise that businesses giving employees a chance at owning part of the company tend to create better motivated workforce. Employees can see how their work translates into growing company value and increase in their personal financial worth. They gradually become the owners of the company they work for.

ESOPs are quite versatile and can help the company meet a number of important goals:

  • Provide a good retirement package to employees.
  • Serve as a mechanism behind the management buyout.
  • Sell an operating unit of the company to its staff.
  • Raise additional capital using tax deductible contributions as the source.

If you think setting up a proper ESOP calls for business valuation, you are right. But this discussion is for another post.