Spring 2010 issue of Horizons

A P u b l i c a t i o n b y R u b i n B r o w n L L P S P R I N G 2 0 1 0 The Next Decade: New Challenges and Opportunities

INSIDE LOOKING TOWARD THE NEXT 10 YEARS Managing Your Assets in Uncertain Times Page 7 IFRS— Looking Ahead Page 9 More than Just the Numbers Page 13 Setting a Solid Foundation Page 15 AND MORE

horizons

CONTENTS

ii Welcome 1–2 RubinBrown New Hires, Promotions, Awards & Announcements 3–4 RubinBrown Around Town 5–6 Chairman’s Corner: The Next Decade 7–8 For Your Money: Managing Your Assets in Uncertain Times 9–12 IFRS — Looking Ahead 13–14 The Transaction Process — More than Just the Numbers 15–16 Steps for Setting a Solid Foundation 17–19 Estate Taxes Over the Next Decade 21–24 Is Revenue Leaking from Your Organization?

Industry News

25–28 CONTRACTORS 29–31 HOME BUILDERS 33–36 HOSPITALITY & GAMING 37–40 MANUFACTURING & DISTRIBUTION 41–44 Media & Entertainment 45–48 NOT-FOR-PROFIT 49–50 PROFESSIONAL SERVICES 51–52 PUBLIC SECTOR 53–56 REAL ESTATE

INFORMATION Graphic Design: Hughes

Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions. Located in St. Louis and Kansas City, RubinBrown has become one of the largest accounting and business consulting firms in the Midwest.

Certno.XXX-XXX-XXXX

www.rubinbrown.com

John F. Herber Jr., CPA Managing Partner

Welcome The Next Decade. It is with a collective sigh of relief that we move into the next decade, nicknamed by some as the “twenty-teens.” This past decade definitely posed some challenges, and probably the most positive thing we can say about the last decade is … that it’s over. But with the 2010 year, we now have a new decade and new challenges and opportunities. As the economy lingers along through what is expected to be a long recovery, we look to this decade with fresh hope and an upbeat outlook. This issue helps us hone in on the business and financial issues that will define and shape this new decade. We start with IFRS, which arguably will be the most significant change in accounting and business standards we witness this decade. We examine the uncertainty related to estate taxes, revenue leakage and investing. After the literal standstill in activity, the state of mergers and acquisitions also is studied with ways we can modify our perspectives on the “transaction process.” As always, I personally welcome your feedback on this issue of Horizons and, overall, on your business views. Please e-mail me directly at john.herber@rubinbrown.com. I look forward to working together on this new, and hopefully improved, decade of business. Pleasant reading.

St. Louis office RubinBrown

One North Brentwood St. Louis, MO 63105 314.290.3300 Kansas City office 10975 Grandview Drive Bldg. 27, Suite 600 Overland Park, KS 66210 913.491.4144

TITLE RubinBrown New Hires & Promotions

New Director

Most recently, she served as the director of communications for the Missouri Society of Certified Public Accountants. She previously worked for the National Association of Electrical Distributors, Optimist International and KPMG. Martin is a member of the Association for Accounting Marketing and holds a bachelor’s degree in mass communications from the University of Missouri-St. Louis.

Dawn Martin has joined RubinBrown as director of communications and client relations, overseeing the firm’s marketing, public relations, advertising and client relations. Martin has more than 20 years of communications experience, including more than 10 years in the accounting industry.

New Managers

Tracy Baisa, CPA, has joined RubinBrown as a manager in the firm’s State and Local Tax Services Group. Specializing in partnerships, corporations and FAS109, Baisa reviews and supervises state and local tax projects while maintaining strong working relationships with clients.

degree in business administration and a master’s degree in accounting from Trinity University. He also is a member of the American Institute of Certified Public

Accountants and Missouri Society of Certified Public Accountants.

RubinBrown has added Elizabeth D. Yount, CPA, as a manager in its Wealth

Most recently, she was a senior tax associate at a local firm in Chicago.

Management Services Group. She oversees and reviews tax returns for individuals with complex tax situations, reviews trust and gift tax returns. Yount also specializes in stock option planning and consulting and compliance services for expatriates. Prior to joining RubinBrown, she was president of a local tax business. She also held management positions at Ernst & Young and Southwestern Bell Telephone. Yount is actively involved in Delta Gamma Center for Children with Visual Impairments and received the organization’s Shining Light Award in 2009. Yount also is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified PublicAccountants. She holds a bachelor’s degree in accounting from the University of Missouri-Columbia.

She also worked for PricewaterhouseCoopers in Chicago. She holds a master’s degree in accounting from the University of Texas and bachelor’s degree in business administration from Robert Morris College in Chicago, where she was the commencement speaker.

RubinBrown has hired Ben Barnes, CPA, as a manager in its Assurance Services Group. Barnes provides audit and other assurance services for clients in the manufacturing and distribution industry.

He has more than 10 years of experience in public accounting and the financial services industry. Prior to joining RubinBrown, he served as an audit manager and transaction services manager at PricewaterhouseCoopers. Barnes holds a bachelor’s

1 u spring 2010 issue

Awards and Announcements

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

AWARDS

The Media Financial Management Association has named Larry Rubin, CPA, partner-in-charge of RubinBrown’s Media and Entertainment Services Group, one of its People to Watch for 2010. In its publication, The Financial Manager, the organization recognized individuals across

Rubin was one of six professionals featured in the magazine’s January 2010 issue, where he was honored for his leadership of RubinBrown’s newly developed Media and Entertainment Services Group. This group services a number of television and radio companies, publishers, cable companies and entertainers. In addition to accounting, auditing, tax and consulting services, the group also provides wealth management, valuation and litigation support services. The group includes more than 15 team members, working with clients across a broad range of media and entertainment entities.

the nation who have made significant accomplishments in rebuilding the financial structure of media companies.

Announcements

The American Institute of Certified Public Accountants has named Fred Kostecki, CPA, to its Professional Ethics Executive Committee for 2009-2010. In this role, Kostecki works with the senior technical committee to interpret and enforce the AICPA Code of Professional Conduct.

RubinBrown has named Chip Harris, CPA, partner-in-charge of its Benefit Plan Audit Group. Harris has worked in the Benefit Plan Audit Group for several years and was instrumental in building the practice in Kansas City. He oversees client service and overall management

His responsibilities include standard-setting, case investigation and other enforcement matters. Kostecki has served at RubinBrown for more than seven years, currently as partner-in-charge of RubinBrown’s Assurance Services Group.

of the group for both the St. Louis and Kansas City offices. Harris has more than 13 years of experience in accounting, having previously worked for Baker Tilly Limited in the British Virgin Islands.

2 u spring 2010 issue

TITLE RubinBrown Around Town

Angels’ Arms Honors RubinBrown for Employee Contributions

On November 14, RubinBrown was named the first-ever recipient of the Jeanne Marie Doll Business Partner Award by Angels’ Arms, an organization dedicated to providing and supporting homes for foster children. Named in honor of recently deceased RubinBrown partner Jeanne Doll, the award recognizes businesses with employees that serve on one of Angels’ Arms’ boards, participate in one or more of the organization’s events, and demonstrate care and compassion for the organization’s mission. The award was presented at the annual “Stepping Out for the Angels” dinner auction and gala. A number of RubinBrown employees are active volunteers with Angels’ Arms, and Doll served as its treasurer for seven years.

RubinBrown Chairman Jim Castellano and Managing Partner John Herber accept the award from Angels’ Arms board members. From left to right: Andy Banker, news anchor, KTVI-TV; Dr. Frank Wood, principal, Washington High School; Herber; Castellano; Romondous Stover, attorney, Hardee’s Corp.; Bess Wilfong, director, Angels’ Arms.

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

RubinBrown Sponsors The Greater St. Louis Top 50 Awards

A large number of RubinBrown partners and team members were in attendance at the annual Greater St. Louis Top 50 awards dinner, which was held at the Hyatt Regency St. Louis Riverfront on Wednesday, November 18, 2009. RubinBrown served as the title sponsor of the event, which is presented by the St. Louis RCGA.

Castellano poses with executives from St. Louis companies. From left to right: Castellano; Jim Weddle, Edward Jones; Tom Voss, Ameren; Phil Koen, Savvis; Dick Fleming, RCGA.

Jim Castellano, chairman, RubinBrown, welcomes event attendees and introduces the award co-sponsors.

Castellano presents the 2009 Spirit of St. Louis Technology Award to Phil Koen, former chief executive officer of Savvis.

4 u spring 2010 issue

Chairman’s Corner

The Next Decade By James G. Castellano, CPA

If you are like me you must be wondering, “How is it possible that the first decade of the new millennium has already passed?” Weren’t we just fretting over the looming disasters posed by Y2K? Sure, I know as one grows older that time has a way of slipping by and changes occur at an ever-accelerating pace. But can it be true that 10 years of the 21st century have come and gone? As we look back now in 2010 on the events of the past decade, we could not have predicted the world events that impacted many in the world in some way: • Invasions of Iraq and Afghanistan • Space Shuttle Columbia disaster • Hurricane Katrina, Asian tsunamis and the devastating earthquake in Haiti • Extraordinary technological advances • Madoff and other scandals • Global financial crisis • S&P 500 hovering around 1100, about 25 percent less than at the start of the decade • September 11 • Enron, Worldcom and Sarbanes-Oxley

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

It has been said that rarely do concerns at the beginning of a decade turn out to be the real problems during the decade. This rings true, as well as the impact we have on our organizations and lives over the next decade.

6. Increased our international business capabilities 7. Grew from the sixth largest firm in St. Louis to the largest accounting firm in St. Louis and 13th largest in Kansas City Looking to the future, we continually challenge ourselves to think about what we can do to have the most positive impact on our firm and our personal lives. The question we will all have to answer at the end of the next decade is: “Did we plan, did we take action on the opportunities that had potential for the most significant positive impact on our organizations and personal lives?” The question we must answer today is: “Will we follow the process and have the discipline to stick with it?” We are grateful to all of our clients and friends in our communities for your confidence in us and wish you the very best in 2010 and beyond.

Impacting our future direction simply requires some process and discipline.

At RubinBrown, we practice an exercise called “Dots on the Horizon.” It is a process to identify the external issues we can see today that have potential to impact our organization in some way. Our “Dots on the Horizon” exercises did not and could not have detected any of the most significant world events of the past decade. But the process did enable us to see and address many opportunities that have impacted our organization in very positive ways.

As we look back on RubinBrown over the past decade, the changes are quite dramatic. During that time, we:

Questions? Contact:

1. Entered the Kansas City market 2. Rebranded as RubinBrown LLP

James G. Castellano, CPA Chairman

3. Moved to new offices in St. Louis and Kansas City 4. Started RubinBrown Advisors LLC, which now manages more than $500 million in investments for clients 5. Created or built new capabilities in: • Internal audit • Enterprise risk management • Continuous improvement services • IT audit services • Corporate finance and forensics • Valuation services • Wealth management • State and local tax services • Entrepreneurial services • Qualified plan audit services • Merger and acquisition services

RubinBrown 314.290.3300 james.castellano@rubinbrown.com

6 u spring 2010 issue

For Your Money

1. Identify your goals and objectives — You cannot build an appropriate portfolio without having a good understanding of your goals and objectives. Remember, assets are a means to an end. Ask yourself the following questions: • When do I plan on withdrawing from this portfolio to fund my retirement lifestyle? • How much will I need to withdraw annually? • How long do I plan on withdrawing from this portfolio? • Will there be any large, non-recurring withdrawals from this portfolio before I retire? • Do I want to leave a legacy to my heirs or charities? If so, how much? You may want different portfolios for different objectives. For example, a portfolio designed to provide for the payment of a wedding in five years will be different than a portfolio providing for your retirement in 20 or 30 years. 2. Understand your risk tolerance — It is essential to have a good understanding of your risk tolerance. From our experience, most investors overestimate their tolerance for risk. Investing in a portfolio that is too aggressive may cause your emotions to take control when the market is volatile, resulting in getting out

Managing Your Assets in Uncertain Times If the stock market’s volatility over the last 10 years has reinforced anything, it is that it is impossible to predict what the next 10 years will bring. One of the most important principles of investing is acknowledging that it is impossible to consistently time the market or predict the future. So, looking forward 10 years and beyond, what can we do to ensure we make sound investment decisions? By Mike Ferman, CPA, and Tom Tesar, CPA, CFP

when prices are low and not getting back in until the volatility subsides and prices are higher.

3. Build a diversified portfolio designed to meet, not necessarily exceed, your goals and objectives — Your portfolio should be diversified both across and within asset classes. Different

asset classes fall in and out of favor at different times of the business cycle.

Appropriately diversifying among all of the asset classes and sub-asset classes should provide you a greater consistency of returns at a risk level

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Also, tax efficiency is not limited to the type of investments you own, but also considers how the portfolio is structured. It is more tax-efficient to invest the fixed income portion of your portfolio in your tax-deferred accounts and the equity portion of your portfolio in your taxable accounts. Distributions from your tax-deferred accounts will be taxed as ordinary income, regardless of source. Gains realized in your taxable accounts will be taxed at the preferential capital gains rate. 7. Monitor your managers — Managers’ style, personnel, philosophy and performance can change over time. Therefore, it is important to monitor your managers to ensure they can perform as well in the future as they have in the past.

you can tolerate. Determining how much of your portfolio should be allocated to each asset class depends on your goals and objectives, time horizon and risk tolerance. You should consider only taking on as much risk as required to meet your goals and objectives. 4. Monitor and rebalance your portfolio — It is important to monitor your portfolio periodically to determine if your portfolio is still in line with your target allocations. If your portfolio becomes overweight to any one asset class, rebalance your portfolio back to your target allocations. Rebalancing achieves two objectives: • It maintains the portfolio’s overall risk/return profile. • It forces investors to sell high and buy low. 5. Be cost conscious — Paying too much in fees will drastically affect the performance of your portfolio. Make sure you understand the total cost of your investments. If you are working with a broker or advisor, ask them to help you determine the total cost of your portfolio. These costs include, but are not limited to, manager fees, advisor fees, commissions and transaction fees. 6. Build a tax-efficient portfolio — Tax efficiency plays an important role in building a portfolio to meet your investment objectives. Make sure you have a clear understanding of the tax impact of your investments. For example, weigh the benefits of actively managed mutual funds, exchange traded funds and separately managed accounts as they all have different tax implications and flexibility. Typically, a combination of these investment vehicles will provide the most tax-efficient portfolio.

Questions? Contact:

Mike Ferman, CPA Managing Director RubinBrown Advisors 314.290.3211 mike.ferman@rubinbrown.com Tom Tesar, CPA, CFP Assistant Vice President RubinBrown Advisors 314.290.3297 tom.tesar@rubinbrown.com

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TITLEGEN RAL TOPICS

IFRS — Looking Ahead

By Eric Janson, CPA, and Mike Ramirez, CPA

Change is the law of life. And those who look only to the past or present are certain to miss the future — John F. Kennedy When looking to the future of accounting, there is one change on the horizon that stands out from the rest: the change from U.S.-based GAAP to International Financial Reporting Standards. According to www.ifrs.com, “IFRS are a set of accounting standards, developed by the International Accounting Standards Board (IASB), that are becoming the global standard for the preparation of public company financial statements.” IFRS is required or permitted in 113 countries around the globe, reports the SEC. The SEC also laid out the roadmap outlining when IFRS could be required for U.S. public companies. The proposed transition from U.S.-based GAAP to IFRS will change the way organizations are run by affecting the organization’s people, processes and technology. To thrive during this future change, companies must prepare and plan now for IFRS. In its roadmap, the SEC detailed milestones that need to be in place before making a decision to adopt IFRS, which was expected to be decided in 2011. The SEC currently is reevaluating that roadmap and is expected to publish an updated version of the proposed plan sometime in 2010.

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Under the proposed timeline, accelerated filers will be required to report comparative financial statements under IFRS for years ending December 15, 2015 (note that the date for adoption for large accelerated filers will be December 15, 2014, and for non-accelerated filers will be December 15, 2016):

When planning for IFRS, companies should consider how IFRS will affect their people, processes, and technology.

People The impact on people will be at different levels. Management and the board of directors must gain a level of understanding of IFRS to effectively oversee the operations of the organization and understand the financial reports and data presented. Employees in the financial and reporting area will need to learn the new standards and use them to account for the organization’s business transactions. Operational management will need to understand how IFRS impacts key performance indicators, management reports and compensation structure, if based on financial performance. To understand IFRS and how it differs from U.S. GAAP, employees must attend training to learn how the new standards must be applied in their organization. External training providers can cost between $1,000 and $1,500 per employee per day. In addition to training employees on IFRS, a project management team and a steering committee should be formed to design a plan for implementing IFRS and oversee the implementation. The project management team must be educated in IFRS, have a strong understanding of the underlying processes and internal controls, and understand the technology and applications supporting those processes. Processes Business processes will be substantially affected by the switch to IFRS. While convergence between IFRS and U.S.-based GAAP continues, multiple accounting policies will still need to be changed to conform to IFRS. These policies include: classifications between equity and liabilities, recognition of contingencies, fixed asset depreciation, goodwill impairment, and recognition of revenue, to name only a few. Procedures and processes may need to be re-engineered to ensure they provide the correct data.

2008

2010

2011

2015

11/08 PROPOSED ROADMAP

EVALUATION AND ASSESSMENT OF MILESTONES

RULEMAKING & ADOPTION DECISION

MANDATORY ADOPTION

In order to meet the 2015 deadline, companies in the accelerated filer group will need to develop a plan for IFRS conversion next year and ramp up the efforts for transition in 2011 and 2012:

2010

2011 & 2012

2013

2015

TRANSITION PERIOD

OPENING IFRS BALANCE SHEET

MANDATORY ADOPTION

PLANNING

Once IFRS is adopted, the SEC also will require comparative financial statements to be presented for the two proceeding years. As a result, some companies may have to maintain two sets of accounting books: one based on IFRS principles and one based on U.S. GAAP. For accelerated filers, to begin recording these transactions in 2013, the company’s IFRS-based accounting system must be implemented, tested and deemed effective by the end of 2012. Companies must start planning now to accomplish these goals.

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PEOPLE • What resources are available to dedicate to this project? • Will more resources be required on a full-time basis? • Assignment of a steering committee and project management team • Identification of technical experts • What employee training will be required?

PEOPLE

PROCESSES • Documentation of accounting policies • How will changes affect SOX compliance and documentation? • Are consolidation changes required? • Will front-end applications procedures and/or journal entry processes need to be changed to handle capture of data? • What opportunities are available for process improvement during adoption? TECHNOLOGY • New financial statements may require re-mapping of current chart of accounts. • Is there a need for new data capture? • Is existing chart of accounts sufficient for capturing new data? • Are current systems capable of handling new calculations, procedures and reporting requirements? • If new technologies are needed, how will selection, implementation, migration and testing be handled? • What modifications/reconfigurations are required of existing systems? changing the underlying processes and controls, it will put a greater strain on this process and will require more time to gather the necessary data, making it a less efficient approach. The switch to IFRS also will affect an organization’s tax planning and reporting; therefore, organizations must plan for these changes. One major effect on a company’s tax planning is the disallowance of the LIFO inventory method under IFRS. IFRS states that an organization following IFRS may not use LIFO when accounting for inventory. This change affects tax planning due to the fact that the Internal Revenue Service allows a company to use the LIFO method for tax purposes if the company uses LIFO for its financial reporting. Since

STRATEGIC OBJECTIVES

PROCESS

TECHNOLOGY

Internal controls must be reevaluated given the subjective nature of IFRS and assessed against SOX compliance. In addition, the financial reporting process will be greatly impacted. Each of the financial statements are presented differently under IFRS than U.S.- based GAAP, and additional disclosures must be noted under IFRS. If the underlying processes and controls are re-engineered and reevaluated first, then changes to the financial reporting process will be easier to implement, as the data needed to prepare the financial statements should come from the underlying processes.

If an organization takes a top-down approach, e.g., it starts with the financial reporting process without

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

the ability to look at the IFRS conversion process as an opportunity for cost reductions, process improvement, organizational enhancement and the opportunity to be on the leading edge of business. Proper planning now allows companies to develop a strategic implementation plan instead of reacting too late and allowing IFRS to only become a cause of increased costs.

LIFO is not allowed under IFRS, organizations that have used LIFO for tax purposes must prepare themselves to use a new inventory method for tax purposes. Technology The technology of firms also will be affected by the new reporting standards. Since IFRS changes the way some financial data is classified, the chart of accounts must be re-mapped to ensure all financial data is in the proper area and financial statements are accurate. ERP systems must be reconfigured to reflect the new classifications. Data that is entered into the GL, the flow of data through the system, and calculations preformed by the system must all be reviewed to ensure the ERP system is capable of the appropriate modification necessary for IFRS. IT general controls must be reconfigured to address the changes that may occur in the IT environment due to changes from complying with IFRS. As noted before, the presentation of financial statements under IFRS will differ from U.S.-based GAAP. Thus, the systems used to consolidate financial statements will need to be restructured to organize financial data under IFRS. The required use of IFRS by U.S. public companies appears to be an inevitable change. Since an IFRS adoption process may be costly, many companies are likely to take the “wait and see approach” or simply resort to tracking changes and IFRS differences in off-line spreadsheets in an effort to delay costs. However, it is important to bear in mind this step will likely only be a less expensive option in the short term. In the long run, conversion to IFRS will be critical to an organization’s success in today’s global marketplace in order to obtain investors and capital and remain viable with competitors. By taking a proactive approach, organizations have

Questions? Contact: Eric Janson, CPA Partner Assurance Services Group 314.290.3295 eric.janson@rubinbrown.com Mike Ramirez, CPA Manager Internal Audit Services Group 314.290.3455 mike.ramirez@rubinbrown.com

12 u spring 2010 issue

GENERAL TOPICS

The Transaction Process: More Than Just the Numbers With all the changes in the economy and the cautious nature in which businesses are evaluating their futures, the mergers and acquisitions market has been relatively inactive. Now that the economy is stabilizing and businesses are looking to buy or sell companies, activity is beginning to increase. We may not see the activity levels of the past, but we will see a new “normal” develop. As part of the new normal, companies will need to modify their expectations on the amount of leverage that can be used to finance a transaction, and there will be a corresponding shift in the multiples that are paid for businesses. In addition, the overall approach that companies use in evaluating and assessing potential acquisitions is shifting. One of the areas that is experiencing a fair amount of change is the due diligence process. By Dan Raskas

seeing and will continue to see this phase expand and become even more important.

The traditional transaction process starts with a strategic business decision to pursue the acquisition of a company. Meetings are held and information is gathered about the prospective seller. At some point in the process, a decision is made to move forward, and typically a letter of intent will be executed. At this point the due diligence phase begins, with the primary purpose of looking into the details of a business to ensure the purchaser is buying what they think they are buying. This process has several major components that will dictate the level of effort and depth of analysis. Historically, these components focused on risk from a legal perspective and financials from a historic performance perspective. While there were elements of future earnings and accretive benefits, a disproportionate amount of time was spent looking at past performance as an indicator of future success. At the conclusion of due diligence, a decision is made to continue the acquisition process or to withdraw. The information learned from due diligence also influences the content of the definitive agreement as the process continues. Once a definitive agreement is executed and financing has been finalized, the transaction will close on the date specified. The process described above worked well for many years; however, changes to the process started as the economy began to shift. The primary changes have occurred in the early transaction stage through due diligence. The amount of planning, analysis and forecasting has seen much more emphasis than what was once the norm. One of the biggest drivers for the change has been limited access to the capital needed to fund a transaction.

While the due diligence phase of the transaction process always has been a critical step, we are

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Banks are looking for less risk and are unable or unwilling to loan the amount of funds required for a transaction at the desired leverage levels. Private equity groups have sufficient funds, but they are looking for certain levels of return on their investment, which is largely driven by the ability of the company to make money and sell at a significant profit after some period of time. The ability to generate returns has become more challenging, which has caused investors, including corporate buyers, to reevaluate their expectations. As the market responds to all of this change, the emphasis shifts to the business reasons for an acquisition and justification of the acquisition based on the current realities of leverage and returns. As part of this shift, companies are altering their previous strategies and, in turn, are doing a better job of evaluating a potential acquisition target. By targeting the due diligence around those areas that will have the most impact on the critical business criteria, a potential buyer will have a much clearer picture of the true fit of the target company. One of the shifts that exist is that companies are more focused on analyzing future performance of the business and what it would look like post- transaction than what once was a disproportionate amount of effort looking at historical performance. In addition, buyers see the need to increase their analysis on more of the operational components of a business with an eye toward how the business will look in three months, six months, a year or even longer after the transaction. This analysis includes planning certain integration activities earlier in the cycle than ever before. In order to make an assessment, it’s necessary to spend the time early on in the process to determine what would need to happen to consider the transaction a success.

Asking questions like the following is critical to achieving the desired outcome:

• Can we take an order on day one? • If not, what do we need to do to be able to? • What are the cultural issues that need to be addressed now? • Who is critical to the business and how can we ensure they will stay?

All of these considerations feed into the planning and execution of the due diligence activities.

While the majority of businesses have been impacted one way or another by the shifts that have occurred over the past several years, companies have made significant changes to survive. As the transaction activity is heating up, companies are preparing themselves to look at things differently than they have in the past. The strategic aspects are more critical now and are driving the underlying details of the transaction process. As companies shift their approach and better prepare themselves in the transaction process, the likelihood of success will be greatly increased.

Questions? Contact:

Dan Raskas Partner-in-Charge Mergers and Acquisitions Services Group 314.678.3530 dan.raskas@rubinbrown.com

14 u spring 2010 issue

GENERAL TOPICS

Steps for Setting a Solid Foundation The past year has been one of ups and downs. As we embark on a new year, we think of beginnings, a fresh start, new opportunities and innovative ideas to propel us forward. What can be done to jumpstart your business in the new year? Here are some strategies to consider. Of course, depending upon your business, some may be more applicable than others. 1. Increase top-line revenues — A few tactics can come into play here. At the top of the list is building stronger relationships with customers. You should stay close to customers; contact them often to learn more about their business challenges and ways you may be able to assist, even if it does not result in an immediate sale. Expanding your network can lead to generation of business possibilities. Whether it is making new contacts or seeking new ways to collaborate or partner within existing relationships, leverage your company’s strengths and those of others. For example, can you team up to share referrals By Theresa Lynch Ruzicka, CPA

and find ways you can be a resource to one another? This collaboration may be a way to tap into new markets. Have you thought of involving more employees in business development? Even if they are not salespeople on the street, they may be able to identify other opportunities, whether it is with current customers or new customers. Sending the message that everyone needs to pull together to do more can develop a team spirit and positive environment. You may even consider a bonus or referral fee program to reward those efforts. 2. Reduce and monitor expenses — If you don’t already have a cash flow model to budget and track incoming and outgoing cash, make an effort to develop a template or obtain one. There are Internet resources for businesses that have tools available to download. By taking a close look at expenses on a weekly or monthly basis, you can identify nonessential expenditures or monies spent on items not related to core business operations. You also can detect spending patterns that are counter to the direction of the business. Once identified, modifications can be made to curb those expenditures. If your company is in a strong cash flow position, you might consider prepayment of rent if the landlord is willing to accept a reduction in the rent for the next year. The tax impact of that could be positive as well if taking a deduction for those prepaid expenses. Consult your tax advisor for more details. 3. Renegotiate financing terms — While banks have been tightening credit, you still might be able to renegotiate terms to allow for changes favorable to your business. If you have positive cash flow and a strong operating plan, you can make the case for lower rates or expansion of credit to fund growth.

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Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

if needed to put monies behind those areas giving you the biggest bang for the buck.

If your current lender is not able to service your needs, do not be afraid to look elsewhere for funds. State and local economic development organizations also may be able to assist with different funding options. 4. Modify payment terms with customers — When good customers run into problems, you can make a choice to stop conducting business with them or try to work with them. One option is to change the payment terms to push for cash on delivery. Consider offering discounts for cash or credit card payments. 5. Reduce inventory levels — Timing production or purchase of inventory to more closely coincide with orders and deliveries can free up funds used in purchasing and storage costs. Delaying payments until they are due can help with a cash crunch. 6. Decrease payroll costs — Letting employees go can be a difficult decision, especially if they have been hard-working and loyal colleagues. In lieu of that option, think about whether you can reduce their hours or not replace those who do leave so those remaining assume more duties. Of course, freezing or cutting salaries also are options that might make sense for your business. If you do need additional staff, consider engaging project resources to fill the gap on an interim basis. This provides you more flexibility to determine if a permanent employee is necessary. You might find that you can outsource some functions in a less costly way. 7. Continue marketing — While some businesses are quick to pull the plug on marketing, now is the time to make sure customers know you are still able to serve them. Take time to look at your marketing efforts to determine the impact and return on those dollars. Make adjustments If reduction in inventory levels frees up space, consider subleasing the space to another company.

Whatever changes are made in the organization, communication with your team is important so everyone knows the rationale and direction going forward. Everyone in the company has a role to play in making opportunities a reality for the long-term success of the business. Being creative in tough times can set the stage for a stronger organization when the economy improves. Weathering tough times often forces a re-focus on the business, especially on the proper allocation of resources and new priority areas that perhaps were less important previously. Priorities can change as the environment around us evolves. Having the flexibility to redefine strategy and make changes helps position the company for the future.

Questions? Contact:

Theresa Lynch Ruzicka, CPA Partner-in-Charge Entrepreneurial Services Group 314.290.3337 theresa.ruzicka@rubinbrown.com

16 u spring 2010 issue

GENERAL TOPICS

Estate Taxes Over The Next Decade

The theme for this issue of Horizons is the “next decade.” What should we be planning for and what will the next decade look like? When it comes to estate taxes, however, anticipating what that tax will look like in 10 years, let alone the next six months, is close to impossible. The estate tax has been in a flux since 2001, when Congress passed and President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act. Under the act, from 2002 through 2009, the value a taxpayer’s estate could be before being subject to an estate tax has gradually increased.

By Rich Petrofsky, JD, LLM

Predictions are difficult, especially about the future. — Danish Physicist Niels Bohr

In addition, during this same time frame, the estate tax rate has decreased.

17 u spring 2010 issue

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

If a tax patch is passed, when will that happen? In December 2009, the House of Representatives passed a bill that would have prevented estate tax repeal from taking effect in 2010; however, the Senate did not act on that measure. Since under current law there is no estate tax, any action Congress may take in 2010 may be made retroactive back to January 1, 2010. Given that the estate tax law is in a flux, individuals should review their current estate plan to ensure that it meets their needs in this time of uncertainty. Under a longer time horizon, there are many estate tax bills floating around Congress that have not been passed. Looking at these bills and what other tax professionals have suggested, we can make the following predictions, always bearing in mind the quote from Niels Bohr at the top of this article. 1. Estate Tax Exemption: In 2001, the amount that a taxpayer could leave at death without incurring an estate tax was $675,000. In 2009, that amount was $3.5 million. Various bills and proposals would adjust this amount to somewhere between $2 million and $5 million per taxpayer. For purposes of predicting where the exemption will end up, $3.5 million indexed for inflation seems to be as good a prediction or “guess” as any. The rationale is that it is difficult to take something away once it is given. Under this theory, the exemption should not drop below $3.5 million. Further, given budget constraints, it may not be fiscally wise to increase the exemption. Indexing this exemption for inflation or at least adjusting it periodically over the next decade also seems fair (although who says the tax law is fair).

In 2009, every taxpayer had a $3.5 million exemption from the federal estate tax, meaning that if a taxpayer had assets worth $3.5 million or less at the time of his or her death in 2009, no estate tax would be due. Anything over $3.5 million would be taxed at a 45 percent rate unless such excess was distributed to a charity or a surviving spouse (or a marital trust for the surviving spouse’s benefit). For 2010, the estate tax is scheduled to be repealed effective as of January 1, 2010. If no Congressional action is taken, a taxpayer who dies in 2010 will not be subject to an estate tax no matter what the value of his or her estate is at the time of death. However, under the act, estate tax repeal is short- lived. When the act was passed in 2001, projected loss of government revenue would have been too great if estate tax repeal was made permanent. In order to get the law passed, it had to end in 2010. Therefore, under the act, and after a one-year repeal in 2010, the estate tax is scheduled to come back on January 1, 2011. When the estate tax returns, it is scheduled to have only a $1 million exemption (as compared to a $3.5 million exemption in 2009) and a 55 percent tax rate (as compared to a 45 percent tax rate in 2009). Although the future of the estate tax is far from clear, most tax professionals, when pushed, probably believe that Congress will pass some type of stop- gap measure, or tax patch, that will basically extend the 2009 estate tax law through 2010. Some believe that a one-year tax patch will lead to future one-year patches similar to what Congress has traditionally done with the alternative minimum tax. Others believe and hope that Congress will take the time to study and implement a permanent estate tax law that will give taxpayers (and their advisors) certainty. What a difference a year can make! So what will happen in the next six months or the next decade?

18 u spring 2010 issue

value of the estate was under the exemption amount. Over the next decade, we would hope that the estate and gift tax laws would be fully unified. 4. Portability: Many estate tax reform proposals contain a provision known as “portability.” Portability allows a surviving spouse to use his or her deceased spouse’s unused exemption, meaning that a husband and wife can leave a total of $7 million to the next generation estate tax-free, no matter how their assets are held or titled ($3.5 million per spouse under 2009 law). Portability removes the unfairness of penalizing some families for not planning in advance or not dividing up their assets appropriately. It is hoped that before the end of the next decade, some form of portability will be enacted into law. 5. Basis Step-Up: Under 2009 law, assets that an individual owns at death are entitled to receive a basis step-up. When the estate tax is scheduled to be repealed in 2010, the step-up in basis rules are replaced with modified carryover basis rules. Since we are predicting that the estate tax will not be repealed, we will predict that the step-up in basis rules will remain the same.

2. Estate Tax Rates: In 2001, the highest estate tax rate was 55 percent. In 2009, the highest rate was 45 percent. Some tax bills would settle the highest rate in at 45 percent. Other bills would increase the rate to 50 percent or 55 percent for larger estates. Another option that has been floated around Washington is tying the estate tax rate to a two- tiered rate based on the capital gains rate. For example, for taxable estates under $25 million, the estate tax rate would be the capital gains rate, and if an estate exceeds $25 million, that excess would be taxed at two times the capital gains rate. For purposes of predicting where the federal estate tax rate will end up over the next decade, the best guess we can make is a high rate of 45 percent. Although the federal estate tax rate has certainly been higher in the past, it is a little unsettling and maybe politically unwise to pass a law where the top rate takes half or more than half of a taxpayer’s assets. Further, although there is some logic to tying the estate tax rate to the capital gains rate, given the uncertainty of where the capital gains rate will be in the future, it may not make sense to tie the two rates together. 3. Unification of Estate and Gift Tax Laws: Currently the federal estate and gift tax laws are only partially unified. One area in which the law remains disparate is the ability for a taxpayer to use his or her exemption amount during life and at death. Under current law, a taxpayer has a $3.5 million exemption at death. The taxpayer is allowed to use up to $1 million of that exemption by gifting during life. Amounts gifted in excess of $1 million are subject to a gift tax even though if those assets were owned at death they would not be subject to either a gift or estate tax if the

Questions? Contact:

Rich Petrofsky, JD, LLM Partner Wealth Management Services Group 314.290.3487 richard.petrofsky@rubinbrown.com

19 u spring 2010 issue

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

CPAs. Business Partners. Beacons. You don’t need us to tell you how things are going. Everyone just wants to get through it as best they can. But, maybe that’s why honest, objective advice is more valuable than ever. From navigating corporate finances to minimizing tax liability, we can help you address the issues of the day that matter the most so you can keep your business moving forward. Expect the kind of counsel you trust so much, you won’t want to make a move without looking to us first.

www.rubinbrown.com

20 u spring 2010 issue

GENERAL TOPICS

21 u spring 2010 issue

Raise Your Expectations CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Is Revenue Leaking From Your Organization?

• Poorly managed back-office functions such as billing, contract management, pricing, discounts and allowances, and credit and collections • Employee abuse, misappropriation or collusion (i.e., theft)

Data analysis can increase the efficiency and thoroughness of the process to identify and analyze revenue leakage.

IDENTIFYING THE LEAK

Identifying the leak requires the organization to look beyond traditional reports and analysis. Revenue leakage may be caused by flawed business processes, system configuration errors, missing usage records or potentially internal fraud.

By Audrey Katcher, CPA, CISA

So what is revenue leakage? According to Merriam-Webster, revenue is “the total income produced by a given source.” Leakage is “the escape through an opening, usually by a fault or mistake.” Thus, revenue leakage is the loss of revenue due to errors, gaps or other weaknesses in the revenue cycle. Consider the increased exposure due to revenue leakage in our current economic times, which makes each piece of revenue significantly more important. Your organization has likely met some success in implementing cost-cutting measures, but have you considered that revenue may be leaking from your organization? Studies indicate that organizations could increase operating revenue by 1 to 12 percent through revenue leakage mitigation. Here are some examples of revenue leakage indicators:

Here are examples of everyday activities that may lead to revenue leakage:

1. Master tables and databases out of synch with contracts, agreements and license terms 2. New services that do not flow through legacy systems correctly 3. Discounted or special (one-time) order terms that are deferred and then forgotten 4. Records/database discrepancies resulting in manual intervention that is not carried out correctly 5. Inadequate interfaces between disparate or decentralized systems (electronic or manual) 6. System failures mid-transaction 7. Incorrectly applied rates and tariffs 8. Incorrect restoration of customer data following a system failure 9. Over-delivery (products and services) in the field without the required service order update, approval or documentation in the system 10. Manual correction of service orders that are called out on error reports with re-entry that is not completed correctly

• Under-performing or idle assets (such as licenses, technology)

22 u spring 2010 issue