Sax FOCUS Newsletter: Issue I 2019

EXPECT MORE

Construction Healthcare Manufacturing & Distribution Not-for-Profit Real Estate Technology Transaction Advisory Wealth Management

Issue I 2019

SAX FOCUS NEWSLETTER

IN THIS ISSUE 04

14

04

07

CONSTRUCTION CORNER

HEALTHCARE CORNER

The Essentials to Successful Succession Planning and Transfer of Ownership in the Construction Industry Written by: Angelo Straface, CPA

Priming your Healthcare Practice for Private Equity Purchase: Part 1 Written by: Deborah Nappi, CPA, MST

09

12

MANUFACTURING & DISTRIBUTION CORNER

NOT-FOR-PROFIT CORNER

How to Thrive in the Supply Chain Revolution Written by: Joshua Chananie, CPA

Presenting a United Image of Your Not-for-Profit Written by: Harper Garrett III, CPA, CGMA

14

16

REAL ESTATE CORNER

TECHNOLOGY CORNER

2019 Real Estate Trends in New Jersey Written by: Stuart Berger, CPA

From the Weakest Link to a Human Firewall — Why You Should Invest in Security Training Written by: SAX Technology Advisors

18

20

TRANSACTION ADVISORY CORNER

WEALTH MANAGEMENT CORNER

The Impact of Tax Reform on Private Equity Deals Written by: Stephen J. Ehrenberg, CPA, MBT

Getting to the Point of a Point Written by: Kyle R. Stawicki, ChFC®

16

20

The information contained within this newsletter is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax or financial advice from a professional.

Sax Focus • www.saxllp.com Page 3

8th Annual

4miler join the 4 miler at garret mountain as we run and walk together for the pediatric patients of St. Joseph’s Children’s Hospital.

8:00 a.m.

Registration

saturday, october 5, 2019 15 weasel drift road, woodland park, nj • 4-mile run on USA Track and Field Certified (USATF) course • 1.5-mile scenic trail walk through Garret Mountain Reservation

9:30 a.m.

4 MILER Run 9:40 a.m.

Scenic Trail Walk 10:45 a.m.

Kids’ Dashes

• Kids’ dashes ranging from 25-200 yards • Scoring by BestRace.com and Overall/Age Group Awards • DJ, family-fun activities, refreshments, random prizes and more!

of dollars raised goes directly to the Child Life Department within St. Joseph’s Children’s Hospital to help mitigate the negative effects on children due to treatment, illness and hospitalization.

We can’t do it without you!

Visit saxllp.com/sax4MILER to learn how you can participate, donate, sponsor or build a team.

Sax Focus • www.saxllp.com Page 2

CONSTRUCTION CORNER

The Essentials to Successful Succession Planning and Transfer of Ownership in the Construction Industry

Written by:

Angelo Straface, CPA Senior Manager

Construction Practice astraface@saxllp.com

Many business owners know they need to make formal plans for a successor, but planning can easily take the backseat to the immediate need of managing daily operations, people, equipment, credit, cash flow, business development, and the next big project.

Many construction companies are family-owned and operated — some for generations — and have had a substantial impact on their local communities over the years. In addition, many of these companies are smaller, and therefore highly dependent on their owners to manage day-to-day issues.

Unfortunately, these are often the same companies that have no succession plan to prepare for future leadership, ownership, and management once the owner retires or is unable to manage the business.

This situation, combined with the importance of management quality, makes succession planning critical to the future success of a construction business. During such transitions, it is vital to have the surety provider’s support and confidence in the

contractor’s financial strength, technical execution capabilities, and management quality and character. While it may come as a surprise to some financial purists, quality of management is one of the most important factors when determining the appropriate level of surety support to a contractor.

TYPES OF OWNERSHIP TRANSFERS In the event that a contractor would prefer to transfer or sell ownership of their company to employees and/or family upon exiting their business, several alternatives exist for supporting the ownership transfer.

One approach would be to treat the related party as an external third party and to then sell ownership interest to that same third party, leaving the financial position of the underlying concern unaffected by the transaction. The usual obstacle here, of course, is the lack of external funds to support the transaction. For this reason, related party transfers are usually facilitated using other methods.

Sax Focus • www.saxllp.com Page 4

SUCCESSION PLANNING ESSENTIALS Other related party scenarios include: • Traditional external financing to support the company’s buyout.

• Injection of capital for a certain period by an alternative financing method such as private equity.

• Ownership transfer through an existing or new Employee Stock Ownership Trust.

According to the Philadelphia Business Journal, some 70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over. While many owners prefer to pass the business on to family or staff, the failed transition is often due to a lack of trust and communication between the owners and successors, and the successors not being adequately trained with the right management skills.

There are various types of business transition methods, and the following are the most popular in the construction industry: • Internal sale. The company, under the new ownership structure and management team, secures funding from a bank in order to buy out the current owners, or the existing owners provide selffinancing of the transaction.

• External sale. An external (third-party) sale is typically the best opportunity for the company’s shareholders to maximize value and liquidity while minimizing deal risk. However, the external sale creates the most exposure to future change.

• Recapitalization. The current owners identify a financial partner who is willing to acquire a majority of the stake in the company.

The financial partner typically invests heavily in the company and ultimately seeks a premium with a three-to-five-year exit window.

• Employee stock ownership plan (ESOP). An ESOP trust is formed in order to acquire stock from the selling owners in exchange for liquidity. Shares are then allocated over time to the accounts of eligible employees based on various factors. The ESOP offers the opportunity to create significant tax savings to the selling shareholders as well as to the company, if the company makes an S corporation election.

• Old company and new company plan. The old company ceases to build up value and essentially ceases its operations while the new company finishes out the work of the old company under a project completion agreement. The old company guarantees the bank debt and bonding line of the new company for a period of time so the new company can establish its financial strength.

After a period of time, the old company is liquidated.

FORMULATE A PLAN Open communication is vital to any succession plan. Start the process by talking to family and staff who can objectively discuss your vision for the future — for yourself and your company.

Once you have shared your ideas you can formulate a plan by focusing on the following steps:

• Decide which family and/or key manager(s) you want to be part of your ownership and management succession plan.

• Make sure your key players understand the responsibilities and risks associated with their role in the succession plan. Alignment of all stakeholders regardless of their role is essential for your vision to be realized.

• Evaluate your successor owner/manager’s dynamics in anticipation of how he/she will respond to a change in management.

• Assess the near and long-term development needs of the company.

VALUATION & FINANCIAL REPORTING Key factors to consider when attempting to value the company upon transfer of ownership include: • Market and customers. What is the potential for your company’s growth — is there a market of expertise or specialization to enhance its operations? Do your employees have adequate knowledge of this specialized area, or do they need more resources?

• Infrastructure. What is the quality of your assets, such as real estate and equipment? Do you have adequate management information systems, and is your management team able to maintain your company’s infrastructure?

• Financial performance. What are your company’s earnings, and what is your company’s bank and surety credit without your involvement as a founder?

Maximizing value of the company is the obvious goal of every business owner who looks to sell or transfer their ownership.

The value of a construction company can be maximized if the company has four fundamental strengths.

The first is a strong financial condition. balance sheet, strong working capital, borrowings, positive bank and bonding and minimal historical and prospective losses and contract litigation.

This includes a healthy minimal line of credit company relationships, exposure to sever job

The second fundamental strength is a strong backlog. Look at the quality of backlog projects. Does the construction company have the right experience to tackle those projects? Are they within favorable geographical performance zones? It’s also important that the projects in the backlog will yield quality gross profit margins with minimal “booking risk” and “profit erosion risk.”

The third fundamental strength is having strong executive and field personnel. It’s critical to invest in seasoned leadership and strong talent.

And finally, strong financial systems. Construction companies with proven fiscal controls, established reporting and budgeting systems, and credible and timely financial reporting are seen as more valuable than companies without those systems in place.

• Identify financial conflicts: • Expected versus real value of your company • Personal needs after retiring • Management’s acceptance of risks associated with a change in ownership

(continued on page 6)

• Credit capacity of the company, and impact on ongoing operations after the transition Sax Focus • www.saxllp.com Page 5

Financial reporting is also vital to a transitioning construction company as it is imperative the company properly reports its earnings. It is just as crucial that the company report any unusual transactions or financial terms of operations that may impact the intrinsic value of the business. Examples of unusual financial transactions include, but are not limited to:

• Planning with no immediate event on the horizon – Leading companies have made succession planning and leadership development an essential part of their core business activities.

This approach results in an “always ready” environment that can make future planned or unplanned succession events less daunting and risky when the time comes.

• one-time construction project gains, losses or other unusual items;

• Depth of planning – When speaking of succession, we often hear people refer to the top jobs within an organization.

Leading contractors go beyond senior management jobs when looking at their succession plans and then commit to an ongoing plan to identify and develop talent for positions that are well below the executive level. Over time, these companies have found that the process ultimately results in an extremely strong commitment to the organization’s success, as staff members feel they are part of a well-developed and strategically aligned plan for future growth and continuity.

• excess or insufficient salaries or benefits that are paid to owners, family members or executives; • excess family or executive perks; • non-market rental or lease arrangements with related parties; • non-recurring professional fees; and • non-recorded financial transactions, including contingent gains and losses from construction litigation.

THE SURETY’S POINT OF VIEW Equally important as the overall financial performance of the company, if not more so, is confirmation that the new leadership team has the capabilities and a mindset that is consistent with the previous, successful management team.

A surety’s assessment of management capabilities is more art than science, as nearly all sureties recognize that the contractor, rather than the surety underwriter, is the true expert in the construction business. As a result, the surety’s assessment is based primarily on overall comfort with the management team’s attitude towards financial and operational risk; a realistic attitude towards technical capabilities; and consistent transparency and responsible engagement with owners, subcontractors and service providers. Of course, a track record of successful project execution is the foundation of the management assessment.

There are several best practices that the sureties will look for when supporting a contractor who is in the process of transitioning the company: • Full commitment to succession planning – Top companies of all sizes view succession planning as part of their core responsibilities rather than as periodic events. Once top candidates for future leadership roles are identified, the leading contractors spend considerable time developing the capabilities of their high-potential candidates.

• Ongoing evaluation – Rather than identifying candidates for a “just in case” checklist, top organizations assess potential and performance on a continual basis when evaluating the readiness of leadership candidates. Further, rather than relying on performance in an employee’s current role, additional “bolt-on” responsibilities are given to stretch a future leadership candidate and determine his or her ability to operate at the next level. In this regard, a safety net is usually provided in order to limit the tuition cost of the education.

• Attracting and retaining talent – Along with providing clear benefits in preparation for eventual management or ownership transitions, embedding succession planning into a contractor’s culture can help attract and retain staff in today’s highly competitive labor market. An absolute priority for attracting new talent is an environment of frequent feedback and welldeveloped career plans. A strong succession-planning culture facilitates the environment demanded by the new workers entering the workforce and the future leadership pool.

Overall, it is very important to decide what the best course of action is in order to ensure the goals and objectives of the selling shareholders are met. If there is one industry that understands the need for planning, it is construction. Timelines, deadlines and changing conditions are factors that construction leaders deal with on a daily basis. The companies that are strategic, realistic and committed to a successful transition will be the ones positioned for positive results.

Remember, you don’t need to execute a plan all at once, but by setting interim goals you can have a solid plan in place before you’re ready to pass on the business. The sooner you start discussing your succession with those you trust, the sooner you can feel secure about your company’s legacy and your personal future.

Top contractors are ahead of the curve in making succession planning part of their core management and leadership activities, and those organizations will be better prepared when the inevitable decision to transition occurs.  Angelo Straface, CPA is a Senior Manager at Sax. He is a member of the firm’s Construction Practice and manages the audit and review engagement teams. He can be reached at astraface@saxllp.com.

• Transparency – The pros and cons of transparency with succession plans are often debated. Full transparency can lead to the unintended consequence of resentment from less successful leaders, while limited transparency can result in mistrust within the organization. While there are merits to each argument, our observation is that top contractors tend to have a high level of transparency with leadership succession plans within their organizations. In addition to the internal transparency, the top companies also share their plans early and regularly with their service providers to ensure support for future changes.

Sax Focus • www.saxllp.com Page 6

HEALTHCARE CORNER

Priming Your Healthcare Practice for Private Equity Purchase: Part I

Written by:

Deborah Nappi, CPA, MST Director

Healthcare Practice dnappi@saxllp.com

Private

equity deals have increased in recent years as baby boomers seek exit strategies for their privately-held companies in lieu of succession planning. Healthcare is one area that has recently been at the forefront of private equity transactions, and this trend is expected to continue.

There are various aspects of the due diligence process: 1. Financial Due Diligence 2. Legal Due Diligence 3. Operational Due Diligence

Sax’s Healthcare Practice has seen our clients enticed by the anticipated multiples and the volume of recent transactions.

However, whether or not their practices are ready to undertake the due diligence process necessary to bring a successful transaction to a close must be seriously considered.

Doing Your Due Diligence Across all industries, not just Healthcare, the purpose of the due diligence process is to evaluate all aspects of the company prior to the acquisition. It is a precautionary measure whereby company records are reviewed in great length providing the purchaser with a level of comfort as to the viability of the entity and the predictive future of the organization’s EBITDA and cash flow.

The due diligence process begins after the letter of intent and a non-disclosure agreement have been signed by both parties, and prior to the preparation of the purchase agreements. While the company owner may look to hurry the process of due diligence, it is inevitably a long, arduous journey that requires much time and attention to detail.

4. Intellectual Property Due Diligence 5. Commercial Due Diligence 6. Information Technology Due Diligence 7. Human Resources Due Diligence This article will focus on financial due diligence.

Preparing for the Financial Due Diligence Process If the plan is to sell to private equity, processes should be put in place a long time before a transaction is considered to ensure that the financial information will be accessible and that the records provided are complete. Much consideration should also be given to accounts with lingering differences in need of adjustment. Time and attention to these matters will be well served in advance of the planning phase of selling.

Sax Focus • www.saxllp.com Page 7

PREPARING FOR PURCHASE

This will require a potential seller to assess the various processes within their organization along with the assistance of a trusted advisor. This assessment will undoubtedly uncover weaknesses which can be remedied prior to the selling of a business.

Reviewing accounts receivable will help gain a better understanding of the collection process and identify issues such as an increase in the days receivables are outstanding. It is important to inquire regarding credit limitation for new customers and sales cut-offs. It is also an opportunity to reveal any underlying process which needs correction. Understanding the revenue cycle of a healthcare entity is of critical importance to the success of the due diligence process.

In addition, it is important to review the respective accounts payable aging schedule. Are there proper monthly cut-offs and are the months' invoices recorded? Are vendors’ statements compared to the aging schedule and are noted discrepancies followed up with the vendor? This might sound simplistic, but for companies who do not have controllers overseeing their accounting process, inconsistencies will become visible when reviewing comparative monthly financial information. This will then become a hindrance to moving the due diligence process along. In addition, a review of all leasing arrangements will prove invaluable to the proper recording of financial data.

While focusing on financial data, the process of identifying potential red flags needs to be implemented in all aspects of an organization. The more that can be addressed prior to the due diligence process of a transaction, the smoother the process will go while sustaining minimal adjustments to the overall value of the business.

Maximizing Your Practice’s Value It is important that healthcare entities are equipped to identify any issues that might impede or devalue the sale of the practice.

When performing due diligence for our clients, we act as if we are the purchaser and analyze all data that would be meaningful to a buyer so we are proactively addressing any and all issues, and are ready with an explanation or course of action to remedy.

A potential purchaser will look back several years at a healthcare entity’s financial history to identify key trends and performance indicators that help to tell the story of past operations and areas for future improvement. Incomplete data and/or poor quality of data leads to a breakdown of the due diligence process, resulting in a delayed closing or the impediment of the transaction. The seller needs to provide data for the roll forward period and consistent monthly financial data that enables the purchaser to analyze trends. This reporting needs to include detailed reconciliations and explanations for any discrepancies. The significant accounts that should be reviewed include: • Accounts Receivable • Inventory • Accounts Payable • Accrued Expenses • Fixed Assets

The Importance of Compliance It is vital that you are complaint. The Healthcare industry is fraught with many regulatory compliance matters. A company’s financial presentation may be stellar but if internal practices are found noncompliant during the assessment, this can seriously impede progress with the transaction. Parties in healthcare transactions will have separate healthcare regulatory due diligence performed.

Regulatory considerations during the due diligence for healthcare entities include: • Stark Law Compliance • Anti-Kickback Statute Compliance • The False Claims Act • HIPAA Compliance In addition, the parties should consider any potential successor liability or pending litigation, and a review of the current payor contracts in place. The purchaser will have their own consultants analyzing regulatory matters for the respective state that the company does business in to ensure the adherence to the rules governing their state.

Sax’s Transaction Advisory At Sax, our advisors recognize the delicate balance between deal makers and deal breakers when it comes to M&As and transactions. With the unique needs of the Healthcare industry and private equity, our advisors have a deep understanding of what it takes to bring a successful deal to a close in both arenas.

Be sure to stay tuned for Part II of “Priming Your Healthcare Practice for Private Equity Purchase” when we address postclose transaction considerations such as tax planning, the roll over equity in a recapitalized company and the circumstances regarding the disposition of the additional equity.

Please reach out to Sax’s Healthcare Practice with any questions or needs with regards to private equity transactions, or the healthcare industry overall. Healthcare advisors can be reached at (973) 472-6250 or www.saxllp.com.  Deborah Nappi, CPA, MST is a Director at Sax and a vital member of the firm’s Healthcare Practice. She specializes in conducting due diligence for private equity, analyzing Healthcare related transactions on the buy and sell side, reviewing practice evaluations and managing postclose transactions. She also serves as interim CFO during healthcare M&A deals, mitigating risk and ensuring a smooth and successful transaction. Debbie can be reached at dnappi@saxllp.com.

• Revenue and Various Expense Categories • Leasing Arrangements • Accounts with Significant Account Balances

Sax Focus • www.saxllp.com Page 8

M&D CORNER

How to Thrive in the Supply Chain Revolution

Written by:

Joshua Chananie, CPA Partner-in-Charge

Manufacturing & Distribution Practice jchananie@saxllp.com

Ongoing

technological advances and increasing customer

demands are transforming the supply chain industry at an unprecedented pace. To be successful in this rapidly changing business environment, companies need to consider new and better ways to meet customer requirements and allocate the right people and resources – quickly, efficiently and profitably.

Joshua Chananie, Partner-in-Charge of Sax’s Manufacturing & Distribution Practice recently partnered with Sandy Vosk, Founder and CEO of Advantage Technology Solutions and John Cosgrove, Founder and President of Atlantic Handling Systems to provide an educational webinar series featuring essential, needto-know insights on technology and the supply chain revolution.

Here is a summary of the most important items that were covered during the webinars:

E-COMMERCE E-Commerce is hitting exponential growth around the world and has forced supply chain professionals to take a fresh look at their company’s technology strategy. This paradigm shift includes product orders, shipping and returns, and affects everything within a company’s infrastructure and systems in place.

E-Commerce brings about both opportunities and challenges.

Opportunities include a booming economy, tax incentives that encourage investments in technology, and an increased demand for logistics. Challenges include the trade war and tariffs, increased costs for space and freight and the ability to attract and retain the right people with the right skills in a highly competitive labor market.

Sax Focus • www.saxllp.com Page 9

SUPPLY CHAIN REVOLUTION “Technology is both an enabler and disrupter – it depends on how you wish to interpret it,” said Sandy Vosk, Founder and CEO of Advantage Technology Solutions. “We continue to create and integrate powerful new technologies that will drastically shift the industries that exist today. It also creates brand new industries and markets for the future. Since e-commerce is here to stay, the goal should be to maximize opportunities and develop plans that will minimize the challenges moving forward.”

Other supply chain challenges include fulfilling more orders faster at a lower cost, improving order accuracy, and enhancing operational efficiency.

“Returns and reverse logistics take challenges to a whole new level,” said John Cosgrove, Founder and President of Atlantic Handling Systems. Amazon has set the bar where customers now expect free shipping and free returns. “For example, 25% of all women’s clothing shipped out under e-commerce comes back into the warehouse. So many companies have policies where they accept returns, and it is a whole new venture in the warehouses now trying to figure out how to deal with them.”

Surviving now requires innovation in terms of inventory management, order fulfillment and processing, and order management and tracking end to end, especially “the last mile”.

“The best solutions begin with a well-designed warehouse, combined with quality material handling equipment and a strong warehouse management system to support your business,” said Cosgrove. “Avoiding bottlenecks requires digital communication with your customers, real-time scanning and a combination of planning, monitoring and operational execution.”

A question was raised: How do we keep up with Amazon Prime deliveries?

Vosk responded, “You could have your orders fulfilled by Amazon Prime, you could create the capabilities within your own company, or you could outsource to third-party logistics companies who are optimally set up for the e-commerce world. What is the right choice for you?”

Cosgrove added, “Amazon has taken the distribution world by storm and continues to expand the depth of their investments.

Each individual company needs to evaluate their capabilities and how they can compete with Amazon in a way that makes sense to them. It isn’t easy to meet Amazon’s standards – that’s why they’re Amazon. To attempt it takes strategy and innovation.”

From planning through execution, it is critical to involve a crossfunctional team that includes operations, customer service, finance, sales & marketing, IT (internal and external) and trusted advisors. Revaluating how you’ve done things and going back to the drawing board takes every facet of your company to do it right.

SELECTING & IMPLEMENTING THE RIGHT SOFTWARE Technology is THE critical, make-or-break factor in the supply chain revolution. Whether you are a start-up business or an established company leveraging legacy systems, somehow, somewhere you are going to need to make some decisions with regards to what you need next to keep up with your customers and the fast pace of technological change.

There is a lot of work that goes into changing a company’s accounting system, but there are reasons why you may need to bite the bullet and make a fundamental change. For example, accounting is foundational, but the crux of what holds everything together and allows you to manage a company effectively. In the light of significant growth and if you are playing in the global supply chain game, more than accounting, enhancing your general ledger, payables and receivables may often be required.

Accounting vs. Enterprise Resource Planning (ERP) Budgeting, forecasting, multiple languages and currency needed for international sales, a CRM system, sales & marketing, integrated order processing, warehouse management, human resources – these are critical business components that can be integrated together so they “talk to each other” and generate long-term positive results. ERP systems can have all of this under one umbrella.

Premise-Based Systems vs. Hosted vs. Software as a Service (SaaS) What is the difference between owning and managing your own software vs. you owning your software and letting someone else manage it vs. a cloud-based subscription service? Vosk states, “Due to the increasing pace of change combined with growing threats from cyber-attacks, I firmly believe it is getting harder and harder to support new technology and if you do not have the right team and capabilities, you could really be at risk. You need to find the solution that makes the most sense to you and your unique supply chain company.”

The functionalities you require, the ease of implementation and use, the architecture of the system, the vendor you will use, and the total costs of system ownership are critical components that need to be weighed in your decision-making process.

Joshua Chananie, Partner-in-Charge of Sax’s Manufacturing & Distribution Practice interjected, “Having a good financial process and reporting is not enough to make sound business decisions.

You need to understand where you are today and where you will be next year. This includes your unique needs and technological set ups. These decisions can’t be made on a whim. They should be part of a strategic process that leverages the combined thinking of your internal leaders and external trusted advisors.”

Vosk concluded, “Despite three decades as a supply chain expert across a variety of industries, I am totally humbled by the pace of change. I know what I know, and I know there are things that I do not know, and I never confuse the two. I strongly suggest you utilize trusted advisors to fill the gap in your knowledge and capabilities to effectively move in the right direction.”

View the full webinar on E-Commerce and the Supply Chain Revolution here.

(continued on page 11)

Sax Focus • www.saxllp.com Page 10

“A key to success to the evaluation and implementation of new software is getting buy-in from the top and establishing a cultural commitment to change. It is important to have a cross-functional project team in place, so you are making these significant decisions with perspectives from all angles of the company,” says Sandy Vosk. “Documented business requirements are critical and performing analysis and due diligence on prospective vendors and systems will make all the difference. In the end, it is vital to have a comprehensive implementation plan in place as it will take time and resources away from daily operations. You need clarity on what you are getting into and how long it will take so you are fully prepared for the transition.”

Vosk concluded, “Even if you are not sure where you want to go with new technology, you have to move. Staying in the same place is not a safe place to be. It’s about following a process that makes sense to you and your business. Don’t hesitate with bringing in the resources that will take your capabilities to the next level.”

View the full webinar on Selecting & Implementing the Right Software here.

TECHNOLOGY & THE SUPPLY CHAIN REVOLUTION We are in the era of e-everything. The pace of growth in technology is unbelievable and a primary driver to the supply chain revolution.

However, there are a number of challenges that can hinder a supply chain business from keeping up with fast change.

According to a 2018 Global Logistics Report by Eye for Transport (EFT), the top five biggest challenges currently facing the logistics industry are digital transformation, maintaining margins, capacity, meeting customer demands and innovation.

Autonomous, Artificial & Blockchain It’s clear that the next generation of supply chain businesses will need to drive efficiencies through big data, predictive analytics, artificial intelligence, robotics, crowd sourcing and shipments, and autonomous vehicles.

Autonomous mobile robots are now seen everywhere. It is estimated that by 2020 worldwide sales of warehousing and logistics robots will reach $22.4 billion by the end of 2021, with robot unit shipments reaching 620,000 units per year by 2021.

That’s two years from now!

It is estimated that by 2020, artificial intelligence (AI) in logistics will include back office automation, predictive operations, intelligent logistics assets, and new customer experience models.

Blockchain is red hot, and it is predicted to increase global trade by nearly 15% and reduce documentation costs representing an estimated 20% of global trade expenses.

The supply chain revolution has brought us into a new world, and one with endless possibilities. Vosk concluded, “It is important to start small with so much change. This is not such easy stuff to do – you need to execute a thought-through and strategic plan. Then you interpret it and scale it.”  View the full webinar on Technology & The Supply Chain Revolution here.

For more information on the supply chain revolution, feel free to reach out to an advisor within Sax’s Manufacturing & Distribution Practice at (973) 472-6250 or www.saxllp.com.

There is a growing fear that technology will replace human jobs, but it can be argued that human roles will just evolve into new capacities. With a strong economy, fewer professionals are entering the supply chain industry and many companies are concerned about attracting and maintaining talent. Based on demographic research, millennials will continue to be interested in working with automation and robotics and drawn to these new roles.

Even though roles will evolve, it is clear people and technology need to work together to meet the increasing customer demands.

Cosgrove stated, “Customers want everything faster and cheaper, and margins are now shrinking. The only way to get a return on your investment is to invest, and not throw people at the problem.”

Chananie added, “In New Jersey especially, margins are decreasing, partially because of the increase in minimum wages through the new 5-year phase-in from $8.85 to $15 an hour. This is another stress factor for a supply chain business and makes it more challenging to maintain and increase profit margins. On the other hand, it is becoming harder and harder to fill roles within the supply chain industry, despite increased pay. Without a labor force, how will we meet customer demands? If we do not meet customer demands, we lose customers.”

Sax Focus • www.saxllp.com Page 11

NOT-FOR-PROFIT CORNER

Presenting a United Image of Your Not-for-Profit Written by:

Harper Garrett III, CPA, CGMA Senior Manager

Not-for-Profit Practice hgarrett@saxllp.com

As a not-for-profit, you are aware how important it is to effectively communicate your mission, values and results of impact to your donors to retain their ongoing support, so you can continue to thrive. It is also vital that you attract new donors in this increasingly competitive arena to not only survive, but flourish. The best way to accomplish this is to identify how these items can be effectively communicated and to coordinate communications so you deliver a message that is clear and consistent.

Although some vehicles of communication to your donors may be specific and unique to your organization, there are several methods that can be leveraged by all not-for-profits to reach a broad audience of donors, volunteers and others.

WEBSITE Whether you’re looking for a specific type of business, not-for-profit organization, answers to questions, or just about anything else, the internet is typically the first stop for everyone today and it is vital that your not-for-profit organization has an online presence. Here are some important items to consider with regards to your website:

• Whether accessing your website from a computer, tablet, phone, or other device, it should be easy to navigate, easy to donate, and should contain all information a potential donor or volunteer would be interested in obtaining.

• Be sure to highlight your program service accomplishments that you are most proud of – ones that will stand out in the mind of someone who is just “clicking through.”

• Take care to ensure making an electronic donation through your website is as easy and hassle-free as possible, and that you accept various forms of electronic payments. Don’t forget to include a mailing address so users that do not wish to make a donation electronically can still send a check.

• Include a listing of your staff and your board members, as well as copies of your most recent and prior year 990s and financial statements to demonstrate your transparency.

An organization with a poorly-designed, barely-operational website is a red flag for many donors that either you aren’t up to date with modern communication methods, or your organization doesn’t have its act together in general.

Sax Focus • www.saxllp.com Page 12

UNITED IMAGE

Form 990

Social Media

Many organizations see the filing of their Form 990 as an annual burden – a process that costs them time and money that could be better put towards programs. However, I challenge you to rethink that mindset and see the 990 as a tool that you can use to make your organization shine. An important tip is to focus on the written sections rather than the numbers, specifically Part I, Question 1, which asks you to briefly describe your organization’s mission or most significant activities. Part III is important as well as it allows you to describe your organization’s mission and then provide a description of your three largest program service accomplishments, including revenues and expenses associated with each one. Part III also asks you to describe any significant new program services you’ve engaged in during the year by describing it on Schedule O. Take this opportunity to consider your main program service activities and how you want them to be presented to the world. Take care to read through your 990 each year to update your program descriptions and highlight current year accomplishments.

Social media is a presence builder, a great way to communicate, and maybe most important to nonprofits – its free! There are a vast number of social media platforms you can leverage to spread your message, and you should be taking advantage of them.

Facebook, Instagram, Twitter, and others are all highly effective at reaching large groups of people with relatively little effort.

Financial Statements Not all not-for-profits prepare financial statements on an annual basis, but all of them should. Even if you are not required to prepare financial statements as part of your reporting or compliance requirements, it is difficult to have a clear picture of your organization’s finances or plan for the future effectively without knowing where you stand financially. In addition, financial statements are yet another method that you can use to inform readers about your organization, like how you are fiscally responsible and how you are utilizing current donations to achieve your program objectives. The first disclosure in the majority of financial statements is a description of the organization. Use this space to highlight the work that your organization does.

Annual Report An annual report is a great tool to showcase the best your organization has to offer, while also providing readers with an overall picture of your organization’s mission, accomplishments during the year, and what your plans are for the future. You can also use your annual report to provide information on the non-financial statistics such as participants who received assistance, meals served, shelter nights provided, etc. to highlight your service accomplishments specific to your programs and demonstrate how your organization has grown from the prior year.

Here are some tips for leveraging social media effectively: • Showcase your impact any chance you get. This can be done with photos of programs as they are in motion, announcements for upcoming events, and information on company recognition or feedback from your beneficiaries.

• Build a connection with your audience by responding to comments, tagging your volunteers and affiliations, and make your content as relatable as possible.

• Remember to include a clear Call to Action. This can be in the form of a link to your website or directly where someone can donate to your cause.

• Consistency is key. Keep your messaging high-quality and cohesive with all your other messaging in other channels. This allows your audience to truly get to know you and become invested in your mission.

To make sure you are delivering your best message, spend the time to think about how you can use all of the above communication channels to your advantage, and make sure they are all delivering a consistent message. It’s not a great look if the mission statement on your website says one thing and the mission statement on your Form 990 says another. Most of all, consider the information you are communicating from an outside perspective; do they all present the organization that you know and love? They should.  Harper Garrett is a Senior Manager in Sax’s Not-for-Profit Practice and focuses on helping to navigate the often complex terrain of the not-for-profit industry and assists smaller nonprofits to achieve sustainability for their organization and mission. Harper can be reached at hgarrett@saxllp.com.

Sax Focus • www.saxllp.com Page 13

REAL ESTATE CORNER

2019 Real Estate Trends in New Jersey

Written by:

Stuart Berger, CPA Partner

Real Estate Practice sberger@saxllp.com

Sax Focus • www.saxllp.com Page 14

TRENDS IN NEW JERSEY We are more than half-way through 2019 and the nation’s economy appears to have its ups and downs due to many moving parts. With regards to the Real Estate industry in particular, there are many variables that have shaken things up, and I believe we will not understand the full impact of change until the dust has settled.

I am neither an economist nor fortune teller, but with more than 30 years of experience in the Real Estate market and as an advisor to clients, it is my duty and passion to have my finger on the pulse of industry trends. Here are some important ones to note: THE IMPACT OF TCJA ON REAL ESTATE Our industries saw sweeping tax changes enacted by the Tax Cuts and Jobs Act, and we are now beginning to see what this means for the Real Estate sector.

For example, the limit on state and local tax deductions (SALT) continues to impact the single-family home market in states with high real estate taxes such as New Jersey. Recent studies have reported that 30% of homeowners in NJ are unable to fully deduct their taxes, and many first-time buyers have been hindered to enter the market because of that. The good news is that we have seen mortgage rates drop after trending up in 2018.

Also incorporated into the tax reform legislation was “The Opportunity Zone Program” enacted to incentivize real estate investment and development in low-income communities across the country. Opportunity Zones are designated tracts allowing investors to provide capital for projects in exchange for certain tax breaks, and 75 municipalities representing every county in NJ have at least one opportunity zone designated.

TRENDS IN REAL ESTATE SPACE The retail landscape continues to be a challenge as consumers are turning more and more to online shopping than physical stores.

The number of retailers filing for bankruptcy continues to rise and the result of these bankruptcies is not just reorganization, but total liquidation. Combining entertainment and food with retail continues to be a way to draw consumers.

Industrial space demand and pricing continue to be strong. We are experiencing a shortage of available space because of demand generated by e-commerce and the need for warehouse and shipping facilities. 2019 will show no sign of softness in this area and the legalization of cannabis will only increase demand.

In the resale market, inventory remains low because of many factors.

While the demand for product for empty nesters (individuals moving after their children have moved out) remains high, new products are limited by NJ’s difficult entitlement process and the high cost of acquiring land. This coupled with the continued increase in material costs and shortage of labor has driven up asking prices for this type of product and many empty nesters have decided to stay put and renovate their existing homes – leading to a boom for those in the home remodeling arena.

We have seen the millennial generation delay the move to suburbia and have stayed in cities and in rental spaces. Trulia, a site for buyers and renters across the country, conducted a survey in 2018 and predicts that millennials will enter the home buying market place at increasing rates this year. This acceleration is believed to be because older millennials have now grown in their careers, paid off student debt and are now starting families.

Certainly, mortgage rates will impact how quickly this cycle ramps up. Due to high costs of construction, acquisition and entitlement, most developers have been hard pressed to produce economical products for these first-time home buyers and have been focused on the luxury move upmarket.

On the local level, many communities continue to embrace multifamily development to both increase their tax base and meet the ever-growing need for affordable housing. Over 60% of the building permits in NJ continue to be allocated to multifamily units, and many of the aging communities have seen a surge in new development as a result. Demand seems to be keeping up with supply, however, because New York City is making only small increases to rent, NJ cities that are lower cost alternatives to NYC (Jersey City, Hoboken, etc.) are feeling the pressure to stop increasing rent as well to stay competitive.

CHALLENGES FACING NEW JERSEY New Jersey has not made the state very friendly for taxpayers of any kind. In 2018, New Jersey instituted its millionaires’ tax which taxes income over $5 million at 10.75 percent. The state also raised the corporate business tax to 11.5% which is the second highest corporate business tax in the country. Some recent statistics also indicate that over 3 billion dollars in tax is paid annually from NJ residents to NY because they work in NY. While this benefits New York greatly, it continues to be a challenge for New Jersey as it tries to raise more tax revenue through means like legalizing sports betting and cannabis.

While there are many factors impacting real estate and the NJ economy in general, the ability to grow job opportunities in the state may have the greatest impact. Gov. Phil Murphy recently signed a bill that pushed a historic increase to the state’s minimum hourly wage. New Jersey will see a $1.15 increase this July, which will increase each year until 2024 when the hourly minimum wage will hit $15. Opposers of the law argue this mandate will put stress on small businesses already struggling to make ends meet, while labor advocates argue the current minimum wage of $8.85 is too little to afford even basic needs.

Looking ahead, New Jersey needs to focus on controlling the cost of doing business, managing its tax structure and allowing for an easier process to obtain development approval. During this time, Real Estate professionals such as I will continue to forecast the effects of change within our industry and focus on new opportunities to capture the competitive advantage.  Stuart Berger, CPA is a Partner in Sax’s Real Estate Practice. For more than 30 years he has provided industry-specific tax and advisory services. Stu can be reached at sberger@saxllp.com.

Sax Focus • www.saxllp.com Page 15

TECHNOLOGY CORNER

From the Weakest Link to a Human Firewall — Why You Should Invest in Security Training Written by:

Sax Focus • www.saxllp.com Page 16

SECURITY TRAINING Studies show that almost 85% of all data breaches are a direct result of human error, which is probably because more than half of employees can’t remember receiving any kind of formalized data security training. Many people seem to think that cybersecurity is only something for the IT department to worry about, that it’s somehow all about technology and administrative controls.

The fact is that humans are the weakest link. Things like firewalls, antivirus software, and data encryption might make things safer, but they’re only as effective at preventing breaches as the people using them. On the other hand, a trained employee can recognize things that artificial intelligence (AI) and computers can’t see, particularly when it comes to phishing scams that don’t rely on vulnerabilities in technology at all.

Overcome the Threat of Social Engineering Attacks Mention cybersecurity to anyone and most people will immediately think of computer viruses or a hooded hacker hiding in a basement and staring at a bunch of gibberish on a screen. Despite being extremely dangerous, programmers and the malware they create aren’t behind most data breaches. Most attacks are carried out by people who know little about modern technology but everything about manipulating unwitting people.

Even where malicious software is concerned, viruses and similar threats usually end up on a computer after a criminal dupes an unsuspecting user into downloading an email attachment or clicking on a link. That’s precisely how the ransomware epidemic started.

Social engineering tactics are also commonly used to steal login credentials or credit card information. Technology doesn’t necessarily need to have anything to do with it.

What is Social Engineering?

Think of it this way: A clever spear-phishing email might build trust by demonstrating personal knowledge about the victim to the point that the victim assumes they must be interacting with someone they know, such as a colleague or superior. In more sophisticated attacks, the email might even come from an otherwise legitimate account that’s been compromised.

Machines just aren’t clever enough to identify such threats. They don’t have the gut instinct needed to sense when something isn’t right. All they can do is detect threats based on specific instructions and patterns given to them. AI may be evolving fast, but it’s nowhere near being able to replace human-driven insight.

Unfortunately, most people have never received the training or experience necessary to detect a clever social engineering scam.

We’re not talking about obvious ploys like the diseased Nigerian prince who wants to move millions of dollars outside the country.

We’re talking about highly sophisticated and targeted scams carried out by patient criminals who are often smart enough to fool accomplished business leaders.

You can’t rely on technology alone – you need to offer training in the form of simulated phishing attacks that transform your team from the weakest link into the first and last line of defense.

Drive Security Awareness and Success with Ongoing Training Did you know that security-related risks are reduced by 70% when businesses invest in cybersecurity training and awareness?

Also, 93% of cybersecurity professionals agree that humans and technology need to work together to detect and respond to threats – Sax Technology Advisors being one of them.

Scams that work once are often carried out by copycats until people eventually wake up to the problem and the criminals try something new. Compound that with the fact that technology itself is constantly changing and evolving, bringing new threats and opportunities alike into the mix. This dynamic environment requires continuous training across every department, and no employee should be left out.

Today, more and more companies are waking up to the threats hackers pose, and the importance of taking action to fortify their company to combat cyber-attacks. Investing resources and efforts into implementing and maintaining a company’s cybersecurity defenses is extremely important, but as employees are on the front lines when it comes to breach attempts, businesses are missing the boat and taking considerable risks by not providing them with adequate training on cybersecurity. Security Awareness Training can create a strong line of defense against cyber-attacks. It helps employees to identify threats, and conditions them to properly respond and report issues to their IT team so quick action can be taken to mitigate damage.

Security Awareness Training includes education on how you can distinguish between a phishing email and a legitimate one, password security best practices, threat response once a phishing scam is detected or a breach has been made, and company device security. A Security Awareness Training program will also include simulated attacks, drills and tests throughout the company on an ongoing basis so the mindset for identifying threats is constant and always measured. Security Awareness Training should also be consistently administered and enforced from the top-down to ensure a culture of security awareness is fostered. The program requires constant evolution and practice to be effective.

While most business leaders recognize the importance of security awareness training, and it’s a regulatory requirement in many industries, it’s important not to make it all about the business.

Your employees should also see the value in it for themselves.

After all, you’ll be doing them a favor by teaching them to identify threats that could target them in their personal lives as well. In the end, we live in an age where digital data is the most valuable commodity of all and keeping it safe from bad actors is everyone’s responsibility.  Sax Technology Advisors provides a fully managed security operations center (SOC) and security awareness training programs to businesses as a customized solution to fit their unique needs and employees perfectly. If you want more focus on running your business instead of worrying about your data’s safety, reach out to a SAX Technology Advisor today at (973) 554-6050 or www.saxtechnology.com.

Sax Focus • www.saxllp.com Page 17

TRANSACTION ADVISORY CORNER

The Impact of Tax Reform on Private Equity Deals

Written by:

Stephen J. Ehrenberg, CPA, MBT Partner

Transaction Advisory Practice sehrenberg@saxllp.com

Sax Focus • www.saxllp.com Page 18

TAX REFORM IMPACT

The passage of the Tax Cuts & Jobs Act (“TCJA”) in December 2017 brought about sweeping changes to the tax environment as we know it. With large scale changes to individual, fiduciary and business taxation, tax professionals and business owners alike spent countless hours determining the impact this tax reform would have on their respective tax profiles. The effect on tax compliance was felt via extensive modifications to corporate tax rates, interest expense deductions and tax depreciation enhancements, along with the addition of the qualified business income deduction and the alterations to taxation of income earned overseas. In addition, the mergers and acquisitions market was clearly influenced as well.

As with the implementation of any new law, taxpayers across all industry groups were faced with uncertainties surrounding the execution of the new provisions of the TCJA. While the actual measurement of the impact will be determined in years to come, business owners and investors were likely hesitant to act upon buy/ sell transactions until the new provisions of the TCJA had been fully vetted. While the old adage “do not let the tax tail wag the proverbial dog” may still apply in these private equity deals, the revisions to the Internal Revenue Code (“IRC”) certainly should be analyzed prior to any acquisition, merger or disposition.

TCJA Considerations While the revisions to the IRC as a result of the passage of the TCJA were broad and far-reaching, there were a number of changes that deal-makers, investors and professional advisors should specifically consider as part of the due-diligence process. While the motivation for these private equity deals could be strategic, cash-flow driven or a combination of these and other factors, modifications to the IRC that could impact these transactions include: • Choice of Entity Prior to the implementation of the TCJA, C-Corporation taxpayers were subject to a top federal tax rate of 35%. The provisions of the TCJA decreased the federal tax rate to a flat rate of 21%.

Historically, U.S. C-Corporation taxpayers faced a potential disadvantage in comparison to their foreign counterparts, as non-U.S. tax rates were typically lower than 35%. As the TCJA has now leveled this playing field via a reduced federal tax rate, coupled with the fact that certain types of income earned overseas may be eligible for further tax rate reductions, the U.S. C-Corporation structure could be more attractive to buyers, as well as in post-transaction structuring alternatives.

• Qualified Business Income Deduction Referred to as the IRC Sec. 199A or “QBI” deductions, owners of pass-through entities (i.e., S-Corporations, partnerships and limited liability companies (“LLCs”) and sole-proprietorships) in certain industries were afforded a potential 20% reduction in the amount of income subject to federal tax. Taxpayers contemplating sale/ merger transactions now had reason to pause, as after-tax cash flow could increase as a result of the new QBI deduction, thus providing rationale to remain in the business.

• Qualified Opportunity Zones One of the long-standing tenets of the U.S. tax code surrounds tax deferral. While permanent savings are certainly attractive to all taxpayers, tax deferral strategies offer numerous benefits as well. While the provisions of the TCJA now limit IRC Sec. 1031 exchanges to real property only, investors now have a long-term tax deferral opportunity via investment in Qualified Opportunity Zone (“QOZ”) funds and businesses. Sellers looking to avoid immediate taxation of capital gains can deliberate the pros and cons of investments in QOZs. Conclusion As referenced above, the passage and implementation of the TCJA has significantly impacted business owners, investors and professional advisors across all industries and service lines. The analysis of the impact of the full scope of the new law is still a work in progress.

However, the drumbeat of the private equity market marches on. While the provisions of the TCJA referenced above are just a small slice of the potential tax planning opportunities and pitfalls impacting buy/sell and merger transactions, the full breadth of the TCJA should be considered as part of any private equity transaction.

For more information on how tax reform has impacted private equity deals, and how it may impact your business, please reach out to a Sax advisor at (973) 472-6250 or www.saxllp.com.

Stephen J. Ehrenberg, CPA, MBT is a Partner at Sax LLP and a member of the firm’s Manufacturing & Distribution and Transaction Advisory Practices. He can be reached at sehrenberg@saxllp.com.

• Interest Expense Deductions Under old law, corporate interest expense deductions for tax purposes were potentially limited by thin capitalization. In other words, if the debt-to-equity ratio did not meet certain thresholds, corporate taxpayers may have been subject to limitations on their annual interest expense deductions.

TCJA modifications to IRC Sec. 163(j) expand the potential limitations on the annual tax deduction to most taxpayers (not just C-Corporations) with average annual gross receipts in excess of $25M. Considering that many private equity deals are debtfinanced, the post-deal after-tax cash flow could be impacted by the new provisions surrounding interest expense deductions.

Sax Focus • www.saxllp.com Page 19

WEALTH MANAGEMENT CORNER

Getting to the Point of a Point

Written by:

Kyle R. Stawicki, ChFC® Partner-in-Charge

SAX Wealth Advisors kstawicki@saxwa.com

A

quick online search for “Dow rallies 500 points” yields a cascade of news stories with similar titles, as does a similar search for “Dow drops 500 points.”

These types of headlines may make little sense to some investors, given that a “point” for the Dow and what it means to an individual’s portfolio may be unclear. The potential for misunderstanding also exists among even experienced market participants, given that index levels have risen over time and potential emotional anchors, such as a 500-point move, do not have the same impact on performance as they used to. With this in mind, we examine what a point move in the Dow means and the impact it may have on an investment portfolio.

IMPACT OF INDEX CONSTRUCTION The Dow Jones Industrial Average was first calculated in 1896 and currently consists of 30 large cap U.S. stocks. The Dow is a priceweighted index, which is different than more common market capitalization-weighted indices1.

An example may help put this difference in weighting methodology in perspective. Consider two companies that have a total market capitalization of $1,000. Company A has 1,000 shares outstanding that trade at $1 each, and Company B has 100 shares outstanding that trade at $10 each. In a market capitalization-weighted index, both companies would have the same weight since their total market caps are the same. However, in a price-weighted index, Company B would have a larger weight due to its higher stock price. This means that changes in Company B’s stock would be more impactful to a price-weighted index than they would be to a market cap-weighted index.

The relative advantages and disadvantages of these methodologies are interesting topics themselves, but the main purpose of discussing the differences in this context is to point out that design choices can have an impact on index performance. Investors should be aware of this impact when comparing their own portfolios’ performance to that of an index.

1. Market capitalization is the product of price and shares outstanding.

Sax Focus • www.saxllp.com Page 20

INDEX CONSTRUCTION IMPACT HEADLINES VS. REALITY Movements in the Dow are often communicated in units known as points, which signify the change in the index level. Investors should be cautious when interpreting headlines that reference point movements, as a move of, say, 500 points in either direction is less meaningful now than in the past largely because the overall index level is higher today than it was many years ago.

Exhibit 1 plots what a decline of this magnitude has meant in percentage terms over time. A 500-point drop in January 1985, when the Dow was near 1,300, equated to a nearly 39% loss. A 500-point drop in December 2003, when the Dow was near 10,000, meant a much smaller 5% decline in value. And a 500-point drop in early December 2018, when the Dow hovered near 25,000, resulted in a 2% loss.

Exhibit 1. Hypothetical 500-Point Decline of the Dow Measured in Percentage Terms

Dow Jones and S&P 500 data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. The chart illustrates what a 500-point drop would have been in percentage terms for the Dow Jones Industrial Average on a daily basis. It assumes a 500-point loss took place each trading day from January 1, 1985, to February 1, 2019, and uses daily historical closing values of the Dow Jones Industrial Average to compute the percentage change. Percentage change does not indicate the actual change in the Dow during the period shown. Actual results may vary.

(continued on page 22)

Sax Focus • www.saxllp.com Page 21

HOW DOES THE DOW RELATE TO YOUR PORTFOLIO? While the Dow and other indices are frequently interpreted as indicators of broader stock market performance, the stocks composing these indices may not be representative of an investor’s total portfolio.

For context, the MSCI All Country World Investable Market Index (MSCI ACWI IMI) covers just over 8,700 large, mid, and small cap stocks in 23 developed and 24 emerging markets countries with a combined market cap of more than $50 trillion. The S&P 500 includes 505 large cap U.S. stocks with approximately $23.8 trillion in combined market cap2. The Dow is a collection of 30 large cap U.S. stocks with a combined market cap of approximately $6.8 trillion3.

Exhibit 2. Performance of MSCI ACWI IMI, S&P 500, and Dow by Calendar Year

Dow Jones and S&P 500 data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2019, all rights reserved. MSCI ACWI IMI is the MSCI All Country World Investable Market Index (net dividends). Their performance does not reflect fees and expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

Even though the MSCI ACWI IMI, S&P 500, and Dow are all stock market indices, each one tracks different segments of the market, so their performance can differ significantly over time, as shown in Exhibit 2. Since 1995, the Dow has outperformed the S&P 500 and MSCI ACWI IMI by an average of 0.5% and 3.3%, respectively (based on calendar year returns). However, relative performance in individual years can be much different. For example, in 1997, the Dow underperformed the S&P 500 by 8.4% but outperformed the MSCI ACWI IMI by 13.9%.

It is also important to note that some investors may be concerned about other asset classes besides stocks. Depending on investor needs, a diversified portfolio may include a mix of global stocks, bonds, commodities, and any number of other assets not represented in a stock index. A portfolio’s performance should always be evaluated within the context of an investor’s specific goals. Understanding how a personal portfolio compares to broadly published indices like the Dow can give investors context about how headlines apply to their own situation.

CONCLUSION News headlines are often written to grab attention. A headline publicizing a 500-point move in the Dow may trigger an emotional response and, depending on the direction, sound either exciting or ominous enough to warrant reading the article. However, after digging further, we can see that the insights such headlines offer may be limited, especially if investors hold portfolios designed and managed daily to meet their individual goals, needs, and preferences in a broadly diversified and cost-effective manner. Kyle R. Stawicki, ChFC® is the Partner-in-Charge of SAX Wealth Advisors, a registered investment advisory firm and financial planning subsidiary of Sax LLP. Kyle has over a decade of experience as a Wealth Advisor and retirement plan fiduciary. He can be reached at kstawicki@saxwa.com.

2. 500 companies are included in the S&P 500 Index. However, because some of these companies have multiple classes of stock that meet the requirements for inclusion, the total number of stocks tracked by the index is 505.

3. Market cap data as of January 31, 2019.

Sax Focus • www.saxllp.com Page 22

Submission Window Now Open for the

2019 Founder's Award

Sax is thrilled to offer local not-for-profits the chance to win a $15,000 unrestricted gift to support their organization’s mission.

This year's theme:

What's Your Impact?

Through the Words of a Beneficiary Nonprofits are invited to submit a non-professional video of one beneficiary of the organization’s programs and services, responding to questions issued in the Founder’s Award application package.

The deadline to submit is Friday, September 20.

Access the Application, and learn more about the Founder's Award here.

Sax Focus • www.saxllp.com Page 23

CONTACT US Clifton, NJ 973.472.6250 Pennington, NJ 609.737.6600 New York, NY 212.661.8640 info@saxllp.com www.saxllp.com