On Balance July | Aug 2016

July | August 2016 | Vol. 12 No. 4 A publication of the Wisconsin Institute of CPAs | wicpa.org

ROCK SOLID Dave Kerber, CPA | 6 Managing partner, KerberRose SC

Plus: Shore up a successful succession plan | 10 Protect your nonprofit’s bottom line against cyberthreats | 22 Leadership tips to effectively navigate change | 26

Big Firm Opportunity; Small Firm Personality KerberRose believes in the importance of encouraging our team members to reach all of their professional and personal goals while being committed to helping our team balance family, work and community.

Whether you are a recent graduate or seasoned professional, a career that is challenging and rewarding is waiting for you at KerberRose.

Visit us at www.kerberrose.com/careers and see what opportunities KerberRose can bring to you!

RECENTLY RANKED IN THE

TOP 20% OF THE MOST FLEXIBLE WORKPLACES IN A NATIONWIDE SURVEY

Shawano l Green Bay l Appleton l Oshkosh l Clintonville Sister Bay l Sturgeon Bay l Wausau l Rhinelander

A publication of Wisconsin Institute of CPAs | wicpa.org

July/August 2016 Vol. 12 No. 4

6 Features

Columns

6 Rock solid: Succession planning is just good business

20 TAX

Twenty-eight years and 18 acquisitions later, KerberRose SC has learned how to manage and plan for succession.

Develop a plan and groom a successor as early as possible to ensure a smooth transition for your business.

By Steven A. Brezinski, J.D.

16 Succession planning for a family-owned business: Ideas for successfully transferring ownership to the next generation These steps can prevent common issues encountered in family business succession planning.

20

Real estate tax tips for owners and investors Recent increasing values bring more tax-driven opportunities for property investors who want to buy or sell their holdings.

By Dave Kerber, CPA

10 It’s a plan: Succession planning for the sole practitioner and small multiple-owner accounting firm

10

By Daniel B. Geraghty, CPA, J.D. 22 TECHNOLOGY

Cybersecurity tips for nonprofits Avoid potential costly cyberthreats that can damage your nonprofit’s bottom line.

By Nicholas J. Allen, CPA

26 SOFT SKILLS

Leadership communication during times of change Effective leaders show poise, agility and patience to minimize the impact of uncertainty at their companies.

By Stephanie A. Barganz-Ryan, CPA, SPHR, CFF, CVA, CGMA

Departments 2

Odds & Ends | news briefs

3 Outlook | chair’s letter 5

Membership Matters | member benefits

15 In Touch | president & CEO’s message 19 Kudos | members in the news 19 Memorials | departed members

By Mark Smith, CPA, MST wicpa.org

On Balance

July | August 2016

1

Odds & Ends

2013 Apex Award for Publication Excellence 2016–2017 WICPA OFFICERS/BOARD MEMBERS Chair Steven G. Handrick, CPA, CGMA Chair-elect William L. Komisar, CPA, J.D. Past-chair Jean M. Hansen, CPA, MBA, CGMA Secretary-treasurer Katherine L. Hauser, CPA, CGMA Directors Michael D. Akers, CPA, CBM, CFE, CGMA, CIA, CMA, Ph.D. Lucien Beaudry, CPA, J.D. Ryan Hanson, CPA, CGMA Debra L. Lenz, CPA, CGMA, CIA, CRMA Terri M. Lillesand, CPA Matthew A. Los, CPA Scott Miller, CPA, ABV, PFS, CVA Matthew J. Schaefer, CPA, CGMA Wendi M. Unger, CPA AICPA Council Neil R. Keller, CPA, ABV, CVA Nicholas S. Lascari, CPA, CEA, CGMA President & CEO Dennis F. Tomorsky, CPA, J.D., CGMA Chief Financial & Operating Officer Tammy Hofstede Vice President of Communications Amy E. Gaeth Editor Cynthia M. Hodnett

Shannon M. Zur, CPA read “Start Saving, Henry!” to kindergartners

at Beautiful Savior Lutheran School in Waukesha on April 29. Zur and other WICPA members read money-themed books to nearly 1,400 Wisconsin elementary students through a financial literacy program called Reading Makes Cents held each April. Photo by Janet McMillan.

Copy Editor Joan Bahr Design & Layout Brett Stallman Advertising Manager Ellen Engel Printing The Printery, An RR Donnelley Company Join us online!

On Balance is published six times a year by the Wisconsin Institute of Certified Public Accountants (WICPA). Change of address should be sent to: Membership, W233N2080 Ridgeview Pkwy, Suite 201, Waukesha WI 53188; Phone: 262-785-0445 or 800-772-6939 (WI/MN); Fax: 262-785-0838; email: jessica@wicpa.org. Statements and opinions expressed are those of the authors and not necessarily those of the WICPA. Publication of an advertisement does not constitute an endorsement of the product or service by On Balance or the WICPA. Articles may be reproduced with permission. © Copyright 2016 On Balance.

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On Balance

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WANT YOUR BUSINESS MENTIONED IN ODDS & ENDS? Email your announcement to cynthia@wicpa.org.

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{ Outlook | chair’s letter } “Clients, employees, investors, board members and communities want to know about succession plans that are in place to take care of their current and future needs and community stability.”

Make succession planning a success at your company

S

uccession is defined as a process in which someone automatically takes an official position or job after someone else. This edition of On Balance focuses on succession planning, the do’s and don’ts for sole practitioners and small accounting firms. This issue also highlights succession planning for family-owned businesses.

Succession occurs for several reasons, including: • A company’s growth through mergers and acquisitions as a part of a strategic plan.

• Business continuity.

• As an exit strategy for current owners who don’t have a next generation management team in place to lead the business.

• A combination of the previously mentioned reasons.

About 64 percent of CPAs are over the age of 50, according to The Rosenberg MAP Survey. If you look at your clients' management teams or your internal management team, you may see the same demographic.

Many owners of CPA firms and family-owned businesses who are baby boomers are planning to retire, reduce their hours at work, or have taken their company as far as they can.

To remain relevant to their client base, these professionals need to grow their companies beyond what the current management group can accomplish or afford.

Numerous business owners and entrepreneurs are focusing on growing their companies and having the financial resources to pay bills when due. Retirement had been the last thing on their minds, but now that the time is here, they might not have groomed an individual or team to succeed them.

Also, many companies’ key employees are the same age as the company’s retiring owner. Younger management team members might have all the energy and drive, but they might not have the financial wherewithal to buy the company.

The owners of businesses looking for an exit strategy

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aren’t the only ones concerned about succession. Clients, employees, investors, board members and communities want to know about the succession plans that are in place to take care of their current and future needs and community stability. Many stakeholders’ concerns transcend beyond one of the company leader’s retirement. For example, the stakeholder may be thinking, “What happens to my business if you get hit by a bus?”

According to the American Institute of CPAs, 75 percent of the workforce will be millennials by 2025. They have the drive, energy and talent. Owners of businesses looking to retire have the history and knowledge. As we work toward the succession of our businesses, there may be opportunity right outside our doors.

Steven G. Handrick, CPA, CGMA is partner of Hawkins Ash CPAs in Green Bay. On Balance or July | August 2016 Contact him at 920-337-4541 shandrick@hawkinsashcpas.com.

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Mix & Mingle WICPA NETWORKING EVENTS FOR YOUNG PROFESSIONALS Further your career, strengthen your professional image or just make new friends at the WICPA's 2016 Mix & Mingle networking events.

Tuesday

AT EACH EVENT:

14

Network with other like-minded professionals

Wednesday

Participate in entertaining activities exclusive to each event

June

20 July

Tuesday

Visit the Committee Corner Enjoy food and drinks

TO REGISTER: Go to wicpa.org/YPEvents $30 per event

26

Stillmank Brewery | Green Bay 215 N. Henry St.

5:30 – 7:30 p.m.

Brewery Tour & Meet the Brew Master

UW-Madison Union South | Madison 1308 W. Dayton St. 5:30 – 7:30 p.m.

Babcock Hall Ice Cream Tasting

Spectrum Investment Advisors | Mequon 6329 W. Mequon Rd. 7:30 – 9:30 a.m.

July

Investing 101 Presentation

Tuesday

Hy-Vee | Fitchburg

18

2920 Fitchrona Rd. 7:30 – 9:30 a.m.

October

Breakfast Demo & Wellness 101 Presentation

Thursday

History Museum at the Castle | Appleton

20 October

Wednesday

7

December

330 E. College Ave. 5:30 – 7:30 p.m.

Tour Museum Exhibits

Pettit Center | Milwaukee 500 S. 84th St.

5:30 – 7:30 p.m.

Ice Skating (optional)

{ Membership Matters | Pearl Insurance } “Pearl Insurance became an affinity partner of the WICPA more than a year ago. Its world-class customer service is known in the industry.”

Meet Pearl Insurance

J

ack Pearl founded Pearl Insurance in Peoria, Ill., in 1954. At that time, Pearl took grassroots marketing quite literally, driving down country roads in his truck, putting flyers with his face on them in every mailbox.

After the first big snowfall, he’d go back and knock on the door of every farmhouse, assisting farmers who recalled his face from the flyers. From there, Pearl Insurance was born, with chairman Jack Pearl at the helm.

More than 60 years later, Pearl Insurance is recognized as one of the top brokers and administrators nationwide and a leader in the professional liability insurance industry.

Pearl Insurance has existed for one reason: To deliver comprehensive solutions that protect what’s truly important to its customers. It continues to evolve its plans to stay ahead of the curve as an industry leader with coverage that’s responsive to the needs of accounting professionals.

Pearl benefits include: • Risk management discounts from 5 to 7.5 percent.

• Privacy and information security coverage of $25,000.

• Moonlighting coverage for equity partners.

• Extended reporting period (“tail” coverage) available for equity partners.

• Additional coverage for Internal Revenue Service Section 7216 defense.

• Full waiver of deductible for early claims resolution.

• Longevity credit for continuous WICPA membership starting at three years.

• More coverage benefits only available to WICPA members.

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Pearl Insurance became an affinity partner of the WICPA more than a year ago. Its world-class customer service is known in the industry. Numerous resources are available to members, whether it’s tapping their consultants, using their risk management library, or subscribing to its Accountants Professional Liability Insurance Blog. Topics range from cybersecurity to reducing costs. Subscribe at http://pearlinsurance.com/Blog/Accountants.

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While you may not be able to prevent legal claims altogether, limit your risks and costs with professional liability insurance that fits your specific needs. To learn more about Pearl Insurance benefits for WICPA members, visit pearlinsurance.com/wicpa, or contact Brooke King at 309-679-0239.

Take full advantage of your membership, saving you time and money, by becoming familiar with all our benefit providers. Visit the Member Benefit Marketplace page of the WICPA website at wicpa.org/marketplace.

Ellen Engel is the advertising manager at the WICPA. Contact her at 262-785-0445 On Balance July | August 2016 ext. 4513 or ellen@wicpa.org.

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Dave Kerber, CPA credits years of effective leadership for his firm's solid succession planning.

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On Balance

July | August 2016

wicpa.org

Photography by Mark Hines

ROCK SOLID Succession planning is just good business

By Dave Kerber, CPA

I

’m Dave Kerber, CPA, managing partner and a founding owner of KerberRose SC. In the 1970s, I moved to the Shawano area from Milwaukee because I wanted to live and work in the beautiful Wisconsin north woods and spend time camping, hunting and fishing.

I was hired by a small CPA firm in Shawano, but I decided there were more opportunities than what the owner was willing to offer me.

So, in the early 1980s, I left that firm to establish my own CPA firm.

After a few years, I combined my firm with two other local CPAs, one being Larry Rose. Together, we worked to develop new opportunities to attract and retain talented staff. As our firm grew, we expanded our client base to include more diverse clients and provide staff with opportunities for growth.

Within the first two years, our group’s shared vision led us to acquire the practices of two small sole proprietors who were at retirement age.

These sole proprietors had no succession plans, and selling their practices was the best option. We learned a lot from these early acquisitions, and they formed the basis of what's currently the plan for succession

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"Talented and ambitious staff are the foundation to any successful CPA firm." at KerberRose. Over the past 28 years, we have experienced 18 mergers and acquisitions. With every addition to our firm, we gained insight on how best to manage a CPA firm and plan for eventual succession.

We learned that each succession is unique. Some are planned and occur over many years. Others are sudden and unanticipated, like in the case of an accident or illness. Whatever the circumstances, there are steps you can take now to help you prepare for succession.

Hire and retain great people Talented and ambitious staff are the foundation to any successful CPA firm. The individuals who will lead your firm in the future are looking for challenges and opportunities today.

As many small and midsize firms know, the firm is sometimes a training ground for young staff. Many five- to seven-year staff can be lured to jobs at larger firms or in industry. To retain more young leaders, our firm offers ownership and leadership opportunities to associates much earlier than at most CPA firms.

While unconventional from standard practices of equity purchasing, we decided to allow staff to purchase equity through interest free payroll deductions over a 10-year period.

This financing option has allowed our leadership to introduce new partners to the firm based on their skills and talent, rather than their financial ability. This allows staff who join us to become equity partners in their late 20s and early 30s, a time when financial responsibilities of young professionals are often allocated to raising families, paying off educational costs and purchasing homes. Enabling our firm’s future leaders to meet both their professional and personal obligations helped us promote diversity in terms of age and gender among our leadership. Our broad and diverse ownership base is a key part of our firm’s succession plan.

Talented leaders are also essential during a merger or acquisition. When two firms merge, it’s not a case of one firm conquering another, it’s an opportunity to learn and improve.

Successful mergers and acquisitions provide more opportunities for everyone and increase the strength of the firm by expanding the diversity of services provided.

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On Balance

July | August 2016

Kerber takes a break from his busy schedule in downtown Shawano.

Embrace technology Technology is also important to the succession of a CPA firm.

Our firm has always strived to be on the cutting edge of new technological processes and developments. Providing staff with the tools to make them more successful is another key piece in attracting and retaining talent. If your firm isn’t up-to-date with technology, you’re putting your clients and staff at a disadvantage.

Cutting-edge technology and standardized systems across a firm reduces frustration, increases efficiency, improves communication and allows employees to excel. Young professionals realize the value of the latest technology, and aspiring staff don’t want to invest in a firm that’s not keeping up with its peers.

CPAs who wish to join or be acquired by another firm will also do well to embrace technology. If your clients and staff work with the latest software and tools, your firm appears more attractive to other firms. While specific software may vary from firm to firm, the key is to keep your staff up-to-date on how to use technology to best serve your clients.

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Reward staff for performance Having an effective performance management system is integral to the growth and success of the staff and firm.

Our firm adapted a performance management system that’s offered through the American Institute of Certified Public Accountants’ Private Companies Practice Section. The tools in the performance management system were easily adapted to meet our specific needs. This tool is free and is available to all firms (http://tinyurl.com/aicpaspcps).

The result is that each employee understands the competencies that need to be mastered to rise to the next level in the firm. Promotions at our firm are performance based rather than tenure based. Staff who are promoted and compensated based on performance are likely to stay with the firm long term, and they are also more attractive to an acquiring firm.

Develop a culture of cooperation and growth The culture of an accounting firm defines how each member is expected to approach his or her job. Our staff are encouraged to get involved and meet others in our profession. Our firm is a member of Prime Global, an association of CPA firms. This has created great opportunities for us to meet our peers throughout the world, share best practices and learn about the procedures

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and processes that have worked successfully in their firms.

We also invest in both internal and external leadership training. This begins with training for our staff accountants, senior and in-charge accountants and manager-level individuals.

Our staff attend training at various locations, both in-state and out-of-state, where they learn technical and soft skills. Included in this program is a comprehensive internal mentoring program.

We also offer training focused on developing leadership skills and learning the nuances of firm management. This program is designed to prepare our future partners for success in leading the next phase of our firm’s growth.

Plan for your succession now Every CPA firm, large or small, should plan for succession.

Hire great people, give them the best tools available, compensate them for performance, and encourage their professional growth.

These are steps for creating a great CPA firm that's successful now and for years to come.

Dave Kerber, CPA is managing partner at KerberRose SC in Shawano.

Contact him at 715-526-9400 or david.kerber@kerberrose.com.

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IT'S A PLAN:

By Steven A. Brezinski, J.D.

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On Balance

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Succession planning for the sole practitioner and small multiple-owner accounting firm wicpa.org

A

successful succession plan accomplishes at least three goals: preserves and unlocks the business value of the departing accountant’s practice, ensures that his or her clients’ needs are addressed, and allows a business owner/CPA to plan his or her affairs. Unfortunately, sometimes the plan is created on short notice. However, the best advice is to start early, and develop a plan.

Sole practitioner Succession planning is different for a sole practitioner and a multiple-owner accounting firm. A sole practitioner is concerned about how services are performed in case of an unplanned absence, such as disability, medical emergency or death. A sole practitioner should consider entering into a practice continuation agreement with another accounting firm to ensure that the practice continues on a short-term basis if there’s an unexpected absence. His or her staff can keep the office operating on a day-to-day basis. However, his or her clients need to know the practice will continue.

However, if there’s no assurance, the value of the practice will diminish, and clients will leave.

For a long-term succession plan, a sole practitioner has several options: sell his or her practice, merge the practice into another practice, or groom another accountant from his or her staff as the successor to ultimately purchase the practice. Typically, a sale or merger of a sole practitioner’s accounting practice involves transactions with an outsider.

The terms and conditions are negotiated. However, the seller should expect that the purchase price will depend on

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revenues derived from clients retained by the buyer after the sale and that a transition period of a year or more will be required for the selling accountant to introduce the buyer to clients and ensure a smooth transition.

There are various rules of thumb regarding price. Yet, one times annual revenues (or less) is a common starting point with payments made over several years and tied to revenues derived from the seller’s book of business. Down payments are usually minimal. If real estate is involved, it’s often leased with an option to purchase or sold with the buyer financing the purchase through a lender.

In the years ahead of the sale, a sole practitioner should heed the advice he or she has probably given to many business owners: Clean up your balance sheet, collect or write off old accounts receivable, and manage your business with an eye toward how it’ll look to a buyer.

Small multiple-owner firm Transactions involving succession planning at a small multiple-owner accounting firm are usually sales to an insider rather than an outsider. The owners/accountants will — in a partnership, operating or shareholder agreement, or a separate buy/sell agreement — establish a means for a retiring or deceased owner to be paid for his or her business.

Valuations are often accomplished by formula, which can either be the value of the entire firm’s practice times the seller’s ownership percentage, or based on the seller’s individual book of business or a combination of the two. It’s more common for the price to be based on the seller’s book of business, even in an equal partnership.

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“A successful succession plan typically takes several years to develop and a number of years to implement. Because the payments often depend on the retention of clients, it’s important for both buyer and seller to ensure that the firm’s clients are well-cared for and are in good hands.”

Generally, the amount paid will be less than in an outsider transaction because one goal is to allow a new generation of accountants to become owners. Also, charging full value might not leave sufficient upside for the new owner to find ownership attractive.

In a multiple owner firm, transitioning services from the retiring accountant to other individuals in the firm should be easier. A firm should, however, be sensitive to whether its compensation system gives a retiring accountant a financial incentive to transition their book of business in the years ahead of their retirement. One approach is to tie the retiring accountant’s payments to client retention after retirement to provide an incentive to ensure that clients are transitioned or to compensate the retiring accountant for work assisting in a transition instead of billed services.

The best laid plans Unfortunately, not all succession plans involve a wellplanned retirement. In cases where an owner dies or

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becomes disabled, the transition of clients must often occur quickly and without participation by the owner. A firm should informally assign another accountant to each owner’s clients so clients aren’t ignored.

Using life insurance to fund cross-purchase agreements is common. The purchase price is sometimes based on the amount of life insurance available rather than the fair market value of the practice, so it doesn’t need to be the same price paid at retirement. Life insurance can be owned by the entity itself or owned by the other owners. Life insurance premiums for cross-purchase insurance won’t be deductible as a business expense regardless of who owns the life insurance. If the other owners are the owners of the life insurance, the firm should consider using a trust or LLC as the beneficiary of the life insurance policy to ensure that the proceeds are used for the cross purchase and not diverted.

If the individuals own the policies and are the beneficiaries, his or her creditors or ex-spouses may obtain

wicpa.org wicpa.org

the proceeds to satisfy unrelated obligations. While these circumstances are fortunately uncommon, having a life insurance-funded succession plan fail because the insurance proceeds are diverted will be a disaster. Disability buyout insurance is also available, although the use of this product is relatively rare, usually because it has a reputation for being expensive.

It’s never too early to start planning. A successful succession plan typically takes several years to develop and a number of years to implement. Because the payments often

depend on the retention of clients, it’s important for both buyer and seller to ensure that the firm’s clients are well-cared for and are in good hands.

Steven A. Brezinski, J.D. is a partner at Axley in Madison.

Contact him at 608-283-6723 or sbrezinski@axley.com.

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On Balance

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SPECTRUM

SM

INVESTMENT ADVISORS

Thank you

to all who attended the

11th Annual Retirement Plan Investment Seminar Co-sponsored by Spectrum Investment Advisors & The Wisconsin Institute of CPAs

- The event was held at the Country Springs Hotel in Waukesha, WI on June 22, 2016 -

2016

spectruminvestor.com Advisor Leadership Award

Semi-Finalist 2015

800-242-4735

The Wisconsin Institute of CPAs, NAPA, PLANSPONSOR and Spectrum Investment Advisors are not affiliated. The National Association of Plan Advisors (NAPA) 401(k) Advisor Leadership Award recognizes leadership, innovation and contributions to the retirement plan industry with sales, marketing and establishment of 401(k) plans. In 2015, Spectrum was one of 10 finalists selected from a field of 100 participants. Finalists were selected based on acknowledgment of peers and customers, demonstrated expertise in plan design innovations or products, results in terms of plan growth or participant retirement readiness, participation and leadership in industry events and committees, expertise sought by peers, regulators and policy makers. The rating is not indicative of the advisors’ future performance. The 2016 PLANSPONSOR Retirement Plan Adviser Large Team of the Year finalists are advisers who have a majority of business revenue derived from employer-sponsored retirement plans, who serve as a fiduciary, are committed to fee-based compensation and are using outcome-based metrics of plan success with clients. A large team is a practice with 11-25 people (including advisers and support staff ). In 2016 Spectrum was one of five finalists in the Large Team category out of 40 companies reviewed by PLANSPONSOR. The rating is not indicative of the advisors’ future performance.

{ In Touch | president & CEO’s message } “The most effective organizational successions result from a positive workplace culture that encourages continuous development of individuals for succession readiness.”

Succession readiness: Is your business prepared?

S

uccession planning requires more than simply finding a buyer for a business or a replacement for a leader. Optimizing outcomes from ownership and leadership transitions requires "succession readiness.”

The most effective organizational successions result from a positive workplace culture that encourages continuous development of individuals for succession readiness.

Building colleagues' skills and their understanding of how an organization benefits those it serves will create a resilient and agile work environment capable of innovating and quickly adapting to changes that often accompany successor owners and leaders. These workplace characteristics also increase the value and price of a business, while providing a solid foundation for an individual who’s succeeding to a new leadership role in an organization.

Moreover, succession readiness is critical for sound risk management. Waiting to plan for succession until after a crisis has created an urgent need for immediate succession will leave an organization vulnerable to negative disruption.

A pipeline of internal talent minimizes potential negative outcomes in the event of the sudden unavailability of an owner or a leader.

An organization's strong support of thoughtful careerpathing for all workers to both enhance skills in their current positions and to explore areas outside their educational or historical workplace focus is another important component of succession readiness. Such career-pathing has the additional benefit of building collaboration, communication, and other skills through cross-training, which further reduces organizational risk.

Equally important to effective succession planning and readiness is developing and implementing transition action steps both before and after succession transactions.

Pre-succession activities include communicating with employees about an organization's succession planning. Such communication can enhance a workplace culture of trust, and reduce the potential for negative employee speculation.

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Human nature often results in individuals filling information gaps with negative opinions. This can fuel employees' anxiety, reduce efficiency, and result in employee turnover at a time when an organization's succession activities can leave it most vulnerable to negative outcomes from such turnover.

Post-succession activities include communicating specific planned changes with employees to reduce anxiety, soliciting employee input regarding potential changes to maximize employee support for organizational changes, and thoughtfully onboarding leaders who take on new organizational roles. Onboarding requires strong support for new leaders from other organizational leaders, including providing mentoring and executive coaching services.

Please let me know of any resources you believe the WICPA could provide to maximize your success and the success of your organization.

Dennis F. Tomorsky, CPA, J.D., CGMA is president & CEO of the WICPA. Contact him at 262-785-0445 ext. 4519OnorBalance dennis@wicpa.org.

May | June 2016

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Succession planning for a family-owned business: Ideas for successfully transferring ownership to the next generation 16

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characteristic that many familyowned businesses share is the need for succession planning. Whether succession planning occurs from selling the business to an outside third-party, or transferring the business to the next generation, every familyBy Mark Smith, owned business will, at some point, CPA, MST face this hurdle. Business owners should seek a professional advisor to guide them through this process.

This article explores several common issues and planning strategies for transitioning a family-owned business to the next generation.

Often, the biggest challenge for many businesses owners is deciding when and how to transfer ownership while still retaining control. Often, family-owned businesses are organized with one class of voting stock. To maintain control of the corporation, a business owner must retain ownership of greater than 50 percent of the stock. This can become problematic, should the business succession plan warrant a transfer of greater than 50 percent interest to the next generation.

Nonvoting shares versus voting shares In this case, one solution is to recapitalize the company so there are two classes of stock: voting and nonvoting. The recapitalization can be designed so there’s a significant number of nonvoting shares compared to voting shares (up to 99-to-1), enabling the business owner to transfer a large portion of the company stock while maintaining complete control. This structure also allows the business owner to transfer a significant portion of the value of the company to the next generation while retaining control.

For example, John owns 100 percent of 100 shares of voting common stock of XYZ Company. Also assume that John has three children who are vital to the future of the business and contribute

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to the value increase in the business. As part of his succession plan, John wants to transfer 25 percent of the company to each child.

However, John isn’t sure which child will emerge to effectively run the business. John could recapitalize XYZ Company to better position himself to transfer 75 percent of the ownership value to his children.

Ninety-nine shares of nonvoting stock could be issued for each share of voting stock. Then, John would transfer 75 percent of the 9,900 shares of nonvoting stock. John maintains voting control with the 100 voting shares while transferring ownership and future appreciation in the stock value now so the children’s efforts in the growth of the business will inure to their benefit. Then, when John is closer to retirement and when a leader emerges among his children, John can transfer the voting stock and any remaining nonvoting stock strategically to his three children.

Transfer stock or create a trust A second issue to consider when planning for the succession of a family-owned business to the next generation is whether to transfer the stock outright to the individual or in trust for his or her benefit. Transferring stock to a trust can provide income tax, estate planning and asset protection benefits. For example, the use of a grantor trust to hold a family-owned business’ stock allows the stock and the distributions from the stock to grow income tax-free.

This occurs because a grantor trust doesn’t pay its own income tax, but rather the grantor of the trust pays the tax allowing the trust assets to grow untaxed.

Additionally, transferring assets to a properly drafted trust can save estate taxes for several generations. Further, assets held in trust can be protected from creditors and divorce. Therefore, any time asset protection is an issue, use of a trust should be strongly considered. Often, the nonvoting stock is what’s transferred into the trust while the voting stock may be transferred to the individual trust beneficiaries. Transferring company stock outright to an individual is more common and is preferred if it’s unnecessary to consider estate tax and asset protection issues.

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“Business owners should consult with a professional advisor to further discuss their own succession planning goals to adequately prepare to pass on their legacy.”

All in the family A third issue to consider when planning for the succession of a family-owned business to the next generation is when to transfer control, i.e. a majority of the voting stock, to the next generation. For many business owners, it’s beneficial for the next generation to first demonstrate their ability, willingness and commitment to fill leadership and management roles before controlling ownership is shifted to them. When the next generation has successfully mastered these roles and can make strategic decisions, then controlling

ownership of the company is transferred to the next generation.

Another important issue to consider when transferring a business to the next generation is the continuity of ownership and management of the business if one of the owners is unable to continue as an owner, due to incapacity, divorce or death.

A well-drafted, buy-sell agreement can accomplish this goal. Buy-sell agreements are an important part of a succession plan, as they will dictate who can be an owner, and how and when ownership will shift when someone dies, becomes incapacitated or divorced. These terms will also dictate

the fair market value of the business interest when it is transferred within the family.

The succession planning process can

be challenging and rewarding. Business

owners should consult with a professional advisor to further discuss their own

succession planning goals to adequately prepare to pass on their legacy.

Mark Smith, CPA, MST is a partner with Baker Tilly Virchow Krause, LLP in Appleton. Contact him at 920-739-3420 or markalan.smith@bakertilly.com.

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kudos Chris J. Augustian, CPA, chief executive officer of BayCare Clinic, was named chairman of the board of managers at Aurora BayCare Medical Center, according to Manitowoc Herald Times Reporter.

Jeffrey W. Danen, CPA, CVA was promoted to partner-in-charge of Hawkins Ash CPAs, Green Bay. Jeffrey W. Danen, CPA, CVA

Leary Jacobson, CPA

Leary Jacobson, CPA was hired as an audit senior at Sikich LLP.

Karen T. Oram

Karen T. Oram, an accountant and financial software advisor at Phillips Tax & Accounting in Oshkosh, earned her certified public accounting designation, according to New NorthB2B. Lacey M. Puls, CPA of Smith & Gesteland in Middleton was named a recipient of the Elijah Watt Sells Award.

Lacey M. Puls, CPA

Robin Lutz, CPA, MT was hired as director of tax services at Huberty & Associates, S.C. in Fond du Lac.

Want your

promotion or award mentioned in Kudos?

Email your announcement and photo in JPG format to cynthia@wicpa.org.

memorials Raymond J. Peterson Jr., CPA

Donald J. Tess, CPA

Raymond J. Peterson Jr., CPA died April 12, according the Kenosha News. He was 48. Peterson earned his bachelor’s degree in accounting from the University of Wisconsin-Parkside in 1995. He earned his certified public accounting designation and joined the WICPA in 1999. The Pewaukee resident worked as a CPA at Konecranes in West Allis.

Donald J. Tess, CPA died April 26, according to the Dodge County Independent News. He was 61. Tess pursued a bachelor's degree in accounting from the University of Wisconsin-Oshkosh in 1972. He later earned his certified public accounting designation and joined the WICPA in 1989. The Fox Lake resident worked as a CPA at Badgerland Financial for 30 years.

(1967–2016)

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(1954–2016)

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{ Tax | Real estate }

REAL ESTATE TAX TIPS for owners and investors

R

By Daniel B. Geraghty, CPA, J.D.

eal estate is as old as dirt. Like dirt, changes in the taxation of real estate are sometimes slow to develop. On the business side, the overall market for real estate continues to rebound from recessionary levels. Increasing values provide more opportunities for real estate investors looking to either finance or to exit their holdings.

Many of these opportunities are tax driven. Some general tips and observations follow.

Property Assessed Clean Energy financing Property Assessed Clean Energy (PACE) financing is a newer form of real estate financing in the form of a tax assessment.

As the name implies, the financing needs to be used to finance energy efficiency, renewable energy and water conservation upgrades to real estate. Significantly, the financing can apply to either new construction or to rehabilitate existing buildings. The improvements are 100 percent financed through a loan from a

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private lender and are paid back with an assessment added to the real estate property tax bill.

Under the program, the annual cost savings on the energy will be enough to make the annual payment. The financing is at a fixed rate for as long as a 20-year period. If the real estate is transferred, the financing transfers with the building. This program is implemented by state and local government (city or county). The City of Milwaukee is the only Wisconsin government currently with a PACE program. However, there’s an active lobby for a number of other cities and counties, including Waukesha, La Crosse, Bayfield and Dane. The program doesn’t replace traditional financing, but instead provides another piece of financing in the form of a tax assessment to fulfill overall investor goals.

New Markets Tax Credits The U.S. Department of the Treasury recently allocated $7 billion to the now combined 2015 and 2016 allocation rounds for New Markets Tax Credits (NMTC) allocations. Awards won’t be given until late 2016, however. Significantly, Congress extended the program through at least 2019. NMTCs continue to offer attractive financing in the right circumstances.

Low-Income Housing Tax Credits Congress recently adopted a bill that permanently extends the

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{ Tax | Real estate }

minimum Low-Income Housing Tax Credits (LIHTC) rate at a fixed 9 percent for new construction and substantial rehabilitation projects retroactive to Jan. 1, 2015. In addition to the value of making the program permanent, the bill’s fixed rate is a significant improvement over the floating rate. The floating rate had fallen to 7.49 percent in December 2015.

Real Estate Investment Trusts Publicly traded Real Estate Investment Trusts (REITS) continue to recover after the recession, although rising interest rates could present new challenges for REITs. The overall market capitalization of public REITs is at fourfold prerecessionary levels and represents 5 percent of the U.S. gross domestic product. Investors wishing to exit their holdings should consider the possibility of a sale to a REIT as they have become more active in seeking out properties. The umbrella partnership technique (UPREIT) continues to allow an investor to defer gains. Under this technique, the investor contributes the property tax-free into a partnership with the REIT wherein the partnership unit value tracks the market value for REIT shares. The investor defers the gain until the partnership units are converted into shares of the REIT. While not ideal for every investor, this can be an attractive alternative in the right situation.

audits and changes in audits once an audit is commenced. The Bipartisan Budget Act of 2015 repealed the prior audit rules governing partnerships (commonly known as TEFRA).

The repealed rules were replaced with much easier to administer (for the IRS) rules. The new rules are effective beginning in 2018, and partnerships should expect a higher audit rate after their implementation. Advisers should pay careful attention to provisions governing audits when making a new investment and consider amending agreements to deal with the new rules once regulations become final.

Daniel B. Geraghty, CPA, J.D. is a partner with Husch Blackwell in Milwaukee. On July 1, 2016, Whyte Hirschboeck Dudek combined with Husch Blackwell to deliver industry-focused legal services to clients. Contact him at 414-978-5518 or daniel.geraghty@huschblackwell.com.

Section 1031 Like-Kind Exchanges Rising real estate prices have continued to make 1031 exchanges more relevant. The Internal Revenue Service (IRS) has continued to issue private letter rulings in this area that are taxpayer favorable, especially in regard to exchanges with related parties. (See, for example, PLR 201408019 for a parking transaction with a related party that qualified as a Section 1031 exchange.) While the rulings may signal renewed flexibility by the IRS, there are still significant technical rules with which investors and owners need to comply. Finally, it should be noted that recent budget proposals by President Barack Obama have included a $1 million cap on the annual amount of 1031 gain that a taxpayer can defer. While the proposal also included some measures to simplify like-kind exchanges, a cap of any size will have a significant impact on Section 1031 exchanges.

Partnership audits Holding real estate in a partnership is generally preferred for a number of reasons. Historically partnerships, especially larger partnerships, have enjoyed a relatively low rate of both

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21

{ Technology | Cybersecurity }

CYBERSECURITY

TIPS C

ybersecurity has become a concern that has spread like wildfire — not only in the business world, but for individuals, as well.

With the number of stories that continue to hit the news related to hackers and security breaches, it has become hard to ignore this topic. If

By Nicholas J. the recent increase in cybersecurity/ data breaches has shown anything, Allen, CPA it’s that nobody is safe from these attacks, including nonprofit organizations.

Nonprofit organizations face additional hurdles that most large retailers and other for-profit entities don’t. Oftentimes, nonprofits face tight budget constraints that limit the funding that’s allocated

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for nonprofits

to the information technology (IT) function. In addition, staffing limitations pose a challenge for these organizations. It’s not unusual for employees of small nonprofits to wear many different hats, from receptionist to information security director and anywhere in-between. In some instances, this role could even be performed by a volunteer!

Some may think that, by their nature, nonprofits aren’t exposed to as much risk when it comes to IT and data security. This couldn’t be further from the truth. There are significant risks that nonprofits face when it comes to cybersecurity. The risk of financial loss is the most immediate component, but the reputational risk associated with a data breach could present an even larger (and longer-lasting) effect on these organizations.

Nonprofit organizations handle significant amounts of sensitive information, such as donor contact information, credit card numbers, and employee payroll and health insurance information.

If this data were compromised or ended up in the hands of the

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{ Technology | Cybersecurity }

“It’s imperative that nonprofit professionals realize that while it may seem that they can’t afford to invest valuable resources in cybersecurity, in reality they can’t afford not to.” wrong individual, it could prove to be very costly for all those involved. In addition, the negative media publicity that would follow could damage the nonprofit’s most valuable asset: its reputation.

Donors that see such negative publicity would be much less likely to make continuing contributions to this organization.

For entities relying on such contributions as a major source of funding, this could have a significant effect on their long-term financial health and viability. All of these risks need to be carefully considered and assessed by nonprofit organizations.

So, the question remaining is this: How do nonprofits (already facing the significant budgetary and staffing limitations described earlier) respond to the serious risks associated with cybersecurity?

First, it must be understood that the entire organization needs to be involved in keeping data and networks secure. Everyone needs to be cognizant of the threats related website security, email attacks, etc. Having written policies and procedures that describe appropriate behavior and use of technology is a great way to

wbb-law.com

establish and communicate expectations to all staff.

Next, management should assess the current weaknesses in data security and address those areas first. By targeting these areas, the organization will get the most data security coverage for the money spent. Organizations that lack the staffing to perform these security functions in-house should explore the growing number of companies offering these services. For many smaller nonprofits, this option may provide the needed services at a reasonable cost.

It’s imperative that nonprofit professionals realize that while it may seem that they can’t afford to invest valuable resources in cybersecurity, in reality they can’t afford not to.

Nicholas J. Allen, CPA is a supervisor in the Assurance Department at Wegner CPAs in Madison. Contact him at 608-442-1917 ext. 1917 or nick.allen@wegnercpas.com.

Reprinted with permission from Wegner CPAs.

THE LAW FIRM OF WEISS BERZOWSKI LLP has been working with businesses and individuals to resolve tax issues for nearly 60 years. The Tax Team has unique skills and knowledge in accounting (CPAs), business and real estate law to handle diverse tax situations. They have earned the reputation for successfully resolving federal and state tax disputes from audit, to appeals, through the Tax Court and into collections.

To learn more about how the Tax Team of Weiss Berzowski can assist you in solving your tax problems, contact Rob Teuber at 414.270.2538 or rbt@wbb-law.com.

B U S I N E S S • E M P LOY M E N T • E STAT E P L A N N I N G • L I T I G AT I O N • R E A L E STAT E • TA X

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2016

Night at the

Races

On May 5, nearly 250 attendees enjoyed a Kentucky Derby themed-evening.

The program included honoring WICPA Excellence Awards recipients, recognizing members for 10, 25 and 40 years of membership and electing members to the WICPA Board of Directors.

Guests then enjoyed dessert stations and Kentucky bluegrass music by The Dang Its.

Watch the videos of the award recipients at wicpa.org/awards

View photos from the event at wicpa.org/facebook

Thank you to our event sponsors: Event & Excellence Awards Sponsor:

Event sponsors:

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25

{ Soft Skills | Leadership }

Leadership communication during times of change

By Stephanie A. Barganz-Ryan, CPA, SPHR, CFF, CVA, CGMA

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A

s a former equity firm partner, I experienced several significant changes, including a major acquisition.

One of the most important lessons I learned involved a phenomenon I call “make stuff up university.” Our natural tendency is to make up our own answers when we don’t have all the information. Perception is our reality until we receive new information to reshape that reality.

Change can be demanding and stressful, whether you’re restructuring your organization, completing a merger-and-acquisition integration

wicpa.org

{ Soft Skills | Leadership }

or moving from one side of town to the other. The best remedy is communication. The following are 10 lessons I learned in improving communication during times of change.

Lesson No. 1 – Be proactive.

Provide proactive information to address employee concerns.

Provide timely information as soon as possible. A real example: Our firm was implementing new and current business unit realignments. We redesigned which business unit employees would participate in and belong to the realignments. We thought we’d done a great job of presenting the business case for this change. What did we miss? A comprehensive organizational chart that specifically identified every employee’s name on it. As a result, a few employees made up information, assuming we must be letting them go. The truth was we believed everyone had a valuable role in the new model, but we failed to effectively communicate this message.

Lesson No. 2 – Listen.

Actively listen. Too often, we assume what an employee is going to say. This can be described as similar to knowing what your spouse is going to say after a few years of marriage. You begin to anticipate his or her reaction. However, being heard is just as important to the employee as you listening to them, even when you think you know the content.

Lesson No. 3 – Make it personal.

You engage employees when you specifically address how the change will personally affect them. See lesson No. 1. Change is automatically filtered through each of us with this question, “How will this change affect me?”

Lesson No. 4 – Presentation matters.

Pay attention to how you present information during times of change. Too much communication is rarely a bad thing.

However, it can be unproductive if you don’t put some thought into the quality of the information you expect people to process.

Think about what you’re telling people and whether you’re doing it in an effective way. Remember that different generations process information differently.

Lesson No. 5 – Apply the rule of seven.

People need to see or hear the same message at least seven times before they retain it. You can't communicate too much.

However, you can communicate too much insignificant or insensitive information.

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Lesson No. 6 – Make time for Q&A. Welcome questions and feedback. Your workforce will feel more secure during the upheaval if they have opportunities to ask questions and voice their opinions. Take their sentiments into account as you make decisions. When you can’t, explain why so people don’t think you’re asking for feedback only to ignore it. The more people involved in the process, the fewer people you'll have walking out the door, or worse: more people staying and acting as internal saboteurs.

Lesson No. 7 – Provide real examples.

What does it mean when you say the organization needs to be more responsive? What behaviors characterize a socalled flat organization? Go to the root of what you're trying to achieve from an organizational behavior perspective, and give the jargon life. I’ll illustrate this by posing this question: Have you been a part of an organization that introduced a mentor program? Upon participating, you find that the mentor program defines the technical skill expectations. What the program doesn’t identify are behaviors. What behaviors or attitudes are your organization trying to drive by introducing this change initiative? As leaders, we can do better at identifying and communicating what real life examples reflect the interpersonal skills and behaviors we value.

Lesson No. 8 – Identify specific results.

Know what results you want, ideally, from both the change initiative and the communication program or tactic. Make the business case for the change. What's the call to action for the change? What systemic or operations changes are under way that provide the framework for the desired results and behaviors? What’s the timeline? Know what behaviors you’ll need to drive to realize organizational acceptance of the change.

Lesson No. 9 – Sure and steady wins the race.

Remember, a change effort starts with an announcement of a merger or change initiative. Many leaders and managers underestimate the length of time required by a change cycle.

That’s why numerous reports indicate poor performance following many initial public offerings, mergers, change initiatives. Just as Rome wasn’t built in a day, people and organizations don’t change in a week or a year. Steady and deliberate wins the race, when punctuated by occasional sprints in a meaningful direction.

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{ Soft Skills | Leadership }

“The perfect Excel chart does not ensure a painless change experience.

Why? Because tasks are easy to list, but behavior and long-held habits and routines aren’t easy to change.”

Lesson No. 10 – Lead by example.

Today’s leaders need to show more composure in the workplace.

With change management requirements, increased marketplace demands and intensifying competitive factors that surround us, leaders must have greater poise, agility and patience to minimize the impact of uncertainty. How leaders respond to these and other growing pressures is an indicator of their leadership preparedness, maturity and acumen. The composure of a leader is reflected in his or her attitude, body language and overall presence.

Employees have repeatedly informed me that they closely watched to see how I reacted and navigated changes. This is where your leadership experience and resolve can really shine by staying strong, smiling often and authentically exhibiting a sense of compassion.

Remember, there’s not a perfect way to communicate change.

Change is uncomfortable. Adapting to change is messy, and absent information, we make up our own answers.

The perfect Excel chart does not ensure a painless change experience. Why? Because tasks are easy to list, but behavior and long-held habits and routines aren’t easy to change. Gather outside advice and factual information, solicit perspectives, and then adapt the approaches for your organization’s or firm’s staff.

Stephanie A. Barganz-Ryan, CPA, SPHR, CFF, CVA, CGMA is chief human capital officer at Ryan Evolution LLC in Madison.

Contact her at 608-516-4565 or SBarganz@ryanbros.net.

SOMETHING

BIG

IS COMING! Watch your mail next week.

- The WICPA

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