Businesses almost always encounter unanticipated roadblocks when they start down the path to expansion. Obstacles may include unexpected labor costs and availability in new markets, or unrecognized barriers to entry such as competitors’ planned expansions into the same markets. Sometimes the biggest hitches in developing an expansion strategy are not recognizing what you don’t know and figuring out how to start the planning process.
The right accounting firm can provide services to circumvent those obstructions.
“Everyone wants to grow and expand. However, you have to look at the big picture and see if it works for the company,” notes George Williams, a CPA who also is an attorney with Ross, Rosenthal & Company in Morristown. “Some clients are well-versed, but others are not looking at the whole picture. That’s a big indicator of whether they are ready to do a business expansion. We (CPAs) are the closest to the client, so we know what’s going on in the books and the records.”
Large firms such KPMG offer an array of services to help guide expansion planning, says George Tobjy, tax managing director at KPMG. The firm has worked with companies through expansions of auto plants, chemical facilities and other large projects.
“We touch on everything. It first could be cost modeling in terms of labor, and how the client measures up against other companies and similar industries. We also have an advisory practice that will look at manufacturing effectiveness,” Tobjy says. “We have groups in different sectors such as employee compensation and communications.”
KPMG’s accountants help companies determine how much space they need. Also, they identify critical positions the company will need to hire at a new site, benchmarking against industry standards and locations that might be appropriate, for example.
CPAs can help determine labor quality, types of skill sets needed and available, and levels of compensation in a location under consideration.
“It’s a holistic approach to helping a company understand strategically what it needs to do,” Tobjy says. “It is a project management function with examination of large amounts of data. If a client plans to open the doors in a year, what will be happening in the area that might impact the opening? Will the area become hot with competitors that were not there a year ago? We go through an interview process and help the stakeholders determine what will be a successful project.”
In a national economy running below 4 percent unemployment, identifying available high-quality labor, especially for companies seeking tech talent, is challenging for business expansion strategists.
“If you are supporting a company looking for high-end tech talent, you really have to do your homework because it might be in such high demand,” Tobjy says. “If you cannot find the right people in the marketplace, you’re not going to be successful.”
Helping companies define the goals and objectives means having an endgame. Some accountants prefer to start a conversation about expansion by discussing where the client wants to finish.
“Are they trying to build up the business or to sell it? Obviously, you must have an end in mind. We can help determine [that] if you have the right team in place. That’s where the value to the client is,” says Michael Coletti, New Jersey office managing partner for Mazars USA. “When I’m pitching clients, I tell them: if you want to hire a historian, hire someone else.”
Coletti says strategic planning is always about maximizing the value of the business. This seems obvious, but the right accountant can lead businesses to see their cash cycle and supply chain with fresh eyes. The approach helped one of Coletti’s clients, an importer, grow from a $25 million company to $60 million in annual revenues over 10 years, at which point they were ready to sell.
“What they did was really look at the inventory process and how to maximize it. They also shrank the time period from the delivery of the product to when they received cash. So, they were capitalized better from an equity position,” he says.
Too often, companies just look at the successes that lead them to want to expand and miss the threats to their company’s progress. Whether it is back-office operations, budgeting, overly optimistic projections, or unfilled critical positions, failing to identify your own weaknesses can wilt a company’s growth plans.
Jason Borofsky, partner in the Clifton office SAX LLP, says CPA firms can make up for a lack of in-house positions needed for successful expansion.
“At Sax, we have wealth advisors who can help, [as well as] tech and IT advisors. If you’re growing in employees, you may not have that HR person with the right expertise,” he says. “Also, when growing, some companies don’t have a chief financial officer. We fill that gap and provide that service while you’re growing.”
Borofsky says it is important to identify the key performance indicators that are most significant to the industry in which the client operates. Companies expanding by purchasing properties need to consider cap rates, which Borofsky points out have been getting very low. Capitalization – or cap rates – are the ratio of Net Operating Income (NOI) to property asset value. For example, if a property recently sold for $1,000,000 and had an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10 percent. Put another way, the cap rate is the rate of return on a real estate investment property based on the income that the property is expected to generate.
“When someone is buying a building at a 4 percent cap rate, they’re not going to get as much profit out of that building as if the cap rate was 5 percent or 6 percent. You really have to understand what the operating income is,” Borofsky says.
He also helps companies take a hard look at their budgeting strategy for expansion. “If you’re looking to expand, but you don’t have equity, the only other way to expand is debt. Where are you going to get it? We know a lot of people. The introductions we can make is one of the biggest things we do,” Borofsky says.
Taking on excess debt without a plan for how you are going to repay it is another common mistake a CPA can help avoid. “Especially if you’re going to expand and leverage the company via the debt,” Williams of Ross, Rosenthal says. “We can do forecasts to determine in the short-, long- and mid-term whether your planning meets your model. That’s where we really get involved in the tax implications.”
Failing to understand the tax consequences of expanding into a new state is another common mistake.
“Every state is constantly refining and changing their tax laws,” says KPMG’s Tobjy. “There were changes within the federal tax code last year and changes in how the employees are going to be taxed. That affects the potential impact on employees of moving with the company to a different state.”
Coletti, of Mazars USA, notes companies selling products online to out-of-state customers may need the help of a CPA to understand the impact of the US Supreme Court decision in South Dakota v. Wayfair, Inc. The court ruled last year that states may charge sales tax on purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state.
CPAs are an integral part of an expanding company’s strategic planning. They can help companies remain vigilant to market dynamics, such as competitors’ expansion plans and skilled labor availability. That’s important, notes Coletti, because even the best plans need tweaking in order to keep a business on the right path. As Coletti puts it, “You can come up with a strategic plan, but if you just stick it in a file and never revisit it, it’s not going to work.”
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