The Right Money Steps and the Right Mindset for the Recession

December 2, 2008

WISE BUSINESS OWNERS AND INDIVIDUALS SHOULD THINK BACK TO THE LESSONS OF 1991-92 AS THEY ADOPT THE MINDSET AND TAKE THE RIGHT STEPS TO WEATHER THE 2009 RECESSION

Partners from Marks Paneth LLP Say 2009 Imperatives Will Include Choosing Among Insolvency, Bankruptcy and Workout; Succession Planning; Severance Agreements; and Having Advisors with Good Bank Relationships

New York, NY - (December 2, 2008) – Many businesses are facing the first serious recession that will affect them in a significant way. Successful navigation of the new environment may require a whole new mindset and focus – including a willingness to deal directly and intelligently with difficult issues, according to partners at Marks Paneth, a New York City-based accounting firm that serves large businesses, including privately owned companies, as well as high-net worth individuals.

"Lots of businesses and individuals haven't experienced a serious downturn in many, many years. In comparison, the fallout from the dot-com bust, and even September 11, didn't have the same impact as what many businesses are experiencing today. Companies that were around in the early 1990s, however, may recall some of the steps and measures that we may need to pull out again. Here's an example: Some companies may need to face the fact that taxes can put them out of business; cancellation of debt by your bank may cause tax to be due. Since the forgiven loan generally counts as income, you'll need to plan for debt forgiveness," said Steve Eliach, Principal at Marks Paneth.

"A lot of the decisions and actions companies will need to take may seem negative, but they require as much – if not more – care and hard work than decisions in a growth environment," he said.

Mr. Eliach and his Marks Paneth colleagues are available to discuss the new reality and what steps savvy business leaders and individuals might consider. For instance...

  • Restructure debt with care: A mistake could be fatal. It may not feel like productive work to analyze the advantages of workout versus insolvency versus bankruptcy. But it is. "Doing this right can save your business, as there are different sets of rules for different circumstances. To put it a bit more positively, you may have alternatives you didn't know about," Mr. Eliach said.

  • Re-evaluative financial management's job; it may be very different than it once was. Restructuring a business – or just restructuring debt – is a full-time job, and it's usually the responsibility of the financial manager. In fact, many companies bring back their original principals to help. This could be a 24-hour-a-day assignment for eight to 12 months.

  • Re-think estate planning – especially when it comes to passing along a business. Michael Bekas, CPA, a Tax Partner at Marks Paneth, said, "If you own a business that will survive -- but take a hit -- in the recession, remember that it now probably has a lower valuation. That means taxes will be lower if you pass ownership to heirs now rather than a few years from now, when it will be worth more. So speeding succession and estate planning may be a smart move," Mr. Bekas said. "As another option to lower taxes, estate planners should consider techniques such as the Grantor Retained Annuity Trust (GRAT). With low interest rates and low stock and property values, donors can carve significant amounts out of their estates."

  • Look for savings and government incentives – including those that might not have seemed worthwhile during good times. "In boom times, some companies might think that, say, a $200,000 tax break to move a company to a tax advantage zone in the Bronx, just isn't worth the effort. Now's the time to hunt down and seriously pursue these incentives; they'll pay off now, and may continue to do so when the economy bounces back," Bekas said.

  • Seize the opportunity to invest in your business – when prices are favorable for some capital items. Marks Paneth Accounting & Auditing Partner Steven J. Ciavarella, CPA, said, "Most companies might be looking to defer capital expenditures. However, due to favorable provisions in the tax law, now is the time when business owners should consider acquiring assets because there will be less impact on cash flow. The economic climate may result in opportune pricing for some capital items."

  • Watch receivables like a hawk. When cash flow is strong, companies often let receivables build up – and think of them as a solid asset. They're probably going to be less solid now, so active collection efforts will pay off.

  • Watch inventories – like a hawk. "Close attention should be paid to inventory levels," added Ciavarella. "In most industries, sales are declining. Inventory that is too slow-moving will put an even greater negative strain on your business' cash flow."

  • If one is eligible for credit, hoard it. Even if a company or an individual doesn't believe an increased credit line will be necessary, it's worth securing it, if it's available. "When you do wind up needing it, you may not be able to get it," Mr. Eliach said.

  • Seek advisors with strong reputations and access. "If you need to restructure debt, borrow more or ask for forbearance, it's often best to work with professionals – such as lawyers, turnaround firms and accountants – that have strong banking relationships," Mr. Eliach said.

  • Count on taxes going up, so do transactions now. "Given the country's deficits, it's unlikely that taxes will stay as they are. So, wise individuals and companies will work to quickly complete any transaction if they want to trigger a tax now," said Mr. Eliach.

  • Consider consolidating. Give some thought to combining business entities and divisions that may not be core practice areas: Not only will it help simplify business process and keep focus on the core business, but it can also help lower costs at a time when it means the most.

  • Pay attention to the books, and beware of an increase in tax examinations. "A serious recession often leads to less care in accounting – as departments downsize – and, at the same time, a greater need for tax revenue on the part of the government. That combination could lead to more, and more costly, audits and examinations. So general managers and affluent individuals need to take care and be very detail-oriented," Eliach said.

    "In addition to taking steps to protect their businesses, affluent individuals should consider other proactive steps to maximize their own wealth options," added Bekas. For instance…

  • Consider the risks of deferring payments under a severance package: It may be worth it to take it all at once and pay more taxes. Executives being offered severance packages often agree to get paid over a period of years – so they get more money, according to the package's terms. But if the company seems shaky – and even if it doesn't – a smart risk management move might be to take the whole amount – even if it's smaller right now. You should also consider the possibility of a future tax rate increase when planning a severance package.

  • Take advantage of a low interest rate environment. "Now's the time for high net worth individuals to make use of certain techniques that are interest-rate sensitive and can have real tax benefits, such as Charitable Remainder Unitrusts (CRUTs), an often overlooked vehicle that can help high net worth individuals looking to sell assets and minimize income tax, generate ongoing income and minimize the impact on estate taxes," said Mr. Bekas.

About Marks Paneth LLP

Marks Paneth LLP is an accounting firm with nearly 500 people, approximately 70 of whom are partners and principals. The firm provides businesses with a full range of auditing, accounting and tax services, as well as litigation and corporate financial advisory services to domestic and international clients. The firm also specializes in providing tax advisory and consulting for high net worth individuals and their families, as well as a wide range of services for international, real estate, media, entertainment, nonprofit, professional and financial services and energy clients.

The firm's subsidiary, Tailored Technologies, LLC, provides information technology consulting services. In addition, its membership in JHI, the leading international association for independent business advisers, financial consulting and accounting firms, facilitates service delivery to clients throughout the United States and around the world.

Marks Paneth, whose origins date back to 1907, is the 28th largest accounting firm in the U.S., and the 15th largest in the New York area. Its headquarters are in Manhattan. Additional offices are in Westchester, Long Island and the Cayman Islands.

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