Making the right choices now could go a long way toward protecting your bottom line later.
By: James Cassel
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MIAMI, Florida, July 22, 2012 – With all the debate surrounding the Affordable Care Act, one could easily get lost in the rhetoric and lose sight of the issue that’s important now: The law is here, whether you like it or not. Clearly, the new or expanded coverage slated for millions of additional people will bring more costs – whether in the form of a tax or penalty. No matter how you feel about that fact, it’s time to set aside politics and take an objective look at the implications of this new law for your business.
One of the most frustrating challenges that middle-market business owners will likely soon face is continued uncertainty. While some people say that the Affordable Healthcare Act will save a substantial amount of money over time and others say it will do just the opposite, nobody knows the ultimate implications because this law is still new. Even the threats ranging from slight modification to repeal of this law will probably remain unknown until after the November election and beyond.
Although it’s impossible to predict the future, we know at least one thing is certain: Because some provisions have already gone into effect and other provisions will be phased in during the next three years, companies will have to redesign their current plans and/or offer new plans to employees.
The time to begin studying this is now. If not managed properly, the issues associated with this law could hurt the bottom line for businesses. For example, automatic enrollment provisions for businesses with more than 200 employees make it critical for businesses to gauge how many of their employees are likely to opt out and to develop appropriate strategies.
Some key points to keep in mind:
• Many businesses that currently provide employee group coverage at reduced premiums may face higher costs. If this happens, some business owners might feel motivated to simply pay the penalties for not offering health insurance to their employees, which was not the intended effect of this law. On the other hand, some believe that insurers may end up competing for your business, bringing down premiums (although this seems highly unlikely).
• Businesses that provide the top-tier plans for certain employees may face higher costs with a 40 percent excise tax tagged onto those “Cadillac” plans if the values of those plans exceed $10,200 for individuals or $27,500 for family coverage. To help prevent this from happening, you should examine your current policies and determine if you will be subject to the new tax. If so, you might want to modify the benefits.
• Another issue facing the business community: the non-discrimination provision in the new law. Businesses will not be able to continue to offer top-tier “Cadillac” plans to some employees while offering others more basic coverage. Offering the same coverage to all employees can be a costly proposition for many business owners. Some small-business owners who cannot afford to offer the same high-quality coverage to all employees worry that this could motivate senior talent to look for jobs at bigger companies that offer better coverage. It is possible that supplemental coverage will be available.
• Owners of some smaller businesses may benefit from tax credits aimed at helping to reduce the costs of providing insurance. However, make sure to understand the fine print, as there will be certain restrictions based on income and other criteria. For example, businesses with 25 or fewer employees who pay average annual wages of less than $50,000 and provide health insurance may qualify for asmall business tax credit of up to 35 percent (up to 25 percent for nonprofits) of the costs of their premiums. Starting in 2014, some small businesses could qualify for tax credits as high as 50 percent. This might sound good, but how many businesses will actually qualify?
• Businesses with employer-based health insurance plans that cover retirees between 55 and 64 years of age can now obtain financial help through the Early Retiree Reinsurance Program.
• It’s said that businesses with fewer than 100 employees may be able to shop for insurance in anAffordable Insurance Exchange, a new “marketplace” where individuals and small businesses may look for affordable health benefit plans. Employers with fewer than 50 employees are said to be exempt from new employer responsibility policies and don’t have to pay an assessment if their employees get tax credits through an Affordable Insurance Exchange. There are still unanswered questions, however, about if and how these exchanges will be established.
Some additional key points relevant to coverage:
The new law makes it easier to obtain insurance for children and adults with pre-existing conditions, many of whom have historically been unable to afford or obtain coverage. It also requires insurance companies to cover certain types of preventive care, including things like screenings and immunizations, without requiring you to make co-payments or co-insurance or meet your deductibles. Starting Jan. 1, 2014, the new law will do away with the dollar limits on benefits that had been previously imposed by many health plans, meaning that health plans can no longer cap their yearly or lifetime spending for your covered benefits.
Again, it’s difficult to know with any certainty either how the new law will affect middle-market business owners or how middle-market business owners will respond. For example, this new law could motivate some businesses owners to do more outsourcing or use temporary labor through third-party providers. Companies in medical and biotech industries, for example, could benefit from provisions in the law that allow for intellectual property protection.
The bill is highly complex and exceeds 2,000 pages. The bottom line: every business has unique needs, and it’s important to consult with qualified insurance professionals who can provide a detailed analysis of all the implications of this law to your business and help you consider all your options. Making the right choices now could go a long way toward protecting your bottom line later.
James S. Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies.www.casselsalpeter.com
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There are several types of investors and equity securities from which to choose. However, they won’t all be a good fit.
By: James Cassel
MIAMI, Florida, July 1, 2012 – Growing a company is seldom easy, and today’s economic environment doesn’t make it much easier. However, even in today’s economy, there are ways to raise equity capital.
But first, put yourself in the place of a potential investor. While investors are by nature willing to take risks, they generally will not just give you money without terms and conditions. Keep in mind that money comes with strings.
When seeking equity capital, there are several types of investors and equity securities from which to choose. However, they won’t all be a good fit. In many situations, the company’s stage of growth and amount of equity financing sought will determine what type of investor, equity, and terms and conditions will be available and most appropriate.
To navigate these waters, here’s a look at the types of equity investments and investors.
Angel Investors: Although angel investors may be friends and family, in most cases they are the type of investors who come after friends and family but before venture capitalists for early stage companies. Angels are people with money and an appetite for risk. These investors may potentially: bring a wealth of experience to this process, have significant relationships with key individuals or companies, and provide valuable management advice. They also may be willing to provide seed money, i.e. startup money, which can become expensive because of the relatively high risks associated with starting a business. Bottom line: Angel investors can be an attractive option for higher-risk, small businesses poised for rapid growth at favorable valuations.
Venture Capitalists: With a more formalized vetting process, venture capitalists invest in a small percentage of the deals they review, as they tend to be extremely selective. Their risk tolerance is often high, and therefore, so is the required rate of return. When they do become interested, it’s usually early in a company’s life. This is usually the first investment by institutional investors. They add expertise, contacts, advice and money. They invest with a planned exit event, such as an initial public offering (IPO) or sale.
Private Placements (of equity): Private placements can include debt, equity or both. While raising money quickly is possible from a legal and structural basis, finding investors of any kind takes time. Private placements can be a good option for growth companies, mature companies looking to expand, and those that want to expand without going public. This money can come from individuals or institutional investors. There can be great flexibility in both the structure and valuation of the deal.
One consideration in private placements is the Jumpstart Our Business Startups Act (JOBS), signed into law in April. The bill basically removes the prohibition on general solicitation and advertisement by issuers relying on Rule 506 of Regulation D (Reg D) under the Securities Act of 1933, as amended. In other words, thanks to Reg D, you may, subject to certain rules and regulations, advertise for investors. The SEC has yet to issue the required regulations under the JOBS Act.
IPOs: Going public for most companies provides an infusion of capital as well as the ability to use its stock as currency for making acquisitions. While IPOs can be expensive, and becoming a public company involves much higher levels of accountability and regulatory requirements, IPOs can also bring many benefits. Although generally thought of for large, established companies, they can be good for small, highly visible, rapidly growing businesses. IPOs take all kinds of shapes and forms. One of the recent notable IPOs, Facebook, was clearly not a particularly well-executed offering. Although its success has been debated, it undoubtedly provided an effective exit strategy for some of its private investors and raised substantial funds for the company.
Private Equity Funds: Private equity (PE) funds are professionally managed funds that invest or purchase control of a wide variety of companies. These organizations usually want majority control, though some funds might be willing to only purchase a minority stake. Some prefer mature, stable companies that can show significant growth opportunities, while others like distressed businesses. PE firms focus on multiple factors such as industry, size and geographical location. Perhaps the biggest advantage is that these organizations can provide access to capital beyond what a traditional bank would finance, as well as strategically assist a company. However, companies considering private equity funds must plan long in advance, and they must be ready to withstand the scrutiny of the due diligence of the PE firm. And remember, the investors will impose many restrictions and conditions.
There are a variety of equity securities from which to choose. Depending on the type and situation of the company seeking growth capital, several choices may make more sense.
Common Stock: Common stock represents a form of ownership in a corporation. The common stockholders own the economic benefit of the company. They are inferior to the rights of preferred shareholders. They receive the profits as well as losses of the enterprise.
Preferred Stock: Preferred stock, like common stock, is an equity security. It can take many forms and have lots of flexibility. It can provide for, among other terms, special voting rights, preference on liquidation, dividends, conversion into common stock and certain restrictive covenants.
Warrants & Options: Warrants are a derivative security that represents a privilege or right to purchase securities at a specified price within a certain time period. Warrants are long-term instruments that typically last several years, but will lapse if the right isn’t exercised during the specified time. The intrinsic value of a warrant is found by comparing the price to exercise your right (also known as the subscription price) with the market price of the stock. If the price of the stock increases in value, the warrant represents an opportunity for an investor (option holder) to profit by exercising his or her right.
Mezzanine Financing: Mezzanine (mezz) financing is debt capital that can be convertible and gives the lender the right, if he or she so elects, to convert to an ownership interest in the company. Many times mezz financing is coupled with warrants. Generally, they are not control investments, and because it may be treated like equity on the company’s balance sheet depending on the structure, it might be easier to get bank financing. However, while mezz financing is less expensive than pure equity, it is still more expensive than debt.
Whatever path you choose, the following tips can help:
• Don’t underestimate the power of relationships, introductions, and good advice from those in the business, like lawyers and investment bankers.
• Be realistic about your business, the valuation of your company, and the amount you seek.
• Conduct due diligence on your investors, as they will check out you and your company. All money is not equal. Make sure you are compatible with the investors because they will own a part of your company and may partake in important business decisions.
• Think about the timing. It will take longer than you imagine. Don’t make rash decisions.
• Consider seeking the counsel of seasoned lawyers, as well as an investment banker.
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Cassel Salpeter & Co.
801 Brickell Avenue,
Miami, FL 33131
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