Earnings before interest, tax, depreciation and amortization

The equation itself is really quite simple: subtract expenses from revenue (excluding interests and taxes) without depreciation and amortization (what you pay for tangible and intangible assets). The remaining number paints a basic picture of your profitability as well as your ability to pay off what it owes.
EBITDA is widely used in loan covenants. The theory is that it measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debt-holder can ignore taxes. They are not interested in whether the business can replace its assets when they wear out, therefore can ignore capital amortization and depreciation.

EBITDA has also been used in determining a sale price of a business. Normally, multiples are derived from comparable companies operating in a comparable environment. e.g., Mid-size manufacturing companies operating in the United States should have the same multiples (P/E, EBITDA etc.) The key is to determine multiples of comparable companies and use this as basis for determining/justifying your own multiple.

Small businesses typically sell for a multiple of less than 5 times EBITDA. But when you plug in the numbers, there can be a big difference between 2 x EBITDA and 5 x EBITDA!

To read the full report, visit http://www.hiscoxusa.com/shared-documents/the-2011-hiscox-dna-of-an-entrepreneur-study.pdf

Contact reports from the twelve Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterized growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favorable conditions than identified in reports from the late spring through early fall.

Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year’s season, and activity in the travel and tourism sector expanded in most areas. Demand strengthened further for nonfinancial services, including professional and transportation services.
Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products. Agricultural producers and extractors of natural resources reported generally robust conditions. Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall but showed signs of ongoing improvement in several Districts. Reports from financial institutions generally indicated a slight uptick in loan demand by businesses, along with improvements in overall credit quality.

Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased. Upward wage pressures were modest overall, although a few Districts noted substantial compensation increases for workers with specialized skills in selected sectors and regions.

* Prepared at the Federal Reserve Bank of San Francisco and based on information collected on or before December 30, 2011. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials. For the full report please visit http://www.federalreserve.gov/fomc/beigebook/2012/20120111/fullreport20120111.pdf

According to the Budget and Economic Outlook published by the CBO last week, the amount of money the federal government takes out of the U.S. economy in taxes will increase more than 30% between 2012 and 2014. At the same time, logic and the CBO suggest the economy will remain sluggish – partly because of the higher taxes.

The CBO report states: “In particular, between 2012 and 2014, revenues in CBO’s baseline shoot up by more than 30 percent,” said CBO, “mostly because of the recent or scheduled expirations of tax provisions, such as those that lower income tax rates and limit the reach of the alternative minimum tax (AMT), and the imposition of new taxes, fees, and penalties that are scheduled to go into effect.”

“The pace of the economic recovery has been slow since the recession ended in June 2009, and the Congressional Budget Office (CBO) expects that, under current laws governing taxes and spending, the economy will continue to grow at a sluggish pace over the next two years,” said CBO. “That pace of growth partly reflects the dampening effect on economic activity from the higher tax rates and curbs on spending scheduled to occur this year and especially next. Although CBO projects that growth will pick up after 2013, the agency expects that the economy’s output will remain below its potential until 2018 and that the unemployment rate will remain above 7 percent until 2015.”

According to the CBO report, federal tax revenues equaled $2.30 trillion in fiscal 2011, and will increase to $2,523 trillion in fiscal 2012, $2,988 trillion in fiscal in 2013, and $3,313 trillion in 2014.

In dollar terms, the anticipated increase in federal tax revenue from fiscal 2011 ($2.302 trillion) to fiscal 2014 ($3.313 trillion) is $1.011 trillion. That is an increase of 43.9 percent.

From just 2012 to 2014, the increase in federal tax revenues from $2.523 trillion to $3.313 trillion equals $790 billion—or 31.3 percent.

What’s the answer for you, your family, and your business? Better and more proactive tax planning!

Source: http://www.cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf (Chapter 4)

According to a study produced by AARP in 2011, “When respondents were told that financial service companies that manage 401(k) charge fees for administering and managing those plans, and that the fees are paid by the employer and/or the employees that participate in the plan, about three in five (62%) reported that they did not know how much they were paying in fees and expenses for their 401(k) plan.”
Source: http://assets.aarp.org/rgcenter/econ/401k-fees-awareness-11.pdf

As important as cost reduction solutions are, 401(k) administrative fees are another piece of the cost reduction strategy pie. Our 3rd party preferred vendor, LCM Capital, offers a Free Forensic Cost Analysis©, comparison and plan review. Do not wait; contact John Nowicki at jnowicki@lcmcapital.com to receive your free review today.

Wal-Mart and the Retirement Plan Committee were sued for not fulfilling their fiduciary responsibilities under ERISA. According to the complaint, the Retirement Plan Committee failed to inform employees about the impact that the allegedly excessive fees would have on their savings, why particular investment options were chosen when less expensive options were available.

If Wal-Mart’s plan with almost $10 billion in assets was paying excessive fees, what are the net fees your plan is paying? Remember, pleading ignorance is not a defense as a plan fiduciary. You are obligated to act prudently when selecting service providers and investment options for your plan and its participants. You must also ensure that no more than reasonable compensation is paid for services taking into account “all” of the compensation, including any revenue-sharing from third parties that will be received by all service providers.

Now you can see why Wal-Mart settled.

The lawsuit also centered on Merrill Lynch using a retail share class of mutual funds which habitually carry higher fees than institutional class shares, conjointly receiving revenue sharing and other unspecified payments without providing any additional services.

Do you know what share class of funds your plan uses?

Furthermore, Merrill Lynch recommended 10 mutual funds, 7 of which collected more than $26 million in 12b-1 fees over the 6 years the lawsuit covered. Every one of the 10 mutual funds included a revenue sharing charge. The district judge overseeing the case noted that there were comparable fund options that did not charge 12b-1 fees.

Do you know if your plan charges 12b-1 fees? Is there any revenue sharing in your plan?

As full fee transparency becomes reality within the retirement plan arena, give yourself a St. Nicholas day surprise and email LCM Capital Management at lcm@lcmcapital.com for your free retirement plan analysis.

You deserve to wake up feeling like a child on St. Nicholas Day!

Source: LCM Capital Management, our Retirement Plan and Wealth Management Advisors.

By law, the dollar amounts for a variety of tax provisions, affecting virtually every taxpayer, must be revised each year to keep pace with inflation. New dollar amounts affecting 2012 returns, filed by most taxpayers in early 2013, include the following:

The value of each personal and dependent exemption, available to most taxpayers, is $3,800, up $100 from 2011.

The new standard deduction is $11,900 for married couples filing a joint return, up $300, $5,950 for singles and married individuals filing separately, up $150, and $8,700 for heads of household, up $200. Nearly two out of three taxpayers take the standard deduction, rather than itemizing deductions, such as mortgage interest, charitable contributions and state and local taxes.

Tax-bracket thresholds increase for each filing status. For a married couple filing a joint return, for example, the taxable-income threshold separating the 15-percent bracket from the 25-percent bracket is $70,700, up from $69,000 in 2011.

To read more, visit the IRS press release at http://www.irs.gov/newsroom/article/0,,id=248485,00.html

LINCOLNSHIRE, Ill., Oct. 3, 2011 /PRNewswire via COMTEX/ –

According to Aon Hewitt’s analysis, the 2012 average health care premium rate increase will be 7.0 percent, which is slightly lower than the 7.5 percent mark in 2011, and on par with the 6.9 percent increase in 2010. However, the average total health care premium per employee for large companies is projected to be $10,475 in 2012, up from $9,792 in 2011, and $9,111 in 2010. The amount employees will be asked to contribute toward this premium cost in 2012 is $2,306 (or 22 percent of the total health care premium), compared to $2,084 in 2011 (or 21.3 percent of the total health care premium), and $1,952 in 2010 (or 21.4 percent of the total health care premium). Meanwhile, average employee out-of-pocket costs, such as copayments, coinsurance and deductibles, are expected to be $2,275 in 2012, compared to $2,007 in 2011, and $1,691 in 2010.

Read the entire report here: http://ir.aon.com/phoenix.zhtml?c=105697&p=irol-newsArticle&id=1612590

A joint study by IBM and the IRS found that for businesses with one to five employees, the cost to comply with the tax code is $7,274 per employee. For businesses with more than 50 employees the cost is $296.50.

Aon Hewitt recently conducted a survey of plan sponsors and this is what was found:

Fees and expenses were rated the most important factor when it comes to selecting
funds

For the past two years, employers are seriously concerned about the fees they pay
given recent scrutiny by regulators and litigators. Aon Hewitt’s analysis continues with, “the percentage of plans that have calculated their total plan costs (fund, administrator, trustee, etc.) has steadily declined since 2009 – the main reason, complexity.”

In our January 2011 Blog, we reminded all plan administrators what their fiduciary
responsibilities are to their plan participants. Consider just one of them; “you must insure that no more than reasonable compensation is paid for your plan services, taking into account all fees including funds, any revenue sharing, administrative, trustee, etc.”

So LCM Capital Management’s simple question of the year is, “how can plan administrators
identify the fees their plan pays, when they acknowledge their number one issue is
complexity and ability to identify plan fees?”

To quote Bono of U2 “I still haven’t found what I’m looking for.” Now you understand why
we titled this month’s Blog “The Quandary.”

According to the Tower Watson survey most plan sponsors generally wait until compliance
issues emerge rather than take action to avert them.

Why wait for compliance issues to emerge when you can email LCM Capital Management
today at LCM@lcmcapital.com for your free retirement plan cost analysis? See what you’re
not being shown and take the complexity out of your fiduciary responsibility.

Source: LCM Capital Management, our Retirement Plan and Wealth Management Advisors.