April 2018 eNewsletter

Backups are an Essential Aspect of your Organization’s Cyber Security Protection

David Owens, Vice President of Sales and Marketing, FSN

Reliable and restorable backups are one of the fundamental foundations provided by IT personnel.   Ensuring business continuity and the integrity of your data, including your customers’ sensitive information, is paramount in today’s digital age.

Traditionally, backups have been deployed as an insurance practice for when things go wrong in terms of hardware failures or disaster recovery events, including building fires or other natural occurrences, like floods and tornadoes.

In today’s era of prevalent cyber security threats, backups are equally important for restoring data as a result of a cyber-attack, where your data gets encrypted then held for ransom by criminal elements.

According to Cybersecurity Ventures, cybercrime damage costs are expected to hit $6 trillion annually by 2021.  Cybercrime has become the most insidious and destructive threat that businesses and organizations of all types face today.

While it was once thought that cyber threats were only a concern for major corporations and other large businesses, hackers are now frequently targeting small and middle-market organizations.

  •  Over 90 percent of cyber-attacks start with a phishing email
  •  43 percent of cyber-attacks target businesses with less than 100 employees

Cyber criminals are working hard to find ways to breach your security.  You need to do all you can to protect your business and your customer data.  Among the data security defense tools in your arsenal are reliable and restorable backups.

If companies don’t have the ability to restore data from a backup job prior to the phishing event that encrypts your data – then paying the ransom to the cyber criminals might be the only recourse.  Besides being a costly endeavor, your data might not be restored, as there is no honor among thieves.

The more data that is lost or compromised, the greater the negative business impact.  Clients might lose faith in your ability to safely deliver products and services, either resulting in lost revenue or liability that could ultimately end in bankruptcy.

Part of a good backups protocol is being able to restore business operations to the condition it was in before your data and software applications were encrypted by the cyber criminals.

Below is the best practice 3-2-1-0 backup strategy:

3: Maintain at least three copies of your data.  One active production copy of your software application running on your server platform (either on-premises, hosted or co-located) and two backup jobs.  The first backup job is local for quick file restores, when a user accidently deletes a file.  The second copy is located at a different geographical location in case of a disaster recovery scenario.

2: Store your backups on two different hardware platforms.  One reason for this is to avoid your backup targets processing the same vulnerabilities.   Backups jobs should never be susceptible to the same point of failure.  As an example, hard drives on the same computing platform could be corrupted by the same virus or hardware failure.   By leveraging different hardware platforms, you can reduce your exposure to the same incident on your backups jobs.

For the local backup target, we recommend a Network Attached Storage (NAS) appliance as a cost-effective storage solution – independent of your active production data on either your server or a storage area network (SAN) under a high-availability configuration.

1: Consider when a catastrophe occurs at your primary data center, whether on-premises or hosted in a private cloud, if all your data is in one place then you are at risk of losing all your critical business data.

For your offsite disaster recovery copy, the hardware storing your secondary copy should be in a physically distant data center. 

0: Verify your recovery plan has zero errors.  It is not uncommon for organizations to deploy a data recovery plan but fail to validate that it performs as required.  Daily monitoring of successful backup jobs and regularly scheduled recovery testing are essential to ensure if you lose data, either to an unexpected event or a criminal act, your organization can be operational in a nominal amount of time.

Regarding your backup solution, two other aspects to consider include having an image based backup vs. file level backup to improve your Recovery Time Objective (RTO).  Determine the Recovery Point Objective (RPO) of how often incremental snapshots should occur, with the goal of keeping a full backup for restoration, in case of a cyber security episode.

In the case of an incident where you need to restore a backup due to a hardware failure, having the entire server or PC image backup will allow recovery in a significantly lesser period of time vs. individually installing operating system functions, the software applications, and then the numerous files.  RTO is important to critical business functions, where hours of downtime vs. days widely impacts your business operations.

Further, the frequency of the backup and the total retention time need to be determined based on specific business needs.  Part of this decision is the financial calculation of the total amount of storage investment for both local and offsite backups necessary to accomplish the defined RPO.

Business Transfer Planning: A Tale of Two Sellers

Stacy Christman-Blomeke, J.D., AEP®, Managing Director, Tim E. Wittenbrook, CFP®, Managing Director
Oxford Financial Group, LTD.

Article by Julia Weaver, J.D., LL.M., Director, Family Office Services & The Trust Company of OxfordTM, J.P. Simmons, CFP®, CLU®, Chief Practice Development Officer

For many business owners considering a sale of their business, maximizing enterprise value becomes a singular focus and the proverbial finish line. Beyond the finish line, however, is the looming reality of the tax haircut this enhanced wealth may face when it passes to heirs. Additional issues around how the family will meet its objectives with the “NEW” balance sheet must also be considered.

Let’s Start with Taxes

By transferring a portion of their business interest into structures that will avoid gift or estate tax, Sellers may retain a significantly greater percentage of this growth in their family’s wealth.

The Three Deltas

Delta One - Avoiding Tax on Valuation Discounts

Creating discounted interest can greatly enhance tax savings. Discounts are typically available for minority non-voting and non-marketable interests, which can generally be created through a fairly simple recapitalization process.

Rather than utilizing $10 million of gift and estate tax exemption to pass $10 million of non-discounted interest, it is far better to transfer that same interest at a value that is reduced by a 30% to 35% valuation discount. When the business interest is later sold, the discount evaporates and all shares receive the per-share sale price. In this scenario, nearly $14.3 million of post-sale non-discounted business interest has been transferred (assuming a 30% discount), while utilizing only $10 million of the owner’s exemption. This is referred to “freezing the discount.”

Delta Two - Avoiding Estate Tax on the Increase in Enterprise Value (EV)

Future appreciation, or the “pop” in value many business owners enjoy as a result of a successful sales process, may also be structured to occur outside of the taxable estate, further enhancing the retention of family wealth.

Delta Three – Avoiding Estate Tax on Appreciating Net-Worth Post–Sale

After the liquidity event, this newly monetized wealth can remain in tax advantaged vehicles that will continue to protect subsequent growth from estate taxation. Over the future years of wealth accumulation, the potential tax savings can be staggering.

Financial Life After the Business is Monetized

How will the family meet its objectives with the new balance sheet?  With the liquidation of what is typically the primary asset of a business owner’s family, the necessity to manage objectives, income and risk becomes paramount. Many families are challenged to successfully navigate the change and sustain wealth across generations. To be prepared, careful financial modeling and testing is needed. The following basic elements of a plan should be considered well in advance of the sale of the business:

  • Define objectives with realistic values and growth expectations taken into consideration
  • Determine the appropriate size of a safety net for the family
  • Design a strategy to support and continue the lifestyle of family members
  • Identify aspirational objectives and generational intentions

Tax Impact Analysis - A Tale of Two Sellers

We assume two sellers in a highly fictional “exact” situation, but for the fact that Seller One (Sally) was referred by her Investment Banker to her wealth planning team for pre-transfer planning. Seller Two (Sam) was not. Both businesses were originally valued at $30 million (the “base” value). Each concluded a very successful sales process and sold their businesses in three years for $60 million. After taxes and costs of $10 million, the net proceeds from each sale was $50 million. However, both sellers are subject to federal estate tax. In other words, without any planning, when the owner transfers wealth to his or her heirs, the IRS becomes the welcome recipient of 40% of this appreciation in EV resulting from the successful sales process.

Sally's Planning Strategy

  • Three years prior to the sale, Sally implemented a strategy to remove a 25% minority, non-voting interest from her taxable estate, retaining full control of the business.i
  • Sally recapitalized her interest into voting and non-voting shares.
  • Sally then created a trust that is excluded from estate (but not income) taxation, known as an Intentionally Defective Grantor Trust, or “IDGT,” referred to herein simply as her “Trust.”
  • Sally seed funded her Trust with a relatively small gift.
  • Sally then sold a 25% non-voting interest to her Trust, which qualified for a 30% discount and was valued at $5.25 million.
  • Sally took back a 9-year, $5.25 million, interest-only balloon note, with a required mid-term AFR.
  • The sale to Sally’s Trust avoided capital gains due to its structure as a Grantor trust and the proper crafting of the terms of the sale.
  • Capital gains will, however, be recognized upon the sale of the interest to a third party, including on all shares held in Sally’s Trust.

Unique Times, Unique Situations

As with all elements of planning, pre-transfer planning should be done in coordination with the business owner’s comprehensive estate plan, particularly in this present time of uncertainty as to our future estate tax regime. When appropriate to meet the core goals and objectives of the business owner, pre-transfer planning can have a significant impact on the family’s enduring wealth.

Sally’s advisors crunched the numbers and selected a recapitalization of Sally’s interest into voting and non-voting shares. After properly capitalizing a trust that is excluded from estate taxation (known as an Intentionally Defective Grantor Trust, or “IDGT”), Sally sold a 25% discounted minority interest to the IDGT in return for a 9-year, $5.25 million interest-only balloon note (the amount of the originally discounted value of her interest), with a required mid-term AFR. This “sale” avoided triggering any capital gain due to the properly crafted structure of the sale and terms of the IDGT.

The sale to Sally’s Trust is only successful when the appreciation in the underlying asset exceeds the AFR hurdle rate.

Why History Matters; Understanding Market Trends

Mike Schueler, CEO, The Schueler Group

I have worked in the construction, development, land and real estate business for over 40 years. In that time, we have witnessed the highs and lows of the economy and had a front row seat to growth, trends and market challenges that have confronted us. One must not look far to understand that the economic lows, while they are a challenge, often result in vibrant recovery.

Our organization was founded in 1935 during the middle of America’s Great Depression which ran from 1929-1939. In fact, a real estate boom had occurred in the 1920’s prior to the stock market crash of 1929 – followed by many years of challenge.  Our founder, George Henkle, as a young man, saw an opportunity to help out the farming community and began a business as a farm brokerage.

The land that comprises Butler and Warren Counties was farmland and George understood that by working with farmers, an opportunity could be fostered for all. His early transactions included the land upon which King’s Island now sits. George ultimately had an early vision that Cincinnati and Dayton would become one large combined market – which he termed a “Super City.”

At this time the area was farmland, and the Cincinnati “suburbs” were generally south of Norwood.

Fast forward to today, and his vision is nearing reality.

By understanding the dynamics of market downturns, we can better forecast and adapt our vision and plan for the future. This requires understanding of the history as well as an optimistic view of the future. This requires planning, perseverance and committed work teams.

The majority of our executives have worked together through both the highs and lows. We understand our customers’ business needs and their vision. Our own vision is about the business success of those for whom we locate land, build facilities and develop and manage properties.

Most businesses continue to endeavor for the long haul. While many would like the “get rich quick” approach, I like to say that we are in the “get rich slow” business. While the former is most appealing, the latter is the more realistic.

The “dot.com boom” (and bust) and the more recent “start- up boom” likely instructs us that most individuals and business organizations do not partake in “get rich quick.” They must accept that success demands hard work, long hours, and a focus that results in solid business planning.

Land, real estate, development and construction are about the deep understanding of market dynamics and the ability to go the distance during both tough and prosperous times. In addition to The Depression, this includes more recent times of 1987 and 2008. In 2008, we witnessed many firms (similar to ours) shutter. We saw the construction business decline, with little growth in the overall economy.

The ability to persevere during these times includes understanding what types of businesses are necessary throughout the ups and downs. Construction continues at all points upon the economy’s continuum and smart businesses understand how to not only respond to a growth economy, but also a challenged one.

It is critical to focus upon lifestyle trends as well as generational activity. 2018 is very much about the impact that the Baby Boom generation has on the overall economy. As this generation ages, they look to where they will live and retire. Both of which heartily impact the development business.

The Millennials also have their own ideas about their lifestyles that include where they will work in proximity to where they live. This impacts transportation, location of their homes (and are these apartments or houses?) and how they spend their leisure time. It also includes wellness, overall individual health, how they consume (online versus malls) and what they do for leisure.

And the business that I run has rapidly led the way in development of the industries that support both the lives of the Baby Boomers and more recent generations. It is up to us to have a vision and know where American lives are headed. Much like our founder George Henkle did.