How To Not Lose Thousands When Purchasing A Business Without Being Hostage To Your Lack of Understanding (Part I: Assembling The Team)

How To Not Lose Thousands When Purchasing A Business Without Being Hostage To Your Lack of Understanding (Part I: Assembling The Team)

It’s no surprise considering what is happening with the baby boomers that valuations and exit planning are hot topic within accounting firms and small and midsize businesses in general.

That said, there’s a lot of confusion around this process and what are the appropriate roles and responsibilities of everyone involved.

Because of this, business owners are costing themselves thousands for failure to assemble the correct team when beginning the process of purchasing a business (and selling for that matter).

In general, the following people will be (should be) involved in the process of purchasing a business. I’ve also listed their role and responsibilities. Obviously, this is an ideal situation as there is a lot of variance in the market when it comes to these opportunities. I will describe this later.

Lawyer – The lawyer is responsible for all of the legal documents and entity formations (if needed). The lawyer will also do lien searches, investigate outstanding or previous legal matters surrounding the business, and work with the CPA on data points needed. The main legal documents that will help you assemble are the letter of intent and purchase agreement. Also, they will help with any earn-out provisions and employment agreements (with owner staying on or key-employees) among others.

CPA – The CPA is responsible for the accounting and tax due diligence. Specifically, digging in the books to make sure everything that was presented during the preliminary stages is accurate. With regards to taxes the CPA will ensure payroll, sales and use, state, and federal taxes were calculated correctly and would not adversely affect the calculated seller’s discretionary earnings. Generally, the purchase price is based on an adjusted net income multiple. This adjusted net income multiple is commonly referred to as seller’s discretionary earnings (“SDE”) in valuation circles; therefore, if there is an area of taxes that have not been calculated correctly then this would be considered an “Issue Item” which would need to be resolved (aka a price reduction (if you are working with me 😉).

Side note: Why a price reduction? Because if SDE was calculated based on annual state taxes of $5,000 (for an example), but they SHOULD HAVE BEEN $10,000, you have to assume the buyer is going to do things the right way and pay $10,000 when he acquires the business, thus decreasing the SDE that was presented by the seller and corresponding purchase price.

Banker – The banker is responsible for requesting the information that is needed such as business plans, asset listings, tax returns, and entity information in order to help finance the acquisition of the business. Bankers involved in this type of transaction are generally well versed and can add value in other ways such as communicating deal structures they have seen in the past. Also, the banker will let both parties know what the constraints are. For example, SBA financing has clear guidelines about how a deal can be drawn up.

Not having the right team can be costly. In the most recent engagement that I was part of, the buyer walked away completely during the due diligence phase after submitting a preliminary offer of over $500,000+. The findings were that important. In another situation, we were able to reduce the purchase price by $200,000 because of an adjustment to SDE. Is this typical of all engagements? Actually – yes. With the right team, it’s very rare to not find any issue items. Remember, issue items generally result in some type on concession by the buyer.

So, if you want to avoid not losing thousands in a bad team, get the RIGHT team…

P.S. – don’t assume the CPA that prepares your annual taxes can also handle your next big deal… do you want to know what the most search terms are on google are with regards to business valuations are? Try:

Sample valuation report

-How to do a valuation

-How to value a small business

-Etc., etc.….

I’m not saying these are all accountants scrambling to figure out how to handle their request from their client to look at a deal for them… but I would bet it’s a big percentage.

Get the right team assembled. Save thousands.

To be continued…

Interested in transaction advisory or business valuation services? Schedule a consultation HERE.

-Joe Gallegos, CPA, CVA

How to increase business profitability without spending a fortune

Peter Drucker (the famous management guru) once said, “you can’t manage what you don’t measure”

Do you want to know what the secret sauce of increasing business profitability is?

Whether you are a CPA wanting to create a consulting practice or a business owner wanting to effect change, the secret sauce of both is creating AWARENESS.

I’m an avid reader. I prefer non-fiction or NOT FAKE (How I always remember fiction from non-fiction – NF = Not Fake) and there’s a common denominator in all of them when it comes to effecting business profitability… obtaining financial awareness.

Moreover, I’ve consulted many small and medium sized businesses that were having all sorts of financial issues including, but not limited to:

Cash flow issues

Profitability issues

Tax issues

Productivity issues

The list goes on and on…

And during these consulting engagements, we would roll up our sleeves and review project profitability (to extent possible, sometimes internal accounting was just bad), staff productivity, cash-flow management and then we would have tough conversations about what the next three months were going to look like based on that information…

In one situation, I remember forecasting that the business had until November before it ran out of cash and we were in August!!


Nonetheless, it was a tough and direct conversation.

But we made changes which included:

  • Cutting losses (we determine to let go non-productive people, this usually represents 20% of your labor pool on average)
  • Focused on high-margin projects, volume didn’t matter
  • Better inventory management, there was a lot of waste here

And you know what happened?

The business improved.

It improved significantly.

Like a $500,000 profit improvement.

Looking at the situation, it’s easy to make the mistake that the root cause of solving these problems were all the changes that were made… but I would disagree.

The reason change was effected was because the business owner sat down with the CPA (me) he hired and went through the numbers.

The CPA showed him where he was losing and needed to improve.

AWARENESS was the key.

Of-course the tactical things mattered, but without AWARENESS, nothing would have happened.

Just try it.

Do you feel like you aren’t as profitable as you should be?

Do you feel like you can improve?

Then find out what the reality is.

Ask me, ask your CPA, ask someone where you should be.

Oftentimes this will be expressed as a benchmarking exercise, where your KPIs will be assessed and measured against your reality.

Have you ever received bad news from the doctor that your blood pressure was too high, or some other KPI with regards to your health was out of whack?

What happens, you figure out what you need to do to improve… and you do it! (of course, some people don’t and suffer the consequences), but the average person will do what they need to do more times than none…

So the secret sauce is –


It is really that simple.

Want to know more? How would like you like to have a strategy session with me? You can schedule a strategy session by CLICKING HERE.

Three things to look for when searching for contractor accountants

When it comes to looking for a Certified Public Accountant for Contractors, the search can be tedious and long. More than likely, you might go through a few proclaimed contractor accountants before landing the “right” one. It’s not uncommon for a contractor to have a CPA turnover ratio of one certified public accountant for every two years.

Therefore, the purpose of this article is to help you with this search and help you identify the best contractor accountant for your contractor business. Below are three things to look for when interviewing your next contractor accountant.

Knowledge of the Industry  This is apparent, but the question remains on how to approach this without making the experience feel too much like in an interview. The best practice is to approach this conversation as you would any other sales meeting that you have with your customers, but at the same time being keenly aware of the questions that this contractor accountant is asking. Here are some key questions that your potential CPA should be asking you:

  • How long do your projects usually last?
  • What do your work in process schedule look like?
  • What states do you have a contractor type license?
  • Do you have a line a credit/if so how much?
  • Do you have a banking relationship? With who?
  • What does your backlog look like?
  • Any bonding?
  • Are you going to need attest services (compilation, review, audit)?
  • How are cash reserves?

Do they want you to make estimated tax payments?  You should ask your contractor accountant how they feel about estimated tax payments. If they are insistent on that this is something you SHOULD be doing, then this should be a red flag. Contractor accountants should know that cash is everything in a contractor type business and that business is cyclical oftentimes. Generally, it’s best practice for a contractor type business to wait until necessary to pay-in because it all it takes is ONE bad project to be in a cash crunch.

Do you like them?  This is meant to be a fun point, but it does hold true. Contractors are special type of people, they are unique from other types of businesses in the same way that you expect Silicon Valley tech gurus to be different than your ordinary Joe. Really pay attention to this one, Contractors cannot afford to move slow, Contractor license applications in comparison to renewals is night and day. Therefore, there are going to be times that a Contractor business is going to be very demanding when it comes to their needs. Does the potential CPA contractor know this? Do they understand this? Do they have the personality to handle this? Do they cringe when you talk direct and honest? Not every accountant is made to service Contractors. Contractor accountants need to be able to take the hits, but also give them in good manner. In my experience, this is what builds trust and lasting relationship when it comes to contractors and their accountants.

JAG CPAs & Co. specializes in serving contractor type businesses, for more information just email info@jagcpastx.com or give us a call at 713-234-5112.

An often-overlooked year-end tax planning strategy for cryptocurrency investors!

Rules and regulations pertaining to cryptocurrency transactions are limited. The only guidance we have is the IRS notice 2014-21. This notice provided that certain cryptocurrencies, labelled “convertible virtual currencies” are treated as “property” for U.S. federal income tax purposes, and thus, “general tax principles applicable to property transactions” would apply to transactions involving convertible virtual currencies. The Internal Revenue Service (IRS) defined “convertible virtual currencies” as those virtual or cryptocurrencies that had “an equivalent value in real currency, or that acts as a substitute for real currency.” By going with the property definition, gains and losses arising from cryptocurrency transactions are capital in nature, not ordinary income.

Most importantly, it should be highlighted that capital losses arising from “property” transactions are not subject to wash sales rules; wash sales rules are applicable to only “stocks or securities” per I.R.C § 1091.

I.R.C § 1091.

(a) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under §165  unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities”.

In simple terms, a wash sale is a sale of a stock or security at a loss and repurchase of the same or substantially identical security 30 days before or after. Wash sale regulations protect against an investor who holds an unrealized loss and wishes to make it claimable as a tax deduction within the current tax year.

Losses arising from cryptocurrency sales are immune to wash sales rules and creates a great tax planning opportunity for certain taxpayers. Let’s look at the following example. Imagine you purchased 1 BTC for $5,000 on November 15th, 2018. On December 10th, price of 1 BTC went down to $3,000. If you were to sell this 1 BTC on December 10th, you would incur a $2,000 ($5,000 – $3,000) short-term capital loss. Since cryptocurrencies like bitcoin are treated as property by the IRS, this loss which would typically be disallowed under wash sales rules, is allowed. In other words, if you had the same transaction with stocks, the IRS would disallow $2,000 of short-term loss because you purchased the stock within 30 days prior to the disposition. The idea behind the wash sale rule is to prevent taxpayers from claiming artificial losses. Since this rule is not applicable to cryptocurrencies, in the example above, the taxpayer can claim a deductible loss and can renter the position at $2,000 per BTC again.

In summary, Capital loss harvesting is a handy year-end tax planning tool. Note that this strategy does not fit every taxpayer. Please consult your tax advisor to see if this strategy is a good addition to your tax plan.