EP47: Maximizing your Exit & Tax Savings with Matt Remuzzi - Domain Magnate

EP47: Maximizing your Exit & Tax Savings with Matt Remuzzi

      No Comments on EP47: Maximizing your Exit & Tax Savings with Matt Remuzzi    

Watch it on YouTube:

Listen on audio:

Listen on other platforms:

Youtube TuneIn iTunes Spotify Stitcher

In this episode, Michael speaks with Matt Remuzzi, the Founder of CapForge. Matt specializes in bookkeeping and tax savings for online businesses, specifically Ecommerce and Saas businesses. Throughout the conversation, Michael and Matt discuss when you’ll need a bookkeeper, how to cut taxes, and how to maximize the value of your business when exiting.

GUEST BIO:

Matt Remuzzi is the founder and CEO of CapForge, a virtual bookkeeping firm headquartered in California. With over 20 years of expertise in general bookkeeping, CapForge started with a single employee—Himself—which has now grown to over 40 bookkeepers and advisors for online businesses.

SKIP TO THE GOOD PARTS:

4:25 — What is Capforge?
13:26 — What’s one of the best US tax jurisdictions?
22:24 — Difference between Cash and Accrual Basis
31:19 — What are Add-Backs, and why are they important?
46:44 — What’s the K9 form for investors?

SHOW TRANSCRIPT:

Michael
This podcast episode is brought to you by domain magnate, a private equity firm, where we buy and grow online businesses for our investors and funds. And in the past 15 years, they’ve completed hundreds of transactions. To learn more, go to domain magnate.com. And also check out our new service, business management service at domain magnate.com slash business management. And today’s guest is Matt at CapForge, who is specialized on Bookkeeping and Tax for commerce and online business owners. I’m excited to learn more about Bookkeeping and Tax. And frankly, my knowledge in that area is quite limited. So I think I’m probably gonna learn quite a bit of new things here, as hopefully we’ll our listeners.

Matt
Yeah, well, I mean, I appreciate your saying that I think you’re probably lying. No, most people are not excited about bookkeeping. It’s not a topic a lot of people get excited about. But I mean, if you think about what we put all the effort into, right, we spend all of our waking hours thinking about our businesses, the accounting piece, the bookkeeping piece, is really how we keep score and figure out if all that effort is worth it, and which parts we should put more effort into and which parts may not be working out as well. So I know the marketing and the branding, and all that kind of stuff is more fun and picking out colors and designing websites and coming up with new products. That’s the fun part of business, I get it. But if you’re neglecting or ignoring the accounting part, then you may be spending a lot of time working on the wrong piece, or, you know, going down the wrong road when you could be doing things more efficiently and maximizing your time and effort. So that’s why I think, you know, accounting and bookkeeping gets to be fun when you get to see the numbers that you’re actually producing, how you’re growing it over time improving your profit margins, and then maybe when you have an exit, what you get to sell the business for. So, you know, it’s not most idea, most people’s idea of a fun day to day activity. But I think it’s super important. And it really helps you make good business decisions. Yeah, thanks. That’s a good point. And when I think about accounting, and then I think about doing my annual balance, that’s obviously not the most enjoyable activity. But when I think about accounting, I think about how can I save on taxes? How can I optimize things? So that’s actually quite interesting? Because this is something that could allow us to increase the value of our business. Yeah, I mean, I think, you know, certainly, everybody should be thinking about how to save the most they can on taxes, right? You know, nobody wants to pay more than they have to, you want to take advantage of all the legal loopholes that are available. But I also think, you know, if you look at any of the people who are famous as business people today, right, Mark Zuckerberg or Elon Musk, or any of the, you know, kind of famous business people, Tim Ferriss, right, they’re not spending the majority of their time thinking about how can I pay less? Right? They’re just building these great big businesses, they’re thinking about how can I find a great product for the market? How can I, you know, dominate my market? How can I charge more and beat my competition and grow this giant thing? And you know, they’re not focused on? Well, if I get too big, I’ll pay too much in taxes? or How can I spend time trying to come up with schemes to avoid taxes, right, when you get to 100 million or a billion, who cares? If you pay 10 million or 50 million in taxes, it doesn’t even make a dent. So while I don’t think it’s something you want to ignore, or not pay attention to, I think most entrepreneurs benefit most from really focusing on the growth and expansion of their business. And then yes, you want to be aware and be smart, but I think most people benefit more from just hiring an expert who can then find the right benefits and loopholes and and, you know, ways to minimize that. But it’s not I don’t think the entrepreneur should spend the majority of their time worrying about paying out they should spend the majority of their time building up. Absolutely. So Matt, tell us a little about cap Forge, how, how many people do you have? How many clients So how long have you been around? cap forge itself has been around for 20 years, but we’ve really been kind of focused just in the online space for the last six or seven. We’ve grown from just myself and a spare bedroom to you know, a team of 45 full time people and just over 1000 clients at this point. And the vast majority of our clients are in the online space. A good portion of them are ecommerce sellers selling on Amazon and other platforms. But then we also have Software as a Service folks and people making money from affiliate programs or content production. We have a couple of influence

In social media type, folks, so there’s lots of different business models in the online space ways you can make money in each of them have their pros and cons that sometimes the e commerce folks wish they were in the software as a service business, because then they wouldn’t have to deal with any physical inventory. But, you know, in the software, as a service folks see their, you know, their subscribers churn every two or three months, and they’re constantly trying to refill that bucket of subscribers, they may wish they sold a staple, like toilet paper, or, you know, dog food. And they could just order 1000s and 1000s of dollars of it and send it to Amazon and have them sell it in theirs while they’re sleeping. So there’s always a, there’s always a grass is always greener mentality about kind of wishing you maybe had a different business, they all can be good, they can all be successful, our biggest seller has $110 million a year in annual revenue. But our smallest guys are just launching their first product. So you know, we cover a whole range of clients. And we see people who are successful, and we see what they’re doing. And we see people that struggle, and we can see what they’re doing. And we try to help our clients get from the struggling side to the successful side whenever possible.

Michael
And for your average client, what’s the revenue, the annual revenue range, more or less,

Matt
I would say our sweet spot is probably between 500,000 and 5 million, that’s where most of our clients fall. But you know, we’ve got a few dozen in the in the 5 million to 25 million range and a few above that, and then we have a whole lot in the, you know, zero to $500,000 range just getting started. And when someone’s just getting started, I think, you know, they’re still entitled to good quality professional service, we try to reduce our pricing as much as possible to accommodate the smaller folks. So they can still afford good advice and good professional consulting. And then hopefully, they turn into one of the bigger folks as they grow and, and are more successful,

Michael
what is your smallest package, your smallest client,

Matt
our pricing generally starts at $199 a month for the bookkeeping, but even among that we have, you know, places where we’ll do a deal or cut a discount for somebody to get them help getting them up to starting. So, you know, we start on the low end, but everybody we try to quote is, you know, the smaller you are, the less you have going, the less it costs us to do the service for you. And so the less we can charge, and then hopefully, again, you know, we grow over time as they grow. And we have clients who started out, you know, launching a one single product and an e commerce platform. And today, they’re selling $10 million a year. And that’s only, you know, three years from zero to 10 million a year. So this is the kind of business where you can really succeed at a high level very quickly if you do the right things. And you know, a little bit of luck is involved. But, you know, to grow a brick and mortar business from zero to $10 million, could take you 10 years or more. So it on the online space is exciting because you can be successful very quickly.

Michael
Interesting. So at only one $199 per month, that’s quite affordable. And what would you say is the minimum size of business that you have to start looking for a bookkeeping service? What is this? Or should you just start looking at that right away,

Matt
I would say, you know, when you’re still in the startup phase, you’re spending money but you’re not making any money yet, you really don’t need a bookkeeper at that point, just keep good track of your expenses on a spreadsheet or something. And ideally set up a business bank account that’s separate from your personal so you’re not commingling your personal expenses with your business expenses. That way, it’s very easy to track exactly how much you put into it. But you know, if you’re an e commerce seller, maybe when you get to 5000 to $10,000 a month, if you haven’t hired a bookkeeper by then you really should start to have one because you should be making at least two or $3,000 a month at that point. If you’re a content business or something else where the margins are higher, you know, you might want to hire somebody as soon as two or $3,000 a month because you’re going to be profitable then. So it depends a little on the business. But I would say as soon as you start making money, that’s a good time to at least think about it. And you know, you don’t want to wait too long. Sometimes we have people call it they’re already making $2 million a year. They haven’t done any bookkeeping for three years. So you know, cleaning up that mess, going back three years and trying to track down every transaction is much, much harder, takes longer and cost more than if they just started, you know, from the beginning so that my advice is start sooner rather than

Michael
later. And you also have some clients, we’ve won Non Non Us Residents with companies and us.

Matt
Absolutely we have. I’ve kind of lost count. I think it’s up to about 30 countries now where we have clients who are located in those places and then in some cases, their main business is in their home country in most cases. They also have a US business setup, but I mean we have people in the UK Canada, Mexico, all over eastern Europe, Australia, Singapore, Hong Kong, New Zealand, Malaysia, Peru, Argentina. So I mean, we’ve, we’ve pretty much covered the globe in terms of clients that we are able to work with. And the nice thing is, you know, no matter where you’re located, e commerce and online businesses all are pretty similar under the, under the covers, they’re all pretty much the same. Once you kind of peel back the different brands and labels and languages, they all pretty much work the same. So we can work with almost anybody.

Michael
And so what are some fundamental differences between Non Us resident own LLC company, and LLC company or, or another us structure that is owned by by an American, or there are some differences in terms of how bookkeeping is down on how taxes are paid,

Matt
the bookkeeping is pretty much all the same. But for sure, there’s difference in taxes. If you’re a US citizen, and you own a US business, you have a few different choices, you can be an LLC, but you also potentially can be an S corp, or C Corp or you out you have some different options. And depending on not only that you’re in the US, but what state you’re in can make a difference as to what structure you want to choose and what the most beneficial tax situation is. On the other hand, if you’re International, and you own a US LLC, then the first question we always ask is, are you in a country with a US tax treaty where there’s an agreement between the two countries, the US and whatever the home country is, as for how taxes are treated, if there is a tax treaty, then usually, it’s pretty simple, we can set up the LLC in a way that it won’t pay any taxes in the US, it’ll only pay taxes in whatever the home country is, if you’re in a country without a tax treaty, then it can get a little bit more complicated, you have to do certain different things to be able to still be able to take the money out of the US without hopefully paying, you know, little or no taxes, usually by setting up a country, a company in your home country that charges a management fee or consulting fee to the US company, and basically take all the profits out of it as an expense, rather than on the basis of the tax treaty. So you know, that’s why it’s hard to give general advice, because every situation is different. The advice I’d give to somebody who’s based in Nigeria is going to be totally different than the advice I’d give somebody based in the UK. But I’m happy to talk to anybody. And if we can help or come up with a structure, a setup that’s going to work for their particular situation, then, you know, we can do that. But it varies so much country to country and situation to situation that it’s really hard to give sort of general advice that people can hear and say, Oh, that’s what I’ll do, because a lot of times they’re their cases just a little bit different.

Michael
Have you also had experience setting up structures and delays or offshore zones? Is that Is that still the case that like is that still something that people do and it’s helpful, not so much anymore.

Matt
It’s not as helpful as it used to be, there’s a lot more disclosure laws and requirements around moving money offshore operating from an offshore account, one of the best legal and really low tax setups that you can get, if you’re in the US now is if you’re able to move yourself and your business to be headquartered in Puerto Rico, that has a really good tax base. Puerto Rico is not a US state. So there is no state tax, and they have an agreement deal with the federal government, the IRS, were a resident there who owns a business and operates out of Puerto Rico only pays a 4% US tax rate. So it’s legal, you pay very little tax, you don’t have to worry about bringing the money back into the US because you’re already technically in the US as being in Puerto Rico. But 4% versus you know, as much as 40, or 45%, total tax sounds like a really good deal. Now, a lot, not everybody can pick up and move to Puerto Rico. That’s one, you know, downside of that particular plan. But it is still legal, and it’s available. And we’ve got probably three dozen clients who’ve been able to move themselves over to Puerto Rico and take advantage of that. And you can imagine, you know, if your your business is doing $10 million a year, you’re making two and a half million dollars in profit, paying 4% tax, versus 30 or 40%. tax is a huge amount of savings.

Michael
Yeah, that’s very interesting. So only 4% and is that capped at some point? Or is it just scaling linearly? like you’d be at 10 million 100 million or you have 100,000 in revenue?

Matt
Yeah, that’s the that’s the rate. So we’re regardless of how much you make and Puerto Rico is trying to bring business and and, you know, support its economy and have people operate there. So there are some fairly strict requirements about how long you have to be there and that you can’t you know, just get up Post Office Box and pretend you’re there, you have to actually, you know, have residency and have a driver’s license and really be set up there. But where it becomes, you know, pretend particularly interesting is, you know, you might be based in the US, but then let’s say you’re thinking about selling your business. And normally you make, you know, $500,000 a year, but now you’re going to sell your business and maybe exit for $5 million. Knowing that in advance, you may decide for $500,000, I’m not moving to Puerto Rico, but for a one time $5 million exit, it might be worth it to go and live there for six months long enough to meet the residency requirement, get your $5 million payday pay or low tax, and then, you know, relocate back to the mainland, or, you know, whatever your plans are. But, you know, we do have clients who are kind of on that track, where they’re planning an exit, and they’re already moved over there, so that when they do exit, they can save most of the money they make from that big windfall, and then, you know, move on to wherever they really want to live afterwards.

Michael
Interesting. And does that 4% cover the federal taxes, estate taxes and kind of everything that that exists there,

Matt
right, because, again, since Puerto Rico is not a state, it doesn’t have state taxes, and that covers your entire federal tax obligation. So there’s some law firms and some CPAs down in Puerto Rico that sort of specialize and making sure you’re set up correctly to, to be able to take advantage of this and not get yourself in any trouble. But as long as you jump through those hoops, and kind of make sure you meet the requirements, this is something that’s available to anyone who is able to get up and move. I mean, for me, it’s a little harder, I have a wife and two young kids. So moving from California to Puerto Rico is, you know, would be a little bit more of a challenge than somebody. But if you’re in a situation where you don’t have those things that are maybe holding you back, and you can move and work from wherever you choose, it might be a great option.

Michael
Yeah, we have we have one team member mike, who recently moved to Puerto Rico. And I wasn’t quite sure why. So now that makes more sense. Now I understand why it’s more. It’s more interesting for people to move.

Matt
Yeah, I mean, it’s also, you know, a nice tropical island in the Caribbean. So, you know, that’s not terrible, either. But from a tax standpoint, yes, there are significant advantages to being there.

Michael
Interesting. And what about Americans living abroad? There’s some some ways to save on tax or some structures that are preferable for for business.

Matt
Yeah, I mean, if you’re an American living abroad, you know, you’re still the US would still like you to pay us base taxes, but you do get some exemptions and write offs. And a lot of them, you know, if they’re permanently relocating, will then set up a company in their in their new home country, and let that be the entity that makes the money and avoids them, continuing to be paid as a US citizen. So again, it kind of depends, you know, which country you land in, and whether you’re just there temporarily, or if you’re planning to be there more permanently, but there’s lots of different strategies people can use to minimize that tax piece.

Michael
Yeah, I’ve met quite a few Americans living abroad. And I’ve seen people set up companies and different places, often using their spouses who are non Americans as as a recipient, but also just setting up companies and then keeping the cash and the companies to avoid having to repatriate it. So I guess that’s, that’s completely legal. Right?

Matt
Yeah, I mean, you can certainly do that, that the challenge that comes if you want to move back to the US and bring your funds with you, that’s where it gets, you know, more complicated, but if that’s not part of your plan, if you plan to, you know, just be a citizen of the world and travel around, or if you’re permanently relocated to your, your new home country, then you know, that’s not an issue, and you’re certainly able to, you know, run a business in the US get paid overseas and keep the money overseas and avoid, you know, the majority of those us taxes.

Michael
Alright, sounds good. What are some common mistakes that people often make with bookkeeping? Or what are some things that people don’t do that they should in order to save on taxes? Can does something come up?

Matt
Yeah, I mean, there’s a few things that people do. One is, you know, just not having bookkeeping, right. If you don’t have your books done, it’s hard to know, if you maximize all your deductions, if you didn’t miss anything, or if there was some opportunity you could have taken advantage of, right? If you’re just doing it all at the end of the year. I mean, we have this all the time clients come in, and it’s already January or February of the following year. And we’re, you know, getting all their numbers together that they, you know, they’re just getting started with us. And then so many times, we’ll kind of look at it and say, Oh, boy, you know, if you had come in September, before the year was over, I could have advised you to do this, this, this and this and that would have saved you a bundle. But now that it’s January or February, the year is over, it’s too late. You’ve missed those opportunities and those missed opportunities. Might be 10,000 $15,000 in extra taxes that you’re paying now that you could have avoided. So, you know, being ahead of it is a big missed opportunity for people just not knowing what they don’t know not being able to take advantage of those savings because they didn’t even realize you know that they were eligible because they just didn’t have anything put together. Another thing we see a lot, especially with e commerce companies, they’ll do their bookkeeping, but they’ll do it on a cash basis. cash basis just means you’re only keeping track of what comes in and out of the bank account. But it doesn’t account for your total sales, because platforms like Amazon will take 30% ish of your sales before you even get the check. And then they’re also not accounting for inventory correctly. And then when they go to sell those businesses, they don’t get the value that they should, they should be doing their bookkeeping on an accrual basis, that gets them a higher valuation, that same identical business, same result, same sales, same everything, just one’s done on a cash basis for accounting, and the other one’s done on accrual basis. That can be the difference between literally hundreds of 1000s of dollars in valuation. So I see that mistake happen pretty often. And it’s gotten to the point where now a lot of Business Brokers and people will tell them, before they even offer to sell their business, they’ll say, hey, call cap forage, get your books fixed. Otherwise, you’re leaving all this money on the table. And not only are you leaving money on the table, but it’s going to cost us in commission. So we want to get the highest commission, and we want you to get the highest value for your business. So just not understanding that, again, it comes down to, you know, having somebody who’s in this ecosystem, who’s an advisor who that can help you, right, so if you just go to your local CPA, or you hire a bookkeeper on Fiverr, or Upwork, or something, they’re not going to know the ins and outs of your kind of business, they’re just going to do the same kind of accounting, they would if you were a restaurant or a gas station or something. And you’re going to miss all these opportunities, both in potential tax savings and then in valuation when you exit the business. So it pays to find somebody who knows your space, right? If you had a problem with your eye, you wouldn’t go to a dentist, right? If your teeth hurt, you wouldn’t go to a podiatrist and say, well, a doctor is a doctor, what’s the difference? I personally I don’t want a podiatrist poking around in my eye. It’s I want an eye doctor. So if you have an online business or an e commerce business, you should have an accountant who knows online business.

Michael
So you mentioned cash basis and accrual basis. Can you expound a bit more on how each works? And what’s the difference?

Matt
Sure. So the cash basis again, just basically follows this is what comes into the bank account. If I get a check from Amazon, I record I got a $10,000 check. And then if I turn around and buy inventory for $20,000, I record $20,000, I spent on inventory. But really, what happened that month is you maybe had $15,000 in total sales on Amazon, not the 10,000, you recorded the check for and out of the inventory, the $20,000 of inventory that you bought, you may have only actually sold $3,000 of it that month, and you still have $17,000 sitting in the warehouse waiting to get sold. So on a cash basis, it looks like okay, 10,000 came in, and 20,000 went out. So that month I lost $10,000 you go Oh no, my business is not profitable. That’s not good at all. On an accrual basis, you say wait a minute, 15,000 came in 5000 went out to Amazon fees. $3,000 worth of product went out, and I made a $7,000 profit. It’s the same business, it’s the same business activity, but it’s just a difference of how you’re recording what actually happened. Neither one is wrong or right. They’re both accurate as far as they go. But the accrual basis tells you what your true profitability is. And the cash basis simply tells you what’s happening in your bank account. And just by looking at what’s happening in your bank account, it’s very hard to tell if you’re profitable or not at work, compare month to month, or see how your costs are changing over time. Right? So on a cash basis, you just have the basics of Do I have money in the bank or don’t I. But on an accrual basis, you have a much better picture of how the business is performing, how profitable you are, how it’s changing over each month. And then like I said, if you were to go and sell it, you’d be able to say look, the business is profitable every month and the profits are growing over time. If you show them a cash basis, it looks like every other month you lose money because you’re buying more inventory. So it’s an accounting you know, I try not to use accounting jargon and when we talk to clients we try to just you know plain English so everybody’s clear, but cash basis and accrual basis. is like the difference between a kid’s bicycle and a motorcycle. Right? You can do accounting either way. But we prefer to do it the more complete, more accurate, more robust way of recording it than just sort of doing the kids version of, you know, pluses and minuses in the bank account.

Michael
Yeah, that makes sense. Of course, you have to record your inventory. But then how, how exactly do you account for the inventory? Maybe you bought some inventory for years ago, but let’s say it’s no longer it no longer has that value of the value drops? A lot of the value went up a lot? do you account for that? Or do you just put the acquisition cost as a value?

Matt
Well, in accounting, when you buy it, the cost is that, let’s say you’re talking about clothes, right? And, and what you bought two years ago isn’t in fashion anymore, right? So you bought $10,000 worth of shirts that were cool two years ago, but now they’re much less cool, you can write down part of that. So let’s say they’re not worth 10,000 anymore. Now, they’re only worth 2000, we took an $8,000 loss because we sat on them too long, and they’re not cool anymore, and we can’t charge what we used to charge. So you can write down the the value of it. On the other hand, though, from an accounting standpoint, like let’s say, just by luck, you bought a million dollars of hand sanitizer, and masks back in, you know, January of 2020. And you’d never heard of COVID, you just thought maybe masks and hand sanitizers would be a good thing to sell. And you paid whatever $100,000 for them, but then all of a sudden, COVID breaks out. And now masks and hand sanitizer flying off the shelves. And before you could only charge $3 for a bottle of hand sanitizer, and now you can get $10. But you still only paid the same $1 for the product. So it’s not that the cost of the product changes, even though the product itself is more in demand and more valuable. What changes is the fact that you can now charge more and so your profit goes from maybe $1, a bottle to $5 a bottle. But again, you wouldn’t know this as nearly as accurately or be able to see it over time without good accounting, right? you kind of know, in your gut, right? you kind of know, hey, this stuff got more popular, I can charge more. But accounting is what really tells you how much are you profiting and how is your profit changing going up or down over time? That’s the important part to now.

Michael
So when you put the inventory at the end of the year for the for the accounting balance, how do you actually what, what value do you put on? Or do you have quite a bit of space in deciding that? For example, you know, you might have had, maybe you bought, like a million dollars worth of those 2020 glasses, you know, there was a sunglasses 2020 a couple years ago, and now they’re probably worthless, right? Do you have like, Can you just put the values? You know, like $100? Because no one would want them?

Matt
I mean, you you can potentially go all the way to zero, right? If if nobody’s going to sell them, or nobody’s going to buy them. And you really literally just have to throw them in a dumpster, you can go all the way to zero if you think they retained a little bit of value. You know, you can keep that but we always, you know, consult with our clients, what, what do you have on hand at the end of the year, let’s review and see if we need to make any adjustments, sometimes just in the process of buying inventory, right? You buy 1000 products from China, they ship it to your warehouse, for some reason, only 990 show up, then you ship it to Amazon’s warehouse. And for some reason, Amazon only gets 980. Well, now you’ve lost 20 units right before you even started selling. So we want to make sure we take those 20 units out, we write off the cost of those because they’re lost whatever happened and they fell off the boat or somebody at Amazon stole some took them home, who knows. But we want to always keep an adjustment in real time for what’s happening to that inventory so that we’re capturing the cost as you go along.

Michael
And what about things like brand value or like a customer lace? Does that? Is that come into your inventory as well.

Matt
So those kinds of assets, they don’t get valued until you sell the business. Right? So like Nike, for example, right? They have that logo, they paid $75 for it 1977 or whatever, right? So on their books, they still have that logos were $75 because that’s what they paid for it. But if you look at Nike as a business, and then he wanted to assign a value if they were going to sell the equity or sell the whole company to Under Armour or something, then at the time of the sale, they would say okay, what are different components of our business worth today? And they’d say, oh, that little swish that we paid $75 for. That’s worth $4 billion today, but You don’t assign a value until it changes hands. So you know, and I know that swish is not 75 bucks anymore. But until somebody actually says, Okay, let’s assign a value, and I’m going to give you cash, and you’re going to give me ownership of that intellectual property, brand account, customer list, whatever it is, it doesn’t on the books increase in value.

Michael
All right, that’s interesting. Go. So let’s talk about buying and selling businesses as that’s what we do demand magnate, and we often look at financial statements, a few things would have noticed is, first of all, there is usually a lot of expenses that are just not relevant to the business people always try to put their car expenses or dining out expenses. And I mean, it’s a sauce business. Right? That makes absolutely no sense. Why would you want to go dining with your wife? If it’s, you know, if the businesses is not related to that? So is that is that something that’s quite common? Is that something that people usually take into account than, than buying a business? And looking at the statement?

Matt
Yeah, so when you’re buying a business, the part you’re most interested in is what were the costs to run the actual business. So if it’s a SaaS business, you know, you probably have some developers, you have servers, you have internet connection, you have ads that you’re buying to drive customers, you have the cost for your merchant account for your stripe or square, whatever using those costs you want to consider. But to your point, exactly, if somebody is running their auto expense through or their dining out, or their travel, or they’re paying for consulting or courses, or what have you, all those expenses didn’t really need to be part of the business owner decided to spend that money, and he wanted to write it off to reduce his taxes. But a new owner wouldn’t have to spend the money on those things, they wouldn’t have to spend it at all, they could choose to do it, but it wasn’t required for the business. So those kinds of items are called add backs, it’s very common to see them in business deals, and a smart buyer is going to consider that those expenses aren’t going to be ones they will have to incur. And so they’ll not include them when figuring out how profitable the business is. Now, a not so smart buyer doesn’t realize that is undervaluing the business. And a smart seller is trying to include more ad backs than probably they should. They’ll say, Oh, well, we spend money on ads. But I mean, really were so popular, we could have not spent money on ads, and we’d still have the same sales. So let’s let’s, you know, add back the ad spend, because you didn’t really need to do that. If the buyer doesn’t understand what’s going on. And they agree to that, then they’re probably overpaying for the business. So buyers and sellers need to agree on what the Add backs are, and they need to be reasonable. And the rule of thumb should be if it was required to spend that money to get the results that you got, then it’s not an add back. If it wasn’t required, it had nothing to do with the business, then it probably is an add back.

Michael
Yeah, it’s probably less common commerce businesses. But with content based businesses with affiliate businesses, we see that a lot. People only put their like web hosting costs, and maybe some paid links costs as the expenses, we don’t put anything else. We don’t put the cost of content, the cost of employees and staff and maintenance and editing. And I think that’s that’s also a big problem in the industry currently with if some of these types of businesses because a lot of buyers don’t really understand what are the costs expected. And they look at the p&l. And they think that this is because the Thai expect to have this is a profit that they expect to have. While in reality, it might be 2030 or even 50%. Lower. Is that something you see commonly as well, in SAS businesses?

Matt
Yeah, I see a lot of people trying to leave things out and see either claim, oh, it was just a one time expense, or Oh, that’s not really important. Are all these contractors, you know, they work on my other business, not on this business that I’m selling you and then come to find out? Well, no, really, they spent 80 hours a week working on this business. And there was, you know, all kinds of other expenses they forgot to include. So you have to be careful as a buyer, you have to do your due diligence and really investigate the business and it helps to know the space, right? If you’ve owned three other four other SAS businesses, and then you look at one for sale, you probably have a pretty good idea of what you should see and what the costs are to run it. If you never have been in this business before you you were a dentist before or something and now you want to get into online business. You probably have no idea what you should or shouldn’t be seeing and you’re taking them at their worst And that’s where you can run into trouble and you think, you know, it’s going to make a certain amount of profit. And then you get actually take control of it and find out it only makes half that much profit.

Michael
Yeah, absolutely. And we see that a lot. And having spirits hang around a lot of experience and all these types of businesses, we would genuinely just look at, at the p&l and know what’s missing, what should be added, or what was just not essential. We were buying a sauce business this year. And it had a lot of personal expenses on the on the books, things like, yeah, things like dining out or travel or like international travel. And also like all kinds of different, smaller expenses. And the seller was not quite aware of that. I mean, they, I think the seller just assumed that they have to give us the financial statement, but just being able to look at it and know that this is not relevant, that is not relevant, and then calculating what’s the actual expected profit for us. That gives us a huge advantage. So understanding the books can be quite helpful in that regard.

Matt
Absolutely. Yes, knowledge is power. And the people that don’t know what’s going on, you know, tend to not be on the winning side of the deal.

Michael
Yeah, and so let’s talk about that a little bit. What are some things that people really need to do if they’re prepared to sell their business? Let’s say they have six months before they want to sell it? What should they do with bookkeeping? How what are some changes they can add to, to maximize the value?

Matt
Well, one of the things that we do anytime a client says they’re thinking about selling is will immediately look at their books, and start to identify places that they might be spending money that they don’t need to, if they’ve been kind of casual with their ad spend, and they could cut it back without hurting their results, or paying more staff than they really need or paying more contractors than they really need. Whatever they can do to really make sure they’re maximizing the profit. And then anything that they’re running through the business that they don’t need to be run through the business will suggest that they stop that, or at least we’ll put it in a separate section, kind of below the line. So that way, we can say here, everything above the line, these are the business required expenses. Everything below the line, this was really personal discretionary expenses, that the seller was choosing to run through the business, you know that for tax purposes, but weren’t really required. And then making sure that everything we have is super well documented and and defensible, right? So if the buyer comes through, and a lot of times the buyers will hire a due diligence team or a CPA to review things. We don’t want there ever to be a time where they point to some number and say, Well, how did you get that and we go, Oh, my gosh, I don’t know how that got there. We want to always be able to say, this is exactly where every number came from. This is how we got it. This is why you know the backup the support, that way you don’t have a situation where somebody comes in, and maybe there’s an N Li for, you know, 500,000. But then after they review the books, and they find all these problems, they revise the offer down to 300,000 or something, right? Whatever the yelloweye is, we want that to stand. Because we don’t we don’t want there to be any problems in the book, in the books, or any reason for them to want to renegotiate because of problems. So just getting everything cleaned up and tight and supported and accurate is really beneficial to a seller getting the highest and best price.

Michael
Yeah, that’s that’s good. So just making sure that all your numbers are together that that all yeah, that you can prove and explain all the expenses and profits. So what are some things that people should do at the end of the year, the end of the financial year? And by the way? Is this always going to be like December? Or, dude, can you choose to end your year? Different months, if that makes sense? And what are some things you should do to reduce your taxes?

Matt
So most us businesses choose or default to a calendar year. So January through December is the fiscal year. outside the US it seems a lot of countries have a different fiscal year, whether it’s September, September or March to March or, you know, June to June, we see a lot more variation in the fiscal year outside the US most us businesses run January through December. So the year end is obviously your fiscal year and whenever they draw the line and say okay, that’s the end of one year, and now we move on to the next year. That’s the time period you want to prepare for but essentially, again, kind of cleaning things up if you have an inventory business. Take the time to run through and see if there inventory that you no longer think you’re going to be able to sell either at all or for full price and make those adjustments. There’s no point in carrying all that value year after year on the books, if it’s really not, you know, sellable if it’s damaged or out of style, or it’s lost, but you just haven’t recorded the loss, whatever the case. And also you want to look at are there any tax changes for the end of the year, like recently in the US, the last couple of years, there’s been quite a few different tax changes. And if you’re not aware of them, and prepared for them, and taking advantage of them, you may have missed out on some of them. For example, there’s been some credits, and and loans and other things around COVID that the government made available, but some of them you had to opt into. And if you missed out on that, I mean, you could have again, missed out on 10s of 1000s of dollars. So having that consultation three or four months before the end of the fiscal year, allows you to get up to speed on any changes, or maybe your business crossed a threshold where before you know, last year, it didn’t apply. But this year, it does because of some tax rule or limit or, or something that you’ve crossed. So having all your numbers together, and then being able to review ahead of the fiscal year just gives you the best opportunity to make sure you’ve caught everything and taken advantage of all the rules and changes and not finding out about it two months after the fact where it’s now too late.

Enjoying our podcast? Support us by leaving us a review on iTunes or on your favorite podcast app.

Interested in being a guest on The Domain Magnate Show? Click Below

Podcast Guest Application Form

0 comment on this podcast

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Subscribe to get the latest deals and tips for buyers