Tax Issues to be Aware of When Selling Your Business, with Roman Basi, The Center for Financial, Legal, and Tax Planning, Inc.

Male: [00:00:00] Business owners likely will have only one shot to sell a business. Most don’t understand what drives value and how buyers look at a business, until now. Welcome to the How to Sell a Business podcast where every week we talk to the subject matter experts, advisors and those around the deal table about how to sell at maximum value. Every business will go to sell one day. It’s only a matter of when. We’re glad you’re here. The podcast starts now.

Ed Mysogland: [00:00:36] On today’s podcast, I got a chance to interview Roman Basi. And Roman is the president of the Center for Financial, Legal and Tax Planning. And I’ve heard him speak, oh, it’s got to be at least five times over my career at different M&A conferences. And he is one of the most sought-after sessions. Any time you go to visit or anytime you go to see him, the room is filled, and he doesn’t disappoint on this episode either. It will be hard pressed for any business owner not to have received some value from this.

So Roman is, like I said, their practice is, I see them as deal making. They help all of the deal makers make better deals for their clients. And he, like I said, he is a sought-after speaker. He goes across the country back and forth, talking about how to maximize the value. His core competencies are business valuation, succession planning, tax planning and buying and selling a business. And like I said, he was so generous with his time, as well as all the rapid-fire answers to my questions. And I am not a tax guy but boy, he sure educated me. So, I hope you enjoy my conversation with Roman Basi.

On today’s show, I’m excited to welcome Roman Basi of Basi Basi & Associates. I should point out today that this is not legal or tax or accounting advice. Roman’s been kind enough to come on the show. He’s not your accountant or attorney yet. So, seek your own counsel regarding any kind of advice we may give. So, Roman, welcome to the show.

Roman Basi: [00:02:49] Thanks, Ed. Thanks for having.

Ed Mysogland: [00:02:50] Like I was saying before we started, I’m a super fan. Whenever I go to these conventions, I don’t get the opportunity to ask the questions that I’ve been meaning to. You know, I take my notes, but everybody seems to lunge forward, and I don’t want to say rock star status. But in the deal making world, you have one heck of a reputation on helping sellers really maximize the value or the proceeds of their sales. So, I guess where I’d like to start is it seems as though you do have a little bit of a niche with the sell side advisors. Can you talk a little bit about how you got into that?

Roman Basi: [00:03:40] We do. And that’s an interesting question. I don’t get that question very often. But, you know, my father started our company back in the late eighties, early nineties. And he was a professor at Southern Illinois University and Penn State University, and I joined him in 1997. And he started doing a lot of research and writing about small businesses in the United States. And companies started to call him wanting advice and information on what to do when they sold or when they created a succession plan or when they just didn’t know what to do. And we have a niche because like my father, I’m an attorney and a CPA. Now, he also has a PhD in economics. However, I am also a real estate broker and a title insurance agent. So, our niche comes in because when we represent a small business in the United States, and I say small business but that’s defined as anything less than $50 Million in assets or less.

Ed Mysogland: [00:04:36] Got it.

Roman Basi: [00:04:37] So, the majority of privately held companies are small privately owned companies. And when we get involved in these, they see us as, oh, you are our legal counsel, our accounting counsel, our financial counsel, our real estate counsel. And that’s what makes up a company besides human resources and employees and insurance and things like that. So. We’ve kind of are a one stop shop with the exception of the brokering or the M&A guidance piece, where we look to gentlemen like you, where that is where most of our referral base comes from is brokers and advisors like yourself. But outside of that, it’s a one stop shop and that’s what created our niche over all these years.

Ed Mysogland: [00:05:17] Well, and it’s funny and it truly is a niche because you’re a fixture. It’s funny that the conferences that I attend, you always have either the house is full for your session or it’s full, and there’s some folks standing around. And it really is, I’ve learned an awful lot about things that even though I’ve been in the business for 30 years, you’ve shared a number of things that have helped a lot of our clients. So, let me start off with every business owner knows that you can sell business with the assets, or you can sell the stock. Every seller wants to sell the stock, and we know that. So, I guess from a high level, can you kind of give the lay of the land for stock in asset sales?

Roman Basi: [00:06:13] Yeah. I mean from a very high-level speaking right, a seller is generally going to say to me, to you, well, I heard it’s best to sell our stock because we’re going to get capital gain treatment on the sale of our stock, which capital gains rates are traditionally lower than your ordinary income tax rates. An asset sale, they’re going to tell us, well, I heard that’s going to be mostly ordinary income tax to me if I sell the assets of my business.

And those are generally speaking the two ways to sell a business. Are we selling the assets on the balance sheet and nothing else? Or are we selling the stock of the company, which is selling everything, everything that’s on the balance sheet and everything that’s not on the balance sheet is a stock sale. And those are the two high level ways to look at those. There are hybrid methods that are becoming more used now, considerably more used now over the last couple of years, where you combine the elements of an asset sale and a stock sale, believe it or not. And for a lot of sellers listening today, they may be saying what, there’s a way to do both and there is a way to do both? And there’s reasons sometimes to do both.

Ed Mysogland: [00:07:28] Well, let’s just dive in. I know I had it on my list to talk about. Let’s just go and talk to hybrids. I mean, you got the momentum.

Roman Basi: [00:07:36] Yeah. So, one of the hybrids that we see a lot of is with an S Corporation, with a flow through entity, and it’s the section that we have is 338 transaction, 338(h)(10) transaction. And what that is in general is selling the stock of a company for legal purposes and selling the assets of the company for tax purposes. Now, why do we need that to happen in some cases? Because the buyer is going to essentially get the stock of the business. So, they may be getting certain licenses or certain contracts or certain royalty agreements that are very, very difficult to transfer.

I’m going to give you a prime example of one that I did, and it was a whitewater rafting company in Colorado. Now, imagine a whitewater rafting company that have got these large rafts, hundreds of them. Each one of them has a federal license on them that they can be on that federal waterway.

Ed Mysogland: [00:08:39] I didn’t know that.

Roman Basi: [00:08:40] How difficult it is to obtain a federal license like that. So, a buyer wanting to buy that company is not going to be able to buy the asset, buy the raft, and then apply for a license with the federal government. It would take years. So, we use a 338(h)(10), which what that does is the buyer gets the stock of the business, so they own the raft, and they own the license. But a buyer also wants a stepped-up basis in the raft, like they were buying it as an asset only.

And so, in this particular transaction, they get a stepped-up basis in the asset, yet they bought the stock of the company and now the buyer can redepreciate the raft. That’s why you see a 338(h)(10). A lot of the times with medical practices. I’m even involved right now potentially in the sale of a very, very large designer company that has royalty agreements associated with it. And we are looking at a 338(h)(10) for that transaction.

So, now from a seller side, as we know, as you said, my niche is sellers, even though we do represent buyers, my real niche, 75 percent of our deals, if not a little bit more, are for sellers. What happens with a seller? Well, a seller has some potential negative taxation to a 338(h)(10). And in the typical transaction, we will do an analysis. We will do what we call our tax minimization analysis, and we will show the seller what the negative tax treatment or if there is a negative to a 338 is. And traditionally, the purchase price should be grossed up by the buyer to account for that negative taxation to the seller because the buyer is getting the benefit of the stepped-up basis of that raft. So, that’s a 338(h)(10), again, high level for you.

Ed Mysogland: [00:10:39] Yeah, so the biggest reason to deploy a 338 is predominantly to assign contracts, right? Contracts, licensure.

Roman Basi: [00:10:52] That’s right.

Ed Mysogland: [00:10:53] So, the–

Roman Basi: [00:10:56] Also think about this. I don’t mean to cut you off.

Ed Mysogland: [00:10:58] No, we’re good.

Roman Basi: [00:10:58] It’s not about a company that has a lot of vehicles, or a lot of equipment and the buyer doesn’t want to have to transfer title to all of those and pay sales tax and use taxes and transfer taxes and relicensing fees. So, this is more useful in more companies than what we even think about. And we see 338s done with companies with lots of equipment because they avoid all of that relicensing.

Ed Mysogland: [00:11:25] Well, and we’re seeing even without the licensure issue, it seems as though the whole motivation is a tax treatment. It doesn’t matter. I mean, are you seeing that, too, or am I imagining things?

Roman Basi: [00:11:41] The whole motivation is the buyer gets that tax treatment. They get that step up in basis. They get to re-depreciate the assets, and yet they don’t have to recreate an entire corporation structure. It’s there for them.

Ed Mysogland: [00:11:54] So why don’t more people do it? Why isn’t that just totally the main way of transferring businesses?

Roman Basi: [00:12:04] It’s a complicated tax analysis and that’s why. Most accountants are not familiar with it. They don’t want to analyze it. They just think it’s too complicated to kind of deal with. A seller is dealing with so many other things in their mind going to market. Complicating it with a 338 can be very difficult if the seller is not educated. I’ll give you this one too. I represented a behavioral health clinic, and I told them from the very beginning this smells like it’s going to be a 338. It smells like it’s going to be a 338. We get the 60-page asset agreement two weeks prior to closing. And sure enough, what’s in there, the 338 clause. That’s why these things don’t have traction, because sellers are not educated, buyers throw them in at the last minute from their legal or tax counsel and it blows things up.

Ed Mysogland: [00:12:50] Yeah. Well, like I said, it just seems as though, Google has educated a lot of sellers, wrong or otherwise. And again, they show up wearing the t-shirt that says I want a 338. And it just doesn’t always go that way, you know.

Roman Basi: [00:13:15] You are absolutely right. We had a seller contact us about a year ago and the seller’s email or reference said, well, I’ve been hearing that I want a 338. I’m like, why does a seller want a 338? Blew my mind. I’m like, that’s for buyers, it’s not for sellers.

Ed Mysogland: [00:13:35] Right. And that’s what I’m saying. It’s funny you say that because we’re seeing it a lot. And again, Google’s a blessing and a curse. We do a lot of — well, I’m certain you do a lot more of it but straightening people’s assumptions out on what they want. One of the things I wanted to ask you about is the different levels of deals, like what is — it seems as though your microbusinesses, look, this is going to be traditional assets, let’s just leave it at that. But where are the thresholds that you’re seeing complexity layered on?

Roman Basi: [00:14:28] So, you got your main street transactions, which are generally what, a million dollars or less, although that number is getting stretched these days because of inflation. And we don’t see too much complexity in the main street deal. Main street deals are generally asset deals straight up or stock deal. Although you get to the higher end of that Main Street deal, you will see some complexity. Now, you get anywhere above a million dollar deal, you see complexity, you see issues.

Give you another example. I got a call the other day from an attorney, from a broker in Arizona. He has a business he’s selling that an attorney owns. However, she happens to be in labor. This just happened last week and she’s physically in labor on the day they want to analyze the purchase agreement. It’s about a $3 Million deal. So, I’m looking at this purchase agreement, and when you say complexity, I look immediately at the tax issues when I look at a purchase agreement. And the first thing I saw on this deal, on a $3 million deal, was a $500,000 allocation to a non-compete. Folks, that’s ordinary income to a seller. I’ve never in my 25-year career seen a $500,000 allocation to a non-compete and I do deals 20 million, 50 million, 60 million, a hundred million. I have never seen that number.

So, you start to see those issues, those complex concepts. And non-compete is not complex, but the tax allocation can be and the negotiation for it can be. And that was a $3 million deal. By reducing that down to a hundred thousand dollars, which is still unrealistic, that saved the client $80,000 in taxes. Well worth my couple of hours of looking at that purchase agreement for her while she’s sitting delivering her baby. So, you see that complexity kind of kick in once you get above that million-dollar range or when there’s potentially real estate involved, because then we have some issues we can flex with from a tax perspective so.

Ed Mysogland: [00:16:33] Well, from an allocation of purchase price, well, we’ll go down there. And the funny thing is one thing that you said way, well, a long time ago, you take that allocation, the furniture fixtures and equipment, take it to book. I mean, you’ve saved a massive amount of taxes. And I’ve used that. That’s in the letter when we counter, if we’re at a stalemate. No, because of you. I guess can you talk a little bit about the allocation of purchase price. And if I just heard that allocation of the non-compete or something, they’re saying, well, why is that a problem? I mean we just negotiated this out, they think it’s a, I don’t want to say a game, but this is a negotiation and we’re kind of moving our pieces around. Can you talk about the ramifications of making really poor judgments on that 8594?

Roman Basi: [00:17:37] And that’s the problem. In early on in a transaction and a seller is negotiating with a buyer, they don’t necessarily, don’t often necessarily, think about the tax ramification. They’re just seeing that high dollar they’re going to get for the company. And that’s where the mistake comes in because how is the allocation being crafted? Who’s in charge of it? And like you just said, what’s the framework you’re going to utilize maybe in your letter of intent? Is it book value to the assets that are on my book? Sellers, if we’re using book value and that’s what’s on your balance sheet, you are not paying taxes on book value. That is your tax-free basis that you can return to yourself. Everything above that, up to the original cost of the item is going to be depreciation recapture, which is traditionally ordinary income. But there are some categories around depreciation recapture. Everything above its original cost, which is rare in an asset sale, is going to be capital gain.

Now, Ed mentions 8594, you mentioned 8594, that’s the IRS form that should be completed at a closing. Keep in mind, that form is not signed by either party. Either party can, if it’s not discussed and it’s not part of the deal, and I’m going to give you an example. It just happened a week ago and I blew my lid. But that 8594, a buyer’s 8594 doesn’t have to match a seller’s. And that’s how we report the allocation to the Internal Revenue Service. You are telling the Internal Revenue Service what seven categories of assets you allocated to in the deal and how much you allocated and how much the fair market value is. The IRS wants to see, are you allocating more or less than it’s fair market value? Folks, you’ve got to be really, really careful.

Here’s my example. We sold a janitorial cleaning company. This was like an under $2 million deal. We had the allocation set in the asset purchase agreement and we used a personal goodwill agreement. The document said each party will file an 8594 after closing in accordance with this allocation. Two months go by, last week happens, we get an email from the buyer. I don’t have any docket. I didn’t represent the buyer. I don’t have any documents. I don’t know what our allocation is. I need all this information. The seller is trying to cut their costs. Did not want to have us respond very much. We were unaware there was this communication going back and forth.

The seller sends the buyer the fair market value of all the assets the buyer bought. That was not our agreed allocation. I immediately jumped in, sent them all proof of the documents, mostly showing book value. I hope to God they don’t have a dispute now because now the buyer can say, well, why is the fair market value so much higher than what we allocated, and I want this. I hope to God they don’t bother. So, sellers, you got to be so careful with the information that is given to the parties, LOI, during due diligence, during purchase agreements and after a closing.

Ed Mysogland: [00:21:02] So, one of the things that has always struck me is why doesn’t the 8594 get signed? You would think of all the documents that the taxable structure, you would think that the service would demand that, you know.

Roman Basi: [00:21:25] Interesting. Because it’s a form. So, a lot of IRS forms don’t get signed. They just get attached to our returns. And the history behind the form says that the parties don’t have to agree, that the parties technically don’t have to agree, and they can file whatever they want. And if they file differently, the IRS has the right to audit them and determine what fair market value is. So, that’s why, maybe they try to avoid the fact that if they required signatures back in the day, parties may never have agreed, and no one would have signed. I don’t know. That’s a great question because I don’t know the answer to it. But that’s the history of it and that’s what people don’t know, is that you actually don’t have to agree but I don’t recommend that. And of course, you don’t either. We recommend everybody agreeing.

Ed Mysogland: [00:22:13] Well, the funny thing is in all my years, I’ve never heard of the service coming back on on that. Have you ever bumped into that?

Roman Basi: [00:22:23] Yeah. The only way — we never ran into it. Again, because look, when sellers use people like you, people like us, they’re generally protecting themselves from those questions of audit. But what the IRS would do is they would recharacterize the allocation and say, well, you can’t put this on goodwill, you’ve got to put this on the assets. And if they audited a transaction, that’s what they would be looking for is a recharacterization of the allocation. And then your client would get a tax bill. You may not ever hear about it. I may not ever hear about it, but it may be happening out there to our clients.

Ed Mysogland: [00:22:56] I got them. So, you had talked about C-Corps. And years ago, I saw more and more of them, not so much these days. But nevertheless, I think it would be remiss not to talk about the QSBS, you know.

Roman Basi: [00:23:13] Yeah, that’s a great topic for sellers out there and for buyers out there. When I represent a buyer or I represent someone going into business, we help them incorporate their companies, we’re going to talk to them about section 1202 of the code. This is for potentially buyers of stock, also for sellers of stock. 1202 is called qualified small business stock. It is stock of a C-Corporation which is a non-flow through entity. If you have stock of a C-Corporation under code section 1202 depending upon when you created the company, when you were issued the stock, how long you held the stock for, you can possibly sell the stock of your company and not pay tax on the gain whatsoever. It is a gain exclusion under section 1202.

Now, you’re right, we didn’t see a lot of C-Corporations after the tax code was passed in the eighties with the creation of subchapter S, which is where S-Corporations come from. However, in 2017, with the Tax Cuts and Jobs Act, when the C-Corporation rate was dropped down to 21 percent, all of a sudden, we saw some conversions to C-Corporations and some incorporation of C-Corporations. And now what I see because of the knowledge of 1202 is we convert some companies that were never a C, we convert them from an S to a C. And then if that company holds on to that stock for five years now, we can sell that stock tax-free. This is wonderful for internal transactions, succession plans, sales to a key employee, sometimes sales to a competitor or someone knowledgeable in the market that is okay buying the stock of the business. So, 1202s are extremely advantageous.

Ed Mysogland: [00:25:14] So, the lookback period for the conversion is five years?

Roman Basi: [00:25:21] The holding. We call it a holding period. You’ve got to hold that stock for five years to be eligible for the exclusion of the game.

Ed Mysogland: [00:25:29] I got it. So, for planning purposes, and I mean, what’s the likelihood that’s going to change, the tax codes? I mean, granted, crystal ball, but what’s the likely that that’s going to change?

Roman Basi: [00:25:39] The 1202 has changed over the years. In fact, let me explain that. I had it in front of me a minute ago. Let me find my, oh, here it is. Here’s my QSBS chart. It’s changed a little bit. So, I don’t think 1202 will ever go away, but it does change. So, if the shares were acquired after September 27th, 2010, it’s a hundred percent exclusion. If the shares were acquired between February of ’09 and September of 2010, it’s a 75 percent exclusion. If the shares were acquired before ’09, it’s a 50 percent exclusion. So, my answer to that question is 1202 is here to stay but the exclusion rates can change with legislation.

Ed Mysogland: [00:26:26] So, in my notes here, I wanted to talk about the 1202g which has something — and I have no idea what this, I’ve never even heard of this, that there is something that the QSBS works for pass-through entities.

Roman Basi: [00:26:43] It does. So a pass-through entity like an S-Corporation, a 1202g can work for S-Corporation, which is otherwise known as a pass-through. You’ve got to be careful though. You cannot transfer during the holding period. That stock cannot be transferred to a partnership or another type of vehicle. So, 1202g, got to be very careful with. We’re just now starting to see some potential transactions and some legislation around 1202g. So, it’ll be interesting to see how that kind of fans out now that we’re seeing more of those.

Ed Mysogland: [00:27:23] Yeah, because we’re talking to a lot of sellers that are sitting here saying, all right, you know, the next couple of years are probably going to be a little bit bumpy. It might be time to retrench and kind of get our plans back in order. And, you know, there’s still time to have a great exit. Does it make more sense to do the restructure and the five-year hold or do the 1202g if you’re an S-Corp?

Roman Basi: [00:27:50] It’s one of the things that we will look at because one thing we say about C-Corporations and a lot of people don’t understand this, that a C-Corporation, you know, you have this 21 percent tax rate, but are you really paying company taxes ever in your C-Corporation or are you withdrawing the profits via salary, bonuses, however you’re withdrawing them. You’re not paying those taxes anyway. So, sometimes it’s more advantageous for us to make the conversion because their tax rate is less if they do leave profits in the company as opposed to an S-Corporation subjecting yourself to the scrutiny of 1202g and then paying a higher tax rate while you’re operating the S-Corporation. So, those are some of the things we look at when we say, is it better to do a 1202g hold on to my S-Corp stock and face a little bit additional scrutiny? Or should I go a 1202 route straight up C-Corporation, run the company. If I have profits in there, I’m only paying tax at 21 percent flat rate anyway. So, those are the analyses that we look at.

Ed Mysogland: [00:28:50] I got it. In one of the sessions I set, I went back to my notes, and I saw a tax -free reorganization. But I, for the life of me, I can’t remember what in the world that was. What is that?

Roman Basi: [00:29:06] So tax-free reorganizations are, so in a nutshell and a high-level overview of that, because they work in certain industries and it’s when a seller is going to retain equity essentially in the new company. That’s when a tax-free reorg of an S-Corp can work.

Ed Mysogland: [00:29:30] I got it. I got it.

Roman Basi: [00:29:30] And we form a new company to hold the stock of the target company buying the new company’s stock. So, the old company — you’ve got to be careful because in general, majority of the sellers that I deal with in the industries I deal with, about 80 to 90 percent of the time, they’re selling out in whole and they’re not taking an equity piece. So, the reorgs are not a possibility for them. However, if you’re a seller and you’re listening to the podcast today and you’re thinking of, yeah, I’m going to sell out, but I’m going to keep a 20 percent interest in my business. Okay. If you’re an S-Corporation, you are a potential candidate for an F reorganization. We see a ton of this in the insurance industry. And we saw more than I’ve ever seen in my life in 2021 in the insurance industry. We call them roll ups where they’re rolling the company up into a new company. But you, the seller, are taking an equity piece in the new company. So, that’s when the reorgs are a possibility. If you’ve got a seller that’s going to sell out in full, that’s not an option.

Ed Mysogland: [00:30:36] Yeah, I got it. So, I’m looking at, I guess like rapid-fire questions. There’s different scenarios that we’re seeing a lot of. You know, sell into a kid, sell into a key employee. We’re seeing more and more ESOP. ESOPs are getting more prevalent and then selling to a competitor in a strategic. I’m just kind of curious to know like, you know, here, if I’m selling to my kid, here’s the top three things you need to keep in mind. If I’m selling to my employee, this is the top three things you need to keep in mind. So, how about can you kind of run through those scenarios?

Roman Basi: [00:31:19] Yeah. And you know what we start with when we look at that for a client is we, again, we like to do what we call our tax minimization analysis. We are showing them the effects of the three different, yeah, are you selling to a family member, are you selling to an employee, are you selling to an outside competitor? And what are the ways that we do that and how does that look for you and what’s your taxation there? And we show our clients down to the penny what they’re going to receive on these.

And let’s just break them down. If you’re going to sell to a family member or a child, typically we’re going to structure that as a stock redemption, where typically 99 percent of the time, I’m going to structure it as a stock redemption, which is where you are using the profits of the business to pay yourself the seller over time for your stock. So, what we will do with the child is we will give them one share, or they will buy a share with a bonus that we give them, and then we redeem all of the owner’s share. So, you, the owner, get capital gain treatment on anything above your basis. You have a little bit of interest income on that because there’s a note given to you for a certain period of time, 10 years, 15 years, 20 years, whatever it may be. The child, on the other hand, is running the company. They’re paying your note. They don’t get a deduction for the note, but they get a deduction for the interest expense. It’s a very clean, easy transaction with a child.

With an employee, it’s about 50-50. Because here’s the difference. If we do a redemption, the person within the company who’s helping, who’s paying the note for you, they’re not getting any basis in their stock. So, if they go to sell their stock down the road, they have no basis. It’s all going to be capital gain. So, sometimes an employee would rather say, no, I want to buy the stock under a stock purchase agreement and I’m going to go get a loan or I’m just going to bonus myself out money. And then what’s that employee doing? They’re building their tax-free basis for down the road if they ever sell the stock. But again, remember, we might sell assets down the road, so all that stock talk goes out the window. So, we like — those are two of the primary ways to deal with an employee or a child. And then, of course, you’ve got some other mechanisms as well.

And you talk about ESOPs. I think ESOPs are extremely beneficial when, and I represent some companies that have ESOPs. The benefit to ESOPs is maybe you don’t have a successor in place, and you’ve got just a core group of employees been there forever and you want them to own a piece of the company, if not all of it, in the future. That’s when an ESOP is the best way to go. The negative to an ESOP is the company has to be valued every year. There’s costs associated with an ESOP. So, now you’re dealing with a valuation of the company every year. And all of a sudden, you should be cleaning up your books and records to avoid all of the seller discretionary expenses so that they’re not part of that valuation each year, or you just muddy the water. They’re good in certain circumstances.

Ed Mysogland: [00:34:38] Right. So, I mean, how far in advance do you plan this kind of stuff?

Roman Basi: [00:34:44] Man, you know, the ideal answer is between three to five years out. Ideally, if someone talks to me and they’re three to five years out, it’s just beautiful. It gives us time to first of all, you know, and as you see on my credentials, I’m a CPA. We are a full-service accounting firm. Number one, clean up the financials, get your books and records right. And I know there’s probably going to be people listening to the podcast that are like, good God, Roman’s right. Clean up your books. It’s going to take a while. And we do it for a lot of companies. We get in there, make sure your books and records are right, because how many companies have a set of books on their computer they’re running, and their accountant is doing all the backend cleanup at the end of the year on their set of books. Yet, the company set of books are still not right.

And how many times you sell a business, and they don’t want us talking to their accountant, they don’t want their accountant to know. So, now all of a sudden, we’re dealing with a messy set of books. So, three to five years out, start cleaning them up. Seller discretionary expenses that you can really start to cut down over that time period is extremely beneficial. You don’t want to get into these arguments with potential buyers of where’s this income coming from or where’s these expenses coming from? And you don’t want to have to explain all of that. So, that’s ideally what’s in now. In reality, most sellers are cleaning up the books within a couple of months of listing the company or after listing the company to be realistic.

Ed Mysogland: [00:36:19] Right? You’re right.

Roman Basi: [00:36:21] So, they don’t love it. But hey, you guys are all giving me more work when I got to clean up books for three years, so that’s okay.

Ed Mysogland: [00:36:28] So, what — one of the things I really enjoyed was when you kind of did your little crystal ball, this is where the puck is heading in the next few years. I mean, what’s your thoughts on that?

Roman Basi: [00:36:45] Well, we’re in desperate need of new tax legislation. We had some major tax legislation during COVID, which was completely separate from the 2017 Tax Cuts and Jobs Act, which was probably one of the largest ones in every year in the history of my career. I’m assuming my father’s as well. We always get tax legislation at the end of the year and now it’s just been nonexistent for the past year or two. So, we’re due. We know we’re due for a rewrite of the code. I don’t see of course with, of course we follow the elections, we follow what’s happening in Congress. We don’t see much changing now over the next year or two because of the division in Congress. So, the next election cycle in two years will be extremely, extremely crucial.

Now, crystal ball speaking as inflation hits us, it continues to hit a little bit. As interest rates go up, valuations of companies go down and it is in an inverse relationship. So, we still have at least one, maybe two interest rate increases. So, valuations of companies on an interest rate perspective are going to come down. If I’m an investor and I want to make a certain dollar for my company and interest rates go up, I have to pay less for my company. It’s a very simple concept. So, that’s something we have to look for, for the next six-month cycle is we are going to have some pressure, downward pressure on the valuation of companies. Set all this real estate stuff aside, some states are having still good times, some states are not having good times. That’s what’s going to come for us in the next six months.

From a tax legislation perspective, there’s some work to do because we know the flat C-Corporates been with us a while. I don’t think that’s going to stick much longer. I think we’ll see a graduated rate come back into play. And then, of course, we’ll have a rework of the individual tax rates. And normally, look back in history, when we start to have depression type times, we will get some tax incentives. So, we’re going to start to see some of those things come back again. Maybe some bonus depreciation or tax legislation, things of that nature, we will see that maybe by the end of 2023, 2024. Let’s see where this recession may take us.

Ed Mysogland: [00:39:06] Yeah. So as working with, especially everybody is talking about baby boomers. And I mean, that’s nothing new. I think everybody, they try to time the market and I’m not certain right now is the best time to time the market. I know that’s a silly thing for a deal guy to say, but I’m trying to figure out, if I’m a buyer, I’m trying to look out for five-year payback of my investment. If I’m a buyer, am I aggressively looking to buy, especially if I have access to, I don’t know, say cheaper capital, but I’m trying to reconcile the two together on when is the optimal time to sell? Like if I’m 70 years old and poor health, I may not want to wait this thing out.

Roman Basi: [00:40:06] Right.

Ed Mysogland: [00:40:07] But if I’m in good health and I’m rocking along, well, it might be a time to do some planning. And I guess I want your thoughts on that before we go.

Roman Basi: [00:40:18] Good point because in the last year to two years, we’ve seen some of the most activity we’ve ever seen in our careers. We know that. We know that selling was off the chart. And I’ll tell this from what I see and I see deals every day. I get two to three calls a day for new transactions and that is no lie. This morning, actually last night at about 10:00 at night, I had a $14 million offer come in on a company from overseas buying a US based company. Folks, it’s every day. So, the market is still as hot as it was.

However, and I tell my wife this, a lot of my closings are being stretched out. We’re not seeing the fire closings that we were seeing at the end of the year last year. Everybody wanted to get done before the election, before there’s potential new tax changes. We didn’t have that rush this year. It’s still a good time to be thinking about selling your company. It’s still a very good time. Fine, interest rates have increased a little bit. It really hasn’t put them out of anybody’s financing capabilities, to be honest. Now, we get a year down the road and we’re into a, which we’ve been in a recession technically for a while, over a year actually, but we get another year down the road in this economy, and we might see, it may not be the best time to be honest. And it also is industry dependent.

Ed Mysogland: [00:41:43] Sure.

Roman Basi: [00:41:44] I’m doing a lot of transactions in the automobile industry right now. There’s a lot of activity going on because honestly, the concept is the same from — the comment is the same from all of them in the auto industry. The older owner dealers are very scared of the new models that were created during COVID for auto sales across the country, and they are selling out. So, if you are in an auto industry segment, your industry is extremely active and now is the time. You will miss your window if you don’t do something now. And I’ve had buyers that wanted to get in the industry, slow down their deals because of where interest rates are and the worry about what’s happening with that industry. So, if you’re a seller of a business, you’ve got to really know the pulse of your industry. Is it changing? If it’s changing, does that influence your decision to market your company now rather than later?

Ed Mysogland: [00:42:44] Oh, that was a great point. Well, my friend, I want to be sensitive to our time. My last question is the same for everybody. And I think I have an idea of what it’s going to be. But nevertheless, I’ll ask it. What’s the one piece of advice that you would give our listeners that would have the most immediate impact on their business?

Roman Basi: [00:43:05] Prepare. I am an Eagle Scout. That’s not on my designations there but the motto of an Eagle Scout is to be prepared. And I can’t tell you that enough. Be prepared. There’s a lot that goes into those two words but the more you prepare, the better this whole process will be.

Ed Mysogland: [00:43:29] You know what, and I’m with you. I wish, you know, being in the exit planning space and all the associations that I belong to, I assumed at some point someone would commission some empirical data that by being prepared, this is the premium I got from my business, or this is, I increase the likelihood of selling it by this. But you would think that that would be, I don’t want to say common sense, but to me that’s probably the most valuable information for a business owner on why you should prepare. But anyway, we’ll get there. So, my friend, what’s the best way we can keep in touch or get in touch with you?

Roman Basi: [00:44:12] Oh, that’s great. Yeah. To get in touch with us, our website is taxplanning.com. Our phone number is 618-997-3436. Or they can always, anyone can shoot me an email. It gets immediately seen by me and whether I respond or one of my staff responds and it’s rbasi@taxplanning.com. We’re on Facebook. We blog twice a week on Facebook, on our Facebook page. So, pretty easy to find. And our website really drives you to everywhere you need to go.

Ed Mysogland: [00:44:42] And we’ll make sure that we have every place that you are featured in the show notes. So, my friend, you know I’ve always enjoyed listening to you at the associations and you certainly knocked it out of the park on this one. I appreciate your time.

Roman Basi: [00:44:59] Thanks, Ed. Thanks for having me. I very much appreciated it as well. See you at the next conference.

Ed Mysogland: [00:45:04] Right on. Thanks, Roman.

Male: [00:45:06] Thank you for joining us today on the How to Sell Your Business podcast. If you want more episodes packed with strategies to help sell your business for the maximum value, visit HowtosellaBusinesspodcast.com for tips and best practices to make your exit life changing. Better yet, subscribe now so you never miss future episodes. This program is copyrighted by Myso Inc. All rights reserved.