Author name: Chris Barrett

Through the use of technology and strategic thinking, Chris brings executive-level financial support into your business.

Stacked coins with a handshake in the background, symbolizing financial growth, successful partnerships, and business agreements.

What a Quality of Earnings (QoE) Analysis is NOT

A Quality of Earnings (QoE) analysis plays a critical role in business acquisitions by providing deeper insights into a company’s financial health. It focuses on cash flow quality and the sustainability of earnings, helping investors and buyers understand the business they are purchasing.

However, to fully grasp the value of a QoE, it’s just as important to understand what it is not. In this article, we’ll explore three common misconceptions about QoE analyses. Additionally, we’ll show how they differ from projections, audits, and valuations, setting clear expectations for business owners and investors.

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Top 5 Cash Flow Management Tips for Small Businesses

Managing cash flow is essential for the survival and growth of any small business. Without proper cash flow management, even profitable businesses can struggle to sustain daily operations, fuel growth, and prepare for unexpected challenges. Whether you’re trying to bridge cash gaps, control expenses, or plan for future investments, keeping a close eye on your cash flow is the key to staying ahead.

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Businessperson calculating net working capital by stacking coins, important for managing liquidity during business acquisitions.

Calculating Net Working Capital: The Ultimate Deal Killer

Business acquisitions often fail due to misunderstandings surrounding net working capital (NWC). Understanding how to calculate net working capital and managed can make or break a deal, especially when purchasing a business.

In this guide, we’ll explore why NWC matters, how to calculate it effectively, and what to consider during the due diligence process. Whether you’re a buyer or seller, understanding net working capital is critical to ensuring a smooth and fair transaction.

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how to buy a med spa

How to Buy a Med Spa

In this episode of the ‘I Bought a Business’ podcast, Chris Barrett, CPA of Midwest CPA, interviews Dhruv Patel, a former Army Medical Corps officer who successfully transitioned into Med Spa acquisition entrepreneurship. Together, they explore Dhruv’s journey from military service to owning a Med Spa. Additionally, they discuss the steps involved in buying a Med Spa and the challenges Dhruv faced during the acquisition process. 

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Entity Structure for Small Business

Choosing the Best Entity Structure for Your Small Business

Struggling to decide the best entity structure for your small business? This guide breaks down the benefits and tax implications of C-Corps, Partnerships, S-Corps, and Sole Proprietorships to help you make an informed decision. The right entity structure can significantly impact your business’s tax obligations, growth potential, and overall operations. Let’s dive in and explore which option best fits your needs.

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How to buy a business

Understanding Restricted Stock Units (RSUs) and Their Tax Implications

Restricted Stock Units (RSUs) are increasingly becoming a go-to choice for companies to reward and retain their employees. If you’ve received RSUs, you might be wondering how they work and, more importantly, how they’re taxed. In this guide, we’ll break down everything you need to know about RSUs and their tax implications.

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F-reorganization

What is an F Reorganization?

Back to Learning Center Introduction Whether you are a buyer or a seller of a small business tax-efficiency should be at the forefront of your financial plan. Among the many options available to acquisition entrepreneurs, F reorganizations offer a blend of benefits for those considering the acquisition of S corporations. This article will walk you through the what F reorganizations are, their advantages to both buyers and sellers, how they are done, and the foresight required to navigate potential pitfalls effectively. What is an F Reorganization? Named after Section 368(a)(1)(F) of the Internal Revenue Code, an F reorganization is characterized as a “mere change in identity, form, or place of organization of one corporation.” This allows a corporation to undergo a substantial transformation without incurring immediate tax liabilities. The process typically involves the establishment of a new corporation (Resulting Corporation). This then becomes the owner of the original corporation’s business operations. The original entity, now a disregarded entity, continues its existence maintaining its operational and tax history. The Strategic Considerations of F Reorganizations F reorganizations present unique benefits and considerations for both buyers and sellers in the acquisition process. Understanding these advantages and potential drawbacks is crucial for parties on both sides of the transaction. Advantages to Buyers Stepped-up Basis in Assets: F reorganizations allow buyers to obtain a stepped-up basis in the acquired assets. This leads to significant tax depreciation benefits and future tax savings. Overcoming Ownership Restrictions: This strategy overcomes the limitations imposed by S corporation ownership rules, enabling entities that are otherwise ineligible, such as private equity firms, to acquire S corporation stock indirectly. Retention of EIN: Buyers benefit from the retention of the existing Employer Identification Number (EIN). The buyer can then avoid having to scramble to update things like payroll, bank accounts, and key contracts post closing. Advantages to Sellers Tax-Efficient Rollover Equity: Sellers can defer any gain on their rollover equity, making the transaction more tax-efficient from their perspective. Simplifying Asset Transfers: By restructuring as a disregarded entity, sellers can simplify the transfer of contracts and other assets, avoiding the complexities of direct asset sales. Preservation of Corporate History: The original corporation’s EIN and tax history are preserved, maintaining the entity’s continuity and avoiding potential disruptions. Disadvantages to Buyers Complexity and Cost: The process of executing an F reorganization can be complex and may involve significant legal and accounting costs. Due Diligence Requirements: Buyers must conduct thorough due diligence to ensure that the F reorganization has been properly executed and that the S corporation’s historical tax positions do not present hidden liabilities. Disadvantages to Sellers Potential for Future Tax Liabilities: If not properly executed, sellers may face future tax liabilities. This is particularly true if the IRS challenges the structure of the reorganization. Operational Disruptions: The process of reorganization requires careful planning and execution, which can lead to operational disruptions during the transition period. By carefully weighing these advantages and disadvantages to make sure an F Reorganization is right for you. Executing an F Reorganization: A Step-by-Step Guide Successfully executing an F reorganization requires following a series of well-defined steps. Here’s a simplified guide to navigating this process: Formation of a New Corporation: The shareholders of the existing S corporation establish a new corporation, intended to be the holding company (Resulting Corporation) of the business operations. Share Transfer: Shareholders transfer their shares of the original S corporation to the new corporation in exchange for equivalent shares in the Resulting Corporation. The original corporation then becomes a subsidiary of the Resulting Corporation. S Election and Disregarded Entity Status: The original corporation elects to be treated as a disregarded entity for tax purposes, simplifying the tax reporting and preserving the S corporation’s tax attributes. Conversion to LLC: The original corporation is then converted into a Limited Liability Company (LLC) under state law. It then becomes a disregarded entity for federal income tax purposes. Final Structuring: If necessary, further restructuring may occur to align with specific acquisition strategies. For example, rolling over equity for sellers or adjusting ownership stakes for buyers. Each of these steps requires careful planning and timing to ensure compliance with tax laws and regulations. The process may be simple but there are lots of places for you to get yourself into trouble. This is why it is so important to make sure you’re utilizing a competent tax professional in your deal.  Navigating Potential Pitfalls While the strategic advantages of F reorganizations are clear, navigating the procedural intricacies and potential pitfalls is essential for a successful outcome. This section outlines common challenges and offers guidance to mitigate risks. Compliance with State Laws The conversion of the original corporation into an LLC, a critical step in the F reorganization process, requires adherence to state-specific laws. These laws vary significantly across jurisdictions, affecting the timeline and complexity of the conversion. Prior to initiating an F reorganization, it’s imperative to conduct a comprehensive review of the relevant state laws to ensure full compliance and to anticipate any potential obstacles. Timing and Tax Compliance The timing of various filings and elections plays a pivotal role in the success of an F reorganization. Specifically, the filing of Form 8869 to elect the status of a qualified subchapter S subsidiary. This has to occur before the conversion to an LLC. Failure to comply with these timing requirements can result in unintended tax consequences, undermining the benefits of the reorganization. Close coordination with tax professionals is crucial to navigate these complexities and to ensure that all procedural steps are executed within the required timeframes. Engaging with professionals who specialize in corporate acquisitions and tax law can provide valuable insights and guidance throughout the process. Conclusion F reorganizations offer a unique opportunity for acquisition entrepreneurs to acquire S corporations with maximum tax efficiency and strategic flexibility. By understanding the benefits, executing properly entrepreneurs can leverage F reorganizations to their benefit. The importance of professional guidance when doing a F reorganization cannot be overstated. Reach out to a professional at Midwest CPA

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Beneficial Ownership Reporting

Guide to Beneficial Ownership Information Reporting

Back to Learning Center Introduction Beneficial Ownership Information Reporting begins January 1, 2024 and most companies in the United States will need to report information about the owner’s and leaders of the organization. These people are referred to as beneficial owners. This information must be reported to the Financial Crimes Enforcement Network (FinCEN).  In this guide we will walk through what Beneficial Ownership Information Reporting is, who needs to report, and how to go about doing so.  Who Needs to Report? The Reporting Rule breaks reporting companies down into 2 categories: Domestic Reporting Company Foreign Reporting Company So long as the company does not meet one of the 23 exceptions listed below they will be required to file a Beneficial Ownership Report with FinCEN. Exemptions from Reporting There are twenty-three specific types of entities that are exempt from reporting. These exemptions cover a range of entities, including certain financial institutions, public utilities, and entities that are already subject to specific types of federal regulation. Below is the full list of specific exceptions from Beneficial Ownership Reporting Requirements: Securities Reporting Issuer Governmental Authority Bank Credit Union Depository Institution Holding Company Money Services Business Broker or Dealer in Securities Securities Exchange or Clearing Agency Other Exchange Act Registered Entity Investment Company or Investment Adviser Venture Capital Fund Adviser Insurance Company State-Licensed Insurance Producer Commodity Exchange Act Registered Entity Accounting Firm Public Utility Financial Market Utility Pooled Investment Vehicle Tax-Exempt Entity Entity Assisting a Tax-Exempt Entity Large Operating Company Subsidiary of Certain Exempt Entities Inactive Entity Who is Considered a Beneficial Owner? A beneficial owner is any individual who either directly or indirectly has either substantial control over a reporting company or owns at least 25% of the ownership interests of a reporting company.  There are cases where there could be multiple beneficial owners and in those cases all beneficial owners will need to report.  What is substantial control? Substantial control can be reached if the individual meats any of the 4 following criteria.  Senior officer Has authority to appoint or remove certain officers or directors Important decision-maker Any other substantial control over the reporting company Filing Timeline Entities formed or registered before January 1, 2024, have until January 1, 2025, to file their initial reports. Entities formed or registered between January 1, 2024, and January 1, 2025, have 90 calendar days after notice of their formation or registration to file. Entities formed or registered on or after January 1, 2025, have 30 calendar days from notice of their formation or registration to file. Penalties for Non-Compliance Failure to report, or providing false or fraudulent information, can result in significant civil and criminal penalties. Civil penalties can amount to up to $500 for each day the violation continues, and criminal penalties can include imprisonment for up to two years and fines up to $10,000. Senior officers of an entity that fails to file a required BOI report may also be held accountable. How to File You have 2 overarching options for filing your Beneficial Ownership Information Report. You can do it yourself on the FinCEN website You can hire someone else to do it For your convenience Midwest CPA is partnering with FileForms that you can utilize to file with FinCEN on your behalf. You can access their site here. We do get a referral should you utilize this link. Alternatively, you could find a local attorney to help you with the filing.  Have more Questions? If you have more questions reach out to a professional at Midwest CPA. While we’ve got you here, why not take a look at our other services. View Services View More Resources Disclaimer The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.

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