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.
How to Buy a Med Spa Read More »
Planning to acquire a business? A Quality of Earnings (QoE) report is crucial to understanding the financial health of your investment. This article explains how QoE reports help uncover the true value, identify potential risks, and support a successful acquisition.
Why a Quality of Earnings Report is Your Best Friend in Business Acquisitions Read More »
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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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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Back to Learning Center Introduction In business acquisitions, it is paramount that you fully vet the business you are buying. Among the various tools available, the Proof of Cash stands out as one of the most important analysis to ensure the accuracy of financial records. For acquisition entrepreneurs, effectively understanding and using Proof of Cash is crucial. It’s not just a part of financial analysis but a key element in revealing the true performance of a potential business acquisition. In this article, we’ll explore what Proof of Cash is, its importance, and how it applies in financial due diligence. This guide is designed to provide acquisition entrepreneurs with insights into effectively using this essential tool in their financial evaluations. What is a Proof of Cash and Why is it Important? The Proof of Cash involves a detailed process of reconciling each item in a bank reconciliation from one accounting period to the next. This includes a thorough examination of cash receipts and disbursements. But why is this process so vital, especially for acquisition entrepreneurs? Accuracy of Financial Records: Proof of Cash ensures the accuracy of a company’s financial records. It highlights discrepancies between recorded transactions and actual cash movements, making it easier to identify errors or potential fraud. Beyond Bank Reconciliation: While similar to bank reconciliation, Proof of Cash offers a more in-depth analysis. It not only reconciles the beginning and ending balances but also scrutinizes all transactions within the period, providing a more comprehensive view of a company’s financial integrity. Essential for Unaudited Companies: For companies without formal audits, Proof of Cash is particularly crucial. It acts as a form of internal audit, ensuring that the financial statements presented are grounded in reality. Key in Financial Transactions: In mergers and acquisitions, the accuracy of financial statements is paramount. Proof of Cash provides assurance to potential buyers about the true financial health of a company they intend to acquire. In summary, Proof of Cash is a critical component in the evaluation of a company’s financial health. It provides a comprehensive and detailed analysis of a company’s financial transactions, ensuring that the financial statements are reflective of the actual financial state. Proof of Cash vs Bank Reconciliation While Proof of Cash and bank reconciliation might appear similar, they serve different purposes and offer varying levels of insight. Understanding the distinction between these two processes is crucial for anyone involved in financial analysis or due diligence. Bank Reconciliation: This process involves matching the balances in an entity’s accounting records to the corresponding information on a bank statement. Its primary purpose is to identify discrepancies and make adjustments to the financial records, ensuring they accurately reflect the transactions. Proof of Cash: This goes a step further. It’s not just about matching balances but analyzing each transaction that contributes to the change in cash balance. It involves a detailed examination of cash receipts and disbursements, cross-checking them with recorded transactions. This process reveals any inconsistencies or anomalies that might not be visible in a standard bank reconciliation. Key Differences: Depth of Analysis: Proof of Cash provides a more in-depth review of financial transactions compared to bank reconciliation. Scope: While bank reconciliations might catch simple discrepancies, Proof of Cash can uncover more complex issues like fraud or significant accounting errors. Application in Financial Due Diligence: In the context of M&A, Proof of Cash is a more robust tool for evaluating a company’s financial integrity. In essence, while bank reconciliation is a fundamental accounting practice, Proof of Cash is a more thorough and revealing process, critical for acquisition entrepreneurs who need a deeper understanding of a potential acquisition’s financial health. Key Components of a Proof of Cash Understanding the key components of Proof of Cash is essential so that it can be properly interpreted. Below are several critical elements that together provide a comprehensive view of a company’s cash transactions. Beginning and Ending Balances: The Proof of Cash starts with the cash balance at the beginning of the period and ends with the balance at the period’s close. These figures are typically derived from bank statements. Cash Receipts: This includes all cash inflows during the period. It involves verifying each deposit made into the company’s bank accounts, ensuring they match the recorded cash receipts in the financial statements. Cash Disbursements: Similar to cash receipts, this covers all cash outflows. It requires a detailed examination of checks issued, electronic funds transfers, and other forms of cash payments against the company’s records. Reconciliation: The core of Proof of Cash is reconciling these components. This means aligning the beginning balance, plus cash receipts, minus cash disbursements, to the ending balance. Discrepancies here can indicate errors or potential fraudulent activities. Analysis of Discrepancies: Any differences found during reconciliation need thorough investigation. This might involve tracing transactions, reviewing supporting documents, and understanding the nature of each discrepancy. By analyzing these components, Proof of Cash provides a detailed picture of a company’s cash handling accuracy. For acquisition entrepreneurs, this means gaining a clear understanding of the financial health and integrity of a potential acquisition. Conducting a Proof of Cash: Step-by-Step Guide For acquisition entrepreneurs and financial professionals, conducting a Proof of Cash is a systematic process that involves several important steps. Here’s a guide to help navigate through this process: 1. Gather Financial Documents: Begin by collecting all relevant financial documents, including bank statements, cash receipts, and cash disbursement records for the period under review. 2. Verify Beginning and Ending Balances: Ensure the beginning balance of the period matches the ending balance of the previous period. Confirm the ending balance with the bank statement at the close of the period. 3. Analyze Cash Receipts: Examine each deposit made into the company’s bank accounts. Cross-verify these deposits with the recorded cash receipts in the company’s accounting records. 4. Review Cash Disbursements: Scrutinize all cash outflows, including checks issued and electronic payments. Compare these disbursements against the company’s financial records for accuracy. 5. Reconcile Cash Transactions: Reconcile the beginning balance with the sum
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When selling a small business, two crucial factors significantly impact the purchase price:
Earnings:
The amount of earnings your company generates is a key determinant, typically measured as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). A sell-side quality of earnings analysis presents an opportunity to enhance both the quantity and quality of these earnings.
EBITDA can be increased by identifying adjustments to your financials that a new buyer should not anticipate incurring. This includes one-time expenses or events, personal expenses that the owner ran through the business, or the normalization of recent changes to business operations.
When the buyer is performing due diligence they are going to be looking for adjustments that will favor them. However, they are not going to point out to you adjustments that will be in your favor it’s up to you to do that.
Sell-Side Quality of Earnings Report and 6 Reasons to Get One Read More »
If you’re an aspiring entrepreneur but don’t think a startup is right for you, a search fund could be your answer.
Entrepreneurship through acquisition (ETA) is a compelling pathway to realize your business ownership goals and own an established business. Search funds provide the financial vehicle to make that dream a reality.
In this article, we’ll provide an overview of search funds, contrast different models, how to start one, and shed light on the appeal, challenges, and trends surrounding them.
A Guide to Search Funds In ETA Read More »
Introduction Once you’ve gone under LOI with a potential buyer for your business the buyer will begin to conduct their due diligence. Sharing access to your QuickBooks file can make this process much faster and easier for bother parties. In this article we’ll be showing you just how to do that. QuickBooks Desktop When sharing a QuickBooks Desktop file for an acquisition we recommend do so via a QuickBooks Accountant Copy. The benefit of sharing the file this way is that you can freeze the books at a specific timeframe, such as the end of the month, quarter, or year. This allows you to continue to operate in the file while you run your business while the buyer can still get in and perform their due diligence without interrupting you. To send an accountant transfer file follow these few easy steps: Open your QuickBooks Desktop file Go to the File menu and hover over Send Company File Select Portable Company File and then hit Next. Enter the end of the last complete month. Then select Next. Create a file password for the file. Make sure to share this password with the Buyer as they will need it in order to open it. When you’re ready, select Send QuickBooks Online If you utilize QuickBooks Online sharing access to your account is even easier. To do so follow these simple steps. Sign into your account as the primary admin. Select the gear icon for Settings and then select Manage Users. Select the Accountants tab. Finally, enter the email of the buyer’s financial due diligence provider and select Invite. See How Midwest CPA can Help You 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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Back to Learning Center Introduction One of the primary financing options for Entrepreneurship through Acquisition (ETA) is a Small Business Administration (SBA) loan, which is tailored to meet the specific debt needs of small businesses. As your business acquisition specialist, we at Midwest CPA have simplified what the Debt-Service Coverage Ratio (DSCR) is and how it is used when applying for your SBA loan. We have included a DSCR Calculator to help you quickly calculator the DSCR for your specific deal. View DSCR Calculator What Is Debt-Service Coverage Ratio (DSCR)? A Debt-Service Coverage Ratio (DSCR) checks a business’s ability to meet its debt obligations utilizing its net operating income. A DSCR calculator functions as a litmus test for a business’s financial health and its ability to service loans effectively. DSCR Calculator With Chart DSCR Calculator With Chart Enter your financial information to calculate your Debt-Service Coverage Ratio (DSCR) and see how it compares to standard benchmarks. Net Operating Income ($): Loan Principal ($): Interest Rate (%): Loan Length (years): Debt Service Coverage Ratio (DSCR) A DSCR greater than 1.25 is usually required by the SBA. How The DSCR Calculator Works DSCR is calculated as follows: DSCR = Net Operating Income (NOI) ÷ Total Debt Service (TDS). Net Operating Income represents the income generated by the business after deducting all operating expenses, while Total Debt Service encompasses the sum of all debt-related payments, including principal and interest for the same period. For example, if a business has an NOI of $100,000 and a TDS of $80,000, the DSCR calculation would be: DSCR = $100,000 ÷ $80,000, resulting in a DSCR of 1.25x. This value indicates that the business generates 1.25 times the income needed to cover its debt obligations. What Is An SBA 7(a) Loan? An SBA 7(a) loan is a financial instrument designed to help small businesses in their journey for growth and expansion. These loans are tailored to assist in various aspects of small business development. The key advantages of an SBA 7(a) loan to Acquisition Entrepreneurs are lower down payments, extended repayment terms, and competitive interest rates. These features offer investors affordable alternatives to conventional financing for accessing capital. DSCR Requirements For SBA Loans In the context of SBA 7(a) financing, a lender will typically require a preferred DSCR of 1.25x or higher. This means that businesses are ideally expected to generate their Net Operating Income (NOI) at least 1.25 times greater than the figure of their Total Debt Service to meet their debt obligations. That being said a DSCR above 1.5 is preferred. Being aware of the DSCR calculation can help you quickly analyze if a deal will meet SBA requirements. DSCR vs. Other Financial Metrics DSCR Calculation measures the ability of a business to meet debt obligations from net operating income, and differs from other financial metrics: DSCR vs. Debt-to-Income (DTI) – DTI provides more information about personal income, making DSCR focused on a company’s financial stability. DSCR vs. Gross profit margin (GPM) – GPM evaluates a business’s profitability by gauging income relative to cost of goods sold, whilst DSCR focuses on the business’s cash abilities to meet ongoing debt obligations, DSCR vs. Seller’s Discretionary Earnings (SDE) – SDE helps determine a business’s true cash flow potential, whilst DSCR looks at a business’s true ability to meet debts with the current cash flow amounts. Check out our blog on seller’s discretionary earnings. DSCR vs. Gearing Ratio – Gearing ratios assess a business’s level of debt in relation to equity, whereas DSCR takes a close examination of a business’s overall income inclusive of equity, in order to service debt repayments. Understanding how the DSCR calculator works can help you differentiate it from other metrics. How Midwest CPA Can Help You The DSCR Calculator serves as a gauge of your business’s financial resilience in meeting debt obligations. At Midwest CPA we offer our clients tailored DSCR calculations, as well as provide guidance into SBA loans for ETA initiatives. Book a free consultation with Chris at Midwest CPA today for further advice. Have a professional do it for you While we’ve got you here, why not take a look at our other services. View Services View More Resources FAQs Can I use the DSCR calculator for any business type? Yes, the DSCR can be used for any business type as it is a universal measure of a company’s ability to pay its debts with its operating income. What are the benefits of using the DSCR calculator? Some key benefits of using a DSCR calculator include: Quick assessment of a business’s financial health. Determination of loan eligibility and borrowing capacity. Aid in financial planning and debt management. Insight into the sustainability of current debt levels. Facilitation of discussions with lenders and investors. What Is A “Good” DSCR? A “good” DSCR typically resides within the range of 1.25x or higher. Lenders view this as a strong indicator of a business’s ability to meet debt obligations comfortably. What if my DSCR is low? DSCR holds utmost importance for lenders as it serves as a litmus test for a business’s capacity to meet its debt obligations. A favorable DSCR instills confidence in lenders regarding loan repayment. Understanding how the DSCR calculator works and its results can also assist you in the loan application process. Why is DSCR important for SBA loan approval? In real estate, a lender will typically require a DSCR of at least 1. While an SBA lender will typically require a DSCR of at least 1.25. These ratios will vary from bank to bank. How can my business improve its DSCR? Improving DSCR necessitates ameliorating your business’s financial performance. Strategies may encompass augmenting revenue, reducing expenditures, or refinancing existing debt to boost the ratio. 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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Introduction The term “QoE” pops up often in business acquisition, but what is a quality of earnings report? When acquiring a business discerning the genuine financial health of a potential acquisition is a key part of good due diligence. This is the role of a Quality of Earnings report. The Quality Of Earnings Report A Quality of Earnings report is not merely a reflection of a company’s profitability. It’s a meticulous analysis that goes beyond superficial numbers, revealing the sustainability, consistency, and reliability of a business’s earnings. For a shrewd entrepreneur, the QoE is a guard against potential pitfalls and a guidepost to promising acquisitions. Why You Need A Quality Of Earnings Report Most companies selling for less than $5M do not have properly maintained financial statements. That being said, even properly maintained financial statements don’t tell the whole story of a company. A Quality of Earnings report focuses on whether or not historical revenue and profit will continue into the future. That is what you really care about, because that future cash flow is what you will depend on to pay down your debt, feed your family, and grow the business. Now, let’s look in more detail at what makes up a QoE report. What Is The Scope Of A Quality Of Earnings Report? A Quality of Earnings report is a consulting engagement and does not have any explicit standards from the American Institute of Certified Public Accountants (AICPA) on the exact processes or deliverables that should be included. That being said, here are a few of the issues that analysis performed in a Quality of Earnings may uncover. Improper Accounting If a company is not adhering to Generally Accepted Accounting Principles (GAAP) they may not be properly representing their financial results. Customer Concentration Revenue is of a higher quality when it comes from a variety of different sources. If all of the revenues for your target are concentrated in one or two customers there could be substantial risk to you as a buyer should one of those customers leave after you purchase the company. Supplier Concentration If a company relies on a single supplier for key resources needed to perform operations then they are at risk of that supplier raising prices, or having supply chain issues. Improper EBITDA Adjustments Just because the seller and their broker say something is an add-back doesn’t make it an add-back. Trust but verify. Related Party Transactions If any employees, customers, or vendors are related to the seller in any way it is possible that the relationship or dealings between the business and those key stakeholders may be different with you as the new owner. Revenue Or Expense Anomalies Some of the expenses or revenues in the historical period may not have occurred in the “normal” course of business. For this reason they should be adjusted out. Sustainability Of Future Earnings The past is not guaranteed to repeat itself. You want to understand how likely earnings are to continue into the future with you as the new owner. Divergence From Industry Benchmarks If the company you are buying has significant differences from industry benchmarks you’ll want to understand what is driving the difference. Recent Developments If something has changed in the business recently such as hiring a new employee, new pricing from a key supplier, or the addition of a new product line you’ll want to know about it. By uncovering these items, you’ll have a comprehensive view of the quality of the earnings you are buying. Profits Vs Quality Of Earnings The broker wants you to think the profits shown on the confidential information memorandum (CIM) tell you everything you need to know, but it will rarely tell the whole story. A Quality of Earnings report will. It dives into revenue consistency, expenditure trends, and filters out anomalies that could skew perceptions. Starting With EBITDA You’ll often hear the term EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) when talking about Quality of Earnings. It’s a foundational metric in the process and removes the distractions of taxes and other expenses. However, a Quality of Earnings report will go beyond just showing a clear view of EBITDA over the historical period. It will include adjustments for non recurring items, differences in accounting methods, and proforma changes that are expected to occur with a new owner. At Midwest CPA, our financial due diligence services analyze EBITDA, and other key financial data that will give you a normalized view of the financials so you know what you are buying. What Are “Normalized” Financials? When buying a business you want to know what financials will look like under normal circumstances with you as the new owner. For example, if the current owner of the business you are buying is getting a 40% discount on the rent for their office because their brother owns the building you would want to “normalize” this rent payment by looking at the financials as if the business had been paying fair market value. In short, “normalized” financials take a company’s earnings and strip away all the unusual stuff. Those things can make the company look more profitable than it usually is. By “normalizing” the financials, you get a clearer picture of how the company would be performing with you as the owner. How To Read A Quality Of Earnings Report A Quality of Earnings report may be structured in a variety of different ways. That being said, the below example shows a common layout that we use at Midwest CPA. Management Adjustments Oftentimes you will find on the CIM that management has already come up with their own adjustments to EBITDA. Management Adjustment Reversals During financial due diligence each of these adjustments will be reviewed and either validated or dismissed. Reclassification Adjustments These adjustments are for items that should not be included in EBITDA in the first place. For example, interest may have been included in total revenue and will need to be adjusted out. Normalization Adjustments These adjustments take
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