A patriotic message to usher in this 4th of July When I tell people that I’m a CPA, they usually have two questions: “Have you seen The Accountant?” and “Have you seen The Accountant 2?” I can’t blame them. This isn’t the most exciting profession, so I get why people only care about it if it involves Ben Affleck playing a one-man army. The only other time people are interested in my profession is the first couple weeks of April when they’re filing their taxes. With the 4th of July approaching, I thought I’d be a bit patriotic in this edition of the newsletter. There’s a long and storied tradition in this country of hating taxes. That very hatred is likely why we are celebrating 250 years. Ben Franklin said there’s nothing certain in this world except death and taxes. He also said our national bird should be the turkey. So, you can take some of what he said with a grain of salt. While I won’t argue about the certainty of death and taxes, I don’t think they necessarily need to be shoved into the same box labeled “Things I Dread But Will Deal With Later.” Instead, I want to offer a different perspective on taxes that I’ve discovered while working on all these M&A deals. Taxes as Investment Long story short, I have started to think about taxes as an investment into one of the greatest economies this world has ever seen. In this country, it doesn’t matter where you started, what you look like, or how old you are. You get a real shot at building something of your own, whether that’s a business from scratch or doing the ol’ Buy Then Build approach. Here’s the thing about that opportunity: it’s not free. Property taxes, payroll taxes, income taxes, estate taxes, excise taxes, tariffs, the list goes on long enough that I could fill the rest of this newsletter with it. But every one of those is doing something. They fund the roads that get your product to market, the courts that enforce the contract you just signed on your acquisition, and the basic security and stability that let you run a business without worrying whether the rules will change on you tomorrow. It also goes without saying that these very taxes support our troops around the world and at home. I’m not here to tell you we’re overtaxed or undertaxed. That’s an argument for someone else’s newsletter. I’m certainly not going to say that our taxes are being spent efficiently. What I am telling you is that none of the opportunity we just talked about, the ability to buy a business, build it, and sell it, exists without the infrastructure paid for by these taxes. Taxes as a Measure of Success Thanks to all the deals I’ve done, I’ve started looking at taxes a little more critically. When a business unethically lowers its tax bill, I’m not the only one who’s stuck with a headache. In reality, there are two sides to this coin, and both of them are ugly. First, the business is built on the benefits of operating in this country, the courts, the highways, public schools, etc. It wouldn’t be able to enjoy so much success without this infrastructure. The other side of the coin is that those businesses don’t invest back into the system. By paying more in taxes, they’re bolstering the goods and services needed for economic success. Your tax bill is, in reality, a rough measure of how much you’ve actually gotten out of the deal and how much you’re giving back. Ideally, people keep track of this balance between what you put in and what you get out, while reporting their income in order to pay into this system the appropriate amount. If they don’t, it ends up being worse for ethical taxpayers. At the end of the day, the government will raise tax rates high enough to pay for what the government needs. If every person and their business were accurately reporting income, tax rates for the USA as whole would be lower. To be clear, I’m not talking about tax avoidance here. It’s tax fraud that gets my knickers in a twist (is that too British to say when celebrating America’s big 250?). It’s well-established in American law and ethos that everyone should “arrange his affairs that his taxes shall be as low as possible.” Every acquisition we help with includes a book-to-tax analysis, comparing a target company’s financial statement income to what it reported on its tax return. When there’s a gap that can’t be explained by standard M-1 adjustments or the usual differences in tax treatment, that’s worth investigating. More often than not, it means the business has been underpaying its taxes. Additionally, if you are a business owner looking to sell your company and have avoided paying taxes, an SBA lender is going to make it a lot harder for the buyer to get a loan. The SBA loan process evaluates businesses from tax returns instead of financial statements. In other words, no matter how nice your financial models look in Excel, a boring old tax form is going to determine what happens with your loan. Conclusion So this 4th of July, as the fireworks go off, I’d encourage you to think about taxes a little differently, too. Not as money taken from you, but as money invested in the country that made it possible for you to build, buy, and sell businesses in the first place. And, if you’ve got a bit of a competitive streak like me, you can think of taxes as a measure of success, too. And if you’re in the middle of evaluating one of those deals right now, that’s exactly where a proper QoE report earns its keep. It’s how you find out whether the business you’re buying has actually been investing what it should or cutting corners you’ll inherit the moment you close. If you want a second set of eyes on a target company’s numbers before you sign anything, that’s what we’re here for. Email us redacted Happy 4th of July.