Main Street News March 2014

Spring Conference: New Format!

Register now for the 2014 IBBA Spring Conference, to be held June 2 – 7 at the Cosmopolitan of Las Vegas. Enjoy a brand new format of interactive discussions centered around increasing your deal pipeline and attracting better clients. In addition to the new Mastermind Sessions, take one of ten educational courses taught by veterans of the industry, attend traditional workshops on subjects of deal case studies and tax updates, experience entertaining keynote presentations, and interact with industry service providers in the Main Street Marketplace.

Featured Quotes

“If belonging to the IBBA can help you close just one more deal in 10 years, that commission will likely pay for every membership and every conference, still leaving you with additional money. That’s quite the investment.”
– Steve Wain, IBBA Chair

“Remember: the IBBA is your mentor, survival guide and tool belt. You don’t have to reinvent the wheel; you can put the IBBA’s existing resources to work.”
– Len Krick, IBBA Vice Chair of Education

Steve Wain, CBI, M&AMI

Chair’s Message

Who Are You and What Do You Do?

wainA few weeks ago I received a phone call from a gentleman who was referred to my company. He was a professional who had worked on Wall Street and held other financial positions over the years. Like many people these days, he found himself looking for what’s next when his “time” at his last job came to a close.

As I always do, I asked him who referred him and some initial questions on what he was looking to buy. The first part of his answer surprised me (although it shouldn’t have).

He said, “I am looking for a business. You know, I didn’t even know you guys existed. I didn’t know anyone did this kind of work.” Although I was happy for the referral, it hit home, once again, that some of the principal issues we face in this industry are ignorance and lack of awareness.

When I joined the IBBA years ago, I was truly impressed with the education and volume of professionals who were a part of the association. My objectives in joining were simple: receive quality continuing education, earn my certification (CBI), and be a part of an organization that would help promote what I do and who my company was. Over the years, I realized that although the IBBA was second to none in education, we were not quite at the same level regarding promotion and awareness.

Even now, when someone asks me, I tell them that if belonging to the IBBA can help you close just one more deal in 10 years, that commission will likely pay for every membership and every conference, still leaving you with additional money. That’s quite the investment. What happens if that number is two deals, or maybe five? Then it will be a bigger payday and an even better investment, right?

The IBBA has been and continues to take steps to make this happen. Over the last two years we began by putting together the Market Pulse Survey. This is a quarterly survey of members from both the IBBA and M&A Source that addresses trends in the industry, data from the deals that close and issues currently facing intermediaries. The report is analyzed and prepared in conjunction with Pepperdine University and the IBBA’s Marketing Committee. The report comes out regularly and over time has become a great source of information and trends that help to promote the IBBA members and the professional work we do. This survey requires your input just 10 minutes every 90 days. The Q1 survey will be circulated next week. Even if you have not closed a deal, please participate in the survey to assist in a greater awareness of our industry and, by extension, greater work for you!

To further the focus on awareness, last month the IBBA Board of Directors made a change to our policies. Our governance model is guided by a set of “Ends” that outline the overall areas that we, as a professional association, want to achieve to ensure our members are receiving a greater value from membership than what they pay. The principal Ends policies, of which there were four, were extended to five with the inclusion of the following:

End 5 – The Business Brokerage industry, as well as the users, or potential users, or clients, or potential clients of the members of the International Business Brokers Association are aware, and recognize, the professionalism and services provided by the International Business Brokers Association members and their awareness is enhanced through the advocacy activities of the International Business Brokers Association.

Although this may just be a bunch of words, the IBBA has never had a direct focus on making this happen with the direct responsibility to reduce the number of people (like my referral above) who don’t know who we are, and what we do.

Our management company now has direct requirements to achieve this growth in awareness and to help us in the advocacy of our profession on an international scale. We must help e that one seller to not give up when he wants to sell his business because he does not know who to turn to, or because his attorney or accountant just can’t help him or her. To turn an unsold business into a closed business sale professionally managed by an IBBA member!

To that end, we are putting more programs together, and enlisting more of our members to help achieve this. I’m happy to announce one of those initiatives this month.

In 2012, IBBA’s Chair, Pino Bacinello, created the President’s Council. It was his idea to ensure that past IBBA Chairs and Presidents remain engaged with the association and help in the future growth. This passionate group has, as you would well expect, a very rich knowledge of the association and the industry. Over the past year, we began to formulate what and how they can make a difference.

Starting this year, the President’s Council, with Jeff Jones as Chair, will become an extension of the association. Working in cooperation with the Marketing Committee, with Lisa Riley as Chair, the IBBA will put together a presentation that will allow members of the President’s Council to speak at colleges, universities, professional associations, business roundtables, local Rotaries and other organizations to explain what a business broker and an intermediary are, who is the IBBA, what is a Certified Business Intermediary (CBI) and what services and benefits we bring to a business owner or buyer. Additionally, we will use this venue to promote the industry to those considering entering into the profession, offer suggestions on how they can get involved in the industry and gain the education required to become certified.

There are over 20 members of the President’s Council—that’s a lot of firepower and stature. Our management company, along with the Marketing Committee, will work to make this a regular offering of the IBBA around the USA, Canada, and hopefully the world (one of our past Chairs is from China and another is from Canada)! Want to help? Do you have a worthwhile organization that would be well suited for the presentation? Contact Lisa Reily or Simone Shahdadi.

I’m also really looking forward to this special conference series in 2014, beginning this June in Las Vegas. It’s going to be unique! The conference, featuring a brand new format of Mastermind Sessions dedicated to best practices, will be unlike any other conference we’ve done and something every member has requested for years. Make sure you register early. This conference series will absolutely provide you the nuggets of knowledge that will help lead to that additional closing we all want.

During the conference, we will also be announcing new member benefits as well as initiatives. Some of these initiatives will be a big addition to your practice. Make sure you attend to find out how to use them effectively and what they will mean to your practice.

Many dedicated people in the IBBA are working hard to make your life better through the growth of your practice. Be a part of that experience! I’m sure as the year progresses you will be impressed with the changes and new additions to your IBBA membership. Who knows, maybe next year someone will contact you and say “I finally decided to sell my business. After I learned about business brokers, I knew I had to call you to help me with this life changing event!”

Welcome to the new IBBA!


Strategic Issues Task Force

What Is Happening on Federal Securities Registration of Brokers?

Once upon a time, a mouse roared. Leonard Wibberley’s 1955 novel tells of a European nation, the Duchy of Grand Fenwick, located in the Alps between Switzerland and France. Economic viability of the tiny nation, a mere three by five miles, was threatened when Grand Fenwick was pushed to the verge of bankruptcy. Motivated by pressure to survive, the Duchy set out to conquer the mighty United States. Cutting to the chase- relying on bows, arrows, courage, determination, expectations of losing and a big dose of serendipity, the little nation defeats the mighty superpower.

Our story is a work in progress. Incomplete, yes; but the plot has becomequite interesting!

The story begins: once upon a time, there was a tiny profession whose economic viability was threatened by an unworkable regulatory scheme conceived and developed for other circumstances by people who were wholly unaware of the unique activities of the tiny profession. But, by quirk of unintended consequences, they also cast the net over the tiny profession. Of course, business brokerage is our tiny profession and the threat is a regulatory scheme that considers business brokers a vague subset of retail stock brokers.

You know the main characters: they are business brokers, Congress, the SEC and various vested interests. There are key role players: a vast business owner community, state securities regulators, securities lawyers, and vested interests profiting handsomely from helping brokers toe the regulatory line.

What are the chapters of this story?

  1. Mankind evolved
  2. Fraud occurred
  3. Laws were written
  4. Laws were written to control securities frauds
  5. The US Supreme Court found one business stock sale (having the normal characteristics of stock) was a securities sale
  6. Lawyers and regulators scurried to figure out what to do with this
  7. Business brokers slowly came to realize this might impact them too
  8. IBBA’s Strategic Issues Task Force (SITF) was formed
  9. SEC issued the Country Business, Inc. No Action Letter
  10. AM&AA organized efforts to obtain an M&A Brokers exemption
  11. IBBA and the M&A Source, through SITF, joined with AM&AA in a joint industry effort: “The Campaign for Clarity”
  12. The House introduced, debated in committee, then passed H.R.2744 on a 422-0 bipartisan, vote of the House
  13. S.1923, an identical bill, was introduced in the Senate. With seven co-sponsors it awaits further action.
  14. The SEC issued the M&A Brokers No Action Letter.
  15. Conclusion – TO BE WRITTEN!

The endings are in play right now. Help us write a happy one! It can be any of the following:

Ending #1: S1923 is passed into law. Ninety days later, defined activities of M&A Brokers unambiguously do not require regulation or registration at the federal level.

Ending #2: S1923 fails. The M&A Brokers No Action Letter signifies the SEC staff’s conclusion of specific conditions under which they would not expect to pursue enforcement against M&A brokers. Brokers can take a limited sigh of relief.

Ending #3: S1923 fails and the M&A Brokers No Action Letter is later withdrawn. Pandora’s Regulatory Box of ambiguities, risks, expenses and burdens is reopened for business brokers.

Ending #3 is pretty unlikely, only because there is no indication today that the SEC is likely to rescind the M&A Brokers No Action Letter. This ending requires nothing more than apathy and ignorance from our profession as a whole and from you.

Ending #2 is most likely today. It provides tons of help to our profession, but leaves many serious areas of hazard, problems, and ambiguity outside the enforcement conclusions within the SEC. This endingalso requires little more than apathy and ignorance from our profession and you.

Ending #1 is a major accomplishment of permanent clarity by removing ambiguity, uncertainty, and obstacles that remain today for business brokers and the business community we serve. Helping S.1923 to pass and become law is not a free ride of apathy, ignorance and finances for you, me and our profession.

What, then, is needed from the individual and collective “you” to help create the “happy ending” of a true legislative exemption from federal regulation and registration?

  • Reject ignorance of the issues. Exchange it for clarity and understanding. The profession has shared much information in webinars, newsletters, forums, etc. Get well-informed and pay active attention to the issues and opportunities.
  • Shed any vestigial apathy. Commit to helping shape your profession’s future into a better one. One way or another, the outcome will impact your profession.
  • Actively participate.
    1. Doff your cap to those who have shouldered the burden for us to this point. Association and Campaign for Clarity leaders, thought leaders, legal counsel, lawyers who requested the M&A Brokers No Action Letter, the SEC staff, financial contributors, etc.
    2. Create a mini grassroots buzz. Ask family, friends and employees to urge their Senator’s to pass S.1923. Make the most personal appeal to your Senators that you can.
    3. Open your wallet. Make a contribution to this initiative. 100% of contributions go to defray third party costs for those professionals who have brought and continue to bring this undertaking to fruition.

Linda J. Purcell
[email protected]
(847) 358-9404

John C. Johnson
[email protected]
(918) 749-6016

Co-Chairs, Strategic Issues Task Force


Len Krick, CBI, M&AMI
IBBA Vice Chair of Education

Learning Curves and Tool Belts – the IBBA is Your Mentor

krickThis is my first message as Chair of the IBBA’s Education Committee. I thought I would dedicate this to all members who have been selling businesses for two years or less. You are in your “critical phase.” By definition, attaining success in your first couple of years in business brokerage is essential—you will find that the IBBA will focus on ensuring that you have the tools to succeed. The IBBA is your mentor.

Membership in the IBBA is a value proposition; that is, what it costs in terms of money and time versus the potential incremental increase in commissions you earn as a result of membership. Whether it is gaining basic skills, methods, processes and techniques, or keeping up with the evolving nature of our business, the IBBA is the only place where a business broker can find these resources. Obviously there is no substitute for experience, but you need to survive financially during your first couple of years to be able to gain experience. The IBBA is your survival guide.

Having the right tools in your tool belt is a requisite for success in our business. I have analyzed the characteristics of the most successful business brokers in the IBBA. All of them took advantage of the educational resources that membership in the IBBA provides; then they applied what they learned in their practices. IBBA education is a lasting resource—after the conference or webinar, when you get back to your office you are building a reference library to call on when needed. I call this your “tool belt.” Then, when you need them you can reach for those tools and you know how and when to use them. You might not need each one every day, but they are there when you need them. The IBBA is your tool belt.

It’s all about decreasing the “learning curve.” Unlike business brokers who are not IBBA members, you have a way of quickly assimilating all the most proven and successful techniques that increase your ability to work efficiently, find and market “high-probability” listings and close a higher percentage of your deals.

Let’s face it, every deal is unique and may require different approaches or skills. However, unlike your competition, you know exactly what to do because of the collective wisdom of the IBBA members who came before you. Remember: the IBBA is your mentor, survival guide and tool belt. You don’t have to reinvent the wheel; you can put the IBBA’s existing resources to work. As a result, in your first couple of years it is essential that you take as many courses and absorb as much of the knowledge as possible, and then make a conscious effort to apply what you have learned. Practice using your tools every day to get deals done. I did this, and I can tell you that it works. The IBBA was my mentor, and never stopped adding tools to my tool belt.


Barry Berkowitz, CBI, M&AMI

THE RESULTS ARE IN: Grand Prize Awarded to CVBBA

Barry-BerkowitzIt was a tightly fought battle among our 15 Affiliates to achieve the Grand Prize for one of their members. The final results are in for the 2013 Affiliate Rewards Program and the Carolina-Virginia Business Brokers Association took first place! Last year’s winner, New England Business Brokers Association, finished in a close second. In third place was California Association of Business Brokers. Congratulations to all!

The Grand Prize winner is Jay Whitney! Jay, a member of CVBBA, was randomly selected from the winning Affiliate to receive the Grand Prize. Congratulations to Jay. He will receive conference registration and travel expense reimbursement toward his choice of one of the two 2014 IBBA Conferences.

Each Affiliate earned their points based on their members joining the IBBA, attending IBBA conferences or registering for IBBA courses. Each Affiliate’s point scores for 2013 were added and normalized based on their total number of members, so even our smaller Affiliates had an equal chance to win the Grand Prize for one of their members.

In addition, each Affiliate earned rewards in proportion to their total points. IBBA headquarters cumulatively distributed Affiliates the following rewards:

  • 26 Course Registrations at an IBBA Conference
  • 3 IBBA Conference Registrations

The Affiliates will distribute the rewards to their members or prospective members based on their marketing goals.

The 2014 Affiliate Rewards Program is underway. We will update you on the program’s progress n future issues of the IBBA Newsletter. Stay tuned!

I look forward to seeing many of you at the next IBBA Conference in Las Vegas in June.


Jeff Snell, CBI
CBI Credentialing Committee Chair

You Can’t Buy Back Your CBI!

Jeffrey-SnellMy oldest son believes that if he ignores a problem long enough that it will just go away on its own. When it comes to clothes he leaves on his bedroom floor, he’s right because my wife confiscates them and he has to buy them back. Unfortunately, this approach doesn’t work for maintaining your CBI credential! The requirements are relatively straight forward, but due to the availability of specific courses at conferences and the bi-annual scheduling of conferences, you have to have a plan. Do you know what you currently need to recertify when your three-year period has expired?

Don’t wait until the last minute, when it is very likely too late to complete the required courses and conferences. The Credentialing Committee is not able to provide special extensions or exceptions for members that ”forgot” or thought that somehow those classes would take themselves and conferences magically get attended on their own. The requirements have been carefully formulated and updated to insure that the CBI credential is meaningful in the marketplace. Exceptions are rare, so know your status! A lapse in your CBI requires that you stop using the credential while you recertify and no one likes to do that.

If you are unsure of which requirements you lack, log into your profile to view the credits you have completed for this recertification period. Be proactive about maintaining your valuable CBI credential because unlike my 11-year-old’s gym shorts, you can’t buy back your CBI.


Bart A. Basi, CPA

The Tax Report

FLP Not Includible
bart-basiThe Tax Court has ruled that the value of a Family Limited Partnership (FLP) will not be included in the estate of the decedent. For example: let’s assume the decedent owned various tracts of wooded property. Held together as one company, her thoughts were that the properties were more valuable as opposed to being split apart. As such, she and her attorney formed an LLC and transferred the properties into it. Subsequent to the formation of the LLC, the decedent transferred all of the LLC shares to their descendants until she owned only 1% of the interest. The Court found the transaction was bona fide as there was a legitimate non-tax reason for the transfer. The Court also found and favored the taxpayer because 1) the property was actually transferred, 2) the interests in the LLC were not discounted, 3) distributions were not made, 4) personal funds were not commingled and 5) the decedent was in good health. This was not an attempt by the decedent to merely change the form of her estate and thus full and adequate consideration was exchanged. The fair market value of the decedent’s interest was included in her estate, not the assets that she contributed to the LLC.

Editor’s Comment: This is a logical model of what an FLP and transfer should look like in an ideal world. The decedent fairly plans the transfer for non-tax reasons and removes value from her estate in order to reduce tax liability and it worked. No unreasonable discounts were taken, no penalties were applied—the transaction worked as it was intended and designed to work.

Unfortunately, many utilizing FLPs see the FLP as a way to “stick it to the Government” and it rarely works. Setting up FLPs can work and does work as long as the FLP is operated in the right manner with the right purpose.

Lottery Winnings
The Tax Court has held that a lottery winner’s contribution of 51% of the winnings to an S Corporation was a gift. The donor worked at a retail establishment when she won the lottery. Her explicit intent was that she wanted to share the winnings with her extended family as soon as she had realized that she had won (because the family had a lottery split agreement previous to her winning). Her father, with the help of an attorney, formed an S Corporation into which 51% of the proceeds went to. Subsequent to the dispersal, her co-workers filed suit for their alleged claim to the money. This litigation was ultimately unsuccessful.

The IRS then took their bite of the apple alleging the subchapter S corporation to hold the proceeds was a gift and not a legitimate business income to the S Corporation. The Court sided with the IRS in declaring that the corporation was set up subsequent to the winning and even if an agreement to split the winnings was in effect, the fact remains that the corporation never purchases lottery tickets on a consistent basis in the past, thus the transaction was a gift, not legitimate income.

Editor’s Comment: Finally, the case has been decided after 13 long years. The long and short of it is that this is not the way to handle a lottery winning or, for that matter, playing the lottery at all. Typically, lottery winners have limited financial knowledge. A multi-million dollar lottery winning demands extensive financial knowledge to properly handle. There are many financial, insurance, tax, and estate planning issues to deal with. A good start in a situation like this is to simply contact an attorney before even claiming the prize!

Life Insurance
The Tax Court has held that the proceeds of a life insurance policy were not includible in a decedent’s estate, despite having incidents of ownership. Over the years, the decedent purchased multiple life insurance contracts. His wife subsequently filed for divorce and a decree ordering the decedent to do certain acts was issued by the divorce court. The decedent refused and the remedy ended up being that his ex-wife was the constructive beneficiary of the life insurance.

Editor’s Comment: The Center has dealt with a matter similar to this. Initially, when the insurance claim was paid, the accountant recorded the money as income resulting in a nearly $500,000 tax. We quickly realized the situation and rewrote the tax return and prevented the tax from being paid unnecessarily.

If life insurance goes to a named beneficiary, IT IS NOT SUBJECT TO INCOME TAX OR ESTATE TAX.

Specified Dollar Amounts
The Tax Court held that a donor transferred specific, non-vague dollar amounts to a limited liability company (LLC) for benefit of his children and his grandchildren. The donor’s CPA used a valuation created by a qualified appraiser for the dollar amounts. The document creating the gift had an adjustment clause specifying that the gifts were to be adjusted to a specific amount of the IRS contested their valuation. The IRS sent the donor a deficiency notice based on the belief the donor intended the adjustment clause to be an additions clause. The Court wholeheartedly disagreed with the IRS including that to be against an adjustment clause and specified formula would not only be improper in this case, it would create bad precedent and bad public policy. Thus, the donor won.

Editor’s Comment: The taxpayer in this case stood on rock solid ground when he employed a reputable CPA and a qualified appraiser. His documents were very clear cut in their intent to supply specified amounts of money to his children and grandchildren. Because the dollar amounts involved in this case were not very big, the donor could have chosen to roll over, play dead, and pay a small additional tax. Instead, the taxpayer charged into the storm and flushed out the IRS for their bad case. Quite a victory for taxpayers!

False Return = Deportation
The United States Supreme Court has ruled that filing a false tax return is grounds for deportation. In the case, the immigrant taxpayers filed a false return. The husband being convicted of signing a false statement under the Internal Revenue Code, and the wife was convicted of aiding and assisting in the preparation of a false return. (Both felonies under the IRC) The fact pattern earned them a deportation hearing with the Immigration and Naturalization Service (INS). As a result of the hearing, the couple was ordered deported as INS rules allow for deportation if an aggravated felony has been committed. The definition under Immigration and Naturalization law in the United States includes that of a felony involving fraud or deceitful representations resulting in greater than $10,000 harm to the victim. The couple argued that under the IRC, the elements of fraud and deceit were not included as element of the crime. The dissent in the United States Supreme Court agreed with this and said they should not have been deported. The majority agreed with the INS stating that Congress intended tax evasion to be included in deportable law, had they wanted otherwise, they could have easily shown their intent within the statute. Hence, fraudulent and deceitful felonies based on tax returns are now deportable offenses.

Editor’s Comment: Many wealthy clients have sensitive tax positions. For the resident alien in this country with substantial wealth, not only may they have sensitive tax positions, but those tax positions could rapidly become INS issues if it involves fraud or deceit. If you are in such a position be sure to have the documentation to support your returns. Bold tax positions can be taken, but you’d better have the support to avoid red flags.

S Corporation Dividends
An Appeals Court ruled that a dividend that was (deemed) unreasonable would be reclassified as compensation for FICA purposes. The taxpayer in question was a CPA participating in an S Corporation / Professional Corporation, which meant it could distribute dividends. As part of the CPA’s compensation he was given $24,000 annually. The dividends resulted in another $175,000 to $200,000 per year in payments avoiding the FICA tax. The Court ruled that such low compensation would not stand as reasonable given the market from accountants of his caliber, his hours worked per week, the earnings of that the firm, and the firm’s dividends were outlandish given the CPAs regular salary. All in all, the dividends were unreasonable and a large portion was reclassified as compensation.

Editor’s Comment: Just because you have figured out a way to manipulate the system does not mean 1) it is legal and 2) you should do it! Not only can the IRS use human intelligence to red flag returns based upon excessive expenses, record comparisons, and the like, it now can use artificial technology as well. Taking unreasonable positions like this will typically not end well.

Depreciation of Apartment
The Tax Court has agreed with the IRS in holding that many components within an apartment complex were residential property subject to 27.5 year depreciation as opposed to personal property subject to much shorter depreciation. The taxpayer in question purchased a large apartment complex covering 40 buildings on 16 acres. The taxpayer gave the complex a $2 million renovation and attempted to depreciate most of it as personal, not residential property, in order to pay less tax. The personal property was designated under a cost segregation study to isolate personal property. The reports are becoming more common as this is a more widely known practice; however, the report ended up being wrong and the Tax Court sided with the IRS in reclassifying a large part of the property as residential, not personal.

Editor’s Comment: The IRS has come out with a lot of guidance on what can be personal and what has to remain residential for depreciation purposes. Common sense or the “benefit of the doubt” argument is not the rule anymore. When having “cost segregation” studies and other credit and expenses studies, be sure the people who conduct these studies are reputable. Many “experts” love to charge high fees for this kind of work ($25,000 plus), but their results are less than admirable if the IRS disagrees with the study.

Roth Ineligible SH
The Tax Court held that a Roth IRA is not an eligible shareholder of an S Corporation. The taxpayer in the case claimed that custodial IRAs were eligible shareholders. In another argument the taxpayer argued that the intent of Congress was to make Roth IRAs eligible shareholders as the trend was heading that way. The IRS was in a particular situation of pointing out that if a Roth IRA was an eligible shareholder, such arrangement could be used in every business model to avoid taxes entirely as Roth IRAs are not taxed. The Tax Court rejected the taxpayer arguments noting that shareholders were specifically limited to enumerated entities and individuals.

Editor’s Comment: Had the IRS lost this case, intervention would have been required by Congress. Any and every closely-held business in America would be best advised to convert to a Roth IRA owned S Corporation to avoid taxes. Although structuring the entity would cost several thousand dollars, the benefits would be innumerable. In short, everyone would do this! I would recommend to anyone with this arrangement to stand down promptly as the IRS has now identified this as an abuse.

Law Firm Staff
The Fifth Court of Appeals has confirmed the Tax Court’s finding that individual attorneys working in a law firm were in fact employees and not independent contractors. Within the 4 person law firm, all the attorneys were paid on a contingent basis. The firm represented that attorneys were handed cases and were compensated directly by the client and were allowed to keep 30 to 50% of the fees depending on where the case originated. The IRS disagreed, pointing out that the attorneys did not provide services to anyone outside the firms grasp and the firm reimbursed all expenses, provided offices. The workers had no risk of loss in the firms. The Appeals Court did not see the Tax Court’s position as being “clearly erroneous” and allowed the Tax Court’s ruling to stand.

Editor’s Comment: This case shows that the IRS is willing to go after even small firms and businesses. I find it particularly troubling that employers, that are clearly employers, engage in this reckless conduct in employee classification. Don’t do this because employees love to tell about the practices of former employers. Further when they get laid off or fired, they will file for unemployment. A call from the unemployment office to a state revenue department is not good in this circumstance. If you have questions on whether workers are employees or independent contractors be sure to contact a qualified advisor.

In proposed new regulations, the IRS will make transfers that convert from C Corporations to Real Estate Investment Trusts largely exempt from transfer taxes. Under the old system, when a C Corporation transferred assets to a REIT, the transfers often resulted in Built In Gains. These gains are atypical in CCorporations, and are usually seen in S Corporations that were once C Corporations. The new regulations are a welcome advance from the old perilous system of Built in Gains.

Editor’s Comment: Real Estate Investment Trusts or REITs were once considered golden investments by Wall Street. They have since cooled in appeal since the real estate bust and pick up in the stock market. On the other hand, REITs are known for their consistent payouts of dividend income, making them an attractive investment for many investors. REITs are tightly regulated investments in so far as they have to payout 90% of the earnings in order to keep the status. This news will encourage new REIT startups and will result in a wide community of investments for the real estate investor.

Partnership and Depreciation Property
The IRS ruled in a letter ruling that depreciable property in a US Possession, owned by a United States Partnership qualified to be depreciated as straight-line or another type of depreciation per the taxpayer’s discretion. Under the unexpanded rule, property owned outside the country by a US Corporation or citizen was not eligible for any treatment other than straight line depreciation. A narrow exception allowed alternative depreciation if the asset was owned by a US Corporation or Citizen and was in a US possession. The IRS has now expanded the definition to include that of a partnership as the taxpayer in question was part LLC and part S Corporation.

Editor’s Comment: Limited Liability Companies are becoming the one stop shop for business entity selection. They have multiple advantages over most other types of entities such as S corporations, partnerships, and C Corporations. In addition, what is known as the Series LLC is becoming popular as well with business people desiring added asset protection when multiple assets and/or locations of operations are involved.

*The Tax Report is edited by Dr. Bart A. Basi, CPA/Attorney at Law, and is published by The Center for Financial, Legal and Tax Planning, Inc. The Tax Report has an annual subscription rate of $75.00 per year. To receive The Tax Report, please send a check to The Center at the address below


By Zac Cartwright

Pratt’s Stats Report

Business Valuation Resources is excited to share with the IBBA members our most recent research on the Pratt’s Stats valuation multiples.

The data in the tables and corresponding graphs include all private buyer transactions from within Pratt’s Stats from all years. The data was ordered around three financial measures from the largest (1) net sales, (2) total assets, or (3) profit (based on net income to sales) to the smallest net sales, total assets, or profit and then divided into five equal-sized quintiles. We report two median valuation multiples and the median financial measure for each quintile in the exhibits below. The first quintile represents the largest group of companies in relation to net sales, total assets, or profit and the fifth quintile represents the smallest group of companies in relation to net sales, total assets, or profit.

The general trend, based on net sales (Exhibit 1) or total assets (Exhibit 2), is companies with the most net sales or total assets have a larger median valuation multiple than the companies with lower net sales or total assets, i.e., size does matter. However, in relation to net profit (Exhibit 3), the general trend is the most profitable companies have smaller median valuation multiples than the least profitable companies. This inverse relationship may seem counterintuitive, but the higher the value in the denominator of the valuation multiple (measure of earnings), the lower the resulting valuation multiple will be from the business sale.

Pratt’s Stats currently has over 20,500 deals and offers up to 100 data points on each deal, including (when available) a detailed business description, a latest full-year income statement, asset data, a purchase price allocation, noncompete information, financial ratios, valuation multiples, and much more! IBBA members can gain access to the Pratt’s Stats data (and the Pratt’s Stats Private Deal Update) by submitting the financial details on companies they’ve sold. To learn more about contributing your deals, please click here or contact Zac Cartwright at [email protected].

Data is based only on private buyer types. The data from Pratt’s Stats were ranked from the most net sales to the least net sales. The data was then divided into five quintiles that contain an equal count of 2,776 transactions, and the median was selected for each group. The first quintile represents a group of companies with the most net sales and the fifth quintile represents a group of companies with the least net sales. ]
Source: Pratt’s Stats®, available at Created on Dec. 11, 2013

march-2014-pratts-stats-report-graphic2march-2014-pratts-stats-report-graphic3Note: Data are based only on private buyer types. The data from Pratt’s Stats were ordered from the most total assets to the least total assets. The data were then divided into five quintiles that contain an equal count of 1,555 transactions, and the median was selected for each group. The first quintile represents a group of companies with the most total assets, and the fifth quintile represents a group of companies with the least total assets. Source: Pratt’s Stats®, available at Created on Dec. 11, 2013.

march-2014-pratts-stats-report-graphic4march-2014-pratts-stats-report-graphic5Note: Data is for private buyer types. The data from Pratt’s Stats were ordered from most profitable to least profitable based on net profit margins. The data was then divided into five quintiles that contain an equal count of 2,636 transactions and the median was selected for each group. The first quintile represents the most profitable group of companies and the fifth quintile represents the least profitable group of companies. Source: Pratt’s Stats®, available at Created on Dec. 11, 2013.



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