EFP 141: CPA Mario Lucibello on Buying and Selling Online Businesses

Justin Cooke

July 10, 2015

Buying and selling websites often includes some big financial decisions.

How do you minimize your tax liability? What structures are best uses to protect and house your online assets? What should you look for from a financial perspective when purchasing an online business?

Counting All Your Ducks – The World of Accounting for Online Businesses

To get some answers, we reached out to our friend of the show Mario Lucibello, a CPA over at GreeenHaus, to dig into the some of the financial nitty-gritty when purchasing an online business. He was refreshingly frank and to-the-point – I think you’ll want to listen to this if you’re considering a purchase.

Check Out This Week’s Episode:

Direct Download – Right Click, Save As

Topics Discussed This Week:

  • Business Structure/Setup
  • Due Diligence With Buying Online Businesses
  • Taxes With Buying/Selling Websites
  • Offshore/Expat Issues
  • Investments/Financing

Mentions:


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“If you’re buying stocks, you’re buying everything that’s happened to that company in the past.” – Mario – Tweet This!

“When the buyers know what they’re buying they might pay more for it.” – Mario – Tweet This!

“Business and website buyers prefer clarity.” – Mario – Tweet This!

 

Big thanks to Mario for coming on the show and sharing with us.

Do you have any accounting questions for Mario related to buying/selling sites? He said he’d be happy to dig into any questions you might have in the comments, so feel free to ask away!

 

Justin:                   Welcome to the Empire podcast episode 141.

                                What are the financial and tax implications that come with buying and selling websites and online businesses? We get this question a lot, and in today’s episode, we sit down with our friend of the show, Mario Lucibello, a certified public accountant, to weigh in on these issues and more. You can find the show notes and all links discussed in this episode at empireflippers.com/cpa. All right. Let’s do this.

Recording:          Sick of listening to entrepreneurial advice from guys with day jobs? Want to hear about the real successes and failures that come with building an online empire? You are not alone. From San Diego to Tokyo, New York to Bangkok, join thousands of entrepreneurs and investors who are prioritizing wealth and personal freedom over the oppression of an office cubicle. Check out the Empire podcast. And now, your hosts, Justin and Joe.

Justin:                   Joe and I are not accountants, but we get accounting questions all the time. When it comes to business structures, due diligence, and minimizing tax burdens for buyers and sellers, there’s quite a bit of complexity going on. And we wanted to sit down with an actual accountant to hammer out some of these issues.

                                Joe, you get this question a lot from buyers and sellers, right? Like, you know, “How do I minimize my tax burden on a purchase? What’s the best time to sell? Should I put it in the previous calendar year?” That kind of thing, right?

Joe:                        Yeah. You know, I qualify it, all the time, with, “I’m not an accountant, but … ” So it’s good that we’re finally getting somebody on the show that does have CPA after his name to really give the real shindig on some of these answers.

Justin:                   The cool thing, too, is Mario is a listener of the podcast, and he’s been a friend of the show, and he’s a great accountant based out in Connecticut. But he’s not boring, right? He’s actually an interesting guy to talk to. So, we’re going to be talking some kind of serious, dare I say boring, numbers in this show. But I think Mario will help keep us entertained and keep it going, and some really good information. It’s a bit of a longer show, but I really recommend you dig into it, especially if this is of interest to you.

                                We cover issues like stock versus asset sale. We look at things like tax structures and how to minimize taxes for industry professionals. We even talk about due diligence, from a buying perspective, in terms of an accounting perspective, and what they can look for. We look at deductions and minimizing tax burdens. We even cover some offshore and expat issues when it comes to buying and selling sites. A lot of buyers and sellers are international. We have an Australian living in Chiang Mai, Thailand that’s selling a site to an American living in Europe. And so, that gets a little messy, so we wanted to ask him about some of those situations, as well.

                                We finally get into some investment opportunities, in terms of our investor program, and other options for buying online businesses that I think you’ll find pretty interesting.

Joe:                        I think it’s Mario, not Mario.

Justin:                   Dude. You’re so wrong. That’s the New Yo-, we had this whole conversation with him about it. He’s like, “Nope. It’s Mario.” You’re trying to throw your New York thing on this, man. It’s just not happening. The rest of the country, man. The rest of the U.S., the rest of the world is Mario, man. So I’m not buying it. I’m not buying the New York you’ve got going.

All right, man. Before we do that, let’s get into the featured listing of the week. What you got for us, buddy?

Joe:                        This week, we’re talking about listing 40254. It’s a SAS product in the music niche. And the nice thing about it is it does have a lot of recurring service members that use this product on a recurring basis. Really, really like that part of a SAS business in general. And this already comes with a number of users that are signed up to a monthly subscription.

The site makes just under $4,000 net a month. We have it listed for just over $118,000. Gets very good traffic, with almost 230,000 page views in the last 30 days. Only less than 10% of that is coming from search engine traffic, so it gets a lot of repeat users, a lot of people finding it from referrals, that kind of thing.

I think that this is definitely an interesting type business if you’re into SAS products and recurring revenue models.

Justin:                   Yeah. I love the recurring revenue. I think that’s interesting. It’s also a business that’s been around since 2009, so it’s got six years of experience. The content is about converting video files to audio files. We used a larger multiple for this because of the recurring, because of how it old it is. The only issue I’d have with it is it’s running on a custom Jengo platform. So, if you want to covert that, or if you want to continue using it, you’d have to be familiar with that, or at least get yourself familiar with it. So there is that. But other than that, I think it’s a really interesting business.

Joe:                        Yeah. I would also say it’s in a slight decline, in terms of revenue and traffic. But it’s definitely something that’s stayed [inaudible 00:04:37] enough that it has long term legs. Little bit of elbow grease, you could even put it back on the incline.

Justin:                   Awesome, buddy. All right. Let’s get into the heart of the episode and talk to Mario.

Recording:          Now for the heart of this week’s episode.

Justin:                   All right. I’m really excited to have Mario Lucibello on the show. He is a CPA on the East Coast. We originally met up because we had some questions for him about our investor program. Our team had some questions for him. I started talking to the guy and I realized, “Wow. He’s not boring.” Like, he’s actually a really funny, crazy dude. You know, for an accountant, I thought that was kind of a rare occurrence. So I was really excited to have you on the show, Mario.

Mario:                   You know, we really do get a bad rap for the whole boring accountant thing, but I guess I’ll take it.

Justin:                   Yeah, man. I’m really excited, because we have a ton of questions. I have some questions for you, and a bunch of our audience were asking questions. We get these a lot, and we’re like, “Look, you need to talk to an attorney. You need to talk to an accountant. These are the people you need to talk to, and we can’t really answer that for you.”

Mario:                   Right.

Justin:                   And what better way than talking to you and having you answer the questions?

Mario:                   Sure.

Justin:                   We’ve got a bunch of sections we’re going to talk about. You know, business structure setup. We’re going to get into due diligence. We’re going to talk about taxes. We’re going to talk about offshore expat issues, and even some investment and financing.

Let’s just get started right away with business structure and setup. One of the questions we get is, you know, a stock sale versus an asset sale. And almost all of our deals are asset sales. What we tell people is that almost all the time, it’s better for a buyer to do an asset sale, because they are waiving liability issues and that kind of thing. Is that true? Is that accurate?

Mario:                   Yeah. I mean, that’s pretty much right on. Exactly. If you’re buying stock, you’re also buying what has happened to that company in the past. If that company has contracts that you don’t want to take over, if they have hurt somebody and they could get sued, then that’s coming along with that purchase.

Then, on the tax side, essentially, if you’re buying assets … say you’re buying assets for $50,000. Now you could depreciate those assets and get deductions for those assets. On the other side of the coin is, if you’re just buying stock, and those assets were internally made by the company, you have no deductions for that $50,000 purchase price.

Justin:                   So you’re getting no write-off for a $50,000, $100,000, $150,000 website purchase if you’re buying the company and the stock along with the deal.

Mario:                   Well, you’re getting a transfer of what they have depreciable.

Justin:                   Okay.

Mario:                   So, now, they might not have any assets that are depreciable in their business. It depends.

Justin:                   So you’re only, yeah, taking on what tax benefits they have, and if it’s nothing, you get nothing. In what situation would it be great for a seller to argue and negotiate for a stock sale? In what situations would they absolutely want to do a stock sale, and even maybe give up some other things in negotiations?

Mario:                   Right. There’s a concept of, it’s called qualified small business stock. If your company qualifies for that, there’s a very, very, it’s either a low rate of 0% tax. To be honest, I don’t know it off the top of my head, but, you know, if your company qualifies for this qualified small business stock sale, then you have a much, much better tax scenario. I would give up a lot for that if I’m paying, say, 5% tax. To be honest, I don’t know the exact percent off the top of my head.

Justin:                   Yeah. So that’s a good negotiating point, if you’re a seller, you might give up in other areas, and non-competes, and things like that. Like, the non-tangibles, in terms of financial gain.

Mario:                   Right. That and C corp. If your company’s operating as C corp, there’s kind of a double tax if you’re selling your assets. So, you know, probably not applicable to most small businesses these days, but if it’s a longstanding business that set up as a C corp just years ago, you know, you’re going to get taxed once, once you sell the assets, and then taxed again when you take a dividend to get your money individually.

Justin:                   Let’s talk about that a little bit, in terms of LLC, S corp, C corp. I got this question from a couple of different people and they wanted to know, you know, if I’m building a portfolio of websites and online businesses over the next couple of years. Let’s say I’ve got one business making $3,000, another one making $6,000 a month, and I’ve got maybe six to eight of these. Should I create a business entity that houses all those businesses, or should the income just flow through to my personal taxes? And which situation would be better?

Mario:                   So, again, if you’re just making an LLC, the income is flowing through to you personally anyway.

Justin:                   Yeah.

Mario:                   So, on the tax side, there’s really no difference, on the tax side. From a buy sell side, if you’re really kind of building to sell, the separation is just easier in, like, a due diligence process. So, you have a separate entity. It has separate books. It has a separate bank account. It’s very easy to trace that this is this business’ income and not your other business’ income, so when you have a buyer come in saying, “All right. I want to see some books and records,” It’s clear that this is this entity’s income, and that’s what you’re buying. You’re not trying to sift through bank accounts that are being shared by two different businesses.

Justin:                   We see that a lot with, especially, these small businesses. You know, $3,000, $4,000 a month, where they have several. And so, they’re all coming into the same bank account. Sometimes they’re under the same corporation and it gets really messy when we’re just trying to separate those out so that we can help them sell the business.

Mario:                   Right. Yeah. So, you guys are doing all that due diligence on your end, and you’re dealing with the headache itself. But on the buy side, remember, you’re buying something you’re not sure of. Any little thing that can make the buyer more certain, more sure, more ready to buy, that separation, that might increase the value of your company. Because when the buyer knows what they’re buying, they might pay more for it, versus, “Oh, I’m digging through these records. I’m not exactly sure what’s going on here. Maybe I’ll pay a little less because of the uncertainty.”

Justin:                   Or they just bail, right? That’ll happen, too. You’ll have interested buyer, maybe you have several interested buyers, and you could have the two kind of battling it out to see who can get the money in first, see who’s going to give you the better offer. And one of them just gets sick of it, because there’s an easier transaction that they’re looking at, as well. And so, it’s clearly legible to them, and they end up going with that deal instead. So you lose out on a potential buyer, and maybe the deal overall.

Mario:                   Exactly. Buyers like clarity.

Justin:                   Tell me a little bit about, we were talking about whether you should have a corporation or should let it go, you know flow through to you personally. And you said, “Well, S corp, LLC, it’s going to flow through to you personally anyway, and if you go with the C corp, I mean, you have the double taxation issue.”

There’s a liability thing, though, right? So, I’m making kids’ little toy cars, and they’ve got some funky paint on them, a kid licks it and gets injured or something, you know, I could be liable. Our company. I could be personally be liable if I’m doing it personally, right? So the liability protection, I think, is important.

Mario:                   Exactly. Exactly. The purpose of the entity typically is not all tax generated. It’s legal. You want to separate your business from your personal assets. You know, again, the kid eats the paint, hopefully they’ll only go after your entity versus your house, your cars, your other businesses.

Justin:                   So, we were talking about how clarity is important from a buyer’s perspective, and I think it’s important, you know, not just a buyer’s perspectives, Mario. Because, from a seller’s prospective, it’s kind of good to know where your money is coming from, and which businesses are profitable, and which aren’t. I’m going to say it’s important for sellers to separate that out, too.

I did have a question from Dustin. He had a bunch of questions, but one of them is, when does it make sense financially to separate them out? We do have people that ask me, and they’re like, “Look, I’ve got this business. It’s making $1,800 a month. Do I need to set up a Hong Kong corporation with Singapore banking, and … ” I’m like, “Well, no. I mean, just make more money and get to the point where it matters.” But at what point does it matter?

Mario:                   Does it matter to go offshore, or does it matter just to have an entity?

Justin:                   Well, to have an entity, and to set up a separate bank account?

Mario:                   I mean, to have an entity instead of a separate account, I think, should be done from day one. There’s no reason not to. The cost is so cheap to set up an LLC, and to open a bank account. That separation of that bank account from your other personal banking and other business banking is only going to make your life easier, when it comes to trying to record your transactions and report them to the government at the end of the year when it’s tax time.

If you have that separate bank account that only does business transactions, then you only have to go through that and categorize your expenses and you’re done. Versus going through your five personal credit cards, you know, three personal bank accounts, and then saying, “Yes. This one, I think, was business. This one, I think, might be personal. I’m not really sure, but if I’m not sure, maybe I don’t want to deduct it, because I don’t want to be a tax cheat and go to jail.”

Justin:                   Yeah.

Mario:                   So, separation, from day one, I just think is a no-brainer.

Justin:                   What if I’ve got 15 different websites? And so, one of them is making $600 a month. The other one’s making 3,000. Another one’s making $450 a month. Do I need to have separate LLCs and separate bank accounts for each of those? I mean, that seems aggressive.

Mario:                   Yeah. No. I mean, you don’t need it. That’s really personal preference. What do you want to know about each of your businesses? If each of those 15 websites are truly separate businesses, and if you want to know which one is actually making you the most money, then the only way to know that is to have a separation of, somehow, a way to separate. It doesn’t have to be a separate entity, but somehow, a way to separate those out and say, “All right. I’m making money here, and I’m doing the least work here. Let’s try to work on that more.”

Justin:                   Yeah.

Mario:                   Versus working your ass on this other business. You’re getting no benefits. You’re barely making any money. And it’s like, what the hell’s the point? Wasting my time.

Justin:                   Yeah. At least have it all, even if you have it going into the same bank account, have it set up differently in QuickBooks so that you can’t track it month to month, right?

Mario:                   Exactly.

Justin:                   So you kind of know where all the money is coming from.

Mario:                   Right. Right. Now, again, if you’re going to be building to sell, or are thinking that there’s a good possibility of selling, then I would definitely have either something that completely segregates it. It could still be under the same LLC, but separate for tax reporting. I mean, there is ways. You can have a separate Schedule C on each of your tax returns, even if it’s just an LLC pass-through for each entity.

The first thing I always do in due diligence is say, “All right. Give me your past three years’ tax returns for this entity I’m purchasing.” Now, if that tax return shows a conglomerate of 10 different entities, that doesn’t give me much assurance that this piece of paper that says your profit and loss actually ties back to what you told the government your profit and loss was.

Justin:                   Yeah. Not matching up.

Mario:                   You know what I mean?

Justin:                   Yeah.

Mario:                   So it’s like, all right, so if it doesn’t match the tax return, you know, maybe we could get there. It’ll take a lot of professional time to maybe get there and say, “Okay. It’s there.” But if you’re thinking of selling, why not? It’s a pretty easy process just to report it separately on a tax return in case you ever do sell.

Justin:                   Let me ask you one question. We’re going to get more into kind of the expat, foreigner side of things a little later. But if I’m not an American citizen, but I’m doing a whole bunch of business in the U.S., is there some benefit to me setting up an S corp in the U.S.? LLC, C corp. If I’m getting paid via Adsense, or Amazon, or U.S. based affiliates.

Mario:                   Right. So, if you’re a non-resident doing business in the U.S., there’s typically two structures. One would be an LLC. That’s, you know, the income flows through to you, just like a U.S. person. Then there’s just the C corp. The S corp, they can’t be an S corp, because you can’t have a foreign shareholder.

Justin:                   Mm-hmm (affirmative).

Mario:                   So now, the LLC would require, then, you personally getting a tax ID number and filing a personal tax return. The C corp would only require the C corp to get a tax ID number, and the C corp file the tax return.

It depends on how you want to hold it. A lot of times, what we see is, if an entity is making the purchase of the business, we will almost always do a C corp. Because if an entity sets up an LLC, that’s considered a disregarded entity, and now, this foreign entity now has to file a tax return in the U.S. to report its U.S. income. Which then has reporting of all the foreign corporation’s information. People typically don’t want to do that.

Justin:                   Oh, okay. So you’re telling me, if I have a foreign corporation that’s setting up an LLC in the U.S., they’re now, the U.S. is going to be digging into my foreign corporation, and basically I have to open the books to them. Whereas, if I set up a C corp, they only have access to that C corp.

Mario:                   Correct.

Justin:                   Okay. All right. That makes sense.

Mario:                   On the individual side, it doesn’t really matter as much, because you’re just, it’s either you file a personal tax return reporting your U.S. sourced income, or you file the corporate return.

Justin:                   All right, Mario. Well, let’s get into due diligence a little bit, when it comes to buying online businesses. First, we’re going to talk on the buy side. And you talked about this briefly, but when it comes to accounting due diligence, what are some quick checks that someone can do as a buyer? How can sellers try to trick you? How can you miss the numbers? And what should you look out for?

Mario:                   So, buy side is, you know, assuming asset sale. I mean, if you’re buying an actual entity purchase, then you’ve got to review every single contract, every single possible liability. But if you’re really just looking at numbers, really what you want to see is, how true are those numbers? And then, what’s called the normalization method, which is just saying, “All right. This is his income and expenses, but what about accounting for the time that the owner spent?” So, if I had to replace him, how much would it cost? A lot of times, that’ll greatly devalue a business, because if you’re going to be working full-time in it and the net profit is only $20,000 a year, is that worth your 40 hours a week? Probably not.

Justin:                   Yeah. It’s interesting. If someone has a job, or … basically, they’re buying themselves a job, and sometimes it’s a bad job, at that, right?

Mario:                   Right.

Justin:                   So, if it makes, like, $1,500 a month and it’s taking up 30 hours a week, yeah, that sucks. It’s not great.

Mario:                   Right. But it also works the other way, too, where, you know, if they’re taking, if in those financials that they give you has a salary expense of, say, $500,000, but the cost to replace them might be $50,000, well, then the value of the actual business is much higher than what the typical profit and loss is saying.

Justin:                   Yeah. That makes sense.

Mario:                   And then you’ve got to, of course, you watch out for, while there’s a ton of these expenses, we don’t really need, we didn’t need to go to 15 conferences around the world, and all of this travel expense. So, a lot of times, you take all that out to get what’s the normalized profit and loss.

Justin:                   Yeah, we call those, we generally will add those back.

Mario:                   Exactly.

Justin:                   So, anything that is, they went out and took the team to dinner, or a weekend in Vegas or something, we …

Mario:                   Exactly.

Justin:                   … include those as add-backs.

Mario:                   All ordinary and necessary business expenses, of course, but on an acquisition, we take those out.

Justin:                   Yeah.

Mario:                   And then, the other thing I always look for is types of expenses. What are they spending their money on? Did they have a big legal cost last year? Well, that would tell me, well, maybe we should look at the invoices from the lawyer. Did they get sued because the paint was bad on their toy business? Well, that might be a problem with the whole business in general.

Justin:                   These poor kids, man. They keep licking all this paint. It’s horrible. I don’t know where I pulled that out from. I think that happened, what, like, back in the ’80s or ’90s.

Mario:                   Yeah. Yeah.

Justin:                   I like that bit though, man. That’s actually interesting. So, they’ve got a bunch of legal expenses. What’s going on with this business? Why did they have these legal expenses? That makes …

Mario:                   Yeah, no. Don’t laugh. We had, I was recently doing an acquisition where they had huge legal expenses, and we had to get the lawyers involved and everything to dig out what was, all the pending litigation, and who was suing who. Because it’s just such a high liability that, well, if the whole business model’s flawed, then you’re buying something for $500,000 or $1 million and it could be worth nothing.

Justin:                   Yeah. You know, actually, when you’re talking about people, and let’s say that a business makes $3,000 a month but the seller is spending 10 to 20 hours a week, maybe 20 to 30 hours a week on the business. I kind of like those business. And here’s my reasoning for that, is because it’s kind of a turn-off to other potential buyers. They’re like, “Ugh. I don’t want to spend all that time on that,” Right? And then, I’m really good with people and process.

Mario:                   Right.

Justin:                   So, we’re really good with bringing VAs in and adding processes to it that could remove quite a bit of that time. And so, you can use that as leverage against the seller to see if you can work out a discount. So, try to put some kind of cost in there. And, especially if I know that I can beat that cost, I’ll be good.

Also, it’s a barrier to entry against potential people that want to copy the business, right? That’s a barrier to entry because it does require some work, and unless you have those skill sets, it might be difficult.

Mario:                   Right. Right. But again, like you said, it’s priced in. You’re expecting to get that at a discount.

Justin:                   Yes. That’s right. And if they give me a discount, then, fantastic. If not, well, I’ll have to take that into account, and look at my multiple, and look at the other deals that I’m currently looking at.

Mario:                   Exactly.

Justin:                   Give me some insights on how to negotiate effectively from a finance or from a tax perspective.

Mario:                   Yeah. So, I mean, negotiating, the number one thing I see is, one, don’t let emotions take over. Some people, they got stuck on a deal. They thought it was going to be great, but prices didn’t move, or certain things came up in due diligence, but they’re already dead set on buying.

Beforehand, have kind of an idea of what you want to buy, and realize there are other deals out there. And then, on the negotiation side, negotiating is so situation specific. It could be anything. You’ve got to kind of get a feel of how the other side is feeling about their company. If you throw out the first number, that’s not a bad thing. Some people don’t like to. In my opinion, I like to. You throw out the first number, I mean, that’s kind of the peg of where negotiating starts, usually.

Justin:                   Yeah.

Mario:                   That’s usually my advice, is throw that first number out and then go from there.

Justin:                   Let’s talk about the sell side of due diligence a little bit. Richard had a question. He wanted to know, what do you recommend to maximize the sale value of a business? What can someone do to their business, let’s say, three months, six months, 12 months out, to start preparing for a sale?

Mario:                   So, again, maximizing value. Pretty much, people want to see an asset that’s increasing in value. If there’s any way you could have your business year over year, quarter over quarter, month over month, that’s better than opposite. I mean, that’s pretty obvious.

Clarity. You want your business to be very clear to the buyer of what they’re getting. You want them to feel as assured as possible that what they’re getting is what you’re selling, and it’s very, very clear what they’re buying. The more assurance they have, the more they’ll probably pay. And I mean, that’s really it. I mean, cash flow, obviously. Better cash flow, better cash flow and an increasing asset typically get the hotter multiple.

Justin:                   Yeah. A lot of times, when you have a decreasing asset … You’ll see those two, especially if the business is for sale for awhile, that they’re kind of done with that. They’ve already moved on, in their head. And the problem is now they’re letting it slip. So, if it’s for sale three, four months, and a potential buyer sees that, and it’s slipping, they’re like, “Oh, I see why they’re getting rid of it. It’s going to crap. I’ll offer a ridiculously low deal and see if they’ll take it,” Right?

Mario:                   Right.

Justin:                   And it might be, at that point, they’re so sick of it that they take the deal. That’s how buyers can get sweet deals and sellers can get screwed, is by not keeping up on the business.

Mario:                   Right.

Justin:                   One of the things you mentioned is cash flow, and definitely profit, because, especially, especially in our space, the five and six figure websites and businesses, these are going to sell based on some multiple of net profit, right? Multi-profit.

Mario:                   Exactly.

Justin:                   So, if you can improve that, that’s good. And like we talked about before, and add-back for a weekend in Vegas is not a problem, but it is a problem if you’re doing exploratory marketing. So, if someone’s spending on some marketing spend, how are you, as the buyer, going to know whether that was critical marketing spend or you had an ROR in that marketing spend. They don’t know. They have to include those costs. So I’d cut out, in the exploratory marketing, three, six, even six to nine months before you sell the business.

Mario:                   Right. And again, that also goes back to having good accounting. Being able to prove that that was exploratory marketing to the buyer.

Justin:                   Next question I had for you is, in preparing the business for sale, how do you go about cleaning up your books? So, I’ve got multiple websites all under the same bank account. I’ve just kind of mingled the funds. Can I pay someone to do that, and at what level does that make sense? If I’ve got a business I’m just trying to sell for $15,000, it probably wouldn’t make sense to pay an accountant to help me for 3 or 4.

Mario:                   No.

Justin:                   At what level does that make sense for somebody?

Mario:                   For one, it depends on how messy it is. If it’s very messy, it’ll take more time. Typically, accountants, we’re going to charge you an hourly rate. If it’s going to take us 10 hours at $150 an hour, there’s $1,500. So, it depends on how long it’s going to take, which means how messy it is. If it’s a little bit cleaner along the way, it might only take us a couple hours to kind of get a decent, normalized report for you.

If it’s a disaster, where you have 15 entities, 20 different bank accounts, and five personal accounts, it might take 20 hours to get it clean. So it’s really kind of a cost versus benefit there, you know?

Justin:                   That doesn’t sound horrible to me, though. Let’s say that I am a little messy, and things are kind of all over the place, but not 10 bank accounts or anything. And I’d pay $1,200, $1,500 to kind of get that cleaned up, and straightened out, and to help prepare for a sale. That’s not unreasonable to me.

Mario:                   Yeah. I think you’ll get your money back, definitely, in a sale.

Justin:                   Any best practices on keeping them clean? Keeping the books clean from the get-go.

Mario:                   Yeah. Get a system. I’ve seen so many different systems out there. Whether you use QuickBooks, Xero, pen and paper, Microsoft Excel sheet. All can work. It just needs to be systematized. You have to say, “Well, monthly, I’m doing this. Weekly I’m doing this. And now I know where everything is, and it’s in an organized manner.” That’s really it. It’s just having your system that reports everything.

Justin:                   If you’re really clean with your books, you just keep two sets, right? Isn’t that how it works?

Mario:                   Well, exactly. Exactly.

Justin:                   Let’s talk about key metrics. What can you do if you’re a potential seller? What kind of key metrics can you use to evaluate whether you should sell a website, whether you hold a website, whether you should buy a competitor? What do you look at? Do you look at return on investment? Do you look on trajectory? How can an accountant help me make a buying or selling decision?

Mario:                   This is a tough one. This one usually comes back to time more than price, because it’s, “Well, I’ve got this thing going on and it’s making me whatever a month. $500 a month. Is it even worth my time anymore when I have this other thing going on that’s making me $1,000 a month? And I really want to focus my time on something that’s more profitable.” That, and, a lot of times, it’s just, “This is boring to me now, and I’m just kind of sick of it.”

Justin:                   Yeah.

Mario:                   No matter what, market price is going to be market price. If you’re not dying to sell it, you just up your price, and if you get a buyer, you get a buyer. If you don’t, you hold onto it. Like I said, it usually comes down to time, and do you have something else going on in your life that takes a better use of it?

Justin:                   We had a situation where we had a small business that we could have sold for probably mid four-figures, and we just kind of held onto it. Just kind of like, “Well, whatever. It’s small. We’ve got our other main business going on over here. It’s kind of earning. Let’s just leave it alone.” And we let it kind of go on, and go on, and the earnings were declining. We didn’t really mess with it. And it got down to the point where, at the end, we were doing a couple of sales a month. We basically gave it away.

Mario:                   Yeah.

Justin:                   And, you know, we should have just said … It’s funny, but now, years and years later, I’m like, “Oh my God. I would totally just sell it.” But at the time, we’re like, “Oh, you know, we’ll get back to it. It’ll be fine.” No. Not fine. I think as soon as you’re turning your attention away from that website, or small business, or project, or whatever, that’s a good time to sell it. Sell it when you’re … Let someone else take it and run with it. They may be able to take it over with new vigor and bring some excitement to the business.

Mario:                   Right. I completely agree. If you’re not willing to spend the time on it because you have better things to do, it’s very unlikely that that asset is going to grow in value magically by not putting any more time in it.

Justin:                   We run into deals now, you know, most, I’d say, four-figure, five-figure, up to mid five-figure deals are done generally for straight cash. A straight cash asset sale, right? No issues there.

Mario:                   Right.

Justin:                   But as you get into the mid to high five-figures and the six-figures, now you’re starting to look at different structuring opportunities. So, we’ll see it where sometimes it’s 70% upfront, 30% in 30 or 60 days after training, and they have certain things that the seller has to do to get the rest of the money. You’ll have earn-outs that are either based on revenue. Earn-outs that are based on profit, which is always dicey. How much is actually profit?

Mario:                   Yeah. Yeah. That’s a hard one to do. Revenue is a better earn-out target because that’s what you’re buying, typically, is revenue.

Justin:                   Yeah. I think, if you want to do, let’s say, an earn-out where it’s 50% profit, one of the things you can do is, let’s say that it’s making $10,000 a month and you’re at 50% margins or whatever, so it’s $5,000 in profit. Then just say 25% of revenue. Tie it to revenue, and based on …

Mario:                   Exactly.

Justin:                   … what you think profit should be. That can work. That has problems, though, too.

Mario:                   Revenue is undisputable.

Justin:                   Yeah.

Mario:                   The profit can always be tinkered with by throwing more money in a business.

Justin:                   That’s sketchy though, too, from a buyer’s perspective. Let’s say you buy the business and the expenses were higher than you thought, and you’re paying them out, but now you’re paying them out, you’re actually losing money every month. Or there was a bunch of work that needed to be done to kind of refurbish the business. Can definitely leave a bad taste in your mouth. At least all the parties, though, know kind of what the deal is. You’re not like, “Oh, no. This trip to Vegas was totally an expense this month. Sorry I couldn’t give you some profit. I didn’t have any.”

Mario:                   Right. Yeah. Yeah. That’s tough on both sides. One thing I always tell people selling a business, when there is some sort of a holdback of cash, is you haven’t yet sold your business. You might not receive that cash. On the sell side, always be wary of that.

Justin:                   It makes sense. We generally will act as escrow in deals between our buyers and sellers, and so, we can hold the cash for a period of time. When we’re coming to an earn-out or something, that’s outside of us. We make the buyer and seller deal directly.

The problem with that is that the seller has no leverage, right? There’s no leverage. How can a seller retain leverage to make sure that the buyer pays them out? Is it just through contracts? Like, just contractual leverage?

Mario:                   Yeah. All I’ve seen is contractual. The one other thing you can do is know who you’re selling to. Are they reputable? A lot of times, you don’t know who you’re selling to. Sometimes you get a feel for what they’re doing. But, yeah, I mean, it’s a big deal of trust when you’re letting them hold back that much, you know, however much funds. Because that’s what you’re banking on. I’ve seen some go where people didn’t get paid their earn-out because the business didn’t go how it was planned.

Justin:                   Have you ever seen, can you give me an example of any really interesting kind of buyout scenarios, or seller financing or anything, that you’ve dealt with?

Mario:                   Nothing really out of the ordinary. I’m sure you’ve probably seen more crazy stuff than I have. Some companies, they will just have almost like an acquisition strategy, where they’re trying to buy not an ongoing business, but they’re trying to buy people. They’re saying, “Well, how about we’ll buy your business for X.” Say it’s $100,000. “But we’re going to then give you 10%, or 20%, or 30% equity in it, and a contract to work there. To manage it.”

Justin:                   Yeah.

Mario:                   Now, it’s not a bad deal for everybody. Where you’re buying an asset, you’ve got a manager now in place that knows the business, and you still have the power to make any changes you want to that business. But it’s part of their acquisition strategy of growing their own business by pretty much buying up their competitors.

Justin:                   We’ve seen deals where the seller retains some equity. It would sometimes happen where the seller is just absolutely sure this business is going to blow up, but they haven’t made it work. They know that someone else could, and they’d like to keep a little bit of equity or a little bit of equity or a little bit of upside. So they’ll keep, let’s say, 20% or 10% equity and give a 25% discount or a 15% discount on the purchase price. So, they’re giving the buyer a bigger deal, but they retain some equity just in case they absolutely crush it over the next couple of years with the business.

Mario:                   Yeah.

Justin:                   And this would be, a lot of times, for smaller SAS companies, you’ll see this kind of deal.

Mario:                   Yeah. That makes sense.

Justin:                   Mario, let’s get into taxes when it comes to buying and selling websites. I’ve got a question from Nemi, who’s a customer of ours, that says, “I’ve never owned a website before and I’m buying one for the first time. How should I account for in my taxes? Or simply, what should I do from a tax standpoint? Same question for when I sell a website for the first time.”

Mario:                   Right. So, when you’re buying a website, again, you’re pretty much buying a business. You’re not just buying the site. You’re buying whoever the customers are of the former owner. Typically, what that is, on the tax side, is probably, for the most part, a Section 197 intangible purchase. Say you buy the site for $50,000. For the most part, that’s a depreciable asset. You bought a $50,000 asset. You can depreciate it over 15 years, and you get that deduction every year.

Now, on the sell side, you’ve sold, again, for the most part, probably a Section 197 intangible asset, and it’ll be capital gain to you, versus ordinary income.

Justin:                   Is there any way to speed that 15 year deduction up? Are there any tricks you know of, or any ways to do that?

Mario:                   Again, it all depends on what assets you’re buying. If you’re buying some training along with it. Again, back to $50,000. If you’re buying a $50,000 total price business, but you’re paying them for two weeks of training or a month of training, what’s the value of that training? The training would be currently deductible to the buyer and would be ordinary income to the seller, versus capital gain. So, yeah, there is some flexibility in that, but not-

Justin:                   And that’s a negotiation point, because that’s not so great from the seller’s perspective. So, as a buyer, you know, on a $50,000 site, I’ll pay $40,000 for it, and the $10,000 extra will go to training to make sure that I can run it properly, or whatever. That’s a good deal for the buyer. Not so great for the seller.

Mario:                   Exactly. Exactly. Now, again, from the selling side, the question is, what other assets do you own? Do you have any big loss positions? Say you’ve got some sort of loss in a different type of business. Maybe it’s time to sell that business, capture your loss to offset the gain that you’re going to have right now.

Justin:                   Let’s say that the business is coming with inventory. Let’s say the business is, $300,000 business comes with $40,000 in inventory. How is inventory classified?

Mario:                   Inventory would be ordinary income. It would pretty much be like you’re selling the inventory. However, in most deals I see, you’re buying the inventory from the seller at cost. It’s usually kind of a no-tax transaction.

Justin:                   Okay. So, that’s interesting. So, if there’s more inventory, we’re talking no tax for either the buyer or the seller, as long as you’re buying at wholesale value.

Mario:                   Right. Now, remember, on the sell side, your gain is not full gain. So, if it’s a $50,000 sale, if you have any cost basis in your business, then it’s not full gain. What I mean by cost basis is, again, back to our example, if you sold a $50,000 site that you bought for $20,000 a week ago, your gain is only $30,000. Now you’re only paying tax on $30,000 instead of $50,000.

Justin:                   Yeah. We’re actually going to get into that. I’ve got a question about that a little later in our rapid fire scenario. But, yeah, that’s interesting. We’re going to go at it, man. I’m going to hit you with some good ones.

Mario:                   Okay.

Justin:                   Are there any other deductions I can take on taxes? Most of the time, it’s 15 years. In what situations would it be, could I get it not spread out over 15 years, 5 years, or 8 years? Are there different classifications for different types of assets?

Mario:                   Yeah. And I think we covered most of them that you guys would probably deal with. Again, other ordinary assets would be, like, if you’re selling accounts receivable. Probably not applicable in most online type sales. Inventory, of course. And the training is really where you have the most flexibility.

Justin:                   So, training, better for buyer, not so great for seller.

Mario:                   Correct.

Justin:                   What do I do, so, I’ve got a good question here from Allen. He’s asking about ways to mitigate the tax burden in an asset sale. Should we immediately turn around and invest the earnings in new products, development? Should we put it all in Bitcoin? Should we buy a Ferrari, Lambo, new house? What should we do with the cash that we’ve made? So, if I sold a $200,000 business today, where can I put that money so that I’m not paying crazy taxes?

Mario:                   Well, the Ferrari sounds like a great idea. That’s different reasons. There is a way you can do what’s called a 1031 exchange. So, if you sell assets and then buy like-kind assets within a certain period of time. Honestly, I don’t know the period of time off the top of my head. Then you get a deferral of that gain. Kind of a complicated scenario, but that option is out there. Again, that’s only for certain types of assets. You can’t use it for goodwill. To be honest, I’ve never done it with a business transaction. I think the first time I talked about it was when we talked about a week ago or two weeks ago with you.

Justin:                   Yeah.

Mario:                   And then, I went and looked it up a little bit. So, yes, it is possible. It depends on what you’re selling. You can’t do it with goodwill. And that was the gist that I got about it.

Justin:                   How much of a website business is considered goodwill? A great portion of it, right? I mean, you’re buying the brand. You’re buying the content. But that’s not, doesn’t have [crosstalk 00:38:14].

Mario:                   You’re also buying a customer list, a lot of times. So, that has a lot of value to it, also.

Justin:                   Yeah. That makes sense. All right. So, probably not the Ferrari or Lambo, although that does sound cool.

Mario:                   Yeah.

Justin:                   Probably not Bitcoin.

Mario:                   Yeah. Probably not there, either.

Justin:                   That’s not going to help. Maybe buying another asset. So, if you’re buying another website or business, possibly.

Mario:                   Right.

Justin:                   But it’s going to depend.

Mario:                   Where we see a lot of those 1031 exchanges is in real estate. People buy and sell real estate all the time. Like I said, I’ve never actually seen it a business, buy sell, but from what I read, you can do, at least in part, you can do it.

Justin:                   Awesome. Okay. So, check out the 1031. That might be a way for you to roll it into other businesses.

Mario:                   Yeah.

Justin:                   So, if you sold several, and you want to, let’s say, upgrade. You want to buy a bigger business. There’s an opportunity to do that. Check it out.

I’ve got a question from Greg. He had a longer one. He said, “The biggest question is, if you sell a website, do you have to pay short term or long term capital gains tax? The rule is generally one year, but what if you had your business more than one year, but not the website? Theoretically, if you sold your whole business entity, that would be long term capital gains. But if you sold your website only, would that not qualify anymore? It sounds confusing, but that’s why I need a CPA.”

Mario:                   That’s a good question. Now, remember, you’re selling each individual asset. So, each individual asset is getting valued on a sale. So, again, what was the agreed upon price on the actual site? You know, the domain name. I mean, what was the agreed upon value of that domain name on the sale? Again, a lot of times, in these small business transactions, nobody says, “Well, this is how much I’m paying for the content. This is how much I’m paying for all the copy. This is how much I’m paying for the actual domain. This is what I’m paying for the customer list.”

But you should be doing that. There’s actually a required form, by the IRS, that you’re supposed to file with your tax return, saying all the assets you purchased. Whether or not that happens is a different story. But I would think-

Justin:                   Yeah. That’s interesting. We actually break those out in purchase agreements. So, it’s actually broken out, but we don’t have a price attached to that.

Mario:                   Right. And then, it all comes down to one big price, and then it comes to their accountant, me, at the end of the year, and says, “All right. I bought this for $50,000.”

Justin:                   “Help me out here, buddy.”

Mario:                   Yeah. It leaves us scrambling, saying, “Well, a lot of times, when you do that, it forces you to go the most conservative approach, which are … “

Justin:                   Gotcha.

Mario:                   ” … the assets that are less depreciable or, on the sell side, might be ordinary income versus capital gain.”

Justin:                   So, what would be the least conservative approach? So, I’ve got the purchase agreement and I want to assign a value to the domain name. I want to assign a value to the content, to the customer list. Where should the value be?

Mario:                   Right. So, for one, there’s non-competes. Non-competes, you never want to have any value to, because that’s ordinary income to the seller.

Justin:                   Mm-hmm (affirmative). Okay.

Mario:                   And again, what you want to have most of the value assigned to is your long term capital gain assets, because that’s going to give you the best tax rates. Anything that’s held longer than a year, as an asset, is the best thing to apply it to you. Assuming, there’s also depreciation recapture you have to worry about it. If you’ve purchased this asset and have had depreciation on the asset, all that depreciation recapture comes back to its ordinary income. Past the recapture amount is capital gain.

Justin:                   Okay. I think I understand that. So, you’re saying if I’ve got depreciated income, that’s coming back as ordinary income. Anything above that, I’m going to take capital gains on that. That sounds …

Mario:                   Exactly.

Justin:                   So, personal income is worse. I’d rather avoid that, generally. Capital gains is better.

Mario:                   Right.

Justin:                   Okay.

Mario:                   Exactly.

Justin:                   I think I get that. So, yeah. Interesting questions. I’ve got the rapid fire scenarios, Mario. We’re going to go to our special segment. Actually, we don’t have a segment, but I’m just doing this because there’s so many questions.

Selling a site and buying another site with cash in the same year. How is that tax reported? I think we’ve already covered that a bit, but what’s your answer to that?

Mario:                   Yeah. So, you’re selling a site and then buying one in the same year? So, the sale, most likely, again, mostly be capital gain. And then you’re buying a site, which again would be the purchase of mostly that intangible asset, which will be depreciable over the 15 years.

Justin:                   Oh. That sucks.

Mario:                   That’s the general rule. Unless we do some planning and try to get as much deductible, et cetera, et cetera. That’s the basic.

Justin:                   We talked about sale of inventory and equipment. How does that work for tax purposes? That’s basically a non-tax event, as long as you’re selling at wholesale rates, right?

Mario:                   Right. Exactly. Now, equipment’s a little different, because equipment has always been depreciated. That’ll be that depreciation recapture, and then whatever’s past that is capital gain.

Justin:                   Okay.

Mario:                   Inventory, typically, gets sold at cost on sales. So, it’s no tax.

Justin:                   Yep. And then, the next question, any benefit to buyer or seller to classify part of the purchase as training expense? We covered that, as well. The buyer gets benefit by claiming some of his training expenses, because they get to write that off the same year, whereas the business is over 15 years. Every time I hear 15 years, it sounds horrible. But they get it the first year.

The seller doesn’t like that so much because they’re claiming that as regular or normal income, right?

Mario:                   Right. Exactly.

Justin:                   Okay. And then, let me ask you this. Here’s an interesting one for you. I’m going to through you off your guard. How do taxes work on a Bitcoin to Bitcoin purchase or sale? We do this. You can actually buy …

Mario:                   Oh, you do this?

Justin:                   … a website, on Empire Flippers, you can checkout on our cart via Bitcoin. So, someone does that and the seller gets paid out in Bitcoin. What’s the deal there?

Mario:                   Bitcoin is treated as property, for tax purposes. It’s almost like buying a site in foreign currency. Let’s do a quick example. Let’s say you paid $100 for your Bitcoin.

Justin:                   Yeah.

Mario:                   And then you actually bought a $10,000 website with that Bitcoin 10 years later, because, so, the Bitcoin increased. So, now, you bought a site for $10,000. The seller, of course, sold the site for $10,000, you know, value.

Justin:                   Yeah.

Mario:                   So, they’ll pay tax on the $10,000 sale. The buyer will actually have a capital gain of $9,900 because of the appreciation in the value of their Bitcoin.

Justin:                   Yes.

Mario:                   And then they’ll have a $10,000 depreciable asset.

Justin:                   Oh. Okay. Oh. Ouch. Okay.

Mario:                   So, it’s basically treated as you selling your Bitcoin for $10,000, from the buyer standpoint.

Justin:                   Okay. So, that’s not great.

Mario:                   Not a good scenario. No.

Justin:                   Yeah. So, we’re both losing on that. The buyer and the seller.

Mario:                   Yep. Well, the seller is in the same situation as they would if they sold it for cash.

Justin:                   I think the real question is, you know, people were asking, “Well, if I’m doing it via Bitcoin, can they find me?” I think that’s their other question.

Mario:                   “Can they find me?”

Justin:                   “Will they know,” Right? I don’t know, man. Bitcoin, I think, up ’til now, has been, most people have been able to hide if they were careful. But I think governments are going to start going after that and trying to figure out ways to tax you, man. You just can’t get away from the tax man.

Mario:                   Oh, definitely. Definitely. I mean, think about it. You’re going against the treasury, who wants to use their dollars.

Justin:                   Yeah.

Mario:                   That’s kind of a big agency.

Justin:                   They’ll spend years. They don’t care. They’ll track you down five years later and find you in a cave in Afghanistan somewhere.

Let’s say I bought a site in 2014. I’m selling it in 2015. What happens there, if I’m doing these separate events in different tax years?

Mario:                   Again, you hold it longer than a year. So, again, back to our example, you buy it for $10,000. For ease, let’s say you depreciated it $1,000, and then, a year later, you sell it for $20,000. Your total gain is actually $11,000, because you’ve depreciated the $1,000.

Justin:                   Yeah.

Mario:                   $1,000 will be ordinary income. $10,000 will be capital gain.

Justin:                   So, I don’t get to take advantage of my full depreciation because I didn’t wait that long, and I’ve got to pay on the earnings that I had, [inaudible 00:45:47].

Mario:                   Correct.

Justin:                   All right, so, I bought the site for $100,000. Took a hit. So, you know, it lost rankings or whatever. It got worse, right? And then I sold at a loss. So, I bought it at $100,000 in February, took a hit, sold it in May for $50,000. Can I claim those losses? How does that work?

Mario:                   Yeah. Well, that’s a good question. That will be a 1231 loss, which will be an ordinary loss. Yeah, you’d be able to pretty much deduct whatever the loss was. So, what’d you say? Buy for 100, sell for 50. You have a $50,000 loss.

Justin:                   Yeah.

Mario:                   That loss, if it offset your other, any other income you have, you might be able to carry it back. So, you know, if you didn’t have any other losses in the current year, but you had income in the previous year. Say you had very high income in the prior year.

Justin:                   Yeah.

Mario:                   You’d be able to carry that loss back and actually get a tax refund.

Justin:                   On the previous year of where I was high tax rate or whatever. Okay. On my personal income.

Mario:                   Yeah. You get to go back two years, and then forward, honestly, I don’t know how many years forward. I think it’s like [inaudible 00:46:48] forward. Something like that.

If, for example, your prior year’s income was very, very low, and you don’t want to carry it back because you didn’t pay that much in tax in the prior years, you could elect to only carry it forward. With that theory of, “Well, I’m expecting to have higher income next year. I’d rather this loss forward.”

Justin:                   That’s nice. I didn’t know that you could do that. So, you can take those losses, you can either carry it back or forward? That’s interesting. Okay.

Mario:                   Right.

Justin:                   We talked about what can be written off in the same year, what has to be written off over time. So, because of the way it works, and because of the way depreciation works, if I’m buying a business, I only get to depreciate a portion of it, and then I’ve got to take the hit on anything I earned or made additional money from. Okay. I think that gets us through the rapid fire scenarios. Thanks Mario. I appreciate it.

Let’s do a couple of offshore expat issues. If someone wants to set up a holding company in Hong Kong and the assets, the websites are being bought and sold by offshore corporations. Both they’re buying from an offshore corporation and selling to another offshore corporation. Are there any benefits to doing it that way, or any downsides? Should you just have a U.S. LLC, or C corp, or S corp? How does that work?

Mario:                   So, the benefit would be is if you are residing overseas. If you’re not in the U.S. but you’re still a U.S. citizen, and then you qualify for what’s called the foreign earned income exclusion. You could exclude up to, it’s about $100,000 per year of income. You know, assuming you don’t have other certain types of income. But that’s the very, very basic.

So, if you’re outside of the U.S. for a certain number of days or have established a true residency in a foreign country, you could possible qualify for that foreign earned income exclusion. Now, if you’re not, if that is not applicable to you, you know, if you’re in the U.S. but you wanted to just use an offshore corporation, there’s not a whole lot of benefit. The best case scenario for you is that you get a little bit of deferral of the income. Again, you’re buying these website. It’s earning income. It’s non U.S. sourced income. You’re not going to pay tax on that currently, but as soon as you start taking any of the money, you’re then going to get taxed on it in the U.S.

Justin:                   So, if my Hong Kong company I have set up … I’m living in the U.S. I’m in California.

Mario:                   Right.

Justin:                   My Hong Kong company is receiving payments. Making $4,000 a month. It’s staying, it’s retained in the Hong Kong company. I’m not getting taxed, in the U.S., on that $4,000 a month, at first.

Mario:                   Correct.

Justin:                   But if I ever take that money out, obviously, I’m taxed as a U.S. citizen, and this would be considered income, right?

Mario:                   Exactly. Exactly. That’s the very, very basic, best case scenario result.

Justin:                   If I turn around and sell that Hong Kong corporation, or at least I sell the assets of that Hong Kong corporation, will that be capital gains or is that going to come back as personal income for me?

Mario:                   So, now again, it’s pretty much the same scenario now. This is like a corporation. So, you’ll have capital gains within the corporation, and then, if you want that cash, you have to then have a dividend to yourself. That dividend, once you take the cash, will come to you and will be taxed to you as a dividend.

Now, the question of, what will be the rate on the dividend will depend on the tax treaty with whichever foreign country you’re in. If it’s a non-treaty country, usually those dividends are not at dividend tax rates. They’ll be at ordinary income tax rates.

Justin:                   Okay. Another question about expats. So, if you’re a foreigner, you’re a non-U.S. citizen, how can you set up and run a U.S. company? We get this question a lot, because there are a lot of people that want to set up drop shipping sites in the U.S., or e-commerce sites in the U.S., and that’s a barrier to entry when they’re trying to set up agreements with the suppliers. It’s really difficult to do if you don’t have a U.S. corporation. Is that relatively easy? Is that difficult, as a foreigner, to get a U.S. corp?

Mario:                   I’ve never seen anybody have that hard of a time, you know, to set up the entity. Where I see people having trouble is opening bank accounts. Can’t really open a bank account just as a foreign person that easily, from what I gather. But if you open up an actual company, get your company, you get your tax ID number, that company then gets its own bank account, and you’re up and running in the U.S.

Justin:                   Do you know of any banks that would allow you, I’ve got the entity set up, I’ve got the tax ID. Do you know of any banks that will allow you to do it remotely? Or, set up an account remotely?

Mario:                   Honestly, I don’t know, off the top of my head. But I know people do it. I will say that.

Justin:                   All right. So, no answer to the banking, but yes, you can definitely set up, and you can get a tax ID. And that’s, the tax ID is what you need for the wholesale suppliers, if you’re looking to do e-commerce.

Mario:                   Exactly. That’s usually the barrier for everything. It’s to get any bank account, you need a tax ID. And if you, you know, like you said, if you want to set up with suppliers, you need a tax ID.

Justin:                   Can that U.S. LLC have an offshore bank account? Or, could I have a U.S. LLC with a bank account in Singapore?

Mario:                   Sure.

Justin:                   Okay. Cool. So, that’s one way they can get around it. Make sure pick a country that allows Stripe, that allows PayPal, that kind of thing. That’ll be helpful, because a lot of countries don’t.

Mario:                   Right.

Justin:                   So that would make it difficult.

Mario:                   And, one other thing, when you’re playing in any of the foreign banks or entities. There’s just a whole load of reporting that has to get done on the tax side. So, expect your professional fees to go way up, and make sure you’re in compliance with all those rules, because the penalties are not a slap on the wrist. They’re, like, obscene penalties. You know, $10,000 for not reporting your bank account that had $50 in it.

Justin:                   Yeah. A lot of these foreign governments, or actually, foreign banks, are not so hot on doing business with Americans anymore because it’s so difficult for them and it’s so risky for them. They’re like, “No, no, no. Take your business elsewhere.” I’ve had friends that have had trouble setting up bank accounts in Hong Kong recently, so I know that’s been a struggle.

Mario:                   Yeah.

Justin:                   Let’s talk about investments and financing a bit as kind of our last section. Are there any investments a seller can look to roll their proceeds in to avoid taxes? And we said possibly, with a business, what was the form for that? It was like a 1031?

Mario:                   Right. Yeah. So, the only thing you really have as an option to avoid the tax would be, well, it really defers the tax, is that 1031 exchange. That would be the only real option out there.

Justin:                   No gifting. We already talked about Bitcoin.

Mario:                   Well, there is some gift planning you can do, you know, if you have a family right before you sell, and if you want to gift some shares to a son or daughter. Those are options. That’ll then work on their tax rates. Assuming they don’t have, depending on how old they are. There’s a thing called the kiddie tax that you’d want to make sure that you won’t get hit with.

Yeah. I mean, gifting prior to sale does happen a lot.

Justin:                   Gotcha. All right. And I’ve got another one for you. This might be kind of interesting. I don’t know if you’ve heard of this before, but I’ve recently heard of using self-directed IRAs to purchase or own portfolios of websites and online businesses. I looked into a little bit. It seemed a little fringe, but it seems like it might be possible. So, I wanted to ask you, is it possible? Is this advisable? What’s the deal there?

Mario:                   I’ve never seen anybody do this with a business. But, again, I’ve seen a lot of people do this with real estate. The issue that will always come up with this is something called, I think the name of it is, like, self-dealing. So, for example, yes, you can make a private investment in an IRA, with your IRA, to some private company. You can’t be active in that company. If you’re active in that company, then IRS is going to say, “Well, sorry. This had a personal benefit.” They’ll say, “All right. That investment’s an automatic distribution to you. And then, you made this $100,000 investment in a website, and now it’s also taxed to you as IRA distribution.”

So, if you do, I mean, you can do this if it’s a passive investment to you, but you’re going to want to dot your Is, cross your Ts before doing it.

Justin:                   Yeah. That’s weird. So, I’ve got a team of people that are running it, right?

Mario:                   Right.

Justin:                   Let’s say I’m not involved in the day to day, but I do own it. Now, that seems pretty passive. But there are situations where, “Oh, I just do a couple of hours a month.” Not so passive now.

Mario:                   Right. Here’s a good example. I’ve heard of one real estate deal go, by sour I mean, you know, the IRA distribution got deemed as a distribution versus an investment because somebody was pretty much just contracting repairmen, et cetera, et cetera, themselves. So, by only being the person to contract them, that made them an active investor.

So, you really have to be very hands-off. Like, completely hands-off. You have to have a manager then go contract them.

Justin:                   Gotcha. Now, if you do have a manager in that business that is effectively running the business, like actually running that business, and you are completely passive, that would be the safer route.

Mario:                   Right. You’re completely passive. Right. You’re not making any decisions on what that manager does.

Justin:                   Yeah.

Mario:                   The manager has full control over that asset.

Justin:                   So, our investor program that we’re working on might fit, because they don’t have any say. They don’t have any involvement. They can pull out, but that’s it. That might be interesting. I don’t know. Seems like a great [inaudible 00:55:43] though, right? That seems great.

Mario:                   Well, there’s so much money in people’s IRAs. That would be a great target for you guys. People are trying-

Justin:                   It’s interesting.

Mario:                   Yeah.

Justin:                   Yeah.

Mario:                   I would think that would be a pretty good option for you guys to target, because, like you said, they’re completely hands-off. They’re getting X dollar. They’re getting a return on their investment, and that’s it. They have no say in how you guys manage the site.

Justin:                   Yeah.

Mario:                   That could work.

Justin:                   I’m going to look into it a little more, Mario. You got me motivated, man.

Mario:                   Yeah.

Justin:                   But here’s the other thing, too. IRAs, like, those are, you know, it’s like, my retirement fund. Those aren’t the investors we’re looking for for this, right?

Mario:                   A lot of people, I’ll be honest with you, have so much money in their IRAs that they’re looking for stuff to do with it.

Justin:                   Yeah. Huh.

Mario:                   So, I wouldn’t even think about it like that, depending on the level of investor. If it’s somebody’s, they’re banking on retiring off that money, then, yeah. You want to be pretty careful with it.

But a lot of people, they have so much built up in their IRA accounts, or have so many other assets, that they really don’t even care about it. It could be a good option.

Justin:                   My last question, before we kind of start wrapping this up, is, you know, we’ve made some comparisons between buying and selling businesses and buying and selling real estate. I think there are some fair comparisons there, some that aren’t. Are you familiar with the crowdfunded real estate platforms? Like, the RealtyShares, or Fundrise, or anything like that, where they’re basically crowdfunding money and leverage real estate purchases? So, a 60-unit apartment complex, or commercial properties, and they’re raising anything from $5,000 to $100,000 from individual investors to do that. Have you heard of those?

Mario:                   No. Not the real estate ones. Not at all. How does that-

Justin:                   Yeah. Yeah. So, they’ve got some debt, and then they’re raising the rest from investors. They’re matching them, basically, with property management companies that are going to do the work. And so, they kind of rate the property management companies. They give their full background. And they show the property, and they show everything that they’re going to do, and you can invest anywhere from $5,000 to $100,000 or $200,000.

It was around before the JOBS Act was going through, and they were kind of banking on that happening, I think.

Mario:                   Right.

Justin:                   They did require you to be accredited to do it.

Mario:                   Yeah.

Justin:                   But now, they’re going to open it up, I’m guessing, even further. Yeah. It’s kind of interesting I think. What do you think about the whole crowdfunded equity thing? Do you think, you know, there’s this whole thing with government where, you know, should people be allowed to kind of make their own decisions there, or do they need government to protect them from themselves? This is kind of a political question, but what do you think?

Mario:                   In my opinion, I think it’s great. It gives entrepreneurs more access to capital, and it gives smaller investors the opportunity to invest with small, closely held companies. Again, can people get overly excited about an investment that they probably shouldn’t be investing in? Sure, but they do that in the stock market, too.

Justin:                   Yeah. You can go to Vegas and blow it all.

Mario:                   Yeah. Exactly.

Justin:                   Yeah.

Mario:                   I mean, is it better than putting half of your life savings on red in the roulette wheel?

Justin:                   Probably.

Mario:                   Yeah. I think so. I think so. Will there be scammers out there? Of course. With everything, there’s going to be scammers.

Justin:                   Yeah.

Mario:                   But, yeah. I think it will be very, very interesting.

Justin:                   I think it gives them access to opportunities that they wouldn’t have, right? It is kind of, you know, “I’ve got lots of money, and I’ve got all these crazy funds I can involved with,” And, you know, “Sorry. You’re just too poor. You don’t get access to the inside.”

Mario:                   Yeah. You know …

Justin:                   It kind of opens it up a bit.

Mario:                   I completely agree. I completely agree. Why do you have to be an accredited investor? Just because you have a certain amount of money makes you a smarter investor? I don’t know. I don’t really see any reason for that. Maybe it’s just the fact that because they have a certain amount of money that, if they lose it, it’s not as important, I guess. I don’t know.

Justin:                   Yeah. That may or may not be true, right?

Mario:                   Yeah.

Justin:                   For some people, it would. I don’t know about others.

Mario:                   Well, from a logistics standpoint, though, I don’t know how an entrepreneur or anybody would manage having 50,000 shareholders at $100 each.

Justin:                   Yeah. Yeah.

Mario:                   I have no idea how you would manage that. Say you have to pay a dividend of some sort to all these shareholders. A small company trying to pay a dividend to $50,000 would be an accounting and bookkeeping nightmare.

Justin:                   Oh, and customer service, too, right? I mean, they’re going to want to know, “What happened to my $100? Did it got up this week or did it go down this week? Where am I at?” Yeah.

Mario:                   Right.

Justin:                   That’s one of the things we considered with our investor program, and people smarter than us and richer than us were like, “No, no, no. You don’t want to do that at all. You want to go after the big money guys that are doing it on a lark, and can’t wait to get a fat return from you and tell their buddies at the country club. That’s the crowd you want. You don’t want the guys that spent $5,000 and they’re like, ‘Did I make money yet? How’s it going? Can we get a weekly report?’ That’s a bad idea.”

Mario:                   Right.

Justin:                   And I was like, “Wow. Yeah. That makes sense.”

Mario:                   Yeah. Exactly. I mean, with just people with a smaller amount of capital, they’re going to be, like you said, anxious. And, like, customer service [inaudible 01:00:29].

Justin:                   And curious, too, right? Not just like, “Did I make money?” But like, “What’s going on? How’s it doing?” They’re going to want to check maybe more often than someone else. Yeah. I guess there are going to be some, you know, that’s the downside from you raising that money, is you’re going to have to deal with, I know it sounds weird to say, but your customer service with all of the shareholders, all of those investors. And I think that’s something you’re going to have to take into account if you’re looking crowdfunded equity.

Mario:                   Right.

Justin:                   Mario, man. Thanks so much for coming on the show. I really appreciate it. I’ve taken up a bunch of your time, but you’ve answered a ton of questions and been really generous. Please don’t bill me. I’m just kidding. You’ve been great, man. Is there anything else you wanted to say? Anything I should have asked you about and didn’t?

Mario:                   Nothing I can think of. If there’s any other questions, of course, you know where to find me, so let me know.

Justin:                   Yeah. So, where can people get in contact with you? I’m sure some people listening to the show are going to go, “Oh my God. I want to talk to Mario. I need Mario.” How can they get in contact?

Mario:                   They could e-mail me. My e-mail is mario@greenhausriordan.com. My website is greenhausriordan.com. You can check that out, even though I don’t really do much to the website. So maybe you should just e-mail me. That’s probably better.

Justin:                   Yeah. Maybe we’ll get some website guys to come help you out there, too. I don’t know. I’ll put a link to your website in the show notes. People can reach out to you, shoot you an e-mail. I’ve already got someone that I want to refer to you because they had some questions for you directly and you might be able to help them out.

So, thanks so much, Mario. I appreciate you coming on, man.

Mario:                   No problem. You have a good one.

Recording:          You’ve been listening to the Empire podcast. Now some news and updates.

Justin:                   All right, Joe. So, we’ve got a couple pieces of news here. The first thing is, we’re bringing our management team to Bali, Indonesia. I’m actually here right now, scouting the area out and kind of setting some stuff up. I got us a nice resort for a couple of days, and then we’re going to do a villa. We rented out a villa for the week. We’re going to bring our team down here, and have some fun, and do a little work together, and mostly just kind of hang out in Bali. So, this is a reward for them kind of crushing it over the last three months.

It’s interesting being here, buddy. We were just talking about this before the show, but the internet is a lot better than it was the last time I was here four years ago. Now it’s passable, whereas when we were here four years ago, we’re like, “There’s no way you could live here on a regular basis,” Because it was just so bad.

Joe:                        Yeah. It’ll be interesting to check out. I’m really looking forward to getting to Bali. Seeing potatohead again. And, you know, parking my butt on a pool bar and watching the waves come in while I drink a coconut cocktail.

Justin:                   Yeah. It’s great to see that Bali is becoming an actual digital nomad location that’s feasible, with reasonable internet. I don’t think it was before and I think it is. And it’s an amazing, it’s a beautiful place. If you’ve never been to Bali, it’s an amazing place. I would really highly recommend you check it out.

The second point I want to mention is we have a new apprenticeship position that’s opening up. It’ll be for a content manager. You’ll be working closely with me to do some content curation, to help us source content for both Empire Flippers and for guest posts, and to come up with new and creative ways that we can use our content book. The podcast, and the blog, and even kind of blends of video, audio, and blog writing.

So, that should be up this coming Monday. If not, it’ll be the week after, but we will have an open application period for that, if anyone is interested, or you know someone that would be a good fit for that, I would really appreciate you sending it over to them.

Last thing I want to mention, Joe, have you heard of Project Fi?

Joe:                        Yeah. Is this the fiber service? No.

Justin:                   No. Not the fiber service. A quick hat tip to you, Johnny, over at the Travel Like a Boss podcast. I saw on his Facebook he had mentioned this. It’s basically a worldwide phone service, and for 20 bucks a month, you get unlimited local calls, international calls, all kinds of stuff. It’s on a month to month basis, and it’s a pay as you go internet. So, I think, if you wanted to pay for, like 5 gig a month on your phone, it comes out to about 50 bucks or something. It’s like $5 or $10 per gigabyte, or something. And it works in 140 countries or something. It’s really kind of amazing. So I was checking it out. Even though, right now, it only works on the Google Nexus phones. I think Nexus 5 and Nexus 6 work. But they even allow, like, financing options, if you want to finance a phone through them and kind of attach it to your bill, you can do that.

It’s really, really interesting. I signed up, Joe. I think you should sign up for alerts or updates. They’re rolling it out slowly. But you should check it out, man, for sure.

Joe:                        Does it work in the Philippines?

Justin:                   I don’t know. It worked in Thailand. It worked in, I think it was Vietnam. There were a whole bunch of countries. 140 countries. I think the Philippines is probably on there. You have to check it out. I’ll put a link to this in the show notes so everyone can kind of take a look at it, but I think it’s really interesting. I mean, it’s more information Google is going to have about you, but I’ve just given in to that beast, man. Google just knows everything.

Joe:                        I don’t know. Unless you’re hiding something, I really don’t see the real reason about the whole, you know, information collection thing. It doesn’t scare me like it does in millions of other people.

Justin:                   Well, their arguments are, like, even if you’re not hiding something, it still can be used for nefarious purposes, whether you’re hiding something or not. I believe those arguments. I think they’re actually genuine. But, you know, it’s just really hard to operate. It’s hard enough to operate a business at all, profitably, period. So, to try to do it without using Google or other massive, major tools that are out there, it seems like an unnecessary burden for something that’s already complicated enough, right?

Joe:                        Agreed. So, do they send you a SIM in the mail that just works everywhere, or you have to change SIMs, or how does that work?

Justin:                   I don’t know. I’m guessing it’s SIM-based. I’m guessing they send you the SIM. But I’m not 100% on that, man. I just signed up myself. So, something to check out. I’ll put a link. You can check it out, too, man.

All right, buddy. Let’s do some listener shouts. Also known as the indulgent, ego-boosting social proof segment. Got a couple of mentions. One of them on Twitter, from Reese Matthews, said, “Note to self. Never sign up to the Empire Flippers newsletter. So many e-mails. Great service otherwise, though.” I was like, “What? Reese.” So I reached out to him on Twitter. I was like, “Dude, what’s going on?” He said he signed up, and he signed up for, like, our valuation tool, plus our buyers list, plus our sellers list, and he got blasted a little bit.

So, I’m going to re-look at those e-mails. In general, if you’re on our e-mail list, you should get probably two e-mails a week, three e-mails max. And expect more e-mails in the first week or two, and then it kind of cuts down after that. So I’ll be checking in on those e-mails, making sure that too many aren’t going out.

We did a guest post recently on mint.com and Kendra on Twitter, friend of the show, mentioned, “Thank you. I’ve been trying to share the concept with a few friends. That’s just the right intro.” I basically did a guest post on how to get started in buying and selling profitable sites, and she thought that was helpful. So, I’ll put a link to that in the show notes, as well, if anyone wants to check it out.

Quick update from Zendesk, buddy. We’ve had 25 tickets that were rated in the last 7 days. We had 23 positive ratings and 2 negative ratings, so things are looking good there. As I mentioned before, we were featured on both the mint.com blog and the FireText blog with guest posts, so I just wanted to thank both of them for allowing us to publish on their sites.

All right. That’s it for episode 141 of the Empire podcast. Thanks for sticking with us. We’ll be back next week with another show. You can find the show notes for this episode and more at empireflippers.com/cpa, and make sure to follow us on Twitter @empireflippers. See you next week.

Joe:                        Bye-bye, everybody.

Recording:          Hope you enjoyed this episode of the Empire podcast with Justin and Joe. Hit up empireflippers.com for more. That’s empireflippers.com. Thanks for listening.

 


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Discussion
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  1. Dan says:

    Definitely put it all in bitcoin. :)

  2. Hey Chris

    While I am not an EU tax expert I think this concept will still hold true. Typically sales tax is charged on sales of product (inventory) or other defined services. The sale of a business assets typically are not inventory (except for the portion of the sale of the inventory assets on hand).

    But again – I know this would hold true in the USA, but I would think the concept would be similar in the EU.

    Hope that helps
    -Mario

  3. Chris says:

    Hi guys,
    I really enjoyed this episode, some very interesting information.
    I’m wondering how you have handled following situation. As a resident within the EU a business is obliged to charge sales tax for all sales within the EU. Sales outside the EU are generally exempt.
    Have you had any EU based sellers that have sold to EU based buyers, where I think technically this sales tax would apply?

    Thanks,

    Chris

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