Transcript

 

Steven Jarvis (00:51)

Hello, everyone, and welcome to the next episode of the Retirement Tax Services podcast. Really excited for what we’re going to share this week. I recently had the opportunity to join my brother Matthew Jarvis onThe Perfect RIA podcast and had an incredible conversation that I want to make sure we shared with our RTS audience as well. So listening to the episode, a lot of great information, really excited to be sharing it.

 

Matthew Jarvis (01:13)

 

Hello everyone and welcome back to another edition of the Perfect RIA Podcast. This is a special edition for my new book, Unlocking Massive Value. We have with us today, special guest, Steven Jarvis, CPA, who I’m sure you know from his work with retirement tax services, helping financial advisors and their clients. But what you may not know is that Steven is also my brother, but in addition to that has an extensive background in audit, across the SEC audits, bank audits, tribal casino audits, like all sorts of auditing. And we’ve invited him here today to talk about how the auditing function works as it relates to M&A deals. In other words, when you go to a seller or if you’re a buyer and someone says, the number is X, I know it’s a handshake deal. Know you like this guy or trust this guy, but at end of the day, someone’s going to look at all these numbers. And it used to be Steven looking at these numbers. So Steven, with that introduction, welcome to the show.

 

Steven Jarvis (02:03)
Thanks for having me. Always excited to get on to these kinds of things. It is kind of one of these like maybe to the general public, not so well known, but within the CPA community, it’s almost everyone’s done some time in audits. Like this isn’t something that really is unique to me in the CPA world. There’s a ton of work that goes on behind the scenes that just most consumers are never aware of. So CPA spend a lot of time making sure that numbers really mean what you say they mean. And so when we talk about M&A and obviously you’re doing all this work around this with your book and things that you’ve gone through. Yeah, it can seem like, I’ve got a spreadsheet, so that must be the number. But there’s a lot more to it.

 

Matthew Jarvis (02:36)
There is a lot more to it. So we’re going to go from a couple of different levels. The first we’re going to dive right in is someone’s P&L versus what their tax return says. So, and again, we’re going to kind of go broad spectrum on who the buyer or seller is, but I do want to this little caveat and Steven, love your thoughts. Even if you’re selling to the advisor down the road or whomever it is, there’s always someone providing capital to that deal. Could be the bank providing capital. could be some kind of aggregator. It could be a PE firm. could be a pension fund. Someone is providing the capital for that deal and that person can’t just go on a wink and a nod or a handshake deal So tell us this first layer of problems that come up when an advisor says yeah I do a million dollars a year, but a year and then they pull the tax return and it says six hundred thousand a Have you ever seen that happen in B? Where does it go from there?

Steven Jarvis (03:22)

Yeah, a couple of things come to mind with that. But yes, I’d absolutely seen that happen where someone says, I think my EBITDA is X and then the reality is quite different. EBITDA is not the same as what my taxable income is. In fact, it’s quite different. One of my new favorites, Matt, is just to ask people what EBITDA stands for because it’s kind of surprising how many people struggle to even get the acronym out there. But at the end of the day, this is where the deal terms matter is we got to know if people quote this insane range of multiples.

 

(03:49)

In the financial planning industry, we’re seeing really high multiples, but we also see this huge range. And this might be mostly anecdotal, but one of the things that I think you can be pretty confident of is that the bigger the multiple is, the bigger the backer behind it, because you mentioned there are these aggregators, they want to pay 15 X to they can go get 25 X. And when those multiples are in there, you can almost guarantee that they’re going to be more scrutiny. If you’re selling your practice to someone you’ve known for 20 years and it’s for three X and just because that’s what you saw in another term sheet, maybe there’s less of that. Maybe it is just, let’s pull the tax return and see what the number is. Where I see this go wrong quite often is that even though advisors are number people, they don’t always spend that much time on their own numbers. So they kind of have an idea of what goes through their bank account. They kind of have an idea what they pay in taxes every year. But then when it comes time to do a deal, it’s like, now the advisor’s pulling the curtain back for the first time in decades to say, Oh, what is that I really make and how much of that is my personal slush funds that I never really worried about because it’s my business. Like we start getting into all these different, 

 

Matthew Jarvis (04:52)
Yeah, interesting point that you mentioned on EBITDA. Again, let’s keep in mind that any headlines we see have probably been cooked, right? Because no one’s been seeing the actual deals. But let’s use a quick EBITDA example. Does EBITDA include the advisor’s compensation? Well, this is an interesting question because the answer, at least in the real world, is not consistent. Some advisors will say, hey, here’s my EBITDA with no compensation to themselves. A lot of times buyers will say, hey, listen, we got to back out $750K of EBITDA to cover your compensation. So even if we say we have two deals, they’re both 10 X EBITDA, they could be wildly different numbers.

 

Steven Jarvis (05:24)
Yeah, how we define EBITDA and then I think that term it’s usually loosely again. You got to go back to the deal terms. This is where and I know that it’s our good friend Ted Jenkins. You called him out at one point and said, hey, show me the deal, which he did. That gets really important. You’ve got to see the actual definitions of things to say what was included in the EBITDA where we like to this conversation with people who obviously if you’re thinking about a deal, it’s important to be having this conversation. If you’re years, decades away from ever having a deal, it’s still an important one to understand because someday it’s going to impact you and the sooner that you can run a business as a business and have clean books, the better off you’re going to be. It might feel fun to say, I’m the owner. can do whatever I want, but that’s not going to help you when you go to sell your firm and you have to try to explain to the buyer, oh, no, no, no, no, no. My income’s really higher, but here’s these silly things I’ve been doing and running through my business. That conversation doesn’t help you look like a serious business owner.

 

Matthew Jarvis: (06:19)
So how far back typically are we talking about? This isn’t like, hey, let me go clean up last month’s books or last quarter’s books. mean, usually these deals, in my experience, they’re looking back multiple years and not in a way that you could go back and clean up, right? This isn’t like, hey, I decided to sell and now I need to go clean up my books from two years ago..

 

Steven Jarvis (06:34)

So I mean, this again, it depends on the terms of the deal. This can range three to five years because they’re not just looking at what your numbers were. They’re also looking at your growth rates. Because when we talk about 10 X, 20 X, whatever X multiple, not all of that’s usually guaranteed. There’s clawbacks to go in there. There’s hagers and growth rates and all these different things. And what I’m hearing from the M&A people is that organic growth rate becomes a huge influence on what multiple you’re actually going to get. And so they want to go back and look at multiple years of how much are you actually growing? And when we say organic growth rate, we’re talking about stripping out market growth for advisors since that can drive up AUM for a lot of people. And then again, if two years ago you decide to suddenly clean up all of your personal expenses and you had this big jump in one year, like three years ago, your income was a little bit lower and then suddenly two years ago it’s higher because you took out all these expenses. Like those are the kind of things that raise questions and raise eyebrows. And the more explaining you have to do about why your P&L says one thing or another, honestly, the less credibility you have because it shouldn’t have to come with a dissertation of explanation.

 

Matthew Jarvis (07:37
)Yeah, that’s a good point, right? One, it calls all the numbers into question and we’ll talk about quality of earnings in a minute, but also to your point, Steven, it highlights that this isn’t a business that we’re buying. This is a list of clients, right? Which is a far lower multiple. If I’m just buying a list of names, that’s a dramatically different price. Steven, where does this factor in? mentioned a couple of times they deal with slush fund or shenanigans, but even legitimate business expenses, right? How do you balance that with, listen, I want to run every legitimate business expense I can through my business. But every one of those lowers my EBITDA. And if my multiple is going to be some multiple of EBITDA, it’s almost like there’s this quandary between do I take the tax deduction or do I take the multiple? Like, help us understand that one.

 

Steven Jarvis (08:18)

That one definitely can be tough to navigate. Mean, I like to always start from let’s make good life decisions and then figure out the tax-efficient way to do them later. And I would probably start with the same logic, even if I thought about selling my business someday. We don’t want to play games one way or the other. We also don’t want to play games that artificially inflate our income because it turns out the people who do M&A do it all the time. And so there’s kind of the expected range that they’re looking for. And so if you’re outside of that range, you may feel like a positive direction.

 

(08:49)

It still feels like an anomaly to them. And if you’re doing 10, 20, 30 of these deals a year, you don’t want 30 anomalies. You’re looking for, Hey, this is the range we want to see. And sure. Maybe we want to be on the higher end of this range, you’re outside of those ranges in either directions. You’re still raising red flags. So it shouldn’t be, Hey, let’s game the system in either direction. It’s let’s run a legitimate business. Let’s deduct legitimate expenses. Let’s not get carried away trying to hide expenses or add.

 

Matthew Jarvis (09:15)
It’s interesting you mentioned the range. One of the people I work with frequently in the M&A space is for the initial pass, and we’ll discuss the detailed passes in a minute. He always just assumes a 50 % EBITDA because he says, Hey, listen, if the numbers below that, it means that they’re wasting a lot of money. We can push that back up. If the numbers above that, means that they’re doing the work of two or three people. We’re going to have to hire multiple people to replace them. But again, that’s an initial pass. One that stands in my mind, Steven, is people that have their kids or their spouse on the payroll, which it can be a legitimate business activity, can be a legitimate tax planning strategy, but it doesn’t make your business look good, right? It looks like your business is overstaffed. Again, a balancing act, but curious, I know you’ve worked with advisors on the legitimate side, but just thoughts in general there.

 

Steven Jarvis (09:56)
What immediately comes to mind for me on things like that is just clean record-keeping. Again, if somebody comes in and does due diligence on M&A, they’re gonna dig pretty deep. And so if it’s clear in your records, like, here’s who was on staff and here’s who the actual people were. If I’m due diligence and I can clearly see, okay, Matt’s hired his kids, but great, that’s an easy carve out, those were his kids, like whatever, we can adjust for that. If your P&L has like five expense categories and that’s it, and there’s no additional detail, then what the heck is even going on here? Like it’s not unheard of for people to hire their kids. It’s when it’s a mystery that we start to have concerns as the buyer, as the person doing due diligence, that’s where I’m going to start kind of adjusting, you know, whatever these allowances are, whatever you want to call them. It’s okay. I see the numbers, but I’ve got a certain range of understandings assume that’s probably worse than you’re really letting me know. And the more cloudy it is, the more I’m going to assume that’s probably worse than you’re really.

 

Matthew Jarvis (10:48)

Makes sense. Another one that seems to fall in that category would be like contractors, right? Sometimes advisors think, what I won’t do is I won’t staff. I’ll just outsource it all, which is a viable strategy, but that doesn’t mean you’ve got this gimme where you can say, Hey, I’m running at this crazy profit margin because I’m outsourcing the whole thing. Steven, let’s talk about personal balance sheets. So if you’re a buyer, but oftentimes, even if you’re a seller, right, people want to know they’re looking for red flags, right? So I guess we talked to us about other red flags. That someone in your role would be looking for when you were doing auditing that as an advisor, I wouldn’t necessarily think of, If I’m selling, I’m selling a business, why do my personal things matter?

 

Steven Jarvis (11:23)
That’s a good question. So a lot of the CPA world, the accounting world, it is operating kind of off of rule of thumbs. Okay. What do we typically see and what is outside of that? And so that can go in both directions, but you can Google these to say, Hey, what are typical accounting ratios? That might even be what you type into Google. This one isn’t as big in the financial planning space that is in others, but like turnover on accounts receivable. How long does it take me to collect? My revenue, what might be more relevant to financial advisors, especially as we see more variety of how fees are charged is what’s my percentage of commission versus recurring versus automated bill. Like, cause ultimately what the buyer is after is cashflow, right? Mean, long-term that’s what we’re trying to get to. And so it’s not just what is the cashflow, is it, how is it generated? How confident is going to continue? That’s where we go back and look at growth rates. Look at attrition rates. We look at these different pieces of it to say, what is on your balance sheet? How liquid is that? How often is it turning over? It’s not just the number, it’s the timing, it’s the quality of what some of these things are.

 

Matthew Jarvis (12:28)

That makes a lot of sense. I was interested in one that came up when I was in my sales process was how interested they were in my current cash holdings, which at first I thought, that’s because they’re buying this cash, which in my deal, they weren’t. They were looking at current cash holdings because they said, we want to make sure this is a stable business. Want to make sure. Now, some of you listening might scoff at that, be like, of course there’s plenty of cash. You’d be surprised how many practices run really thin on cash. And so if there’s any kind of hiccup between the transition from buyer to seller, that business could run out of cash. Last thing a buyer wants to do is buy this thing and then have to dump a ton of cash into it, right? Steven, please, your thoughts.

 

Steven Jarvis (13:02)

Yeah. So that’s a great example. So as you’re looking at that, as an advisor, you think, Hey, this is my business. Knew whatever I wanted. And so every quarter you pull all the money out of the business and then every now and then, you have put some money back in. Now you have capital contributions and distribution that probably really weren’t necessary if you just left cash in the business. And now these raise red flags to the person doing the due diligence because, you’ve got the business that they’re diving deep on. You’ve got your personal side that they’re going to look at. But if it feels like there’s kind of this veil of there’s things going on on the personal side that affect the business, but I don’t have total transparency. We have then it raises more questions than it does.

 

Matthew Jarvis (13:34)
That’s a big sidebar here on if you’re running a business and you’re treating it like your personal bank account, you’re losing a lot of the legal protections of that business. Makes it really easy to pierce that corporate veil. Steven, let’s change gears just a little bit and look at this  If you were a buyer now again, as a listener, if you’re out planning on buying a practice, still listen, because it’s helpful to know, Hey, what’s a buyer looking for? So when a buyer’s looking at a practice, what are some of other things they’re looking for? And then not just before the sale, as these deeper levels of due diligence, including the quality of earnings.

 

Steven Jarvis (14:07)

So, from the buyer perspective, they’re trying to get a real clear picture of what is the real cashflow of the company. I think for the most part, we’ve been talking about people with capital backing. We’re not talking about selling to a different advisor who’s just gonna try to step into your shoes. That’s a little bit different of a situation. If you’re getting bought by anyone larger than you, they’ve got to look at what’s my cost to replace this person, not just to servicing the clients, running the business. mean, this is the time where you’re gonna start realizing just how much you do for your business. And so…we’re looking at, yeah, what’s that real cash flow number? What does it cost to replace the owner who’s now going to step out of the business? What’s that retention look like for the owner already versus when the name changes on everything? We got to tell this paperwork. Do we see any things that are potential red flags for potential legal issues? So this is where it goes beyond your P&L and balance sheet and that they’re pulling complaints and reviews and these different things to see great example. These are going to be industry specific. So for financial advisors, I would expect that you’re going to get a lot of questions on any refunds or discounts or anything around how that revenue comes in, which is totally different than other industries. I’ve worked on these for other industries where, Hey, we just don’t want refunds to be over 20%. It just depends on how the industry works. But as financial advisors, like that’s not how the industry typically goes. And so you’re looking from the buyer’s perspective, they don’t know you personally. This isn’t an evaluation of Matthew Jarvis as a human being and your personal integrity. They’re seeing how you stack up compared to what they typically see. And are you within that range that comfortable?

 

Matthew Jarvis (15:34)

Interesting you note about industry-specific things. And this is I’m glad to have you on the podcast to talk about this, because some of the industry specific things that came up that I was a little bit surprised about was not just that they wanted a client list. And on another time we’ll talk about how do you go through the due diligence process without revealing your intellectual property? Like I’m not going to give you the names and telephone numbers of my clients, not until I’ve got a check in hand, but things that they wanted to know was when did every client come on board? Like what year? How many of the clients beneficiaries are clients of yours? What was the source of the client? How many clients have left and when did they leave? Right? So stuff like that, Steven, that you mentioned, these are things that are going to be very specific, especially at these bigger dollar amounts. A low multiple, sure, we’ll assume it’s three X gross, we’ll call it a day. Higher multiple, again, these aren’t dummies that are buying this stuff and they’re not backed by dummies either. 

 

Commercial (16:21)

retirementtaxservices.com/summit

 

Steven Jarvis (17:06)
Well, two things that come to mind are completely unrelated. The first is concentration. The reason they’re looking at your clients is because, if you have a hundred million of AUM and you’ve got 200 clients, they’re not just going to assume that that’s evenly distributed across all 200 clients. That’s what even if you’re anonymizing this and saying it’s client one through client number 200, if client number seven happens to be 150 mil or camera one number eight and three, it happens to be like 90 % of your AUM and one client. That’s a whole different conversation.

 

(17:35)

We’ve got this huge concentration risk. The other thing that comes to mind now is you’re going through that about where these clients come from. know unrelated to the M&A discussion, you hammer all the time to advisors about, where did your last five clients actually come from? Can you show that to me? And so these are the types of things that yes, they’re going to knowing that’s going to help you from a prospecting standpoint, knowing where to spend your time and focus your efforts. It’s also going to help you when you go to have someone evaluate your practice so that you can confidently say, Here’s how I know this is where my last five clients came from and the intentionality behind it. Because if it’s haphazard, you’re not selling the same type of assets as it would be if you have a machine, a set process for how new clients come on board.

 

Matthew Jarvis (18:15)

Yeah, that totally makes sense. Totally makes sense. Steven, as an outsider to the audit world, it seems like a big premise of all audit is kind of like, prove it. Like, hey, these are what you told me the numbers are, but prove to me that these are what the numbers are. What are some of the other types of things that will come up in this process, either if it’s during the due diligence or the quality of earnings? What are some of the other things that they’re looking for? We mentioned, obviously they’re going to see your books as they’re written. They’re going to see your tax returns as it’s written, because they’re going to assume that you probably told accurate information to the IRS. We’re going to see billing files from the custodian, bank account statements, other things that come to mind.

 

Steven Jarvis (18:50)
Is  making sure that things are just internally consistent. You’d be surprised at how often financial statements get generated that don’t agree with themselves. And so especially for small business owners, sometimes this will be the first time that the really in-depth financial statements even have to be prepared. Then you start getting into, I’ve got to explain some of these things and add context, add footnotes, this sort of a thing. And so most advisors have been through some kind of regulatory audit. And so… You can think about it really similarly, even though it might feel like the M&A guys are your best buddies. And hopefully that’s the way it works out. They’re still trying to make sure they get a good deal for their backers. And so you can’t go into this assuming, Hey, we’re all friends here. So just let me kind of haphazardly answer these questions. As you get questions, explore, like with asking for more detail on a number, just assume that they think something is wrong and you need to defend it. That might not be the case, but you don’t want to just give the one line. Well, it’s fine. Like you gotta make sure that you understand your business and your records and your books enough that you can provide context for what the story behind the numbers is.

 

Matthew Jarvis (19:49.506)

Yeah, that makes a lot of sense. lot of these, Steven, you kind of reference this as simply best practice in general, right? And we mentioned this earlier in the episode, whether you are planning to sell or you unexpectedly need to sell or you’re audited by the IRS or you’re just are trying to maintain good books. I know one of our strategic partners, Belay, which you can text letters RIA to 55123 to get Belay’s guide to delegation, but they also have bookkeeping service. Cause I know that unlike people that go into the audit world, a lot of people that are in the entrepreneur space, their attention to detail can be lacking at best. So for me, the idea of sitting down and doing my bookkeeping would be a miserable thing. I’ve actually never once done my bookkeeping. I’ve always had someone do it. Yes, it’s an expense. But one of things that came up when I was going through my due diligence was, your books are really clean. Like we still have questions. Like we still want to know what is this category and who are these contractors and why is this expense this and how long is this contract for? But it wasn’t like, well, I had, you know, two million in revenue and one million expenses and there it is. Right. Like it was more than that.

 

Steven Jarvis (20:45)
Another thing that comes to mind is we’re having this discussion. This may seem obvious to some people, but I feel like it still needs to be said. Whether we’re dealing with regulators looking at our books or this is part of an M&A transaction, you are always going to be better off by just owning books. And what I mean by that is, especially if you haven’t been in the weeds in your books, it is very possible that at some point during this process, something’s going to come to your attention and you think, well, crap, that’s not what I thought was going on, or that’s not what I expected, or that’s not what I intended.

 

(21:14)
And having been an auditor, having sat on the other side of this, it makes a huge difference psychologically for the person digging through your records. If you come to them and you say, Hey, Matt, you would ask this question and we dug into it. And I was surprised to realize that we’d actually done something wrong here. And this is something we need to clean up here and to just own it and tell the story proactively. It’s just never to your advantage. I hope they don’t notice that one has as soon as somebody gets a whiff of weight. Are you not giving me the whole story? That doesn’t seem quite right. Or how could you have just went and looked at that account and you still didn’t know that this was off? Now I’m digging harder. Now I’m being even more skeptical. Now you’ve broken that trust that would have been there. Had you just said, Hey, you know what? You asked us to dig into this. We dug into it and there’s something a little bit off. We need to fix it.

 

Matthew Jarvis (21:58.574)

That’s a really good example. You one of those came up for me. Were on the closing line, like the wire transfers were supposed to happen the next day or something. I get a call, frantic call from the buyer saying, hey, we just pulled, I didn’t even know this was a thing, Steven, I’m sure you did. There is like a credit bureau for businesses. You know, like you can pull someone’s individual credit report. There’s the same thing for businesses. And for my RIA, I had years ago opened up a line of credit. There was no balance on the line of credit, but it showed that there was a lean from the bank against the line of credit. And we can’t do anything until the bank releases this lien and it clears off of the deal. And so I said, well, let me call my bank real quick. And I call my bank and luckily it was a regional bank and they’re like, dude, we’ll try to do this thing, but it usually takes weeks, weeks for this to clear off because it’s not something you’re done in a hurry. Like, and Steven, to your example, I owned it. Said, guys, you know what? I’m really sorry. I didn’t think about this because I never carried a balance on it. I here’s a copy of this. I’m working on it. We were able to get it taken care of, but same kind of thing. Like this stuff comes up that you’re not going to think about.

 

(22:57)

Steven, speaking of that advanced level of due diligence, sometimes there’s this misconception, again, whether we’re talking about M&A or the IRS or whatever, that if nobody said anything, then I got away with it and it won’t ever come back up. Like, hey, the deal closed and it funded and I’m good. Or the IRS audited me and they didn’t see it and they left and I’m good. Help us clear up that misconception. 

 

Steven Jarvis (23:18)
I mean, people like to talk about the statutes and limitations of the IRS and you know, what time period before those go by. Just my personal approach, I mean, you do what you want to do. Let’s pay every dollar we owe and not leave the IRS a tip. And what I mean by that is we’re going to do everything we can up front to do things by the book. This isn’t an issue of, hey, let’s hope we get away with something. I mean, I would recommend that approach with the IRS in general. It’s doubly, triply true of when you go to sell your practice because for the most part, especially in the financial planning industry, this isn’t a, write me a check and I’m done. And we never talk to each other again. There’s usually some kind of. Earnout period. There’s a, sometimes there’s overlap of how much longer you work. There was a transition. And so great. They sent you the initial wire and you feel like you’re in the free and clear, but now there’s not going to be digging into your business from the standpoint of doing due diligence. They’re going to be digging into your business because they need to run it. So two years later, this comes up that, wait, something wasn’t what we thought. And it seems pretty obvious that you knew about it.

 

(24:15)

That’s why there’s all that legalese in those contracts about representations and warranties and all this different stuff that I’m not an attorney, but I’m going to bet it’s really not even that hard of a situation for them. If it’s clear to them, you knew something withheld it. It doesn’t matter how much time’s gone by. They’re going to come at you. These are big deals. If somebody’s kind of multimillion dollar checks and you misled them, I wouldn’t count the statutory limitations as being your only defense.

 

Matthew Jarvis (24:38)

Yeah, for sure. Right. I mean, their first round would be, hey, we’re going to withhold this next payment. Right. Yeah. And so when I see these big headline deals, like for these deals to work out, the buyer is assuming some astronomical growth rate or that there’s some way they’re going to get out the backside of the payments. And this isn’t necessarily like a morals or ethical statement. They like, they have to make money on these deals too. And so let’s hope that you’re dealing with an ethical player whose goal it is to pay you all the money. You may be dealing with somebody who’s a little bit less than ethical, or I guess in this case, you lied about your numbers that they’re just following the rules.

 

(25:08)

They’ll find a way that you don’t get paid for the rest or they have huge legal teams that will easily bury you on them. But let’s talk about intentionally misstating this ties to statute of limitations and the IRS and whatnot. So people say, hey, IRS, through your statute of limitations. A, that’s not universally true. But B, whether it’s the IRS or the buyer, if they can somehow show that you knew that this was incorrect. And by the way, their ability to show is not like a smoking gun. It’s really just like they feel that way. Suddenly the statute of limitation goes on and then problems escalate dramatically.

 

Steven Jarvis (25:38)
And to be really clear, it’s not that the statutory limitation gets longer, it’s that it goes away altogether. If you commit fraud, which if you intentionally mislead the IRS, you intentionally mislead really anyone, I mean, that’s kind of the core premise behind fraud. And now all of sudden it doesn’t matter how many years have gone by. And so everything’s so digital anymore that this could be a text message, this could be an instant message, could be comments on social media. Like this doesn’t have to be the in your contract you added a paragraph that was intentionally untrue. You could have communicated in lots of different ways to acknowledge, hey, I think this might not be right, but I’m going to let it fly. If that ever comes up in discovery, great, now you committed fraud on top of whatever, however you misled them. And yeah, it’s just really not going to go in your face.

 

Matthew Jarvis (26:23.672)

You know, a space where I’ve seen this come up and I don’t want to use the fraud label because that’s a little intense for this, but where I’ve seen it come up is when financial advisors also own the building that they’re in. And it’s not specific to financial advisors, but when a business owner also owns the real estate, there can be some confusion. We’ll use that term about which expenses were for the building and was the least subsidized one way or the other. Like a lot of times they’re undercharging and they try to increase it or vice versa. That’s an area where you could be totally well intentioned. It could just be something you never thought of. And then that changes or someone realizes, a second, these numbers don’t add up. And it would be very easy for that to come back and say, hey, wait a second, you were cooking the books, even though that might not have been your intention.

 

Steven Jarvis (27:01)

Yeah. And that’s why, again, why we have this conversation, whether you’re about to your business or not, you’re better off running your business as a business. And again, it might seem like a really simple statement, but for a lot of us as entrepreneurs, when we get into all of this, we didn’t have previous experience running businesses. And so it’s not that we intentionally tried to set something up in any kind of wonky way. It’s the maybe we get a few years into doing whatever it is where experts at and we realize, you know what? I’ve learned a lot of things along the way. And I think what happens to lot of people is they’re like, wow, I’ve made it this far. Why I cleaned it up. Well, there’s a lot of reasons to just go ahead and take that time, clean it up and be separate.

 

Matthew Jarvis (27:37)

Yeah, and appreciate you taking that positive spin on it because, you know, we’ve talked about some of the negative repercussions, but there’s also a lot of positive sides to cleaning up your bookkeeping. A lot of cases that you and I could cite where advisors have found dramatic tax savings, things that they could have been deducting, but they weren’t, or expenses that had gotten way out of control that they didn’t realize, or vendors that had been misbilling them the wrong direction for a long time. And going through and cleaning this up made a big difference, which Steven speaks to the importance of having someone else look at your books, that’s a friendly party, right? Not that your buyer is an unfriendly party or that the bank is unfriendly or the IRS, well, the IRS is unfriendly. You don’t want an adversary being the first person to look at your books. I want a friendly person. I want to go to Steven and say, Hey, Steven, like if I was selling my practice to your client, tell me what you would say in my books. It doesn’t make sense.

 

Steven Jarvis (28:22)

The example is coming to mind for me is that we all suck at reviewing our own work. And this just happened. My daughter is a freshman in high school. She’s to the point where they’re writing essays for English. And she’d asked me to review a paper she had written. She’s super sharp. I just started reading sentences out loud. And as soon as I read it out loud, she’s like, yeah, that sounds terrible. But she had proofread the whole thing. But when you know what you were trying to accomplish, it can be really hard for you to see where the issues are. Same with reviewing your own books. Like you knew what you intended. And so it looks right to you.

 

(28:50)

So having a peer group, having a mastermind, having other people, whether it’s a formal third party who you pay to come in and review your books, which can be a great idea. It can also just be as simple as getting together with other financial advisors and talking through, you refer to it as financial addressing, to go through it and actually share with other people what’s going on so that somebody else can say, Steven, there is no way that’s how that works. Explain to me how that can possibly be real. And then you start pulling it back and you’re like, yeah, I’ve been lying to myself. I didn’t realize it makes lot of sense. 

 

Matthew Jarvis (29:20)

Well, Steven, that’s a great segue, great softball into a quick promotion for the retirement tax services fall tax planning summit, which as I’m looking at my calendar is at October 1st, October 3rd in Tempe, Arizona, which is going to be a lot of fun. Kitces is named at top conference or one of the top conferences for 2025. And so people can learn more about that at retirementtaxservices.com. Steven, any parting tax wisdom related to M&A or just in general, as we’re talking to our advisor audience?

 

Steven Jarvis (29:47)

The biggest thing that keeps coming back to me as we have these conversations is start now, whether you’re undecided on how you’re going to exit your firm, someday you will exit your firm, regardless of how you think that’s going to happen, whether it’s through some kind of M&A deal, whether it’s to a successor advisor that you want to build up in your practice. At some point you have to exit your firm and now is the right time to make sure it’s getting cleaned up. It’s always going to be in your favor to do that.

 

Matthew Jarvis (30:10.722)

Yeah, that’s true. I’ve never met somebody who cleaned up their books and said, Hey, I wish I would have waited longer to clean up my books. It’s like that new exercise program. I wish I would have waited longer to start exercising. Awesome. Steven, thank you so much for all our listeners. Be sure to check out Steven on retirementtaxservices.com, the retirement tax services podcast, and of course the fall summit. And until next time, happy planning.

 

Steven Jarvis  (30:31.616)

I hope you enjoyed that discussion as much as I did. So many valuable insights from that. And then of course, if you want to dive into this more and in person with us, be sure and get reserved for the summit, go to retirementtechservices.com/summit. You can join us in person in Phoenix later this fall. And we’ll get real specific with how we put this stuff in action. Happy tax planning.