Episode 407: Due Diligence, Tax Strategy, and Deal Structuring

Corey KupferAlex Lopez CPA is passionate about helping business owners scale, increase profits, and minimize taxes. With over 12 years of experience working at global accounting and consulting firms and in corporate America, Alex runs a CPA firm specializing in CFO services and tax minimization strategy. Alex enjoys talking and reading about entrepreneurship as I certainly do.

Alex, welcome to the DealQuest Podcast. I'm Corey Kupfer, and this DealQuest Podcast is a dealmaking podcast and an M&A podcast, so today we are talking about M&A deals, due diligence, and tax strategy.

Alex LopezThank you. Happy to be here, Corey. Thanks for having me.

Corey KupferListen, I wanna get into all your background, working with entrepreneurs and working on deals on the due diligence side and tax minimization side, all that structuring stuff you do. We'll get into deal structuring and what you've seen across M&A transactions. But before we get to any of that, I wanna take you back to when you were a little kid growing up, maybe ten, twelve years old. What did you wanna be? 'Cause I'm guessing maybe a CFO, CPA, tax expert wasn't it, but you tell me.

Alex LopezThat had not crossed my mind at that point. But entrepreneurship was already on my mind, since long before that. But at 10 years old, I was back in my native Colombia. It was an interesting time, a brutal time. The 90s in Colombia were no picnic. There was a lot going on at that time. But there was always also a beautiful side to the city, Medellin.

I was lucky to be born on the bright side of the city, and there was always a lot of development, a lot of nice high rises going up, being constructed all the time. And I was just fascinated by that as a child, and I still am today. I absolutely love buildings and that's why I emphasize real estate and construction. So I was fascinated by the people behind those projects. Who orchestrates these beautiful projects? And it started before I was ten years old, as far as I remember. I was fascinated by these things. And that sparked my interest in entrepreneurship and real estate.

Corey KupferWow. It's so interesting. You talk about what things were like back in the nineties, how difficult it was, but yet things are still getting built, right? And entrepreneurs are still making a living and building businesses, even in the most challenging of situations, right? That resilience is what makes strategic deals possible in any economy.

Alex LopezExactly.

Corey KupferAll right. One more question. Looking back, what was the first deal of any type you were involved in? It could have been something maybe when you were younger or early in your career, whatever comes to mind.

Alex LopezAs a child it was candy. Candy for sure. It was this little sour candy called Cry Babies. You can still find them at some stores today, but they were really big in the nineties in Colombia. They're an American candy. I don't know if it was as popular here as it was back then.

But I was selling them in school and in the neighborhood. And that was also my first big lesson in business. Not to trust anybody. I was robbed by my partner at the time. All of our supplies, they disappeared, right? As well as our earnings. And I didn't know for years who it was, but it was heartbreaking to find out.

Corey KupferWow. So an early lesson in business partnerships going bad. Well, it's funny, obviously, because I'm not saying you do much more of the structuring of the tax minimization stuff like that, but maybe, at least forensic accountants, maybe that was a trigger for something, being interested in watching the numbers, huh? That kind of instinct for watching the numbers is exactly what good M&A work needs.

Alex LopezYeah, absolutely.

Corey KupferI love it. So listen, let's talk a little bit. Your bio says about twelve years of experience working at global accounting and consulting firms and corporate America. Talk to me a little bit about your journey. First of all, when did you come to the US, and how did you start your career? And I want to hear how that journey built the M&A experience you bring to deals today.

Alex LopezIt was around the summer of 1999. It was pretty much the peak of Colombia's worst turmoil, with political violence and the exacerbation of the whole drug violence thing. And we sought political asylum here. My parents wanted a better life for me and my brother. I was a kid. I was about twelve years old. And that was in 1999. By the early two thousands we saw the beginning of a big boom in real estate here in Florida, and my parents caught a break, right? They got involved in real estate. Actually, we were already in real estate back home, but not for the first couple of years here. Then they got into a real estate business. I was still a kid. I became very interested. I was watching what was going on, the deals that were happening, and I decided to try my luck in that industry. Remember, I always had an interest in buildings and properties and business in general.

And I was very eager to get started and I got my real estate license straight out of high school. I was still a teenager. As soon as I could get it, at eighteen I got it. And it was booming times. So that was nice for a while, but a relatively short while. I was killing it, so to speak, for a couple of years and then all of a sudden, we know what happened to that, right? We all lost our shirts. And not just myself and my family, neighbors, friends, clients, everybody. It was absolutely brutal. Down here in South Florida in particular. We're the poster child of the boom. We're the poster child of the bust. And yeah, it was very rough for quite a while.

And I decided to double down on my college education. I was already working on a business degree, but I wasn't taking it as seriously. But seeing as my real estate dreams were broken for the time being, I decided to just double down on my business degree and I stumbled into accounting. I found I had a knack for it. They make you take accounting courses. I never dreamt of being an accountant, but I finally had a knack for accounting and finance based on what I saw and how I did in the required courses. I also had a very influential professor who was a veteran from the big accounting world. And he told us all about the opportunities and the incredible growth and development that can be achieved if you launch your career at one of these firms. So that influenced me a lot. And I decided to change my major. And when it was time to graduate, it was a big decision. Do I remain in the real estate business? I was in commercial real estate at that time and the market was making a comeback. I was starting to do well again. But for better or worse, I chose my career in accounting and finance and I got started at one of the global firms straight out of college. That's how they like you. They want you straight out of school so they can mold you.

Corey KupferGreat. And before we continue up, because I want to hear about the rest of your journey, obviously you got an early lesson in riding the wave up, the boom, and then dealing with the bust of the, I assume we're talking about the global financial crisis time, right? And obviously we got really hurt then as well. Not only had we put together a couple of real estate investment funds and invested in some stuff, and had some good deals, and then things went bad in the crisis, and we had to scrounge and figure out how to get some money out of that. But also, as a corporate and deal lawyer, my revenue was down thirty, forty, fifty grand a month before I knew it, right? Deals stopped, money stopped flowing. Our deal volume dried up. So trust me, I'm really familiar. But it's easy to ask what were the lessons on the downside, right? What were some of the things you learned on the upside that still, despite the bust, you did well or learned how to do right, even though it went bad because of the extreme situation of the world economy? What was some of that learning that helps you now when you deal with clients as an accountant?

Alex LopezA lot. I learned a ton from the good and a ton from the bad. For starters, I was a very timid child. I was deathly afraid of speaking to strangers, and I did not have the best social skills outside of my inner circle. I was very outgoing with people I knew, but I was never one to socialize and didn't have the salesman personality, so to speak. The real estate world helped me big time with that. I got used to talking to all kinds of other professionals and clients and sellers, buyers, tenants, et cetera, early on and I learned a lot from that. And I also learned a lot about the macroeconomics of the business, how everything functions, how the deals are financed, every side of a transaction. I just learned a lot about deal making in general, the due diligence process early on.

And also about the sentiment of the people, how things go. I saw firsthand that exuberance that led to what we all experienced in the end. And hindsight is 2020. One could go back and say, this was a no-brainer, it was bound to happen. People are buying 10, 20 properties, showing no income. But back then even the smartest hedge fund managers didn't really know. Everything seemed normal. It seemed like it was never going to stop. Not since the Great Depression had we had such a brutal crash. So when you go back and think about how it all went down and what you would have done differently and where we all went wrong, it might be obvious, but at the same time you kind of have to experience it to really know what's happening, if you hadn't seen it before.

If you hadn't lived through that, you probably wouldn't be able to stop what happened to yourself and others around you. So it was an incredible experience.

Corey KupferSo it's interesting, because I had been through other cycles. I was a couple of years into my career during Black Monday, the stock market Black Monday in eighty-seven, right? There was the early nineties recession, there was the internet boom and bust, late nineties into early two thousands, right? So it's really interesting. Listen, there are Black Swan events, there are global economic events. There's things that no matter how much experience you have, none of us have a crystal ball. However, to take your point about having gone through it, when you've never experienced it there's no way, but when you've been through some of these cycles, what are some of the signs, right? For example, there's a debate starting about AI and some of these AI companies, right? And is AI going to change the entire future of the world? I think in large ways yes, but also is there some sort of bubble in any of these companies? I think I saw Mark Cuban being interviewed recently talking about how some of these AI companies are so ridiculously overvalued. That kind of valuation debate matters to everyone in the M&A industry.

So I'm not asking you to predict the future on any particular AI company or whatever, none of us can do that. But out of your experience, and obviously being now an accountant, right? And advising people on, I'm not saying you advise them specifically on investments, but part of what you do is look at people's numbers and help them structure and minimize tax and that kind of stuff. What are some of the signs? What are some of the things you think were cautionary flags, or ways that you hedge or protect against those kind of cycles?

Alex LopezI'm a big fan of ratios and anecdotes as well. The ratios usually don't lie. It's typically not defensible once you go too far outside the norm for any given industry. And you know this, you're a due diligence guy. You would have to have an outrageous amount of upside to justify valuations and deal terms that, quite frankly, have become way too common now, without pricing in exuberant expectations. So I'm a big fan of ratios for gauging whether we're getting into that type of situation again. I'm not predicting the future, but there are all kinds of signs that we are just about in the same type of situation as we were last time. So that's one thing.

And then again with the anecdotes, I believe it was Jeff Bezos who says that when the charts and the numbers start to look a little bit incredible, that's where you want to listen to the anecdotes, and what people are actually saying. Because there comes a time where that begins to tell you more than the actual numbers are telling you. And when you see people just making these deals that make no sense and expressing expectations and behaving in a way that it's like this is never going to stop, that's when you know that we've crossed the line. And I'm kind of seeing it. It's not that far from where we were back then.

Corey KupferSo it's interesting. Let's get into the more specific deal conversations, right? Let's talk about diligencing a deal. There are obviously specific things on the deal, but part of it also is, okay, what could be the effect of things in the global economy and things like that on deals? So talk about the scope of diligence when you work with people, and also how you take into account, if at all, these macroeconomic and political risks in that process. I'm curious how that shapes your M&A strategy and your view of deal value.

Alex LopezAbsolutely. You have to take it all into account. Because I've seen deals go sideways just on the macroeconomics alone. There's typically something broken under the hood, but I have seen a couple where it was a good deal until it wasn't, relatively shortly after.

So I spent many years as a financial auditor. That was actually my very first job in big accounting. And you're trained to obtain an understanding of the big picture and then the most critical areas of a business very quickly, and then you are trained to corroborate and analyze and validate and test in every which way whether what the business is claiming that it owns and that it owes and the kind of cash flow that it makes, whether that's materially correct. So that is in essence the job of a financial auditor. And as part of doing that job for years, not only for my clients, but also seeing my clients going out there and buying all kinds of companies and then doing their due diligence on the companies they were buying, you pick up a thing or two about what matters and what tends to be the telltale signs of what is a good deal and what is a bad deal. And that's effectively a framework that I still use today with my clients to analyze the deals. You want to kind of wear an auditor's hat in a way.

But then you also want to look at the big picture, the industry and the broad economy. So when you first committed, you start with the basics. You're going to be looking at financial statements, tax returns, projections, source documents. The legal side is huge, obviously. You want to dig into the legal structure of the entity, how it operates, board minutes, all that good stuff. You want to look into potential litigation, any kinds of claims, threatened litigation, demand letters, all that good stuff. And as part of that, you start piecing together what's going on with the business, which way it's trending.

And likewise for the industry itself, because there's a lot of benchmarking you have to do. If you're looking at a medical provider, for example, you're going to want to look into how that particular specialty is doing in its market. And then as part of that, the signs start to show, this is declining or this is on the upswing. And that's typically how you get an understanding.

Corey KupferLove it. There's something I tell clients all the time, and it may seem a little harsh, but I do it for a reason and I want them to understand it, and I think it speaks to this conversation. I like the fact that you stressed at least twice that you've got to look more holistically as well, right? Because one of the things I say to my clients on the sell side, for example, I say, Listen, you've got to understand something. Whether it's the CEO of the buyer or the corporate development person or the vice president, whoever it is who's signing off on this deal, they make a macro decision that this is a good acquisition for them, that you're a good company, whatever. And then they send in the due diligence team. Often that includes the M&A team, whether it sits inside the company or at an M&A firm. And this could be lawyers, financial and accounting people, HR, tech people, whatever, right? You've got to understand that with the due diligence team, their risk is higher if they don't find something that's a problem and the deal goes through.

Then they're like, why didn't you find that issue with the financials or that issue with the tech integration or that legal issue, right? So you've got to understand that most of the people who come in to do due diligence, and I speak about lawyers as well, right, their focus is to try to find anything that's wrong, right? And the reason I appreciate your conversation about holistic is that what some of them are not great at is balancing that, right? Yes, that's part of the job, but you also have to understand the overall benefit and upside of the deal and understand that there's risk in everything, right? You want to identify risk, you want to mitigate it, but you can't totally eliminate it in business. So talk to me a little bit about that balance of identifying where there could be issues. Lawyers get this reputation all the time of being deal killers, right? And anybody in due diligence, it is a different mentality sometimes, because their risk is not that the deal doesn't go through, although I'm not saying there's no risk, but their personal risk for a lot of them is that the deal goes through and they miss something. That balance matters whether you're managing acquisitions or advising on them.

Alex LopezYeah. Sometimes the best deals are the ones that you don't make, right? But at the same time, you have to be on the lookout for that diamond in the rough, or for what could uncover value, so to speak. And I've seen plenty of situations where it goes in one direction big time or the other. A lot of times we end up finding diamonds in the rough.

Just to give you an example, I mentioned a medical provider earlier because I recently worked on a deal in the industry and I was on the sales side on this one. And it's pretty clear it's an established niche that has a pretty narrow range of multiples where these deals tend to land. But this group I was sniffing around for a while, they just seemed pretty interested despite the objectively very high price that the seller was demanding, because he just did not want to sell, just not interested in selling. And objectively, we had an internal conversation, once we finished the sell-side due diligence, about what made sense economically and why we knew that the buyer was going to stretch the limit of the market, but we didn't know why. And the reason is that they have a very narrow niche that's completely different from what my guy does, but where picking them up would give them a boost that greatly exceeded an inflated price on our end. That's rare, but we almost couldn't find what that was. It was not until after many conversations during the negotiations that we were able to piece together what was happening there, and so we stuck to our guns and got a really high selling price.

But it often is the other way around, where you have a buyer coming in. I'll give you an example where it went completely sideways. Luckily we were able to pull out of the deal. I was on the buy-side due diligence on this one. It was a transportation deal here in Florida. It was a fleet of transportation in the education space. And it was a deal that looked very good on paper from the get-go. We had the works. Proof of cash, all the agreements with the customers, the physical observations of the assets. We went real KGB on this one, real Intel. And we had observed the operation in every which way. Everything seemed perfect.

It was one little ratio that seemed off. One little ratio. It was related to insurance. And we had gotten a half answer about why it's set up this way and why it made sense. And to be frank, we were a bit blinded by everything else. Long story short, it was a multi-million dollar thing, where the seller had effectively cheated on some of the insurance applications and the real cost of the coverage that was needed was several times what we thought it was, to the point where the deal no longer made sense. We had to pull out. So it happens. You just have to do your homework. You have to look under the hood. You have to kick those tires. You have to look at things from every angle.

Corey KupferYeah, and I love those two contrasting examples, because a lot of people think, okay, sure, on finding the issues, that's part of what due diligence is. But there's the other side of it, the unrealized value, and also understanding why. I love your example. I give a similar example. We were on the sell side of a deal a while back, and my client was a private company selling to a public company, right? And this ties into what you said in your deal example, that once you realized why they saw additional value in the deal, it gave you negotiating leverage to hold firm, because you understood that, yeah, maybe they were paying an above-market multiple on typical multiples, but in terms of the pro forma outlook for them, the future value of the deal, it was a lot higher.

For us we had a similar situation in that we did a lot of due diligence, and on a public company it's in a lot of ways easier, right? Because we see all the public stuff and we listen to their calls with the Wall Street analysts and stuff like that. And we figured out, wait a second, wait a second, in order to hit their numbers that they promised the market for this year, they need to buy us, right? They need to buy somebody this size. We were the only company that size in the industry. There were a couple of smaller folks and a couple of real big ones. Nobody fit that shoe perfectly. We were the only ones available. And when they actually did the due diligence and their accountants came in and disagreed with an approach that our accounting folks took, and were looking to knock off about three million bucks off the purchase price, and frankly, their folks were probably right on the issue, we just held firm. And they said, well, wait a second, we offered you this, the EBIT is really lower because of X, Y, and Z. And we said we understand that, and I was able to say, listen, my guy has a number in mind. Whether you're right or wrong, you may very well be right, he's not going to go below this number. And we were able to hold on that because of the due diligence we did, knowing that they wouldn't hit their analyst promises to Wall Street if they didn't buy us, right? And of course we ended up getting the full price. Understanding what the buyer really needs is a big part of sell side M&A, and it's what a good sell side M&A advisor looks for in company acquisitions. It's also why negotiation comes up so often on this negotiation podcast.

Corey KupferAll right. So let's shift over a little bit. Let's talk more on the tax planning and mitigation side, right? Because unfortunately, not that there isn't stuff you can do approaching or after a deal, but on almost anything you do, whether it's the ability to run a process and get more people to the table in the first place or whether it's planning, the earlier the better, right? In the M&A space, a smart M&A approach starts long before the letter of intent. And a lot of folks don't even start thinking about tax planning until they have a deal under LOI or whatever, right? And if you listen to this business exit podcast with a sale somewhere down the road, this next part is for you. So let's talk sell side for a second. If you're thinking about, or maybe you're going to exit the business at some point, who knows what the time frame is, what are some of the things that people should be thinking about in advance, before they even have a deal on the table, in terms of the tax planning and mitigation side of things?

Alex LopezA couple of things. Every situation is different, but I'll tell you some of the biggest misses that I tend to see, particularly in the small to medium-sized deals. One of them is leaving the qualified small business stock sale option on the table. A lot of people don't qualify for this, but you'd be surprised how many times it is missed, for no reason other than they didn't anticipate it and they didn't take the steps to be able to take advantage of that. That is a strategy by which you can exit almost entirely tax-free on the capital gain from selling your business. Now, there are limitations, of course, like with everything else, but typically the first ten million dollars of gain are very easy, and it could be higher, right? It's not that tough to qualify. Things like, you have to be a C Corp, you have to hold the stock for at least five years. And so you have to be taking steps in the right direction to qualify for that. And yeah, you have to leave a couple of things on the table between the time that you start the business and the time that you sell, deductions, right? Because as a C Corp, you don't get the pass-through losses from the business. But that is often dwarfed.

So I could tell you about a big blunder on that one. A lot of times we get the call either after the fact or just about when they're going to close. We got a tech guy who called us late last year. He had already negotiated, he had already gone through all the due diligence from the buyer. The deal was locked and loaded to close. In his defense he called before the year was over, at least, right? Because that helps in other areas. But he just was not set up to take advantage of the qualified small business stock sale and he paid a seven figure tax bill because of it. Young guy too, very young. And very successful within just a few years. He built a very impressive company in just a few years. And a competitor bought him for a lot of money. And he did not know that this existed. That was the issue.

So a lot of times, unfortunately, it tends to happen more with my own crowd. I'll be forty soon, right? So people a little younger than me, a little older than me, they tend not to have been around the block as much and have not established a long-standing relationship with financial and legal professionals that can guide them in these matters. Sometimes they just haven't needed it, sometimes they just haven't gotten around to doing so. So they tend to make the most mistakes. And that's also why, I obviously serve everybody, but my emphasis is entrepreneurs around millennial plus, right? Because they need it the most. They're scaling businesses, they're getting to a really good spot in their careers, in their business growth, and now they're starting to need all these things. And they have painful mistakes that they can avoid. So that would be the most impactful one in most cases in the seven to eight figure range for the most part.

But then there's also the matter of what to take as a lump sum up front. The earnouts could be huge for tax minimization as well, even just getting part of your payout spread across a few years. First of all, you can usually negotiate much better terms, right? There's the expression, your price, my terms. Or the other way around.

Corey KupferYeah, you give me a price, I'll give you the terms, you give me the terms, I'll give you the price. Yeah, exactly.

Alex LopezExactly. So again, most of these strategies are best played as part of the negotiation or before the negotiation, right? You've got to have your goals. You've got to know what you want. It's not just about a number and a closing date. It's about, how is that going to affect me, not just tax-wise, in a million other ways. Just getting ahead of the situation is just massive. Being proactive about these things. Typically with a qualified small business stock sale you can get out of what's usually a six to seven figure tax bill, sometimes higher, right? You just have to be proactive, you have to know about it and you have to take steps to be able to take advantage of that. But also, even if you don't go that route, negotiating a deal with a structured payout, like an earnout or a holdback or another creative financing deal where you get a lump sum up front and then spread out the rest of the payout over a few years. Well, one, that buys you time on the tax bill, it gives you time to maneuver, but at the same time you will be able to spread it at what could be much lower tax brackets in other years. Not to mention that you will likely negotiate a higher price with the buyer if you're able to arrange that type of financing. There are a couple more sophisticated strategies you could use, like an installment sale trust, and a few other ways to minimize taxes and get the best terms on the selling price. But those are the big three that we typically see as highly advantageous.

Corey KupferYeah. And like you said, QSBS is a huge one in terms of how you structure from the beginning, right? Are you a C Corp, are you an S, are you an LLC, right? And a lot of other scenarios where there are benefits to being a pass-through entity, but part of it depends upon where you're going. All of it feeds into the M&A deal structure. It's funny, because we represent a lot of financial advisors, wealth management people, and they're specific enough to always ask the question, but lawyers don't qualify for it. It's one of the carve-outs. A lot of us in the professional services realm aren't allowed to take advantage of that. But folks in a lot of other industries can, and the folks who are much more aware of it can't take advantage of it. The guy that's running the HVAC business or the roofing company, whatever, I don't wanna stereotype, but just in general, they are less likely to be aware of it, or to think about it. And listen, a lot of people in any industry start a business without an exit in mind, right? They just start, they're building it, and they're structured the way they're structured, right? So there's that piece.

And then the other thing we see on the structure side that affects things on deals sometimes, and I'm sure you run across this a lot, is that a lot of people make S elections to get the benefit of the self-employment tax difference between an S and an LLC, even if they're an LLC entity, there are taxes on S. Which makes sense because for people that don't understand that, basically self-employment tax, the Social Security disability, is paid on every dollar you take out on an LLC, whereas you can establish a reasonable salary in an S Corp and take distributions above it. But one of the things that happens in a deal, and we see this a lot with folks that are structured as an S, is you go to sell, and especially, for example, in wealth management and some other places, where there are serial buyers or roll-ups where they're doing these deals where you get part cash and part equity, right? Some rollover equity. And the rollover equity's great in that it's tax deferred, you don't pay tax on it, and there is this potential upside for a second sale later and multiple arbitrage if it works out with these roll-ups. But the point is that if you're an S and you have differing, some people want more cash and other people want more equity, I usually start to say you can't do it. You can do it, but it's extremely tax inefficient. It's a big tax issue. You've got to take it proportionally, or else there's a big tax hit. So these structuring decisions, for the folks who are listening, if you're starting a new business and you have any inkling that you're going to exit it or sell it down the line, which hopefully should be the goal, you wanna start thinking about these structuring things really early. That holds in wealth management M&A, where rollover equity is common, and in equity M&A generally. And if you're a financial advisor looking for a financial advisor podcast that digs into deal structuring, this is the kind of conversation we aim for.

Alex LopezYeah, no, structure matters a lot. And that's typically where you see the biggest mistakes. And in a lot of cases it's relatively low-hanging fruit, right? The S election is very common, it's highly advantageous in a lot of cases, but not in all. It's actually pretty disastrous in some cases. It makes no sense for real estate operations for the most part. Real estate investment deals, it makes no sense, and we often see it being used by mistake. And then in other cases it's exactly what people need and they don't have it. So it's a catch twenty-two in some cases.

But at the end of the day, it's just something that you need to think about from the beginning, right? You've got to either educate yourself about how your entity structure will serve you or find somebody who can do that for you. Because it can be massively impactful for taxes and obviously for liability purposes. But there's a lot of misinformation and misunderstanding about how these things work, unfortunately.

Corey KupferYeah, and then on the other point you made about structured payments over time, back end money, so you spread it out, again, you said it right, it's obviously on a deal-by-deal basis, and taxes definitely should be one of the big factors you're considering, right? But not the only one, right? Terms matter as much as price in any M&A negotiation. It's interesting, because I see some gurus on the smaller deals, and by the way, small Main Street deals it's probably more true, where there's this wisdom sometimes, get as much money up front as you can because there's no guarantee you'll ever get anything on the back end, right? And you know what, there's some truth in that in some of these owner-operated businesses, where you have somebody who's coming in, they're not sophisticated, maybe they're going to run the business to the ground. You hear these examples in all these small deals where somebody's got to come back in and take their business back. But on the middle market and upper deals that we work on a lot, that kind of thing rarely happens.

You have quality buyers. Let's distinguish. You get money up front, and then there are certain payments over time that are not contingent upon anything, right? They're just guaranteed, paid over time. And if you have a strong buyer and you do the reverse due diligence on them, then in our deals it's extremely rare where somebody doesn't get their back end money. And then there's some that might be contingent, subject to retention of clients, things like that. So obviously you've got to hit those metrics. And then you have the earnouts, where the quality buyers on the bigger, even just middle market and up deals, are usually willing to pay as long as the revenue comes in and there's no breach of the reps and warranties.

So when you hear this wisdom out there, I had somebody who actually didn't know about the QSBS. I was at a conference and they were speaking about their experience and they were like, man, I learned this lesson. Everybody should be a C Corp. And I was like, whoa, whoa, hold on. I understand. In your case, yes, you couldn't take advantage of the QSBS because you didn't form originally, but no, not everybody should be a C Corp. It depends, right? You may not even qualify. If you don't qualify for QSBS and you plan to exit, likely being a C Corp is the worst thing you can do because of double taxation, right? So it really depends. Get advice, people. Get advice. And that means getting real M&A advice early, not after you have a buyer.

Alex LopezYeah, no, those matters are way too important. And what hurts me is that a lot of times they just don't know, and then sometimes they just think otherwise. So for example, with the QSBS being a C Corp, it's not the best for taking losses. When the business is running losses, you're probably not going to benefit at all from those losses as far as offsetting the rest of your income, right? But I'm going to tell you this in the context of tech, because I've dealt with this a lot for tech companies. They can benefit and are usually the biggest winners here, right? Because they sell for these big multiples and they build these valuations relatively quickly. So I've seen now a few cases where the entrepreneur was under the impression that the C Corp was not good for them because it would hurt them while they held the company. So they didn't structure as a C Corp. But I would say, at the same time, you had very little losses for a few years and you built up this multimillion dollar business that you're going to sell and save potentially millions of dollars in taxes, just because you didn't write off a few hundred grand of losses for the first three to five years. It almost doesn't add up. Not to mention that you don't necessarily take those losses even if you're not a C Corp, right? Because once you've already exhausted what you invested in the business in the first place, you're not going to be taking those losses even if you're not a C Corp, right? No basis. Exactly. So those are the cases that hurt me, when people are not able to take advantage, or they hurt badly from something like that that could have been prevented.

And actually you reminded me, Corey, of another interesting example, where we're talking about how people might be of the opinion that, take all you can now because you might not see another penny. So I was working on another deal, I was on the buy side on this one. I had initially made an offer. It was a leveraged deal. And the offer price was very competitive. It wasn't quite asking price, but it was very competitive, and the seller was interested in making the deal happen. But then all of a sudden at the LOI stage, so nothing legally binding had been signed yet, I guess another buyer came along and was offering cash. Less, right? So the seller became very insistent that our deal had to be a cash deal. My guy had the capability to buy cash, but he didn't want to because he wanted to use leverage, and at the same time he wanted to keep the seller. There was an earnout involved, but it was a small one. Long story short, the guy was so adamant and was then willing to make a deal with us that was much lower than the original offer price, but still a little higher than the other offer he had.

But something was off now, that insistence on the cash payout. Long story short, it turns out he was getting ready to be convicted and go do time for a white collar crime. And somehow he had kept it under wraps. We hadn't found that in the initial round, but towards the end, a couple of weeks away from closing, we uncovered that. That's why he was so insistent on getting cash up front, because he had to get his affairs in order. So it's like, again, that's an extreme example, but sometimes you just know when something is soft based on the economics and the details of a deal. So yeah, thank God for court searches.

Corey KupferYeah. Another example of why due diligence is so important. You've done buy side M&A advisory work and sell side diligence, you're active in the M&A business yourself, and you're pursuing growth through acquisitions, so I'm curious what you're seeing in recent M&A transactions. So listen, as we come to time here, any big things you're seeing in terms of trends or industries or interesting spaces, or what you're seeing with your clients in terms of what's going on on the deal side that we haven't covered? I know it's a big question, but is there anything of interest before I ask you my final two questions?

Alex LopezWell yeah, there are a couple of spaces that I find particularly interesting now. But to caveat that, going back to our earlier conversation about ratios getting out of whack and valuations becoming wild, I do think that we're generally at that point and there's just too much hype in most places. Things have gotten propped up so badly. But I would say honestly my own space is actually really good. I'm buying firms right now.

I just bought one in January and I'm actively looking and negotiating deals to buy more. And also some of the trades, such as AC, as you mentioned. Electrical is doing really well right now. Drone operations, there are a lot of different niches in there. People think drones, they think photography and social media. No. There's a lot more than that. We have inspections, pressure washing, inspections for insurance purposes in particular and for safety. I'm seeing very good numbers coming from those companies, and they're getting hot. But at the end of the day, from my perspective, I planted a lemon tree a long time ago. So right now I'm making lemonade and I'm loving it. So my eyes are on the accounting and consulting firms.

Corey KupferLove that. So, boy, we could talk for hours. We had a great initial check-in call before this, the pre-call, and you're as passionate about deals and helping entrepreneurs grow as I am, and so we could talk forever. For business owners looking for exit strategy advisors, or for strategic advisory on the tax and diligence side of a deal, Alex is someone to know. But we are at the end of our time. So Alex, if people want to find out more about you and your practice and everything you do to help folks in general, not only as a CPA, but you do CFO services, which we didn't get into a lot because it's not specifically deal related, and also on the due diligence and tax minimization side, where should they go?

Alex LopezAlexLopezCPA.com is the easiest way to find me.

Corey KupferExcellent. Alex, my final question on the podcast is always about my highest value in life, which is freedom. And for me that means everything from freedom around the world for people from oppression to why I've been an entrepreneur for decades and haven't had a boss. What does freedom mean to you and how does it impact your life and business?

Alex LopezFreedom is the ability to be oneself and at peace with one's surroundings and just being able to do the right thing and not worry about anything else.

Corey KupferAlex Lopez, thanks for being such a great guest on the DealQuest Podcast. Whether you want a mergers and acquisitions podcast or a business acquisition podcast, and if you follow the best M&A podcasts, I hope DealQuest earns a spot on your list. And if you've got a deal story of your own and you're wondering how to be a guest on a podcast, or how to get on a podcast as a guest, you can submit a podcast guest application at beaguestondealquest.com. We're a business podcast looking for guests, and we'd love an M&A podcast guest with a story like Alex's, so come be a guest on a dealmaking podcast.

Alex LopezThank you, Corey. I thoroughly enjoyed it.