I remember from a long ago business school class that unprofitable businesses can and do survive for many years if they are cash flow positive, but profitable businesses with negative cashflow will be gone before you know it. That may not be as true in the current “new economy” where you just raise more (other people’s) money. But I still look to cashflow. But like Mark is saying, you can’t trick yourself, like by kicking taxes down the road. Or there are some WISPs that survive entirely by charging install fees, selling CPE to customers at huge markups, and talking new customers into prepaying the first year. They are losing money AND they are cashflow negative on their entire customer base, the only thing that keeps them afloat is signing up new customers. If that every stops, the whole thing collapses like a house of cards.
But back to depreciation recapture. When I was deciding whether to sell to JAB, my accountant didn’t bring that up. What he pointed out was that the entire sale price would be taxed, the cost basis was zero. Even if I had put seed money into the company in the early days, those expenses had been used to offset revenue for tax purposes. I had mistakenly thought only the difference between the sale price and what I had put into it would be taxed. But I must be misunderstanding the depreciation recapture thing, especially since it sounds like it doesn’t matter if you expensed or depreciated the equipment, they want to tax all those expenses that were used in the profit=sales-expenses equation in previous tax years. Ignoring the stuff we bought that has long since died or been retired and replaced with newer stuff, I usually figure the CPE plus a prorated share of the tower equipment costs almost a year of gross revenue per customer (we use Cambium 450 which is on the expensive side). ARPU is climbing as less and less people take the lowest speed tier, but that is somewhat offset by small cells and less subs per AP, as well as moving toward all licensed backhauls. But when customer pays $600/year and SM alone can cost $300 or more, then add in maybe 1/15 of an AP, and you’re somewhere between 0.5 and 1.0 times annual revenue invested in equipment. (Then rinse and repeat every 3-5 years as equipment becomes obsolete.) So if I sell and get, let’s just say 1x revenue, and then pay tax on the entire sale price, are they going to want to tax the equipment at what will probably be the highest marginal tax rate on top of that? It seems entirely possible the taxes would eat up the entire sale price. That can’t be right. I must be misunderstanding something. I also doubt many of us track every capital asset and when it gets replaced due to lightning, water intrusion, it becomes obsolete, or you just need something faster. Like you replace Tranzeo with FSK with 430 with 450 with 450i with 450m. And while occasionally you might redeploy a piece of equipment to a smaller site, usually it becomes eWaste. But if I had to document all that to avoid paying tax on every piece of equipment I ever bought, I’d be screwed, my asset records are not that detailed. I’m also not clear on whether this only applies to large capital assets, or everything we ever expensed. Like cable and mounts and POEs and antennas, and what about license keys for radios. Like capacity keys or lite to full keys or all those keys you buy for a licensed link. From: AF <af-boun...@af.afmug.com> On Behalf Of ch...@wbmfg.com Sent: Saturday, August 22, 2020 4:19 PM To: AnimalFarm Microwave Users Group <af@af.afmug.com> Subject: Re: [AFMUG] Buying and selling ISP’s +1^6 I like my books to be surgically accurate and very current. I want to know exactly where we are every month. I have a third column of class of expenses in my books. Any of the crap I buy because I want to or I am experimenting or I think I can fix up an old piece of junk goes in the column. Then it does not factor into my contracting or manufacturing profit and losses. For example, almost every month manufacturing is in the black. Once in a while we have delayed shipments put us in the red but the next month is it doing that much better. Contracting comes and goes. Some weeks I have the guys just doing work on the buildings and grounds. I have them code their time so I can pull the non revenue producing payroll expenses out and see if they have a positive gross profit based on revenue producing projects. The thing I am always watching for is negative gross profit on a revenue job. That is a good way to go bankrupt. And sometimes things go sideways on contracting and you do lose money. Then we look at all the below the line stuff and try to minimize that. Always a challenge because most of that stuff is there month after month irrespective of revenue. Then I can tell the various divisions how they are doing independently of the other divisions and independent of my discretionary money wasting experimental stuff. From: Mark Radabaugh Sent: Saturday, August 22, 2020 2:52 PM To: AnimalFarm Microwave Users Group Subject: Re: [AFMUG] Buying and selling ISP’s I’m thinking y’all need to take a serious look at accounting and depreciation and what they mean. Depreciate equipment at your best estimate of the useful life of the equipment. Keep your books accurate so that you know exactly what you are making (or not making). That’s the entire point of accrual accounting and depreciation. It’s way to hard to tell what is happening when you don’t accurately track depreciation. Work with your tax accountant to get your tax books and returns to minimize (but not eliminate) the taxes you owe. You can certainly use Section 179 and other accelerated depreciation methods to reduce your tax liability but it needs to be done strategically. Paying a little tax now can greatly reduce your taxes in the future. The point is you need to have accurate accounting with realistic depreciation to sensibly run the business. Tax strategies are important, but nowhere near as important as knowing if you are really making money or not. Mark On Aug 22, 2020, at 2:34 PM, Matt Hoppes <mattli...@rivervalleyinternet.net <mailto:mattli...@rivervalleyinternet.net> > wrote: That doesn’t make any sense. What am I missing? If I pay $50,000 for a truck and depreciate over 5 years I take $10,000 per year. Why would I need to pay back anything if I sell in year 2? Or are we saying if I write off the entire $50,000 on day one on something you’d normally depreciate over 5 years and sell at year 2? On Aug 22, 2020, at 2:30 PM, ch...@wbmfg.com <mailto:ch...@wbmfg.com> wrote: They assume if you ever took depreciation for anything, it was used as an offset for income tax you would have paid. They want that back. I presume stuff you junked does not count. From: Ken Hohhof Sent: Saturday, August 22, 2020 12:04 PM To: 'AnimalFarm Microwave Users Group' Subject: Re: [AFMUG] Buying and selling ISP’s Any WISP that has been around for 10+ years has probably expensed or depreciated several times as much equipment as is currently active in their network. Do you have to identify which expensed or depreciated equipment is still in use and which went in the dumpster years ago? And how do they determine what the sale price is for the purpose of seeing if it exceeds the depreciated cost? Do they assume the entire sale price of the business was to acquire equipment? Seems like you would be taxed twice, first for capital gains, then for the expenses you used to offset revenue for tax purposes. I know most buyers prefer an asset sale to a stock sale, in case there are ghosts in the closets. But would a stock sale avoid this problem? Does it matter C Corp, S Corp or LLC? From: AF <af-boun...@af.afmug.com <mailto:af-boun...@af.afmug.com> > On Behalf Of ch...@wbmfg.com <mailto:ch...@wbmfg.com> Sent: Saturday, August 22, 2020 10:51 AM To: 'AnimalFarm Microwave Users Group' <af@af.afmug.com <mailto:af@af.afmug.com> > Subject: Re: [AFMUG] Buying and selling ISP’s One concept that was new to me in my sale was depreciation recapture. If you fully expense or 179 expense or if your equipment is old enough to have fully depreciated, all the depreciation expense comes back to bite you in the ass. You will be taxed on it. From: Ken Hohhof Sent: Saturday, August 22, 2020 9:39 AM To: 'AnimalFarm Microwave Users Group' Subject: Re: [AFMUG] Buying and selling ISP’s That is very dependent on whether the business is being run as “milking the cash cow” or “reinvesting to grow the business”. Especially since section 179 allows a lot of capital purchases to be expensed in the first year. I suspect many WISP owners prefer to add staff and equipment and towers and customers, rather than declare profits and pay taxes. That doesn’t mean their businesses are worth less to a buyer. Back when I worked for corporate America, I remember around 1990 working for a public high tech company and at stockholder meetings the CEO would be asked why the company at every earnings statement would just break even or a little more. He would answer they were in business to grow, not to pay taxes. I am sometimes puzzled by competitors who seem to have crappy service, are hated by their customers, and have high churn. Then I realize they are milking the cash cow, spending as little as possible, and probably making as much or more profit as I am. In the case of big, crappy companies, they probably don’t sweat the churn because there are millions more suckers out there, you just need advertising to rope some of them in to replace the cancellations. Like when asked about Frontier, I describe them as the slum landlord of phone companies. From: AF <af-boun...@af.afmug.com <mailto:af-boun...@af.afmug.com> > On Behalf Of Chuck McCown Sent: Saturday, August 22, 2020 10:02 AM To: AnimalFarm Microwave Users Group <af@af.afmug.com <mailto:af@af.afmug.com> > Subject: Re: [AFMUG] Buying and selling ISP’s Whatever 5x your earnings are. Not sales or revenue or gross profit but bottom line earnings on your income statement/ pl. Your taxable income. Sent from my iPhone On Aug 22, 2020, at 8:16 AM, Mike Hammett <af...@ics-il.net <mailto:af...@ics-il.net> > wrote: What does the revenue multiplier end up being, though? 5x EBIDTA / revenue gets you what, in purchases that have been made? ----- Mike Hammett <http://www.ics-il.com/> Intelligent Computing Solutions <https://www.facebook.com/ICSIL> <https://plus.google.com/+IntelligentComputingSolutionsDeKalb> <https://www.linkedin.com/company/intelligent-computing-solutions> <https://twitter.com/ICSIL> <http://www.midwest-ix.com/> Midwest Internet Exchange <https://www.facebook.com/mdwestix> <https://www.linkedin.com/company/midwest-internet-exchange> <https://twitter.com/mdwestix> <http://www.thebrotherswisp.com/> The Brothers WISP <https://www.facebook.com/thebrotherswisp> <https://www.youtube.com/channel/UCXSdfxQv7SpoRQYNyLwntZg> _____ From: "Chuck McCown" <ch...@wbmfg.com <mailto:ch...@wbmfg.com> > To: "AnimalFarm Microwave Users Group" <af@af.afmug.com <mailto:af@af.afmug.com> > Sent: Friday, August 21, 2020 8:20:47 PM Subject: Re: [AFMUG] Buying and selling ISP’s 5 x ebidta Revenue multiples are of no value. Sent from my iPhone On Aug 21, 2020, at 5:30 PM, cjwstudios <cjwstud...@gmail.com <mailto:cjwstud...@gmail.com> > wrote: 1x annual revenue and hope the customers stay on On Fri, Aug 21, 2020 at 5:43 PM Matt Hoppes <mattli...@rivervalleyinternet.net <mailto:mattli...@rivervalleyinternet.net> > wrote: This is the issue I’ve always had when I’ve looked at buying an ISP. It always seems like a lot more money I would have to put out to buy then I could just build and take the customers if something is wrong with the current network. > On Aug 21, 2020, at 12:43 PM, Seth Mattinen <se...@rollernet.us > <mailto:se...@rollernet.us> > wrote: > > On 8/20/20 8:13 PM, Steve Jones wrote: >> I think you either buy or sell, isp isnt really a flip thing > > > There is/was someone in my part of the country buying up ISPs and trying to > package them all together as a flip. My ISP customers tell me it's far easier > to get the flipper's customers to cancel and switch than buy their company. > > -- > AF mailing list > AF@af.afmug.com <mailto:AF@af.afmug.com> > http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com _____ -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com _____ -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com _____ -- AF mailing list AF@af.afmug.com <mailto:AF@af.afmug.com> http://af.afmug.com/mailman/listinfo/af_af.afmug.com
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