I get absolutely crazy whenever a buyer tells me they are looking to buy a “cash” business and I get equally nuts when a seller tells me there is more revenue than what they show.
I know, some of you are thinking I am out of my mind, and that may be so in regards to some matters, but when it comes to running a business or purchasing one, unreported income (a.k.a cash sales/under the table income/off the books money, etc) is a curse, not a blessing.
From a buyer’s perspective, how can anyone possibly pay for something they cannot prove? Talk about someone being out of their mind that is the definition of insanity.
Why would anyone ever buy a business based upon the seller telling them “there is plenty of cash that comes in that I don’t report” (wink, wink).
As a business owner, unreported income is not only illegal, it is plain stupid.
First, I guarantee in any business, if the owner is stealing money, so too are the employees.
Second, instead of taking out cash, reinvest it in the business.
The potential growth that can result can be infinitely greater than what the seller “got away with”
. Third, since businesses are sold at multiples, all revenue and the resulting additional profits will yield a factor of two, three or four times.
Unfortunately, many business owners get into the habit of taking cash and their lifestyles require it.
If that is the case, then at the very least have enough foresight to halt the practice at least a year before you may be planning to sell the company so a buyer can validate the income.
As a buyer, never get fooled into paying for something a seller cannot prove.
In any business I have ever purchased when a seller expects me to pay for the cash they cannot prove, I always offer to pay them a multiple of the cash after I have had a chance to measure it for 2 years after the sale,. To this they always respond: “How can I know that what you are telling me will be correct?” and to that I always respond” “that is exactly my point. If you cannot trust my figures how can I trust yours?” I win every time.
If you run a business then run it properly. Put all of the income on the books. Doing anything else is not only illegal and cheats the government, it cheats yourself from investing more in the business and from the added value you will leave on the table when the time comes to sell.