“Wait, you have to add back the $100,000 in cash”, he said | selling a business
It happened again. A cafe owner chooses not to report $100k in sales on his P&L (and his tax return). BUT when he tells the business broker the valuation is too low, he “remembers” the $100k in unreported cash sales.
The new broker called me for some advice (This cafe owner was not working with my firm I should say). So I told her to tell the owner this:
You can’t get paid on the same cash twice.
In other words, if you don’t report the income, you save on income taxes, (which is obviously illegal and can put you in jail), but it costs you at the closing table when you sell the business.
What does that look like?
$100k in unreported income (saving maybe $30k in taxes) could be worth $300k to $500k in selling price.
AND, it makes it impossible for a broker to explain to buyers why there is an add-back for $100k in unreported cash.
AND it makes the buyer wonder, “what else is the owner lying to me about?
AND you could go to jail.
Trust is everything in business, especially a business sale.
If you choose to buy $50k in excess supplies and $50k in inventory to reduce income taxes, that would be considered legit in most places. It can be listed in add-backs, but it requires invoices and a history of not spending on those expenses in other, less profitable years.
For the cleanest business sale, here’s some advice:
Run your business very clean for three years prior to selling. Take a decent salary, don’t layer in personal expenses and report EVERYTHING. That builds your balance sheet and increases business value.
Your reward? More money at the closing table to boost your retirement, take a once-in-a-lifetime trip, or maybe even fund your next venture.
That makes all your years of hard work pay off.
If you are a business owner who’d like to think more deeply about your business,download the free guide , “What’s Next For Your Future”