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How can a broker convince a seller to keep accurate books instead of worrying about saving taxes?

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Answers (5)
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Small Business Underwriters
Founder

To put it simply, explain to the seller that the purchase price is directly related to the documented historical cash flow. If they want to hide cash now, they cannot expect a buyer to pay for revenue that cannot be documented. It's like Tom Cruise in "A Few Good Men": "It doesn't matter what I know, it only matters what I can prove!"

Jun 16, 2009
David Collins
Glentyde Capital Advisors, Inc.
CEO / Owner
Mecklenburg County, NC

Suppose a biz will be soon sold, and will priced at, say, 4.5 times cash flow. Suppose further that the seller has a marginal tax rate of 40%.

Okay, every additional dollar of reported profit / cash flow (simplistically assuming that profit = CF) will cost Seller 40 cents in tax per year, but will boost the selling price by $2.70 after tax--even more if Seller's effective tax bite on the sale is less than his/her ordinary marginal rate; not an unreasonable assumption if a chunk of the sale will generate capital gains.

You'll need to replace these simplistic assumptions and numbers by ones more specific to your situation, but the answer will probably be that Seller gets a nice bang for the buck by not underreporting the cash flows.

Good luck!

Jun 15, 2009
Julie A. Barnes, CPA
Small Business Exchange, Inc.
Travis County, TX

Hi James,

I could not agree with my 2 colleagues more! However, I think the problem boils down to human nature - very few small business owners set out to cheat the government - they just find themselves 'borrowing' from ready cash. They are almost invariably shocked at the sum of their 'ocassional' draws and scramble to reconcile Cash to the financials when they file their taxes.

SO - even though they might understand the problem intellectually - it's sometimes difficult to keep your hands out of the cookie jar!

Julie A. Barnes, CPA
SBX, Inc.
www.SmallBusinessExchange.net

Jun 15, 2009
Craig Phillips
Classic Properties
Horry County, SC

James
The owner over the years has established an income for his business that is well below the actual income of the business. Often times showing little income or negative income. When he decides to sell he cannot easily admit to the buyer that the numbers are skewed. The seller winds up finding it very hard to sell his business for what he knows it is really worth. Sometimes they are lucky to get half of what it is worth. By cheating the government they end up cheating themselves.
Best regards,

Craig Phillips
REALTOR
cphillips@classicproperties.com

Web Reference: www.classicproperties.com

Jun 15, 2009
Michelle Orr
Wells Fargo SBA Lending
Business Development Officer
Fairfield County, CT

James,
This is a great question and unfortunately I don't have an answer as to how you can convince a seller to do this; BUT as a former lender and now owner of a commercial loan consulting business, I can tell you that if a Seller wants to sell his/her business quickly, and can't attract a cash buyer, they better show cash flow on their tax returns if they expect a buyer to be able to obtain a loan. Either that or agree to Seller financing.

Good luck!

Best regards,
Michelle Orr

Jun 15, 2009

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