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What if a seller manipulates the financial statement

For example can't they have their mom work full time in their restaurant and not paid her at all. Thus boasting the net income from for example $50,000 to $70,000. Then they can list the business for $75,000 more.

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Answers (7)
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The BAF Group LLC
MD

I stand by my assertion that a SIGNED copy of the Tax Returns is something to be desired, on several accounts. First, lenders and the SBA are asking for those, as well as a document that allows the SBA to verify that the Tax Return you have is the same one that the Seller has filed with the IRS. (You can't do that, if you are getting financing from the Seller or private lenders.) If the Seller knows this from the start, he will be much more careful about providing exaggerated information. That would be...what do you call it?...FRAUD! And the signed Tax Returns, in combination with other information he may give you provide the documented proof of his fraud. I have had Sellers pull their listings off the market when they find out we are asking for that kind of proof and how we plan to use it, both when listing their businesses, or when acting as representatives for the Buyers.

This is not always the way to go, particularly with cash businesses like Restaurants, if and when the Seller has lied to the IRS, as well as to the Buyers. You can file his Tax Returns under "F", for Fiction! But in other cases, it is a bona fide way of starting, even if you feel you can only use his Cost of Goods as a means of approximating his Revenue. But John is correct: Ask, Ask and Ask again!

Dec 20, 2010
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I agree with the last poster MOSTLY. I went into the place i bought at least 12 times before I made an offer. Tax returns are a good base to determine cogs, etc..... but they are not the ultimate determinig factor. But use is it as base or reference and ask, ask, ask, and keep asking until you get the right answer.
To me though , when buying an existing biz , I just what to fine tune it, NOT change it to my vision. If I wanted that I would start from scratch.
Too many times I get info from brokers on biz' where they list a great cash flow and then they tell me 'but you will have to change the menu, remodel the restaurant, and change the hours, etc."
To me that is a start up. I won't pay more than taking over the lease and a small percentage of used FFE.

Dec 20, 2010
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Freedom Business Brokers
Orange County, CA

Mr Suggs
I feel pity with those who suggest that get a signed copy of tax return from the seller to determin whether he is making a profit he is claiming. If that would be a determining parmeter not too many businesses will change hands.
First of all let me make it clear buying a business is like marrying a girl.When you marry you see the bigger picture that the girl you are going to marry will take care of you and vice versa.But if you start analyzing every girl nobody will be able to qualify as per your demands. So you see the basic characterstics in a woman and you marry and later you both prosper because of her moral support.
I have seen many succesfull businesses going down because of the stupidity of the buyer even if he has done the proper due diligence. And on the contrary many businesses flourish because of positive steps taken by the buyer.
Second when you buy a business put yourself in that business and use your vision.If you see that
your vision will make that business successfull buy it .
What I mean don't make a due diligence a determining factor to buy or not to buy a business specially seeing the tax returns.There are many other ways of checking a business.
Seeing the buying invoices is one of them. See the trend how much the seller is buying every month
then add an average profit to it .Now deduct the expenses from it In the expenses if anything is missing ask the seller why that is missing. That is actual net.Other way is to visit the business unannounced and count the heads. Last but not least observe the business for one or two weeks.

Dec 20, 2010
Michael Hamlar
Hamlar Enterprises, LLC
Roanoke City County, VA

Mr. Suggs,

I hope this finds you doing well. You asked a popular question. It is hard to distinguished between manipulated and orginal documents. As mentioned earlier I would ask for signed tax returns but even those can be manipulated. Any lawyer or accountant could also manipulate financials. However, with the proper due dilligence the buyer should be able to determine if the business and financials make sense. I get your quesiton with every deal we work with. Some brokers are trained and have the degrees in business to determine if things add up. However, at the end of the day the business belongs to the buyer and every angle should be considered. Hope this helps if you need further information we would be happy to speak to you toll free at 1-8006-82-1950 ext 101.

Regards,

Michael Lawrence Hamlar
President & CEO
Hamlar Enterprises, LLC
Hamlar Business Broker
P.O. Box 3336
Roanoke, VA 24015
Office: 1.800.682.1950 ext 101
Fax: 1.800.682.1950
Website: www.hamlarenterprises.com
Email: mike@hamlarenterprises.com
Skype: MHamlar

Dec 18, 2010
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Don't count just on your CPA and lawyer, also do your own due deligence. Many small operations have family employees working off the books. Get involved as much as possible before you buy. Income of $50 to $70k can have 2 or 3 people working off the books and putting in tons of hours. Be careful, often you'll pay $75k and won't even be able to make min wage. DO NOT depend on your broker to know what's going on, many of them are clueless!! If something looks fishy, BEWARE.
Be aware that signed tax returns can be made and never filed. Get proof of taxes paid. I ran into this before. Don't underestimate what some people will do to unload a sinking ship.

Dec 17, 2010
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The BAF Group LLC
MD

I agree with Robert. But the first thing you want to see is SIGNED Tax Returns. Get those for your own, rough estimation of Cash Flow and Value, but then take them to an Accountant who can help verify the information on the Tax Returns with support information. Anyone who decides to save money by not hiring an Attorney or Accountant in purchasing a business, is a fool!

Feb 4, 2010
Robert Cutler
Attorney
New York County, NY

Terell, you raise a very good point. This is precisely why a potential buyer needs to hire a skilled lawyer and accountant to adequately diligence the business before the purchase agreement is signed. You want to make sure that the business you are buying is precisely what it purports to be, and a good diligence review should reveal any inconsistencies or problems.

Feb 4, 2010