Ladies and gentlemen, the hard core truth is this: You can hide your cash now and avoid taxes; or you can record your cash and show your profit and multiply the value of those recorded dollars when you sell your business.
This is a really difficult issue, because it’s not just one of dollars and cents, but also of ethics and values. I am a Christian, hard core. Yet, when it comes to recording incomes, that little “The Heck with the IRS” devil frequently rears his head. If I had a dime for every time “should I report this or not?” went through my head, I’d have retired 10 years ago.
Okay, so I’ll record my cash and pay my taxes. But how about those stable fees I pay for my horse every month? Should I deduct that as a “Professional Services” expense? I lost that battle; I recorded it… until my accountant wagged her finger at me. Curses again! Nothing like surrounding yourself with people who will hold you “accountable.”
Then a funny thing will happen. A potential client will come in to talk about listing their business through The Exit Eagle, and I’ll ask for copies of the last three years of taxes for their business, and I’ll do the fair market business valuation to get a sense of twhat the business might sale for. And guess what? The Available Cash Flow (ACF) – the driver of the value of the business – averages out to a negative over the last three years. I make legal adjustments – like backing out the stable-related “Professional Services” – and we get to at least a positive number, but it’s not great. When they come back and I present it, that’s when I hear about the cash under the bed. No, I do not want to go to your bedroom to see it.
Sometimes, the most recent tax year will reflect a revenue increase; in other words, the owner recorded more cash than usual anticipating the sale of the business; it’s not a real increase in sales. But one year doesn’t do it; the other two years drag the value down. If you’re going this route, make it three years. Ain’t no dummies going to be writing a check for your business.
One thing I learned in my 18 years as a turn-around consultant: There are many tools and techniques for increasing profit (e.g., ACF) that don’t involve hiding income. There is no benefit to Fortune 500 companies doctoring the books; it reduces their stock value. So profit maximization is achieved through smart thinking and hard work, not magic numbers. Oh, well, there is Enron…
I’m not here to tell you what your decision should be. I am here to tell you, whether it is an ethical dilemma for you or not, if you don’t show that revenue over three years before you sale, you will take a hit on the sale price. Unless you have a really amazing niche.
Want to maximize your sale price without doing anything dodgy? Call me, Virginia, today for a free one-hour consultation: 412.514.1050.