Misstating Income a Shortsighted Strategy

I’ve written about the importance of having financial records up-to-date and accurate when preparing to sell a business.

For obvious reasons, it makes sense to have everything in order to properly represent what is being sold. Otherwise, it would be similar to trying to sell a car without showing its color, condition or mileage.

Unfortunately, I’ve come across many clients who are successful in running a business but struggle with keeping organized records. With a little guidance and time, situations like this can easily be corrected.

However, every now and then, I’ll come across a seller who is deliberately understating their income. Last week in the middle of tax season, I spent some time with an owner who might not have been filing accurate tax returns.

Maybe he was filing accurate tax returns and was trying to deceive me. Or maybe he is filing inaccurate tax returns and was being accurate with me.

Either way, the effect is the same. No buyer or business broker with any credibility will entertain that owner as a client or as a seller.

From a broker’s perspective, I would immediately lose credibility when I disclose these “facts” to a qualified buyer. If I were to lose credibility with the buyer, I would never get it back and I would lose the opportunity of being able to sell them a business in the future. This would negatively impact my other clients who are selling their businesses with legitimate records.

With the buyer, since a bond of trust in a business transaction is of paramount importance, the seller will blow up that bridge before the buyer tries to get across it. Real buyers want real facts and figures.

For example, if the seller has already shown that he is dishonest, what assurance does the buyer have that the seller won’t be dishonest a second time?

With reports of accounting transgressions in corporate America seemingly on a daily basis, local business buyers are more cautious than ever before.

What the seller needs to do is be honest. Be honest with yourself. Be honest with the government. Be honest with the buyer.

The result is that the seller might have a few more taxes to pay during the course of business’ operations, but the value of the business will increase exponentially by having records that reflect reality.

There’s an old saying about not being able to have your cake and eat it too, which I never understood. Now I do.

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