This article are provided for information purposes only, and are not intended as legal advice.


Buying a cash business

April 27th, 2009

What is the value of a cash business?  It is hard to dispute how much cash a person brings in but whatever the owner tells you, it is impossible to prove and many times the cash that he is telling you is often overstated.  Many years ago a person bought a retail store, three months later they put the store up for sale claiming that it was too much work but it was generating tons of cash.  If they only owned the store for three months, chances are it was not generating the amount of cash that the old owner stated.  If it was generating lots of cash and they wanted to sell it, why not deposit the cash in the bank account?  Telling me something and actions which are different generates a red flag, proceed with caution. 

 

If you acquired the shares of a company generating lots of cash which was not reported, you may be assuming sales and income tax liabilities relating to the old owners.  Never buy shares of a company with cash sales.  You could end up with considerably more liabilities than you ever imagined. 

 

I heard of another case where the owner ran a business but had a totally different business which was run for cash, no reporting ever took place.  No one knew about this side business including his accountant.  The owner passed away, someone bought the business based on the financial records which did not show a large profit.  Years later, the new owner ran into the kids of the deceased owner and thanked them for such a wonderful business, they were referring to the cash business run on the sideline.  To the kids surprise, they did not know anything of this business.  The kids sued the accountant for not revealing this side business and lost in court because the accountant was not aware of this business.  To add insult to injury, the tax authorities now found out about this business and unreported revenue and assessed the estate of the deceased person taxes based on estimated income.  The children were never paid for this business and they ended up paying considerable sums to the government for income taxes on unreported income. 

 

Cash sales are required to be reported to the tax authorities.  If not, you could be liable for sales and income taxes for years to come.  It is hard to prove the cash sales that you have therefore many buyers of a business tell the owners of the business for sale that the cash sales are a freebie, no goodwill is based on something that you cannot prove.


Filed under: Buy a business — Gary Landa @ 8:41 am


No Comments »


No comments yet.


RSS feed for comments on this post. TrackBack URL


Leave a comment


You must be logged in to post a comment.