Question on buying a small business?

Question

I am looking at buying a small business. The business includes a house on the property and is shown as profitable. However, the business is cash based and lets just say not all cash is recorded. Other than what the owner tells us there is no way of knowing exactly what is brought in. When we ask for financial statements all we get are profit and loss statements which he has calculated all of his personal expenses into the business (mortgage, car, insurance, food, entertainment, vacations etc.) as business expenses. I intend to run the business above the table so to speak and am trying to valuate if the price is worth it. Any advice is much appreciated!

Answer 1

I would either walk (no, RUN!) away from this business as fast as possible, or insist on a contract that clearly states you are buying ONLY the physical assets of the business and that he is responsible for all debts and TAXES of the business.  If he is running his personal living expenses into the business accounts, the IRS is going to be talking to him about income tax evasion.  You should have your accountant review ALL his company financials, the company tax returns, AND his personal tax returns.  I have a bad feeling about this one.

If the business is run from the house, he might be able to justify deducting a PORTION of his house expenses (mortgage, utilities) from the business income, based on the square footage taken by the business, but not having the business pay all housing expenses, plus his vacations, food, and entertainment, etc.

If you do buy it, be sure you form a new entity (LLC or corporation, not a sole proprietorship) to actually buy the business and run it.

Answer 2

You need an accountant to evaluate the business's financials. All of his expenses might be solidly legal to do, on the advice of his accountant, but I agree that it seems a little shady even if it isn't.

If he uses a program like QuickBooks, he can create a backup file to put on a CD, which you then bring to your accountant to import into his computer. If he keeps everything on paper, have him box it up and you can bring it to your CPA. Profit and Loss statements are fairly useful if you have a long series of monthly plus annual statements so you can see the ebb and flow of the business over time, but individually they aren't worth much if you aren't intimately familiar with the business already.  

Answer 3

If it were me, I would insist on seeing the tax returns. Now, we all realize that most cash businesses skim cash from the taxman. I estimate the percentage who do is 100%.

He has already admitted to you that he is a liar and a cheat. So, big deal. That's fine. Nobody is perfect. But don't allow him to get all sanctimonious about how you now have to believe him and how you have to pay him a fair price based on what he SAYS he actually had for income.

Remember, he admitted to you that he's a liar and a cheat!

I would negotiate hard with him based on bank statements and tax returns.

What are you basing your price on? Start with a fair value of just the land and house.

Now, what factor do you add for the business? 1 year's gross sales? 5 years net profit? Every situation is different. What kind of business it it? It makes a huge difference. Is there any inventory? What is the general order of magnitude of gross and net sales? $10,000 or $100,000 gross? $5,000 or $50,000 profit?

Answer 4

thats sounds like its going to be more bad then good because like you said if just cash and then guys not giving you any numbers or more paper work if you think that you can make it do well go for it but sounds like something is fishy