Selling A Business: Telling Potential Business Buyers About Unreported Income


Telling Buyers About Unreported IncomeA question that occasionally comes up in our Business ProSell program is whether a seller can and should reveal to prospective buyers that the business produces extra income not reported on tax returns.

The purpose, of course is to let the buyer know there is more income to be made from the business than is posted in the business records, The expectation behind this admission, is that the buyer will be more inclined to make an offer and at a price that will satisfy the seller, if buyers learn there actually is more money collected than is posted.

But many small business entrepreneurs, particularly business sales intermediaries, think that lying to the government about the actual business income subject to taxation is a mistake. And bragging about it only compounds the error.

Pro Argument:


A number of business owners systematically under-report their companies income. Perhaps most get away with it.  One reason they can avoid being examined by taxing authorities is that there are far fewer agents than there are business owners who don't pay their required share of taxes. One seller told me that some buyers are more inclined to get into a business, perhaps for the first time, when they learn that being a business owner offers ways to reduce their tax exposure - ways not available if they were working chiefly for someone else. A rather surprising reason some sellers feel they should tell all about unreported income is to make the buyer a co-conspirator in the crime of tax avoidance. It's insurance against being sued, one owner told me. His reasoning was that a buyer who is disappointed with performance of the company after taking over and has an inclination to accuse the seller of misrepresentation, will think twice about that idea. That's because he might have to testify in court that he is aware of the former owner's practice of illegal tax avoidance and is guilty of neglecting to report it to the IRS.

Con Argument:

But it seems an unnecessary risk for the seller to take. And putting a buyer in that awkward position is not the best way to get a business relationship started. Most buyers don't want to hear about anything that is not documented. They don't want to take your word when it applies to the landlord's promise of a new lease, your customers' verbal pledges to remain loyal or vendor statements that they won't raise prices. Why would buyer prospects believe that you really collected $80,000 in discretionary earnings last year rather than the $55,000 stated in the books? As one buyer told me, "If I know the seller is not telling the truth to the tax authorities, what makes me think he'll be honest with me?" and talking to a business sales intermediary about unreported income is not a good strategy if you want his or her trust and cooperation.

An owner who admits his or her tax dodge when offering a business for sale may think the tactic will add appeal to the offering and increase chances of getting a sale at a desirable price. But that usually does not work and it's a plan that is likely to backfire with unintended and unwanted consequences.

Peter Siegel, MBAAbout The Author: Peter Siegel, MBA is the Founder and President of BizBen.com. He is a SBA SCORE Counselor, author, consultant/coach (ProBuy, ProSell Programs), and advocate on the topic of buying and selling small to mid-sized businesses in the California marketplace. Having writen three books and hundreds of publication articles he has assisted small business owners/sellers, business brokers, agents, and business buyers for over 25 years. For a FREE consultation on how to best sell or buy a California small business phone him direct at 925-785-3118.

Categories: BizBen Blog Contributor, Buying A Business, Deal And Escrow Issues, Due Diligence Issues, How To Buy A Business, How To Sell A Business, Selling A Business


Comments Regarding This Blog Post


Everyone knows there are certain legitimate and discretionary advantages to small business ownership; but, one of them should NOT be hiding cash income.

I frequently encounter business sellers who are downright proud about how much income they hide from the IRS -- sometimes tens and hundreds of thousands of dollars. Frankly, it appalls me --- every dollar they don't pay has to be made up by someone -- the rest of us who report our income and pay our taxes.

So, when I'm confronted by sellers who insist that their business be valued on their "real" income; I make it clear: "you don't get two bites at the apple." When you tell potential buyers how much you hide you are really saying: "I'm a liar. I cheat the government. I make your tax burden higher because I'm not paying my fair share. Now, believe me about everything I'm telling you about my business." Really???

Sellers who have hidden their income should be thankful they haven't been indicted and thrown in jail ... and keep that information to themselves.

Contributor: Business Appraisals, Valuations Advisor

Years ago, when I first started selling businesses I was doing an appraisal for a potential client and I asked him to prepare a list of benefits he received from the business that were not necessary for the operation of the business. One of the items he mentioned was a yearly $100,000 plus in sales of rejected products that he sold in Mexico and pocketed the money. I told him he should destroy the list as this could create a legal problem with the IRS. I went back a few weeks later and the business was shut down with only his wife being present. She told me that one of their employees got their hands on the report and sent it to the IRS.

Do I need to say more about hidden income?






  Helpful Resources To Assist In Selling And Buying California Businesses
Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.

Helen Yoo, New Century Escrow - Escrow Services In Southern California

New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Janet Carrera: Escrow & Bulk Sale Service - SF Bay Area

Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.

Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Elizabeth McGovern: Escrow Services - San Francisco Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

Joe Ranieri, Business Broker: Orange, LA County Areas

Having owned retail/restaurant businesses for over 20 years, my interest turned to selling businesses rather than owning them. I specialize in LA & Orange County restaurants, fast food independents and chains, bars, & liquor stores. Call 714-292-5448 Cell/Text.

Julieanna Wakileh, Business Broker: PreSchool Center Specialist

I have 30 years of experience, working, founding, owning, operating, consulting, and selling preschools. I'm very knowledgeable with procedures that are required for selling preschools. My practice, knowledge and education is ideal for the sale of preschool centers. 925-451-2884 Cell/Text.


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