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Disclosing Unreported Income When Selling A Business


When selling a business some owners think it is to their benefit to disclose to potential buyers that they are hiding additional income from the taxing authorities. However, experts disagree and say that disclosing this information may actual hurt your chances of selling your business.


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3/8/2017
Contributor: Timothy Cunha JD: Business Broker, SF Bay Area   Post ID: 1222

Although cash income is less common with the trend toward payment by credit and debit card, cash income can still be a significant factor. Needless to say, all cash income should, by law, be reported, even though often enough it is not.

Sellers should not be disclosing unreported income to buyers. Period. As a business broker, I will not make any representations to any prospective buyer about any unreported cash income.

A business valuation cannot be based on unreported cash income. Generally it is unverifiable. It would need to be discounted by the taxes that would be paid by an honest business owner. It may not be sustainable by a new owner who does report the income because often the customer paying cash doesn't want their possession of cash potentially known to tax authorities. And, in order to take over a business and continue to operate it with unreported cash income, the buyer is effectively saying, "On the day of closing I agree to become a felon."

And, lastly, but very importantly, when a business owner says, "Look I've lied, I've cheated, I've stolen from the government, because I don't report my cash income or pay my fair taxes on that income," why should anyone believe anything else he tells them? He's already established that he's dishonest.

1/24/2017

This is where planning for the sale is so important. If you have income that is not reported but wish to use this income towards bettering your valuation you need to be able to prove it. The practice of not reporting income is not recommended and will likely reduce the Buyers Pool for Marketing your business; at the desired price. However, if well documented and verifiable you may be OK.

Specializing in the laundry business, this is an area we deal with frequently. Although, this is somewhat expected by Buyers looking at laundries. Back to planning, it is advisable to have a 2 year plan to sell your business, if possible. The more time for preparation the better. During this period you should carefully track all income and all appropriate operating expenses. Keep all supporting documents available; especially if you intend on still not reporting. (preferably start reporting it). Sometimes, depending on communication limitations, it is good to have Buyer and Seller sit down and explain the clouded areas between themselves.


  Helpful Resources To Assist In Selling And Buying California Businesses
Joe Sandbank, Esq. - Legal Services

I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process.

Helen Yoo: Escrow & Bulk Sale Services - 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.

Elizabeth McGovern: Escrow Services - SF 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.

Janet Carrera - Escrow & Bulk Sale Services - 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.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services

Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.

Diane Boudreau-Tschetter: Escrow And Bulk Sale Services

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.


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