Will creative accounting cost you in the end? Considering selling your HVAC business, and you have been CREATIVE with your accounting? You may be in for an uphill battle.
If looking for your income and expenses on your tax return or P&L’s is like playing a game of “Where’s Waldo”, you may be in for a shock when it is time to sell.
I know I have talked about this in the past, but it is absolutely worth repeating because it is one of the biggest problems I see what working with buyers and sellers. In an effort to minimize taxes the seller has some expenses, that if a new buyer owned the company they would not have, and I understand tax reduction strategies. However, if you are flagrantly doing things to hide income, or inflate expenses, that in reality is stealing, and you cannot expect a buyer to pay you for that.
Put yourself in the buyer’s shoes, if you met with me and said, “Patrick, I want to buy a solid heating and air company in South Georgia, and I need it to be at least generating $200,000 in profit,” and I said, ” I have this great one for you in Valdosta, on the tax returns it says they are only making $15,000, but don’t worry he really is making $250,000.” How much would you pay for that business??? Certainly not full price right? Then why on earth would you expect someone to pay you money, on the money you have been hiding from the government?
Another Problem: A business that size is normally going to require some financing, often SBA financing. How do you think that will work when the buyer walks into the bank and says I would like to buy this business for $500,000 that is showing a profit of $15,000??? And let’s not forget the SBA is a government agency. So now you are asking the government to guarantee a loan, so you can sell your business and retire, based on income that cannot be proven, and income you have never paid taxes on. That could be a fun afternoon.
Once again, I completely understand tax reduction strategies, but if you are doing everything you can to reduce your tax liability, do not be shocked when a buyer offers you lower than market value for your business and then expects you to finance a portion of it because they can not get a loan anywhere else.
In my opinion, you should be paying as much as you can in taxes, you will be rewarded for it when it is time to sell. The more PROVABLE money you make, the more you can expect when it comes time to sell.