Spring! It's baseball season, allergy season, thunderstorm season (for those of us based here in the Midwest), aaaand it's tax season.
Taxes. They're a source of common ground among all industries. We all have to pay them, nobody likes paying them and so we're all looking for ways to reduce the amount we pay.
The government has deemed that there are many ways in which people can make better use of their own money than the government can. Their research shows that when people save money for retirement or school or donate it to charities and the like, then the government does not have to spend as much money on social services later. This is why we have tax deductions.
But our discussion today isn't about those little gems that will help us save more and pay less. That's your accountant's area of expertise. Our area of expertise is helping you get the most value out of your business when you sell it.
This discussion is about what happens when business owners have been working their books to drive down taxable income (not YOU, of course - it's this other guy that you know...) and then wonder why they don't get top dollar when they sell their business. They've saved a little money in the short-term, but it's going to come back to bite them when they're ready to sell.
Let's say a business owner runs a business where many of his customers pay in cash yet he's not reporting all that he receives. He's getting the benefit of using all that cash now, but when it comes time to sell the business later he's shocked to find that his value is far less than what he thought. When we value a business, we employ a process by which we recast the financial statements. Receipts that are not reflected on the tax return cannot be added back into the financials. In fact, when we apply a 2x or 3x (or whatever is appropriate) multiple to the earnings, it makes it MUCH worse because while the business owner put a dollar in his pocket last year, he's giving up multiple dollars this year when it's time to sell. "It seemed like such a good idea at the time...."
The moral of the story is this: While it might be painful to write that check each year to the tax man, you'll likely make much more than that on the flip side when we sell your business. If your business earned it, you need to show it or we can't prove that your business earned it at all. If you have questions about your taxes, contact your accountant. If you want to talk about valuing or selling your business, contact your friendly neighborhood business broker.