Cash Businesses - The Good and The Bad

By
Real Estate Agent with ReMax Preferred RIL#b16447 MAL#9501751

In all of the businesses I have listed over the years, it seems that there is one thing common among all "cash businesses" - there are "two sets of books". There are costs, benefits, and risks to having "two sets of books" and each owner/operator has to determine if it is worth the risk and potential cost. The risks are getting "caught" by the IRS; huge fines, penalties with interest, professional fees, aggravation and time. The benefits are cash free income and ...well that is really it. The costs, in addition to the aforementioned, become apparent when the Owner, now Seller, attempts to sell the business. Banks (at least when they used to lend money for business acquisitions) will not lend on undocumented income and a Buyer is very resistant to paying for undocumented income. So the Seller has invested time and effort to build a business and make it profitable but now faces the prospect of not being compensated for his efforts to create Value.

What to do? One common solution is for the Seller to "hold paper"for three to five years - financing the deal, in order to facilitate the transaction. This is a strong indicator of the Seller's confidence in the profitability of the business as well as permitting the Seller to realize some immediate cash. Typically at least 20% of the Sales Price. Another solution requires planning and changing behavior - not common, nor easy, for small business-owners. A few years before they want to sell, we try to convince the Seller to stop "cooking the books" and start reporting all income on their tax returns. This provides prospective Buyers, and Banks, with empirical data on which they can value the business. Additionally, it can yield a quicker return on the Seller's time, effort, and money which was invested in the business to create value.

What are your thoughts on Cash Businesses?

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Joseph Luca

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