As a business owner, have you ever wondered whether or not you were doing the right thing by not reporting all of the revenue that your business is making? Not just from a legal or tax stand point but how it might actually effect the overall value of your business? Well, business brokers do think about it. In fact, as brokers we know that buyers will only pay for what can be proven. What does that mean to you as a business owner? It means that if you think you might sell your business in the future, the sale price will be a lot lower than you anticipated because of the reduced amount of documented revenue and profits from your business.

The question is how much lower will the sale price be as a result?

Here’s why this can be a problem

Jack is the owner of the “Good Books” company that is earning a little over $750,000 in annual revenue resulting in a cash flow slightly over $120,000. Remember, cash flow is the owner’s salary plus EBITDA or Earnings Before Interest, Taxes, Depreciation and Amortization.

John is the owner of the “Bad Books” company – the twin to “Good Books” – and is earning the exact same revenues and has the same expenses.

Both businesses have been performing about the same for the last four years that Jack and John have owned them.

Let’s assume that John has gotten bold over the years gradually taking $200 every week from the cash register in his first year; $400 a week the second year; $600 a week the third year; and $1,000 a week the fourth year.

So what exactly did John do and how did it affect his bottom line?

1. While taking some of “his” money out of the cash register, he also took the sales taxes that he had collected from his customers on behalf of the state;

2. He also has held back the percentage of gross sales that his insurance company charges for worker’s compensation coverage.

These two items would have been deductable; therefore, John’s taxable profits were reduced by something less than the amount that he took from the Cash Register. Let’s also assume that John pays 40% combined state and federal taxes on these profits.

John’s Doing

If you combine the capital that John took out of the sales tax account, the money he would have paid the insurance company and the taxes he “saved”; his “take” was $50,430. At first look, John is ahead of Jack by a little over $50,000 for the four years despite both having identical businesses primarily due to the taxes that he has been able to avoid so far.


What does John Lose When He Sells His Business?


When Jack sells his business, he receives a sale price at the midpoint of the recommended price range that is based on generally accepted business valuation methods. On the other hand, John receives a sale price that is about $67,000 less than Jack’s. The sale price is also at the midpoint of the price range for his business but because of the reduced cash flow, the business is valued less.


While John was able to “pocket” about $50,000 over a four-year period with risk, it resulted in a net loss of over $16,000 when he finally sold his business. This is not counting the potential future risk of an IRS audit that can come even after the business has been sold.


My simple point – it is better to report and pay taxes than to dip into the Cash Register no matter if you can get away with it because you will lose in the end when it comes time to sell your business. Keeping good books will keep you in the black and away from IRS scrutiny, no matter how tempting it is to take a little cash off the top. If you are planning to sale your business in the next few years….Report the correct numbers (you may pay a little more in taxes) and benefit at the closing table by the buyer. Yes, you are literally being reimbursed from the buyer for your “extra” taxes, PLUS put more $$$ in your pocket!