Business with mostly cash income

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June 26, 2020

by a searcher from Columbia University - Columbia Business School in Princeton, NJ, USA

I have narrowed down my self funded search to a few potential acquisition targets. This one landscaping and lawncare company does ~$1M gross sales, but tax return shows $300K. How can I do due diligence to confirm the cash component of the business and any recommendations on due diligence. Many thanks.

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Reply by an intermediary
from University of Pennsylvania in Durham, NC, USA
As others have indicated, it's probably best to walk away from this one. But if you want to dig deeper, the IRS has an Audit Techniques Guide for Cash Intensive Businesses that might be helpful. See https://www.irs.gov/businesses/small-businesses-self-employed/cash-intensive-businesses-audit-techniques-guide-table-of-contents
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Reply by a searcher
from Babson College in Raleigh, NC, USA
If you plan on getting any bank financing, this is a non-starter. It is not completely abnormal to have a small degree of discrepancies between the financials and tax returns on smaller deals, but you're talking about a 3x+ difference, which is impossible to reconcile.
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