How to deal with cash revenue businesses where the owner doesn't declare everything

May 04, 2025

by a searcher from Columbia University - Columbia Business School in Jacksonville, FL, USA

I am looking at a business where about 15-20% of the revenue is "off-the books." It is a Medical spa. Assuming the Point of Sale and appointment software match, should I just ask the Seller to hold a forgivable note on that portion of the Enterprise Value that is junior to the bank debt?

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Reply by a searcher
from Emory University in Tucson, AZ, USA

Hard no. The seller's decision to keep income off the books and dodge taxes means they've forfeited the opportunity to capture that value. There's a distinction between legitimate tax strategies and tax evasion. If the seller has engaged in tax evasion, it would raise concerns about what other issues might arise (likely in tips and payroll for a medspa environment), their trustworthiness, etc.

Reply by a professional
from Bentley College in Miami, FL, USA

This is a common — but tricky — situation when evaluating cash-heavy businesses. You’re right to be cautious. When a portion of revenue is undeclared, it presents both valuation and financing challenges, especially with lenders who will typically only underwrite based on verifiable financials. Asking the seller to hold a junior, potentially forgivable note tied to the unreported portion can be a creative way to bridge the gap — essentially having them "put their money where their mouth is" if they claim the cash flow exists. However, you'll want to: - Validate the claim through other means — POS records, appointment books, staff interviews, or customer volume patterns. - Structure the note carefully — contingent on future performance, ideally converting to forgiveness only if the claimed cash flow materializes post-close. Be mindful of the new SBA rules around seller notes. It's a nuanced due diligence challenge. If helpful, DueDilio can connect you with specialists who have tackled similar situations in cash-reliant industries.

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