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

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

1yr ago

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

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 an intermediary 1yr ago
from The University of Chicago in Chicago, IL, USA

All sellers play tricks with taxes. If no one did, then we would not need accountants and IRS. Even public companies with audited statements do that. If you believe in the numbers, then find a way to structure upside to seller creatively. If you do give FSN, make sure there is no interest on it.

reply by a searcher 1yr ago
from University of Toronto in Toronto, ON, Canada

I don't think it's as black and white as people are making it out to be. If we avoided any company with any hint of tax evasion, we wouldn't look at anything with addbacks for meals and entertainment, personal cell phone, personal vehicle, etc. But yes, definitely proceed with caution. I've personally found it too difficult to verify cash sales, so I personally don't count those sales in my valuation calculation.