HVAC/Home services Searchers - questions about financials

Here is a checklist to consider: When evaluating HVAC/home services companies that handle significant cash transactions and potentially engage in off-the-books payments, there are several considerations for a potential acquirer: Cash Income Verification: Verifying the actual income can be challenging. Buyers often rely on indirect methods, such as comparing reported income to industry averages, assessing the volume of service calls or contracts, and evaluating the physical wear on service equipment to estimate actual usage and revenue. Valuation and Offer Adjustment: The amount of unreported cash income can lead to adjustments in the company's valuation. Buyers might use a lower multiplier or demand a higher discount to mitigate the risk associated with unreported income. This is because of the potential legal and tax liabilities, and the uncertainty about the business's true financial performance. Liabilities and Legal Risks: Dealing with off-the-books payments introduces significant legal and tax liabilities. A potential buyer needs to assess the risks of inheriting past tax liabilities and the costs of transitioning to a fully compliant payroll system. Due diligence should include legal consultations to understand potential exposures. Transition to Compliance: Buyers who have acquired companies with off-the-books practices commonly transition employees to formal payroll as part of bringing the business into full compliance with tax and labor laws. This process involves assessing the financial impact of higher payroll costs, potential back taxes, and penalties, and integrating these factors into the post-acquisition business plan. Negotiation Leverage: Knowledge of cash transactions and off-the-books payments can serve as leverage in negotiations, allowing the buyer to negotiate a lower purchase price due to the associated risks and potential liabilities. Ethical Considerations: Beyond financial and legal implications, buyers must consider the ethical aspects of acquiring a business engaged in such practices. Transitioning the business to a compliant model aligns with ethical standards and reduces future legal risks.

I’d expect it to lead to large payroll adjustments on your pro forma. I haven’t seen as much of this in the licensed home services segments but have run into it on others. My general rule is that you need to assume 20-30% increases in payroll to take someone off of cash. If you don’t you’re running with some big risk….namely workers comp