I'm considering purchasing a company where about 15% of its revenue has not been reported and is absent from the Seller's Discretionary Earnings (SDE). This unreported revenue is said to flow directly to the bottom line, making the valuation quite appealing when factored in.
However, I have a couple of concerns: - how can I verify this unreported revenue amount, given it's not reported on the income or cash flow statements? Could acquiring a business with a history of underreporting create any legal or financial liabilities for me? Does an asset purchase vs. a stock purchase shield me from liability?
I would really appreciate insights from anyone who has experience with similar situations. Thank you in advance for your help!
2. ^Searchfunder member answer is thorough.
3. There are some ways of verifying cash. But it is situation specific.
4. It is easy to say do not pay for cash. And you should not. Pay based on Tax Return. But the reality is value has a wide range. So may be your offer based on TR hedges towards the upper range.