Pulling unreported cash receipts out of a business is indefensible and unwise under any circumstances, but particularly if the owner expects to exit in the next 3-5 years.
All of us during our childhood were offered the parental edict: “Don’t do it, you are only hurting yourself.” So “why”, you may ask . . . now that you are a grown adult, “should I not skim?”
Many reasons immediately come to mind and I am certain that we could all come up with many more, but in the interests of brevity, I’ll keep it to six reasons.
- Skimming is against the law. Tax evasion is a felony.
- Management of your business becomes more challenging. Skimming requires you to underreport revenues which means your cost of sales percentage rises. Cost containment and inventory control are more difficult to assess.
- Loss of Employee, Partner and Spousal Trust. You set a bad example and create a fertile ground for others to steal. Worse yet, a disgruntled employee or retaliatory ex-spouse or partner could report you.
- Bank Loans are difficult to secure, for you and potential buyers.
- The value of your business declines.
- The marketabilty of your Business is severely compromised. You cannot expect potential buyers to trust you, let alone make a “leap of faith” and pay a premium for your business on the merits of unreported, unverifiable income.
Hopefully this doesn’t apply to you. But, if it does, what’s the solution? I refer you back to your childhood: Don’t Do It.
- Stop Skimming
- Clean up your books.
- Effectively manage your business, using reliable financial records.
- Redeem your credibility with your staff, your partners and your bank.
- Add value to your business as an ongoing entity or as a potential sale. The amount you no longer skim can easily be worth 2 – 5 times its selling value, or more, depending on the degree of skimming and the size and nature of your business.
In summary, each of us at some point makes a life defining decision … “Do I want to eat better or sleep better?” You make the call. As it relates to preparing a business to sell, you can do both.
Don Ross is a seasoned business broker with Exit Strategies Group. He can be reached at 707-778-0210 or firstname.lastname@example.org.