25 Jun Report shows that less that 20% of advertised businesses for sale claim financials taken from their tax returns!
Buying Can Be the Best Way to Own a Business but Take a Close Look at the Tax Records. Unlike starting your own business from start-up or buying a franchise, buying an existing business usually gives the business buyer/ investor many distinct advantages such as an existing customer database, equipment in place, proven systems and processes, and an existing flow of cash to the owner. Over the years we have spoken to many business start-ups and franchisees who, even after several years, are still not making money, and often losing money. But buying an existing business does not guarantee success or profits either. A business buyer considering an acquisition must make sure the business is performing as well as the Seller is claiming.
Two recent studies showed that, of the thousands of businesses for sale, less than 20% backed their numbers up with tax returns. Many people see businesses for sale on any number of websites, like BusinessForSale, BizBuySell, BizQuest, BuyBizUSA, Craigslist and more. One recent study of business for sale included over 3,000 businesses for sale. The majority claimed to be making a profit, showing earnings ranging from under $50,000 to over $4,000,000. Then they study looked at where owners got the numbers they advertised, including gross sales and total owner benefit. Some made projections based on how they thought the current year would do (Annualized and Pro Forma). Sometimes the figures are numbers that the owners just ‘think’ might be reasonable (“Owner Estimate). Others said the numbers were something they could “prove” but that a serious buyer would have to figure out (Owner to Prove). A recent showed that only of 16.45% the businesses had numbers that came directly from tax returns.
Tax returns indicate what a business owner reports to the government. Most people do not report higher than the actual revenue numbers to the IRS, but there are some who report less in order to minimize taxes. When a business owner decides to sell their business, they want the best possible price for their business. Business owners try to demonstrate the value of their businesses in order to secure a buyer offering the best price.
While reviewing a business’s taxes are just one of many important steps in the essential process of Due Diligence, business buyers should always take a close look at tax returns – and not just the set that the seller provides. Over the last year we have see at least two cases where the sellers provided signed tax returns that did not match the ones they submitted to the IRS. In both cases, the ones that were NOT submitted to the IRS represented a more favorable benefit to the owner than the one’s submitted to the IRS. It is hard to say which set of tax returns was a more accurate representation of the business performance. We recommend that you always look at the set submitted to the IRS. To get a copy of the tax returns submitted by a business owner, send the IRS a complete form 4506T signed by the business owner. It can take a few weeks but the IRS is very good about replying quickly.
Always spend time on Due Diligence. There are a lot of great businesses for sale and buying a business can be the perfect way to enter the wonderful world of business ownership. Do your research and have a good support team to review the data. Include a seasoned broker, an attorney and an accountant as part acquisition team.