HVAC/Home services Searchers - questions about financials

March 19, 2024

by a professional in London, UK

Has anyone else who's searching in HVAC/home services come across business owners that take large amounts of cash payments for services? Does that affect your decision to acquire them?

How do you weigh the amount of cash income in the valuation and offer on the company?

Its not unusual that many home service businesses take cash and the books don't reflect that and some of the information that these owners are saying about taxes, cash and paying people off the books is a liability. Has anyone acquired a service company that was paying people off the books and then acquired it and put people on payroll?

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Reply by a searcher
from Texas Tech University in Houston, TX, USA

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.

Reply by a lender
in United States

From what I gather, this query touches on the challenges of acquiring businesses in the HVAC and home services industry that heavily depend on cash transactions, including revenue collection and employee compensation.

It's worth noting that any business engaging in such practices—failing to report cash payments or compensating employees off the books—will likely face difficulties
securing financing for an acquisition, particularly when seeking SBA-backed bank loans.

The scenario described is a definite no-go for me. Even if it were offered with 100%
seller financing—a deal structure today that's often pitched to buyers—I would not
consider it. I would concentrate on seeking opportunities with businesses that have demonstrated profitability through their IRS-filed tax returns. Thank you for the tag ^redacted‌

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