Suggestions for verifying income in a business with all cash transactions?

May 30, 2024

by a searcher from Florida State University in Leesburg, FL, USA

How can I go about verifying income in a business that takes all cash transactions? I have the owners tax return but the business has a slight net loss, however, I'm told by the owner that "it makes money". The owner has lived out of state for years and is operating another business in a different industry but worked in this industry for over 40 years and is known for this kind of work. Based on conversations with the owner, agent, current employee (basically running the business), I think it likely still nets something reasonable ($200-300k/yr?). I believe that most cash transactions are not declared on paper, thus, the net loss on his tax return. The owner is providing no P and L. Any suggestions?

Reply by an investor
from Illinois Institute of Technology in Pasadena, CA, USA

I looked at a similar cash generating situation in years past (cash vending machine business). The FS always showed lossed on the business, but the map above the owner's desk had pins of the 45 countries he visited over the prior 10 years. You should ask for the owner's FS statements, bank accounts and don't rely on company statements. Get a forensic accountant to consolidate his personal financial records/bank statements with the company. A good QE will discover the truth to the financial performance of the business.

Reply by a searcher
from University of Illinois at Chicago in Madison, WI, USA

I’ve seen deals where all or some of cash receipts are not recorded or under reported. As others have stated, I’d start with the tax returns and honestly with no PnL, that’s your only option. Additionally, you’ll have to explain to the sellers that you’re basing your offer/valuation on verifiable earnings. 200-300k is a big range, especially when you have debt to service.

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