That's a helluva lotta cash to add-back!?

December 30, 2023

by a searcher from Concordia University in New York, USA

Spoke with the broker representing a popular local food producer/purveyor. The owner is also selling the RE, which I'm not interested in purchasing at this point. SDE is ~500k, ~300k of which is cash (undeclared revenue).

I asked if the cash revenue can be substantiated and the broker said it has been recorded. Assuming it's legit:
- How do I value the cash portion of SDE? I already mentioned applying a discount to the cash to reflect that I'd be declaring it.
- How difficult will this make debt financing? I'm wondering if / to what extent a seller's note can help.
- How can I think about lease-to-own in this context? Can a rental agreement be incorporated into the seller's note somehow?

Has anyone seen or dealt with this sort of thing before?

Thanks in advance.

Reply by a professional
from University of New Haven in Cromwell, CT, USA

Is the broker indicating that cash sales are being reported on the financial statements? Have you benchmarked the financial resluts against industry standards - specifically gross margin - this can be a "tell" as to how the income is being reported or not. The comment "discount" the cash seems to indicate you do not beleive it is being reported? Is the current owner paying a rent to himself? This is important as you will have to consider rent in your determinaton of value

Reply by a searcher
from Virginia Polytechnic Institute and State University (Virginia Tech) in Blacksburg, VA, USA

This deal probably isn't bankable if you don't seriously discount the unreported cash, so the seller would probably have to carry a lot of paper. Either way, use a heavy seller note with an offset provision if the cash doesn't materialize. If the seller isn't willing to do this, walk away.

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