When a Business Has 2 Sets of Books
"My spouse and I have been looking to buy a business for some time. We've found a good local business with a great location and lots of existing customers. The seller wants us to pay one and one-half times his gross sales last year, which our accountant says is a fair price. The seller has also agreed to let us pay him 40% of the purchase price over the next five years, which we think is also a good deal.
"The problem is that the seller told us he carries two sets of books -- 'one for the government, the other for real' -- and that he wants us to pay one and one-half times his gross sales as reported on his private set of books, which, naturally, shows much higher gross sales.
"Of course, we're nervous about doing business with this seller. Still, the business is an attractive one and we have no intention of playing any games once we take over. Everything will be on the up and up.
"Is there any way we can still do this deal and avoid being caught up in the seller's web if the government should ever go after him?"
Many small businesses -- too many, in my opinion -- play these sorts of games. My initial reaction is to say, "Well, if this seller is lying to the government and others, what are the odds he's being straight up with you about other things?"
Still, it may not always be practical to walk away, especially in a situation like this where the business may actually be doing quite well and has the potential for significant growth down the road.
When a client of mine is buying a business with less-than-reliable books, I have three rules:
-- Do lots of due diligence before you buy, and make sure the private set of books is for real.
-- Always base the purchase price on the seller's public set of books.
-- Make sure the government, the seller's creditors and others can't come after you for money the seller owes them (what lawyers call "transferee liability").