Hiding the Money
Image via Wikipedia
Hiding the Money
I attended a meeting where a business broker spoke about a visit he had with the owner of a company. The owner had contacted him and asked to meet with him to discuss the possibility of selling his business. The owner provided the broker with a review of the financials and a tour of the factory.
While walking through the factory, the broker noticed that the warehouse was reasonably filled with inventory and the machinery was significant and up-to-date.
When they returned to the owner’s office the broker pointed out that there appeared to be a significant difference between the amount of inventory on the books vs. what was in the warehouse. The owner quickly agreed, stating that if he reported it, he would just have to pay taxes. In addition, his sales would be lower because he would not have as much inventory. Therefore, he would not make as much money.
The subject changed to the equipment, which was on the books for much less than it was obviously worth.The owner agreed and indicated that all parts for the equipment are charged to cost of goods. He then would have his employees assemble the parts for the new machinery.
The broker polled the group for their thoughts. The group, to a person, felt the business was not saleable and did not want to be associated with this type of a transaction. The owner had a serious income-tax evasion issue and the potential liability for the buyer could be significant.
The owner needed to go to a tax specialist NOW. He was probably going to need five years or more to clean up his books before he could put it up for sale.