| Buying a business can be full of potential traps. By | | | | the tapes have been kept. |
| doing your research beforehand you will put | | | | There is a way in which you can get an indication |
| yourself in a much stronger position. | | | | of whether it is true or not but it is beyond the |
| Sure you can go back and try and get some | | | | scope of this article to explain it in detail here. It |
| redress for any deliberate misrepresentation, but | | | | requires the calculation of the Gross Profit to |
| do you really want to go down that route? | | | | Sales % and its comparison with the industry |
| Here are a selection of potential traps to watch | | | | average. |
| out for and be prepared to handle. | | | | But I don't think you should try to prove it! It |
| Trap: Boosting Sales by Feeding the Till: | | | | should be up to the seller! You should say |
| One of the immutable laws of business is that | | | | something like "Look, you've given me these |
| nobody overstates their income in a tax return. | | | | audited figures and now you are saying they are |
| I must admit I do rely on it being true, even | | | | wrong? Unless you can prove that to me I am |
| though I know of one occasion where a devious | | | | going to stick to what you first told me". |
| seller fed the till from his own pockets to boost | | | | Trap: Boosting Sales by Selling to Friends: |
| his sales. | | | | A clever client of mine told me that when he said |
| That alone is not unique, but he followed through | | | | this to the owner of a small (all cash) corner |
| by showing the boosted sales in his tax return. He | | | | store the owner said, "Spend a week behind the |
| figured that the extra tax he paid would be more | | | | counter and run the shop yourself before you |
| than covered by the higher price he got when he | | | | sign up for it. You'll see". |
| sold the business. | | | | My client did so and, yes, business was brisk. The |
| Its unusual for a vendor to be foolish enough to | | | | friendly locals seem to come in just about every |
| show one sales or takings figure on the tax | | | | day to buy something. Unbeknown to everybody |
| return and another, higher figure on the figures | | | | however my client quietly marked each item with |
| presented to you. The explanation of course being | | | | a felt pen before he handed it over. Next morning |
| that the difference is undeclared cash they have | | | | they had mysteriously reappeared on the shelves. |
| pocketed. | | | | The owner had his cronies spend up big, then met |
| Anybody who does this runs the risk that you | | | | them around the corner where he bought |
| are from the IRS or whatever your tax office is | | | | everything back again and put them back on the |
| called. | | | | shelves late at night. |
| What is more likely is that as soon as they think | | | | Trap: Not Knowing the Sales Figures are Based on |
| they can trust you they pull you aside and | | | | Bankings: |
| whisper that they always take $100 a day out of | | | | Note that in small retail businesses like this it is |
| the till and use it to "feed the family". | | | | very common for accountants to get the sales |
| This is exactly what happened when I revisited | | | | figures from the bankings, not the till tapes. This |
| the GRB Shop. He said, "All retailers do it and you | | | | leaves it wide open for the owner to put |
| will too. It's one of the few perks you get for | | | | whatever they like as the sales figures, and this is |
| working the crazy hours" and showed me a | | | | generally accepted by the accountants. So much |
| bundle of cash. | | | | for the audited figures! |
| $100 a day in a 6 to 7 day retail business is about | | | | The message of this article is that if you |
| $30,000 a year you can add to the bottom line, | | | | encounter situations like these where you have |
| and it certainly explained the high price they were | | | | some doubts about the figures but you want to |
| asking. That is, if it's true! | | | | proceed with the deal, there is one effective thing |
| So, can you prove it one way or the other? The | | | | you can do. Hold back a % (say 25%) of the |
| answer is, you can never be sure. You could try | | | | purchase price for (say) three months so you can |
| matching the till tapes to the bankings. This is | | | | be satisfied the figures are correct. |
| very laborious however and assumes that all sales | | | | If the owner agrees, there is a good chance |
| go through the till - and that there is a till and that | | | | everything is above board. |