Buying a business is a huge financial investment for anyone especially when one works hard to scrape together his or her hard earned savings to buy a business. So making an intelligent purchase is key to making sure you don't make a bad investment.
And it's always all about the money. The money the business makes today. The money the business can make tomorrow. So making sure the money is real, is one of the most important items one needs to confirm during the due diligence process.
This bad economy has brought out the worse in business owners. Many skim the cash, don't pay the state the sales taxes they collected from the customers, they don't pay the payroll taxes to the state and federal agencies, and as a result, they fail to pay their share of the taxes. It's a vicious cycle business owner catch themselves into, particularly in the restaurant business where a lot of cash changes hands, and because the restaurant owners set a certain standard of living for themselves and when the economy weakens, that standard doesn't change and they look to other sources to finance their lifestyle, namely, the state and federal governments become banks with free money.
But that doesn't mean that all restaurant owners do this. There are many running their business like a business. They keep good books and records. They pay their employees fair wages and pay their taxes. Those owners get rewarded when they sell their business, while the others, well; they made their profit already.
But the most important point is, if the restaurant owner will lie to the IRS, do you really think they have an issue lying to you?
So as a buyer, how do you make sure that the financial information you're getting is what the seller reported to the government? How do you know that the profit is real, or at least as real as in the eyes of the government? Unless you know this little secret I'm going to tell you, you wouldn't have a clue how to verify the information.
There are people who will doctor the tax returns they show you. I've seen it firsthand. So here is what you do. Ask the seller to sign an IRS form 4506-T. This form will give you authorization to get one number from the IRS, the income number on the tax return for a number of years as stated on the form. You mail the form to the IRS and within weeks you'll have your answer.
If the Seller refuses to sign it, then you have your answer anyway. Walk away!
Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry. Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer. Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world. There he participated in more than $11.5 billion of merger and acquisition transactions. He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University. Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions.