Are you planning on eventually selling your business? Take action now to start increasing its value.
“I’ll give you a discount if you pay me cash.”
Has someone ever told you that? Business owners offer a discount, not just because they’re getting cash, but because they are not reporting the cash as income in their businesses. Yeah, that avoids paying higher taxes, but that not only puts you at a costly risk if you get caught by the IRS, but you are lowering the value of your business. Without accurate tax returns that show your true income, you cannot sell your business for its true value based on your actual revenue. Your value is based only on what you’ve reported, and you’ll have to sell your business for less than what it’s worth. In addition, this can scare away potential buyers who may question your honesty if cash is not accounted for.
I have cash sales but need to use it to pay contractors.
You don’t report cash income because it’s used to pay contractors. Unreported cash sales used to pay contractors once again puts you at risk for a costly IRS penalty. IRS requires you to report all gross income and send 1099s to your contractors. In addition, you are not showing actual revenue in your books and your profit and loss is inaccurate. Because you’re not reporting it, your cash flow looks much lower than it actually is which, once again, lowers the value of your business and lowers the asking price. This also adds doubt and scares away any potential buyers because your cash is not accounted for.
What would a potential buyer want to see?
When thinking ahead to the sale of your business, think about what a buyer would want to see. If you were the buyer, does the business look appealing to you? Does it look like a great investment? Start keeping accurate records of your income and expenses, making sure your statement categories accurately reflect your business so a potential buyer can easily understand how you’re making money and where it’s going. Start increasing your value now, and if possible, go back and fix your mistakes.