Trust but verify…. always, but definately when buying a business.

I hear it all the time. People who have purchased businesses, invested a huge amount of their own money and then borrowed more to close the deal, only to then find out that the seller either ‘cooked the books’ or simply lied about revenue, sales, etc. and the buyer believed it. The buyer typically finds out way to late, after the deal closed and is sitting in the drivers seat, wondering were the revenue  went.

It never was there, is the usual answer, you were duped.

Rule one: Trust everyone but verify the facts. Hard verification, real verification, test the customer base, check the bank statements , see what was actually deposited monthly, one can’t lie about that one, its easy to check. Call the top ten clients and make certain all is well with them and the relationship, verify their purchases and willingness to continue. Any opposition from the seller regarding this communication is a clear sign tha all is not right. Insist or pass.

Do whatever you can to absolutely determine exactly what sales revenue is. This is the most common area of error a buyer makes, believing the bloated sales projections of the seller without personally  verifying the facts.

The second issues is when he seller cooks the books, making them appear to be better then they are. Its easy to do, but once again verifying monthly bank statements and talking to the top ten clients will prevent such scams from succeeding. Do it, do not be foolish its your cash and there is no possible reason to rely on the sellers information without verifying.

The cash business. ‘I do not deposit the cash,’ they say, ‘it’s here but I keep it so as to not pay taxes on it, everyone does it, but I CAN PROVE IT…..’ and on the story goes..

Here is the bottom line. First if they lie to the government they will clearly lie to you. So if the tax returns are not reliable and the bank statements likewise are also not reliable then either run the other way, or explain that you can only evaluate the business based on actual deposits and tax return statements, and actually filed and signed forms. If the owner is shorting them both then he either has to understand he is hurting the valuation of the business by doing this and cannot expect you to pay for phantom invisible income or you will simply not purchase.

Only evaluate the business on verifiable information, tax returns and bank statements are the primary indicators of real revenue. If he cheated the government then he pays the price when he sells as the value is what is reported not what he steals.

Furthermore there are secondary ways of determining real revenues. Look at the production records and the inventory movement, employee productivity, sales commissions, etc, all are direct indicators of what was made and shipped and what was paid for…all a direct determining factor of revenue.

If you do your diligence you will not be fooled.

There is absolutely no reason for anyone to get beaten by someone who has cooked their books or lied about revenue, it is far too easy to check it out and determine what the real truth may be. Failure to do this is iresponsible and you have no one to complain to, as you caused your own demise.

This issue occurs way to often and it is way to easy to prevent. Do not fall into this trap.

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