Under-reporting Income KILLS Your Business Valuation! Avoid This Mistake #shorts

[00:00:00]return. So, like >> Yeah, and >> Like, you got to be strategic.

[00:00:03]>> And think about the math on this. I don't think a lot of sellers really think through logically the damage it does when they underreport or they hide a bunch of personal expenses. Let's say someone for whatever underreported or put a bunch of personal expenses to the tune of $100,000 on their tax returns.

[00:00:20]And let's say they're at a 28% tax bracket. They saved 28 grand on taxes.

[00:00:25]And that's what they look at. But, what they don't look at is the flip side that if that business was sold for a three and a half multiple, that $28,000 they saved on taxes cost them $350,000 in the valuation.

[00:00:38]And they just don't know how valuations work. They don't think through. They don't They're so focused on minimizing taxes.

[00:00:46]They don't realize they're killing their valuation down the road.

[00:00:49]>> So, if that same person 3 years uh prior would have came to you and said, "Okay, well, you know, you could sell this business maybe and get 800,000 for this business today. But, if they would have 3 years ago started backing out those personal expenses, now they had 2 years of real actuals and they would have bite bite the bullet and paid tax those 2 years or whatever.

[00:01:11]Um they would have probably got a a much higher >> Not necessarily, and I'll tell you the number one biggest factor isn't because the business was bad or is declining.

[00:01:21]It's because for lack of a better word, the seller was dishonest on their tax returns. The tax returns don't indicate what is really happening. I mean, I can't tell you You see this all the time. I can't tell you how many sellers have I show up and sometimes I meet them at their house and they have a decent house. And there's a boat on the side yard. And there's a Tesla in the front yard. And I look at their tax returns and they're like, even with the adjustments and the add-backs, I'm like, "What What's happening here? Something doesn't add up."

[00:01:51]And because they haven't reported all the all the income or they're stuffing so many personal expenses uh through the the business in a way that we can't adjust or add back and they just killed themselves on the ability to then go and get SBA financing. It's not to say the business is not sellable, but it's not going to get the market value that it should if they were able to get SBA financing. So, we have to look at seller financing, the right deal structure. Sometimes we have to look at earn-outs uh and go outside of the SBA.