I admit I’m a liar – that’s why you should trust me!
That’s what the business owner said.
I was evaluating a business for sale as a potential buyer. The owner’s tax returns showed he made a small profit, but soon after I met him he made it clear that the tax returns “weren’t the real numbers”.
First there was vague insinuation, “well, that’s not necessarily everything”; then the clear statement “we do bring in more than that”. And finally, he told me that his business was way more profitable than his tax returns showed, and he had a second set of books to prove it.
Why would someone admit tax fraud to a stranger?
Because He Wanted My Money of Course
His asking price for the business was about 50% more than was justified by the financial results documented in his tax returns. I thought the business was overpriced and I told him so. He responded “overpriced against the tax returns, sure. But not overpriced by the actual results”. When I expressed my deep concern about the information he was sharing . . .?
I already admitted the tax returns were false. That’s how you can know these are the real numbers.
I didn’t make an offer on the business. If he was willing to lie to the IRS, with potential consequences well beyond anything I could create, what would keep him from lying to me?
And taxes aside, once I knew he was a liar (he admitted it after all) how could I trust any of the answers he gave me about employees, equipment, or anything else? Even if I believed him about the “real” results (which I did) how much of my own money was I willing to risk on my ability to tell truth from fiction?
Keep Clean Records
Your business’ results are documented by your official tax returns. That’s it. Those are your results. Even if you have “another set of books” that say otherwise. Your tax returns are what your buyer will take to their bank. It’s how your buyer will determine what they are buying. It’s how they will determine value.
Legal and personal integrity risks aside (and those risks are substantial), if you chose to fudge your tax results you are severely damaging the value in your business.
You can’t have your tax break and your value too. “I’m a liar – that’s why you should trust me” doesn’t work.