“If You Hide the Money Too Well, Nobody Will Be Able to Find It.”
When I began my business brokerage career in 1995, it was common to find that business owners were not reporting all of their business revenues. In addition, they were also incurring numerous personal expenses (cars, house payments, country club memberships, personal food, etc.) through their business. This, of course, was done to lessen the federal and state taxes paid each year. Over the years, there has been a decline in this type of activity. This has happened for several reasons.
- First, increases in technology and digital banking have made it much easier for the IRS to detect, track, and find unreported business income and non-business-related expenses.
- Tax avoidance may be legal; tax evasion is a criminal offense. Fewer accounting professionals will continue working with business owners who underreport revenue and inflate expenses.
- In most states, funding for childcare tuition—whether public or private—is often publicly available. The amount of revenue paid to each childcare center is also published annually and monthly.
- A growing number of childcare business buyers, business brokers, bankers, lenders, and financial consultants opt not to consider working with businesses with questionable financial statements and tax returns. Why? When a business owner represents inaccurate financial information (tax returns) as accurate, it is considered fraud. When third parties (other professionals) represent the financial information as true (if they know it is not), it perpetuates fraud – no one wants to suffer the consequences of being a part of the fraud. So, folks are unwilling to discuss cash not deposited in the business bank account, inaccurate enrollment/billing for child care to public funding agencies, tallying up a long list of personal/family expenses run through the child care business, or similar non-business-related expenses. Business Brokers do not want to try to explain the financial inaccuracy to buyers. Most buyers will have advisors helping them with acquiring a childcare business. Professional advisors are quick to advise buyers to pass on buying a business with questionable financial records – they do not want to incur any liability either. Accountants and CPAs prefer not to engage in conversations with buyers, their CPAs, attorneys, lenders, or others about their clients’ unreported income and inflated expenses. Also, lenders and investors are less likely to provide funding for acquiring a business with questionable financial records.
It is not as common as it used to be; however, I still see some childcare business owners with unreported income and inflated business expenses. So, what is the impact on the value of the childcare business? The short answer is that it decreases the value of the childcare business, and often the value of the real estate (including the building and land). Not reporting all of the revenue that comes into your childcare business and inflating (paying personal expenses) expenses decreases the business’s net operating income (profitability). Lower business profitability equals lower business value.
So, one of the quickest ways to increase the value of your childcare business is to “stop hiding the money.” Report all your income, including any tuition payments and registration fees that are paid in cash. Analyze line by line all the expenses paid by your childcare business. Stop paying for personal expenses through your business – including food for home, personal travel (non-business related), non-working family members on the payroll, personal vehicles, club and social memberships, household expenses and repairs, yoga classes 😊, and more. If the expenses are personal and non-business-related, stop paying for them through your childcare business. Accurately report your childcare finances, stop spending time trying to “hide the money,” and use that time to work on making your childcare business more financially healthy, profitable, and valuable.
