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Wednesday, June 25, 2008

Daily Observation - Truth and Tax Returns

Continuing on with our theme from yesterday the truth, I wanted to share an incident that we heard about today. A referral client came in and presented the tax returns and profit and loss statement of business to the Broker that he was considering. The client relayed to the Broker that the returns did not adequately reflect the real income of the business.

It was also told that the purchase price was X but when the broker did her calculations based on the income from the return the selling price should have been more like X-Y, a significant difference. Because of the strength of the buyer the amount of his down payment and the collateral that he was willing to post the broker most likely would have been able to secure a lender for the loan amount that he needed, even though the business on paper did not cash flow.

So everything should have been all right even though the owner did not report all of his income. Right? Wrong!

Even though the broker was able to get over all the obstacles there is one that she would not be able to get over. SBA requires an independent valuation of the business for larger loans. Therefore a business valuation would be procured, and there is no way ever that the business valuation would yield any where near the selling price of the business.

So you must be aware of all the aspects of a loan, not just the 5C's +E, but also what the business is worth based on Official Records, not the word of the owner, or reconciled cash receipts. Bankers in addition will also apply Business Ratios to determine the real value of a business as well.

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