what owners need to know about stealing cash from their business vr business brokers of the triangle

What Owners Need To Know About Stealing Cash From Their Business

Small business owners struggle with cash, literally.  It’s not just cash flow, it’s green paper cash. While diminishing (most of my clients do about 90% in credit cards these days), the cash that does come through can pose a challenge for owners who stand at the counter and have to decide whether to put it in the register or put it in their pocket.  While the government is clear about what to do with the money, when no one is looking it can be a challenge; pay the tax or keep the cash. I see the pocket option in about half of the small businesses I work with.

When making the decision of what to do with the cash, here are some considerations when it comes to options for exit:

It Makes A Business Unfinanceable

Good brokers can assist owners with offering terms to buyers when taking a business to market.  Outside of “all cash” and seller financing, SBA loans are the go-to method for financing a small business.  One time, when analyzing the tax returns of a business for an SBA loan, the loan broker noted that the profitability just wasn’t there.  Upon further probing and discussion of where the money went, the topic of unreported cash came up and the lender stated simply, “Oh, they are stealing the cash.”  

The fact of the matter is that SBA guidelines are straightforward; if a business can’t show that a future owner could earn enough profit from the business to satisfy the debt service of the loan and make a decent living, the loan can’t be written.  

The owner may have a multi-decade long history of running the business with these earnings, but lenders can’t write notes for businesses that don’t show earnings in very specific categories; most specifically earnings before interest, depreciation, and amortization (EBITDA).

Not showing the cash reduces the ability of an owner to get paid full consideration at closing and forces an owner to consider alternative methods of being paid; more specifically seller financing, which most owners dislike.  If the bank won’t finance, the owner is the only one who can offer financing…

Paying Employees With Cash Is Double Jeopardy

Often times owners who don’t report cash end up paying employees with it to save on payroll.  Seems like a logical move, right? Unfortunately, paying employees with cash that wasn’t reported is double jeopardy.  Without getting into legal specifics, owners should know that this practice is extremely bad. The government considers payroll and employee taxes to be held “in trust,” meaning it’s the government’s money and the owner is just holding it for them temporarily.  

Proper bookkeeping includes categorizing these funds as current liabilities for this reason.   


If and when they are not reported and paid, and local state or federal authorities find out, there can be serious repercussions.  I have seen cases where government officials showed up to a small business and shut them down for failure to pay sales tax, and the failure to pay employee taxes can result in huge fines, or worse…

Owners Lose In Enterprise Value What They Save In Taxes

When an owner goes to sell a business, a savvy business broker, as well as a savvy business buyer, will only look at what’s reported.  Even if an owner can prove that they are collecting cash, which is hard to do, an owner will be suspect that perhaps they are not disclosing all expenses.  

Negotiating on undocumented facts is a weakness, and it raises credibility issues.

Owners who calculate how much they are saving in taxes should also consider how much they are losing in the value of their business as small businesses are valued on a multiple of proven earnings.  This can mean that for every dollar an owner pockets today, he or she is taking multiple dollars from his or her future sale price.

One important note here is the “look back” period.  Typically buyers look back 3-5 years when considering the earnings of a business.  This means that owners who are considering the sale of their business in several years could change their business from a “lifestyle” business to a business that shows more profit as they are positioning to sell.  What taxes they pay when showing that profit they will reap when a buyer pays the price they are asking based on the documented earnings.

Furthermore, money invested with a good CPA can go a long way to mitigating tax exposure while still reporting all of the cash.

It Throws Off The Numbers

Businesses have “benchmarks” for financial performance, and since the cost percentages of successful business are well documented, keeping the cash or reinvesting the cash into vendors skews the numbers.  Buyers will see that something is off.

Final Thoughts…

Owners often assume that future owners will run their business the same as them, but this isn’t always the case.  Some owners report everything, and others report as little as possible.

Candidly, it’s a major challenge in the small business market.  Personally, it accounts for many of the owners I’m unable to assist as a business broker.  Owners with unreported cash can still their businesses, but they are face a disadvantage in the marketplace when compared to the owners who report everything.

Part of being a business owner is the freedom; freedom for how an owner uses their time, how they use their resources, and how much risk they take.  Knowing what’s at risk and the long term effects of unreported cash is part of the battle for small business owners when determining their options for exit.