Buying a business? Buying a restaurant? What do you need to ask?

Buying a Business? Buying a restaurant? What do you need to ask for?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

 

Sellers never tell you the real reason that they are selling their business!  Buyer beware is an  important mindset.  Never accept verbal statements as true unless supported by solid documentation.

I am using as an example the purchase of a restaurant.  Most restaurants are on an accrual basis of accounting. 

 

How does this differ from a cash basis?  Cash basis recognizes income when cash is collected while accrual basis recognizes income when revenues are earned even if the revenue is not collected.

 

 Cash basis recognizes expenses when furniture, fixtures and equipment is placed in service and expenses are paid even if the check payments are for a future period. 

 

For example, a cash basis business can prepay up to 6 months of rent for the next year in the current year and get a deduction for the rent as long as there is not a distortion in the bottom line taxable income. For example if your revenues are $2 million for the year and you prepay 4 months at $6,000 per month, the cash basis taxable income is not being distorted.

 

On an accrual basis, the  prepaid rent of  for the following year would not be deductible in the current year.

 

Most restaurants report their profit and loss and balance sheet on the accrual basis.

How do you know whether you report your businesses income on the accrual or cash basis? Your CPA tax preparer simply elects cash or accrual method on the first page of the business return for a C corporation, S corporation, partnership.   If you own your business as a sole proprietorship, then you select cash or accrual on the Form 1040 Schedule C. 

What if you are an LLC? Well, an LLC can choose to be taxed as a sole proprietorship (one owner), partnership (two owners), S Corporation or C Corporation (also known as a regular corporation because until 1958 S Corporations did not exist).

So you see that an LLC is not always treated as a partnership.

So now you have signed a letter of intent with an “out clause” if you’re CPA and you find that the restaurant or other business seller has misrepresented the numbers.

 

Here is a partial list of what to ask for:

 

  1. 1.    FULL Monthly financial statements for all of the current year and the two previous years including the balance sheets.  Many times expenses are hidden in the balance sheet.
  2. 2.       Explanation for balance sheet accounts the seller knows are incorrect.
  3. 3.       Work Papers including support for monthly bank reconciliations, trade accounts receivables, furniture, fixtures and equipment detail with depreciation support, liquor license support (i.e. Copy of payments), prepaid expense and insurance support, accounts payables detail and aging, accrued payroll 12-31-12  , sales tax liability, Debt amortization notes, lease agreements, shareholder or member loans.   December 20xx and January 20×1 payroll reports, fica tip credit report, W-3,  W-2s, 1099K,  POS daily sales report from December 2011 to January 2013,
  4. 4.        COMPLETE 2011 and 2012 tax returns (not just 4 pages)
  5. 5.        General ledger detail from December 2011 to January 2013.  QuickBooks(tm) accountants copy with password.
  6. 6.       Copy of lease with any percentage rent.
  7. 7.       Copy of contract with allocation of purchase price and earn out provisions.
  8. 8.       Copy of any shareholder loans, minutes.
  9. 9.   Allocation of purchase price of the business

 

We are different than other tax professionals because we are proactive  and solution oriented professionals.  If you would like to discuss, please call me at 602-292-2009 Jeffrey Brooks, CPA, CFP, MBA for Jbrooks WA, PC. a CPA and CFP firm specializing in tax reduction for business owners.

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com