One of the issues I have encountered in my practice are owners that do not report all of the income from the operation. This includes, but is not limited to:
- Apartments - usually in the laundry revenue
The impact on value from not reporting cash flows can be substantial in the end game. Let's look at an example. If a business/property hides $10,000 in cash from the tax statements, the tax savings using a 25.00% tax rate would be $2,500. Since taking cash comes directly from the bottom line (NOI), there is less revenue to capitalize for value (or the inverse by using a multiplier). So, using the $10,000 and a capitalization rate of 10.00% (see my blog on what is a cap rate), the additional value created would be $100,000. Trading $2,500 in taxes for $100,000 in potential value is not a good choice.
Most professionals are going to "reconstruct" the income and expenses for value services and marketing for sale usually going back 3-5 years. Keeping a clean set of books will assist in both of these areas, especially in today's market. It's much easier to convince anybody, either in the lending or buying world, of the value of a business/property if the cash flows are documented.
Some other accounting tips:
- Get away from "shoebox" accounting
- Detail your income streams - Just a gross revenue amount doesn't let the books "speak"
- Track all of your personal expenses coming out of the business to assist in the reconstruction
- Keep details on capital improvements versus normal repairs and maintenance
Being an appraiser, I can't help myself from putting in a disclaimer. This example may not directly apply to all business/properties as tax rates and capitalization rates may vary for individual properties/owners.