Four Easy Danger Signs that Tell You when a Business Owner is Lying

Recently a very excited business buyer was ready to enter escrow on a Quiznos Sub located in Oxnard, California.

First, the seller claimed that she had a net profit of $150,000. Because her business was so very profitable, she was demanding $450,000 for the business and was not flexible on the price. She was making this very nice profit from her $750,000 per year, sales volume. This seller with great confidence insisted her store was actually making this money and the price was not negotiable. Katherine, the buyer, was herself an accountant working for a movie studio. She was very excited about buying this business, and really wanted to believe the seller. The difficulty the buyer was having was two-fold.

1. The seller provided last years tax returns but said she had no current financials.

2. When Katherine, contacted the regional sales manager, for the franchise, to ask questions, she was told that the seller was lying and the location could not possibly be making that much money. He suggested the buyer run for the hills.

Instead of following the regional managers advice, Katherine called me and requested that I give her my opinion as to the validity of the seller’s claims. I was not told until after I had rendered my opinion, that she had already consulted with the regional sales manager.

Second, I requested that I be given the Quiznos™ sales reports from the prior and current year. I demanded that I be given a profit and loss statement for the current year to date. The sellers explanation for not being able to provide this was that if she brought her accountant in to prepare this document it would cost her $500.00 which she was too cheap to spend. Instead she gave me a proforma financial statement for the last year and the current year. A proforma statement is basically a budget of what things should cost in a perfect world. The budget, of course showed she was making the required profit.

Before I even took the assignment I estimated that the profit was no more than $50,000 based on the reported sales. I then started my financial audit and due diligence.

Third, I compared the tax return to the Quiznos™ sales report and her proforma. The proforma had the highest number, being $800,000. The franchise report showed sales of $750,000. The extra $50,000 being unreported cash sales. Then the most amazing thing, to her accountant, was next, She put only $700,000 sales on her tax return. Every business owner knows that your tax return must match what you report to the franchise or you are dead in an audit. Could you believe that she reported less to the IRS then she told Quiznos™? If she would have been audited, they would of nailed her for fraud in ten minutes. We now knew the kind of person we were dealing with, but at Katherine’s request I finished my review.

Fourth, I then looked at this proforma financial statement, which is always an open invitation to create any appearance you wished. It was clear upon inspection, that there was not enough payroll expense to operate the location. The other expenses also didn’t look correct but at that point who cared.

I then told Katherine to run for the hills but if she really wanted the store to offer $200,000 less. It was only then that she told me the regional manager had told her the same thing. I certainly hope no one else was foolish enough to buy this or any other business based on a proforma statement.