Cash Float Accounts
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Definition: A bank account specifically set up by a business owner to float money through from Business A to enhance the perceived value of Business B .
A business seller with a lot of money--aside from that generated by the business they're trying to sell--may float this money through the operation to make it look like sales. This increases the apparent value of the business for sale and, with it, the purchase price.
Cash floating is usually easiest to conceal if a seller has two different businesses. Money will be floated from one business (so there are no taxes paid on the operation of that business) to the one being sold so that taxes are paid on that operation only. This is done in several ways.
Floating cash through bank accounts makes it appear as if Business B--the second business--is taking in money. It can have great impact on the sale price of certain retail businesses, such as those where a lot of cash changes hands. This is particularly true if the retail business is one with relatively low-priced items.
Another option is to have Business A paying for invoices coming in for Business B, or to funnel receivables from Business A--the more profitable business--into Business B--the less profitable one, thus making a business that doesn't do much volume look good on paper.
In labor-intensive businesses, a seller will take a low salary from Business B or put some of the employees from Business B on the payroll of Business A; therefore, the payroll expense implicit in the business for sale (Business B) isn't reflected in the profit and loss statement (P&L). The seemingly low labor costs in a labor-intensive business can make it extremely attractive to an unwary buyer. Yet high labor costs may be the very reason that the business is being sold. Remember the adage, caveat emptor? Buyer beware! Find out whether the seller of any business you want to buy owns any other businesses, and if so, what kind of businesses they are. Investigate the financial records with a critical eye to make sure no cash is being floated.
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