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.