Due Diligence

When buying a business, make sure past profits are documented.

You are investigating a business that you like, and the sellerhands you income tax forms that show a $50,000 profit. "Ofcourse," he says with a wink and a nudge, "I really made$150,000." What do you do?

There may be perfectly legal reasons for the lower reportedincome. For instance, if the seller gave his nephew a nonessentialjob for $25,000 a year, you can just eliminate the job and keep thecash. Same goes for a fancy leased car. One-time costs ofconstruction or equipment may have legitimately lowered netprofits, too.

What to watch for: a situation where the seller claims he or shemade money but just didn't report it to the IRS. If thishappens, either walk away from the deal...or make an offer based onthe proven income.

Excerpted from Start Your Own Business: The Only Start-Up GuideYou'll Ever Need

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