Does undocumented cash income help or hurt my business’s sale price?

Cash that is not recorded cannot be shown to a buyer, so it cannot support your price. Income missing from the books and from filed returns is hard to verify, and BDC says buyers ask to see financial statements and tax returns. This page explains why, and what to raise with your own advisers before you talk to anyone about the numbers.

What a buyer can check

BDC’s selling guide says buyers ask to look at historic and interim financial statements, projections, tax returns and other records. BDC’s negotiation guide says buyers examine historical revenues, profit margins and cash flow, and that consistent profitability makes a business more attractive. A figure that exists only in memory, or in a cash drawer, cannot be matched to any of those documents.

What the Income Tax Act requires

Section 230(1) requires every person carrying on business to keep records and books of account in a form, and with information, that lets the taxes payable be determined. Under Income Tax Act s.230(4), they are kept for the prescribed period or otherwise until six years after the end of the last taxation year to which they relate, subject to the Act’s other retention rules, such as s.230(5) where a return was not filed. Section 239(1) makes certain conduct an offence, including false or deceptive entries in a taxpayer’s records, or omitting a material particular from them.

Why it matters in the agreement

BDC’s guide to purchase agreements says the indemnity section sets the ground rules for the compensation a vendor must pay if disclosures about the business turn out to be inaccurate. Earnings you describe that your records do not show are a disclosure that may later be tested.

What to do before you list

Speak to your accountant and your lawyer about your own position before sharing any figure with a buyer. They can tell you what can be shown and how, and whether earlier years raise a separate issue. See what lowers the value of a business for other items buyers discount.