When running a cash business such as vending, there is always temptation. Temptation not to deposit all the cash in the bank. Temptation not to pay the correct commissions to customers and employees. Temptation to report fewer sales than you actually made. Paying taxes — income tax, sales tax and payroll taxes — is what some try to avoid by withholding cash from business deposits. But this can have repercussions when it comes time to sell the business. Instead, keep good records that let a buyer verify reported revenue, expenses and obligations.

Be smart with cash

As I mentioned, some operators are tempted to not deposit all the cash into the bank. However, by not depositing all cash, your bank deposits will be lower than what a VMS reports. While there are all kinds of creative ways to work around cash versus deposits, this only makes your business vulnerable — and raises questions for a potential buyer. They will ask why there is a shortfall in VMS sales versus bank deposits.

The deposits should be close to matching the sales reports and bank statements. Deposit dates will vary but should be close enough to see that the sales are in fact there. Without this paper trail, a potential buyer will recognize that the owner has been taking cash out of the business, and they will conclude that the seller has not run a clean operation. This could result in lower offers for the business or even a buyer pulling out during the due diligence period.

Using cash to pay employees under the table could be a deal killer. Paying them in cash causes so many negative and unlawful impacts on your business. It reduces your deposits, and the employees pay no Social Security, Medicare and federal income taxes, which is illegal and could leave you on the hook for a lawsuit from an employee who gets audited. If you do not disclose this to the buyer, it could lead to a lawsuit from them as well and could kill the deal altogether.

Insurance companies base their rates on sales, so underreporting could cause problems there, too. Underreporting payroll could reduce your workers’ compensation insurance rates but could lead to a lawsuit from an injured employee. The right thing to do is deposit all of the cash and run a legit business.

Handling commissions

The old game of bidding a higher percentage of commissions to a customer, only to pay less than the amount due, has been around forever in the vending space. In the industry, this is called “R-factoring,” or “factoring.” The R is a reduction of commissions being paid to the customer as agreed upon to set the account. It happens all the time, and brokers like me have to explain to the buyer that the commission reports are false. So then, naturally, the buyer will make an adjustment to the purchase price to account for the actual commissions due after the sale of the business.

It looks very bad when you sell the company and the new owner pays the contracted percentage: It raises a red flag that you were deceptive in your commission payments. If you are guilty of this, make sure you are transparent with the buyer to avoid any future lawsuits.

The buyer will need to correct the future payments, and that can lead to speculation with the customer contact — that the commissions paid in the past have not been correct — and risk to the buyer. There have been situations where the buyer has filed a lawsuit against the seller to recover losses because they were not aware of the factoring of commissions.

For example, suppose you are R-factoring an account for which you agreed to pay a 20% commission, but instead you are paying them 10%. If their sales are $5,000 a month, at 20% commission, you’ve agreed to pay them $1,000 a month. Instead, because you are factoring the commission, you are paying $500 a month. When the new owner comes in, he pays the customer 20% commission, not knowing you have been short-paying. Now the customer’s commissions have doubled, leading them to believe you have been short-paying them under the contract. Either they question your past commission payments, or they go after the buyer for the past shortfall.

The old game of out-bidding a competitor based on a higher commission should come with higher prices for the end customer. If you think a competitor is underpaying the contracted commission percentage, one way to overcome that — without passing judgment — is to guarantee the customer that your commissions will meet or beat what they are being paid.

It also should be noted: If you falsify commissions to an entity like a prison system, university or city business, you could face criminal charges.

The best policy is an honest policy.

Keep the financials as clean as possible

Anytime an operator is ready to sell the business, the buyer will do what is called “recasting” the financials. This means they cross off the non-business expenses that are seller’s expenses from the financials. This recasting removes non-business line items from a financial statement to better reflect a clean bottom line. These line items could be personal vacations, vehicles, bonuses, family on the payroll who don’t work there, and more.

The less the buyer has to cross off the financial statement, the better your company looks and provides them with a clean bottom line to make an offer on the business.