Business Valuation – Typical Trick

I noticed a trend about 20 years ago. The trend went from undeclared cash payroll to employees being declared on the business books. It started with automotive businesses and then moved into restaurants. It now can be found in many industries. The construction industry still has not caught on to this interesting trick yet. They still operate on many undeclared cash wages.

Don’t be Fooled by Cash Wages

Let me explain. If you do not have workers compensation insurance for your employees you can be fined for each employee not covered as well as sued personally by the employee if they are injured on the job. This puts pressure on the underground cash economy to put every employee on the payroll, thereby paying all payroll taxes required and workers compensation insurance premiums. Being very shrewd Americans, many did not put all of the employee’s income on the books but only a portion. The portion was the amount necessary to cover minimum wages for a 40-hour workweek. There are 2080 hours of work in a year.

For example when minimum wage was $7.00 per hour, I found that each employee showed they received a salary of $14,560 each year, on the books. That meant that all federal, state and workers comp insurance payments were paid on only the minimum wage amount. All wages above that amount continued to be paid in cash.

When a business buyer looks at the expenses of a prospective business he may be misled by the wage expense shown on the books.


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Image credit: uba-foto iStock
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