The ethics of buying a business
Jane and Mike needed extra money. Who doesn’t? They decided to buy a small business to supplement Mike’s earnings, so they borrowed money from a friend and purchased a retail store Jane could operate.
The previous owner had not reported all revenue, keeping cash transactions off the books. He claimed higher sales than the tax returns showed and got a better sales price for the store from these first-time buyers. Since the transaction was small, the sales contract was shoddy and minimal, drawn up by a local attorney who had documented few business sales in his law career. No one considered that a big deal until …
Less than a month into operation of the new business, problems emerged. It was discovered that merchandise believed included in the sale had disappeared with the previous owner, the weak non-compete agreement with no enforcement mechanism facilitated illicit competition, suppliers vanished, the asset list was fuzzy … and on and on it went.
That’s when Jane and Mike came to me for advice. As solid believers, their consciences were dogging them about how to report cash sales. Should they report them or not?
The advice I gave them included ethical considerations for any future business purchases. Nowhere are genuine Christian ethics or their lack on display more than when decisions involve money. Here’s the advice I gave them:
Never deliberately misreport income: personally or in business. As believers, we’re to let our yes be yes and our no, no. Truthfulness should be our clothing. Just as important, the IRS can recommend jail time for underreporting income, but only fines for aggressively taking deductions. The best predictor of future behavior is past behavior. A seller who’ll lie to the IRS will lie to you. When it benefits him, he will take advantage of anyone. The most expensive lawyer is a cheap, incompetent one. Buying a business requires specific up-to-date experience. Whether it is a big or small transaction, the risks are high using a novice attorney, even if he’s a sincere believer. The family friend who handled one back in ’06 won’t do. Having the right reps and warranties, a tight non-compete, and an accurate asset list are just a few of the items that need to be agreed upon and written down. The days of a handshake sale are long past for all except Warren Buffett. Create a financial analysis before purchase, not after. If you cannot do this, hire someone, or get a qualified friend to do it. Finding out afterward that the cash needs are beyond your reach is a painful realization. There is a price too high to pay, and a price too low. This follows the biblical mandate to do unto others as you would have them do unto you. To pay too much is to be taken advantage of, and no one wants that. To pay too little is to take advantage of your neighbor, and we ought not want to build our net worth on the shoulders of others’ loss.Mike and Jane are learning the hard way. I hope you don’t.
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