Most small business owners are making one simple, well-intended mistake. Not only will it be impossible to sell their business should that need arise, but it puts you in danger of being arrested at any moment. What mistake is that?

“Optimizing” their finances so that no income tax is due. AKA fiddling your tax returns.

Of course you don’t want to send 20+ percent of your real income to the IRS. But understand how the basic measure of business value works, if you do have to sell: typically somewhere between 1x and 3x your net income. Suppose you are netting $250k/yr in reality but only showing $25k (or less: some CPAs advise their clients to show only $13k/yr as wages). OK, after non-business deductions, you’d be saving $40k/yr in taxes. Not chump change.

But if something happens and you need to step away from the business, buyers are only going to pay for the $25k/yr profit you are showing on your tax return, and you sure won’t be in the “top performer” category, so you’ll get maybe $50k for this business – which would actually be worth $750k-$1 million if you had clean books and tax records. Shouldn’t they believe you about the other $225k you make but can prove? “Trust me”? You just admitted you’re lying to the IRS! Why would they trust you? Actually, most buyers will run away from this scenario completely.

So to save $200k in taxes over the next 5 years, you gave up $800k in capital value for the business. Obviously, the sooner you have to step away, the less you are saving in taxes, not to mention you are still in the audit window, and a sudden high value may very well trigger an audit. Aha, but what if you don’t want to sell in the next 5 years? In the age of AI, even the not-so-tech-savvy government is going to be able to detect improbable situations. What are the chances of a systemic or random audit? If it happens, you’re dead meat.

Still bucking the odds? What are the chances some life-altering event will happen in the next 5-7 years? Think back 7 years – 2019. How much of what has happened since then did anyone foresee? COVID, Trump 2.0, Iran, you name it. (Or is it possible that a disgruntled employee might rat you out to collect a reward?)