Cash Receipts, Corp Purchase, Oh My

[geekgirldany]

I've got a few questions here and really just need some advice.

I had a meeting yesterday with a potential customer. He purchased a restaurant. Actually he purchased the stock of the shareholder in a corporation. Restaurant business has been run through this corporation.

Several things concern me about even getting involved:

1. Buyer did not consult with another accountant and/or attorney. He used the sellers.

2. Buyer did not understand that he bought stock in the corporation. I reviewed the contract he signed. He thought he should be able to deduct the payments to the seller as a expense. The prior accountant listed the purchase price of the stock as a "other liability" on the balance sheet. Buyer seems not to understand what I am talking about... I probably wouldn't either.

3. Buyer purchased in Aug 06. All payments made to the seller were put under this liability in the corporation. The corp paid the seller.

4. Nearly all expenses are paid in CASH. Mainly the food he purchases.

5. There is a provision (?sp) in the purchase contract that the seller can buy back the name of the corporation for $10.00 if he ever wants it back. Is that normal?

6. Accountant told new owner to pay sales tax on sales amount. Only thing is that the total sales includes sales tax collected from customers. So he would be paying sale tax twice the way I look at. Prior years sales tax figures seem to come from outer space.

7. No split tax year in 2006 which I believe should have been done on the corporate return. It was split three ways??

For all the reasons above I am feeling very nervous about taking on this customer. I really do believe he did not know what he was doing and just took the word of the seller. The whole paying in cash thing bothers me alot. He says he keeps the receipts. But he just takes the money out of the register to pay for the items.

What do you guys think? Should I take a chance and help him out or tell him to go somewhere else? I have never really dealt with restaurant businesses. He wants me to do his bookkeeping, payroll, tax prep for this year, 2007.

Thank you for reading.

[JoshinNC]

I have one restaurant and I will most likely never take another one

I've got a few questions here and really just need some advice.

I had a meeting yesterday with a potential customer. He purchased a restaurant. Actually he purchased the stock of the shareholder in a corporation. Restaurant business has been run through this corporation.

Several things concern me about even getting involved:

1. Buyer did not consult with another accountant and/or attorney. He used the sellers.

2. Buyer did not understand that he bought stock in the corporation. I reviewed the contract he signed. He thought he should be able to deduct the payments to the seller as a expense. The prior accountant listed the purchase price of the stock as a "other liability" on the balance sheet. Buyer seems not to understand what I am talking about... I probably wouldn't either.

3. Buyer purchased in Aug 06. All payments made to the seller were put under this liability in the corporation. The corp paid the seller.

4. Nearly all expenses are paid in CASH. Mainly the food he purchases.

5. There is a provision (?sp) in the purchase contract that the seller can buy back the name of the corporation for $10.00 if he ever wants it back. Is that normal?

6. Accountant told new owner to pay sales tax on sales amount. Only thing is that the total sales includes sales tax collected from customers. So he would be paying sale tax twice the way I look at. Prior years sales tax figures seem to come from outer space.

7. No split tax year in 2006 which I believe should have been done on the corporate return. It was split three ways??

For all the reasons above I am feeling very nervous about taking on this customer. I really do believe he did not know what he was doing and just took the word of the seller. The whole paying in cash thing bothers me alot. He says he keeps the receipts. But he just takes the money out of the register to pay for the items.

What do you guys think? Should I take a chance and help him out or tell him to go somewhere else? I have never really dealt with restaurant businesses. He wants me to do his bookkeeping, payroll, tax prep for this year, 2007.

Thank you for reading.

My client is similar in that she pays most of the vendors (and employees for that matter) from the cash register. It takes alot of time to keep up with these transactions, so your normal pricing structure most likely won't work. She pays through the nose for me to do her books (less than 200 transactions per month, I bill her nearly $1000 per month) because it is so time consuming. If something doesn't look right, maybe you should leave it alone. But, maybe you like a challenge and want to help this person get on the straight and narrow.

[Uncle Sam]

Restaurant Business

Dany-RUN, not walk, RUN away from this as FAST as your legs can carry you.
Restaurant businesses are the most risky, volatile, unreliable, underhanded businesses I've ever seen-and I'm a former sales tax auditor where restaurants are a major pick for sales tax audits.
From what you've already told us - the "potential" client didn't have enough sense to previously consult with HIS OWN accountant - created a conflict of interest for the other accountant (not that I really care about him), relied upon an accountant that sounds like a real birdbrain, walked into a trap for potential third party and government liability for before he even owned the business, etc. etc.
Unless you are confident in dealing with tip compliance reporting, sensitive issues for sales tax compliance, credit card discount issues, transient workers - i.e. illegals -
STAY OUT.

[Golden Rocket]

The Accountant is a necessary Evil

It's obvious that he did whatever he wanted to do and didn't have enough confidence in an accountant to guide him through his end of the mess. This tells me you will be looked upon as a necessary evil as well. Here he is a year after the fact, knocking on your door, bringing this mess to you.

Before you take on this guy, tell him you are not going to tolerate certain abusive practices. Very common, for example, to hire help, pay them out of the cash register instead of through payroll, and reduce his sales by the amount paid under the table. He avoids payroll taxes, he understates sales taxes, and avoids payroll-related items such as deducting for child support, employment reporting to the state, tip reporting, etc.

My guess is that he will look for help somewhere else.

[geekgirldany]

Thank You

Thank you guys for posting. It helped me alot to have some other views on this situation.

I got finished reading the rest of the contract. Some items just do not jive with other stock sale contracts I have read or been involved in. The buyer openly told me that he was paying labor cash. No payroll wages. When I mentioned that it should be payroll wages he did not seem very thrilled with that. He said the previous owners had always paid labor in cash. No W-2/1099s.

I feel sorry for the guy but I just don't think I should take on the liability. Maybe he can find another accountant that feels up to the task.

Thank you again for taking the time to read and post.

[outwest]

Aside from the issue of taking on the client..

Here's some thoughts on the issues:

2. Buyer did not understand that he bought stock in the corporation. I reviewed the contract he signed. He thought he should be able to deduct the payments to the seller as a expense. The prior accountant listed the purchase price of the stock as a "other liability" on the balance sheet. Buyer seems not to understand what I am talking about... I probably wouldn't either.

Probably trying to create some psuedo-redemption/reissue deal. Don't think that would fly.

3. Buyer purchased in Aug 06. All payments made to the seller were put under this liability in the corporation. The corp paid the seller.

Looks like a reclass to distributions.

4. Nearly all expenses are paid in CASH. Mainly the food he purchases.

Many food vendors require COD cash from restaurant customers. Says something about the stability of the industry.

5. There is a provision (?sp) in the purchase contract that the seller can buy back the name of the corporation for $10.00 if he ever wants it back. Is that normal?

No, and foolish to agree to by the buyer.

6. Accountant told new owner to pay sales tax on sales amount. Only thing is that the total sales includes sales tax collected from customers. So he would be paying sale tax twice the way I look at. Prior years sales tax figures seem to come from outer space.

You're right, back off the sales tax from gross receipts to calculate gross sales.

7. No split tax year in 2006 which I believe should have been done on the corporate return. It was split three ways??

Assuming this was a S Corp, either allocate per share per day or (if the shareholders all agree) close the books on date of sale to figure the annual income split.

And I agree with the other line of posting. Send this guy to a competitor that deserves this kind of client.

[dsi]

I would take this client conditionally. That is, the client MUST be willing to involve an attorney, and the client MUST be willing to pay me a hefty retainer. Bring him on.

[oceanlovin'ea]

Restaurants

I have had a couple of restaurants as bookkeeping clients in the past few years. One was good and paid for supplies and groceries with checks and did payroll the right way. He has had a couple of friends that during slow times worked as waitresses for tips only. Actually one man, Charlie, started the first business with his son. When it got going good, he stepped out of the picture and bought another restaurant. After about 5 months he sold that restaurant to the cook. So from him, I ended up with 2 restaurants. But they both really struggled to make ends meet. The cook sold out in May. The other is still struggling.

THEN I also had (have) the restaurant from down under. A very elderly lady owns the restaurant but her son and daughter run it. They pay cash for groceries, keep some of the receipts, do cash payroll for themselves only. Their kids help out some in the restaurant when they need them. She ends up having to pay electric bills and such out of her own pocket. He gets behind in his sales tax. THey are 2 years behind in their corporate tax return. With just the actual receipts that she gives me, the restaurant still runs in the red. The only reason I still have anything to do with the business is the elderly lady. I am trying to keep her out of trouble.

But I would NEVER take another restaurant that did not pay with checks and do payroll properly. It is just not worth the aggravation.

Linda F

[geekgirldany]

I just called the customer and told him I could not help him. That I did not know enough to help him. He said a couple of times "you specialize in small businesses though". I told him the way he is structured there is more too it than I know. So he came by and picked up the forms he left and didn't say a word. Wasn't very happy.

Outwest all the points you made are ones I thought of and it just seemed like alot more trouble than it would be worth.

Dsi... that is what I thought a good attorney.

Linda, I know where you are coming from. You know I said I haven't dealt with restaurants before. But I do have one customer that runs a small take out restaurant. She keeps up with her bookkeeping in Quicken and I do her sales tax and payroll. So there are some good ones out there.

[BOB W]

I shy away from all of those "Cash" type businesses> pizza, deli, rest, etc. Even if they have good records, those records can't be trusted.

Not that I'm a prude but, I don't want the potential exposure of audit whether Sales tax or State or Federal. My client base, I feel, must be protected. Any one client can effect the rest of my clients if any agency comes knocking. No one client is worth risking my business and clients. I know the above may sound paranoid, but I feel that in each government audit the accountant gets valued also.

Not necessarly on paper but somewhere within the process. Maybe some of you ex-auditors on this board can expand on how the accountant is viewed during an audit and what/where that opinion will lead to...???

[Black Bart]

You probably did the right thing.

The buyer openly told me that he was paying labor cash. No payroll wages. When I mentioned that it should be payroll wages he did not seem very thrilled with that. He said the previous owners had always paid labor in cash. No W-2/1099s.

I once had to get rid of a restaurant like this for the same reasons and I really hated to do it 'cause he paid a good fee for this area (not like Josh's -- for $1,000 bucks a month, I probably would've kept on wrestling with it).

These cases usually keep going downhill. The previous owner's illegal past practices were not challenged, so new guy sees no problem with more of the same and thinks (pick one) you're too strict/ you don't know what you're doing / you're a horse's rear-end.

My guy's operation was a shambles and, as they say, it just got "curiouser and curiouser." He had: no books, a box of several hundred merchandise invoices, no cash register tapes, monthly sales scribbled on a piece of notebook paper. Sales were nowhere near annual bank deposits, so sales (and sales taxes) were understated -- at least I think they were, but deposit slips stated only "list" and might have included savings transfers, loans, or other non-taxable items. In his favor, he added $X thousands to income for "cash sales of special orders, parties, etc." and deducted several $X thousand more from purchases for personal use groceries and donations to food charities. Still, when markup was added to remaining purchases, sales still weren't in the ballpark. Quarterly payroll records were also on notebook paper -- the three-month details were obviously written all at once (taken from: memory? the air?) rather than posted week-by-week. Minimum wage wasn't paid and tips/I-9s weren't even on his radar screen.

It was blatant and I coached and complained, aspiring to put him straight. But...nothing changed, so I dropped him (a big relief -- you can't hardly get enough fee to justify these). He sold the business a few years later and the rumor was that a sales tax audit had wiped him out. I've had several good, straight-up cafe clients, but the fast and loose type seems more common.

Re: getting a lawyer: it usually won't help; most don't know taxes and will just take anything given and run with it; writing it up to suit the taxpayer. They usually don't worry about the fine points like we do and seem to have a "bring it on" attitude toward audits.