By Ed Rappuhn – SCORE Nashville

Reader’s question: “I am buying a restaurant but I’m having second thoughts. The owners have told me that actual sales are greater than what they reported on their tax returns. What should I do?”

While this is not uncommon in a cash business, obviously these owners are dishonest. The legal aspects are troubling enough, but their lack of ethics makes anything they tell you very questionable. Did they stay in business simply by cheating or is this a viable business? If this is a business you “have to have,” consider nothing more than they reported on the tax returns when you determine the value of the business. Next make sure the sales agreement is for only the business assets with the sellers responsible for all liabilities, known and unknown. Who knows what else they’ve done?

Instead of focusing solely on the negatives associated with this opportunity, let’s look at the positives of behaving ethically.

  • Employees follow the lead of owners. If you behave ethically and treat your workers with respect and honesty they likely will follow your example. If, on the other hand, you suggest they omit cash transactions at the register to avoid paying taxes, employees will think, “why not just pocket half of those transactions?”
  • Customers are aware of ethical behavior. They see it when you replace something they bought even though the warranty expired a week ago or when you chase them out the door with the change they left on the counter. They talk about your fairness and honesty with their friends!
  • Vendor relationships are better when you behave ethically. This includes paying your bills on time. Vendors tend to forgive a single (or rare) late payment. Consistently slow-paying invoices causes vendors to charge late fees and eventually require prepayment.
  • Your tax audits go better when you behave ethically. If the auditor sees that you have been honest in your reporting, he will be less likely to reject a favorable position in a gray area. Need I mention treating the auditor with a bit of respect rather than contempt helps as well?
  • Consider giving something back to the community that supports your independent business. Is this required? Of course not. But if the local community supports you with publicized “small business days,” you can sponsor a sports team for disadvantaged youth or volunteer with Junior Achievement.

If you are more interested in long-term success than possible short-term gain, ethical behavior helps. Your customers, vendors, employees and the community appreciate working with “good” people. Your business will be more valuable when you decide to sell. Besides, it’s the right thing to do.

Ed Rappuhn is a mentor, workshop facilitator, and the past-chair of SCORE Nashville. SCORE mentors guide entrepreneurs in starting and growing their businesses. Sign up for a free SCORE mentor, find out about our reasonably priced workshops and other services, or volunteer to become a SCORE member at Email questions about your business to questions@scorenashville.organd watch for the answers in future columns. 

Ethical behavior pays off long term