How to check a CIM's revenue against the tax returns

A CIM is written by the seller's broker to sell the business. The tax return is filed with the IRS under penalty of perjury. When the two disagree about revenue, the return is usually closer to the truth, and it is the number an SBA lender will underwrite on regardless of what the CIM says.

Comparing them takes about twenty minutes, and it's the first check worth doing on any deal.

Find the right line

Use gross receipts, and use the same years the CIM shows. Where it sits depends on how the business files:

• S corporation (Form 1120-S): line 1a is gross receipts, line 1c is after returns and allowances
• Partnership or multi-member LLC (Form 1065): line 1a and line 1c, same layout
• C corporation (Form 1120): line 1a and line 1c
• Sole proprietor or single-member LLC (Schedule C): line 1

If the CIM reports net revenue, compare it to line 1c. Otherwise use 1a.

Ask early whether the seller will sign IRS Form 4506-C. A lender will use it to pull transcripts straight from the IRS and confirm the returns you were given are the ones that were filed. A seller who hesitates over that form is telling you something.

Line the years up

Put each year side by side and compute the gap as a percentage of the tax return figure. Here is the sample deal we use to demonstrate Metis Diligence, Harbor Line Mechanical, an HVAC company. The company is fictional. The pattern is common.

• 2022: CIM $3.64M, tax return $3.61M, gap 0.8%
• 2023: CIM $4.12M, tax return $3.71M, gap 11.0%
• 2024: CIM $4.48M, tax return $4.40M, gap 1.8%

Two of those years are close enough that an ordinary explanation is likely. 2023 is not, and 2023 is the year the CIM's growth story depends on: it shows 13% growth that year. On the returns, 2023 grew less than 3%.

A small gap that shows up every year usually has a boring cause. A large gap in one year, especially a year that props up the asking price, needs an answer in writing.

Explanations that hold up

Each of these is common, and each comes with a document that proves it.

• Accrual versus cash accounting. The CIM counts revenue when it's invoiced, the return when it's collected. December work paid in January lands in different years. Proof: an accrual-to-cash bridge and the year-end accounts receivable aging.
• Different fiscal years. The return covers a fiscal year, the CIM a calendar year. Proof: the return's tax year dates, and monthly P&Ls to rebuild the calendar year.
• More than one entity. The CIM combines two companies and you were sent the return for one. Proof: the other entity's returns and a list of what each one does.
• Pass-through amounts. Sales tax or reimbursed materials counted as revenue in the CIM but not on the return. Proof: sales tax filings and the general ledger.

The explanation that doesn't

"There's cash we don't report" is not a reconciliation. You can't verify that income, a lender won't finance it, and if you buy the business you buy whatever exposure comes with it. It also tells you how the seller treats numbers they're asked to stand behind.

What happened with Harbor Line

The four Metis Diligence analysts read the 2023 gap differently, and the report kept the disagreement instead of averaging it:

• The forensic CPA thought it was probably timing. The CIM looked accrual-basis and the return cash-basis, and December receivables could explain it.
• The bear called an unexplained 11% gap, in the exact year the growth story rests on, a reason to walk away until the seller reconciles it in writing.
• The lender pointed out that it barely matters for financing: the bank underwrites on the tax returns either way, so price the deal off the returns.

The useful output was one question for the seller: provide the accrual-to-cash bridge and the December 2023 receivables aging that explain the $408K gap between 2023 revenue in the CIM and the 2023 Form 1120-S.

Until the gap is explained

Value the business on the tax return figures. If the seller's explanation checks out, the higher number comes back and you've lost nothing. If it doesn't, you haven't paid for revenue that never existed.

This is general information, not tax, legal or lending advice. Have a CPA review the returns before you sign anything binding.