Embezzlement and Business Value: What Every Business Owner Should Know

As business brokers who have been selling businesses here in Texas for more than 20 years, we’ve seen just about everything. Every year, we meet with business owners who have experienced employees stealing from them. We’re not talking about small things like slacking off on the job or running personal errands on company time—we’re talking about outright embezzlement. Large sums of money are stolen by the very employees whom owners trust the most.

Unfortunately, embezzlement is far more common than most business owners realize—and it can have a devastating impact on the business’ value when it comes time to sell.

 

How Common Is Embezzlement?

The statistics are sobering:

• Roughly two-thirds of U.S. small businesses experience employee fraud at some point.
• Over 55% of embezzlement cases occur in businesses with fewer than 100 employees, and more than 80% in companies with fewer than 150 employees.
• The median loss in a small business fraud case is around $150,000, with some cases averaging over $1 million.
• Perhaps most concerning, over 50% of businesses never recover any of the stolen money.
• Studies suggest 30% of businesses fail outright because of embezzlement.

 

Real Stories From the Front Lines

When we sit down with owners considering a sale, we often discover embezzlement during the due diligence process—sometimes before the owner even knows it’s happening. A few examples:

• Family betrayal: A manufacturing company had its owner’s son handling bookkeeping. Over time, he began using company funds to pay off his personal credit cards. By the time it was discovered, he had stolen several hundred thousand dollars from his father’s business.
• Nephew’s scheme: In another case, a nephew responsible for receiving payments would collect customer payments, back out the invoices in the system, and pocket the cash. The theft went unnoticed until the business was prepared for sale.
• Hidden discounts: Just this week, we reviewed a business where a trusted employee had been giving her friend a 75% discount—well below the company’s cost—quietly draining revenue from the bottom line. These aren’t isolated incidents—we see this happen every single year. And because they’re often committed by the most trusted employees, the discovery is especially devastating.

 

The Impact on Business Value

When a buyer evaluates a business, they’re not just buying the revenue—they’re buying the systems, processes, and controls that ensure that revenue is accurate and sustainable. Embezzlement throws all of that into question.

• Reduced earnings: Theft directly lowers reported earnings, which reduces business value. Multiples are applied to discretionary earnings, so every dollar lost to embezzlement cuts into valuation.
• Buyer skepticism: Discovery of theft makes buyers question the accuracy of the books, which can kill deals or force deep discounts.
• Reputation risk: Even if the embezzlement has stopped, buyers may fear it could happen again if internal controls are weak.

In short, embezzlement not only incurs immediate costs—it can also reduce business value by hundreds of thousands of dollars when it comes time to sell.

 

How Business Owners Can Protect Themselves

The good news is that small businesses can take steps to minimize the risk of embezzlement and preserve their business value:

1. Separate financial duties. No single person should control all aspects of accounting, deposits, and payments.
2. Regular outside reviews. Have an external CPA review your books periodically, or even better, have you, as the business owner, conduct periodic reviews. One of the best tools is a detailed profit and loss statement, which shows every income and expense in a separate line.
3. You have a business that has inventory, perform cycle counts where you count a small portion of your inventory every day or every week. By using this method, you would cycle count your entire inventory at least once every six months.
4. Internal controls. Require dual signatures for checks, implement a purchase order system, and reconcile accounts payable and receivable on a regular basis.
5. Monitor lifestyle changes. Sudden unexplained lifestyle upgrades by employees can be a red flag.
6. Conduct background checks. Especially for employees in financial roles.
7. Encourage transparency. Create a culture where whistleblowing is safe and employees feel comfortable raising concerns.

 

Protect Your Profits Today to Maximize Your Exit Tomorrow

At Gateway Mergers & Acquisitions, we understand the devastating impact of embezzlement—not just emotionally, but also financially and strategically, when it comes time to sell. A business plagued by theft sees its value eroded, sometimes beyond repair.

The key takeaway is this: embezzlement is common, costly, and preventable. Business owners who establish robust controls today will not only protect their current profits but also preserve the long-term value of their business when they decide to sell.

If you’re considering selling your business, or if you’d like advice on how to safeguard your company’s value, our team at Gateway Mergers & Acquisitions is here to help. Reach out today and call us at (972) 219-6961!