Article summary
The article, authored by tax barrister Dave Ananth from Meridian Partners, addresses a common pitfall in family-run businesses where paper profits often mask underlying unprofitability because family members work long hours without receiving standard market wages. When evaluating a business for sale, potential buyers assess its true sustainable earning capacity by deducting the real market cost of replacing all unpaid or underpaid family labor with market-rate employees.
Failing to properly record wages or relying on unrecorded cash transactions creates significant legal, tax, and relational risks, including severe back-tax audits from Inland Revenue, wage compliance penalties, and internal family disputes. Ultimately, paying children and family members fair market wages and maintaining transparent financial books instills financial discipline, protects family trust, and presents a realistic, honest valuation that buyers can trust.