There’s an old expression, “you can put lipstick on a pig, but it’s still a pig”. That is exactly how I view many of the items sellers add-back to their financials to pretty up their businesses for sale.
The reality is that many add-backs are legitimate, but after twenty plus years in the business sale sector, an equal number are nothing more than lipstick. The issue of course is how can a buyer distinguish between the two?
Keep in mind; these
First, we need to establish what is “Owner’s Benefit” and why it is used. The concept is to reconstruct the financials to present a scenario of what a new owner can realistically expect to have available to pay themselves a salary, service any debt and grow the business assuming everything remains status quo after they purchase the business.
Note that Owner’s Benefit can also be referred to as Seller’s Discretionary Earnings, or Adjusted Cash Flow or Seller’s Cash Flow or a host of other terms. More important than the terminology is to be certain what is included and excluded in the compilation.
It is equally important to note that only items that were expensed can be added back. Also, add-backs of alleged personal seller items expensed through the business must be truly personal and not ones a new owner will incur. Also, look out for “one-time” expenses that sellers try to sneak in as add-backs. If these expenses occur on a fairly regular basis, then they are simply not one-time extraordinary expenses to be added back.
Regardless of the term used to describe Owner’s Benefit, the formula used to establish it is as follows:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation LESS Allowance for Capital Expenditures
Why Add Back Depreciation?
Be Very Careful About Depreciation and Capital Expenditure Allowance
Why Add Back Interest?
Each business owner will have separate philosophies for borrowing for the business and how to best use borrowed funds, if necessary at all. Furthermore, in nearly all cases, the seller will pay off the business’ loans from their proceeds at selling; therefore, you will have use of these additional funds.
A Final Word
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