There is usually a very healthy debate between buyers and sellers regarding each side’s calculation of the total Owner Benefits (OB) figure. First,
Conceptually, it is the correct way to present the financials. The problem of course is making sure the components of this figure are correct.
The formula used is to arrive at the OB is:
Pre-Tax Profit + Owner’s Salary + Additional Owner Perks + Interest + Depreciation LESS Allowance for Capital Expenditures
For example: if the company purchases a $125,000 piece of equipment and its useful life is determined to be 10 years, then each year the company can deduct $12,500 off its Net Income to reduce its tax burden. However, it is not an actual cash transaction. No money is physically leaving the business or changing hands. Therefore, this amount is added back.
But, and it’s a big one,
A word of caution: this allowance and offsetting reduction of the Owner Benefits is almost never shown in the figures a seller presents but absolutely must be included. It's a simple and correct argument that buyers must make when applicable and one that sellers and brokers cannot rebut.
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