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Business owners are a funny bunch. They are almost universally type-A personalities and are stubbornly proud. There is a range however, in what business owners feel comfortable running through the business income statement. Some business owners keep all personal expenses outside of the business and some business owners have the whole family's expenses running through the business, including their second cousin's cell phone. Many business owners are shy to mention these things to their investment banker or business broker when selling their company. I am here to say with absolute certainty, we don't care and I bet that we have seen it before.

What your investment banker or business broker does care about is making sure all the personal expenses running through the business are properly accounted for and added back to the income statement. Because buyers generally value a company on what it can generate in terms of cash flow, making sure that you re-state earnings to remove any personal expenses or one-time events is absolutely critical when entering into an acquisition discussion. For example: If a buyer is paying a multiple of 6 times cash flow for a business, but you have forgotten to remove the salary of $120,000 you pay to your sister (who doesn't really come into the office), you are effectively giving away $720,000.

One way to think about these expenses as a business owner, is to ask yourself, "What expenses wouldn't be here if I weren't here?"

I would caution you not to dig too deep when you go through this exercise. Some business owners, when they begin to understand the math, start listing everything under the sun as a one-time event or personal expense. Real business expenses need to stay on the income statement. Eliminating real expenses as part of the re-casting of an income statement can cost you credibility, which can impact how you are treated for the rest of the transaction dialogue. 

The message here is that you shouldn't let how you are running your business today scare you from selling it. An investment banking professional can help you to normalize your income statements. You, however, will have to explain things to your second cousin.

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