Purchase Agreement1

There are a host of reasons to include only true business expenses as you approach the time to sell your business. Here are some of the most important ones, and a few to keep out of your company’s financial statement.

1. The first two focal points a buyer will have are the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) and the seller discretionary cash flow (SDCF).

2. Consider that a confused buyer will not buy. Keep it simple; avoid having to explain what you did.  Having a clean financial statement will build credibility.

3. In addition to a buyer, the bank that is going to loan the money also has to buy in. It is always advisable to get the price of the business being sold as all cash, or as much cash as possible, when you sell. Although you did a great job of managing your business and all indications are that the potential buyer is qualified to manage the business, you just can’t know for sure. For most business owners, the proceeds from the sale of the business is a major part of a retirement plan. You don’t want the business back in a basket at some point in the future. Once you are disengaged, you are disengaged and won’t want the business back.

4. A bank will not “add back” expenses to EBITDA/SDCF that are buried in the cost of sales or office supplies. Consider the effective personal tax rate that you would save from these types of expenses, compared to a two or higher multiple you can receive on EBITDA/SDCF when it’s time to sell.

5. A bank will not allow the owner’s vehicle, vehicle repairs, and maintenance that have been expensed through the business to be add-backs. The bank’s position is that the new owner will also need a car, even if it may not be a high-end luxury vehicle like you have. Pay for this out of your personal income, and expense business use by getting reimbursed for mileage traveled. The objective is to show as much EBITDA/SDCF as possible.

6. Keep travel and entertainment expenses as strictly business.

7. Consider that, from a buyer‘s and bank’s perspective, if income is not reflected on the federal income tax return, it does not exist.

The less explaining that a buyer and the bank need to understand your financial statement, the more value it will add value to your business.

If you would like a confidential, no-obligation analysis and discussion of what you can be doing now to prepare for when you are ready to put your business on the market, please call (888-893-6661) or e-mail ([email protected]) me. I serve customers nationwide. To learn more about my background and see customer recommendations, visit my LinkedIn profile at http://www.linkedin.com/in/dolansales.

(c) 2014 Dolan Sales, Inc.