One of the most commonly overlooked preparations for selling a business or franchise is cleaning up the financial statement of seller-specific expenses. These expenses are commonly called add-back or seller discretionary income, because they are added to the net operating profit of the business. Seller discretionary income would be expenses related to the seller, which a buyer would not incur. Seller discretionary income could also be categorized as personal in nature, related to the seller.
The most important reasons to complete this task before year-end are:
1. Every dollar you can add to your profit is worth a multiple of two to three-and-a-half times that amount when establishing the price of the business. So, pay the earned income tax at whatever your adjusted rate is for these expenses in the current year; it will be worth far more to you as profit later this year or early next year, when you go to market to sell your business.
2. Not having to explain and document these add-backs will add credibility to your financial records, adding value to your business.
3. Not having to explain the seller discretionary add-back to the bank’s underwriter when it comes time to finance business will allow those expenses to be counted as profit, which will help you meet the bank’s required debt-coverage ratio and support a higher price of the business. This is similar to the qualifying process when you apply for a mortgage– the income of the borrower must meet a certain ratio compared to the monthly mortgage payment.
4. The idea is to get the highest price possible for your business, and get you all cash at closing, by being able to get your business financed by a bank.
5. It is easier to go back and reclassify the seller discretionary income for the first seven months of the year and the rest of the year going forward than try to do it all at year-end.
If you would like a confidential analysis of your financial statement, suggestions on how to optimize your business, and ideas for how to position your business for the highest possible price, please contact Bob Dolan at 888-893-661 or view my LinkedIn profile at www.linkedin.com/in/dolansales.
I have customers from around the country. With more than 40 years of reselling businesses and franchises with sales in the $600K to $10M range, I have experience, know-how, and a proven track record of selling businesses remotely across the state and across the county.