You have been keeping meticulous records of your profits for years. You have saved on taxes by cleverly putting perfectly legal expenses into your company which also happen to increase your enjoyment of the business. Those season-tickets sure were fun, and you are glad you could invite some customers so you could write-off the expense. Your son loves his car. Glad a lot of those auto expenses could be written off in the business since he works for you part-time during the summer. You now want to sell your Company and are regretting those decisions! How can you get maximum value for your company when you put so many expenses in there?
Good news. You can correct the past. Not only is this done routinely, it is expected. This is called “add-backs” of non-essential expenses. If done right, buyers will not only accept this, they will embrace it and give you the value you deserve for your company. Below are the most common add-backs that I advise in my work with Panthera Advisors (M&A Services):
1) Owner Salaries & Bonuses
You have made $400,000 a year the last few years. You deserve it. The company has thrived under your watch and easily tripled in value over just the last few years. Besides, you know a lot of people who make this kind of money. Now, the tune must change. It’s time to find some similar companies and see what they are paying their leaders. $175,000? Couldn’t be…. that’s too low. But, alas, that is your new salary. Adjust away. You just increased your profits by $225,000.2) Family Staff Workers
Your spouse a part-time book-keeper? Working a little less now that the accounting firm has taken on a larger role? It was nice you were able to keep their salary at $50,000. They were worth it. Now, let’s take another look at the last couple of years. Working just 10 hours a week now? Mmm… You could have hired a part-time clerk for $20/hour. That’s just $10,000 a year. You just added another $40,000 to your profits!
3) Lifestyle Expenses
Your boat sure has been fun. It’s nice that your company is in the fishing-gear business so you can write the boat off as “research”. But did you really need to go out in the open sea and test that new fishing pole? Wasn’t there enough research on it already? On second thought, maybe you didn’t need to have that boat for the business. Voila! The $30,000 per year in boat expense just got added back into your profits!
4) One-Time Expenses
Remember that building remodel last year and the upgrade to your data servers? It wasn’t a big deal to expense those at the time – just another tax saving! On second thought, maybe it might have made sense to amortize those expenses over time. The remodel will last for years and it will be at least a decade before another server upgrade will be needed. In any case, any buyer will know that those were one-time expenses that they will not be incurring. Add-back! Found another $175,000 to my bottom line!
5) Legal and Professional Fees
Remember that consulting firm that helped you define your market for thousands of dollars? You got a lot from that project, but now that you know your customer base so well, you won’t be needing that again. That frivolous lawsuit from a former employee which cost you dearly in legal fees? That was a crazy thing, glad that’s over. You’re pretty sure that buyer won’t anticipate having to hire more consultants or fend of those types of lawsuits. Nice add-back. There’s another $80,000. Wow! Up to $550,000 add-backs! There’s a nice addition to your valuation!