By Michael Shea, Transworld Business Advisors
If you are looking at your tax returns to determine what your business is worth, you’re likely looking at a “discounted” version of your success.
In the world of business brokerage, we have a saying: “You can’t have your cake and eat it, too.” Most owners spend years working with accountants to minimize their tax liability by maximizing expenses. While that’s great for the IRS, it’s a hurdle when it comes time to sell. To get you the highest possible price, we have to “recast” your financials using strategic add-backs.
Recasting allows us to show a buyer the true SDE (Seller’s Discretionary Earnings)—the actual cash flow available to a new owner. Here is how we bridge the gap between your “paper profit” and your “true value.”
The “Hidden” Profit: 5 Critical Add-Backs
When we prepare your business for market, we look for expenses that are either personal to you or won’t exist for the next owner.
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1. Discretionary Owner Perks: This is the most common category. From your personal vehicle lease and health insurance to club memberships and family cell phone plans, if the business paid for it, we add it back to the bottom line.
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2. Market Salary Adjustments: Are you paying yourself a $300,000 salary when a general manager could do the job for $120,000? That $180,000 difference is “excess compensation” and serves as a direct boost to your EBITDA.
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3. One-Time “Black Swan” Expenses: Did you have a major legal dispute, a roof repair after a storm, or a one-time consulting fee for a software implementation? These are non-recurring events. Since the buyer won’t have to pay them next year, they shouldn’t count against your valuation.
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4. Non-Essential Staff: Many owners keep family members or long-time associates on the payroll who may not be vital to daily operations. These “lifestyle” payroll costs are valid add-backs.
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5. Interest and Depreciation: These are standard accounting entries. Since a buyer will have their own debt structure and depreciation schedule, we add these back to show the raw earning power of the assets.
The Valuation Multiplier Effect
Why does a $50,000 add-back matter so much? Because business value is calculated on a multiple.
If your business is trading at a 4x multiple, every dollar we successfully “add back” to your earnings puts four dollars in your pocket at the closing table. That $50,000 one-time expense isn’t just $50,000—it’s $200,000 in additional sale price.
Preparation is the Key to Credibility
Buyers—and more importantly, their lenders—are skeptical. You can’t simply “claim” an add-back; you have to prove it. This is where professional representation makes the difference. We ensure every adjustment is documented and defensible, so it stands up during the rigorous due diligence process.
Your business is likely your largest asset. Don’t let a conservative tax return dictate your retirement. Let’s look at the “real” numbers together.
Is your business ready for a “recast”? Would you like me to create a “Recasting Worksheet” for you to help track these expenses over the next few months?