Attempting to Promote Your Enterprise? Skipping This One Step Will Go away a Fortune on the Desk

September 3, 2021 7 minutes to read

The opinions of entrepreneurs’ contributors are their own.

You have decided to sell your company – and you are thrilled. You have put years of effort into building your empire, you have buyer interest or even an offer on the table and for the first time in years you see the light at the end of the tunnel. Part of you just want to take off, seal the deal, and ride into the sunset.

Not so fast. While rushing the sale can be tempting, without a proper Seller’s Discretionary Income (SDE) calculation, it can often leave tens of thousands or even hundreds of thousands of dollars on the table. Most likely, your business is selling multiples of SDE, and SDE is net income plus add-backs. Most of us know this first number very well, but the second number is the secret to lucrative exits.

Add-backs are owner benefits and one-time expenses that are included in your current financial statements but are not incurred when a new owner takes over the reins. Digging for them – and adding them “back” below your net income line on your exported P&L – is vital if you are looking to make the top dollar for your business.

I’ve helped thousands of people sell their businesses online over the years, and it’s one of the biggest mistakes owners make when they don’t add a mark-up to their business valuation. In my book, The EXITpreneur’s Playbook: How To Sell Your Online Business For Top Dollar By Reverse Engineering Your Pathway To Success, I go into great detail with lots of numbers and examples of why ignoring or rushing add-backs could cost you the equivalent of your college education Child. Here’s an overview of what add-backs are and which three levels of add-backs are most relevant for business owners.

How add-backs work

Again, add-backs are owner benefits and the one-time expenses that are not carried forward when your buyer takes over your business. By listing these customizations, you are showing your potential buyer that if you acquire the business, your business will actually spend less. These finer accounting details are strict, but when you provide them you actually build trust and a relationship in the negotiation process.

Related: Top 10 Negotiating Tactics Used By Buyers (And How To Respond To Them)

Some add-backs are obvious. For example, if an owner receives a high salary in an owner-operator company or the company takes over your health insurance, these are “owner benefits” and are considered to be surcharges. Other add-backs are more nuanced and can be as granular as credit card cashbacks or converted points, or recent changes in your unit cost (COGS). It ultimately depends on the organization and structure of the company, and no two businesses are alike.

It’s good to be both rigorous and demanding with add-backs. Too little care leaves money on the table, but too much nickel and dimming or sloppy calculations can strain your relationship with your buyer and potentially cause a business to fail. Here are three stages of add-back to consider as you prepare your business for a future sale.

Take into account your obvious add-backs

Most owners give themselves a couple of benefits in owning their business – these can be considered add-backs. Your most obvious add-backs, for starters, are owner’s payroll, owner’s health insurance, owner’s pension contributions, charitable contributions, and intangibles like depreciation.

Related: Do you leave money on the table? 5 often overlooked tax deductions

While these add-backs are obvious, often owners still make mistakes that put them in a difficult position when the time comes to negotiate a deal. For example, when it comes to the owner’s salary, this figure assumes 40 hours or less weekly working hours. As a business owner, do you actually only work 40 hours a week? If the answer is no, open the door for your buyer to renegotiate; They will point out that it will take more than one person to replace you. This leads to higher projected operating costs – and an adjusted offer after due diligence.

Donating to charity can also be a tricky addition. Sure, the next owner of the business doesn’t have to make the same charitable contributions, but what if your company’s charitable endeavors are inherently linked to marketing and selling the product? Charitable donations can be an add-back, but only if you have demonstrated that eliminating those expenses will not have a negative impact on total sales. That’s why you need data and a long-term plan.

Take stock of the one-time expenses from last year for additional add-backs

Your discretionary earnings (SDE) for sellers is calculated from the last 12 months of your company’s financial statements. If you have had one-off expenses during this period that are not carried over, these expenses count as markups and can help you increase your rating.

For example, if your company has paid one-time legal fees or registered new trademarks, patents, or copyrights, these are add-backs. One-time new graphic designs or device purchases? Yes, these are add-backs too. When your accounting is a mess, you know you need clear books to get the best value for your business. Hire an ecommerce accountant and do two to three years of rebooking when you need to get everything up to speed – those one-time accounting costs would also count as add-backs.

Personal expenses embedded in your P&L can also be considered add-backs as they are not covered, but you should be careful here. Are the business meals you are serving actually being used for business purposes? Your buyer will go through every line of your financial statements with a fine comb; adjust your financial spending accordingly so your numbers are transparent and clear.

Related: You suck in money, so never mix business and personal expenses

Dig really deep and leave no stone unturned

This last category of add-backs can get very specific, but when we’re trying to get the best valuation possible, every dollar counts.

Take, for example, expenses that occur every few years instead of every year. A common example is a website redesign or brand refresh. You could invest $ 10,000 in this effort, but you only do so every 3-5 years. Since it is not repeated annually, the majority of this expenditure is considered an add-back.

Another example that is very important to entrepreneurs are expenses for professional development, such as courses, masterminds or business coaching. The seller chose to invest in these resources in order to become a better entrepreneur – that was his decision. If the buyer wants to take on these investments for themselves as well, this is also an option. Since it is not a significant expense for the company, the investment can be considered an additional contribution.

Selling your business can be one of the most exciting and lucrative days of your entrepreneurial career. But to be successful, you need to have your ducks lined up, and a trusted advisor in your corner can help you get there. Start thinking less like an entrepreneur and more like an EXITpreneur today, and a hefty payoff can be closer than you ever imagined.

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