If you’re considering selling your business, it’s vital to get your financial documentation in order. Having expert accounting support is the best way to ensure you get the highest possible valuation for your business, especially when it comes to factoring in owner add-backs.
We see so many franchise and restaurant owners relying on simple bank statements to run their businesses. While this approach can certainly work to keep the lights on, it doesn’t set you up for running your business efficiently or for getting it ready to sell.
No buyer is going to purchase a business based on bank statements and tax returns alone. You need to provide a thorough financial picture to potential buyers, which means creating detailed financial statements and reports.
While we strongly recommend working with business advisors for marketing and sales support around selling your business, it’s equally important to have your financial data reviewed and prepared by an accounting professional. In particular, accurate recording of your owner add-backs is vital for selling your business at top dollar.
What Are Owner Add-backs?
Owner add-backs are the expenses of a business that won’t necessarily transfer along to the new ownership. These typically include costs that fall into the categories of expenses that are unusual, discretionary, or non-recurring.
For example, if there was damage to your business’s building in the last year and repairs cost $10,000, this is both an unusual and non-recurring expense. It should be “added back” into the business’s EBITA in order to reflect the true value of the business to a potential buyer.
The add-back process involves identifying and adjusting these kinds of extraneous expenses in your financial statements to reflect the true operational income of your business.
Why Accurate Add-backs Matter
Essentially, add-backs are vital for presenting your business in the best light to potential buyers. Add-backs serve to remove non-operational expenses from your financial statements, such as personal expenses, owner salaries, one-time costs, or extraordinary expenses like major equipment repairs or upgrades. By doing so, you present a clearer picture of your business’s true profitability, making it more attractive to potential buyers.
Failing to accurately track add-backs can significantly impact the valuation of your business. Including non-operational expenses in your financial statements lowers the net profit, potentially undervaluing your business. By properly accounting for add-backs, you increase the perceived value of your business, leading to better offers during negotiations.
Common Owner Add-backs to Consider
There are many expenses that we see categorized as operational costs that aren’t necessarily relevant to the core operations of the business. For a potential buyer, the owner’s salary may not be relevant as an operating expense, since they may plan to hire a manager. Similarly, depreciation will not transfer with new ownership.
While some costs (like owner salary) can be significant and obvious, the less obvious add-backs can add up quickly. An accounting professional will help you track down the expenses that might otherwise fall under the radar and lower your business’s valuation.
The most typical add-backs to consider include:
- Personal expenses
- Owner salaries
- Depreciation
- Amortization
- Interest
- Business taxes
Presentation Is Important to Potential Buyers
Getting your business ready for sale means making sure that all aspects of the business are clean and presentable – both in terms of actual curb appeal and your financial reporting. Buyers will scrutinize your P&L statements to determine the value of your business, and while you can’t remove expenses, you can move them around to accurately reflect the operations of the business.
Expenses that can be categorized as owner add-backs (such as owner salary) are often entered in ways that sit above the net income, resulting in a lower net income on paper. Properly categorizing them in your financial statements helps with both clarity and efficiency, presenting the business in terms of normal operations and profitability.
Failure to remove non-operational expenses will lower the perceived profitability of your business and can deter potential buyers. By presenting clean, accurately adjusted financial statements, you increase the likelihood of attracting serious buyers and securing a favorable sale price.
We’ve seen these adjustments increase the value of a business by up to $150k, making it well worth the investment of having professional assistance in preparing your financial statements.
March 2024
