Invest in Taxes to Increase Value When Selling Your Business
Small business owners have a multitude of challenges in the current business environment: issues such as inflation to labor demands to supply chain delays. Owners are constantly exploring ways to increase sales and reduce expenses while ensuring they have a personal net increase at the end of the year.
One way to increase net personal gain is to reduce your business tax hit at the end of the year. The best way to do this is to reduce your net income. In other words, show your company is not as profitable as it could be.
How to Show Less Net Income
A popular way to show less net income is to use your company as an ATM. Showing business expenses such as a boat, personal trainer or home furnishings might be questionable. A boat may be used to wine and dine potential clients but is it really needed, on an ongoing basis, to create company profits?
Show Healthy Net Income When Selling Your Business
If selling your business is five to ten years away, you may be content in mixing in questionable personal expenses with legitimate business expenses. Once you decide you want to sell your business, it is imperative to show strong historical three to five year net income reflecting an upward trend. That is what buyers want to see!
You might think personal expenses can be used to normalize EBITDA or to show as add backs. However, most buyers and banks will accept only minimal personal expenses as add backs. Most personal expenses are thrown out and this reduces your company value.
The Power of the Multiple
Using a very simple example, let’s say you charge $100K in personal expenses to your business in a year. If you are taxed at 40% you will save $40K in taxes. If, when you decide to sell your business, it is determined your company value is 5X EBITDA, that $100K net income would have an additional $500K in company value (5 X $100K). A $460K difference! Granted, you will have extra capital gains taxes with a higher value, yet the benefit of the higher value will far outweigh the tax savings provided by personal expenses to your business.
If you would like to learn more about valuations, check out the following articles “Seriously Drive Up the Value of Your Company” and “One Tweak That Can (Instantly) Add Millions To The Value Of Your Business”.
As you prepare to sell your business, I highly recommend you consult with your CPA to ensure you are guided in your exit tax planning. If you are a business owner that has decided to sell in the next three to five years, you will want to show as much net profit as possible now. This will put you in a position to entertain multiple buyers with strong offers, as a result of your commitment to investing in taxes!
This article was written by Sam Thompson. Sam is the president and owner of Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies. Sam is a Merger and Acquisition Master Intermediary (M&AMI) and a Certified Business Intermediary (CBI) who has successfully guided countless business owners through the sale or merger of their company. Prior to becoming a business broker, Sam was a successful CEO and business owner for 29 years before selling his $16 million business.