confidential business sale - buying or selling small businesses
DESCRIPTION
If the buyer has continued interest, the next step in the process is a Buyer and Seller meeting at a time that is convenient for you. Since we have office locations in Cleveland, Detroit, and Youngstown, we often have initial meetings between Buyers and Sellers in our conference rooms.TRANSCRIPT
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Buying or Selling a Business
Understanding the Business Profitability
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Small Business Financials
Recast Financials
• Seller desires to lessen tax distorts data
• If business exists 3 or more years, this suggests they
are making money
• Many people live out of their companies expensing
personal benefits to the business
• The top line is important, the bottom line is important,
but what is in between tells the real story
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Financials
The two financial documents that are adjusted are the
Income Statement
Balance Sheet
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
What is Recasting
• Adjust The INCOME STATEMENT to determine
SELLERS DISCRETIONARY EARNINGS (SDE)
• SDE is the amount of money the business generates to
pay debt service and provide wages for the
owner/operator
• An adjusted Income Statements gives the buyer an
economic view of the business so a buyer can compare
different businesses equally
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
What is Recasting
• Adjust the BALANCE SHEET to Fair Market Value of
the Assets to be transferred to a new owner– Furniture, Fixtures & Equipment
– Inventory
– Accounts Receivables (not typical in small business sales)
• Banks will loan on assets and cash flow
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Financials
Everyone has a different meaning of “Business Earnings”
Possible Definitions:
– SDE - Seller’s Discretionary Earnings– This is what we use for small businesses– This can be equate to the owner’s lifestyle he is living out of the business
– EBITDA - Earnings Before Interest, Taxes, Depreciation, & Amortization– This is typically used for larger businesses– Private Equity Groups or Investors not managing the day-to-day operations
will typically use this term– The easiest way to think of EBITDA is that you calculate the SDE but then
you subtract out a cost for a full-time manager’s salary and benefits since there will be an expense for someone running the show
– Net Income (or Net Profit) – Bottom line of tax return after all expenses– Doesn’t really apply to small businesses since only the owner, accountant,
and IRS are the only individuals to see this number. The goal in small business is to minimize so that less taxes are paid.
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
Recasting Example:
Real Life Business We Sold
2004 Unadjusted Pre-Tax Profit =
$43,721
2004 SDE =
$277,076
An uneducated Buyer & Seller could
view the profitability as
$43,721 vs. $277,076
This is over a 600% difference!
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
What items are typically adjusted?– Depreciation– Amortization– Interest– Officer Compensation– Family salaries/benefits– Officer Insurance– Officer Auto– Officer Fringe Benefits– Rent– Replacement Employees
Sometimes positive, sometimes negative
You must understand when you can adjust and when it must stay.
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
The bottom of the tax returns read:
The owner’s lifestyle reflects the above numbers plus:
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
Though the owner spent his “earnings” as shown on the previous slides, as a business buyer, you have the above amounts to spend to your discretion. This would include paying yourself a salary and servicing the debt required to purchase the business.
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
General rule when recasting:
– If a new owner walked in today to replace the current
owner, ask yourself, “What expenses are necessary to
generate the current level of sales?”
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
Items to think about that we have seen in the past:
– Owner currently pays his employees 100% medical while his competitors
don’t pay medical. Can you add this back?
– As an area developer of a franchise, the current owner pays 4.5% royalties
versus the typical 6% royalty. Is an adjustment needed?
– The owner owns the real estate in a separate corporation and leases it to his
business. The Fair Market Rent for the area is $2000 per month. To lower his
business taxes, he charges the business $2500. Is an adjustment needed?
– For the example above, times now have been tough for the business so he
decides to cut the rent to $1500 per month. Is an adjustment needed?
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
More questions to think about:
– The owner takes a salary of $80,000 and works full-time in the business. This
is a fair market price for a person in this role in the company. The owner’s
wife does all of the accounts receivable and accounts payable for the business.
She works approximately 35 hours a week doing these functions. So they
don’t have to pay social security taxes for both of them, she doesn’t take a
salary since the $80,000 is sufficient for them to live on. Is an adjustment
needed?
– The owner has a flower shop. He is expensing the delivery van through the
business. Is an adjustment needed?
– The owner of the flower shop is expensing his BMW through the business. Is
an adjustment needed?
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
More questions to think about:
– The owner has a home-based travel business. The business
spends $50 per month for internet service. Is an adjustment
needed?
– The owner has a brother that works in the business who manages
the paint department. A person of that skill level typically makes
$35,000 per year. Because he is the owner’s brother, he is
making $55,000 per year. Is an adjustment needed?
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Recasting Income Statements
Remember:
– You will not be able to accurately recast the financials
of a business by just looking at the income statements or
tax returns
– You have to ask questions to understand where add-
backs (or subtractions) may exist
Confidential Business Sale, Inc. ConfidentialBusinessSale.com
Contact One of Our 3 Offices
Confidential Business Sale, Inc.
Independence Tower
5755 Granger Rd.
Suite 360
Cleveland, Ohio 44131
Phone: (216) 739-0272
Fax: (216) 739-0279
Confidential Business Sale, Inc.
Laurel Office Park I
17177 N. Laurel Park Drive
Suite 236
Livonia, Michigan 48152
Phone: (313) 221-9378
Fax: (313) 221-9379
Confidential Business Sale, Inc.
StanJim Building
5437 Mahoning Ave.
Suite 2
Youngstown, Ohio 44515
Phone: (330) 423-0879