Don't Step Over Dollars to Pick Up Dimes
Most agency owners try to pay as little tax as possible, which usually makes sense. However, this strategy can have drawbacks when it comes time to sell the business.
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There are certain discretionary items that can be added back to improve the bottom line number when determining the value of a business.
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The problem arises when owners are overly aggressive in running personal expenses through the business.
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For instance, it is not uncommon to see household expenses - such as repairs or landscaping being paid by the business, or non-working family members on the payroll.
These types of expenses can significantly reduce the value of the agency since they are not considered acceptable add-backs and are therefore excluded when calculating Earnings Before Taxes Depreciation & Amortization (EBITDA).
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​Calculating the true cost
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Suppose an agency had $65,000 in personal expenses that can't be added back when calculating its value. That's $65,000 that cannot be factored into the calculation of the agency's value.
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Assuming a 24% tax rate, that owner would have saved about $15,500 in taxes.
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Using a very conservative valuation multiple of 4x EBITDA, that $65,000 would decrease the value of their business by $260,000.
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The net result is that tax "savings" would cost them around $244,500 if they were to sell the agency.
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Maximize the amount you receive when selling by cleaning up your financials
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To avoid a situation like this, remove as many personal, non-business expenses as you can from your business finances, and start reporting all income if you plan to sell. The sooner you start, the better.
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