For small business owners, it is not uncommon to run a number of personal expenses through the business. This is largely done in an effort to reduce the amount of taxes payable, but if you are considering the sale of your business then you may potentially be leaving a considerable amount of money on the table at the time of closing.
The Hidden Cost of Lower Selling Prices
Businesses typically sell for a multiple of earnings, and so the higher your earnings, the higher the sale price will be. For every dollar you try to save by putting personal expenses through the business you may see a tax saving of around 37 cents per dollar. However, for every dollar you generate in earnings that is then applied to the multiple, you might see this dollar be worth $3, $4, or sometimes even more. In an attempt to save pennies, you may be losing out on dollars.
How Clean Financials Can Maximize Your Sale Price
By eliminating personal expenses from your business not only do you increase the chances of getting a higher sale price, you also increase the prospects of selling your business. Buyers will find it much easier to understand the financials, which increases the likelihood of an offer being made. The fewer adjustments that a buyer sees in the financials, the greater the level of trust that they will have in the numbers, and the more you are likely to see favorable deal terms.
Avoiding Deal Breakers During Due Diligence
Once a buyer has made an offer and you are under contract they will begin the due diligence process, which gives them an in-depth look at your financials and allows them to verify the numbers contained within your tax returns, bank statements etc. The more straightforward your financials are, the easier the due diligence process will be for the buyer, and the less likely they are to challenge you on the numbers. It is often said that ‘time kills all deals’ and by having your financials in order, the due diligence process will be much quicker and allow you to move forward toward closing the deal.
By having clean books and records you prevent a situation occurring where the buyer could have some leverage that they can use against you to perhaps try to change the sale price or the deal terms later in the process.
A high number of deals involve financing from a third-party lender, such as an SBA 7a loan, and these lenders can feel uncomfortable with the numbers if they are seeing a large amount of personal expenses being run through the business. This will usually result in the lender only being willing to lend a lesser amount, which can mean you having to reduce the asking price of the business in order to get a deal done.
The Risks of Mixing Personal and Business Expenses
Aside from any potential problems with lenders, the bigger concern you may face could be with the IRS in relation to tax issues or audits, along with leaving yourself open to legal action on a personal level. Most owners register their business as a corporation to provide them with protection as an individual, however if you are running a number of personal expenses through the business an argument could be made by opposing counsel that the courts should pierce the corporate veil, and
this can impact you directly. If you have any concerns at all in this area you should speak with your attorney.
Legitimate Ways to Save on Taxes
There are several ways you can save on taxes in a legally acceptable structure, and to find out more you should speak with your CPA, wealth manager, or a tax attorney. By taking these steps you can put your business in a position that is most appealing to a buyer, and that maximizes your sale price without any concerns over personal expenses.
If you are currently running personal expenses through your business, then taking the steps to address this issue will require some adjustments, perhaps to the salary or distribution you take, but in the long term this can have significant benefits.
As I mentioned at the start of this article, and the key point to take away, for every dollar that you run through your business that is not a legitimate business expense, you may be saving around 37 cents per dollar in taxes, but when it is time to sell your business that same dollar could end up costing you an additional 3 to 4 times that amount. If you are considering the sale of your business, it will benefit you greatly to remove the personal expenses from your financials.
Looking to Sell? Let’s Talk
If you are considering selling your business, whether now or in the future, I’d love to chat with you! Please note that approximately 90% of my listed businesses sell, compared to the national average of 10-20%. The first step toward learning more is to get in contact and schedule a call with me.
To contact Jim, give him a call at (407) 927-8999 or send him an email at jimp@bossgi.com.
About the Author: Jim Parker
Jim Parker is an experienced business broker selling businesses with gross sales between $1 million and $10 million. His company is based in Clermont, Florida. As an industry leader, he has served as the past president of the Business Brokers of Florida and currently sits on the International Business Brokers Association’s Board of Governors. Jim is a sought-after speaker who teaches others in his industry best practices in ethics, closing transactions, and finding qualified
buyers. He has earned over 50 awards and recognitions in his career.
Jim is a Certified Business Intermediary (CBI), Certified Mergers and Acquisition Professional (CMAP), Masters Certified Business Intermediary (MCBI), and is a Mergers & Acquisitions Master Intermediary (M&AMI). He is one of less than 20 business intermediaries in the world that have all four of these designations. Jim specializes in selling auto repair shops, oil and lube shops, collision centers, tire dealers, and other auto-related businesses throughout the United States. He has a reputation for fair dealing and impressive results. Jim focuses exclusively on businesses with at least $1 million in gross sales.
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