Get Adjusted: Making the Most of your Bottom Line

7 common add-backs that boost EBITDA and company value.

When you are ready to sell your business, you may have to adjust your bottom line to maximize company value. Most businesses are valued based upon earnings before interest, taxes depreciation and amortization (EBITDA). While public companies want to maximize their reported earnings, private company owners usually focus on minimizing profits to lower taxes. Therefore, many S corporations or limited liability corporations (LLCs) may have understated profits because of private company expenses that impact their bottom line and reduce EBITDA. That’s fine as long as your accountant and the IRS agree that they are legitimate business expenses. However, when you want to sell your company, those private company expenses will lower your EBITDA and your company’s value unless you can demonstrate to potential buyers that the expenses will not transfer following a sale. To present the true value of your company, your investment banker should develop your “adjusted EBITDA” by adding back those expenses that will not be inherited by a new owner. Here are 7 common add backs that can boost your EBITDA and company value:

  1. Owner’s salary and compensation – usually the largest single add back item. However, even if you’re retiring, someone will have to lead the company and be paid a fair salary. Therefore, salaries can’t be eliminated entirely. Many private company owners often take home more than a “market rate” salary and the bottom line should be adjusted to add back compensation in excess of the market rate, or what it would cost to hire a successor.
  2. Salaries and bonuses paid to relatives – if they will not continue working for the company post-transaction they should be added back.
  3. Personal travel – that is commonly linked to business travel.
  4. Vehicles – if not used primarily for business purposes.
  5. Life insurance premiums and other fringe benefits – provided for the owner or their family members.
  6. Excess Rent Payments – many times business owners hold the company’s real estate in a separate entity. Sometimes that entity is sold along with the operating business; other times, the owner will retain the real estate. In the latter case, make sure the rent is consistent with market rates. If it’s not, at least some of the cost should be added back to the bottom line.
  7. Non-recurring expenses – these can include: litigation costs, bad debt expense, or one-time inventory write-downs. These should be excluded from your adjusted EBITDA. Accounting and auditing fees, however, are recurring items and should not be added back.

Not all potential cost savings are legitimate add-backs. For example, elimination of your HR department by the acquirer will ultimately save the buyer money. However, this is not an add-back because the function still must be provided. Such savings would represent a synergy with the buyer, but not an increase to your adjusted EBITDA. There’s nothing wrong with managing your business to minimize taxes. However, when it comes time to sell, get adjusted to maximize company value!

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