Most business owners pay themselves a salary through their company’s payroll system. In addition, a high percentage of business owners represented by Praxis Business Brokers “enjoy” some (or in a few cases significant) perks paid by the company and expensed on the business’s books. These perks can range from common and IRS acceptable practices (such as health insurance) to more aggressive and less acceptable practices (such as vacations thinly disguised as business trips).
While the brokers at Praxis have no interest in passing judgment on either the magnitude or composition of owner perks, we want business owners to understand that it is imperative that (a) we know of all such perks, and (b) the business owner tracks these perks very carefully. Why, you ask?
The basis for what a buyer will pay for a business is generally a multiple of either a historical, normalized SDE (seller’s discretionary earnings) or a historical, normalized EBITDA (earnings before interest, taxes, depreciation and amortization). While the range of multiples for SDE or EBITDA is broad (from under 3.0x to more than 6.0x), we will use 4.5x for the purposes of this analysis.
To disclose seller perks as part of the normalization process (often called recasting), we actually dedicate one or more line items in our valuation template for “add-backs” of seller perks. We have learned the hard way that if we list an exact number, say for instance, precisely $50,000 as “seller estimate of value of seller perks,” most buyers find such an exact, round, unsupported figure to be insulting. A general round number as an add-back for seller perks is often viewed as a flimsy justification of $225,000 ($50,000 x 4.5) of the purchase price of the business in this example. In addition, that single generic, unsupported add-back can often undermine both the seller’s credibility and the buyer’s overall confidence both in a potential deal and in the selling price of the business.
If, on the other hand, for the same business, the line item for seller perks reads “seller perks which will be fully supported during due diligence” with a figure of say, $50,355, the buyer will not question that add-back as he knows that the seller understands that the buyer will want to review and accept the perks that the seller has historically enjoyed. The buyer will also be far more likely to accept in normal course other add-backs which are well supported and most importantly recognize that including a multiple of supported add-backs in the purchase price is both fair and reasonable.
While keeping track of the value of seller perks can sometimes be tedious, there is only one loser for not embracing the process – the seller.