Sales Aren’t Profits: A Common Selling Mistake

I received a surprise email. I need your help selling my business. It’s a million dollar business.

A business owner who I had helped sell a few years ago shared my email and I received the message above from the owner.

We hopped on the call to discuss the business and educate him on the process.

Then I asked the question… how’d you settle on a million dollars?

Their answer: That’s what I did in sales last year.

I asked for the financials and received them a few days later.

I bet you can guess what I’ll say next.

The business was losing money. $75k lost last year and $40k the year before. But the owner said don’t worry, there are a lot of personal expenses in there.

There are some commonly accepted addbacks – think depreciation, interest payments, salary for non-working family members, a personal car run through the business.

But this owner’s addbacks? Well he ran his groceries through the P&L, nearly every meal, all his gas, personal travel, and numerous purchases at big box retailers.

Unfortunately, this is a common sight. I’m not the IRS and won’t lecture anyone on the tax code.

But I will ask the same question each time. If you were a buyer – how do you know what’s a real business expense and what isn’t when looking at this?

Lenders are risk averse by nature. If it’s not clear and can’t be proven, they don’t accept the addback. Buyers are the same.

The truth is not even the owner knows how much his business made. The way he ran his business meant he saved a lot of money on taxes while running it, but will struggle to sell.

I’ve noticed a correlation in listings. The more addbacks the less likely the business is to sell.

If you choose to run all your personal expenses through your business, that’s between you, your accountant, and the IRS. But know, your likelihood of selling decreases dramatically.