Why You Should Start Showing More Profit Now

It’s no secret that small business owners aim to maximize expenses on their tax returns, in order to show the least amount of profit possible. While that is a common practice to minimize tax liability, it can negatively affect your business’s chances of qualifying for an SBA loan, and ultimately could hinder your chances of selling your business. 

If you are preparing to sell your business, or even thinking about selling it in the next few years, there is one big thing you can do now, which could help you increase your selling price and the ability to sell your business: show more profit on your tax returns. 

Business Financials and Lenders

More than 50% of our buyers intend on utilizing an SBA loan to purchase a business. In order to do that, the buyer of course must qualify, but more importantly, the business needs to qualify first. Your business broker will perform a financial recast and perform add-backs (non-cash expenses and non-essential business expenses, such as personal expenses that get added back to the owner benefit) to maximize your business’s most probable selling price, but lenders/banks will not accept all of those add-backs. Lenders have certain add-backs that they allow, and that’s it. If the business is originally valued for sale based on a load of add-backs, even if you can prove them, this could be an issue in the future with a buyer who is using financing. Showing the “cleanest” financials and the most amount of profit on your tax returns as possible, will put your business in the best position to qualify for an acquisition loan. 

Business Financials and Buyers

Any add-backs that you and your business broker add to your financials need to be provable to a buyer. As the seller, you have the burden of providing evidence to a buyer that the add-backs you’ve shown are the real deal, as those add-backs will be tested during Due Diligence. That’s what Due Diligence is all about. The buyer is looking to confirm that the financials they’ve been provided with are true and accurate. That’s why it is paramount that you are honest with your business broker when he or she is performing your recast and valuation, because your goal should not be to include as many add-backs as possible to boost the owner benefit as high as possible. You want to have the owner benefit that is as accurate as possible. If the majority of your owner benefit is achieved via add-backs, then that is a much riskier situation for a buyer, and many buyers will be turned off by that. We’ve even had buyers who say they won’t consider any add-backs when looking at a business’s financials. So, in order to attract the quality buyers who are willing and able to purchase, having clean financials (showing as much profit as possible to the tax man) will definitely do the job. 

How many years of maximized profit do I need to show?

Ideally, you want to want to minimize your non-business expenses or personal expenses on your tax return for the 3 years prior to listing it for sale. That’s going to put you in the best position to get the most money for your business, and furthermore, find a solid qualified buyer to purchase the business. If you can’t get three full, years, having 1 or 2 is better than none, so that’s why we like to help sellers prepare for their sale as far in advance as possible. Of course, as business brokers, we are not CPAs or tax experts, so it is important for all sellers to consult with their accountants on all tax matters. 

If you would like to talk with us about preparing your business for sale, in order to get the highest selling price possible when the time comes, we are happy to schedule a confidential chat with you, even if you are a few years away from selling.