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Understanding Add Backs When Buying Or Selling A Business
| Guest post by: Andrew Rogerson |
Article Overview: An add back is a type of tax deduction that small business are able to claim on their taxes. Understanding them and how they work shows one of the many benefits to owning your own business. This article goes into detail about add backs and how they are used after you decide to buy or start your own business.
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Free Download - How to sell a business By Andrew Rogerson |
Understanding Add Backs When Buying Or Selling A Business
Small businesses are a critical part of the
economic landscape. All the businesses
on the Dow 30 started as small businesses, reached a critical mass that then
led them to becoming a public company and grow to where they are today. Depending on whose statistics you use, small
businesses make up 98% of all businesses in the US economy.
One of the benefits of being the owner of a
privately held small business is that you get to take tax deductions that wage
and salary earners are unable to claim.
This is all part of the risk and reward scenario that comes from owning
and operating a small business.
When it comes to selling the business,
these tax deductions can get in the way as it reduces the true cash flow of the
business, which affects the business valuation and therefore how much the buyer
is willing to pay. To navigate this
scenario, it’s important to understand how to deal with these legitimate tax
deductions or as they are called, add backs.
An add back is a legal expense that appears
in the financial statements of the business such as the profit and loss
statement or tax return but has no true economic value in the performance of
the business. For example, most business
owners choose to take out health insurance on themselves and possibly their
spouse and children. If the spouse and
children do not work in the business then it would be legitimate to accept this
expense as an add back. In this example
there are two critical things. The
spouse and children must not be currently working in the business and they must
not work in the business once the buyer takes over. Other add backs the business owner may choose
to run as an expense through the business includes personal expenses, auto
costs be it gas, repairs, maintenance or insurance for non working family
members, cell phones and vacations claimed as business trips. Another acceptable add back is the payroll
tax paid against the salary earned by the business owner.
Legitimate add backs play an important role
when appraising and negotiating a business.
They can be contentious but the best approach is to prepare a report
that shows what add backs the seller claims as reasonable so the buyer or lender
can have an open and honest discussion.
The best approach when claiming add backs
is to only claim them if they are sizeable in nature and there are not too many
of them. What is sizeable? That depends on each business but I would
suggest anything greater than $1,000 is a good starting point and I would not
suggest trying to justify every add back or a buyer will feel too uncomfortable
as in the end, they don’t want to spend too much time and energy worrying about
every dollar and cent.
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About the Author: Andrew Rogerson RSS for Andrew's articles - Visit Andrew's website Andrew Rogerson is a 5-time business owner that loves helping entrepreneurs sell or buy a business. Andrew currently holds the Certified Business Intermediary (CBI) designation from the International Business Brokers Association (IBBA), the highest designation awarded by the IBBA. Andrew has also earned the Certified Business Broker (CBB) designation from the California Association of Business Brokers (CABB.) He holds a Certified Machinery and Equipment designation (CMEA) from the NEBB Institute and is a Certified Senior Business Analyst (CSBA) with the Society of Business Analysts. Andrew is a member of the Sacramento Metro Chamber of Commerce and past Chair of the Sacramento Chapter of the California Association of Business Brokers. Andrew is also the author on a series of four books: Successfully Sell Your Business, Successfully Buy Your Business, Successfully Buy Your Franchise and Successfully Start Your Business. For more information go to http://www.businesstransactionbooks.com Click here to visit Andrew's website   Successfully buy a business |
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