How Profitability is Open to Interpretation

How Profitability is Open to Interpretation

Jan 17 2018

Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to a buyer—is where you can dramatically spike your company’s value.

Let’s take a simple example to illustrate:

Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business for $100,000 per year. You could safely make the case to a buyer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you three times profit for your business, that one adjustment has the potential to earn you an extra $300,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business. This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of a new owner.

Some of the most common adjustments relate to rent (common if you own the building your company operates from and your company is paying higher-than-market rent), start–up costs, one-off lawsuits or insurance claims and one-time professional services fees.

Your multiple is important, but the subjective art of adjusting your SDE (Seller Discretionary Earnings) is where a lot of extra money can be made when selling your business.

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