Owners of privately-held businesses want to maximize their cash flow and legally minimize the taxable profit they report to the Internal Revenue Service. A common way to do that is by depreciating business-owned real estate, machinery, furnishings, fixtures and equipment in accordance with IRS rules. They also expense whatever is allowed such as a convention trip, business lunches and executive salaries for themselves and family members working in the business.
But at some point you may want to sell your business and interested buyers will ask to see your tax returns and proof of earnings for previous years. That’s because financial buyers make offers based upon what you report to IRS and your historical financial statements. They presume that your past success is a precursor to their return on investment.
Do you show them your tax returns and historical financial statements with a wink and an explanation? The answer is “yes.” But instead of a wink, you say, “let me prove to you what the real cash flow would have been if my strategy were not to legally minimize my income tax burden.”
Stacy Alario, a certified business intermediary and shareholder at American Business Brokerage Inc., shows business brokers how to increase the selling price of businesses with recast financial statements. The recast statements are presented alongside of the original ones that depreciate and expense every legitimate item to lower the owner’s income tax.
Alario teaches Accounting Basics for Business Brokers for the International Business Brokers Association University. “Privately held businesses are trying to shelter their income using tax-saving strategies to pay the least income tax,” she tells her students. Recast statements show the real profits by eliminating depreciation, many of the expensed items and nonrecurring, extraordinary operating expenses. But she adds that the eliminated write-offs and “nonrecurring expenses must be supported by documentation.” Moreover, “Any adjustments to a balance sheet or (profit-and-loss statement) should be footnoted.”
Business appraisers also recast financial statements to increase a business’ value. “One of the most useful tools a business owner can put in his or her planning toolkit is a set of recast company financials,” according to the ebusinessappraisals.com newsletter. “Most business owners diligently minimize their overall tax exposure and maximize the benefits that come with business ownership.”
The business evaluation firm says that recast financial statements can increase the appraised value of your business and its selling price. Additionally, recast financial statements provide justification for knowledgeable lenders to increase the loan amount to your buyer. It can make or break the sale of your business.
That’s good reason to tell the buyer of your business that BoeFly’s 2,200 lenders are experienced business lenders and many will consider recast financial statements as long as you footnote and explain the justification for modifications. Some will also consider projected income as a basis for increasing the loan amount to help consummate the sale to your buyer. Be aware, however, lenders trend projections using your financial statements as the starting point. So recast statements can result in higher projections and a bigger loan for your buyer.
In addition to a full bank loan, a small amount of seller financing can also increase your sales price. To make seller financing more acceptable for your banker, your financing should be subordinated to the bank loan with right for the bank to cure a default. The bank may also want payments on your loan to be delayed until there is ample cash flow to better service both loans.
BoeFly’s lenders are transaction oriented and many are willing to think through recast financial statements and deal structuring. Qualified buyers for your business will get multiple offers for financing. BoeFly’s advanced technology simplifies the process for bankers and borrowers to make negotiations faster and less costly.
Lastly, have a competent business lawyer and tax professional review the terms of seller’s offer to purchase your business. They will advise you about limiting your future liability and tax consequences resulting from the sale.
Jerry Chautin is a former entrepreneur, commercial mortgage banker and business lender. He writes and blogs about business and real estate for several publications and is SBA’s 2006 national “Journalist of the Year.” Jerry is a volunteer business mentor with SCORE, “Mentors to America’s Small Business,” offering free business advice. Post your comments and ask questions on this Blog or send Jerry an e-mail.
Copyright © 2012 Jerry Chautin — All rights reserved.