Normalising your accounts pre-sale
- December 9, 2019
Add normalising accounts to your pre-sale checklist, ensure you get some help to add as much back into your EBITDA as possible.
Some business owners love doing their own financial accounting, others file all their receipts in a box. This is not helpful for a potential buyer! Although you should retain your business receipts normalising your accounts is an important step in sale preparation.
Normalising means taking certain expenses and income out of your profit and loss statement to show potential buyers a more accurate picture of your operating costs and potential profits.
EBITDA vs. Adjusted EBITDA
EBITDA is your earnings before interest, tax, depreciation and amortization.
Adjusted EBITDA is add-backs of expenses that are currently included in the income statement (and thus the EBITDA) but won't be expenses for the new owners. This can consist of regular expenses such as an owner’s salary, as well as one-time costs that aren't an ordinary business expense.
Most buyers will use your adjusted EBITDA as the basis for their offer. Generally, the value of your company, and the offer from a buyer, comes from your profits multiplied by a specific number. The higher your profits, the higher the offer. This means adding expenses back into your accounts is essential to receiving an offer worthy of your business.
What to Add Back
Add backs are generally personal or non-recurring expenses that the new owner won't have to pay. One-off expenses should also be included; for example, legal or insurance costs, one-time professional fees, new equipment, and the cost to develop a new product.
Owner expenses can include personal items such as a vehicle, entertainment, travel and club memberships that aren’t essential to running the business but are included in the income sheet for tax mitigation.
Taking the time to go through your expenses and determine your adjusted EBITDA is worthwhile, it gives you and your potential buyer an accurate picture of the operating costs and potential of your business. It’s also an opportunity for you to increase the value of your company. Add normalising accounts to your pre-sale checklist and make sure you get some help to add as much back into your EBITDA as possible.
Brokers know how to look for these adjustments, so they can work out the best adjusted EBITDA for your business, they could add quite a bit to your bottom line maximizing adjusted profits.
The higher the profits, the higher the offer!