How to (Almost) Sell Your Business for More Than It's Worth

The value of a business is generally worth a multiple of adjusted earnings. For this example, let’s use three times earnings. Besides automatic addbacks for taxes, depreciation, and interest (by definition), you can also make earnings adjustments for owner’s salary, one-time expenses, and discretionary expenses.  

To put it another way, you get three times any adjustment you make on top of the business price, so let’s get started on making some adjustments that could net you tens of thousands more than what your business is actually worth.

Add back a lease payment, but make the buyer assume the lease. 
I’ve seen this work.  Often you’ll see “addback lease payments” in the instructions on how to calculate discretionary earnings, but this assumes that the seller pay off all leases at close.  I heard of a UPS Store owner that sold his store based on earnings that didn't include lease payments, but didn’t pay off a lease on one of the large digital copiers. The buyer didn’t make payments on the lease and they ended up in court, each spending tens of thousands.  OK, so it didn’t work.

Do you work as a husband / wife team? 
This is a good way to inflate earnings.  Although the correct method is to addback one owner's salary, add back both husband and wife’s salary as "owner’s salary".  Hopefully the buyer will not realize that they must hire someone to replace one of you.  Perhaps you the husband takes a salary but not your wife.  In that case you don’t even have to add back anything.  To justify this, just tell yourself that you will probably sell to a husband / wife team in which the wife will also work for free.

Do you own the real estate along with the business?
If you own the real estate and don’t have the business pay you rent, you have some pretty nice financials already cooked up and ready to serve with no adjustments needed.  The key here is to wait until the last minute before the close, then say, “gee, the last thing we need to do here is figure out how much rent we’ll charge you once you own the business”.  Hopefully the buyer will not figure out how grossly unrealistic the earnings number is without any rent (and that he is paying three times that number).  I’ve actually seen businesses presented this way that when fair market rent is added it actually swung the earnings into the negative.  I’ve not heard of any that actually made it through a closing that way.  Far more common is using a rent figure that is merely what the seller decided to pay himself, with no relation to the real world and fair market rent.

Add back discretionary expenses that are not discretionary
Some expenses sound like they may be discretionary expenses, so add these back and hope no one challenges them.  Go to an industry convention each year?   Important as it may be to attend, it kind of sounds like it could be discretionary.  Add it back.  Gifts, contributions, season tickets, etc. to important customers? Employee bonuses? Add them back.  Business brokers sometimes use some of these categories as "automatic addbacks".  In that case there isn't much to do but agree with your broker that these are expenses that have no impact on the business. It would take a dim-witted buyer to not realize that these expenses can be important to the continued success of the business, but you may as well give it a try.  I’ve seen others try it.

The bottom line is that you would have to find a pretty stupid buyer to pull these tactics off, which is the subject of another blog entry: There are no Stupid Business Buyers.  

So I can’t actually tell you how to sell your company for more than its worth.  Almost, but not quite.  I can tell you that if you are a business buyer, these are things that sellers (and brokers) have tried, and will try again.  Watch for them.