As we have discussed elsewhere, the cash your business generates – particularly in the 12 months leading up to a sale – is critical to how much an investor will pay for your company. This means you should be evaluating discretionary expenditures carefully before you make them.
Sellers often have their businesses absorb personal expenses. This is an accepted perquisite of business ownership and buyers will usually credit your business’ cash flow (for determining purchase price) for any of these expenses that the business won’t be responsible for after the closing. So while you don’t need to eliminate all of these in the year up to the closing, if you run a significant amount of tax expenditures through your business you may create some tax risk that may complicate your negotiations with buyers who won’t have any tolerance for paying pre-closing income or payroll tax.
True business expenses, however, can be more complicated. Buyers generally won’t agree that “discretionary” bonuses paid every year should be credited to your cash flow for valuation purposes, but the matter gets less clear when thinking about expenses such as:
- true one-time “stay” or retention bonuses
- non-routine trade show expenses (such as for shows that happen every 3 years)
- large holiday parties or anniversary celebrations
- significant marketing expenses (web site revamping, advertising, etc.)
Should you make these expenses in the year or two preceding a sale? Let us help you make – and characterize – these sorts of choices in a manner designed to ensure that you’re not hurting the company’s sale value when trying to do right by your employees and your company.