Don't Make This Mistake When Selling Your Practice
Updated: Jun 9, 2020
Today we are going to cover everybody’s favorite topic – preparing your financial statements to sell your practice! Wait- don’t leave- I promise we will make this short, sweet and to the point… And definitely worth your time!
When you come to us to sell your business, one of the first things we do is review your last three years of Profit and Loss statements. We analyze these statements for possible addbacks; These are adjustments to your financial statements where we take out:
Personal expenses (such as club memberships, car payments, health and car insurance for your family, etc.)
Owner’s salary, and salaries for any family
One-time expenses (non- recurring repair or maintenance, a marketing expense that will not be repeated, etc.)
Depreciation (tax deduction on equipment, not a cash transaction so not a true expense)
Interest (unless new owner will be taking on your loans, which is highly unusual)
Do you currently run a lot of expenses through your practice? It’s a common practice- although definitely a gray area with the IRS. But our concern here is how it will affect your practice sale.
Banks don’t love huge addbacks. Depending on the lender, they may or may not accept your addback as valid, especially in todays’ tighter lending market. How can this affect you?
Let’s say you’re selling your practice, and you adjust your net income with addbacks for:
$5,000 for meals and entertainment
$5,000 for travel
$10,000 for depreciation
$20,000 for personal insurance for car and health
$150,000 for salaries for yourself, your spouse, and your teenage daughter
$20,000 for personal expenses such as supplies, gifts and home office furniture and décor
$10,000 for interest expenses
$10,000 for one-time marketing and repair expenses
Altogether, you add $230,000 back to your profit, resulting in $300,000 adjusted EBITDA (earnings before interest, taxes, depreciation and amortization.) But in today’s lending environment, it’s possible the lender will only accept the salaries, depreciation and interest, resulting in an EBITDA of only $240,000. This can significantly impact who lenders will approve for your business, leaving you with the option to seller finance or chose from a smaller potential buyer pool.
So- if you are thinking of selling your practice in the next 3-5 years, the take-away here is this is a great time to streamline your financials. Instead of passing expenses through, consider giving yourself and/or your spouse/ family members a raise. This will always be an acceptable addback, and it results in a much cleaner financial statement. This will increase your payroll taxes, so talk to your tax accountant and see what the ramifications will be.
It probably goes without saying, but just in case… Your addbacks will be highly scrutinized by potential buyers and their accountants. So this is a process best done carefully, with documentation to cover why any expenses are being removed to add profit back. If you are dealing with a complex financial statement revision, the best way to handle it is with a Quickbooks Detailed Profit and Loss Statement. Then you can go line by line, note all the expenses to addback, and indicate reasons as needed. Doesn’t sound like your favorite way to spend a weekend? Give us a call- cleaning up your financial statements is only part of the full service package we offer sellers!
So there you go- that wasn't so bad! And if you loved this post and want to think a little more about the state of your financials, make sure to read this one, too. Until next time!