Interpreting Reported Earnings Quoted By Small Business Seller

If it’s true, as commonly believed, that small business owners tend to be creative individuals, one of the expressions of this talent can be found in the way they calculate the adjusted net earnings they receive from their businesses.

Seasoned business brokers often have difficulty coming up with an accurate earnings figure when analyzing the records of a company going on the market. Their challenge is to determine how much a new owner is likely to earn, based on the current level of gross revenues and the expenses actually needed to generate that income.

If accurately calculating the “bottom line” is hard for someone skilled in this field, imagine the difficulties faced by a real estate licensee with a background in home sales, who is called on to list a small California business opportunity for sale. It’s easy to understand how real estate professionals lacking experience in analyzing businesses records, can be misled by a seller into advertising an exaggerated earnings figure for a business offering.

But the agent or broker will soon get an education–the hard way–about the importance of determining and stating the correct figures. That education will begin when the broker goes back to the seller for more information, after a buyer–relying on initial profit statements–discovers in due diligence that there is no way to substantiate the profits claimed.

EBTIDA

The first thing for a new business broker to understand about an earnings statement is the calculation of Earnings Before Taxes, Interest, Depreciation and Amortization. The seller’s books will probably show each of these T-I-D-A items as expenses, deducted from the gross profit figure along with other fixed costs, before conducting the final calculation of earnings.

An accepted accounting protocol is to assume that these TIDA expenses will vary, depending on the way each buyer wants to manage the financial side of his or her business. And because these “variable” expenses do not represent costs absolutely necessary to conduct business, the common practice is to add the TIDA expenses to the “bottom line” figure to arrive at the seller’s earnings. And this figure should be properly explained as EBTIDA.

ONE-TIME EXPENSES

The cost of a legal settlement with a disgruntled former employee or with an unhappy customer who has some kind of claim, is an example of a non-recurring, or one-time expense. So is the cost of an expensive capital equipment item that was purchased from the business’s ready cash in a single year. As these expenses are not going to be incurred by the new owner, it is fair, when analyzing the seller’s Profit and Loss Statement, to add the amount of these non-recurring costs to the bottom line.

The buyer may have other one-time costs once the business has changed hands, and will treat them however he or she sees fit for bookkeeping purposes. But any non-recurring costs listed by the seller can legitimately be considered as if the dollar values associated with them are part of the seller’s earnings.

PERSONAL EXPENSES

It is common for the owner to have his company pay personal vehicle costs because he uses the car while conducting business, and for an owner to consider it the responsibility of the business to provide her with health insurance, and for an owner to carry a family member on the payroll, even though that person only does occasional, part-time work for the company. These represent business expenses which incidentally, also provide benefit to the owner. And as these are items charged to the business at the discretion of the owner, it is an accepted practice to assume a new owner will not incur the same expenses, and to add these costs to the seller’s earnings figure.

Memberships in social/business organizations, such as country clubs and fraternal societies, subscriptions to periodicals and internet services, and other discretionary “business” costs might also be considered “add backs” when determining seller’s earnings.

An inexperienced broker listing a business and wanting to enter an owner earnings figure that is correct, and can be logically explained, will benefit by carefully questioning the seller on each item “added back.”

But there is no substitute for having worked with these expense entries in the past and knowing from experience, how to calculate seller’s actual earnings.

It amazes me how many people are afraid of losing a deal, losing the next big thing, to the extent that they are willing to comprise what they stand for and what their values are. These people have bought onto themselves the need to sell at every opportunity, to sell nonstop and to sell no matter whether it is ethically or not. There is a fear, a doubt, a part of them that is caught up in the game of sales.

Imagine if you could live in a world where people came to you, where there was an endless amount of business, sales, and referrals and in a world where relationship was king.

Does that world exist? Is there really such a place?

Well for those business owners in that world, they know the world does exists and they also know it is a pretty exclusive club to get into. Exclusive, not because of whom you are or how much you make. Exclusive because you have to think and act a certain way. A way in which most business owners do not, or do not know how to, a way which is the opposite in most causes to what the years of business training has provided.

In the world of relationship building there is no need to sell, there is no need to be rejected constantly and there is no need to continue chasing prospects to the extent that they do not answer your calls. In fact in the relationship world over 85% of people you speak to do business with you. Is that the world you want to be in?

Building relationships with others is not certainly new, it is a forgotten skill, and it is a skill that has been lost in the hustle and bustle of society and the need for results immediately. Relationship people when done correctly can open a whole new world to other people, other contacts and other opportunities. It is what successful businesses and successful business owners know and it is the secret to their success. So how do we change and be a relationship builder?

Well the first part of becoming a relationship builder rather than just a sales person is your attitude, it is a mindset and it is the way you think and act. People building relationships do so not because it will provide them with more business, they do so because they want to. This also provides a big return. Relationship builders are people who try and add value at every opportunity they get to another persons life, rather than just being interested in making a sale. Relationship builders have people so interested in them because the way they think, act and what they do, they are never short of a prospect to talk to.

Think about it, would you rather speak to a person trying to add value to your life or a person trying to sell you at every opportunity?

With social media, the internet, cheap phone calls all over the world, it is easy to be a relationship builder, it is easy to show how much you care and that your value is sky high, it is easy to create business and do business.

Does your business care enough about their prospects, customers, clients and community members to wish them a happy birthday, to send a card of thanks, a small note or gift or just a phone call to say hi, how you are going. Most people in business do not see these items as important; they do not see these as money making activities.

Without naming this big company, they spend more time on building relationships with their clients, having fun days, evenings, sending movie tickets, wine, cards then they do on the phone. This has them #1 in their industry and controlling their market with over 47% of the business.

The power of social media allows you to send messages to your friends and fans in minutes, it tells you and allows you to wish them a happy birthday and it allows you to make them feel important by connecting with them.

Do you take advantage of such tools, do you take advantage of relationship building or are you just constantly selling, selling and selling.