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For small business owners, it is not uncommon to run a number of personal expenses through the business. This is largely done in an effort to reduce the amount of taxes payable, but if you are considering a business sale, then you may potentially be leaving a considerable amount of money on the table at the time of closing.
Many small business owners run personal expenses through their business to save on taxes. But if you’re planning a business sale, this can reduce your final price—sometimes by a lot.
Businesses usually sell for a multiple of earnings. For every dollar saved on taxes by mixing personal expenses, you might lose $3 to $4 in sale value. Trying to save pennies now could cost you dollars later.
Removing personal expenses improves your chances of a higher sale price and attracts more buyers. Buyers trust clear, straightforward financials. Fewer adjustments mean smoother deals and better terms.
After an offer, buyers dig deep into your financials during due diligence. Clean books make this process faster and easier, reducing chances of renegotiation or deal delays.
Lenders, especially third-party ones like SBA loan officers, prefer businesses with clear financials. Mixing personal expenses may reduce their loan amount, forcing you to lower your sale price.
Aside from any potential problems with lenders, the bigger concern you may face could be with the IRS in relation to tax issues or audits, along with leaving yourself open to legal action on a personal level. Most owners register their business as a corporation to provide them with protection as an individual.
However, if you are running a number of personal expenses through the business an argument could be made by opposing counsel that the courts should pierce the corporate veil, and this can impact you directly. If you have any concerns at all in this area you should speak with your attorney.
There are several ways you can save on taxes in a legally acceptable structure, and to find out more you should speak with your CPA, wealth manager, or a tax attorney. By taking these steps you can put your business in a position that is most appealing to a buyer. That can maximize your sale price without any concerns over personal expenses.
If you’re running personal expenses through your business, addressing this may mean adjusting your salary or distributions. However, these changes can bring big benefits over time.
For every dollar that you run through your business that is not a legitimate business expense, you may be saving around 37 cents per dollar in taxes. But when it is time to sell your business, that same dollar could end up costing you an additional 3 to 4 times that amount.
If you are considering a business sale, whether now or in the future, I’d love to chat with you! Please note that approximately 90% of my listed businesses sell, compared to the national average of 10-20%. The first step toward learning more is to get in contact and schedule a call with me.
To contact Jim, give him a call at (407) 927-8999 or send him an email at jimp@bossgi.com.
Jim Parker is an experienced business broker selling businesses with gross sales between $1 million and $10 million. His company is based in Clermont, Florida. As an industry leader, he has served as the past president of the Business Brokers of Florida and currently sits on the International Business Brokers Association’s Board of Governors. Jim is a sought-after speaker who teaches others in his industry best practices in ethics, closing transactions, and finding qualified
buyers. He has earned over 50 awards and recognitions in his career.
Jim is a Certified Business Intermediary (CBI), Certified Mergers and Acquisition Professional (CMAP), Masters Certified Business Intermediary (MCBI), and is a Mergers & Acquisitions Master Intermediary (M&AMI). He is one of less than 20 business intermediaries in the world that have all four of these designations. Jim specializes in selling auto repair shops, oil and lube shops, collision centers, tire dealers, and other auto-related businesses throughout the United States. He has a reputation for fair dealing and impressive results. Jim focuses exclusively on businesses with at least $1 million in gross sales.
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