In This Episode
We have found that most owners don’t have a good handle on exactly how much money they are taking out of their business. It’s not that they don’t care. It’s more a factor of there being so many ways people get value out of there business. Some things have been going on for so long that many owners simply forget about them or simply take them for granted.
One of the exercises we go through with many of our business coaching clients is helping them get a sense for the value of their company. One of the most common ways a potential buyer will value your company has to do with placing a multiple on something known as “owner discretionary cash flow”. I know that sounds like a fancy pants word but the idea is to capture all the cash that the owner has control of and to show the true ability for the business to generate cash.
The starting point to figure these things out is your Profit & Loss statement (“P&L). You want to start at the bottom line (i.e. net income) and add back cash items that are outside the normal operations of the business. Some categories to consider looking into for these add backs include:
- Owner as Employee Expenses: for the owner this includes things like salary, employment taxes, healthcare, 401k and/or other retirement accounts.
- “Personal” Stuff: when you own a business there are often blurry lines between what’s considered a business vs. personal expense. Some examples would include things like cell phones, vehicle leases, dinner/lunch, gas, rent and travel. Many owners have never personally paid a bill for Verizon because the company has always covered their cell phone bill.
- Professional Services: chances are there are some professional services you have engaged to help you grow and get better as a business owner that are outside of the basic requirements like having an accountant file your taxes. Perhaps you’ve brought in a consultant or coach to help with a project or to do some training.
In addition to all of these P&L items, you’ll also want to look at your Balance Sheet to see what other things might be paid for but aren’t showing up as expenses on the P&L. This could include things like auto loans and distributions to cover tax payments or to simply take additional funds out of the business. There are also “non-cash” things like credit card points and airline miles and hotel points. Lots of stuff to consider here but certainly worthwhile to help reinforce for you exactly why you continue to do what you do when running your business!