Owner Benefit - Damon Desautel

Owner's Benefit

The first step in understanding the value of a small business is to discover what the true profits of the business are. This process is the cornerstone of all valuation models. It involves more than looking at the tax returns or the profit & loss statements.

Tax Returns and other Financial Statements do not always show the true “economic earnings" of a company. As a buyer or a seller you need to understand what the true economic earning actually is. Further study and analysis can reveal the "Owner's Benefit" also called the Owner’s Discretionary Earnings*.

The "Earnings" of a Business Enterprise Include:

Net Profit (loss) before Taxes plus the following add-backs:
- Owner’s Total Compensation.
- Depreciation & Amortization.
- Interest Expense.
- Expenses that are unnecessary to the operation of the business (Perquisites).
- Income Taxes.
- Nonrecurring Expenses.

Owner’s Benefit Worksheet

The goal of the analysis, using our worksheet, is to determine the potential economic earnings of the business before tax decisions. Valuation is based on that Owner’s Benefit.

Owners Records come from seller’s P&L’s OR Tax Returns.
Adjustments are add-backs or subtractions to Operating Expenses.
Reasons for each add-back are given.
Adjusted Expenses column will provide a more accurate picture of expenses and help to compute the Owner’s Discretionary Income.

From Tax Return Or P&L	Owner's Records
Gross Profit	227,966

OPERATING EXPENSES	Owner's Records	(Adjust-ments)	Reason for Adjustments	Adjusted Expense

Accounting	840	840	Does her own	0
Advertising	2,350	1,000	Used $1,000 to advertise personal rental property	1,350
Amortization			Standard add-back
Auto Expenses
Bad Debt
Bank Charges	375	375	Standard add-back	0
Commissions
Contract Labor
Depreciation	1,841	1,841	Standard add-back	0
Donations	500	500	Personal expense not needed for the business	0
Dues	843			843
Employee Benefits
Freight	83			83
Insurance - Business
Insurance -Auto
Insurance -Health	3,090	3,090	Personal Insurance	0
Interest			Standard Add-back
Janitorial	780	780	Cleans office herself	0
Maintenance	280	280	Home AC repair	0
Office Supplies	1,551	950	School Supplies	601
Owner’s Salary	36,270	36,270	Standard add-back	0
Postage
Rent Equipment	66			66
Rent Facility	28,206			28,206
Repairs
Salaries	52,013			52,013
Supplies	2,877			2,877
Tax	835			835
Tax - Payroll	7,103			7,103
Telephone	13,505	2,100		11,405
Travel/Entertain	100	100	Personal Travel	0
Utilities
Miscellaneous
Credit Card Charges	4,941			4,941
TOTAL EXPENSES	158,450		TOTAL ADJUSTED EXPENSES	110,323

Gross Profit	227,966
Minus Total Expenses	(158,450)
Net Operating Income	69,516

Note that the profit shown on the seller’s P&L is $69,516, but after the adjustment are made to the Operating Expenses, the Owner’s Benefit is $117,643 and this amount more accurately shows the earnings of the business.

Gross Profit	227,966
Minus Total Adjusted Expenses	(110,323)
Owner’s Benefit	117,643

* The term “Owner’s Discretionary Earning” has been defined by the International Business Brokers Association as a substitute for such terms as Owner’s Discretionary Cash, Owner’s Cash Flow, and Owner’s Benefit. These terms are not fully descriptive and have different meanings in accounting, financial, and appraisal professions.

The International Business Brokers Association states that the earnings of a business are to be based on the net operating income before taxes (from the tax return). The analyst will then add-back to the profit certain expenses that are tax related or are not necessary to operate the business. This then becomes the "Owner's Discretionary Earnings" and more accurately shows the earnings of the business.

For more information on the process or if you have questions, feel free to give me a call at 727-403-9933 or email me at tbbizsales@gmail.com