Damon Desautel 727 403 9933 Email Damon
Tampa Bay Business Group Cr Commercial Realty Inc

 

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