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The Exit Strategy Handbook – Valuation Adjustments

Sep 17Jeff Matthews

We are exploring the recently released book, “The Exit Strategy Handbook” by Jerry Mills, the founder and managing partner of B2B CFO®.     

Business owners use various ways to manage their tax obligations.  The capitalization and legal structure of the firm chosen is just one way an owner can control their tax obligations.  But the tax minimization techniques which make great sense for the business can also reduce a firm’s EBITDA and thereby the ultimate selling price.  Adjustments to EBITDA are found in nearly all transactions.  Below is a partial list of these adjustments:

  • Compensation (including bonuses) to the owners and management that is more or less than market prices
  • Owning equipment and real estate personally or in another entity and charging rent to the target company at higher or lower than market prices
  • Hobbies that are embedded in the business.  For example, decorating the office with art or including specialty vehicles as company assets
  • Utilizing company paid employees to perform tasks and services for the benefit of the owner or senior managers
  • Encouraging employees to participate in charitable activities favored by the business while on company time
  • Entertainment expenses that blur the line between company and personal.  These can include tickets to events that the owner would prefer to retain after the sale
  • Below market transactions with favored customers, suppliers or related parties
  • Nepotism expenses.[1]  These can include employing family members or expenses that will not be paid by the buyer in the future
  • Legal fees associated with one-time transactions including the contemplated sale
  •  Unusually high capital improvements that are not a regular recurring expense
  • Minimized maintenance spending which could lead to the new owner having to invest quickly in safety or equipment maintenance
  • Non-compliance with environmental rules
  • Unusual bad debts, outside expected normal levels for the business
  • Expenses for other businesses of the owner that are not properly allocated to the target company
  • Inventory and parts which are obsolete or not carried at near replacement value
  • Professional fees, such as tax work or legal fees, that the buyer will not incur

Every business will have its own story and items that should be adjusted in determining a fair EBDITA for selling purposes.  Anticipate that the sellers might object to the removal of certain expenses and have their own list of adjustments to consider.

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B2B CFO® has over 200 experienced chief financial officers have deep knowledge of transactions and business improvement that can be tapped to help you sell your business.   You can explore the backgrounds of our team at www.B2BCFO.com/index.php?page=cfo-directory .


[1] Mills, Jerry L. (2013). The Exit Strategy Handbook. ISBN 978-0-09886932-1-0, Jerry L. Mills and B2B CFO, LLC., pp.54

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