In my world of small business buy-sell there are almost as many ways to inflate a business’s income as there are on Wall Street. Rarely is anything straightforward.
The most common technique is to adjust profit and call it “Seller Discretionary Income.” What this means is the owner’s salary, medical insurance, cell phone, car, travel, and more are added to profit because these items are “discretionary” not necessary. It’s even worse when the salaries are added back for multiple owners, all or whom are active in the business.
This actually goes way past what is done on Wall Street. Just imagine a public company’s annual report stating net income is before the CEO’s and/or other officer’s compensation.
My guess it’s something originally done to make lousy businesses look better. A naïve buyer will fall for this, which is why I ask if it’s fraud (to present a company’s income like). The bottom line is someone has to run the company and whether it’s the owner or a hired gun they deserve to be paid a fair market salary for that work. No legitimate business appraiser would ever do a valuation without including compensation for the work the owner does. Banks factor in a salary figure before they determine cash flow for debt coverage.
It is amaze filled with twists and turns plus traps, trapdoors, and quicksand (once sucked into this line of thinking it’s hard to escape).
“People who are trying to make this world worse re not taking the day off – why should I?” Bob Marley
