of the benefits of being the owner of a privately held tiny business is that you get to take tax deductions that wage and wage earners are unable to claim. This is all part of the risk and reward scenario that comes from owning and operating a tiny business.
When it comes to selling the business, these tax deductions can get in the way as it reduces the true funds flow of the business, which affects the business valuation and therefore how much the buyer is willing to pay. To navigate this scenario, it is important to understand how to deal with these legitimate tax deductions or as they are called, add backs.
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An add back is a legal expense that appears in the financial statements of the business such as the profit and loss statement or tax return but has no true economic value in the performance of the business. For example, most business owners pick to take out medical health insurance on themselves and possibly their partner and kids. If the partner and kids do not work in the business then it would be legitimate to accept this expense as an add back. In this example there's critical things. The partner and kids must not be currently working in the business and they must not work in the business one time the buyer takes over. Other add backs the business owner may pick to run as an expense through the business includes personal expenses, auto costs be it gas, repairs, maintenance or insurance for non working relatives members, cell rings and holidays claimed as business journeys. Another acceptable add back is the payroll tax paid against the wage earned by the business owner.
Legitimate add backs play an important role when appraising and negotiating a business. They can be contentious but the best approach is to prepare a document that shows what add backs the seller claims as reasonable so the buyer or lender can have an open and honest discussion.
The best approach when claiming add backs is to only claim them in the event that they are sizeable in nature and there's not lots of of them. What is sizeable? That depends on each business but I would recommend anything greater than $1,000 is a lovely beginning point and I would not recommend trying to justify every add back or a buyer will feel uncomfortable as in the finish, they don't need to spend much time and energy worrying about every dollar and cent
