The short version
- Buyers pay on provable cash flow, not on revenue.
- Add backs must be real and documented.
- Owner draws and one time income do not count as cash flow.
- Unreported cash earns nothing in a sale.
The starting point
Seller discretionary earnings is what one working owner could take home. It starts with profit and adds back the owner's pay, benefits and perks, plus interest, depreciation and one time costs.
Larger firms with managers in place are valued on EBITDA, which swaps in a fair salary for a manager.
What counts as an add back
Add backs must be non operating or one time and be provable. A personal vehicle on the books can qualify. Extra money that happened to arrive does not.
Selling a truck or taking a loan is not operating income, and treating it that way can cost you trust in diligence.
Draws are not cash flow
Money you move to your own account does not show on the profit and loss statement, and it does not prove earnings by itself. It must be recast properly with your accountant.
Unreported cash costs you
A buyer pays only for income you can show. Skimming cash to save about twenty percent in taxes can lose you two to three times that amount in sale value at a typical multiple.
Timing and expectations
A sale usually takes seven to nine months, and the financial review runs through most of it. Clean books shorten the wait.
Steady results through closing help. Buyers distrust both a decline and a sudden jump right before listing.
Why equipment heavy firms get a haircut
Companies with trucks, tools or machines can carry large depreciation add backs. Buyers know the equipment must be replaced someday, so they may count part of depreciation as real spending.
Bring a list of equipment, ages and any planned replacements to head that off.
Keep books current
Trailing twelve months matter most. Update the profit and loss and balance sheet with your CPA, and clear stale items. Our guide on unclaimed property covers one common cleanup.
Then read about broker fees or request a price range.