Like many privately held companies, we run discretionary personal expenses and related-party facility leases through our P&L to minimize taxes. How does cleaning up our financials and eliminating these run-throughs before going to market directly protect our valuation?

Question

Tyler Smith · Accepted Answer

Running personal vehicles, family cell phone plans, non-market facility rents, and personal travel through your business P&L is standard tax avoidance for privately held companies. However, when you take that business to market, those tax write-offs cost you multiples of every dollar saved.

Buyers price acquisitions based on normalized EBITDA multiplied by a market multiple. If you save thirty thousand dollars in taxes by burying personal expenses in the business, you might celebrate in April. But if your business trades at a six-times multiple, that same thirty thousand dollars of suppressed EBITDA wipes out one hundred and eighty thousand dollars in enterprise value at closing.

While sell-side advisors prepare adjustment schedules called add-backs to add those personal expenses back to earnings, institutional buyers view aggressive add-back lists with extreme skepticism. Every dollar of discretionary spending you have to defend in due diligence chips away at buyer trust. When buyers see sloppy financials, they assume your operational controls are equally undisciplined, which triggers aggressive audits, prolonged due diligence, and re-trading at the eleventh hour.

At least twenty-four months before listing, eliminate personal run-throughs entirely. Pay market rent on any owner-held real estate. Separate all personal and corporate credit cards. Ensure your revenue recognition strictly complies with GAAP standards rather than cash-basis tax accounting. Presenting clean, unadjusted financial statements forces the buyer to focus on your operational earnings rather than arguing over whether your country club dues were legitimate business development.