We run several personal expenses and family salaries through our business to minimize our tax liability, but our exit advisors warn us this will complicate our financial audits. How do we transition these discretionary owner expenses off our books on our multi-year runway without disrupting our current cash flow or leadership compensation?

Question

Tyler Smith · Accepted Answer

Running personal expenses and family salaries through your business is a common practice, but it creates friction during M&A due diligence. While your accountant can calculate add-backs to show your adjusted EBITDA, buyers will deeply scrutinize these adjustments. A long list of personal add-backs signals sloppy operational discipline and raises red flags about the true profitability of your business.

To prepare for a clean transaction, you must begin separating your personal and business finances at least three years before your target exit date. Start by reviewing your financial statements with your leadership team. Identify every family member on the payroll and evaluate their seats on the Accountability Chart. If they do not GWC™ their roles, you must transition them out of the business and reallocate their responsibilities to qualified team members.

Next, move all non-essential personal expenses, such as personal vehicles and country club memberships, off the company ledger. This clean-up will make your financial statements transparent and easy to audit. By presenting clean, unadjusted financial records, you will build immediate trust with potential buyers and eliminate the need for complicated escrow agreements and adjustments at closing.