We have run personal expenses, family vehicles, and country club memberships through the business for years to reduce our tax liability. How do we clean up these discretionary add-backs before we go to market?

Question

Tyler Smith · Accepted Answer

Running personal expenses through a privately held business is common, but it creates a massive accounting mess during due diligence. When you prepare for an exit, you must clean up your financials and run the business as if it were a public company.

Every personal vehicle lease, family phone plan, and travel expense you claim must be documented as a discretionary add-back. If you cannot clearly prove that an expense was purely personal and non-operational, a buyer's forensic accountants will classify it as an operating expense, which directly reduces your EBITDA and your ultimate valuation.

To fix this, begin phasing out these personal expenses at least twenty-four months before you go to market. Pay for personal items out of your personal accounts, not the company credit card. This simplifies your quality of earnings audit and builds trust with potential buyers.

Furthermore, ensure that any family members on the payroll are either performing real jobs at market-rate salaries or are removed from the payroll entirely. If they are critical to the business, ensure their roles are clearly defined on the Accountability Chart with matching GWC.

A clean, transparent profit and loss statement shows buyers that you run a professional operation, eliminating the skepticism that leads to valuation discounts and escrow holdbacks.