Ben Means Business

This is a guest post by Peter Siegel of BizBen. I found his site extremely useful for anybody wishing to sell a business. Be sure to check it out.

One of the first questions most potential business buyers ask is: what is the adjusted net income or seller’s discretionary cash flow on the business they are seeking to purchase? Buyers want to know this number since that is the amount of money they will most likely be “putting in their pocket at the end of the year”. So this figure is of utmost importance to business brokers and sellers because it will ultimately determine the value of a particular business.

A simple definition of Adjusted Net Income:
"The amount of money the new owner will make from the business – the true bottom line; or what the buyer of the business can expect to “clear” from the business once they own and operate it in their own way."

Adjusted net income usually contains these line items below from the business financials and tax returns – these numbers are “added back” to the net income at the end of the year to obtain the adjusted net income of the business.

1. Owner's Salary
2. Depreciation
3. Interest
4. Amortization
5. One Time Expenses (Items like equipment, trucks, etc)
6. Owners Personal Expenses (Auto expenses, entertainment, travel)
7. Owners Pension/Retirement
8. Rent (If the real estate is being sold with the business)

There are other possible “add-backs” such as family salaries - family members that don’t actually work at the business yet magically earn a salary (and will be gone when the new owner takes over), and managers that may be replaced when the new owner completes the deal.

Remember many owners of small businesses “write-off” as many business expenses as possible to limit their tax liability at the end of the year. Many of these “write-offs” can be added back to the net income to obtain the “adjusted net income”.
So remember, when selling a business, to be sure to pay special attention when computing your Adjusted Net Income. Don't nonchalantly turn in a number with the rest of your financials. Take your time, do your research, and you'll get the offer that you desire.

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Peter Siegel, MBA is the founder of BizBen.com – Businesses For Sale an advertising & resource center for small businesses wishing to sell. Mr. Siegel is a national consultant and author who has written three books on the topic.`Be sure to check out his small business blog to learn more about buying and selling small businesses.