Pay Your Taxes. That's Right! It is Ok.

A business that reports all their income and pays taxes will be worth more than the business that did not.  We call this investing in taxes.  Take a look at the scenario below:

	A	B
Sales	$500,000	$500,000
Unreported		$(100,000)
Expenses	$(300,000)	$(300,000)
Net Income (Seller’s Discretionary Earnings)	$200,000	$100,000
Multiple	2.45	2.45
Value	$490,000	$245,000
Taxes Paid	$(80,000)	$(40,000)
Proceeds to Seller	$410,000	$205,000

Business A reported all of their income and paid $80,000 in taxes.  Business B chose not to report $100,000 of their income.  The result was a savings of $40,000 in taxes paid.  However, when it came to value the business, A was worth 2 times as much as B.  


Bottom Line:  Report all income; invest in taxes, and in the long run your business will sell for a higher price.

The Shark Tank

If you haven't seen the ABC show "The Shark Tank," it is worth watching for many reasons.

One by one people line up to pitch their new idea, the next must-have product, killer app, or revolutionary service. They are hoping to convince one of these 5 investors to "buy in" to the business in exchange for capital (i.e. cash).

Some ideas are brilliant. Other ridiculous. The sharks chew up the ones that stink and invest in the ones that are good. I find the process of analyzing each business venture to be very entertaining.

On Friday a couple was asking for $125,000 for a 10% stake in the business. My mind automatically calculated the value of the business to be $1.25 Million. The next question was how much money did the company generate? Their answer was, "We have sold $4,000 of product in the past year."

What!!! You have got to be kidding me. This couple had valued their business at $1.25 Million based on $4,000 in sales. Not even profit, but sales. The sharks chewed this idea up and sent the couple away with nothing but embarrassment.

I hate to admit it but this scenario is more common then you think. I deal with with unrealistic business owners every day. I wish there was a good way to help business owners understand how much their businesses are worth and how to create value.

It would certainly make my job much easier.

Trevin Rasmussen, CBI

Business Broker

Bristol Group