A client had no plans to sell his business for years. Then something changed. He had started a second business, and it took off! It needed all of him. He decided to get the equity out of the first business to scale the second one.
Here's the problem. For years he'd run personal expenses through the business in small amounts scattered across many categories, and he'd also expensed the entire build-out of his new startup through the old company over three years, until he incorporated separately.
None of this was illegitimate. These were real, defensible write-offs, but that's not the point. The point is, the EBITDA of the business he now wanted to sell no longer reflected the actual business operation. On paper, earnings looked far lower than the reality, and in a sale, what's on paper is what gets valued.
Yes, we can explain all this to a buyer, but "trust me" isn't evidence. And buyers value evidence and track record. Scattered add-backs across dozens of categories can't be cleanly proven, and a lender won't finance against an explanation. The result - the business is now worth roughly 40% of what it should be.
Two lessons come out of this.
First: Clean books are real money. Every dollar you bury in add-backs might reduce your valuation by three or four dollars (depending on the multiple).
Second: You never know when. This owner was sure he would hold his first business for many more years. But, the trigger to sell almost never arrives on schedule. And the question is never "if I sell my business", it's always "when" and "under what terms".
Prepare! Because when you need to, it's too late to start.
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