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Business Perks – Benefit or Detriment?

Business Perks

There are a number of perks business owners take from their business.  These include, but are not limited to, basics like auto expenses, memberships, and insurance plans to extras like entertainment, vacations, or having an additional family member on the books.

Perks are another way for owners to get further compensation for their hard work. However, they can complicate valuing a business. When it’s time to sell your business, make sure you do one of the following:

  1. reduce perks to increase your net income, or
  2. maintain an excellent paper trail in order to clearly delineate which expenses are needed for operations and which are your discretionary expenses utilized to mitigate taxes.

Be aware that doing a job for “cash” – or perks that can’t be proven – can diminish the value of your business. When preparing your business for sale, your advisors will “normalize” your financials to account for these extras. When perks are adequately documented and easily understandable, we can usually get the majority of that value accepted.

While valuing a business is not a simple calculation, buyers will look at SDE (seller’s discretionary earnings) or normalized EBITDA (earnings before interest, taxes, depreciation, and amortization) to determine their offer. For example, in broad strokes:

  • a Main Street business with an SDE of $200,000 USD will typically sell at a 2.0 multiple: $200,000 x 2.0 = $400,000 in value
  • a Lower Middle Market business with EBITDA of $1.2 million might sell at a 5.0 multiple: $1.2mx 5.0 = $6 million.

These VERY general guidelines are influenced by any number of business factors or market conditions. However, it shows the importance of driving cash to the bottom line in the 2-3 years before you sell. Your discretionary cash is multiplied in a sale, so discuss with your advisors about the tax benefits / value tradeoff of certain perks. In other words, is the short term gain at a low current tax rate reducing a much larger gain when selling?

More perk considerations:

  • Your total compensation and retirement needs. For example, if you’re pulling $200,000 as salary, you may think you can comfortably live off that amount in retirement income…unless your perks actually provided an income closer to $275,000. 
  • Don’t forget the family! For example, your child works for the company as part-time social media support but is paid equivalent to a full-time marketing manager.

Thus, it’s important to know and understand how much you (and your family) are truly taking out of your business.

Perks are a common way for owners to pull additional value from their business. However, when it’s time to sell, you and your advisors need to be able to account for these perks in detail.

Remember: Fewer perks tend to increase value!