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Multiplier Effect of Expenses When Selling

December 15, 2017 // R. Shawn McBride // No Comments »

R. Shawn McBride recently spoke about planning ahead with your business.

Hey, folks. Shawn here with you. One of the things we often talk about in planning is we talk about the fact that you need to know what your exits are. You need to start with the end in mind. We talk about it in my book Business Blunders, www.mcbridebook.com, and I talk about it elsewhere.

We always need to know where we’re going, what that 10 year-vision is, what that dream is. And sometimes part of that dream or that vision is selling the business. This is perfectly fine. In fact, we should be thinking about what the end is. But, during the last couple years of the business, a very interesting thing happens. Expenses become very critical because businesses are typically bought based on their net profit, or more realistically their EBITDA, their earnings before interest, taxes, depreciation, and amortization.

Essentially, we’re taking the net income and we’re adjusting it for non-cash, book-type entries. Based on these calculations we come up with an estimate of how much money the business is generating. Then usually that generated revenue is multiplied by a multiplier for their particular industry, a “multiple” as the investment bankers would call it. And so, we take income times the multiple and we get a value. But, think about this in the last few years.

Any expense that the company has is dragging against those earnings, which then doesn’t get multiplied by whatever the applicable multiple is for the particular industry. So the unique or weird effect we get for a business during this period of time, is any expenses are getting multiplied multiple times over. So, those expenses in the last couple years can cost the business a lot of money in the long term. This is why we want to do some very strict and hard planning if somebody thinks they’re going to sell a business, particularly at a particular point in time. It’s a more powerful tool for you to think about.

If you’re thinking about selling, you want to do the advanced planning. You want to plan early, and you want to move those expenses prior to the last couple of years of the business or avoid them altogether. So think about those things. Very important if you’re thinking about selling someday. Start planning now. Now’s the time to plan, not at the last minute.

I’m R. Shawn McBride. If you’re thinking about planning, check out the McBride for Business YouTube channel and check us out at the R. Shawn McBride Fans and Audiences page. It’s not easy to talk about these things. We talk about them regularly and I applaud you for being somebody that’s proactive and working through it.

Get your business valuation checklist at mcbrideforbusiness.com. Reach out to me. Let me know how I can help you. Maybe I can come in and meet with you one-on-one, do some business strategy, some coaching with your organization or help your employees with a keynote at your next conference. Yourbusinessspeaker.com profiles me as a speaker. Let me know how I can help you. I’m here for you. I’m R. Shawn McBride. I’m signing off but I’ll be talking with you again very soon.

Make sure you download our free checklist to assess your business.

This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique. Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Freeimages.com/photographer Ulrik De Wachter.

About the Author
R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can reach R. Shawn McBride at info@mcbrideforbusiness.com or (214) 418-0258.

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Posted In: Business, Management, Strategy



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