Similar to the Farmers Insurance tag line, our firm 'Knows a Thing or Two Because We've Experienced a Thing or Two.'
This is a story about "Ed" who is a composite of some of the sellers that we have 'experienced'. Ed owned a very profitable company with revenues of $3M. His CPA indicated that he had compiled earnings (EBITDA) of $1M and could expect a valuation of about $4,000,000 (4X).
Getting under the Covers to Find the Real Earnings. Our first task was to 'peek between the sheets.' A few of the things that we discovered were:
There were only three folks in the office, but office expenses were well over $24,000 per year. We learned that these expenses were related to Ed's Costco Credit card (“you gotta eat you know”).
An expense for consulting was determined to be for Ed's mother who was in a nursing home ($10,000/yr) “She used to be our bookkeeper and knows a lot.”
A building maintenance expense for $3,000 per month related to the caretaker of the seller’s ranch "Somebody has to pay him.”
Ed Gets an Increase in Value and is a Happy Camper. The above adjustments resulted in $70,000 of increased earnings and an increase in value of $280,000 assuming a 4X multiple.
Ed was very happy with the 28% increase.