The Million Dollar Fur Coat

Effective Strategies for Success by Kathy Boyle, Chapin Hill Advisors, Inc.

Auditing the books…

A CPA I know relayed this tale to me so this is a true story! A business owner was selling his business and the accountant I know was hired to audit the company’s books for the buyer. In his review, he found a $100,000 expense which could not be tied to a business expense.

After much prodding, the business owner finally admitted he had bought his mistress a fur coat and buried the expense in his business payables. The business was being purchased for ten times EBITDA (earnings before interest, taxes, depreciation and amortization which is the measure that normalizes earnings for most companies) so that line item cost the owner a million dollars of sale value. $100,000 x 10 = $1,000,000.

Of course, that million dollars was only a fraction of the sale price so keeping that expense in the business was likely much less expensive than the divorce which may have ensued after disclosing the purchase in his personal accounts.

Cleaning up…

The moral of this story is that most business owners write off everything but the kitchen sink. No buyer wants to comb through your books to figure out if the beach house on Cape Cod or the condo in Florida is legitimately a business destination or a family vacation spot camaflouged with a few business meetings on each trip. If you utilize the services of a valuation firm, they will “normalize” earnings by discovering line items which are suspect and backing them out of the equation. We utilize a variety of valuation firms to help our business owners plan out their sale but also for estate planning, gifting as well as buy-sell agreements. This is yet another expense you can minimize by taking action in advance so the valuation firm has less detective work to execute.

One reason we advocate starting preparing your company for sale 6-10 years prior to entertaining a transition of your privately held company is items like expenses. It is unlikely you can transform all of your habits overnight. If your family members are also working in the business, you will need to set clear policies and implement. With the recent changes in the tax law, many items we are all accustomed to treating as deductible expenses are no longer write-off’s so these can be easy categories to begin moving off your company books.

Trusting advisors…

One business owner I worked with a few years ago was a classic case of  putting too many personal expenses through his business. As I was consulting with him and his team with the goal of increasing revenue, visibility and profitability, I found out he could not really read his P&L. Therefore, I began a monthly review of the P&L I would receive from his accounting firm and would translate it for him into plain speak so he could grasp the details.

I was initially puzzled by certain categories which randomly increased by substantial margins. I would ask the business owner if he had ramped up a particular product line and therefore stocked up on some expensive supplies. He would simply shrug his shoulders.

Finally, he authorized his CPA to speak candidly with me and I found out that these categories which were gyrating month to month were where she would allocate some of his semi-personal expenses. In reviewing his P&L to put together his personal and business expense worksheets, even I was confused as he owned four homes and ran the expenses for every one of them through the business. Figuring out landscaping, utilities, property casualty insurance, plowing, etc. was quite a chore and involved his office manager’s time quite a bit.

In my opinion, the CPA firm should have put their foot down and insisted he take out these clearly personal expenses rather than backing them out each year. Now, to be fair, this particular business owner was extremely stubborn. The CPA firm had a reputation for specializing in his industry and they charged a flat annual fee. Therefore, it may not have been worth it to them to spend hours attempting to convince him to move over the legitimate personal expenses to his personal bank account.

I suggested he simply pay himself a flat monthly salary, enough to cover his fixed personal costs and hire a bookkeeper to pay his personal bills but he refused. Part of the reason he refused however, was the fact that the accounting firm let him do it. Blindly trusting advisors is not always in your best interest.

Where to begin…

If you are not sure where to even start, working with an outside advisor can be very helpful. Your accounting firm may be a good place to start or you might consider bringing in a fractional CFO. Fractional CFO’s are trained to review your overall financials in the big picture and work with you and your internal team to ready the books over time.

A boutique M&A firm can provide metrics on similar companies, potential buyers and multiples of your EBITDA. This can then help you set the tone for the action you wish to take which might involve coaches, new systems, changes in professional advisors, more efficient retirement plans and benefits and other changes which can help your top and bottom line. These changes can result in a much greater value if you plan to sell your business. If you plan to transition to the next generation or employees, you know what value you are about to transfer.

Running projections for these potential sale or transitions can help you decide “how much is enough”. Can you simply retire and follow your passion whether it is travel, scuba diving or golf. Will you need to work longer? Do you need the sale value to be greater? All of these questions can be solved with enough time and objective advice.

The key is to look forward to what your goals are in the next 10-20 years. Working with a big picture, long term vision allows you to implement gradually. What you should not do is simply put this off to the infamous “tomorrow” as all business owners I meet are busy and there is rarely a quiet time or an ideal time to start this process.

This topic is an actual presentation Kathy gives to audiences of business owners. If you are interested in having this presentation made to your association, chamber of commerce or business networking group, please reach out to Molly Stephens at [email protected]