Business Suicide (How to kill your Business without Really Trying)
PART II (Second of a Two Part Series)
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In part one of this series, I started out by saying "Every business owner wants to know HOW to make the most money while paying the least amount of income tax. After all, if you pay too much income tax you might be considered by some to be un-American!"
Hopefully, that jogs your memory somewhat. And, like most red-blooded American business owners-you want to pay the least possible amount in income taxes. Right?
Some business owners (not all) will find that there are times when paying more income taxes actually increases the value of their businesses. No, I haven't been smoking "whacky-tobaccy." It really is true.
Who will benefit by paying more income tax? Right now you are reading this article and probably thinking, "He can't be talking about me!" Well, maybe I am and maybe I'm not. You will have to decide as you continue to read.
As we all know, the IRS frowns on business owners who operate in the "underground economy." They are the business owners who don't report all of their income...because it saves income taxes. (You know who you are.) If that shoe happens to fit you, you might be setting yourself up to loose much more money than you are saving on your income tax bill!
Before I go on, you need to know that I do not condone the practice of "skimming," underreporting income, overstating deductions, or doing anything else that illegally reduces your taxes. My personal belief (for which you didn't ask-but you're going to get it anyway) is that we live in the greatest and best country in the world. I want to pay my (fair and legal share of) taxes because I feel blessed that I can raise my family in America. But that aside, I know that not all business owners feel as I feel about paying income taxes.
Many smaller "main street" businesses, and even some larger ones, find ingenious (but not legal) ways to reduce their income tax bills. As I mentioned earlier in this article, they might just be cheating themselves more than they are cheating Uncle Sam and other taxing authorities. Let's look at a couple of examples that will demonstrate my point.
Small Mom and Pop "main-street" businesses generally can sell for 2 to 3 times "seller's discretionary earnings" or SDE. Larger "main street" businesses can sell for 2.5 to 5 times the SDE. So you might be asking yourself, "What, exactly is SDE?" Many business brokers will define SDE as Earnings before Interest, Taxes, Depreciation and Amortization (expenses) PLUS owner salary and benefits. Here is one example of Seller's Discretionary Earnings (where the owners have not reported $25,000 of annual income):
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Business Pre-Tax Profit (under reported by $25K) |
$37,000 |
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Add: Owner Salary already Deducted |
+36,000 |
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Add: Owner "benefits" paid for and deducted |
+15,000 |
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Add: Interest Expense Deducted |
+ 5,000 |
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Add: Depreciation Deducted |
+15,000 |
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TOTAL "SELLER'S DISCRETIONARY EARNINGS" |
$108,000 |
Now, let's assume that similar businesses in this same industry and having attributes similar to this business have been selling for 2.5X SDE. That means that the sel
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Grover Rutter is a CPA and Business Broker who has been dealing with closely held businesses for over 30 years. "Now that the baby boom generation is maturing, the business advice they receive has to be much different from 10 to 20 years ago," Rutter explains. For this reason, Grover has written a newly released book that provides "straight talk" to business owners so they can learn very quickly HOW to increase and maintain their business values. This book provides an excellent "self examination" for business owners to apply to their own business situations. Your Business IS Your Goldmine! (Learn How to Get the MOST Out of Your Business) delivers an important message that most business owners NEVER hear! HOW TO GET THE MOST FROM YOUR BUSINESS! This powerful (and easy to use) message will help business owners put their business financial well-being into perspective. The tax deductible Guide is less than $20, and should be read by every business owner. Interested readers may find the guide at www.Lulu.com/businessadvisor |