Q: When you say that taxes can be added back to get a "net profit" number would that also include sales taxes for a retail business?
A: You bring up an excellent point. When you add back taxes, along with other standard "add backs", your objective is to obtain a figure for the total Seller's Discretionary Income (sometimes referred to as Sellers Discretionary Cash Flow, or Adjusted Net, or Owner's Benefit). You do not add back any sales taxes because that is not money that you, as the new owner, would have available after expenses to pay yourself a salary and service any debt. When looking at a business' financials, you want to be certain that the Revenue number being represented is net of sales tax. If by some chance it's not, then you must check that there is an expense item for sales tax.
When it comes to sales taxes, the business is simply an "agent for the government" (sounds pretty neat) to collect and remit the taxes and so the inflow and outflow of the taxes is an accounting function only.
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|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|