After years of budget cuts, the U.S. Small Business Administration is finally getting a $730 million boost from the American Recovery and Reinvestment Act of 2009. The stimulus bill money, coupled with an additional $15 billion from the Treasury Department to buy up SBA-backed loans, are for some, an indication that the agency will play a pivotal role in economic recovery. Although the SBA doesn't issue loans directly, it facilitates small business lending through banks and other financial institutions by mitigating associated risks. Alberto Alvarado is the district director of the SBA's Los Angeles office, which oversees the country's highest-volume SBA loan portfolio, valued at approximately $1.3 billion. We asked him to talk about the stimulus bill and the new programs the SBA would offer to provide access to credit, unfreeze the markets and re-inspire lending.
What is the SBA's role in the recovery?
At the end of the day, we are the messengers of hope. We have to go out there and encourage the businesses. Many, many are discouraged. Many, many have closed down. But we see the [bill] as a clear ray of hope, and certainly the best ray of hope we've had in a long time.
Are the programs going to have a visible impact?
We believe so. Starting this fiscal year [October 1, 2008], we've had a significant, significant decline in lending. In 2007, we did on average 120 approvals a week; last year, 70 a week. Last month we had about 20 a week. But once investors start to buy loans and the markets start to move, we expect the weekly number to pick up.
What's holding up the SBA loan markets?
One of the drivers in increasing loan volume has been the ability of a bank to sell a loan in a secondary market and obtain a significant premium. Then the bank could go out with increased liquidity and make more loans. Now, there are $3 billion in loans stuck in that secondary market. For about a year, banks haven't been selling, investors haven't been buying and premiums are low.
How long will the additional money be able to fund these new programs?
The funding will continue to the end of the calendar year and into next year, but that's about as much money as there is to run those programs. We think these are good programs and they will certainly jumpstart things. Whether they will be needed beyond that period is not clear at this point.
Are you expecting additional help from the federal government?
We're not looking necessarily for new programs or features because we think these are significant. Obviously there will be refinements as we go down, but nobody's thinking of these programs not netting the results [because] these measures dramatically increase the SBA's ability to help small business owners.
What's the SBA's outlook?
In concert with other things that are happening, we feel very positive about [the future]. We've seen excitement in the last few weeks, and we expect significant increase in volume and an increase in interest in our programs by the lenders and businesses.
Friday, June 19, 2009
Tuesday, June 16, 2009
Reach These Startup Milestones
Planning for the success of your business not only gives you a map of how to get to your target destination, it also gives you the hope of knowing exactly what you’re shooting for. Check out these startup milestones to help you get your business into the stratosphere.
Six months after startup: You should be defining your processes, who your customers are, what your company does and how you beat the competition. “By six months, you should be able to handle your business operationally,” says business strategist Robert W. Bradford, co-author of Simplified Strategic Planning. “Although, it may still be a bit rocky because you’re working the kinks out.”
One year to 18 months after startup: Most new businesses will reach profitability at this point. You should at least be breaking even: Your spending to get new customers should equal the revenue they generate. Your operations should be smooth at this point, says Bradford, and “you should certainly understand what the key factors are in attaining and improving profitability by one year.”
Three to five years after startup: At this point, you should be more effective and efficient in generating customers. You’re continually improving what you’re doing, and now it’s important to evaluate your strategic growth plans. Ask yourself: How do we beat or avoid competition? How can we play the bigger game? Says Bradford, “This is one of those dangerous points where a lot of entrepreneurial businesses are comfortable, and they never move beyond where they are.”
Six to 10 years after startup: Is your business on autopilot? Can you go on vacation and return to smooth sailing? Think about expanding geographically or into new products or markets--you may also be thinking about exit strategies and succession planning at this point. Adds Bradford, “That’s the point where you say, ‘I know how to make this work. Now I move to the next level.’”
Six months after startup: You should be defining your processes, who your customers are, what your company does and how you beat the competition. “By six months, you should be able to handle your business operationally,” says business strategist Robert W. Bradford, co-author of Simplified Strategic Planning. “Although, it may still be a bit rocky because you’re working the kinks out.”
One year to 18 months after startup: Most new businesses will reach profitability at this point. You should at least be breaking even: Your spending to get new customers should equal the revenue they generate. Your operations should be smooth at this point, says Bradford, and “you should certainly understand what the key factors are in attaining and improving profitability by one year.”
Three to five years after startup: At this point, you should be more effective and efficient in generating customers. You’re continually improving what you’re doing, and now it’s important to evaluate your strategic growth plans. Ask yourself: How do we beat or avoid competition? How can we play the bigger game? Says Bradford, “This is one of those dangerous points where a lot of entrepreneurial businesses are comfortable, and they never move beyond where they are.”
Six to 10 years after startup: Is your business on autopilot? Can you go on vacation and return to smooth sailing? Think about expanding geographically or into new products or markets--you may also be thinking about exit strategies and succession planning at this point. Adds Bradford, “That’s the point where you say, ‘I know how to make this work. Now I move to the next level.’”
Friday, June 12, 2009
Financing the Business Acquisition
The epidemic of corporate downsizing in the U.S. has made owning a business a more attractive proposition than ever before. As increasing numbers of prospective buyers embark on the process of becoming independent business owners, many of them voice a common concern: how do I finance the acquisition?
Prospective buyers are aware that any credit crunch prevents the traditional lending institution from being the likely solution to their needs. Where then, can buyers turn for help with what is likely to be the largest single investment of their lives? There are a variety of financing sources for business acquisition loans, and buyers can find one that fills their particular requirements. (Small businesses--those priced under $100,000 to $150,000--will usually depend on seller financing as the chief source.) For many businesses, the following are the best routes to follow:
Buyer's Personal Equity
In most business acquisition situations, this is the place to begin. Typically, anywhere from 20 to 50 percent of cash needed to purchase a business comes from the buyer and his or her family. Buyers should decide how much capital they are able to risk, and the actual amount will vary, of course, depending on the specific business and the terms of the sale.
Seller Financing
One of the simplest--and best--ways to finance the acquisition of a business is to work hand-in-hand with the seller. The seller is the best source for a business acquisition loan. The seller's willingness to participate will be influenced by his or her own requirements: tax considerations as well as cash needs.
In some instances, sellers are virtually forced to finance the sale of their own business in order to keep the deal from falling through. Many sellers, however, actively prefer to do the financing themselves. Doing so not only can increase the chances for a successful sale, but can also be helpful in obtaining the best possible price.
The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third-party lender. Sellers will typically finance 30 to 50 percent--or more--of the selling price, with an interest rate below current bank rates and with a far longer amortization. The terms will usually have scheduled payments similar to conventional loans; the tax picture, however, can be better than with straight debt.
As with buyer-equity financing, seller financing can make the business more attractive and viable to other lenders. In fact, sometimes outside lenders will refuse to participate unless a large chunk of seller financing is already in place.
Small Business Administration
Thanks to the U.S. Small Business Administration Loan Guarantee Program, favorable financing terms are available to business buyers. Similar to the terms of typical seller financing, SBA loans have long amortization periods (ten years), and up to 70 percent financing (more than usually available with the seller-financed sale).
SBA loans are not, however, a given. The buyer seeking the loan must prove stability of the business and must also be prepared to offer collateral--machinery, equipment, or real estate. In addition, there must be evidence of a healthy cash flow in order to insure that loan payments can be made. In cases where there is adequate cash flow but insufficient collateral, the buyer may have to offer personal collateral, such as his or her house or other property.
Over the years, the SBA has become more in tune with small business financing. It now has a Lo-Doc program for loans under $100,000 that requires only a minimum of paperwork. Another optimistic financing sign: more banks are now being approved as SBA lenders.
Lending Institutions
Banks and other lending agencies provide unsecured loans commensurate with the cash available for servicing the debt. ("Unsecured" is a misleading term, because banks and other lenders of this type will aim to secure their loans if the collateral exists.) Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a reliable source of income. Unsecured loans are also easier to come by if the buyer is already a favored customer or one qualifying for the SBA loan program.
Although the terms may sound attractive, most business buyers are unwise to look toward conventional lending institutions to finance their acquisition. By some estimates, the rate of rejection by banks for business acquisition loans can go higher than 80 percent.
With any of the acquisition financing options, buyers must be open to creative solutions, and they must be willing to take some risks. Whether the route finally chosen is personal, seller, or third-party financing, the well-informed buyer can feel confident that there is a solution to that big acquisition question. Financing, in some form, does exist out there.
Prospective buyers are aware that any credit crunch prevents the traditional lending institution from being the likely solution to their needs. Where then, can buyers turn for help with what is likely to be the largest single investment of their lives? There are a variety of financing sources for business acquisition loans, and buyers can find one that fills their particular requirements. (Small businesses--those priced under $100,000 to $150,000--will usually depend on seller financing as the chief source.) For many businesses, the following are the best routes to follow:
Buyer's Personal Equity
In most business acquisition situations, this is the place to begin. Typically, anywhere from 20 to 50 percent of cash needed to purchase a business comes from the buyer and his or her family. Buyers should decide how much capital they are able to risk, and the actual amount will vary, of course, depending on the specific business and the terms of the sale.
Seller Financing
One of the simplest--and best--ways to finance the acquisition of a business is to work hand-in-hand with the seller. The seller is the best source for a business acquisition loan. The seller's willingness to participate will be influenced by his or her own requirements: tax considerations as well as cash needs.
In some instances, sellers are virtually forced to finance the sale of their own business in order to keep the deal from falling through. Many sellers, however, actively prefer to do the financing themselves. Doing so not only can increase the chances for a successful sale, but can also be helpful in obtaining the best possible price.
The terms offered by sellers are usually more flexible and more agreeable to the buyer than those from a third-party lender. Sellers will typically finance 30 to 50 percent--or more--of the selling price, with an interest rate below current bank rates and with a far longer amortization. The terms will usually have scheduled payments similar to conventional loans; the tax picture, however, can be better than with straight debt.
As with buyer-equity financing, seller financing can make the business more attractive and viable to other lenders. In fact, sometimes outside lenders will refuse to participate unless a large chunk of seller financing is already in place.
Small Business Administration
Thanks to the U.S. Small Business Administration Loan Guarantee Program, favorable financing terms are available to business buyers. Similar to the terms of typical seller financing, SBA loans have long amortization periods (ten years), and up to 70 percent financing (more than usually available with the seller-financed sale).
SBA loans are not, however, a given. The buyer seeking the loan must prove stability of the business and must also be prepared to offer collateral--machinery, equipment, or real estate. In addition, there must be evidence of a healthy cash flow in order to insure that loan payments can be made. In cases where there is adequate cash flow but insufficient collateral, the buyer may have to offer personal collateral, such as his or her house or other property.
Over the years, the SBA has become more in tune with small business financing. It now has a Lo-Doc program for loans under $100,000 that requires only a minimum of paperwork. Another optimistic financing sign: more banks are now being approved as SBA lenders.
Lending Institutions
Banks and other lending agencies provide unsecured loans commensurate with the cash available for servicing the debt. ("Unsecured" is a misleading term, because banks and other lenders of this type will aim to secure their loans if the collateral exists.) Those seeking bank loans will have more success if they have a large net worth, liquid assets, or a reliable source of income. Unsecured loans are also easier to come by if the buyer is already a favored customer or one qualifying for the SBA loan program.
Although the terms may sound attractive, most business buyers are unwise to look toward conventional lending institutions to finance their acquisition. By some estimates, the rate of rejection by banks for business acquisition loans can go higher than 80 percent.
With any of the acquisition financing options, buyers must be open to creative solutions, and they must be willing to take some risks. Whether the route finally chosen is personal, seller, or third-party financing, the well-informed buyer can feel confident that there is a solution to that big acquisition question. Financing, in some form, does exist out there.
Wednesday, June 10, 2009
Business Plan Basics
The best way to show bankers, venture capitalists, and angel investors that you are worthy of financial support is to show them a great business plan. This is especially true for those who want to purchase a going-concern business. Even if you are expecting that the business seller will be financing part of the purchase price you will need to convince him/her of your credit-worthiness. Make sure that your plan is clear, focused and realistic. Then show them that you have the tools, talent and team to make it happen. Your business plan is like your calling card, it will get you in the door where you'll have to convince business sellers, investors and loan officers that you can put your plan into action.
Once you have raised the money to buy, start or expand your business, your plan will serve as a road map for you. It is not a static document that you write once and put away. You will reference it often, making sure you stay focused and on track, and meet milestones you have set out. It will change and develop as your business evolves.
Do I need a Business Plan?
Not everyone who buys, starts and runs a business begins with a business plan, but it certainly helps to have one. If you are seeking funding from a business seller or venture capitalist, you will certainly need a comprehensive business plan that is well thought out and contains sound business reasoning.
If you are approaching a banker for a loan to buy a business, your loan officer may suggest a Small Business Administration (SBA) loan, which will require a business plan. If you have an existing business and are approaching a bank for capital to expand the business, they often will not require a business plan, but they may look more favorably on your application if you have one.
Reasons for writing a business plan include:
Support a loan application to buy or start a business
Raise equity funding to expand a business
Define and fix objectives and programs to achieve those objectives
Create regular business review and course correction
Define a new or newly purchased business
Define agreements between partners
Set a value on a business for sale or legal purposes
Evaluate a new product line, promotion, or expansion
What's in a business plan?
A business plan should prove that your business will generate enough revenue to cover your expenses and make a satisfactory return for bankers or investors.
Executive Summary--features the highlights of your plan and sells your idea in two pages or less.
Company Summary--a factual description of your company, ownership, and history.
Products (or services or both)--describes your products and/or services and how they stand out from competitive products and services.
Market Analysis-provides a summary of your typical customers, competitive landscape, market size, and expected market growth.
Strategy and Implementation-describes how you will sell your product, how you will put your plan into action, and establishes milestones.
Management Summary-provides background on the management team, their experiences, and key accomplishments.
Financial Plan-contains key financials including sales, cash flow, and profits.
What makes a successful business plan?
A well thought out idea and strategy
Clear and concise writing so nothing is ambiguous
A clear and logical structure that show's that you know what you are doing
Illustrates management's ability to make the business a success
Shows realistic sales, expense and profitability projections
How do I write a business plan?
Sitting down looking at a blank computer screen as you prepare to start your business plan can be daunting. You may want to look at some alternatives that will make the process a bit easier.
Hire a Professional
A professional consultant will create the business plan for you, but you still have to be prepared to think through your business and understand the underlying concepts in your business idea. You will have to work closely with the consultant to ensure that he or she develops a good plan that accurately represents your business or business idea.
Use Business Planning Software
A good business planning software package will provide you with an outline for a well-developed, objective-based and professional business plan. Software packages will remove the problem of starting from scratch by structuring your plan for you. The software should ask you the right questions that will pull out the most important underlying concepts within your business idea.
Once you have raised the money to buy, start or expand your business, your plan will serve as a road map for you. It is not a static document that you write once and put away. You will reference it often, making sure you stay focused and on track, and meet milestones you have set out. It will change and develop as your business evolves.
Do I need a Business Plan?
Not everyone who buys, starts and runs a business begins with a business plan, but it certainly helps to have one. If you are seeking funding from a business seller or venture capitalist, you will certainly need a comprehensive business plan that is well thought out and contains sound business reasoning.
If you are approaching a banker for a loan to buy a business, your loan officer may suggest a Small Business Administration (SBA) loan, which will require a business plan. If you have an existing business and are approaching a bank for capital to expand the business, they often will not require a business plan, but they may look more favorably on your application if you have one.
Reasons for writing a business plan include:
Support a loan application to buy or start a business
Raise equity funding to expand a business
Define and fix objectives and programs to achieve those objectives
Create regular business review and course correction
Define a new or newly purchased business
Define agreements between partners
Set a value on a business for sale or legal purposes
Evaluate a new product line, promotion, or expansion
What's in a business plan?
A business plan should prove that your business will generate enough revenue to cover your expenses and make a satisfactory return for bankers or investors.
Executive Summary--features the highlights of your plan and sells your idea in two pages or less.
Company Summary--a factual description of your company, ownership, and history.
Products (or services or both)--describes your products and/or services and how they stand out from competitive products and services.
Market Analysis-provides a summary of your typical customers, competitive landscape, market size, and expected market growth.
Strategy and Implementation-describes how you will sell your product, how you will put your plan into action, and establishes milestones.
Management Summary-provides background on the management team, their experiences, and key accomplishments.
Financial Plan-contains key financials including sales, cash flow, and profits.
What makes a successful business plan?
A well thought out idea and strategy
Clear and concise writing so nothing is ambiguous
A clear and logical structure that show's that you know what you are doing
Illustrates management's ability to make the business a success
Shows realistic sales, expense and profitability projections
How do I write a business plan?
Sitting down looking at a blank computer screen as you prepare to start your business plan can be daunting. You may want to look at some alternatives that will make the process a bit easier.
Hire a Professional
A professional consultant will create the business plan for you, but you still have to be prepared to think through your business and understand the underlying concepts in your business idea. You will have to work closely with the consultant to ensure that he or she develops a good plan that accurately represents your business or business idea.
Use Business Planning Software
A good business planning software package will provide you with an outline for a well-developed, objective-based and professional business plan. Software packages will remove the problem of starting from scratch by structuring your plan for you. The software should ask you the right questions that will pull out the most important underlying concepts within your business idea.
Monday, June 8, 2009
Seller Financing: It Makes Dollars and Sense
When contemplating the sale of a business, an important option to consider is seller financing. Many potential buyers don't have the necessary capital or lender resources to pay cash. Even if they do, they are often reluctant to put such a hefty sum of cash into what, for them, is a new and untried venture.
Why the hesitation? The typical buyer feels that, if the business is really all that it's advertised to be, it should pay for itself. Buyers often interpret the seller's insistence on all cash as a lack of confidence--in the business, in the buyer's chances to succeed, or both.
The buyer's interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments--for any reason--the seller would be forced either to take back the business or forfeit the balance of the note.
The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms instead of having the buyer seek a commercial business acquisition loan. On average, a seller who sells for all cash receives 69.9 percent of the asking price. This adds up to a 15.8 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash. The seller who asks for cash receives, on average, a purchase price of 36 percent of annual sales; compared to the seller accepting terms, who receives an average of 42 percent of annual sales.
Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.
Seller financing greatly increases the chances that the business will sell.
The seller offering terms will command a much higher price.
The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line--in many cases, their entire capital. Although this investment doesn't insure success, it does mean that the buyer will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to sellers, they will, in most cases, be helping themselves as well.
Why the hesitation? The typical buyer feels that, if the business is really all that it's advertised to be, it should pay for itself. Buyers often interpret the seller's insistence on all cash as a lack of confidence--in the business, in the buyer's chances to succeed, or both.
The buyer's interpretation has some basis in fact. The primary reason sellers shy away from offering terms is their fear that the buyer will be unsuccessful. If the buyer should cease payments--for any reason--the seller would be forced either to take back the business or forfeit the balance of the note.
The seller who operates under the influence of this fear should take a hard look at the upside of seller financing. Statistics show that sellers receive a significantly higher purchase price if they decide to accept terms instead of having the buyer seek a commercial business acquisition loan. On average, a seller who sells for all cash receives 69.9 percent of the asking price. This adds up to a 15.8 percent difference on a business listed for $150,000, meaning that the seller who is willing to accept terms will receive approximately $24,000 more than the seller who is asking for all cash. The seller who asks for cash receives, on average, a purchase price of 36 percent of annual sales; compared to the seller accepting terms, who receives an average of 42 percent of annual sales.
Even with these compelling reasons to accept terms, sellers may still be reluctant. Selling a business can be perceived as a once-in-a-lifetime opportunity to hit the cash jackpot. Therefore, it is important to note that seller financing has advantages that, in many instances, far outweigh the immediate satisfaction of cash-in-hand.
Seller financing greatly increases the chances that the business will sell.
The seller offering terms will command a much higher price.
The interest on a seller-financed deal will add significantly to the actual selling price. (For example, a seller carry-back note at eight percent carried over nine years will double the amount carried. Over a nine-year period, $100,000 at eight percent will result in the seller receiving $200,000.)
With interest rates currently the lowest in years, sellers can get a much higher rate from a buyer than they can get from any financial institution.
The tax consequences of accepting terms can be much more advantageous than those of an all-cash sale.
Financing the sale helps assure the success of both the sale and the business, since the buyer will perceive the offer of terms as a vote of confidence.
Obviously, there are no guarantees that the buyer will be successful in operating the business. However, it is well to note that, in most transactions, buyers are putting a substantial amount of personal cash on the line--in many cases, their entire capital. Although this investment doesn't insure success, it does mean that the buyer will work hard to support such a commitment.
There are many ways to structure the seller-financed sale that make sense for both buyer and seller. Creative financing is an area where your business broker professional can be of help. He or she can recommend a variety of payment plans that, in many cases, can mean the difference between a successful transaction and one that is not. Serious sellers owe it to themselves to consider financing the sale. By lending a helping hand to sellers, they will, in most cases, be helping themselves as well.
Thursday, June 4, 2009
Understanding Goodwill
Business sellers and quite often business appraisers as well tend to focus their attention exclusively on the market value of the owner’s equity. They want to know how much the owner can ‘take to the bank’ upon the sale of the company. The effort devoted to the estimation and calculation of the seller’s equity notwithstanding, concern for this issue is virtually non-existent among business buyers. Buyers couldn’t care less about the amount a seller will profit from the sale of his or her business.
The three things small business buyers typically want to know first about a potential acquisition are the seller’s discretionary cash flow, the total asking price for the business, and the amount by which that price exceeds the value of the business’s hard assets—i.e., the amount represented by the intangible assets. Although the intangible assets of a going concern may be identified individually, for convenience of analysis and price negotiations among small business owners, they are usually all lumped together under the general heading of “goodwill.”
Buyers want to know how much of the purchase price is represented by “goodwill” because they often have the very real alternative of starting a similar size business from scratch and therewith avoid paying for any ‘goodwill’ at all. This is something that many sellers don’t think about. However, it would serve them well if they did. Sellers should always keep in mind that there is a price beyond which it will make more sense for a buyer to start a business rather than buy a business even considering the greater risk involved in doing so.
The three things small business buyers typically want to know first about a potential acquisition are the seller’s discretionary cash flow, the total asking price for the business, and the amount by which that price exceeds the value of the business’s hard assets—i.e., the amount represented by the intangible assets. Although the intangible assets of a going concern may be identified individually, for convenience of analysis and price negotiations among small business owners, they are usually all lumped together under the general heading of “goodwill.”
Buyers want to know how much of the purchase price is represented by “goodwill” because they often have the very real alternative of starting a similar size business from scratch and therewith avoid paying for any ‘goodwill’ at all. This is something that many sellers don’t think about. However, it would serve them well if they did. Sellers should always keep in mind that there is a price beyond which it will make more sense for a buyer to start a business rather than buy a business even considering the greater risk involved in doing so.
Monday, June 1, 2009
Seller's Discretionary Cash Flow
Seller’s discretionary cash flow is probably the best measure of profitability for the purpose of evaluating the financial performance of small businesses and is a concept that is used extensively throughout the field of business brokerage and business valuation.
For those unfamiliar with this particular performance measurement, it is determined by adding to pre-tax net profit the wages for one principal owner/manager (or salaried manager) including bonuses and any personal insurance premiums paid through the business. To this total is added the non-cash expenses of depreciation and amortization plus all interest paid on long-term debt. Additionally included are all expenses not necessary for the operation of the business generally categorized as “owner perquisites” which typically include such things like the owner’s personal auto expenses, travel and entertainment and so forth enjoyed by all of the owners and their family members. And finally, any non-recurring expenses (not capital expenditures) such as a one time uninsured loss, an extraordinary repair expense and costs of that nature should be added to the total and non-recurring earnings subtracted.)
For those unfamiliar with this particular performance measurement, it is determined by adding to pre-tax net profit the wages for one principal owner/manager (or salaried manager) including bonuses and any personal insurance premiums paid through the business. To this total is added the non-cash expenses of depreciation and amortization plus all interest paid on long-term debt. Additionally included are all expenses not necessary for the operation of the business generally categorized as “owner perquisites” which typically include such things like the owner’s personal auto expenses, travel and entertainment and so forth enjoyed by all of the owners and their family members. And finally, any non-recurring expenses (not capital expenditures) such as a one time uninsured loss, an extraordinary repair expense and costs of that nature should be added to the total and non-recurring earnings subtracted.)
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