Monday, April 2, 2012

Ask Julie!
America’s Business Broker
Syndicated Column, April 2, 2012 

Question: I own my building and want to lease it to the buyer of my business for more rent than I currently pay. Will this effect my valuation? 

Answer: If you own your building and plan to lease it to your buyer at a higher rent than you are currently charging yourself, a negative adjustment (reduction) will have to be made on your annual earnings to reflect the new amount. For example, if you charge yourself $8,000 a month ($96,000 annually) but the market rent you will charge the buyer is $15,000 a month ($180,000 annually), you will have to subtract $84,000 from earnings for each year you are under charging yourself. The problem compounds when you multiply the negative adjustment by the pricing multiple. If your business is priced at 3 times discretionary earnings, the net negative impact of the adjustment is a $252,000 hit AGAINST your selling price- ouch! From this illustration you can see that a fair market adjustment can be a significant, so plan ahead and charge yourself properly after discussing the tax consequences with your CPA.

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A little Monday nudge for you :) > "Life begins at the end of your comfort zone." -Heale D. Walsch