This is the trickiest part of the eValuation. The exercise here is to always look at your business the way a Buyer would and identify what cash flow will or will not be realized by a potential Buyer.
Determining the correct owner's compensation to add back is key. Choose the option below that best describes your situation:
Departing Owner Does Not Need to be Replaced
In the scenario when a firm is being sold to a group that will not be replacing the primary owner(s), then 100% of those individual's W2 compensation, health / insurance benefits and keyman insurance costs can be added back.
Example, if the departing owner's W2 and Benefits total equals $300,000, in this instance you would add $300,000 to the Owners W2 and Benefits Addback field.
Departing Owner Needs to be Replaced at Same Cost
In this scenario, the firm is being sold to a group and the departing owner needs to be replaced at the same cost. None of this departing owner's compensation should be added back.
Example, if the departing owner's W2 and Benefits total equals $300,000 and you are going to replace him or her with an individual making the same salary, you would add $0 to the Owners W2 and Benefits Addback field.
Departing Owner Needs to be Replaced but at a Lower Cost
If the firm is being sold to a group and the departing owner's roles / responsibilities can be assumed by someone with a lower salary.
Example, if the departing owner's W2 and Benefits total equals $300,000, but they can be replaced with an employee that earns $125,000 you would add back the difference - or $175,000 - to the Owners W2 and Benefits Addback field.
Departing Owner Needs to be Replaced but at a Higher Cost
This describes the situation when a the firm is being sold to a group and the departing owner needs to be replaced, but at a higher cost. This is considered a management replacement cost.
Example, if the departing owner's W2 and Benefits total equals $75,000, but their roles and responsibilities need to be assumed by someone else that earns $125,000, you would need to subtract an additional $50,000 from the cash flow a buyer would realize. So in this instance, you would enter $-50,000 in the W2 Owners and Benefits Addback field.
Still have questions? Contact our eValuation specialist for a no-cost 15 minute consultation