This question was asked by a business owner who is considering the sale of her business. An addback is an expense that is not a normal one for the business and is, therefore, taken out of the equation when performing a valuation and calculating a company’s earning power.

The goal when presenting financial information to a potential buyer is to clearly represent the business earnings. This is done by recasting the financial information into a spreadsheet that we call a “Normalized Income Statement,” a reconstructed representation of the company’s performance and the owner’s “Discretionary Earnings” across several years.

What Are Discretionary Earnings?

The IBBA (International Business Brokers Association) defines Discretionary Earnings as follows:

“The earnings of a business enterprise prior to the following items: Income taxes, Non-operating income and expenses, Non-recurring income and expenses, Depreciation and amortization, Interest expense or income, Owner’s total compensation for those services which could be provided by a sole owner/manager.”

This owner’s question, by definition above, clearly qualifies as a non-recurring expense.

Question and Answer About Addbacks

Question:

I did a radio spot last year that did not produce results. Would this expense be considered as a possible addback when valuing my business?

Answer:

The short answer to your specific question is yes. A marketing or advertising effort that was a one-time event that did not produce corresponding revenue can be considered as an addback since a new owner would not incur the one-time expense.

Let’s consider the same one-time radio ad at a cost of $50K, resulting in one job for $10K and you will not be doing radio again. In this situation, one might make the case for adding back $40K, which is your cost for the ad, less the revenue brought in from the ad.

Let CBB Help You With the Nuances of Each Situation

Most situations are not cut and dried. Every circumstance has its nuances and each would be evaluated based on its particular merits. All addbacks must be reasonably supported because buyers…and lenders…will be looking closely and judging the legitimacy of each.

CBB is one of the oldest and largest business brokerage firms in the U.S. We have established ourselves as a leader in the field as a founding member of the International Business Brokers Association (IBBA) and the Texas Association of Business Brokers (TABB).

We would like to help you maneuver through these varied and often complicated processes. Please contact us and discover how we can assist you in reaching your goals. 

But what about brand recognition? Does it carry a lot of weight when you’re selling your business? We often receive a lot of questions about this topic. Therefore, we’ll explore this subject next to help provide the clarity you need to make informed decisions.

Brand Recognition – How Important Is It If I’m Selling My Business?

“If this business were split up, I would give you the land and bricks and mortar, and I would take the brands and trademarks, and I would fare better than you.” – John Stuart, Chairman of Quaker (ca. 1900)

Business branding has become an art and it all starts with a vision! A little moxie can go a long way if your business is in a competitive market.

A unique brand identity that distinguishes your business from your competitors is the route to success for all companies. The better the brand position you have in the marketplace, the better you will perform over your competitors, which lowers the risk of taking over the business by a new owner. This translates to higher value.

Questions to Answer When Considering Your Brand Image

• How is your business perceived by your target market? 
• What unique attributes do customers and prospects associate with your business? 
• Is your business name trademarked? 
• Are your logos or other intellectual property protected? 

These all represent your brand and are valuable.

Not only do you recognize companies by their products or services, but you can also identify them by their logos, signs, commercials, or theme songs.

Branding does not have to mean spending lots of money. Beating the competition means a better bottom line, which means a higher price paid for your business.

We’ve discussed addbacks and the importance of branding, but there are additional ways to help your business. For example, do you have an active marketing plan? In the next section, we’ll review how this plan can help instill confidence in your target audience. 

Increase the Value of Your Business – Document Your Marketing Plan

An articulated, working marketing plan is a sign of an organized business and provides a roadmap for a new owner to follow.

A marketing plan that is tailored to reach a defined target audience instills confidence that growth can be achieved in an effective, predictable manner under new ownership.

In other words, by increasing the probability that the business will continue to perform and grow into the future, the risks associated with acquiring the business are significantly reduced in the eyes of prospective buyers. Less risk means a better value. Therefore, the efficiency with which you attract customers will increase the purchase price paid for your business.

What Elements of a Marketing Plan Are Important to Prospective Buyers?

Some points to consider in developing your marketing plan that would be important to prospective buyers include:

• Understand the return on investment (ROI) of specific marketing efforts: This is a powerful tool to achieve growth and conquer competitors. ROI Marketing is particularly powerful for small and midsized businesses that can’t afford to waste money. It can increase your business “Moat.” 

Ask yourself: What is your marketing / advertising return on investment (ROI) per campaign? Where can you get the biggest bang for your buck (print, TV, radio, email, newsletters, webinars, seminars, tradeshows, online)?

• • Document your sales process and its effectiveness.

• Develop marketing systems that improve sustainability of profits and margins

• • Solidify and diversify customer base: Know who your customers are, and define your target market
  • Analyze and outline other marketing opportunities that could effectively grow the customer base

• Know the marketing methodologies of your competitors.

• • Focus on Human Capital: People are such a crucial aspect of selling and marketing. A solid sales team and a documented hiring and training system will solidify the ongoing performance of existing and future sales staff. A trained sales team is a tool that a buyer can count on to help in transition and to ultimately increase sales in the future.
  • Keep marketing performance reports available for analysis: Can management measure and evaluate marketing efforts to verify their contributions to the bottom line? Marketing strategies are key to increasing profits and honing margins.
  • Maintain a marketing calendar: This keeps track of budgeting and staffing needs for promotions and events. It crystallizes focus on the value in each campaign, builds consistency, and aids in preventing marketing lapses that cause the “feast and famine” effect that many businesses experience.

• Estimate your target acquisition cost per customer.

• Understand the marketing budget necessary to achieve goals: Which tactics will best realize these goals?
• Monitor marketing-to-sales ratio to make sure it is in line with industry norms: Many companies spend too much on advertising without knowing how effective it is, and many advertising dollars are wasted.

We’ve discussed the importance of a marketing plan, but it’s also critical to consider your online visibility. This can provide insight into your company’s strengths. So how does an online presence add value? We’ve got the answers.

A Strong Online Presence Adds Value When Selling a Business

In today’s business climate a strong online presence is vital. Prospective buyers of your business are googling you and your competitors to determine your standing.

Today’s buyers of businesses are much more sophisticated than they used to be. One of the very first places a potential buyer will go to be introduced to and learn about your business is the Internet. What will the potential buyer find?

Is your website getting top rankings in search engine results? 

Are you actively using Internet marketing to keep your clients and customers engaged?

Dominating the major search engines for your profession or industry is an important asset when it comes time to sell the business. It takes time, perseverance, and dollars to get there and is viewed favorably by prospective acquirers of the business. Keeping in tune with modern technology is key to staying relevant and competitive.

If today’s buyers, and your customers for that matter, cannot find you on the web, your business is losing out. Lack of an online presence makes your business look old and antiquated. 

If you are thinking that a buyer of your business can implement a site, you are right. But it is going to cost you dearly. The buyer will “discount” any proposed offer they might make by their “assumed” cost of setting up a web presence and getting good rankings in the search engines.

The value of your business is based on “perceived value” in the eyes of the business buyer. Having a good presence on the Internet adds to the favorable perceptions of potential buyers.

When it comes time to sell, buyers want to see a business that’s earning well, well-known, and set up to keep growing. Cleaning up your numbers, building a recognizable brand, having a clear marketing plan, and showing up strong online all help buyers feel confident .

If you’re thinking about selling and want help putting your best foot forward, reach out to CBB. We’re here to help.