I receive approximately eight emails a week from both business buyers and business owners wondering what is exactly adjusted net income and why it is so important in the selling a business process.
Adjusted net income also called: adjusted cash flow, sellers discretionary income, add-back income, etc. is typically defined as: owners salary + net income + depreciation + interest + ammortization + any other business expenses that have been written off that aren't neccessarily "real business expenses" - you know the type: personal auto expenses, vacations, entertainment, subscriptions, etc.
Business sellers should define the true value of their adjusted net income before they go on the market since this is usually the second question (the first being - where is the business located?) most business buyers want to know.
Business buyers should also ask what line items define the adjusted net income being represented since many business brokers and owners tend to add-back quite alot of expenses to comprise this number. This is important since most lenders for SBA financing do not allow alot of the "fluff" - they only will add back the basics like owners salary, net income, depreciation, interest, ammortization, etc. when computing the adjusted net income for debt service analysis.
Note: if you put ten business brokers and business owners in an office and gave them one set of tax returns and financials for a small business and asked them to compute the adjusted net income on the business being presented you would probably get ten different answers!
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Peter Siegel, MBA is the founder of both BizBen.com and USABizMart.com and has written 3 books on the topic of selling and buying small and mid-sized businesses. The books are: "
Businesses For Sale - How to Buy or Sell a Small Business", "
Buying a California Business - The Ultimate Guide for Savvy Business Buyers", and "
Selling A California Business - The Ultimate Guide for California Business Owners". He also conducts weekly Webinars (online seminars) at the Business For Sale Academy - an online educational resource of seminars, round-table discussions, and educational training for business buyers, business owners, business brokers, and agents.
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