"For success in life and business always go the extra mile" - Jeffrey Feldberg
Jeffrey Feldberg is the co-founder of Deep Wealth. The M&A journey for Jeffrey began when he said "no" to a 7-figure and "yes" to mastering the art and science of a liquidity ...
"For success in life and business always go the extra mile" - Jeffrey Feldberg
Jeffrey Feldberg is the co-founder of Deep Wealth. The M&A journey for Jeffrey began when he said "no" to a 7-figure and "yes" to mastering the art and science of a liquidity event. Two years later, Jeffrey said "yes" to a 9-figure offer. During the process, Jeffrey increased his company value 10X.
How did Jeffrey increase his company value 10X and go to a 9-figure liquidity event?
Jeffrey created a 9-step roadmap on how to prepare for a liquidity event.
The Deep Wealth Experience has you learn the 9-steps of preparation in 90-days. At the end of the 90-day,s you create a blueprint to help you optimize your business value. You also have the certainty of capturing the maximum value for your liquidity event.
This podcast is brought to you by Deep Wealth.
When it comes to your liquidity event, you have one chance to get it right, and you better make it count. Enterprise value is created from preparation and not the event itself.
Learn how the Deep Wealth Experience helps you maximize enterprise value. Master the same strategies our founders used to increase their company value 10X.
Access the same 9-step road map of preparation that paves the way for success. Enjoy the certainty that you'll capture the maximum value on your liquidity event.
Enjoy the interview!
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This podcast is brought to you by the Deep Wealth Experience. In the world of mergers and acquisitions, 90% of deals fail. Of the successful deals, business owners leave millions of dollars on the deal table.
Who are we and how do we know? We're the 9-figure exit guys. We said "no" to a 7-figure offer. Two years later, we said "yes" to a 9-figure offer. In the process, we increased the value of our company 10X.
During our liquidity event journey, we created a 9-step road map of preparation. It's the quality and depth of your preparation that increases your business value.
After our 9-figure liquidity event, we committed ourselves to help business owners dominate and win. The Deep Wealth Experience has you create a blueprint to optimize the value of your business.
Our solution is resilient, relentless, and gets results. Enjoy the certainty that you'll capture the maximum value on your liquidity event.
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This podcast is brought to you by Deep Wealth.
Your liquidity event is the most important financial transaction of your life. You have one chance to get it right, and you better make it count.
But unfortunately, up to 90% of liquidity events fail. Think about all that time, money and effort wasted. Of the "successful" liquidity events, most business owners leave 50% to over 100% of their deal value in the buyer's pocket and don't even know it.
Our founders said "no" to a 7-figure offer and "yes" to a 9-figure offer less than two years later.
Don't become a statistic and make the fatal mistake of believing that the skills that built your business are the same ones for your liquidity event.
After all, how can you master something you've never done before?
Are you leaving millions on the table?
Learn how the 90-day Deep Wealth Experience and our 9-step roadmap helps you capture the maximum value for your liquidity event.
Enjoy the interview!
Steve Wells: I'm Steve Wells.
[00:00:06] Jeffrey Feldberg: And I'm Jeffrey Feldberg. Welcome to the Sell My Business Podcast.
[00:00:10] Steve Wells: This podcast is brought to you by the Deep Wealth Experience. When it comes to your liquidity event or exit, do you know how to maximize the value of your business? You have one chance to get it right, and you better make it count. Most business owners believe that business value is determined during the liquidity event.
[00:00:29] Unfortunately, most business owners are wrong. Your enterprise value is a direct result of the depth and quality of your preparation. Who are we and, how do we know? We're the 9-figure exit guys. We said "no" to a 7-figure offer. Two years later, we said "yes" to a 9-figure offer.
[00:00:47] Despite having the same people, the same company, the same services, we increased our business value 10 times.
[00:00:54] How did we do this? We spent millions of dollars and years of time to uncover strategies that level the playing field. The end result is the 12-week Deep Wealth Experience.
[00:01:05] We've created a proprietary solution that is relentless, resilient, and gets results. Learn how to master the art and science of a liquidity event. We've leveraged the same strategies that took us from 7-figures to 9-figures.
[00:01:19] The Deep Wealth Experience levels the playing field so you can dominate and win.
[00:01:24] Book your free call today to find out if you have what it takes for the Deep Wealth Experience.
[00:01:28] Visit www.deepwealth.com/success to book your free call.
[00:01:35] Jeffrey Feldberg: Welcome to episode 48 of the Sell My Business Podcast. For our regular listeners, as you know, we have two kinds of episodes on the Sell My Business Podcast. The typical episode is where I'll have a guest on the podcast. One of the usual cast of characters in this crazy and wacky world called mergers and acquisitions.
[00:01:57] And the other type of Podcast is what we're doing today. And this is where I do a deep dive on a particular topic. So, for episode 48, the topic today, it's somewhat technical, but it's an important one as you think about your liquidity event and preparing for that. And so the topic for today is how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event.
[00:02:25] Now here's the thing to keep in mind. Of all the businesses that are in the market for a liquidity event, depending on who you speak to up to 90% of those businesses will not have a liquidity event. They will fail. And when you dive into those details, what comes out is that the business owner simply isn't prepared for that liquidity event.
[00:02:50] One of the areas that often come up are mistakes made in EBITDA adjustments. So, there are five common areas that I'm going to make you aware of, and knowledge is power, but only if you know it and how to apply it. So, with that in mind, we're going to talk about how to avoid committing the worst EBITDA adjustments before your liquidity event with mistake number one. And mistake number one is why EBITDA adjustments for your lifestyle will increase the value of your business. Now, most business owners, when they start the business, it's for a number of reasons, but at the top of the list is the ability to create a lifestyle for yourself.
[00:03:32] And why not? You spend the time, the effort, the sleepless nights to make this happen. You're putting all the risk out there. And when your business is successful, you want to have the fruits of your labor, your rewards. And so, for many business owners, this usually takes the form of things like season tickets to your favorite sports teams.
[00:03:53] Some business owners may have charitable donations. Other business owners like to travel and they'll combine travel with business. Perhaps you like to own different properties. Or even tinkering around with all kinds of different equipment or machinery that's related to your business, but fulfills a need that you have just to get your hands dirty, get in there and figure out all the different kinds of things.
[00:04:19] And while these activities are great for your lifestyle, they're not great for a liquidity event for two reasons. Number one your future owner isn't going to participate in any of these activities. And number two, if you don't make this kind of EBITDA adjustment, you're actually lowering your profits. And with a lower EBITDA, your business is worth less.
[00:04:45] So, the key here is to identify what these lifestyle expenses are and be able to adjust for them. I'm going to give you a few examples and then also talk about how you should really do this, particularly when you know you're having a liquidity event. So, as an example, I know one business owner who absolutely loves to tinker with the latest and greatest in machinery. He spends hundreds of thousands of dollars a year of buying new equipment. Now the equipment is related to the business, but it isn't needed today, or even next year for the business. This particular owner loves to keep on top of the technology, where this machinery is heading, what it's doing.
[00:05:31] He owns a manufacturing company. And so, for him, it helps to scratch an itch that he has for keeping interested and keeping relevant. And at one point he may deploy that machinery in the business itself. But the reality is that the business doesn't need all that excess machinery. So, when you know what all of these things are, and some of the ones that I mentioned earlier, what you're going to want to do is take that out of the books and you want to normalize the revenue and the expenses for the business, and you'll end up with a higher profit.
[00:06:05] Now having said that one of the issues that most business owners will do is they'll do the EBITDA adjustments right on the eve of a liquidity event itself. So, in other words, all the years leading up to the liquidity event, these lifestyle expenses continue. Here's the problem with this. Although you're fully justified to remove all of these expenses and go to your buyer and say, the business doesn't really need these expenses, your buyer is probably going to challenge you. While it's great that you're telling me that I don't need all these expenses, but how do I really know? And some buyers may take you at face value. Other buyers may put a discount on what you're providing. So, if you want to get ahead of this, the best thing that you can do, and it's going to be a little bit painful for some of you, but it's well worth the time and the effort if you know your liquidity event is two years out or five years out, or however far out it's going to be. Stop putting those lifestyle expenses through the business. Now, some of you are saying, well, wait a minute, does that mean I have to pay out of pocket and insult to injury I'm not only paying out of pocket, but I'm going to be paying more taxes because my business profits are going to increase.
[00:07:26] I'm not going to have as high expenses as I would have otherwise. The short answer is yes. Why you want to do that though is when you go to your future buyer and you say, here are three years or five years of audited financial statements, and you have no lifestyle expenses in there. There's nothing that will be challenged. And here's the thing that I want you to think about because some of you are saying, well, what about the out-of-pocket expenses that I'm now personally paying after tax dollars or I'm paying taxes on the profits. Depending on the industry that you're in, the multiple that you receive for your business will make it a rounding error to what you're paying right now, both in increased taxes, as well as out of pocket expenses. So, as an example, you may receive a seven-time multiple or a 10 time, multiple, or 30 times multiple. Let's just use the 10-time multiple, because it makes the math really easy. So, if you are saving, let's say $300,000 each year of not putting lifestyle expenses through the business. Well, that's $3 million a year every year that you're adding to the enterprise value of your business.
[00:08:42] So, again, it's a rounding error when you compare that to what you're paying an increased taxes or out-of-pocket expenses. Let's suppose at that $3 million per year was done over a three-year period. Well, that's $9 million of value, unquestionable value that the buyer cannot challenge because it's not in the books.
[00:09:05] You're the benefactor of that. So, yes, there is some short-term pain, some short-term out-of-pocket expenses, but overall, you're coming forward with a clean slate. And as you know, in the Deep Wealth Experience and our nine-step roadmap, one of the things that we always encourage you to do is to clear all the skeletons out of your closet.
[00:09:27] And I got news for you, lifestyle expenses, even when they're disclosed are a skeleton in your closet. Because here's the other thing that a lifestyle expense will do that you may not have thought of. When you share these lifestyle expenses with the buyer, the buyer is a person, the buyer is human. The buyer may judge you based on the lifestyle expenses and say, look at this, you were sloppy with how you're spending the money in the business, or you just bought in excess. It wasn't required.
[00:09:57] And that kind of broad stroke of who you are as a person is going to permeate through the entire liquidity event and will likely lower your enterprise value. Remember a liquidity event is as much art as it is science. So, the best rule of thumb is don't include any lifestyle expenses when you're preparing for your liquidity event.
[00:10:21] Okay, let's get back to how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event. And mistake number two is not accounting for intercompany accounting. Not accounting for intercompany. Accounting is asking for trouble. Now in the nine-step roadmap that we have at Deep Wealth step number eight, it's the skeletons and the Rembrandts. You want to find the hidden skeletons in the closet and remove them. And you want to take those hidden Rembrandts in the attic and put them out for public display. But in the case of not accounting for intercompany accounting, that's a skeleton in the closet. It's interesting.
[00:11:05] I was speaking to an investment banker the other day, who shared a story with me and the story went, something like this. The business owner came to the investment banker to go to the market for a liquidity event. On paper, the business looked promising. There was something like $10 million of revenue.
[00:11:22] The profits were really high. And a deal was struck and the investment banker and the business owner began preparing to go to market. Now off to the side, I don't recommend this approach as you know, here at Deep Wealth my recommendation is that you always, always, always do your preparation well in advance of hiring an investment banker.
[00:11:45] Had this business owner done that he would have saved a tremendous amount of time and money. Ultimately the deal didn't happen because when the diligence was being done, the prospective buyer found out that the majority of the revenue and subsequently the profits came from intercompany transactions. The business owner, in this case, had a complicated setup.
[00:12:12] There are many inter companies that were all charging each other. But ultimately it was all coming from the same pot. So, when you took those $10 million in revenues and you actually trace back to where those revenues and where those profits were coming from the business, believe it or not, it was losing money.
[00:12:32] Forget being even slightly less profitable. It wasn't profitable at all. The business was losing money in its entirety. So, the takeaway for you is you really want to clean up your books. If you're having any kind of intercompany transactions that are going on.
[00:12:52] Number one, you're going to need to identify those well in advance and make the future buyer aware of this. But better yet. Again, going back to that clean slate, why not remove the intercompany transactions altogether? If it's possible, that's what you should be doing because for the buyer you want to show up with that clean slate with those audited financials and say, here you go.
[00:13:17] All the financials are there. I have a proven track record of success. It's consistent year over year, the growth is consistent. The profits are consistent and there's nothing there that the buyer is going to be able to challenge. Speaking of challenges, why do buyers love to challenge you? Whether it's on lifestyle expenses or intercompany accounting.
[00:13:39] Well, the reason is this. For every challenge or problem or issue that your buyer finds, it's an excuse to do one of a few things. It's an excuse to lower the enterprise value. It's an excuse to have an earn-out, which I strongly recommend you never do. It's an excuse to bump up the level of the escrow that you're going to have after the deal.
[00:14:05] So, the fewer excuses that you give your future buyer the better off you're going to be. You can eliminate an earn-out. You can minimize an escrow. You're going to maximize the enterprise value of your business. So, again, not accounting for intercompany accounting is asking for trouble. Don't do it.
[00:14:27] Circling back on how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event, let's go to mistake number three. Mistake. Number three are EBITDA adjustments that have you crush it and win when you look at your salary and bonus. Well, how was this a mistake you may be asking? Let me give you some context and let's look at what business owners either don't consider or they don't do.
[00:14:54] For many business owners, your business is your kingdom. And because it's your kingdom, you decide how much money you have as a salary, how much money you take out as a bonus. Completely discretionary. And if the business can afford it, why not? Well, here's the thing. The higher the salary and the higher, the bonus that you take out of the business, the less your profits are going to be.
[00:15:18] Now, your accountants may be advising you of doing this for tax reasons, and those are completely justified. But when it comes to your liquidity event, you want to do everything possible to show the absolute, highest level of profits that you can. So, in this case, if you're taking out a salary and a bonus, that is well above what the normal levels for the market are, reduce that you want to put that to what the market level is. Better yet, hopefully, you're in a situation where the business runs without you and you have a CEO. Now, if you run the business and you don't have a CEO, that's a whole other discussion that we have at Deep Wealth of why you don't want to do that.
[00:16:02] But let’s for example, go with a business owner who doesn't have a CEO who runs the company, the business owner tries to get smart. And when it comes to a liquidity event, goes to the market and says, well, the money that I took out I'm going to normalize that I'm going to just put that back to the company. And what a lot of business owners don't do is they forget to add in what the cost of a CEO who's running the business would actually be.
[00:16:28] So, that is a mistake written all over it that you don't want to do. And again, one of the benefits of why you want to have the company run without you. Well, there are many benefits. For starters, when the company runs without you, you get your time back and you have now the opportunity to focus your time on solving those painful problems that you're passionate to solve.
[00:16:50] And when you do it right, you can create a market disruption. When you create a market disruption from that excess time that you have because your business runs without you, well, you're going to ensure that your business has many, many years, prosperous years ahead for you, your revenues go through the roof as do your profits. But the other important reason of having the company run without you, you take any and all questions away from the future buyer of what it would cost to bring in a CEO to run your business.
[00:17:21] You have your CEO, you have your management team in place. You recorded what they've been doing for the past three years in audited statements. There's absolutely zero question of what it costs for your management team to profitably run the business. You take that doubt, you take that challenge away from the buyer.
[00:17:42] And if you're doing what you should be doing and the business runs without you, and now you take out your bonus and you take out your salary. Well, that's perfectly justifiable because it's not needed. The business owner isn't going to be paying you once the business is purchased from you. So, again, you want to make sure that you take into account your salary and your bonus, but you do it in the right context. You do it in the context that your business is running without you. And that you've accounted for what that cost in terms of salaries and bonuses for your management team. And if you can figure out a way to not have those high payouts in the first place leading into your liquidity event, all the better. It's a cleaner slate.
[00:18:26] So, that wraps up mistake number three. So, again, circling back to how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event, let's go to mistake number four. Mistake number four is to be smart and do the smart thing by ensuring your rent falls within market norms. Now, speaking of norms, many business owners own the physical building that their business operates out of. And again, for tax reasons, your accountants may tell you to charge a higher-than-normal rent to the business so that you can lower the profits of your business. And as a result, pay less taxes. And when you're not selling your business, that perhaps is an effective tax strategy if that's coming from your accountant and they feel that that is a justifiable and safe way to go. But when it comes to a liquidity event, when you're charging rent that is too high, or perhaps you're charging rent that is too low. That's a big mistake. And that's something that the buyer is going to pick up on.
[00:19:34] So, what you want to do with all things for a liquidity event is you want to prepare well in advance. And again, that's what the nine-step roadmap has you do when you go through the due diligence process when you're doing an internal audit. And this is why you do an internal audit. This is where you're picking up all the potential pitfalls that you have ahead of time.
[00:19:56] So, if you're charging too high of a rent, what you're going to want to do is number one, create a new rental agreement between you and your business. Well, hey, you own the business. You're the landlord. You can tear up the agreement. You can create an agreement; you can do whatever you want. But you want to get a new agreement between you and the business.
[00:20:15] And you want that agreement to ensure that the rent is at the market level. It can't be too high. It can't be too low. It has to be a defendable position. Perhaps, what you're going to want to do is speak to a few real estate agents in the area who do commercial leasing, find other examples of businesses in your area that are operating out of similar kinds of buildings to find out what the rent is, what the TMI is, so that you can create a justifiable rent and a justifiable lease for your business.
[00:20:50] And why you're doing this is when your future buyer is looking to acquire the business. There are absolutely zero questions on the level of market rent. Having spoken to many business owners, and I had this option myself when I was selling my company. Oftentimes the future buyer may want to actually buy the building from you in the liquidity event itself.
[00:21:14] And my advice to you is don't do it. One of the things that we talk about in the Deep Wealth Experience in the nine-step roadmap, it's actually step number three. When you're getting to know your future buyer, better than your future buyer knows him or herself or, you know, yourself. And what's really important is ahead of the liquidity event, before you even start. What you want to do is create two things.
[00:21:42] And these two things, number one is the deal points that you absolutely want to have in the deal. As an example, it might be that certain employees are going to be kept in the deal, or it's going to be a certain type of purchase. Maybe it's an asset purchase. Maybe it's a stock purchase, whatever kind of purchases it is you specify in events what you want that to be. But the second thing that you're specifying is what I call no fly zones. And those no-fly zones are things that you will walk away from the deal table if that no-fly zone is in the letter of intent and ultimately in the agreement itself. And when you do this in advance, it's done without the pressure.
[00:22:25] You have time to think through this. An example of one, a no-fly zone would be an earn-out. You could say under no circumstance, will I have an earn-out. If there's an earn-out on the table, in the LOI, or in the purchase agreement, I will walk away from the deal. One of the things that we recommend at Deep Wealth and in the nine-step roadmap is that you have an auction where you have multiple buyers who all have an interest in buying your company at the same time.
[00:22:57] When you have other buyers, your threat is credible. I'm going to walk away and I'll find a buyer who's going to respect my no fly-zone of not having an earn-out. Well, another no-fly zone will be, I am keeping the building. The building is not for sale. Why do you not want to have your building for sale?
[00:23:14] Well, there's a few reasons. For starters having a building where you can charge rent while that's passive income that's going to be coming in year after year after year. And there are many businesses whose real estate over time, became more valuable than the business itself. Perhaps after you sell the business, you may want to get into the business of buying other commercial properties, where you're going to lease them out and you can start with your own building.
[00:23:44] Whatever it is, maybe you're going to become a future landlord or not. It doesn't really matter, but you do own the building now that is creating passive income for you. And you want to keep that passive income. But the other reason why you want to keep the building out of the liquidity event, many buyers will try and buy that building from you at a lower market value.
[00:24:07] And why have your liquidity event get destroyed over something that has nothing to do with the business? You're arguing with your future buyer, that your building is worth more than what the future buyer is saying that it is. Keep it clean, take it off the table. The building is not for sale. I will have a lease with you.
[00:24:27] Here's my existing lease that I have with the building between myself and the business. You can see that I'm charging market rent. You can see that the TMI is reasonable. The rate is reasonable. I will continue this lease when you buy the business. Hard to argue with that because it's bulletproof. You have the audited financial statements that show the levels from that lease year in year out. You have the operating costs to operate from that building.
[00:24:56] There's no funny business about this and you're taking the ammunition off the table for that buyer to challenge you on that. So, do the smart thing and ensure that your rent falls within market norms and that you have a reasonable and fair market lease between you and the building that your business operates out of.
[00:25:19] So, again, let's circle back to how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event. And rounding it out to mistake number five is this is where you can increase your enterprise value with EBITDA adjustments, for repair, maintenance, and inventory. Now, this last area, particularly around repairs and maintenance and inventory this can be a sensitive and touchy area. Many business owners because of personal preference because lifestyle preferences, as an example, will have more inventory than what's needed. And the rationale for this is not to disrupt the supply chain or that just in case when a longstanding customer places, a last-minute order, a big one.
[00:26:12] Just in case you have that inventory there, that you can fulfill that order and keep that customer happy. Same thing with maintenance. I have a business owner that I'm in regular communications with, who both owns the building and operates out of the building. Now, this particular business owner is meticulous with the building.
[00:26:32] You could literally eat off the floor from this building. And this business owner goes to great time and expense to maintain that building quite openly, above and beyond what would normally be required. Why does this business owner do that? Well, because he can, he both owns a business and he owns the building, but it also gives him pleasure in having a building that's immaculate.
[00:26:57] Now, in case you're wondering with this business owner, is he having clients come to his place of business? No, absolutely not. Most of his business is in North America and the clients do not typically visit him. He's doing this for personal reasons and he can do that because he can, he's the owner of both the building and the business.
[00:27:17] But again, when it comes to your liquidity event, what you want to do is you want to normalize all of these areas. You want to have a fair market value in each area that the business operates from. And this can't be an argument where you're going to the buyer. Well, I know I've spent $200,000 a year on maintenance for this building, but really you only need to spend $50,000 a year.
[00:27:41] Your future buyer is going to challenge you on that delta of $150,000. And there's nothing that you can do to prove it. So, in the case of this one business owner, if he were having a liquidity event, the smart thing for him to do would be to pair back the maintenance and as painful as that would be for him to have maintenance levels that would be at an industry standard, which in this case is less than and lower than what he's doing.
[00:28:08] Because this way he can go to the future buyer and say, here's what we've done to maintain this building for the past three years. I own the building and I am okay with this level of maintenance continuing when you buy the business and you're operating out of these premises. Same thing with inventory.
[00:28:25] If you overstock your inventory again, pair it back to what's needed and you need to keep that level of inventory consistent year over year. So, you have not only a compelling story, but a story that you can back up with figures and facts. That you can go back to that future buyer and say, here you go. This is the inventory level that I've kept for the past three years or the past five years here are the audited statements to prove it.
[00:28:53] There is nothing to talk about from that future business owner. If the business owner makes the case that more inventory is needed or less inventory is needed, well, that's going to be from your new buyer's perspective. If that future buyer makes the case that there should be less inventory or more inventory, that's not a defendable position because you have the numbers to back up everything that you're saying.
[00:29:18] So, where is it on point number five, that many business owners get it wrong and they lose credibility and trust with a future buyer. And again, in the Deep Wealth Experience, in step number three of the nine-step roadmap, the step that's focusing on your future buyer, both for your investment banker and your future buyer the currency is not money.
[00:29:44] The currency is trust. Your future buyer has to trust what you're saying. If there's no trust between you and your future buyer, one of two things will happen. Either the buyer will walk away and you'll lose the deal. Or the buyer will place a significant penalty on the business.
[00:30:03] The enterprise value will be lowered because the buyer will say, I just don't trust you. I don't trust what's going on here. Neither of those scenarios is desirable. And what happens with most business owners to be blunt, they get greedy. So, they don't ahead of time take the repairs, maintenance, and inventory to market levels. They keep everything the same as it was. And when it comes time for the liquidity event, at that point, they step up to the table and say, well, you know, I'm going to normalize repairs and maintenance and inventory. They either make that mistake or the mistake that they make that's even worse is when they go to normalize it at the liquidity event, not years before they become greedy and they reduce inventory levels to a ridiculously low level. And there's no maintenance and there are no repairs for infrastructure or replacing equipment or any of those things. Now, when your future buyer sees that, they're asking themselves the question, well, if I am being lied to on these areas, what other areas have I not been told the truth? And you go down a slippery slope that quickly disintegrates into a lose-lose situation. So, the best thing to do well in advance is to ensure that the levels of repair for aging equipment maintenance and inventory, that you normalize those to market levels, years in advance.
[00:31:38] If you haven't done that, and you're finding yourself heading into a liquidity event at the very least, what you want to do is to get market comparables that you can point towards so that you have a defensible position. And be honest, be transparent. Build trust everywhere that you can at every instance with the future buyer, because that trust is what's going to keep things moving ahead.
[00:32:03] And ultimately get the deal done. So, let's do a recap of how to avoid committing the worst EBITDA adjustment mistakes before your liquidity event. And there were five mistakes that we spoke about. And so the first mistake had everything to do with lifestyle expenses. And as you recall, these are the expenses that you put through the business for your personal preferences.
[00:32:27] These expenses are defendable from a business expense side point, but they're not really needed for the business itself. And the best thing that you can do is to eliminate those all together, even though you'll be paying out of pocket for those expenses and you'll have higher taxes. Ultimately, it puts forward a bulletproof case that the business operates exactly as it needs to operate with the expenses that have been audited year over year.
[00:32:56] The second mistake was not accounting for intercompany accounting, which is asking for trouble. And for this mistake, the best thing to do is to eliminate all intercompany accounting completely. It's better to have a clean slate. If for any number of reasons, you're not able to do that, those transactions must be clearly identified and pointed out, and illustrated in your audited statements. This should not come as a surprise to anybody. And the treatment of those intercompany transactions should be treated at the market level of what any future buyer or auditor would treat this at when buying a company.
[00:33:38] But again, if you can avoid those intercompany expenses, that's the best thing to do. Then the third mistake that we spoke about is when it comes to your salary and bonus. Now, again, I'm going to take the position that your company is running without you. And this way you have a defensible position of what it cost for a CEO to run the business. Of what it costs for a capable and talented management team to run the business.
[00:34:04] If you're taking out a salary and a bonus, well, clearly that's not needed to run the business. You're going to take that out. You're going to normalize that. And that's going to add to your enterprise value because you have lower expenses and higher profits. And again, yes, the business will pay more taxes.
[00:34:21] But the whole thing here is when it comes to EBITDA adjustments, let's go back to my example, where you're getting a 10-time multiple for your business. And it just as easily could have been a 20 time or 30 times multiple. For every additional dollar of profit. You're receiving $10 back in value. So, that's short-term inconvenience.
[00:34:43] That's short-term pain. Again, it's a rounding error relative to the additional value that you're going to get. But better yet, if you have the opportunity to have passive income from other areas that it doesn't have to come from your business and you can remove your salary and bonus completely, all the better.
[00:35:03] Because again, buyers are human and they make judgments and they make assumptions. And if you're taking out an overly high salary and bonus, well, that may be up for interpretation from the buyer as to the kind of person that you are.
[00:35:18] I'm not saying that it's right. I'm not even agreeing with that. I'm not saying that it should be done, but it is what it is. And perception is often the reality. So, the more of a clean slate that you have, the better off you are. And when it comes to an EBITDA adjustment for your salary and bonus, what I love to see you have is no salary and bonus coming from the company. You're having other sources of income from other entities that have nothing to do with the business that you're selling.
[00:35:44] It's a clean slate. And then the fourth thing that we talked about is when it comes to the rent that your business pays. If you own the building that your rent is going to be within a market norm. Now I spoke about, and I can't emphasize this enough, your building is not for sale. So, when you sell your business, you keep the building and you have a fair market value lease in place that the buyer will continue and resume. And again, that lease is bulletproof. It cannot be challenged. It's at what market levels are. And you've been able to demonstrate this year over year. You're the better off for that. And that actually goes back to that no-fly zone list and that deal point list that you want to have before your liquidity event.
[00:36:26] And then last, but certainly not least. I spoke about EBITDA adjustments around repairs for aging infrastructure, maintenance of the building, keeping excess inventory, and how ideally, in the three to five years or however many years leading up to the liquidity event, that all of those areas for repairs and maintenance and inventory are done at industry standard levels.
[00:36:53] Not too high, not too low, just right. And those are numbers that cannot be challenged by the buyer.
[00:36:59] So, that's the recap for EBITDA adjustments and your takeaway should be this. When you firstly, minimize the number of EBITDA adjustments that you need well in advance, it creates a much smoother liquidity event.
[00:37:13] There's less friction with you and the buyer. There are less challenges that the buyer can put onto you for you to have to either demonstrate or defend. It also takes away any unwanted judgment that the future buyer may put on you in terms of how you run the business, how you spend the money, what you're buying that doesn't have anything to do with the business.
[00:37:34] And when you do this right, you will increase the profit of your business. Your EBITDA will go up. Your enterprise value goes up and after all, isn't that what it's all about? So, hopefully, the takeaway here from you is preparation done well in advance of the liquidity event will pay itself back in spades.
[00:37:52] And this is just one small part of the nine-step roadmap that we have at Deep Wealth. And the nine-step roadmap is a methodical system that walks you through. Step by step by step of what you need to do to prepare a solid foundation for the liquidity event, the actual preparation itself, and then your ability to extract that deep wealth that you've always had in your business, but perhaps it's been hidden from view.
[00:38:20] Because you just didn't know it was there until you did the preparation. And when you do the right preparation when you know what you're doing when to do it and how to do it, that's when dreams become reality, you unlock the full potential of your business and you have a successful liquidity event.
[00:38:37] Now, if you're interested in the nine-step roadmap and you'd like to learn more about that, we would love to talk with you about that at Deep Wealth.
[00:38:44] This is the same nine-step roadmap that I created from my nine-figure exit. For the members of the community, as you know, I said no to a seven-figure offer and yes to a nine-figure offer when I deployed the nine, seven roadmap that I created for my liquidity event. So, we'd love to speak with you. Come to our website at www.DeepWealth.com
[00:39:05] You'll read about the story. You'll hear about the Deep Wealth Experience and there you can book a free consultation in terms of how we can help you achieve your goals and dreams. That said, I'd like to thank you for your time today. You can always earn money, but you cannot manufacture more time. And the fact that you spent time with me today through this podcast or the many podcasts that we do here at Deep wealth a heartfelt thank you for you.
[00:39:32] If you like the podcast, if you find that you're receiving value from the podcast, it would mean a lot to me if you can go to Apple Podcasts and there put a review on the podcast. This is your way of paying it forward. The more reviews that we get, the more business owners will know about us.
[00:39:48] We can extend our reach and help our fellow business owners, founders, and entrepreneurs from being taken advantage of on their liquidity event. And we can ensure that we tilt the playing field to our advantage. So, that said thank you so much for your time today. And as always, please stay healthy and safe.
[00:40:06] Thank you so much.