When valuing a business, it is common practice, to adjust for 1 owner operator. When the business is absentee owned, it would seem logical to add back the manager, since they are taking the role of the owner, but this could cause the buyer lots of issues when they go for financing.
The way a bank looks at the value of a business is based on the specifics on the buyer’s circumstances. So if the buyer decides to keep the manager, the bank will not allow the add back of the manager, this will effectively reduce the net profit by the salary of the manager. In some cases, this can be a substantial amount and drastically affect the value of the business and the ability for the business to financed by a bank.
The owner of a fast-growing vehicle resale business contacted us to sell his business. It was only 4 years old and the owner was absentee. He had a manager that ran the business. The business was making nearly $250k in profit without the manager’s salary.
Since it was absentee owned, the appraiser added in the manager’s salary (about $100K) to calculate the net profit based on an owner-operator. This resulted in a value of about $800ok.
Multiple banks were presented the package for this business and we received 4 pre-qualification letters from banks saying they would be willing to finance this deal and provided their terms.
The business was listed for sale at $765k and an offer was accepted at $750k. The buyer decided he wanted to keep the manager. The buyer called the banks that had presented the pre-qualification letters.
While in underwriting, the bank that was chosen found an issue with the business value. Since the buyer is keeping the manager, the manager’s salary could not be added back and therefore the value of the business was significantly less. The buyer had to find another bank for lending and this jeopardized the entire deal.
When a business is absentee owned, it is important to consider the role of the manager. If the manager is a critical component to the business and likely to be kept in by the buyer, the manager’s salary should not be added back, especially if the business will be requiring bank financing.