Seller’s Discretionary Income Explained - YouTube

in this video we're going to dive into the  concept of seller's discretionary earnings  

and why it's an important concept if you're  selling your business and stick around till  

the end of the video because i'm going to give you  the three best examples of sellers discretionary  

expenses which can be applied to your net earnings  to give you sellers discretionary income adding  

these expenses back to your net income is in  fact your seller's discretionary income and  

these ad banks if done correctly will result in  you selling your business for more simply state it  

seller's discretionary income is the amount of  money a business is producing for the benefit  

of an owner this includes the owner's salary and  any distributions she is taking from the business  

but this also includes any expenses that go  through the business that a future owner will  

not incur for example if you pay yourself more  than a future owner would have to pay a manager  

to do the same job that you're doing that extra  above and beyond amount is part of the seller's  

discretionary income it's a benefit to you as  a seller to add back those expenses and show  

that your business is more profitable let's talk  quickly about why a business owner would want to  

incur more expenses and show their business  as less profitable than it really is isn't  

every business owner trying to reduce expenses  and therefore be more profitable the answer  

to this question is no while it is a good  idea in every business to reduce expenses  

on needed expenses it's even more strategic to  put expenses through the business and mitigate  

your tax burden or pay less taxes at the end  of the year if you can reasonably put expenses  

into the business that you would have  normally incurred with your personal money  

it's a great idea to do so this will result in  you paying less taxes at the end of the year  

the reason this concept exists is because when  a buyer is considering making an acquisition  

of another business they're usually going to  estimate future earnings using historical earnings  

as a reference point it's in the best interest of  a seller to raise their hand and say wait a second  

guys there's some sellers discretionary expenses  on my books i'd like to reforecast for you  

and show you what expenses you would  incur in the future these recast earnings  

are called sellers discretionary income but they  go by many names owners benefit recast earnings  

and adjusted net income to name a few it's really  in the interest of the seller to recast earnings  

and as the seller it's a conversation that  you proactively want to bring up during some  

transactions that i have been involved in i've  heard it said that this concept is most relevant  

to smaller companies however that statement is  not entirely accurate at large publicly traded  

companies there's always controls in place  that prevent employees from spending company  

money on personal expenses so while it's true that  recasting earnings doesn't need to happen as much  

for larger companies it's not complete to say this  is for smaller companies now there's obviously a  

correlation between smaller companies and single  shareholder companies better and more accurately  

said this is most relevant to single shareholder  companies where operators of the business also  

control the expenses incurred in the business by  extension this means that yes it's mostly true  

that seller's discretionary income is relevant to  smaller companies but the truth is there's not a  

one-to-one match but i wanted to highlight that  fact that this is most relevant to companies with  

simple shareholder structures and not necessarily  the size of the company okay so i promised you a  

bonus in the beginning of the video and i'm going  to give that to you here i'm going to list for you  

three very common sellers discretionary expenses  which can be added back to the tax returns  

net income to produce sellers discretionary income  so what expenses are we talking about automobile  

expenses is a great example if your car that  you use for your personal life goes through the  

business that is a great example of an expense  that can be added back also travel travel that  

would not normally be incurred by a business  um maybe a conference or a conference retreat  

thing and retirement plan contributions for the  benefit of the owner is another good example of an  

expense that can be added to sellers discretionary  expenses for the benefit of the seller so in  

conclusion if you're thinking about selling your  company it's fundamentally important to be adding  

back some of these sellers discretionary expenses  to get a recast number of your earnings or sellers  

discretionary income ideally two to three years  before you're ready to sell your company you would  

start a very good regimen of record-keeping as  to what those sellers discretionary expenses are  

so that you can show those expenses to a potential  buyer and they'll easily be able to reconcile  

what are expenses that they might  not need to incur in the future

wait a second guys wait a second  and say wait a second guys