Has This CEO Earned Her $2,645/Night Hotel Room?
Are you using your company to fund your lifestyle?
Imagine a business owner who occasionally treats herself to a night at the Ritz-Carlton when she travels to San Francisco for business. Her club room costs her $529 per night, but she figures she has earned it. She can run the cost through her business; it won't even be a blip on her expenses for the month.
Now, there's nothing inherently wrong with staying at the Ritz instead of, say, the Courtyard Marriott. But a seemingly harmless indulgence like this can have much larger repercussions if you're thinking of selling your company in the future.
Now imagine the same CEO decides to put her business on the block. Most businesses are valued on a multiple of your pre-tax earnings. So, let's say she receives an offer of five-times her earnings. That $529 hotel room reduced her profit by $529, which, when multiplied by five, means she paid $2,645 for her oasis nestled in the heart of Nob Hill ($529 x 5=$2,645).
While it is true acquirers will "normalize" your earnings (the process of recasting your financial results to estimate your performance under their ownership), they probably will not bother with the bulk of your small expenses, which can add up to a lot:
- Is that $4 morning coffee worth $20 each day?
- Is the Cadillac you rented for $80/day still fair at $400/day?
- Does the $50 bouquet of fresh-cut flowers for the reception area bring $250 worth of smiles?
- Would you have treated the sales team to that $400 after-work bender if you'd thought it'd cost you $2,000?
Read more:
- RIP to RFPs: Why You Should Stop Chasing Bids for Business
- Decoding the Secret Language of Angels, VCs, and Eric Schmidt
- Should You Share Equity With Your Employees?
- When Profit Is The Enemy of Value
John Warrillow is the author of Built to Sell: Turn Your Business into One You Can Sell. He has started and exited four companies and was named one of America's most influential marketers by BtoB Magazine in 2008. Think you can sell your business? Take the Sellability Index Quiz.
Follow him on Twitter @JohnWarrillow
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