Depreciation and Amortization, IRS Taxes, Franchise Taxes, Interest Expense, Donations, Non-Recurring Legal Expenses or Non-essential expenses.
Other Expenses, Owners Medical, Life Insurance for Owners, Pension Plan contributions for owner’s family, Non-Essential Salaries, Health insurance (owner’s family portion), Owners vehicle expenses (lease payments, operating expenses, repairs, gas, depreciation and insurance), Magazine subscriptions, Owner’s Travel, Entertainment, Home office expenses and Home telephone expenses. Any other owners benefit that the seller has hidden in some expense account.
Real examples include:
- Personal clothing listed as uniforms.
- Family eating out listed under entertainment.
- Children’s education listed under staff training.
Additional clarification on lease payments is as follows: As discussed in the prior paragraph, lease payments made on personal automobiles are not a business expense and are added back. The buyer many times needs to assume a lease payment on leased machinery. If the lease has a $1.00 buyout or any buyout at the end for less than fair market value of the machinery it is called a financing lease. We treat them like a loan payment and add back 100% of the payments and the seller must pay these loans off or the escrow needs to deduct the balance due from buyer’s cash requirement.
We also put these assets on the balance sheet. If the buy-out at the end of the lease, at fair market, on the date of the buy-out, then this is a real lease which is really just a rental agreement. The payments are left as a business expense and are not added back. To find out which kind of lease the seller has will require asking the seller or his accountant.”
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