This is the first question that every buyer asks but it’s the wrong question. Are they profitable? This is a much better question and one that the seller is more likely to be prepared to answer.
What’s the difference?
Keep in mind that most IT firms are small owner operated businesses. This means that there are more benefits than simply salary that are flowing to the current owner and the current owner has incentive to keep profits low by maximizing the flow of income and benefits to themselves. So the current owner may very well be correct when saying, “yes my company is very profitable” even when the bottom line in the books are only showing a pittance.
We’ll be encouraging our sellers to rearrange things in their books to present a clearer picture for you of just how much salary plus benefits are actually flowing to them that would flow to you if you bought the firm. These are most likely currently showing in the books as expenses when in fact they are incoming that will be coming your way and represent that mysterious missing profit.
Some of these items could include: car payments, auto insurance, auto repairs and maintenance, home office expenses like toilet paper, furniture, printer, a vacuum, remodeling, electricity, heating and cooling, etc; health insurance, computer purchases, software licenses and subscriptions, meals, internet service and cell phone service. The list of expensed items for business owners if often very significant and needs to be ferreted out if you want to determine the true profit of the company you are considering to purchase.
Ask the question, “Are you profitable?” then ask them to prove it because it may not be being pushed to the bottom line.
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