Want to know the number that buyers look at when they're deciding if they should buy your business or not? It's EBITDA, earnings before interest, tax, depreciation, and amortization. Why? Because EBITDA shows the true earning power of your business. There's three quick ways to boost your EBITDA.

Number one, remove the personal expenses that don't belong in the business. Number two, improve your gross margins by raising prices or renegotiating any costs. And number three, cut one-time non-recurring expenses so buyers see only sustainable profit.

These three ways to boost your EBITDA are the three things you should focus on today. And if you do, you'll increase the value of your business. Now let's dig deep, deep into each one of these so you can have a thorough understanding for how you can improve the value of your business.

First, removing those personal expenses. So if you're talking to a business broker right now, and that business broker says, ah, listen, everybody runs their personal expenses through their business. You don't need to be concerned about it.

That's the first sign that you're probably working with the wrong person. You see, business brokers, especially business brokers who work with main street businesses, smaller businesses, they love to talk about seller's discretionary earnings or SDE. And they love to talk about ad backs.

And when they talk about ad backs or when they talk about seller's discretionary earnings, they're talking about the expenses that you run through your business that really shouldn't be there. So like the gas you put in your boat, or your country club membership, or that vacation you took to France. And because you met with one of your suppliers in Paris, you wrote the whole vacation off and you paid for the whole vacation out of your business.

Now, those business brokers will say, listen, we're going to, we're going to do some adjustments. We're going to, we're going to add back the money that you spent into the business so that the buyer will understand what your business is really worth. And that's fine.

And that happens all the time. It happens every day. That doesn't mean it's right.

Your personal expenses running through your business, while they will save you a little bit of money on taxes today, as long as you don't get caught by the IRS, are going to decrease the value of your business over the longterm. Why? Sellers pay, sellers get paid based on a multiple of EBITDA, earnings before interest tax depreciation and amortization. Now, business brokers will say, well, it could be a multiple of SDE.

It could be a multiple of seller's discretionary earnings. That's all well and good, but your EBITDA should still be strong on your financial statement. So if you're running personal perks through the business, car, travel, insurance, whatever, move those expenses out, pay yourself a salary plus distributions, a reasonable salary plus distributions, and pay your personal expenses from your personal after-tax money.

Because a buyer is not interested in looking at all of these ad backs and then wondering what you didn't add back that you're trying to sneak by. You see, your reported earnings are not reflecting your true profit potential when you're putting all these expenses through your business. And it's going to raise questions in the mind of the buyer.

If your business is doing a million dollars or more, your expenses should be legitimate. You should be paying yourself a reasonable salary plus distributions, and you should be very comfortable opening the books and showing the books to anyone for scrutiny and not having to worry about it. A family business that added back $250,000 in personal expenses, as an example, translates into nearly a million dollars in extra value at a four times multiple.

So if you're going to get paid a multiple of your EBITDA and your EBITDA is light by $250,000 because you're sandbagging that number of expenses, you're going to cost yourself a million dollars if you get paid a four times multiple for your business. And that's the bottom line. Your short-term savings is killing your long-term value when you add your personal expenses into your business.

So get those personal expenses out of there. The second thing you can do to increase EBITDA is improve your gross margins. So raise your prices strategically or lower the value of your cost of goods sold.

So if buyers see strong margins, that's a proof to them that you have competitive advantage, that you are dominant in your market. If your margins are high because your expenses are low and your prices are at the top of the market, you have an obvious competitive advantage over other businesses they could buy. So take the case of a distributor who improves his margins by 5% by renegotiating supplier contracts, that 5% translates into a 30% higher value for the business when the owner goes to sell.

And that's just by improving the margins by renegotiating supplier contracts. So every year aim to reduce your expenses by as much as you can and increase your prices by as much as you can. That creates more margin.

And when you create more margin, you make your business more valuable. Okay. The third thing you can do is eliminate one-time expenses.

So non-recurring costs like lawsuits or renovations or special marketing campaigns, they drag your EBITDA down. If you can eliminate these, it's going to make your bottom line look better. Buyers will adjust, but only if you clearly document them.

For example, if you have a lawsuit and the lawsuit gets settled and you pay the whole settlement in one year, a buyer will say, okay, so your profit on a year over year basis was reduced because you had a $50,000 lawsuit settlement. It's unlikely you'll have that lawsuit again. So we're going to add back that 50,000 when we consider looking at the multiple value for your business.

But eliminating it is better than then having to adjust for it overall. Let's take a business that had a $400,000 one-time renovation expense. That one-time renovation expense, if it's not accounted for when you're doing your books, is going to reduce the value of the business by about 1.2 million if they're getting a three times multiple.

So if you're renovating, you got to make sure you're properly accounting for that one-time expense. If you have a lawsuit, you got to make sure you account for that one-time expense. If you're buying a piece of equipment and you're taking all the depreciation, make sure that's accounted for appropriately.

Everything you do to increase your EBITDA increases the value of your business. If you don't clean up your EBITDA, make it look as pristine as you can, buyers are going to assume your profits are weaker than they are. And if they assume your profits are weaker, you lose control of the negotiation.

You lose all your leverage. EBITDA is the number that decides whether buyers line up and have an auction for your business or whether buyers turn and walk away. Don't sell your family business until we talk.

I will help you increase your profit the right way. In our next episode, we're going to talk about how to position your business as a strategic acquisition. We're going to talk about how you can position your business so buyers fight to pay you a premium.

Don't miss our next show.