When it comes to selling your business, understanding your finances goes far beyond the numbers reported on your tax return. Many business owners assume that the amount shown on their taxes is the same as the actual cash their business generates. In reality, there is often a significant difference between the tax number and the real number, and knowing this distinction is critical if you are preparing your company for a potential sale.
What Is The Tax Number?
The tax number is the figure reported on your business tax return. It reflects your business’s net income after accounting for allowable deductions, depreciation, and other tax-specific adjustments. While this number is essential for compliance with the IRS, it does not always provide a clear picture of the ongoing financial health of your business.
What Is the Real Number?
The real number, often referred to as your true cash flow or adjusted EBITDA, shows the actual financial performance of your company. This figure adjusts the tax number by adding back certain expenses or deductions that are not part of the regular operations of the business. Common add-backs can include:
One-time expenses, such as legal fees, equipment purchases, or office relocations
Personal or discretionary expenses run through the business
Non-recurring repairs or unusual operational costs
Other irregular expenses that do not reflect the company’s sustainable earnings
By accounting for these adjustments, you arrive at a more accurate picture of the cash your business generates on a consistent basis. This is the number that buyers are most interested in when evaluating a company for sale.
Why The Delta Between Numbers Matters
The difference between your tax number and your real number—often called the delta—can be substantial. Understanding this gap is essential for several reasons:
Preparing For A Sale: Buyers focus on the real number rather than the tax number. Knowing your true cash flow allows you to position your business more accurately in the market and justify a higher valuation.
Demonstrating Consistency: Adjusted numbers show predictable, sustainable earnings, which are highly attractive to potential buyers.
Identifying Opportunities: Reviewing the delta helps you spot areas where you can optimize expenses and increase cash flow before going to market.
Strategic Planning: Understanding your real number gives you a clearer view of the business’s operational efficiency, helping you make informed decisions for growth or investment before selling.
How Exit Stage Left Advisors Can Help
Calculating the difference between your tax number and real number can be complicated, especially if your business has multiple add-backs or complex financial arrangements. Working with a trusted M&A advisor like Exit Stage Left Advisors can make this process much simpler. Their team helps business owners assess their financial situation, identify add-backs, and determine the true cash flow of the company. This insight allows you to present your business in the best possible light to buyers, increasing both interest and potential valuation.
Conclusion
Your tax return is only a starting point. To maximize the value of your business and prepare it effectively for sale, focus on your real number—the true cash flow your business generates. Calculating the delta between the tax number and real number gives you a clearer understanding of your company’s financial health, highlights areas for improvement, and ensures that you are ready to make strategic decisions when the time comes to sell.
By knowing the real number and working with experts like Exit Stage Left Advisors, you can position your business for success, attract serious buyers, and achieve the best possible outcome from your sale.
