We believe the three basic tenets that should be applied when compiling the PEBITDA report are that they be simple, understandable and verifiable.
The report should provide at least 3 years of evidence.
The source documentation used (Accountant’s Financial Accounts, alternatively the lodged tax returns for the trading entity and/or Business Activity Statements) to compile the reports should be referenced or attached. Cash or undeclared earnings or expenditures cannot be included in these reports.
Simple expiations or notes should be included in the report to explain unique expenditures or complex add backs.
Some things to look out for include:
- Expenditures for tax planning purposes. These represent once off expenses and/or expenses, which reflect the management methods and tax structures used by the current proprietors, e.g. Accountancy fees.
- prepayments of expenses and timing of certain expenses by performing an analytical review of prior year comparative expenses categories.
Examples of Potential Add Backs:
Buyers will not generally pay for unrecorded sales and financiers will not recognise them.
Category of Add Back Examples
Financing costs and costs of capital:
* Interest income
* Interest expense
* Depreciation
* Amortisation
Items of income or expenditure which have not been included in the financial reports of the business
Costs of Home office not charged to business.
Non-recurring, extraordinary, unusual or personal items of income or expenditure including the owners’ compensation
* Profit or loss on sale of any business asset
* Covid government grant including Cash Flow Boost and Jobkkeper Subsidy
* One off costs for relocating office
* Extraordinary repairs or legal settlements
* Salary, fees and superannuation, drawings, or cash takings by the owners (provided it is in the P&L)
* Owners motor vehicle expenses
* Owners personal choice expenses e.g. cleaner, grooming, entertainment charged to business
Items of income or expenditure not directly related to the normal operational or trading activities of the business examples:
* Donations
* Formation expenses
* Life or other owner’s insurance costs
* Bookkeeping fees
* Review of accounting fees
* Related party transactions
* Legal costs if not related to business
* Non business travel
* Subscriptions or Memberships of non-business related associations
Eliminating expenses required to establish the business on a totally
unencumbered basis examples:
* Equipment Leases
* Equipment rental costs
To maximize the sale price of the business and to commence marketing Capital Commercial Business Sales requires a fully completed PEBITDA or EBITDA report to be provided by your, or a mutually agreed qualified accountant.
This report must be presented on company letter and reference and supply the source documentation used to complete the report also provided.
Marketing will not be able to commence until this document is completed.
Please contact my office directly for further information and clarification.
