Owner’s Involvement
Any business buyer who is looking at buying a business needs to understand what the owner currently does in the business. The business buyer wants to know the hours they work and what functions they perform.
An easy example is a chef in a restaurant. If the chef is the owner of the restaurant, the business buyer needs to understand what days they work, how many hours they work (day and night), if they do the food preparation, ordering, book work and once the owner leaves, can another chef replicate what the current owner prepares for customers.
All this is important as it impacts the sale price that can be asked for the business. When a profit and loss is reviewed it needs to include all costs and this includes the true cost for the hours and functions the owner undertakes in the business.
Using the example of the restaurant and the owner is the chef, if the profit and loss only shows a wage to the owner/chef of $30,000 for working an 80 hour week – the profit and loss does not represent the true cost of running the business. The profit and loss needs to be adjusted to show how much it would cost to employ 1, 2 or 3 people to do what the owner currently does.
Once you know the true profit of the business, you can begin to understand what the value of the business. Further, you begin to understand what areas you need to address if you buy the business.
So in essence we are trying to get the adjusted profit and loss back to if the business was run under management so it includes all costs.
This does not necessarily mean businesses need to be run under management – a lot of business buyers want to buy a business so they can work in it. However business buyers are not going to pay much for a business that in essence is a job. Therefore if after including the true cost for the owner’s time in the profit and loss results in small bottom line i.e. the business only makes enough to pay the owners wage, what you have is a business that is actually a job.
Once the business buyer knows the adjusted profit and loss for owner’s involvement, they can look at the business for what it is and decide if they want to proceed further.