• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar

Strategicia

Initiate. Inspire. Innovate.

  • Home
  • Topics
    • Family
    • Health & Fitness
    • Education
    • Furniture
    • Technology
    • Business
    • Financial
    • Marketing
    • Transportation
    • Construction
  • Ask a Question
  • Contact Us

The ABCs of Discretionary Earnings

Last updated on August 22, 2011 by Sozo Staff

Every business generates a certain amount of profit or loss. However, not every business calculates this profit in the same manner. Discretionary earnings calculations help sellers and buyers make sure they’re on the same page in terms of cash flow.

Add Backs

A private business owner with no immediate plans to sell has an incentive to report lower profits, thus reducing taxes. This is often accomplished by writing off costs such as owner salary and health insurance as business expenses. These expenses are sometimes referred to as discretionary expenses because they are not necessary for business operations; therefore, they can be expended at the owner’s discretion. When it comes time to sell, the business owner has an incentive to do just the opposite. Non-necessary costs such as owner benefits and one-time expenses can be “added back” to profits without distorting the performance capability of the company.

Benefits

Discretionary earnings are reached by recasting financial statements to remove the financial benefit received by a business owner. Typically, this means adding figures such as owner salary, pre-tax net income, owner perks, interest, non-cash expenses such as amortization and depreciation, non-operating expenses, and one-time expenses. Many small to medium businesses rely on DE to calculate earnings, while larger companies tend to use another measurement, EBITDA (or Earnings Before Interest Taxes Depreciation, and Amortization). EBITDA produces a similar result but excludes owner benefits such as salaries and perks, which usually only apply to smaller, privately-held companies.

Cash Flow

For buyers, discretionary earnings and EBITDA strip away variables to reveal cash flow – and, in theory, a company’s true earnings potential. This is especially useful for financial buyers valuing a limousine business or other transportation company. Your sales price will likely be based on a multiple of your discretionary earnings. But although DE is a frequently used calculation method, it doesn’t always produce the same results. It’s not uncommon for business owners to get carried away, adding back expenses that cannot legitimately be categorized as profits. Misrepresenting profits can confuse a buyer, derail a sale, and, in the worst case scenario, serve as grounds for a lawsuit.

When recasting financials for your limo or charter bus business for sale, it helps to consider what costs a new owner would need to incur to produce your current cash flow. If the expenses are necessary, they must remain as expenses. If they truly are discretionary, it may be possible to add them back. Whether you’re buying or selling a limo business or a school bus company, a qualified transportation business broker can determine a fair value so you and a buyer can agree upon a fair price.

Filed Under: Transportation

Additional Articles

Portrait of an Ideal Seller by the Expert Transportation Brokers


Primary Sidebar

Lyon Financial

Popular Articles

  • Effects of Television on Teenagers
  • Genuine Mahogany vs. African Mahogany: What's the Difference?
  • What Is So Great about Teak Wood?
  • Modern Perforating Techniques Used by Metal Manufacturers & Fabricators
  • Is Your Teen Diagnosed with Reactive Attachment Disorder?
  • Ipe Decking: Should you use Face Screwed or Hidden Fasteners?
  • Top 3 Pool Maintenance Tasks – and Suggestions on How To Do Them
  • The Gymnast’s Diet: Why You Should Avoid Nitrates & Nitrites
  • The Gymnast’s Diet: Why You Should Avoid Refined Flours and Sugars
Lyon Financial

Freshest Articles

  • Salt Water Swimming Pool Maintenance, Part 2
  • Salt Water Swimming Pool Maintenance, Part 1
  • Lovin That Outdoor Pizza Oven!
  • When Should I Pump My Septic Tank?
  • When Buying Larger Size Lumber Is Actually Cheaper, Part 3
  • When Buying Larger Size Lumber Is Actually Cheaper, Part 2
  • When Buying Larger Size Lumber Is Actually Cheaper, Part 1
  • Pool Safety Tips: Keeping Kids Safe, Part 5
  • Pool Safety Tips: Keeping Kids Safe, Part 4
  • Pool Safety Tips: Keeping Kids Safe, Part 3
Lyon Financial

Reader Feedback

  • Mitch Shearer on How the All-New X10 HUB Builds on Already-Amazing Technology
  • Alec Burns on Health Benefits of Having Your Own Backyard Swimming Pool
  • Welded Mesh on Modern Perforating Techniques Used by Metal Manufacturers & Fabricators
  • Tyler Johnson on Top 3 Pool Maintenance Tasks – and Suggestions on How To Do Them
  • Kate Hansen on Health Benefits of Having Your Own Backyard Swimming Pool
  • Shaylee Packer on Modern Perforating Techniques Used by Metal Manufacturers & Fabricators
X10 Home Automation

Copyright © 2023 Sozo Firm Inc · Privacy Policy · Disclaimer · Sitemap