Do you know what your business is worth?
Most owners think they do. They look at the bottom line of their tax return, apply a "rule of thumb" they heard at a golf course, and come up with a number.
Usually, that number is wrong.
If you’ve been running your business for years, you’ve likely spent a lot of time trying to pay as little in taxes as possible. That’s a smart move for your bank account today. But when it comes time to sell, those same tax returns can become your worst enemy.
The truth is, your tax returns were never designed to show the value of your business. They were designed to satisfy the IRS.
At Vision Fox Business Advisors, we see this gap every day. We call it the "Valuation Gap," and if you don't bridge it, you’re leaving money on the table.
The IRS is not your buyer
Think about your goals when you sit down with your CPA.
You want to maximize deductions. You want to write off the truck. You want to include your travel, your home office, and your health insurance. You might even pay family members a salary.
Every dollar you "expense" is a dollar you don't pay taxes on.
But a buyer looks at the world differently.
A buyer isn't looking for ways to hide profit. They are looking for the actual cash the business generates. When they look at your tax return and see a low net income, they don't see a "tax-efficient" business. They see a business that doesn't make much money.
Your tax return shows what you owe. A valuation shows what you’ve built.
If you want to get the real price for your life’s work, you have to look past the tax forms. You have to find the "Truth about the numbers."
SDE: The number that actually matters
In the world of small business, specifically for companies doing $1M to $5M in revenue, we don’t talk much about "Net Income." We talk about Seller’s Discretionary Earnings (SDE).
SDE is a fancy way of saying: "How much money does this business actually put into the owner’s pocket?"
To find this number, we start with your tax return and then perform "add-backs."
An add-back is an expense that a new owner might not have, or an expense that is actually a benefit to you personally.
Common add-backs include:
- Your salary and payroll taxes.
- Your health insurance.
- Personal travel or vehicle expenses paid by the company.
- One-time repairs (like a new roof or a major equipment overhaul).
- Charitable donations.
When we add these back to your reported profit, the number changes, sometimes drastically.
A business showing $50,000 in profit on a tax return might actually have an SDE of $250,000. That’s a massive difference in valuation.
If you try to sell based on the $50k, you’re losing out on hundreds of thousands of dollars in the sale price.
Why numbers are only half the story
Even once we find your SDE, we aren't done.
If two businesses both make $400,000 in SDE, are they worth the same?
Not necessarily.
As I talk about in my book, Before the Clock Decides, the value of a business is tied directly to its risk and its ability to run without you.
A buyer is essentially buying a "box" that produces cash. If that box only works because you are inside it turning the gears, it’s not worth much to someone else.
Tax returns don't show:
- Owner Dependency: Does the business die if you take a vacation?
- Customer Concentration: Does 80% of your revenue come from one client?
- Systemization: Are your processes in your head or in a manual?
- Market Position: Are you the low-cost leader or the premium choice?
A buyer will pay a "multiple" of your SDE. That multiple goes up or down based on these factors.
If your business has messy financials or relies entirely on your personal relationships, the buyer will discount the offer. They are accounting for the risk that the profit might disappear the day you walk away.
The Owner Clarity Engagement: Finding your "Truth"
At Vision Fox Business Advisors, we believe you can't plan for the future if you don't know where you are standing today.
That’s why we start with the Owner Clarity Engagement.
This isn't just a basic valuation report. It’s a deep dive into the "Truth about the numbers." We look at your tax returns, your P&Ls, and your operational risks.
We find your real SDE. We identify the "red flags" that would scare off a buyer. And we give you a clear, honest number of what your business is worth in today’s market.
Most owners find this process eye-opening.
Sometimes, the number is higher than they thought because of the add-backs. Other times, the number is lower because the "risk factors" are dragging it down.
Either way, you get clarity. You stop guessing.
Climbing the Exit-Planning Ladder
Selling your business isn't an event; it's a process. We think of it as a ladder.
Step 1: Owner Clarity Engagement.
Get the truth. Understand your valuation and your risks. Know your starting point.
Step 2: Private Partnership.
For many owners, the Clarity Engagement reveals that the business isn't quite ready for a top-dollar sale. In our Private Partnership, we provide 12 months of high-level coaching. We help you think clearly, build systems, and reduce owner dependency. We move the needle on your value before you hit the market.
Step 3: Business Brokerage.
When the business is ready and the timing is right, we handle the sale. We operate with total discretion, finding the right buyers from across the country, not just in your backyard.
Don't wait until the clock decides
I’ve seen too many owners wait until they are burnt out or facing a health crisis to look at their numbers.
By then, it’s often too late to fix the things that are hurting your value.
If you're generating between $1M and $5M in revenue, you have a real asset. But that asset's value is hidden behind your tax returns and your daily operations.
Your tax returns show the past. A valuation shows the future.
Make sure you know the difference.
Take the first step toward clarity.
If you want to know the real "Truth about the numbers," let's talk. You can explore our business owner resources or reach out to start your own Owner Clarity Engagement.
Your business is likely your largest financial asset. It deserves more than a "rule of thumb" guess.
Get the facts. Build your value. Exit on your terms.
FAQ: Business Valuations & Tax Returns
Q: Why do buyers ask for three years of tax returns?
A: Buyers want to see consistency. They look at three years to see if your earnings are growing, shrinking, or staying the same. They also use them to verify that the numbers on your internal P&L match what you reported to the government.
Q: Can I add back my own salary?
A: Yes. In an SDE calculation, the owner's salary is added back because the "earnings" of the business include what the owner takes home. However, if the business requires a full-time manager to replace you, the buyer will eventually account for that cost.
Q: Does my business location affect the value?
A: While location matters for some industries, most buyers for $1M–$5M businesses are willing to look regionally or even nationally. Don't limit yourself to local buyers; the right buyer might be three states away.
Q: How long does a valuation take?
A: An Owner Clarity Engagement is a thorough process. We don't just "plug and play" numbers. We look at the story behind the numbers. Usually, you can expect a full picture within a few weeks of providing your financial data.