This is an interesting one. Often, tax optimisation is not taken into account when valuing a business and the reason why – going concern businesses are valued on an EBITDA or EBIT multiple (so that Earnings BEFORE Interest, Tax, Depreciation and Amortisation.
Now, let me just say that I am not a tax accountant and I consult great tax accountants when I advise businesses on their earnings optimisation. But what I do know is how tax minimisation can be used strategically to increase lifetime value of the business’s net cash earnings, and how to manage the ‘tax techie’s’.
Take the the Australian Research and Development Tax concession as an example. It can be used to significantly reduce a businesses tax burden (often to zero). But business owners do not have a strategy of how to apply the monetary savings to generate an even greater return. I’ve used the scheme to wipe out tax bills for my clients (it was that or get debt funding).
Tax can reduce your net cash returns significantly!. Tax advisers are (generally) compliance focused and need to be managed to YOUR outcome. Make sure that they are following your instructions and that know how to increase net cash NOT just be a compliance tool in preparation.
Its been my experience worldwide that there are tax strategies that can be adopted to reduce the cash out (and hence the cash retained for investment).
Re-investment – say the return on equity in the business is 20%, then the money should be reinvested wisely back into the business because its unlikely to be considered for an earnings multiple in the business sale (I’ve tried it before).
Think strategically about the use of cash in the business and how it can be reinvested to create an even greater EBITDA – if it can’t, withdraw it and invest in other assets.