Managing Earnings Case Study
It is the rare exception that an owner of a middle market company manages their company to maximize profits as opposed to managing the company to minimize taxes. There is absolutely nothing wrong with the latter approach as it is perfectly legal in most instances. Unfortunately when it comes time to sell the company and want to maximize the proceeds these actions will have a negative impact on its value.
Business owners use a myriad of techniques to manage earnings including excessive compensation and benefits, perquisites, lease payments for nonessential business assets, charging above market for the real estate used in the business, using LIFO to value inventories and leasing machinery and equipment at rates that are not “arms length”. It is the latter issue is the subject of the Case Study.
Over the years there have been occasions where we have found a prospective client using the company as their personal ATM. This results in uncomfortable moments for all parties as we have had to advise them that their financial statements will not pass muster with prospective buyers. In today’s environment it is absolutely essential that a company have a track record of proven and sustainable earnings that are supported by the financial statements.
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