This one comes up constantly, and it’s a dangerous assumption. You show your accountant the books, they tell you what your business is worth based on the net income, and you anchor your exit expectations to that number.
Here’s the problem: your accountant’s job is to minimize your taxes, not maximize your business valuation. Those are opposite goals.
Every legitimate deduction you can take, your CPA will take. That company car? Write it off. Home office? Deduct it. Meals and entertainment? Claim it. Professional development, equipment, travel—anything that reduces your taxable income goes on the expense side of your return. From a tax perspective, this is smart. From a valuation perspective, it’s hiding your actual earning power.
When a buyer looks at your business, they want to know what it actually produces in profit. They’ll take your tax returns and recast them—add back all those discretionary expenses that a new owner might not need to make, or that they might want to make differently. What looked like $200K in net income on your tax return might actually represent $400K in true earning power, or what’s called Seller’s Discretionary Earnings (SDE).
The gap is typically 30% to 50%, sometimes more. That’s not a small variance. That’s the difference between a $700K valuation and a $1.4 million valuation on the same business.
Here’s a concrete example. A service business owner shows you their tax return: $200K in net profit. Seems reasonable. But let’s look at what’s actually happening. The owner hired their spouse as a “consultant” and paid them $60K a year—a perfectly legal tax move, but a new owner might hire someone external for half that or handle it internally. There’s a $60K add-back. The company has an expensive company car that they depreciate and deduct; a new owner could drive a Honda and pocket the difference. Another $15K add-back. Professional memberships, a home office stipend, travel expenses that could be managed differently—another $25K combined. Suddenly $200K becomes $300K or more.
Now multiply that by 3.5x (a typical small business SDE multiple), and you’re looking at $1 to $1.4 million, not the $700K you thought you had.
Your accountant is doing exactly what they should be doing—protecting you from the IRS. But they’re not in the business of maximizing what a buyer will pay for your operation. That’s not their role. It shouldn’t be the only data point you use for valuation.
Before you settle on a business value, get a second opinion. Use an online valuation platform or hire a professional business appraiser who understands the recast process. They’ll look at your actual earning power, not just your tax-optimized bottom line. You might be surprised at what the business is actually worth when you account for the full picture.
Your accountant is your friend. Just don’t let them set your exit expectations.
Owners Club helps you recast your financials accurately and understand your real business value. Get a valuation that reflects your actual earning power, not just your tax return.