WHY LOWERING OPERATING PROFIT TO CUT TAXES UNDERMINES YOUR BUSINESS VALUE

For many small business owners, tax planning is a necessary part of the strategy. Sometimes an accountant may suggest reducing reported operating profit in the annual statements to lower the owner’s tax burden. While this can yield short-term tax savings, it can come at a long-term cost: a lower sale price when the owner retires. Under ASPE (Accounting Standards for Private Enterprises), financial statements should faithfully reflect the business’s actual economic performance.

This article outlines why artificially suppressing profits to minimize taxes can erode the business’s value, and how to pursue legitimate tax planning without sacrificing credibility or sale value.

Why reducing operating profit to cut taxes can reduce business value

💼💰 - Selling price is often a multiple of earnings or normalized cash flow; when profits are artificially suppressed, the base used for valuation shrinks, lowering the eventual sale price

🔎📉 - Buyers seek credible, sustainable earnings; tax-driven profit reductions can look like non-recurring or artificial adjustments, signaling lower earnings quality.

➡️🏦 - Tax savings don’t automatically translate into higher cash flows; reduced profits can still leave cash flow constrained, affecting debt capacity and future growth.

🕵️‍♀️💬 - Lower profits raise due diligence concerns; buyers and their advisors scrutinize earnings quality, which can lead to discounts or tougher terms.

💳🚫 - Financing may become harder or costlier; lenders base decisions on cash flows and earnings power, so a suppressed profit base can limit funding in a sale

⚠️📉 - Artificially reduced profits raise red flags about reliability and governance; the perceived risk increases, potentially lowering the multiple applied to earnings.

📈🧭 - Tax planning should align with substance and long-term value; aggressive profit suppression can erode the asset base (e.g., depreciation choices) and undermine growth opportunities.

🔄🧭 - Valuation methods rely on normalized or cash-based metrics (like EBITDA or owner-adjusted cash flow); if reported profits are manipulated, buyers will adjust or walk away.

Conclusion

Profitability drives value. While minimizing taxes is important, doing so by suppressing reported operating profit can erode the very value buyers rely on when valuing a business for sale. Aim for legitimate, compliant tax planning that preserves earnings quality and credible financial statements under ASPE. Focus on sustainable cash flow, normalize earnings, and disclose significant tax strategies transparently. If you’re considering the sale of a private business, align tax planning with solid accounting practice, maintain robust controls, and consult a CPA familiar with ASPE and business valuations to optimize both tax outcomes and long-term value. For access to professionals for advice on marketing your business in the US and Canada, simply CLICK on the button below.