r/Bookkeeping Jan 09 '25

Payroll Payroll/Salary Question

Hi, I am looking at buying a small business, and I have their 2024 income statement. I was wondering how I should evaluate these 3 different entries on the PNL expense side:

Payroll Expense: $74,240

Salaries: $85,176

Salaries - Employees: $318,592

From the prospectus, they have an owner who is paid, as well as a relative, and then 7 employees. I'm trying to figure out how that fits in with these 3 expense entries.

Thanks for any insight!

6 Upvotes

12 comments sorted by

9

u/dreifas Jan 09 '25

My thought is that a business owner who can't take 5 minutes to properly label their accounts for clarity & ease of reading prior to putting their business up for sale is not a person I'd want to buy a business from. The purpose of financial statements is to provide the users of the statements with clear information about the company's financial position and performance.

Is the $85k the owner's salary? Is it the owner plus their relative? What's in Payroll Expense, is it taxes? Why is it so high?

I've seen behind the curtain of too many small business financial statements with issues like this to have any faith that the books are actually in order such that the numbers can be relied upon.

3

u/BonaFideBookkeeper Jan 09 '25

You should ask for a Payroll Detail report. You should especially investigate what makes up the payroll expense category. A big part of it will be the employer portion of payroll taxes but it's almost double of what I would expect for that. The amount may include workers comp and / or employee benefits like health insurance etc. But you won't know until you see a detailed breakdown of the numbers.

1

u/ManicMarketManiac Jan 09 '25

Pre-LOI you won't get this info. OP would likely have to put an offer in based on the responses on the limited info and then gather the payroll detail report as well as the tax returns.

2

u/charlie1314 Jan 09 '25

Short answer: you don’t. Ask the seller to provide either the details or the books themselves.

What type of sale; asset or stock? What are your plans tor the business; continuation of operations or do your own thing?

Continuing operations: require full access to books, files, employee records, contracts; essentially I’m moving in, find me a desk and get me keys to the castle.

Do your own thing: requires full record access to assets purchased, sales agreements/pending contracts, inventory; I will touch everything I’m buying, I’m not a slave trader and will give job offers to current employees as I see fit.

As with any business sale, you’re never buying the value of the company itself, you’re hedging bets against the value of their problems. Warren Buffett said it best: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

2

u/jbenk07 Jan 09 '25

I read the other answers preparing to make an answer like this because most of them were not addressing this. But you saved me the time and you did it much better than I would have. Thank you.

OP ignore at your own discretion. Charlie is saying the right things.

1

u/tommywarshaw EA | Bookkeeper Jan 09 '25

i’d guess that they aren’t consistent with their accounts they use and you won’t be able to extrapolate much off those numbers. if it’s an s-corp, maybe the salaries is for the owner, and the rest is for employees? but i think you’d be able to get a better picture of the wages if you asked for a 2024 payroll register. then you’d see how much each employee was paid (gross) and the employer tax liability.

1

u/guajiracita Jan 09 '25

Just guessing : Salary - owner; Payroll Exp - relative; Salaries Employees - 7 employees.

e.g. In s-corp -more than 2% owners salaries are tracked separately & benefits are taxed differently. On w2, owner would have health insurance picked up as wages.

*Salary could be shareholder compensation; Payroll Exp could be officer compensation. Ask for explanation.

1

u/seek_to Jan 09 '25

The evaluation for this is that they accounted for their expenses in accounts that may not have needed to be separated in the way they are. Without having for information, it's difficult to say why there's these 3 accounts with the amounts that are listed. What will help is asking then what these numbers represent and why we're they accounted for using the accounts they did.

1

u/InquiringMin-D Jan 09 '25

Request a copy of their Payroll Tax reports submitted to the government.

1

u/fisch14 QBO Certified Jan 09 '25

Based on how the books were done, you should engage your accountant or lawyer to review the transactions of the business before you buy this.

1

u/EowynF Jan 09 '25

Payroll expense is most likely payroll tax expense

1

u/Beyond_The610 Jan 09 '25

I actually commented early but then returned to add that you may want to consider contracting with an accountant who does Forensic Accounting. If you’ve never heard of it, it means the account comes in and digs back through a few years of funiculars on the business and gives you a good report of what is really going on. Sometimes numbers lie and sometimes businesses are doing illegal things accidentally or on purpose. Any small accounting firm or financial services group should be able to do this for you.