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Identifying Business Perks

Posted in Business Valuation, on Oct 2014, By: Mark S. Gottlieb

Perks24/7 Wall St, published, “Eight Outrageous CEO Perks” which detailed various executive perquisites, or “perks.” From Oracle’s Larry Nelson’s $1.53 million security team, to Dow Chemical’s Andrew Liveris’s $98,000 for financial planning, the article revealed some expensive perks of corporate CEOs.

In the case of closely-held businesses with a single owner, perquisites provide benefits to owners and reduce business taxes. By placing some company profit into perquisites, they can not only enjoy these perks, but can deduct these costs from the business’s reported income. When valuing a business or determining the normalized compensation of the owner, it is imperative to identify these issues.

Perquisites are compensation beyond a normal salary and benefits. These items are discretionary, meaning they are extra compensation and would not necessarily have to be paid to someone else with the same position. Unlike bonuses, which are a lump-sum, perquisites are often in the form of pre-paid services or goods.

Perquisites generally fall into a set of common categories:

  • Retirement Plans,
  • Insurance Plans,
  • Pensions,
  • Financial planning services,
  • Tax services,
  • Education,
  • Memberships,
  • Entertainment,
  • Automobile Expenses,
  • Company credit cards,
  • Family Costs, and others.

Some perquisites, such as a Supplemental Executive Retirement Plan (SERP), can be rather straightforward to find within a business’s accounts. However, there are some perks are trickier.

While many forms of entertainment, such as lunches, are legitimate costs, others can be in excess, or altogether unneeded. One way to examine entertainment perks is to match the costs against industry data. If an executive’s entertainment perquisites are higher than the industry norm, there has probably been an additional cost added that must be investigated.

One must also lookout for automobile expenses that are not business related. Such as a personal vehicle for the owner’s child. Or a vastly overpriced for car: a Chevrolet may have served well, but instead they’re driving a $200,000 Lamborghini. There can also be hidden expenses; after all, there are also expenses such as insurance, gasoline, and maintenance. These items can be hidden within the operating expenses of the business. For example, gasoline for the perk vehicle could be separately itemized in a general utilities section.

Family perquisites can too be exploited. There may be a spouse placed on the books so they can receive an individual retirement account, even if the spouse does no work for the company. If a family member is legally and in reality employed by the company, there can still be misuse. For example, if an owner’s child is working for the company as a secretary but is receiving the salary equivalent to a senior executive, there is probably something awry.

It is only fair that owners of businesses be entitled to the fruits of their work. Perquisites are a standard way for them to be further compensated. However, when one is trying to estimate the value of a business, or normalizing an owner’s compensation, these “perks” must be found and accounted in detail. Because these numbers can be hard to discover, as well as difficult to interpret, the services of a forensic accounting expert must be utilized. With their experience and skill, they can readily and quickly discern perquisites and their full cost.

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