Understanding the Risks of Treating an RTO as a “Private ATM”

This discussion examines a common but often overlooked issue in the RTO sector: owners using their business as a personal funding source, rather than maintaining clear financial separation. While this approach may seem manageable during operations, it becomes highly problematic when the business is assessed for sale.

The topic is particularly relevant for RTO vendors considering an exit within the next one to three years, as well as buyers and advisors reviewing financial performance. In the current transaction environment, where scrutiny around compliance, earnings quality and sustainability is high, the way financials are presented can materially influence both valuation and deal certainty.

At its core, this issue is not simply about accounting treatment. It directly affects credibility, perceived risk, and a buyer’s ability to rely on reported earnings.

 

What “Treating the Business as an ATM” Looks Like

Blurred Separation Between Personal and Business Expenses

In practice, this behaviour typically appears as personal or discretionary expenses being run through the business. These may include motor vehicle costs, consulting fees, or other payments that are not clearly aligned with commercial operations.

While some level of adjustment (or “add-backs”) is standard in SME transactions, excessive or inconsistent use raises immediate concerns. For example, a business reporting strong revenue but a negative net profit—only to later present substantial adjustments—signals a disconnect between reported and underlying performance.

Heavy Reliance on Add-Backs

Add-backs are intended to normalise earnings. However, when they become large relative to reported profit, they shift from being explanatory to being defensive.

From a buyer’s perspective, significant adjustments suggest:

• Weak financial discipline
• Lack of transparency in reporting
• Potential overstatement of maintainable earnings

This creates a credibility gap that is difficult to overcome, regardless of the underlying business quality.

 

Buyer Perspective: Why This Raises Immediate Concerns

Doubts Around Financial Integrity

When financial statements require extensive explanation, buyers and their advisors begin to question the reliability of the entire dataset. Even if adjustments are legitimate, the burden of proof shifts heavily onto the vendor.

Inconsistent classification of expenses—such as moving costs between categories year-to-year—further reduces confidence. Buyers rely on patterns and comparability. Without consistency, meaningful analysis becomes difficult.

Perceived Lack of Internal Controls

Irregular financial reporting often indicates weak internal controls. For an RTO, this is particularly sensitive given the regulatory environment and the expectation of robust governance.

A lack of control in financial reporting can lead buyers to question broader operational discipline, including compliance, funding management and reporting obligations.

Earnings May Be Discounted

Even where adjusted earnings appear strong, buyers may discount them if they are not clearly evidenced. In some cases, they may revert to statutory profit or apply conservative assumptions, reducing the effective valuation.

 

The Importance of Consistency and Disclosure

Stable, Comparable Financials

Consistency across reporting periods is critical. Buyers expect to see:

• Clear categorisation of expenses
• Stable treatment of similar cost items
• Logical alignment between operational activity and financial results

Frequent reclassification or “willy-nilly” allocation of expenses undermines this expectation and complicates due diligence.

Transparent and Defensible Adjustments

Where adjustments are required, they must be:

• Clearly documented
• Commercially reasonable
• Consistent with industry norms

If a vendor cannot easily explain an adjustment, it is unlikely to be accepted at face value by a buyer or their accountant.

 

Preparing for Sale: Timing and Strategy

The Value of Early Preparation

Ideally, financial preparation should begin at least three years prior to sale. This allows time to:

• Normalise expenses
• Establish consistent reporting practices
• Align financial statements with tax and regulatory requirements

Early preparation reduces reliance on retrospective adjustments and strengthens the overall presentation of the business.

Shorter Timeframes: What Can Be Done

Where advance planning has not occurred, attention should focus on the most recent financial year.

Key priorities include:

• Presenting the latest year with minimal or no add-backs
• Ensuring expense classifications are accurate and consistent
• Aligning reported profit with the true operating performance of the business

Earlier years may still require adjustments, but buyers will typically place the greatest weight on the most recent period.

 

Salary, Distributions and Perceived Involvement

Misalignment Between Salary and Actual Role

A common issue arises where owners extract funds through wages despite limited operational involvement, then attempt to add these costs back as non-essential.

From a buyer’s perspective, this creates uncertainty. If a salary is recorded, it is often assumed that a replacement cost will be required post-acquisition.

Structuring Withdrawals More Transparently

Clear separation between operational remuneration and profit distribution can improve credibility. Where owners are not actively involved, profit extraction through dividends rather than wages may provide a more transparent reflection of business performance.

The key consideration is not the structure itself, but whether it can be clearly explained and justified to a third party.

 

Practical Interpretation for RTO Vendors and Buyers

For Vendors

The way financials are managed in the years leading up to a sale has a direct impact on:

• Buyer confidence
• Depth of due diligence
• Negotiation dynamics
• Achievable valuation

Reducing reliance on add-backs, maintaining consistency, and demonstrating clear financial discipline positions the business more favourably.

For Buyers

When reviewing an RTO with significant adjustments or inconsistent reporting, the focus should be on:

• Verifying the legitimacy of add-backs
• Assessing the sustainability of earnings
• Understanding the true cost base required post-acquisition

Caution is warranted where explanations are complex or unsupported by clear documentation.

 

Final Observations

Treating an RTO as a personal funding vehicle may not create immediate operational issues, but it introduces substantial friction at the point of sale. The transition from internal understanding to external scrutiny is where these practices become problematic.

Ultimately, buyers rely on what can be evidenced, not what can be explained. Financial clarity, consistency and discipline are central to bridging that gap.

 

Considering Your Position

If you would like to discuss how these issues apply to your specific situation, you are welcome to book a confidential meeting.