Allowed Cash Flow Add-Backs in SBA Lending

From the lending side, I find I am often getting pushed by buyers, sellers, and business brokers regarding the use of add-backs and what lenders will allow when it comes to SBA lending. To be sure I was not losing my mind and the market had not shifted, I recently completed a soft survey of 20 of the more aggressive SBA lenders to find out what add-backs they would and would not accept. I am going to share a summary of those results below. Please note, this is a combination of multiple responses and every lender varies, but I am presenting the overall consensus below. Meals & Entertainment - pretty consistently all lenders said they will not add these expenses back because they cannot verify if they are necessary for marketing the business. Travel - generally will not be added back with rare exceptions. If an owner lives out of state and travels back and forth and the buyer will not need to do so, then it could be added back. If a seller is going to go through the process to prove family travel, then some lenders would consider it. However, receipts and proof would be required in all cases. Phones - generally will not be added back. The buyer would need phone service. However, if there is a large extended family plan and the seller is willing to provide receipts, some lenders will add back family member phones. Donations / Charity - it can be added back. However, please note on most tax returns donations / charity show up as K-1 deductions and not operating deductions, so if the tax returns are used they will not be added back. Legal / Professional Fees - if they can be proven to be one-time, then they can be added back. This might be preparation for a sale, a lawsuit, etc. The lender will likely request invoices to back up the add-back. Seller's Salary(ies) - of course an add-back. However, adjustments would need to be made for the buyer's salary. W2's will be required to verify these salaries. Buyer's salary would need to be sufficient to support personal living expenses, debts, rent or mortgage, and income taxes. Family Salaries - if it can be proven the family members are not essential or active in the business, or need to be replaced, then these salaries can be added back. W2's will be required to verify these salaries. Payroll Taxes - depends on the lender, but generally not added back if the buyer and seller payroll is close. If there is substantially more seller or seller family payroll than buyer payroll, then the difference between seller payroll taxes and buyer payroll taxes can be added back. Health Insurance - can be added back so long as the buyer does not require health insurance that would meet that expense. Life Insurance - can be added back so long as evidence can be provided it is for the seller. Seller Retirement Benefits - can be added back so long it can be proven it is for the seller or seller family members and was paid by the company. Auto Expenses - lenders address this one differently. Generally speaking the response was if the business is one where an auto is not necessary, pretty much all auto expenses can be added back. However, if it is a business, like home services, where the buyer would likely need an auto, then it is unlikely the expense would be added back. If there are excess family auto's, then those can be added back. Typically the lender will require proof of these items. Gasoline - just about all lenders said no to adding back gasoline. It is almost impossible for lenders to determine what vehicle the gasoline went into and if it is a legitimate add-back. Personal Expenses Buried in Other Categories like COGS, Office, Supplies, etc. - most lenders say they typically do not add back these items as they are hard to verify. Some lenders said with solid proof or a good QofE they would consider adding them back. But some lenders said they will not add them back at all. Generally speaking without a good reason and proof, I would not expect these items to be added back. One-Time Expenses (like repairs): So long as they can be proven to be one-time in nature, they can be added back. Lenders will want to see support. Payroll or Profits Taken Out Via Management Fees / Leases or Other Categories: So long as proof can be provided those funds went to other entities the seller owns and benefited the seller directly via wages or income, then they can be added back. The lenders will want to see the tax returns for those other entities to support this. Excess Rent Paid or Rent on Non-Business Properties: generally added back so long as the seller can provide proof it is not a property associated with the business or if excess rent, the new rent going forward will be less. Dues & Memberships: basic memberships and dues for associations and other groups are a no. However, if it is a golf club membership or sports tickets that would not continue post acquisition, so long as proof is provided they can be added back. Training, Gifts & Bonuses: generally not being added back. Lenders assume any buyer would need to continue to provide these items to employees or customers to maintain the business. Hopefully this list is helpful and provides some clear feedback. Generally speaking the responses from lenders were pretty consistent. A few other general comments that came out consistently from the lenders were as follows: 1) The more add-backs a lender has to use to hit the minimum debt service coverage ratios the more nervous the lenders are and the harder it is to get a deal approved. 2) Receipt of a Quality of Earnings greatly increases the comfort in using some types of add-backs. 3) Lenders are not going to spend the time to go through seller's bank and credit card statements to determine what is personal or business expenses. It is not worth it for them and many lenders stated their banks do not like to work with sellers who clearly have committed tax fraud (not my words - from lenders). 4) Buyers often do not realize that they are likely to incur many of these same expenses the seller occurred or maybe different one-time expenses, so it is not prudent to add everything back. Again, I hope this information helps. If you ever want to discuss a specific deal or specific add-backs, you can reach me here or directly at redacted