Bad debts as an add-back when calculation EBITDA & SDE?

March 25, 2022

by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Toronto, ON, Canada

Hello community,

Any thoughts on bad debts that are added back to the P&L by sellers to calculate EBITDA and SDE? I believe that's not right since bad debts do reflect an operational reality of the business. What have you seen on the market? What is normally accepted?

Thanks

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Reply by a searcher
in Highlands Ranch, CO, USA

If the item is large and truly extraordinary in nature a case could be made for it. This is really dependent on the business and industry though. For a lot of businesses it's necessary to expect some amount of bad debts every year. In that type of scenario that is just a normal business cost and should not be added back. If it's a business that truly doesn't have bad debts typically and it is a material item and unusual circumstances I wouldn't be surprised to see a seller add it back. I may or may not exclude that item in my own computations of value. Even if it's "one time" this should show you it's possible for this to happen again so you'd need to decide if you were comfortable with that risk and how material the risk is in your own valuation. Also you may want to consider if there are controls or payment policies in place to deter likelihood of this type of circumstance or consider adding them if you acquire--like requiring up front payment for new customers, etc.

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

From a lending perspective, I think it depends on when the bad debt was incurred. I am working on a deal now where there was a large bad debt item in 2020 but upon review that bad debt revolves the right off of some A/R dating back to 2014 that the company finally wrote off in###-###-#### In that case not only the client but also the lenders are comfortable because it was an adjustment for something that happened one-time in the past. So if it is truly one-time and can be explained, we can typically get lender's to add it back to cash flow. However, if the company consistently has bad debt year over year, then it cannot be added back. If you need advice on the specific situation you are looking at from a lending perspective, feel free to reach out at redacted Good luck.

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