How do lenders see recast financials?

searcher profile

December 16, 2024

by a searcher in Chicago, IL, USA

I am speaking with the sellers of a Auto-Service center who have presented solid financials but they prepaid expenses and purchased
additional inventory as a tax avoidance strategy. They have kept updated documents as evidence of this and are saying that the prepaid expenses and additional inventory should be added to EBITDA. Essentially they are saying that the financials can be recast to show the true profitability. I do believe they are being honest based on the documents they have provided. The expenses were paid long in advance and the inventory is more than what they need.

Is this standard practice to recast financials to show the "true EBITDA", and how do banks/lenders generally look at it? Thank you.

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commentor profile
Reply by a lender
in Ponte Vedra Beach, FL 32082, USA
A QOE would provide legitimacy along with the business valuation with specific valuations for inventory. A lender may request the breakdown of these prepaid expenses and listing of the specific inventory purchased with details of what has been used versus what will transition in the sale. Happy to have a more in depth conversation my cell is###-###-#### and email is redacted or my calendly is https://calendly.com/bturner-thebancorp/45min
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Reply by an intermediary
from University of Toronto in Toronto, ON, Canada
Normalizing the performance of the business is commonplace for buyers, sellers and lenders. But the knife cuts both ways, you should drill into all the line items for variances. There could be other understated expenses that, if normalized, could offset the prepaid inventory costs. Also is their any obsolete or missing inventory? Do a detailed year over year analysis. A Q of E helps, but is not always necessary.
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