Legit addbacks vs. accounting risk

searcher profile

February 11, 2026

by a searcher from Harvard University - Harvard Business School in Salt Lake City, UT, USA

I’m curious searchers/bankers think about accounting quality in lower middle market deals: what level of bookkeeping sloppiness or “addback” behavior is fairly common and acceptable if it’s disclosed and can be cleaned up, versus what patterns make you conclude the seller lacks integrity or the business has real risk?
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commentor profile
Reply by an intermediary
from Mount St. Mary College in Orange County, NY, USA
This is a huge topic, I do not judge sellers for "tax strategies" but I explain its likely to mean less value. I counsel them to either make peace with that or clean it up for 3 years and then we can market their business. It is not unusual to see $350k-600k SDE businesses where the owner does not even know what accounting system is being used. We regularly deal with super messy books and help them to clean it up enough to present the opportunity.. One could judge that and call it a red flag, but I would also say that is the searcher opportunity on the small end. By the time you get to $750k in SDE and up, I would be more concerned about super messy books. There may be situations where I could make peace with it, but as the numbers get bigger we tend to see more sophisticated owners or they have more sophisticated staff. Small business owners do not see the sloppiness or personal expenses with the same moral strictness I have heard in forums like this. I understand the thinking people espouse on this, but I think its just reality. Again its very situation dependent.
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Reply by an intermediary
from Georgia Institute of Technology in Houston, TX, USA
Hi ^redacted‌ - Pete did a good job of outlining it. Most run the business as a lifestyle business so they use add-backs to improve the EBITDA. The LMM banks usually have their calculations anyway. Anything above that may get categorized as Goodwill. Hard to justify a really high goodwill when the books are sloppy. What else is sloppy? Thanks ^redacted‌
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