Major add back - question

April 28, 2025

by a searcher from Loyola College in Maryland in Washington D.C., DC, USA

A seller states that they paid a consulting fee to their immediate family member. It’s significant ~100k. They are considering it a major add back. Thoughts? How would you handle? Pre LOI at this point, but strongly considering as the numbers and everything else looks good.

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Reply by a professional
from Bentley College in Miami, FL, USA

Generally, payments to family members can potentially be valid add-backs, but they require careful scrutiny. The key is whether the consulting services were real and necessary for the business, and whether the compensation was at fair market value. Here’s how you might handle it: - Request documentation: Ask for invoices, contracts, and a description of the services provided. - Assess necessity: Determine if the role was critical to the business. If the family member’s work won’t be needed post-acquisition, it leans more toward a legitimate add-back. - Benchmark compensation: Check if $100K is reasonable for the services rendered. If it’s inflated, only the "excess" over fair market value should be an add-back — not the full amount. - Factor into your LOI carefully: Consider making your offer contingent on satisfactory validation of this and any other major adjustments. If you want a second opinion or help structuring your QofE around tricky adjustments like this, DueDilio can quickly connect you with vetted diligence experts.

Reply by a searcher
from The University of Michigan in New York, NY, USA

In addition to what's been shared, I think rather than straight up asking the seller about the validity, which is completely fair, you can phrase it as "hey, something that gives me pause is items in the P&L that at first glance seem to be pure addbacks, but in reality they partially represent real work. Can you help me understand the operations a little better?" I think just making it more conversational and less like a check list exercise helps you build rapport and determine the character of the person on the other end of the deal.

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