Reasonable Addbacks

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by an intermediary from University of Texas at Arlington
in Fort Worth, TX, USA

2yrs ago

Reasonable Addbacks

On occasion, we have heard from prospective buyers that there are too many addbacks being claimed on some deals. What are your key considerations in determining the reasonableness of addbacks when evaluating a company's financial performance, and how do you ensure these adjustments accurately represent the company's operational efficiency and earnings potential? In your process, do you apply a standard percentage of revenue as a benchmark for acceptable addbacks, or do you use another method? In one deal 70% of the addback was market adjustment for owner's salary, they paid themselves well!

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reply by a lender 2yrs ago
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

I would definitely recommend being cautious when looking at add-backs. However, there are add-backs that are very standard and usually accepted by most lenders. They include: Owner's salary & wages, related family member salaries & wages that are not or will no longer be involved in the business; seller health benefits, seller life insurance, seller retirement benefits, rent if the property is coming with the purchase, seller auto leases, seller golf club memberships, seller boats or airplanes paid for by the business, etc.

Items that are not usually added back by lenders are meals & entertainment, travel, general auto expenses like gasoline, etc., any expenses buried in other operating categories like office supplies, professional fees, COGS, etc. seller credit card purchases, etc.

Sometimes we see one time expenses added back to cash flow. That is acceptable if you can verify it is really a one-time expense. But you want to be cautious here and be sure that is the case. We will see expenses like consulting being added back for multiple years but if the expense is consistent for multiple years it is going to be hard to convince a lender to add it back unless it is getting paid through to the owner in another way.

I hope this information helps. I am more than happy to jump on a call to discuss specific add-backs at any time. You can reach me here or directly at redacted

reply by an intermediary 2yrs ago
from The University of Chicago in Chicago, IL, USA

There are many good answers on good/bad/reasonable add-backs. In addition, there are add-backs related to accounting policy changes, cut-offs and inconsistencies.