Reasonable Addbacks
March 25, 2024
by an intermediary from University of Texas at Arlington in Fort Worth, TX, USA
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!
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
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
from York University in Toronto, ON, Canada