Significant Seller Addbacks -- Creative Options

March 30, 2024

by a searcher from University of Colorado at Boulder in San Francisco, CA, USA

Hello Searchfunder Community,

This has always been a very helpful community so I thought I'd pose my situation here to crowdsource some creative ideas.

There is a good opportunity that I've found (recurring revenues, high gross profits, great industry, upside potential, etc.), but the seller has been running a ton of outside expenses through the business. Think significant travel, meals, rental properties, personal vehicles, etc. They have done this to such a significant extent that the business shows nearly zero net income even though the adjusted EBIDTA after addbacks is $1M to $1.5M.

Due to these addbacks, I don't think that the business is bankable as most lenders will want to see receipts for every transaction or amended tax returns. That being said, I think this is a good business on the surface and if I can find a creative way to get a transaction done, I think I will have an edge vs other buyers who see these issues and immediately walk away.

My question to the community is this: is there something that I can do to try to validate these expenses are personal to enough degree that I can get an SBA lender to lend on the transaction?

Some ideas I had are:

1. Agree with the seller on multiple on EBITDA and get an audit done where an independent party validates the last years expenses and anything that isn't verifiable is counted as a business expense and therefore reduces EBITDA.

2. Perhaps there is an opportunity to "play the long game" and tell the seller to operate the business for ~3 months without running these expenses through the business, and maybe there's a creative lender that would see this as sufficient?

3. The seller is open to seller financing of sorts, but wouldn't want to peg anything around profitability as they do not control future ownership decisions. Is there a type of seller financing that might sense here that I'm not thinking about?

I appreciate all of your thoughts and ideas on a creative path forward!

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

These are always very challenging businesses to finance. The problem you have is most lenders will only add back easily verifiable personal expenses including owner & non-essential family member wages, personal auto, seller life insurance, seller health insurance, seller retirement, memberships (like to a country club), airplane or boat expenses (if they have one), etc. Items that are not personal in nature or there is no way for a Bank to verify they are not for the business are almost impossible to add-back. These typically include travel & entertainment, meals, or personal expenses buried in typical operating categories like office supplies, COGS, etc.

You are looking at having to cover a pretty big gap going from roughly break-even to $1 million in add-backs. Unless they are paying consulting or management fees to related entity that they can provde that is their personal expenses, if much of this is buried in other categories unless they can provide receipts proving specifically it is personal (not just having the receipts but verifying via the receipt it is not a business related expense like it was for work on a home versus the business), it is going to be a challenge.

Although you could get a QofE to try and support the add-backs, most lenders will not accept that report alone as verification of the add-backs. They are responsible under the SBA loan program to verify things directly, so they would still need the proof even if you had a QofE done.

I am more than happy to get on a call or look at the package and add-backs and try to provide support. You can reach me here or directly at redacted

Reply by a searcher
from Harvard University in Toronto, ON, Canada

One suggestion to keep the deal moving and quickly assess how large the plug will need to be would be is to have the seller bucket expenses into two groups (1) large expenses, easy to track; (2) small expenses, harder to track/verify. The first group, assuming they are legit personal expenses, should be financeable through a bank with an auditor review of the addbacks. For the second group, depending on the total amount, you can explore a seller note. You would be underwriting the risk of the group 2 expenses not being "personal", however, you won't have to "sell" the quality of these adjustments to the bank so as long as you get there on the underwriting and adjustments, it could bridge the difference.

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