Add backs & gettting sellers to put their money where their mouth is?

April 10, 2024

by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA

Hi, fellow searchers! Question on Add backs.

Submitted an LOI recently and we are now actively negotiating on the deal. I would like to get this deal done, but what's holding me back are the add backs....I can only verify what the bank has been able to verify but do trust the sellers. Despite that trust, I'm having trouble paying for add backs which I cannot verify. Not to mention the multiple on those add backs.... These add backs include accounts such as "meals", of course, but also "office" (not to be confused with rent), and "hardware & small tools" expenses and etc., for which the sellers have been writing checks to themselves on a weekly basis. Now, if we could somehow verify those, I would be willing to pay up. But how does one do such a thing?

The sellers have tried to minimize their tax liability and so this is making the deal unbankable without some type of side-note for the sellers outside the SBA. How do I structure a side-deal where I can pay them for the gap in cash flows (add backs) IF the cash flows are what they said they'd be..... I want to trust them and I do, but really still don't feel 100% and it's likely due to my lack of experience in deal making...

Thanks in advance!!!

Reply by a searcher
from University of Texas at Austin in Lexington, KY, USA

If seller has been writing checks to himself, you can track that through the bank statements -- but I'd want to make sure it's actually just him moving money around (illegally) and not him buying items the business actually needs on his personal accounts then reimbursing himself.

The seller's attempt to limit tax liability - correctly or incorrectly - hurts him in this situation. Anyone trying to get a loan to buy his business will have to make the math work for the bank or bring in additional equity. Or the seller can agree to take on a seller note in a large enough amount the bank is happy.

Be vary cautious of these if you can't confirm what they are for. It's great to want to trust the seller, but they have different incentives from you...

Reply by a searcher
from Southern Methodist University in Dallas, TX, USA

Are you going the SBA 7a route? I came across a similar deal where the seller was using a business credit card for a number of personal expenses and then tried to itemize the credit card statements. The issue is I can't verify based on the merchant if the purchase was for the business or personal. Two approaches you could take, 1)Seller enjoyed the reduced tax liability over all of those years and now has to "pay" for it 2) Forgivable seller note for the outstanding EBITDA (assuming the bank allows it) - if the expenses don't decrease after purchases you would forgive the note and move on.

+5 more replies.

Join the discussion