Banks and Add-backs

searcher profile

April 23, 2022

by a searcher in Chicago, IL, USA

Do banks take add backs into consideration when assessing the cashflows of a company?

I am working on a deal where there are a few legitimate add backs which significantly increase the net earnings. Do banks account for this when making loan assessments?

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commentor profile
Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
Yes, lenders will typically add-back reasonable items that can be verified to be either one-time or seller related in addition to typical EBITDA. Typical add-backs I will see is officer salary (although you then have to factor in a reasonable owner salary for a new owner / manager), family member salaries if they are not active in the business or leaving post-acquisition; verifiable benefits such as retirement, health insurance, auto expense; rent if the property is being purchased as part of the transaction; one-time repair, legal, or other expenses that can be verified as one-time (like settlement on legal action, the write-off of bad debt, one-time adjustments to inventory). Add-backs lenders will typically not use are items that cannot be verified. These will include owner travel expenses, owner personal expenses, meals & entertainment, etc. If you would like to discuss some specific expenses related to a transaction you are looking at I would be more than happy to discuss with you. I can be reached at redacted
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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA
It depends. Interest, Depreciation, Amortization - Yes (they will factor in the new debt service, and a capex estimate if this is important to the business); owner's comp yes, but they also include a charge in their assessment of the funds the buyer will need for living expenses (so depends on household expenses and other wage earners); other owner benefits (health care, retirement, insurance, personal expenses, etc). -- yes if they can be documented and verified; one-time, non-recurring expenses (like a moving expense, or an extremely unusual bad debt) - yes, if they can be documented and verified, and are truly non-recurring (vs., for example, a normal level of bad debt that is just an operating expense).
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