Broken Deal Post-Mortem: Excessive Add-backs & Illegal Operations

by a searcher from Columbia University - Columbia Business School

1 week ago

I recently had a chain of healthcare clinics that fell through.  I wanted to back a Searcher that was the intermediary, but 60% of the Adjusted EBITDA was due to add-backs.  Examples include the following:

1.  Car Leases (okay)
2.  Trips (okay)
3.  Rent (for a rented home)
4.  Marketing for new clinics (not acceptable)
5.  Staffing for new clinics (not acceptable)

The deal spanned a few states but was operating illegally in 2 of them.  Also, when going through the GL for rent, the add-back for house rental turned out to be office rent.  


There are good brokers and sellers, but some make me cringe.  So unscrupulous.  I want to notify the governing bodies in these states for wasting my precious time.

1 like
244 views
13 comments

investor from Ohio State University

Yikes. How common is this among search fund investment opportunities on offer? You can scrutinize questionable add-backs during due diligence easily enough, but how do you even catch whether the business is illegally operating in different states?

2 days ago | like reply | 0 likes

searcher from University of Virginia

I feel you. I recently ran into a similar issue where we kicked off diligence only to find out the majority of the seller's addbacks should've never been presented that way (no way a lender would've accepted them). Inflated SDE by a mile.

3 days ago | like reply | 0 likes

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