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

February 04, 2025

by a searcher from Columbia University - Columbia Business School in Jacksonville, FL, USA

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.

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Reply by an intermediary
from The University of Michigan in Bonita Springs, FL, USA

There is an old adage, "buyers are liars and sellers are storytellers." Add-backs for marketing and staffing are definitely operating expenses. That is likely malpractice. The add-back for rent could have been the seller misleading the broker. If it was rent for unnecessary office space for a new owner, then it may be legitimate. If it was rent for space where patients were being seen, then that is again, likely malpractice.

I see you are in Jacksonville. If the business and broker were in Florida, a license state, you can report them to the DBPR; however, it is unlikely anything will happen. If it was a Florida broker and member of the BBF, I would be surprised and certainly like to know who because we offer extensive training on recasting financials and as a BBF Board Member I would be willing to suggest the appropriate training to the member. If a non-BBF member, I would recommend they join and educate themselves before harming more buyers and sellers.

Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

Thanks for the tag, ^redacted‌. Similar to what Bob Champoux described, as an investment banking firm we thoroughly vet sellers' financials and only include reasonable adjustments. We also do operational and basic legal (ownership, proper legal formation, etc) due diligence, before even considering representing a seller. Many, maybe most, business brokers do not. It's just not part of their service. Not their business model. (For those brokers reading this who do conduct reasonable diligence and who act prudently, please understand I'm not talking about you.) You can argue they should, for ethical and practical reasons, and I'd agree. But that's not reality. The root problem is sellers who intentionally or negligently misrepresent their business. Hard to fathom even what their thought process is. Those deals are radioactive and buyers need to move away as fast and as far as possible.

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