Discounting owner's compensation (and similar kind) add - backs

August 14, 2022

by a searcher from Babson College - F.W. Olin Graduate School in Austin, TX, USA

Hey all - I am currently under LOI and my loan file is in underwriting. I've been told by my bank that every owner comp add-back will be discounted to 70% of the whole. For example, if salary is $100k, they are only adding back $70k. I'm wondering how common this is and if I should consider reaching out to my backups?

This is affecting the TTM DCR; all other DCRs even at discount look great.

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

This is not common. We do a lot of SBA financing and I have never seen a Bank discount the seller's expenses. Certain seller expenses they might not be able to add back if they cannot verify them like travel and meals & entertainment, but I have never seen them discount customary seller add-backs. Of course they need to make an adjustment to overall cash flow for any new salary the new owner may need to live on, but that is after all seller expenses that can be used have been fully added back to cash flow. I am more than happy to discuss options at redacted and just left you a message on this as well. Thank you.

Reply by a searcher
from Notre Dame de Namur University in San Francisco, CA, USA

I wouldn't use sellers salary for the add backs personally. Lenders discount out because it is seen as a necessary expense to the business. Every time I have approached a seller I do not add their salary back based on DCSR purposes for my self. Certain commissions or distributions can be added back, but you have to be very careful, because of situations like this. Underwriters are looking for why a deal may go south, and for these reasons they discount many items.

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