How to think about addbacks

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June 03, 2021

by a searcher from Webster University in Westchester, Los Angeles, CA, USA

GuessworkInvesting https://twitter.com/guessworkinvest?s=09 wrote a post on addbacks https://bigdealsmallbusiness.substack.com/p/addback-magic and I was hoping it would spark conversation.
1) I'm unclear on some lines, such as non-cash expenses. That seems really vague. Why specify how the expense was paid instead of the expense itself?
2) Would you add or subtract and reasonable add backs from this list?

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Reply by a professional
from Marquette University in Kirkland, WA, USA
I've worked with hundreds of buyers over the years and add-backs are always an issue, especially the personal expense ones. When they're outrageous it's, "If they'll lie to the IRS will they lie to me?" You must put in a fair market salary for running the business, you must allow for cap ex, and allow for operating interest (not acquisition interest). Good bankers, like ^Lisa Forrest, will often discount the fringe add-backs like personal travel, etc.. And, amortization is usually legitimate. It sure is nice when when the financial statements are a true reflection of the business' earnings.
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Reply by a searcher
from The University of Chicago in Chicago, IL, United States
Ultimately you are trying to understand the cash flow of the business and "NonCash' expenses don't impact cash flow directly. The two big ones in that bucket are depreciation and amortization. The example in the article of a Gain/Loss on the sale of an item I think would be better be described as 'Non-Operating' as a gain on a sale does produce cash but that is a one time event and isn't related to the operation of the business. The smell test I like to use is "Will this expense/revenue exist in the business if the owner is no longer involved?"
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