Legit addbacks vs. accounting risk

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by a searcher from Harvard University - Harvard Business School
in Salt Lake City, UT, USA

4mos ago

Legit addbacks vs. accounting risk

I’m curious searchers/bankers think about accounting quality in lower middle market deals: what level of bookkeeping sloppiness or “addback” behavior is fairly common and acceptable if it’s disclosed and can be cleaned up, versus what patterns make you conclude the seller lacks integrity or the business has real risk?

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reply by a searcher 3mos ago
from The University of Chicago in Chicago, IL, USA

Go in with the mindset of looking for any expense that is truly one-time or non recurring, and then adjust for a reasonable owner salary (assuming the owner is the "CEO") and pull out and personal benefits. That gets you most of the way there. That and get a lightweight QoE if you're post LOI, there are folks on here who will do them for $5-10k and it's money well spent if you don't have a strong financial background.

reply by a professional 3mos ago
from Florida State University in Fort Lauderdale, FL, USA

In lower middle market deals, messy books are common and usually fine if the numbers tie to tax returns and EBITDA can be cleanly rebuilt from bank statements. Reasonable addbacks like excess owner compensation, personal expenses, or true one time costs are generally accepted if they are well documented and defensible. Where buyers and lenders get nervous is when addbacks start rewriting reality, such as recurring “one time” expenses, working capital manipulation, or revenue that does not reconcile cleanly. Sloppiness is fixable, integrity issues are not. If the story changes during diligence or cannot be supported with source documentation, that is when deals get repriced or fall apart.