Major add back - question

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by a searcher from Loyola College in Maryland
in Washington D.C., DC, USA

1yr ago

Major add back - question

A seller states that they paid a consulting fee to their immediate family member. It’s significant ~100k. They are considering it a major add back. Thoughts? How would you handle? Pre LOI at this point, but strongly considering as the numbers and everything else looks good.

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reply by a professional 1yr ago
from York University in Toronto, ON, Canada

Owners can play loose and fast with payments to related parties so I'd ask the seller for context. Was it just done for 'tax planning' purposes? Or was it for real services? Also if it was a one-time payment (not recurring every year) that would point it to it being more of a legitimate add-back

reply by a searcher 1yr ago
from The University of Michigan in New York, NY, USA

In addition to what's been shared, I think rather than straight up asking the seller about the validity, which is completely fair, you can phrase it as "hey, something that gives me pause is items in the P&L that at first glance seem to be pure addbacks, but in reality they partially represent real work. Can you help me understand the operations a little better?" I think just making it more conversational and less like a check list exercise helps you build rapport and determine the character of the person on the other end of the deal.