Quick question for Lenders

searcher profile

July 09, 2021

by a searcher in Coral Gables, FL, USA

Most sellers try to lower their tax liability as much as possible which decreases their taxable income on their tax return, however it seems like lenders see the business as less profitable because of this so my question is are there any lenders out there that take the P&L into consideration or do they just add back to the tax return?

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commentor profile
Reply by a searcher
in Austin, TX, USA
I'll defer to actual lenders for the best answer but in my experience, for SMBs lenders will start from the tax return and then work backwards through the verifiable adjustments to get back to whatever the broker or business is claiming in the financial statements or CIM for SDE or cash flow. It's not uncommon for there to be a fairly sizeable discrepancy between the two numbers. I've seen businesses that will be marketed as having x SDE or EBITDA and after a little digging, you find out it's based on the trailing 6 months of sales with a lot of operating expenses recast to owner benefit or one-off expenditures. I've spread out reasonably conservative income projections for companies that are literally half of what is on the CIM. All things being equal, I'd be very cautious with any business (or broker that is representing it) where there is a large spread between the tax returns and stated income without very obvious, relatively legal justification.
commentor profile
Reply by a searcher
from University of California, Berkeley in San Francisco, CA, USA
Lenders would use tax returns since many SMB do not have any prepared statements. Lender will try to adjust from there to a reasonable and normalized CF number. It is this CF that they need to know to calculate DSC, WC req and CapEx etc. Lenders will use P&L if they are of decent quality. CPA prepped or issued, absolutely. Company prepared statement vary widely so there is no definitive answer.
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