Rationale for lenders for Add-backs for personal and leisure expenses

June 12, 2024

by a searcher from Brigham Young University in Salt Lake City, UT, USA

Hi all - I'm working on a deal where the seller lists ~$75K annually in discretionary travel, meals, and entertainment, all on a business credit card. The seller noted that these were personal expenses for traveling around the country for concerts, but the seller's clients and business is located only in CA.

My understanding is that lenders won't consider travel, meals, and entertainment as legitimate add-backs, but I'd appreciate if someone can provide some clarity on why that is? For example, if receipts show that the owner's travel was outside of CA and expenses were outside of CA, would this not be sufficient to show that the expenses were not related to running the business?

Thanks!

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Reply by a lender
in United States

Lenders typically do not add back expenses such as travel, meals, entertainment, and charity donations et al because these are common for all business owners. The proposed buyer will have the same nickel-and-dime expenses, so the expenses are a wash. Throughout my career, underwriters have told me they won't add back minor expenses because there is no clear proof of what is personal versus business-related. However, one-time significant expenses for personal reasons can be added back if there is solid proof, with some bank and non-bank lenders, but not all. This includes a paid invoice in the business's name, bank or credit card statements showing the payment, proof of paid credit card balance, a letter of explanation, and underwriter review and approval. My advice ^redacted‌ is to gather this chain of personal expense transaction proof immediately, as the bank won't approve the deal until the underwriter is satisfied. Some sellers delay providing the proof or never had the proof from the get-go, and many listing brokers fail to require proof before listing the business. No eligible proof of these personal expenses will hold up your business buying and loan approval process. I've pulled my hair out over my career requesting and waiting for proof. If you don't get the proof right away, you're probably never going to see it. Appreciate the tag ^redacted‌

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

As a general rule we find most lenders do not add back meals, travel & entertainment expenses because it is hard for them to verify what is legitimate and what is not legitimate. It is hard for them to know if any of this is related to wining or dining clients or if it is true personal expenses. If you are using an SBA loan, the SBA lenders need to verify any add-backs, so it can be even more challenging unless there is solid proof they are personal. I hope this helps to clarify. Happy to discuss further at any time at redacted

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