I clearly have been struggling to put in LOIs because I am seeing deals with significant add backs that are challenging. E.g.: seller salary added back without provision for salary for new CEO, eliminating seller health insurance, add back on Section 179 etc. How do folks navigate these because I feel this is the basis for many broken deals if the gap in EBITDA calc is too wide based on what will pass underwriting and what will not
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As for seller add-backs that are generally accepted, they are as follows: • Auto loan payments (not typically gas or repairs as it is harder to verify) • Life insurance • Health insurance • Any sort of retirement benefit - company paid 401-k contributions, profit sharing, etc. • Salaries & wages • Related family member salaries & wages that are not essential or will no longer be with the business • Consulting, accounting, and legal if they can be proven to be one-time for some reason • Donations - so long as they are not deemed essential for business relationships
Items that are usually excluded are: • General auto expenses like gasoline and repairs • Travel • Meals & entertainment • Personal accounting and legal that cannot be verified • Expenses buried in standard expense categories (like in office, cost of goods, etc.)
The rule of thumb is if it is something that can be easily verified and is not buried in an expense category where there is not a way for the Bank to verify it is a legitimate personal expense versus a business expense, the Bank will not add it back to cash flow. If you need any assistance looking at a specific deal, we are happy to do so. You can reach me here or directly at --@----.com Good luck.