With the Tax Cuts & Jobs Act some small businesses have switched from the usual "accrual" way of accounting for inventory (expensed when sold) to treating Inventory as non-incidental Materials and Supplies and expensing it when it is purchased.
In doing so the Cost Of Goods sold is arbitrarily increased and profits are lowered resulting in a tax saving.
To determine the EBITDA, the CPA of one such business argues that the inventory actually on hand at the end of the tax year should be deducted from the COGS each year after the switch to Expensing Inventory, to reflect the true earning potential of the business, as if the switch had never happened. In addition to the inventory on hand but not in the books, he makes the case that the inventory paid for (and expensed) in one tax year but received in the next should also be added back.
It would seem to me that, other than the floating inventory expensed and not received, only the increase in inventory each year should be added back, and not the total value of the inventory on hand a the end of the year.
The SBA lenders on the other end say No Inventory Add-Backs- No Exception!
Has any one else been confronted with this issue and how was the inventory added back in the EBITDA or SDE to reflect a fair valuation for both the Seller and the Buyer?
But this is good news for a buyer, because now you can tell them that their decision has made the business unbankable and they'll have to accept a lower price or hold more paper.