What are common add-backs?
SHORT ANSWER
One-time costs, personal expenses paid by the business, and the difference between what you pay yourself and what a replacement manager would cost.
- One-time costs: a lawsuit settlement, a one-off consulting project, moving costs.
- Personal expenses: a family vehicle, personal travel or phone bills run through the company.
- Owner pay: if you pay yourself $300,000 and a general manager would cost $150,000, the $150,000 difference can be added back. If you pay yourself less than market, earnings go down instead.
- Non-working family members on payroll.
Why do add-backs matter so much?
SHORT ANSWER
Buyers pay a multiple of adjusted earnings. At a 4x multiple, every $50,000 of accepted add-backs adds about $200,000 to the value. Every $50,000 rejected takes the same amount away.
Which add-backs do buyers reject?
SHORT ANSWER
Buyers reject add-backs they can't trace to a document, costs that are likely to repeat, and "one-time" items that show up every year.
A buyer's accountants will test each one during due diligence. A short list of well-supported add-backs is more convincing than a long list of guesses.
How to prepare your add-backs
- Keep a schedule with each add-back, the amount, the year and the reason.
- Attach the invoice, contract or statement behind each one.
- Stop running personal expenses through the business well before a sale.
- Have your CPA review the schedule before any buyer sees it.