By: Mike Bloom & Josh Bennett
What Are Addbacks?
In privately-held and family-owned businesses, it’s common for owners to run personal expenses through the business to minimize taxable income.
These personal expenses can include a personal car, golf course memberships, landscaping services, charitable contributions, family salaries, personal travel, legal fees, planes, boats, and more.
Addbacks are very common in transactions, but excessive personal expenses make it more difficult to determine the true cash flow of the business to the potential purchaser.
In addition to personal expenses, addbacks can also be categorized as nonrecurring. Nonrecurring expenses are those that are not expected to repeat, such as lawsuit payments, inventory write offs, losses from theft or natural disaster, new software system installations, office renovations, losses on sale of assets, and more.
Why Should I Track and Reduce Addbacks?
Addbacks are a common source of contention and negotiation between potential purchasers and the seller, so a seller needs to track and properly document their personal and nonrecurring addbacks and reduce as many as possible leading up to a sale.
Potential purchasers are skeptical and less trustful of financial statements with excessive addbacks, so presenting them with clean financial statements can give them confidence in their accuracy and reliability.
Operating a business with clean financial statements for a few years leading up to a transaction can facilitate a speedy due diligence for the buyer and can increase the purchase price.
Do you keep track of personal expenses within your business? Do you think you are ready to sell your business? Take the Seller Readiness Quiz to see if you are ready to begin the sell-side process.
About Piedmont M&A Advisors
Piedmont M&A Advisors is a boutique investment banking firm specializing in buy-side and sell-side transactions for businesses with revenues between $10 million and $200 million. We also provide capital raising, valuation, strategic advisory services.
To learn more about Piedmont M&A Advisors, or to discuss questions you might have today about selling your business, contact us today for a free consultation.