Aggressive Add-Backs
How do you verify SDE add-backs when buying a business?
Long adjustment lists. Recurring costs labeled one-time. Savings that have not happened yet, counted as if they had.
What to ask for
Suspecting a flag is not the same as verifying one. These are the documents and signals that turn a hunch into a decision.
- The adjustment schedule with documentation behind each line.
- Bank statements for anything labelled one-time.
- Three years of the same expense category, to see whether the one-time cost recurs.
- Any add-back for a saving that has not happened yet.
The question to ask the seller
“Walk me through each add-back. Truly one-time, and documented?”
Ask it in those words. A seller who answers straight is telling you something. A seller who dances is telling you more.
At a 4x multiple, every dollar of add-back you accept adds four dollars to the price. Add-backs are the cheapest place for a seller to manufacture value and the most expensive place for a buyer to be agreeable.
Grade every add-back A, B, or C, and accept only what you could defend to your lender with a document in your hand. The ones you cannot defend come out of the number.
Accept only what you can defend. At a 4x multiple, every dollar of add-back you accept adds four dollars to the price.
Travels with
Flags that show up together.
Screening one of these usually turns up the others. They share a cause more often than they share a coincidence.
Every deal you read gets safer.
The flags live in the community, applied to real deals every week. Membership is complimentary.
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