What to Know about Addbacks in M&A
When it comes time to sell your business, you want to put forth an accurate financial picture of the operations under new ownership. This is when addbacks become a useful tool.
Addbacks allow sellers to “add back” certain personal or one-off expenses that will not be realized once the buyer takes ownership, thus increasing EBITDA. It’s a way to zero out these expenses on the income statement.
Here are some of the most common addbacks we see as sell-side advisors:
Owner’s compensation: If the owner or any executives are paid outsized compensation relative to industry averages, it is unlikely that the buyer will maintain those levels.
Taxes and benefits: The taxes paid on outsized compensation can be added back. Additionally, benefits for executives who will not continue on with the company after the sale can be considered addbacks.
Personal expenses: Many family-owned businesses will have expenses that are personal in nature and not to be continued under new ownership, such as expenses for vehicles, travel and clubs.
Salaries to family members: In some instances, members of the family that owns the business receive a salary despite not being directly involved in the business.
Legal expenses: Lawsuit settlements can be considered addbacks as long as they are out of the ordinary.
The less complicated addbacks are, the better off a seller will be. Going to market with addbacks that are
not ironclad can not only slow down the process but also negatively affect valuation.
When tracking these potential addbacks, record precise figures and do it on a monthly basis. Take
detailed notes and have documentation such as invoices and W-2s so that the addbacks hold up
throughout due diligence.
Buyers will be questioning addbacks, so be prepared to explain and defend the rationale. Transparency is critical. An experienced sell-side advisor will help to determine what is an appropriate addback, as well as prepare all documentation and have conversations with buyers about what is acceptable.
Matthew Roberts is Vice President at Copper Run. He specializes in the business services, distribution and manufacturing sectors.