Addbacks when selling a business

“Addbacks” when selling a business: What You Need to Know

 

In business brokerage and the industry of selling a business, there’s a term that might sound like a secret prize: “addbacks.” So, what are “addbacks,” and why do business brokers, like Sigma Mergers and Acquisitions, affectionately refer to them as “go away expenses”? To put it simply, “addbacks” are the expenses that are lurking in a business’s profit and loss statement (P&L) but will “go away” once the current owner decides to hang up their entrepreneurial hat and walk into the sunset of retirement or starting in a new venture. Imagine you’re the proud owner of a profitable business, and you decide it’s time to sell the business. As you sift through the financial paperwork, you’ll notice various expenses listed on the P&L – wages, travel costs, and perhaps even the new truck in the driveway at home.

AdobeStock 107718973Now, here’s the power of “addbacks”: some of these expenses are not tied to the essential operation of the business and will vanish into thin air once you’re no longer own the business. Sigma Mergers and Acquisitions, with their knack for simplifying complex jargon, affectionately dubs these expenses “go away expenses.”

Let’s delve into a real-world example to clarify this concept. Consider a small business where the owner that has the company pay health insurance or auto insurance.  These expenses can be addback to the profit.  These are considered profit to the new buyer. But “addbacks” don’t stop at personal benefits like Health Insurance. They extend their influence to other areas like travel expenses for non-business-related trips or perhaps that lavish company car that won’t be revving its engine in the business’s parking lot after the owner moves on to new adventures. In essence, understanding “addbacks” is like having a backstage pass to the financial performance of a business. It allows potential buyers to see beyond the surface-level numbers and gauge the true profitability waiting to be unearthed once the previous owner steps aside.

Here is a list of typical “addbacks” that if found in your companies P&L could be added back:

 

  • Owner’s Salary:

   – The salary paid to the owner, especially if it’s higher than the industry average, might be added back.

  • Personal Expenses: Any personal expenses of the owner that are not essential to the business can be considered addbacks.
  • One-Time or Non-Recurring Expenses: Costs associated with unique, non-repeating events, such as legal settlements or major renovations, may be added back.
  • Excessive Owner Perks: Luxurious or excessive perks enjoyed by the owner, like high-end company cars or exclusive memberships, may be added back.
  • Non-Business Travel Expenses: Travel expenses that are more related to the owner’s personal trips rather than essential business travel may be added back.
  • Depreciation and Amortization: Though these are non-cash expenses, some business brokers may add them back to reflect the actual cash flow a new owner can expect.
  • Non-Essential Employee Benefits: Benefits or bonuses that are not necessary for the ongoing operation of the business may be added back.
  • Interest Expenses: If the business is being sold as an asset sale, interest expenses not relevant to the new owner may be added back.
  • Owner’s Retirement Contributions: Contributions made by the owner to retirement plans, especially if they are higher than industry norms, might be added back.
  • Excess Rent Payments: If the business pays above-market rent due to a relationship with the property owner (who is also the business owner), the excess amount may be added back. We have also seen rent at a second location that isn’t used for the business or no longer used for the business.
  • Non-Essential Utilities and Services: Costs for utilities or services that are considered non-essential for the business operation might be added back.
  • Non-Essential Professional Fees: Fees paid for services that might not be necessary under new ownership, such as excessive legal or consulting fees.

 

It’s important to note that the specific addbacks can vary based on the nature of the business and the agreements between the buyer and seller. Business brokers carefully analyze these expenses to provide a clearer picture of the business’s true profitability for the future potential buyers. It’s like a financial crystal ball, revealing the genuine earning potential that might be obscured by the current owner’s unique business style and spending habits. So, the next time you hear the term “addbacks” in the realm of business transactions, don’t let it intimidate you. Think of it as the secret sauce that adds flavor to the recipe of buying and selling businesses. With Sigma Mergers and Acquisitions leading the way, these “go away expenses” become the key to unlocking the true value of a business, ensuring a smooth transition for both the seller and the new owner.

CATEGORIES
Scot Cockroft Business Broker
Hi, I’m Scot Cockroft.

When I founded Sigma Mergers and Acquisitions back in 2003, I had sold my business the year prior.

Now, that can sound good, but let me tell you, back in 2003, it was not easy to sell a business. Not that I’m saying in modern day times it’s easy to sell a business, but back then I interviewed broker after broker after broker, and no one was interested in actually seeing the value that my business brought to the table.

SHARE
Facebook
Twitter
Telegram
LinkedIn

Ready to get started?

Ready to Get Started?

Footer

Sigma is a the leading business broker in with Corporate offices in Dallas/Fort Worth with roots from 1984. Over 600 businesses sold in Dallas, Fort Worth, Texas, Oklahoma and across the South. Sigma provides full business brokerage services with NO upfront fees. We provide Market approach business valuations for business sales. Sigma is passionate about helping business owners achieve their goal of financial security. Contact us today for a free no obligation business valuation. We are here to help you achieve your goals.

Our Address

(214) 214-9400
Info@sigmamergers.com
Corporate Headquarters in Dallas

Quick Links