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Monday, June 30, 2008

Daily Observations - Add Backs

Today's blog deals with the subject of Add Backs. Simply stated add backs are just that, they are the expenses that a seller has deducted on their Profit and Loss or on their tax returns which should be credited back. Credited back only means that a new buyer of the business should be able to add them back into the Profit and Loss as a credit rather than a debit to determine what is known as Seller's Discretionary Cash Flow.

Sellers discretionary cash flow is the money left over each month after all expenses have been paid to run the business including the payment of debt service on any outstanding loans.

The reason this is so important is that business brokers use this number to determine what a business should be valued at, or sold for. They then apply a multiple to this number to determine the selling price plus they can add back inventory and furniture fixture and equipment if of a significant value.

Typically the amount of credits that a bank will add back to determine profitability will not be the same add backs the business broker factors in to determine selling price. There is the problem with add backs. So if you are representing a seller or a buyer they must be made aware that the add backs that you are applying will not necessarily be the same add add backs that a bank will apply to determine if a business is eligible for financing.

Both broker and banker will always allow the following, depreciation, amortization, interest expense and any extraordinary one time expenditures. But that is where the similarities come to a stop. For more information on Qualifying for an SBA Loan read on.

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