My broker keeps telling me I can "add back" a bunch of personal expenses to make my EBITDA look better. Is this real? Feels like I'm just shifting numbers around. I run a small landscaping company and honestly I pay for a lot of stuff through the business that isn't strictly business. Would love to hear from people who have actually sold.
Valuation
How adding back your personal expenses boosts your business valuation
Yes it's real. Add-backs are standard. Your personal vehicle use, some travel, maybe a family phone plan. As long as you can document it and a buyer's accountant accepts it, it increases your normalized earnings and therefore your valuation multiple.
It's real but be careful. I tried to add back my boat as a "marketing expense" and my buyer's due diligence team just laughed and cut the whole thing. You need defensible expenses, not creative ones.
How much are we talking? A few thousand? My understanding is add-backs only matter if they're material. If you're adding back $4k of personal expenses on a $2M business, nobod cares.
DustyAnvil mine are more like 40-50k a year. Mostly vehicle, insurance, some meals I probably shouldn't have run through the company. So maybe material enough to matter.
40-50k is definitely worth adding back. But the key word is 'normalized.' A buyer will ask: can they replace you and still have the business run? Your personal expenses aren't the issue, it's whether the business still shows profit without them.
Also, be upfront about it. Don't wait for them to find the personal expenses in the books. If you disclose and document, it's a non-issue. If they find it, it becomes a trust problem and they start questioning everything else.
This is the part I wish I'd known earlier. My first offer got killed partly because I looked like I was hiding things. Second time around I gave them a list of every add-back with receipts and it went way smoother.
What about owner's salary? Is that the same thing or separate?
Separate but related. Owner's salary is usually added back and then replaced with a market-rate manager salary. Personal expenses are different, those just come out of the equation entirely. But yeah they both affect EBITDA.
I'd get an accountant to do a quality of earnings report before you go to market. It costs a few grand but it'll tell you exactly which add-backs will hold up and which won't. Cheaper than losing a deal over it.
This is all really helpful. I think my main takeaway is I need to clean up the books before anyone looks at them. The broker made it sound simple but it doesn't sound simple.
It's not simple but it's normal. Every business owner does this to some degree. Just be honest and document everything.
One more thing, check if your add-backs are recurring or one-time. A one-time expense is fine to add back but a buyer might value it differently than a recurring personal cost. Recurring personal expenses are usually the cleanest add-backs.
Also don't forget that the multiple you get is applied to the adjusted EBITDA. So 50k of add-backs at a 4x multiple is 200k of enterprise value. That's ehy it matters.
Yeah the math is real. But don't get greedy. Buyers and their accountants aren't stupid. If you overreach they'll just discount everything you claimed.
Appreciate all this. Going to talk to my accountant this week ajd build a proper schedule of add-backs before we list.