Case Study: When Buyers Didn’t Believe the Seller’s Add-Backs
Why Unsupported Add-Backs Can Sink a Deal
Claiming an add-back and proving one are two very different things. This fictional case study, a companion to our
case study on documented add-backs, compares two Florida businesses to show what happens when a buyer’s
due diligence team will not accept the seller’s discretionary expense adjustments.
Both companies are fictional composites used to illustrate a pattern brokers see often during
business valuations in Florida.
Company A: Palmetto Auto Glass – Add-Backs the Buyer Accepted
- Annual Revenue: $1.8 million
- Reported Net Income: $210,000
- Add-Backs Claimed: $95,000
- Support Provided: Invoices, payroll records, a documented litigation settlement
Palmetto Auto Glass claimed add-backs for above-market owner health insurance, a company vehicle, and a one-time litigation settlement. Every item had paperwork. The buyer’s accountant accepted all $95,000 during due diligence.
Company B: Sunview Detailing Co. – Add-Backs the Buyer Rejected
- Annual Revenue: $1.75 million
- Reported Net Income: $195,000
- Add-Backs Claimed: $140,000
- Support Provided: None for most items
Sunview Detailing’s owner claimed $140,000 in add-backs, including undocumented cash tips, family trips labeled as “marketing travel,” and vague meals and entertainment expenses. When the buyer’s accountant asked for support, only $30,000 could be substantiated.
| Metric |
Palmetto Auto Glass |
Sunview Detailing Co. |
| Add-Backs Claimed |
$95,000 |
$140,000 |
| Add-Backs Accepted by Buyer |
$95,000 (100%) |
$30,000 (21%) |
| Adjusted SDE Used in Final Offer |
$305,000 |
$225,000 |
| Result |
Closed at asking multiple |
Offer cut by $380,000; deal nearly collapsed |
Why This Happens
Buyers, especially those using
SBA financing, rely on lenders and accountants who require documentation before crediting any add-back to cash flow. Sellers who overreach with vague or unsupported claims do not just lose the disputed amount, they also lose credibility on the legitimate add-backs, which invites even more scrutiny across the entire deal.
Lessons for Business Owners
Be conservative and specific. Only claim add-backs you can support with receipts, invoices, or payroll records, and be prepared to walk a buyer through each one. A smaller, fully defensible list of add-backs will almost always produce a better outcome than an aggressive list that unravels during
the sale process.
Related Case Studies
For more real-world (fictional) examples of how deal factors affect outcomes, see: Case Study: Cash Sales Gone Wrong, Case Study: Inventory Mistakes That Cost Sellers at Closing, Case Study: Equipment Value vs. Cash Flow Value.
Related reading: Case Study: Two Pool Companies and the Value of Recurring Service Accounts and Case Study: How Clean Financial Records Change a Business Sale.