Is the cash flow figure provided by a business seller always a true depiction of the company's profitability? In this episode of The 7-Minute Takeover, we debunk the myths surrounding financial "ad-backs" and normalized EBITDA.
Discover how to evaluate common adjustments and identify high-risk versus low-risk claims to ensure you’re making a sound investment.
Timestamps:
0:24 - What is an Ad-back? Defining the move from net income to normalized cash flow
1:02 - Calculating EBITDA: Interest, taxes, depreciation, and amortization
1:41 - Common examples of ad-backs: Owner compensation, market rate rent, and one-time expenses
3:32 - Risk Assessment: Categorizing adjustments into low, medium, and high risk
4:02 - Medium risk examples: Vehicles and business vs. personal use
5:09 - High risk red flags: Club memberships and "one-time" recurring bonuses
6:30 - How lenders view ad-backs and the importance of "chunky" adjustments
7:52 - When to engage an accountant for a Quality of Earnings (QofE) assessment
8:36 - Negotiation strategies: Bridging the gap between seller and buyer valuations
Don't take the seller's numbers at face value—do the diligence to protect your investment.
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