By Brent Beshore, adventur.es | January 28, 2016
Appropriate financial recasting is critical to gaining buyer trust and completing a deal. Some examples of inappropriate recasting to determine Adjusted EBITDA. Note, this article is not addressing Seller's Discretionary Earnings (SDE).
Owner's responsibilities are not significant? Compensation should be a fair wage based on the owner's responsibilities, but it’s definitely not $0.
Leadership compensation varies from industry norms? If the leadership is staying on after the sale, their compensation cannot be changed just because it varies with industry norms.
Use of more costly sub-contracted labor during a busy season? You cannot adjust the extra cost of seasonal labor unless you add the cost of inactive full-time labor. And if the net is cheaper, why haven't you done it?
Ineffective online marketing campaigns? They are still real spending. You can't add back real spending on the business.
One-time expenses such as the cost to develop a company’s website or inventory write-offs conducted every year? If it’s a necessary cost of doing business, it shouldn’t be adjusted out.
Research & Development costs? New revenue streams aren’t delivered by stork. Sustainable businesses require ongoing investment, which a buyer will have to invest in as well.
Projected savings from recent, or even yet-to-be-fully-implemented, changes in process or software? You can’t change the past. The best method is to forcast how it might look in the future.
One-time litigation events? If the company must spend real money to defend itself against customers, suppliers, etc., that won’t change with ownership. Evidence of a legal history will tell a buyer such events must be accounted for in projections and valuation.
The best advice on creating a list of adjustments? Be honest and conservative. The relationship with buyers will start out on a much warmer and productive path.
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