By Phil Villegas
For the past 15 plus years, a fair amount of the work I’ve personally been involved with relates to dealership buy/sells of all makes and sizes. Despite the size of the transaction, nearly all of these will have either a well-documented or loosely implied list of seller’s “Add-backs”. Add-backs are suggested adjustments to a dealership’s reported profit, essentially as the word states, add-back to profit to arrive at the dealership’s true earnings. The spirit of most add-backs is to account for and eliminate non-operational or unusual expenses that a new buyer would likely not have to incur going forward.
Add-backs can cover a wide range of topics, from compensation, advertising, tax, legal, travel and entertainment, unrecorded income, data processing, etc. All these add-backs are disclosed with the end goal to recast the dealer’s financial statement, and ultimately, improve the appearance of the dealerships’ profitability to make the financial prospect of acquiring the dealership as attractive to a buyer as possible.
Given the general selling environment and knowing that dealers are not predisposed to being content with leaving any money on the table; liberties are often taken when these add-backs are claimed. So, whether we are analyzing a transaction where the add-backs or normalization of earnings analysis was prepared by a Big-4 accounting firm or it was a verbal claim based on a dealer’s handshake agreement, we have found that in nearly every deal, not all add-backs hold-up to detailed scrutiny.
While it may seem like common sense, we still encounter dealers signing Asset Purchase Agreements with little or no due diligence of seller add-backs, often just relying on either the selling dealer, broker’s representations. As Ronald Reagan would say “Trust but verify.”