Can seller add-backs be used to qualify for an SBA acquisition?
Short answer
Yes, if the lender justifies each one. SOP 50 10 8.1 lets lenders make prudent adjustments to the acquired company's cash flow, but unsupported adjustments cannot be used to meet coverage. Source: App. 15, Para. C.2.b.
Yes, but each add-back has to survive the lender's written analysis. SOP 50 10 8.1, Appendix 15, Para. C.2.b, allows an adjusted debt service coverageCash available for loan payments, divided by those payments. Above 1 means the cash covers them. Full definition ratio. The lender may make prudent adjustments based on savings the deal can realize.
Items the SOP names
- Unfunded capital expenditures
- Non-recurring income
- Distributions, including distributions for S-Corp taxes
- Seller discretionary expenses
- Ownership compensation
The documentation standard
The lender must explain why each adjustment is prudent and necessary, and how ongoing operations can support it. That justification goes in the credit memorandum. Adjustments without it are ineligible for the coverage test.
Owner pay gets extra scrutiny
If the lender adjusts ownership compensation, a global cash flow analysis must show the principals can meet their obligations on the adjusted pay. That analysis must reach 1:1. Your pay must also cover your current obligations and living expenses.
Larger deals
On a purchase at or above the $3,000,000 threshold, the Quality of Earnings report must document all add-backs. The lender must use that report's earnings (Para. C.1.b).
Business Expansions
Adjustments may reflect the combined entities when the acquired business will operate independently after the purchase.
What counts as prudent varies by lender. A seller's add-back schedule does not bind the lender.
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