Two Deal Killers When Buying a Business

Buyers on occasion get on a high horse when it comes to “add-backs” such as depreciation and adding extra costs to a transaction.  For transactions under $15-millioin, equipment and assets which will be utilized for years, it can be argued that depression should be “added back” to net profit, to calculate the owner benefit.   This could also be categorized as an extraordinary expense, which a buyer would not have after the sale.

If a buyer chooses to press this with not including depreciation as an “add-back” – it will most likely end the conversation and the buyer will miss an otherwise good opportunity.  The effect of not considering this type of an add-back, lowers the amount of owner benefit and the price of the business, and is not reasonable generally speaking.  A buyer will not incur this cost, it is a ploy to try to negotiate the price down.

The other deal killer is to have a buyer decide to add the cost of new staff to operate business, when the business is being offered as an owner operator business.  This lowers the amount of owner benefit and consequently the value of the business.   For most sellers, this would be non-starter, unless seller were highly motivated, or it was a stress sale. Hopefully there is an intermediary involved to try and reason with the buyer or find some middle ground.  Sometimes a buyer just doesn’t want to get real, and there is nothing which can be done.