Adjustment / Add-backs.
When buying a business for sale it is an area where great care and careful investigation should be exercised, over exuberance in adding back one off unusual items, when reviewing previous year’s accounts to gauge maintainable earnings. Something unusual goes wrong in most businesses at least once a year and if it isn’t the item you have added back, it could well be something else.
The following are however, certainly items which you could consider:
a)Excessive remuneration to working directors or owners
b)Excessive travelling and entertainment expenses
c)Unrealistic provisions for depreciation
f)Excessive superannuation to working directors or owners
g)Remuneration paid to non-working directors or owners
The final question that is to be faced up to in the case of a number of small to medium sized businesses is that their financial accounts have been prepared with income tax in mind. When it comes to the sale, miraculously the seller wants to explain that the real profitability is somewhat different. The question of conservative stock valuations or write-offs and their accounting policy with regard to repairs and maintenance and capital expenditure are obvious examples.