Frequently Asked Questions
What is the intended purpose of add-backs in adjusting a company's taxable income?
Add-backs are a crucial tool in adjusting a company's taxable income to reflect the true income that a new owner can expect in the future. The primary purpose of add-backs is to provide a more accurate representation of a company's earnings. This is achieved by adding back certain expenses that are not indicative of the company's ongoing operations or that may not be incurred by the new owner. There are three main reasons why a company would use add-backs: to borrow money for business use, to reinvest in the business, and to determine a fair salary for the buyer when they begin running the business. Standard add-backs include EBITDA (Expenses Before Interest, Taxes, Depreciation, and Amortization). Depreciation and interest are added back because they do not represent actual cash outflows and the new owner will not have these expenses. Additional add-backs can include owner's compensation, payments to family members, one-time expenses, retirement plan contributions, employee severance payments, lawsuit settlements, personal expenses, and losses due to unexpected events. These are added back because they are not related to the core business operations or they are not expected to recur under the new ownership.
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