Addbacks Explained

Newsagencies in QLD are sold on the basis of Goodwill + Stock.

Newsagencies in NSW are sometimes sold as Goodwill + Fixtures & Fittings + Stock.

Goodwill is a multiple of Owners Profit. To explain Owners Profit, it is calculated as a return to 2 working owners, doing reasonable hours, before any form of owners remuneration, interest & borrowing costs, depreciation, taxation, amortization, personal (non-business related) expenses and any one off, non-recurring expense. (known as Addbacks).

This is also known as P.E.B.I.T.D.A. (Proprietors Earnings Before Interest Taxation Depreciation & Addbacks/Adjustments)

Owners often enjoy some personal benefit to running a business; and may incur costs in the business that are not needed by the business to operate. For example, interstate travel, luxury motor vehicles etc.

Expenses of this nature are factored back to an “apples for apples” comparison; and are termed as “addbacks”. These are expenses unique to a particular owner, but not truly needed by the business  to generate its income.

Below is a list of the more common addbacks, with some understanding behind them.

INTEREST & BORROWING COSTS

Business valuation formula’s of EBIT, EBITDA & PEBITDA all addback Interest as a basis for calculating the Owners Profit for an owner to work with. Consider two “Million dollar” businesses, where one person owes $500,000, and another has paid off all loans. A new owner may need very little borrowings, or the maximum loans available. Somewhere in all this, there needs to be a level playing field for valuation purposes.

In general, the “business” does not need borrowings; only the owner needs borrowings to own  the business. Accordingly, interest and all loan related bank fees and borrowing costs are added back, benchmarking the bottom line or owners profit available to a new owner, to service any debt they may need, and the balance meets their remuneration desires.

LEGAL & CONSULTING FEES

Most newsagencies do not need annual legal council or consultation, but from time to time, may engage a professional service to assist with business operational tasks, eg a lease renewal. As these are not an annual recurring cost, they are added back to the bottom line.

ACCOUNTING & BOOKKEEPING FEES

Every business needs accounting costs for tax office compliance; but, it is expected that a business owner would perform their own Business Activity Statements (BAS). Some accountants charge from $1,000, others $10,000 to basically achieve similar results; just as a Mercedes and a Barina will both get you from A to B. The average accounting costs for a newsagency is $3,000 per annum, so fees in excess of this are commonly added back as an owners discretionary spend, eg having the accountant prepare BAS’s, personal & family tax returns & other advice.

Owners are also expected to look after their own books, so engaging any bookkeepers is also considered a discretionary spend.

OWNERS REMUNERATION

Whether taken as drawings, directors fees, wages, salaries, salary sacrifice, superannuation or alike, whether it’s $1,000 a year or $200,000 a year; for business valuation purposes, any form of Proprietors Earnings are added back to the bottom line. This does not include undeclared cash.

STAFF WORKING ON AN OWNERS BEHALF

Much like Interest, some owners do 70hrs a week each to maximize personal income, others closer to retirement may be only performing 10hrs a week. To level the playing field, owners are expected to have performed “reasonable hours”. Reasonable hours are considered as 45 to 50 hours per week per owner, or 90 to 100 hours per week collectively.

This theory comes from considering owners as two salaried employees, ie employees beyond penalty rates doing any hours or days needed to fulfil the job. A salaried employee was any person paid 25% or more above the award. Award was 38 hours per week, so 25% more is 47.5 hours per week, or 95hrs a week for 2 working owners. Hence the expected benchmark of 90 to 100 hours collectively being acceptable.

This is common to many industry types for sale and is a fundamental understanding for buyers, their accountants and financiers to accept.

Where an owner chooses to pay staff to cover hours they are expected to do, there may be a case for adding back the cost of those discretionary wages. For example, the owners are close to retirement age, and only doing 30 hrs a week. They could be paying staff at least 60 hrs a week to perform hours on the owners behalf, giving rise to an addback of the cost of that 60 hrs; and making that business’s net owners profit comparable with others not paying such excess to staff.

MOTOR VEHICLES

If the owner uses their Prado to do a delivery run, when the most common delivery vehicle is a Suzuki Sierra; the difference in cost may be considered an addback as owners discretion to use a more expensive, more comfortable car. The owners may also be putting their private cars through the business for tax advantages; but those private cars are unnecessary for the business to operate.

Other less common, but relevant addbacks include :-

ADVERTISING – If they tried a one off and it didn’t work, it would be added back. If it’s an annual expense, then it’s not an addback.

DONATIONS – Philanthropy is a discretionary spend and not needed to run a business. If however they sponsor the local sports teams annually, creating customer loyalty, that should remain as a business cost.

FINES & PENALTIES – If the business is run correctly, there should be no fines or penalties incurred, making these a personal expense due to owners neglect, not a business expense.

LEASES – Where an item is being paid off and provided unencumbered at the time of settlement, then the Lease costs are no longer an ongoing expense to the business, giving rise to an addback. eg: photocopiers

PERSONAL INSURANCE – Businesses should carry general and public liability insurance, but, Directors or Income Protection Insurance and alike are a personal benefit item, not a business benefit item.

ONE-OFF EXPENSES – Replacing an engine in a delivery vehicle is hopefully not an annual expense. Same for expensed items more of a capital nature like minor shopfit works. As long as these are unique, non-recurring expenses, they would be deemed as acceptable addbacks.

FBT Contributions – Some of the above give rise to a tax defined Fringe Benefit. If the owner “compensates” the business for that benefit, it mitigates paying Fringe Benefits Tax. This is not “business income” and should show as a negative adjustment to addbacks

Addbacks are usually calculated by the owner or the owners accountant, and should be substantiated during a contract due diligence. Newsagencies For Sale Pty Ltd strongly recommends all purchasers engage and conduct a Contract Due Diligence.