Anonymised, illustrative composite. Three vehicles ran through the company's books as add-backs on the same claim — the lender's underwriting team accepted two of them and asked hard questions about the third.
At a glance
A regional service business changing hands under an asset purchase reported seller's discretionary earnings of $410,000, including a combined $54,000-a-year add-back for three vehicles the owner's family used and the company paid for — lease payments, insurance, and fuel across all three. The buyer's financing was structured around this figure from the start of the term sheet.
An add-back is only as good as the documentation behind it, and the lender's underwriting review split the three vehicles into two different categories. Two were titled to the corporation, carried commercial insurance, and were logged as fleet units used for service calls — ordinary, defensible business expense add-backs with a clean paper trail behind each one. The third was a personally-titled SUV, insured on the owner's personal policy, with no business-use log and no operational role in the business the diligence team could identify.
The seller's own accountant had included all three vehicles in the add-back schedule without distinguishing between them, on the reasoning that the company had paid for all three and so all three qualified. That reasoning conflates who paid the bill with whether the underlying expense was actually a business cost — a company can pay for a personal expense without that payment becoming a defensible add-back, and the lender's review treated the two questions separately from the start.
The lender accepted $36,000 of the $54,000 claimed add-back — the two documented fleet vehicles — and disallowed the remaining $18,000 for the personally-titled SUV. Reported SDE of $410,000 fell to $392,000 on the underwriting file. Against deavo's published financing guidance, which sets a debt service coverage floor of roughly 1.25x on an SDE basis, that $18,000 reduction in accepted earnings cut maximum serviceable annual debt service by roughly $14,400 — from about $328,000 to about $313,600.
There is no statute governing which add-backs a lender must accept; this is underwriting judgment, and deavo's published financing guidance labels its own DSCR bands and multiples an “Illustrative estimate only — not a financing offer, pre-approval, or financial, legal or investment advice” — the underlying earnings figure still has to be one a specific lender is willing to underwrite. The distinguishing fact between the accepted and disallowed vehicles was documentation: corporate title, commercial insurance and a business-use log on two vehicles; personal title, personal insurance and no log on the third. Financing under the Canada Small Business Financing Programme, which the buyer was also pursuing for part of the facility, adds its own constraint on top — and the programme's sub-limits nest rather than stack, which is the detail most often got wrong. ISED states the term-loan maximum as $1,000,000 for any one borrower, “of which no more than $500,000 can be used for purchasing leasehold improvements and purchasing or improving new or used equipment and of that amount, a maximum of $150,000 could be used for intangible assets and working capital costs.” The $150,000 sits inside the $500,000; it is not additional to it. Any earnings figure feeding a CSBFP application then faces the same lender scrutiny on documentation this file's add-backs met. See ISED's CSBFP guidance for the programme's own limits.
The deal closed on the reduced $392,000 figure, with the seller retitling the disputed SUV to himself personally before closing rather than trying to make the case for the add-back a second time. The two documented fleet vehicles stayed with the business unchanged. For the related normalization dispute over a missing salary line rather than a documentation gap, see an owner salary set at nil for five years, and for the ratio both files were underwritten against, the debt service coverage ratio glossary entry.
Financing structured against the full, undocumented $54,000 add-back would have left the business roughly $14,400 a year short of the debt service it was actually underwritten to carry, a gap that would have shown up as covenant pressure within the first fiscal year rather than as a manageable pricing adjustment before closing. The cost of catching it early was a smaller loan and a slightly lower price; the cost of missing it would have been a facility sized against earnings the business could not actually deliver.
It would also have left the buyer carrying an ongoing personal-use vehicle cost the acquired business had no actual need for once the founder's family stopped using it — a recurring expense with no offsetting earnings benefit, sitting on the books of a company the buyer was already paying full price to acquire.
The tell was the mismatch in how the three vehicles were held: two on the company's own title and commercial insurance, one on the owner's personal policy with nothing tying it to the business at all. An add-back that cannot point to a business-use log, a commercial title, or commercial insurance is a personal expense wearing a business add-back's label, and a lender reviewing the file will find the gap the same way this one did — by asking for the paperwork.
A 30-minute call is enough to tell you whether AI pays for itself here.
