The Truck on the Books

Our COO was 3 hours into a general ledger, somewhere past midnight, when he found the fishing poles. The account was labeled as something innocuous. The balance was north of $2M. Shop equipment in that business meant welders, lifts, and a fleet of service trucks, so a balance that size was not strange on its face. What was strange was the detail behind it. Rod by rod, reel by reel, invoice by invoice, a meaningful chunk of that account was fishing gear. Tournament-grade fishing gear, purchased steadily over 2 decades, capitalized like it was a lathe.

He did not find it because he is clairvoyant. He found it because he read fixed asset registers line by line, and somewhere around year 9 of the schedule the vendor names stopped being industrial suppliers and started being marinas.

Nobody was hiding anything, exactly. The owner fished. The business paid. The accountant, who had been dealt this hand for 20 years, had long ago stopped asking questions. That is how it goes in private companies, and if you own one, you already know it, because somewhere in your own ledger there is a version of the same thing. Usually it is a truck.

The Biography in the Add-Back Schedule

The truck is the universal. A loaded F-350 that tows a boat exactly twice a year, titled to the company, fueled on the company card, insured on the company policy. Next to it sit the family phone plan, the lake house internet that shows up as telecom expense, the hunting lease that hosts one customer trip and 11 personal ones, the season tickets, the niece on payroll who answers phones in the summer.

None of this scandalizes me. The tax code practically invites it, every accountant in America has blessed some version of it, and an owner who ran 30 years of risk through his personal balance sheet is entitled to run some of his life back through the P&L. When a seller's advisor hands me an add-back schedule, I do not read it as a list of sins. I read it as a biography. It tells me what the owner loves, who he takes care of, what he fears, and how he thinks about the line between himself and the company.

That last part matters more than the dollars. The dollars are usually small against enterprise value. A $60K truck and $40K of family expenses on a business earning $4M move the needle less than a single week of order flow. What moves the needle is what the schedule says about how untangled the owner's life will be from the business on the day after close.

The Visa Request

Which brings me to the strangest due diligence request I have ever received, and I want to be clear that I have changed every identifying detail except the sentence itself, because the sentence is the point.

We were deep into a process. Good business, real earnings, an owner we liked. We had worked through the poles, the trucks, the payroll cousins. And then, in a working session about something else entirely, the owner leaned toward my COO and asked whether, as part of the transaction, and using his connections, we could help get his mistress a visa.

He was not joking. He asked it the way you ask about rolling over the company health plan. In his mind this was simply another arrangement the business had always handled, and the business was changing hands, so the arrangement needed a new sponsor.

We did not laugh, and we did not lecture. We said that was outside the scope of the deal, and we moved on. But I thought about that question for weeks, because it taught me something the ledger alone never could. Every add-back schedule has a boundary line where the owner's sense of normal lives. Most owners draw that line at trucks and phone bills. This one had drawn it somewhere I could not see from the financials. That is worth knowing before you sign reps and warranties with a man, and there is no checklist question that surfaces it. You only get it by sitting in the room long enough for the real business to come out.\

In the middle of diligence, the owner leaned over to my COO and asked, in the same tone he used for freight quotes, whether we could get his mistress a visa.

Paul W. Swaney III

What I Actually Do With the Truck

Here is my honest posture on add-backs, and sellers should hold me to it. If it is real, documented, and truly personal, I give full credit. The truck comes out, the poles come out, the phone plan comes out, and the seller gets paid on the earnings the business will actually produce without them. I have never retraded a deal over a documented add-back, and I never will, because add-backs done right are the seller's money, not mine.

The critical approach is to have a methodology that makes sense to the founder, your investor base, and the valuation.

The friction comes from the undocumented ones, and this is where owners cost themselves real multiples of real dollars. An add-back you can prove is worth its full amount times the multiple. An add-back you assert is worth a discount, an argument, or nothing at all. The difference between those two outcomes is usually about 90 days of your accountant's time, spent before a buyer ever shows up.

So my advice to any owner thinking about a sale in the next few years is simple, and it is the same advice your own accountant has been too polite to push. Pull the personal spending out of the business now, or at minimum, start a file. Every truck, every trip, every relative, with dates and amounts. You are converting stories into proof, and in a sale, proof is the only currency that trades at par.

Reading the Ledger Myself

There is a version of private equity where nobody who decides on the deal ever reads the fixed asset register. An analyst reads it, summarizes it into a data pack, and the pack gets summarized into a memo, and the memo gets summarized into a committee slide. By the time the fishing poles reach the decision maker, they are a footnote about asset quality, if they survive at all.

I run a different model out of necessity and, at this point, out of conviction. As an independent sponsor I have no analyst pool and no committee, so I read the ledger myself, at midnight, line by line. That used to feel like a limitation. It has turned out to be the edge. The poles, the truck, and the visa question all live in the details that summaries are designed to remove, and those details are where you learn who you are actually buying from.

The truck on the books never killed a deal for me. It has saved me from a few. Read the whole schedule. The business is in the numbers, but the seller is in the add-backs.

Paul Swaney is the founder of Swaney Group Capital, a fundless sponsor focused in the lower middle market. LeverUp® is published weekly. More if I have something else to say.