When selling or buying a small to mid-sized business, one of the most critical concepts to understand is the term “add-backs.” Add-backs play a central role in determining the true earning potential of a business, which directly influences its valuation. Whether you are a business owner preparing to sell or a buyer evaluating a potential acquisition, understanding add-backs can make or break a deal.
In short, add-backs help normalize the financials, giving a more accurate picture of how much money the business actually generates for the owner.
In many small businesses, the owner pays themselves a salary or runs personal expenses through the business (e.g., health insurance, auto expenses, or cell phones). These are added back because a buyer may not incur those exact expenses or may pay themselves differently.
One-time costs such as a legal settlement, a new website build, or a major equipment repair that’s unlikely to recur in the future can be added back.
Travel, meals, or entertainment expenses that served the owner’s personal lifestyle rather than business needs are often added back.
These are non-cash expenses and are typically added back when calculating Seller’s Discretionary Earnings (SDE) or EBITDA.
Because a buyer may finance the acquisition differently, interest payments are often excluded to make financials more comparable.
Examples include accounting fees for a past audit or consulting fees for a business project that is now complete.
However, sellers must be prepared to justify every add-back with clear documentation. Buyers and lenders will scrutinize the financials and expect evidence that these adjustments are legitimate and reasonable.
Buyers rely on add-backs to determine what they’re really buying. The adjusted earnings help assess:
Whether the business can support debt payments
What kind of salary the buyer can expect
How sustainable the cash flow is
Buyers should approach add-backs with healthy skepticism. Not all proposed adjustments are valid or sustainable, and over-aggressive add-backs can inflate the perceived value of a business.
Reviewing bank statements and tax returns to validate add-backs
Questioning any discretionary or non-recurring expense
Understanding how the business will operate under new ownership (some “owner-specific” expenses may become necessary again)
Suppose a business reports $100,000 in net income. The seller adds back:
$60,000 owner salary
$8,000 in personal vehicle expenses
$5,000 for a one-time marketing campaign
$10,000 in depreciation
Total Add-Backs: $83,000
Adjusted Earnings: $183,000
If the business is being valued at a 2.5x multiple of SDE, the difference is significant:
Without add-backs: $100,000 x 2.5 = $250,000
With add-backs: $183,000 x 2.5 = $457,500
Add-backs are more than just accounting tweaks—they are essential to understanding the true profitability of a business. Sellers must clearly identify and justify them to maximize value. Buyers must thoroughly review and validate them to avoid overpaying or acquiring a business that can’t meet their expectations.
Whether you’re buying or selling, working with a knowledgeable business advisor can help you navigate the nuances of add-backs and ensure a fair and accurate valuation.