Understanding Add-Backs: What Buyers Need to Verify Before Making an Offer

What Are Add-Backs?

Add-backs are expenses that are added back to net income to calculate Seller's Discretionary Earnings (SDE) or adjusted EBITDA. They represent costs that a new owner would not necessarily incur.

Common Legitimate Add-Backs

• Owner salary and benefits above market rate
• One-time expenses (legal settlement, equipment replacement)
• Personal expenses run through the business
• Depreciation and amortization (non-cash expenses)

Questionable Add-Backs

• "Personal" vehicle expenses for a business that requires driving
• Family members on payroll who actually contribute to operations
• Rent adjustments that assume below-market lease terms
• Projected cost savings that have not been realized

How to Verify

• Ask for documentation for every add-back
• Compare to industry benchmarks
• Consider what you would actually spend as the new owner
• Consult with your CPA before accepting any add-back at face value

The Impact on Valuation

Since business value is typically a multiple of earnings, every dollar of inflated add-backs multiplies into thousands of dollars of overpayment. This is why pressure-testing add-backs is one of the most important things a buyer can do.