Want to see how your add-backs measure up? Download our free Add-Back Assessment Guide to learn what buyers accept, what they challenge — and how to prepare for both.
When it’s time to sell your business, your EBITDA becomes the cornerstone of your valuation. But here’s the catch: the number buyers care about isn’t just what your financials report — it’s what your normalized, adjusted, and defensible EBITDA says about the true earning power of your company. That’s where add-backs come in.
Handled strategically, add-backs can increase your enterprise value by hundreds of thousands — even millions — of dollars. Mishandled, they can erode buyer trust, inflate expectations, or derail a deal altogether. In this post, we’ll unpack what experienced buyers really look for, where sellers often overreach, and how to prepare your business so every dollar of adjusted earnings counts.
What Are Add-Backs — and Why Do They Matter?
Add-backs are adjustments made to your company’s earnings to reflect a more accurate picture of its ongoing profitability. These adjustments are intended to exclude expenses that are not truly part of the future operating reality a buyer will inherit.
Strategically applied, they:
- Normalize earnings across periods
- Present a clearer view of free cash flow
- Help justify a higher valuation multiple
- Reduce perceived risk for buyers
But not all add-backs are created equal — and the most successful sellers know the difference between acceptable normalization and wishful thinking.
The Primary Categories of Add-Backs
Legitimate add-backs typically fall into a few categories:
- Owner-Specific Expenses: Personal car leases, travel, meals, health insurance and other benefits paid through the business.
- One-Time or Non-Recurring Costs: Litigation fees, facility relocation costs, or emergency repairs unlikely to reoccur.
- Accounting Adjustments: Non-cash charges like depreciation or amortization (when EBITDA is the basis of valuation)
- Excess Compensation: If an owner pays themselves significantly above market rate, the difference may be added back
- Non-Essential Employees or Roles: In rare cases, roles that will not continue post-sale may be adjusted. An example would be family members that are on the payroll but have very little, if any, responsibilities.
These categories are only as strong as their documentation and rationale. Which brings us to the key issues.
Legitimate Add-Backs vs. Wishful Thinking
Here’s where experienced buyers sharpen their pencils.
Claiming an add-back isn’t the same as getting it accepted. Buyers — especially private equity groups and sophisticated strategic acquirers — will scrutinize every adjustment and ask:
Is this expense truly non-recurring, non-operational, and non-essential to the business going forward?
Some common areas where you can expect push back from a savvy buyer:
- “Marketing experiments” that were part of customer acquisition, not truly one-time
- “Owner travel” that doubled as sales trips or client entertainment
- “Descretionary bonuses” to employees that are in reality important to retention efforts.
- “COVID-related expenses” that now feel operational and recurring
Add-backs that can’t be supported with clean documentation and logic often become negotiation points that reduce purchase price or increase holdbacks. Worst case? They signal a lack of financial rigor that can scare away buyers.
Add-Backs Are Negotiated — Not Dictated
A critical mindset shift: you don’t “declare” add-backs — you defend them.
Buyers don’t take these adjustments at face value. They’ll ask for:
- General ledger entries
- Receipts, contracts, or payroll data
- Historical recurrence across years
- Context for why the expense won’t return
If you can’t explain and document each one, it won’t survive diligence — or won’t hold up in valuation.
Preparing Your Add-Backs: Do It Early, Do It Right
The most credible add-backs are the ones planned, tracked, and justified well in advance of a sale.
If you’re even 12–24 months out from an exit, start now:
- Maintain a running log of potential add-backs in your financials
- Create internal documentation to support each one
- Ask your accountant to tag these in your chart of accounts
- Conduct quarterly reviews with your advisor or broker
Also consider a sell-side Quality of Earnings (QoE) report. A professionally prepared QoE not only strengthens your case with buyers — it also filters out weak or questionable adjustments before they become deal breakers.
Add-Backs Are a Valuation Lever — Use Them Wisely
Done right, add-backs tell a compelling story of sustainable earnings and operational efficiency. Done poorly, they raise red flags that stall or kill deals.
If you’re planning to sell, work with an experienced business broker or investment banking advisor who understands not just how to identify legitimate add-backs, but how to build the documentation and narrative that gets them accepted.
Want help assessing the add-backs in your business? Contact us — we’ll help you separate fact from fiction and build a valuation that sticks.
Want to see how your add-backs measure up? Download our free Add-Back Assessment Guide to learn what buyers accept, what they challenge — and how to prepare for both.