Add-Backs

What Qualifies as an Add-Back

A legitimate add-back must meet one of three tests:

• Owner-specific: the expense exists because of this owner's personal choices and would not be incurred by a typical buyer (personal vehicle, family health insurance, country club dues run through the business)
• Non-recurring: a one-time event that won't repeat — a lawsuit settlement, a one-time equipment repair, pandemic-era relief repayments
• Non-cash: depreciation and amortization reduce taxable income but not cash available to the owner

Categories of Add-Backs

Owner compensation — The most significant add-back. The full economic compensation to the owner: salary, distributions, bonus, health insurance, retirement contributions, payroll taxes on owner comp.

Owner perks — Personal expenses run through the business: vehicle, phone, meals, travel. These are legitimate but require receipts.

Relatives on payroll — Family members who are paid but don't provide equivalent market-rate labor. The add-back is the difference between what they're paid and what a replacement would cost.

One-time expenses — Legal fees, recruiting costs, equipment write-offs, or repairs tied to a specific event. Must be demonstrably non-recurring.

Depreciation and amortization — Standard accounting add-back.

Contested Add-Backs

Sellers regularly push add-backs that buyers should challenge:

• "Discretionary" marketing spend that was actually building the customer base — if you add it back, you're claiming growth was free
• Owner's below-market salary — if the owner pays himself $60K but a replacement manager costs $120K, the add-back is negative
• Rent to related party — if the owner pays himself rent on a building he owns, above-market rent is an add-back; below-market rent means buyers would pay more under arm's-length terms

The Documentation Standard

Every add-back must be documentable. Sellers who claim add-backs without supporting bank statements, payroll records, or receipts give buyers a legitimate reason to discount the SDE or walk away. Buyers should request a full add-back schedule with line-item justification before LOI.