Add-Back

An expense added back to reported earnings to calculate adjusted EBITDA, typically representing one-time costs or owner-related expenses that won't continue post-acquisition.

An add-back is an expense that is added back to a company's reported earnings to calculate adjusted EBITDA or Seller's Discretionary Earnings (SDE), representing costs that won't continue under new ownership.

Common Add-Backs

Owner-Related

  • Above-market owner salary
  • Owner's personal expenses run through the business
  • Owner's health insurance and benefits
  • Personal vehicle expenses
  • Family member compensation (if not essential)

One-Time Expenses

  • Legal settlements or fees
  • Relocation costs
  • Non-recurring professional fees
  • COVID-related expenses

Non-Cash Items

  • Depreciation and amortization
  • Stock-based compensation
  • One-time write-offs

Legitimate vs. Aggressive Add-Backs

Legitimate: Owner's personal car lease ($800/month) won't continue Aggressive: Claiming all marketing spend is "one-time"

Impact on Valuation

Add-backs directly affect purchase price:

  • $100K add-back at 4x multiple = $400K higher purchase price
  • Buyers and lenders scrutinize add-backs carefully
  • QoE reports validate or reject proposed add-backs

Best Practices

  • Document each add-back with supporting evidence
  • Be conservative to maintain credibility
  • Expect 20-40% of proposed add-backs to be rejected

Related Terms

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