What are add-backs? Definition, formula and example
This is for buyers checking a broker's earnings figure and for owners preparing to sell. By the end you will know what counts as an add-back, which ones a buyer or bank will accept without argument, and which ones start a fight.
What add-backs mean in plain words
A small business's tax return shows the lowest profit the owner could legally report. Add-backs undo that. Each one says: "this cost was really the owner's choice, or a one-off, or not cash at all, so a buyer should not count it against the business."
Added to net profit, they produce seller's discretionary earnings (SDE) or adjusted EBITDA, and the asking price is a multiple of that figure. So every $10,000 of add-backs can move the price by $25,000 to $40,000. That is why sellers look hard for them and buyers check each one.
How add-backs are calculated
Earnings for valuation = net profit + add-backs
There is no fixed list. The test for each item is two questions:
- Can it be proven? A bank statement, invoice, payroll record or contract that shows the amount and what it was for.
- Will it truly not recur under a new owner? If the new owner will face the same cost, in the same form or a different one, it is not an add-back.
An item that fails either question stays in the costs. The usual categories are listed in our SDE glossary post.
Accepted versus disputed add-backs
Illustrative example: add-backs claimed on a $900K-revenue plumbing company with $120,000 net profit.
| Claimed add-back | Amount | Usually accepted? | Why |
|---|---|---|---|
| Owner's salary (one working owner) | $85,000 | Yes | Standard for SDE; buyer replaces the owner |
| Owner's health insurance | $14,000 | Yes | Personal benefit, documented |
| Depreciation and amortization | $22,000 | Yes | Non-cash charge |
| Interest on owner's loans | $9,000 | Yes | New owner finances differently |
| One-time roof repair after a storm | $18,000 | Yes, with invoice | Non-recurring |
| Owner's spouse on payroll, does the books | $30,000 | Disputed | Someone must still do the books |
| "Marketing we stopped" | $15,000 | Disputed | Revenue may fall without it |
| Annual bad-debt write-offs | $12,000 | No | Happens every year |
| Accepted total | $148,000 | Net profit $120,000 + $148,000 = SDE $268,000 |
The seller's list added to $205,000 and implied SDE of $325,000. The accepted list gives $268,000. At 3 times SDE, that is a $171,000 difference in price from the add-backs alone.
Where add-backs show up in a deal
A broker builds the list for the listing. A buyer tests it in diligence, and a good buying process starts from the tax returns and adds only what can be shown. An SBA lender under the 7(a) program does its own version and will drop any item without paper, which can shrink the loan. A careful sale process puts the proof in a folder before the first buyer asks.
At closing, the agreed price is allocated across assets on IRS Form 8594. The add-backs do not appear there, but the price they produced does.
Common mistakes
- Two owners, two salaries added back. SDE allows one. The second job must be paid for.
- Personal expenses with no trail. If the owner cannot show it, the buyer cannot count it.
- "One-time" items every year. Three years of "unusual" repairs are a repair budget.
- Adding back costs the business needs. Cut advertising shows up later as lost customers.
- Forgetting the costs that go the other way. A below-market owner salary or related-party rent should reduce earnings, not be ignored.
Questions people ask
What is the most common add-back?
The owner's salary and benefits. In an owner-run business it is added back in full for one owner to reach SDE. For EBITDA, a market salary for one manager stays in the costs.
Can I add back my own salary when I sell?
Yes, for one working owner, and the buyer will expect it. If a second family member also works in the business, their pay is an add-back only if the role disappears or is not needed.
Do banks accept the same add-backs as brokers?
Usually fewer. Lenders accept owner salary, non-cash charges, interest and documented one-time costs. They tend to reject personal expenses without records, cut marketing, and anything that depends on the seller staying.
How do I prove an add-back?
Keep the document that created it: the invoice for the one-time repair, the payroll record for the family member, the card statement for the personal expense. No document, no add-back.
Sources
Pober, M. (2026). What are add-backs? Definition, formula and example. Acquisitions.com. https://acquisitions.com/blog/what-are-add-backs/
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