Can a seller keep adding back the same kind of non-recurring expense every year?

An add-back is an expense in the financial statements that a seller asks a buyer to ignore when judging the business’s earnings, for example because it is personal, discretionary or non-recurring. The label “non-recurring” is a claim about the future. An expense that shows up in several years of statements is evidence against that claim, however it is described.

Who tests your adjustments

BDC says a valuator typically reviews records including financial statements and discretionary and non-recurring expenses. On the buyer’s side, BDC says an accountant can prepare a quality of earnings report that goes beyond standard financial statements to identify and adjust for non-recurring items, accounting irregularities and risks, and that financial due diligence helps validate the purchase price. Every add-back you present is therefore open to testing.

Why repetition weakens the claim

BDC’s sale-negotiation guidance says anything not up to par is an opportunity for a buyer to start creeping down the price, and that significant price adjustments typically occur during due diligence. A repeated add-back can give a buyer that opening. If a cost has recurred, ask your accountant whether it belongs in normal operating expenses rather than among the add-backs. Where a cost is real but varies, such as repairs, ask your accountant whether an average is more defensible than a full add-back.

What to have ready

BDC advises reviewing your records with your accountant to make sure they are up to date and that interim statements are accurate. For each adjustment, assemble support that a stranger could check:

• An invoice, contract or payroll record for each item, tied to the year it was booked.
• A plain reason the cost will not continue once you leave, for example a personal expense that stops with you.
• The same treatment of the item across every year shown, so that no year looks selectively adjusted.
• A schedule from your accountant reconciling reported earnings to adjusted earnings.