Which add-backs are legitimate when adjusting EBITDA for a sale?

An add-back is a cost in your financial statements that you say a new owner would not have to pay. Present one only if you can prove the cost and show that it really goes away. BDC’s guide to selling a business lists discretionary and non-recurring expenses and management compensation among the records a valuator typically reviews, so be ready to support each one. Our glossary explains add-backs in general terms.

Costs that are clearly personal

Personal costs run through the company, such as a family trip booked as business travel, are candidates only if you keep a receipt for each and can show it had no business purpose. BDC’s due diligence guide says a buyer can check whether tax returns match the financial statements, so be ready to show how each item was booked and why. An item you cannot document is a claim, not an adjustment.

Owner pay and family on payroll

If you adjust your own pay, compare what you take with what a replacement manager would cost to do your job. If the business still needs someone in that role, the whole salary does not disappear. If a family member does real work, ask your accountant whether to adjust their pay to a market wage rather than remove it. Pay to a family member who does no work for the business is a candidate only if you can show that.

One-time items and shared costs

A cost is one-time only if it does not recur. If a legal bill, repair or consultant fee labelled one-time shows up in more than one year of your statements, be ready to explain why it will not recur. BDC’s due diligence guide says a quality of earnings report, which an accountant can prepare, goes beyond standard financial statements to identify and adjust for non-recurring items, accounting irregularities and risks. Costs shared with another company you own need the same test: could the price be defended as arm’s length?

Presenting the schedule

Keep a schedule listing each add-back, its amount, its year and the document that proves it. BDC’s negotiation guide says buyers meticulously examine historical revenues, profit margins, EBITDA, cash flow and asset values, and that significant price adjustments typically occur during the buyer’s due diligence period. Expect the schedule to be tested then, and leave out anything you would not defend line by line. An accountant or a chartered business valuator can advise on your numbers. Deavo does not.