Add-backs
Add-backs are expenses added back to a business’s reported profit because they are personal, one-time, or specific to the current owner and will not continue after the sale. They are how reported net profit becomes SDE or adjusted EBITDA, and they are the single most contested part of a valuation.
Every add-back is a claim that a cost on the financial statements is not really a cost of running the business. Some are obvious and uncontroversial. Others are a seller arguing their way to a higher price, and a buyer’s accountant will treat them accordingly.
Add-backs that usually survive
- Owner compensation above or below market, and family members on payroll who do not work in the business
- Personal vehicles, travel, meals and memberships run through the company
- Genuinely non-recurring events with documentation — a one-off legal settlement, storm damage, a single relocation
- Rent paid to the owner above market, where the buyer will negotiate a market lease
Add-backs that usually get removed
- Deferred maintenance and equipment replacement dressed up as one-time spending
- Marketing the business genuinely needs to hold its revenue
- A "one-time" cost that also appeared in each of the last three years
- Staff the owner intends to cut, where the buyer is not confident the business runs without them
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryHow to Read a Business's Financial Statements Before You Buy in Ontario
- 03Treadstone LawLegal commentaryHow to Prepare a Business for Sale in Ontario
- 04Treadstone AssociatesAdvisoryBookkeeping Automation
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