What are common add-backs?
One-time costs, personal expenses paid by the business, and the difference between what you pay yourself and what a replacement manager would cost.
- One-time costs: a lawsuit settlement, a one-off consulting project, moving costs.
- Personal expenses: a family vehicle, personal travel or phone bills run through the company.
- Owner pay: if you pay yourself $300,000 and a general manager would cost $150,000, the $150,000 difference can be added back. If you pay yourself less than market, earnings go down instead.
- Non-working family members on payroll.
Why do add-backs matter so much?
Buyers pay a multiple of adjusted earnings. At a 4x multiple, every $50,000 of accepted add-backs adds about $200,000 to the value. Every $50,000 rejected takes the same amount away.
Which add-backs do buyers reject?
Buyers reject add-backs they can't trace to a document, costs that are likely to repeat, and "one-time" items that show up every year.
A buyer's accountants will test each one during due diligence. A short list of well-supported add-backs is more convincing than a long list of guesses.
How to prepare your add-backs
- Keep a schedule with each add-back, the amount, the year and the reason.
- Attach the invoice, contract or statement behind each one.
- Stop running personal expenses through the business well before a sale.
- Have your CPA review the schedule before any buyer sees it.
Frequently asked questions
What is an add-back in business valuation?
An add-back is an adjustment to a company's earnings that removes a cost that won't continue under a new owner, such as a one-time expense, a personal expense paid by the business, or owner pay above market rate.
Is owner salary an add-back?
Partly. The difference between what you pay yourself and what it would cost to hire someone to do your job can be added back. If you pay yourself less than market, earnings are adjusted down instead.
How do I make sure buyers accept my add-backs?
Document every add-back with an invoice, contract or statement, and keep a clear schedule showing the amount, year and reason. Add-backs that can't be traced to evidence are usually rejected during due diligence.
