Glossary
8 Add-Backs Sellers Claim That Do Not Survive Diligence
When a seller hands over a list of add-backs, the job is to figure out which ones are real. Most are. The ones that fail share a pattern: they cannot be traced, they recur, or they fund something the business actually needs. We show every item as a management add-back next to a verified add-back, with the rationale attached. Here are the eight that most often get cut.
Add-backs are what turn EBITDA into adjusted EBITDA. EBITDA is earnings before interest, taxes, depreciation, and amortization as the books report them; adjusted EBITDA is that figure after normalizing for owner-specific, one-time, and non-operating items. The difference between the two is only as credible as the add-backs behind it, which is why each one has to survive scrutiny.
- The cost with no general-ledger entry
A claimed one-time expense that has no matching entry anywhere in the books. If it cannot be traced, it does not survive. This is the single most common rejected add-back.
- Theft, shrinkage, and “lost revenue”
Revenue a seller believes was lost to theft or shrinkage is very hard to justify, because it rarely ties to specific invoices or documented events. It is almost always removed.
- Owner compensation above true replacement cost
Adding back the full owner salary assumes the business runs with no one in that seat. It rarely does. We add back only the portion above what it costs to replace the work, which on an owner-operated business is the difference between presented EBITDA and real SDE.
- “One-time” costs that recur every year
A cost labeled non-recurring that appears in two or three consecutive years is, by definition, recurring. Repetition is the disqualifier.
- Personal expenses with no documentation
Owner-personal spending run through the business is a legitimate add-back only when it can be identified and supported. Undocumented, it does not hold up.
- Double-counted payroll from two accounting files
Running two accounting files at once, a common artifact of a growing business, can double-count payroll. The “add-back” to fix it is really a correction of a bookkeeping error, not a true normalization.
- Reconciliation discrepancies from a system migration
A “reconciliation discrepancy” offered as an add-back often turns out to be a placeholder created when the business migrated accounting systems. It is an artifact, not an earnings adjustment.
- Discretionary spend the business actually needs
Marketing, training, or repairs cut to dress up a year are not free money. If removing the cost would shrink the business a buyer is acquiring, it is not a clean add-back.
How we keep it fair, not aggressive
The goal is not to strip a seller of every adjustment. On a sell-side engagement it is a partnership to maximize value within reason. What we will not do is throw in every add-back the way some intermediaries do, because an add-back that does not survive the buyer’s diligence costs the seller credibility at the worst possible moment.
Frequently asked questions
What makes an add-back survive diligence?
It can be traced to the books, it is genuinely non-recurring, and removing the cost would not impair the business going forward.
Is the owner’s full salary always an add-back?
No. Only the amount above what it costs to replace the owner’s actual work. The rest is the cost of running the business.
Who decides which add-backs count?
The analysis presents management and verified versions side by side with rationale, so the buyer, seller, and lender can all see the basis for each decision.
Where to next
See how add-backs fit the broader picture in the Quality of Earnings due diligence guide, or learn what a Quality of Earnings report covers end to end. To pressure-test a specific add-back list, talk to our transaction advisory team.
