A plain-English guide to add-backs: what counts, what lenders and buyers accept, and how to document them before you sell.
What an add-back is
Buyers and lenders value your business on its adjusted earnings, often called seller's discretionary earnings or adjusted EBITDA. An add-back is an expense on your books that a new owner wouldn't have to pay, so it gets added back to profit. Common examples are owner perks run through the business, a one-time legal bill, or non-cash items like depreciation.
Why they matter so much
Every dollar of accepted add-back is multiplied by the price multiple. A $50,000 add-back at a 3x multiple is $150,000 of price. That is exactly why buyers and lenders scrutinize them, and why unsupported ones get removed.
What usually gets accepted, and what doesn't
Easier to defend: documented one-time costs, personal expenses with receipts, and owner pay above what it would cost to hire a replacement. Harder to defend: vague "miscellaneous" items, recurring costs described as one-time, and anything with no paper trail. If it recurs every year, expect a buyer to treat it as a real expense.
How to fix it before you list
Build a written add-back schedule, reviewed by your CPA, with a document behind each line. Do it early, ideally a year or more before a sale, so the numbers show up consistently in your financial statements and tax returns. Earnings that match your records survive diligence. Earnings that exist only in a spreadsheet usually don't.
This article covers general lending and deal practices and is not legal, tax or financial advice, or a guarantee of loan approval or terms for any specific business. Lender criteria vary, so talk to your CPA, attorney and lender about your situation.