Acquisitions

Add-backs

Learn how sellers restate profit into "owner's earnings," and how to tell the legitimate add-backs from the aggressive ones that inflate the price.

  • Beginner
  • 9 min total
  • 12 chapters

What decision this helps you make: Which add-backs to accept and which to challenge, so you pay a multiple only of defensible earnings.

What this topic is

Add-backs are adjustments that restate a business's reported profit as seller's discretionary earnings (SDE), by adding back the owner's salary, personal perks, and one-time costs. Legitimate ones are fair; aggressive ones inflate the price.

Why it matters

Every add-back you accept is multiplied by the valuation multiple into the price, so scrutinizing add-backs is one of the highest-leverage diligence tasks. Accept the defensible ones; challenge the rest.

Who should learn it

Anyone buying a small business valued on "adjusted earnings" or SDE.

What you will understand

  • Understand add-backs and how they build SDE
  • Tell legitimate add-backs (owner salary, true one-time) from aggressive ones
  • See why every accepted add-back is multiplied into the price
  • Accept the defensible, challenge the rest

Prerequisites

Common misconception

"The seller added back $130K of expenses, so the real earnings are that much higher." Only for the legitimate add-backs. If some are recurring costs disguised as one-time, or personal spending a new owner will still incur, they aren't really add-backs at all. Accepting them, multiplied by the multiple, means overpaying.