Two sellers, same multiple, $2M apart on price. The entire gap was in the add-back schedule.
What add-backs are
Buyers usually price a business on adjusted EBITDA: earnings before interest, taxes, depreciation and amortization, adjusted for costs that won’t continue under a new owner. Those adjustments are add-backs.
They’re legitimate. If an owner pays themselves well above what a replacement manager would cost, the difference is a real add-back. The problem is how many sellers stretch them.
Why add-backs matter more than the multiple
Owners anchor on the multiple in the letter of intent and treat diligence as a formality. But the multiple is applied to adjusted EBITDA, so every add-back a buyer rejects is multiplied too.
Say you claim $600K of add-backs and the buyer’s diligence team accepts $250K. At a 6x multiple, the $350K they rejected costs you $2.1M of purchase price.
Common add-backs, and how they hold up
| Add-back | Usually holds up when |
|---|---|
| Owner pay above market | You can show what a replacement would cost |
| One-time legal or settlement costs | It’s clearly a single event with documentation |
| Discontinued product line | The costs and revenue are cleanly separated |
| Family members on payroll | They don’t do work the buyer will need to replace |
| Personal expenses in the business | Each item is documented and clearly personal |
| “Non-recurring” marketing or projects | Rarely, if something similar happens every year |
Aggressive or conservative?
Aggressive: add back everything arguably non-recurring and concede in negotiation.
Conservative: add back only what you can document.
The real line is documented versus hopeful. Legitimate normalizations are worth a lot at exit, and leaving them out isn’t discipline. It’s leaving money behind. But one add-back you can’t support makes a buyer doubt the other forty.
Before you go to market
- Build the schedule as if you were the skeptical buyer.
- Keep support for every adjustment: board minutes, invoices, contracts.
- Cut the ones you can’t defend.
- Have someone outside your team test the schedule before a buyer does.
The multiple gets the headline. The add-backs get the money.
Common questions
Can I add back my own salary?
Not all of it. You can usually add back the amount above what it would cost to hire someone to do your job. The buyer will still need someone in that seat.
What documentation do buyers want for add-backs?
Anything that proves the cost was what you say and won’t recur: invoices, contracts, payroll records, board minutes and settlement agreements.
When should I start tracking add-backs?
Now. Documenting them as they happen is far easier and more convincing than reconstructing them years later during diligence.
Scorecard