Add-backs, explained simply
Sellers argue that some costs will not exist under a new owner: a one-off lawsuit, the owner’s personal vehicle, a family member on payroll who does not work in the business. Each add-back increases EBITDA, and therefore price.
Buyers test each against documents and against the history of the business. Costs that appear every year are not one-off, and savings a buyer might achieve in future are not add-backs.
Treatment of common add-backs
Typical treatmentEvidence, recurrence and whether the cost is a past fact or a future saving decide acceptance.
Worked example
Alder Creek’s owner claims $0.75 million of add-backs. The $0.30 million legal settlement and $0.25 million of excess owner salary are accepted. The $0.20 million trade show is rejected because the company attends every year. Accepted add-backs total $0.55 million.
Alder Creek Manufacturing, Inc. is a fictional company. All figures are illustrative.
Why it matters in a deal
Every dollar of accepted add-back is worth the multiple in price, which is why add-backs are among the most negotiated items in a transaction.
Red flags
- Add-backs that are large relative to reported EBITDA
- The same “one-off” cost appearing every year
- No invoices or contracts supporting the add-back