The Add-Back Trap: How Brokers Inflate SDE (and What to Do About It)

What’s an Add-Back (Really)?

If you’ve ever looked at a small business listing and thought,
"Wait, how is this guy making $400K from a doggy daycare?"
You’re probably looking at an add-back fiesta.

An add-back is any expense the seller claims you won’t need to pay once you take over.

Sounds harmless. Even logical.
Until it isn’t.

In theory:
Add-backs adjust net income to reflect owner benefit.

Think:

• Personal car lease
• Annual ski trip passed off as a "conference"
• Grandma on payroll for answering the phone

In reality:
Add-backs are where the broker hides the markup.
It’s how they turn a $200K income business into a "350K SDE machine" — on paper.

They’ll say:
"These are just discretionary expenses. Totally optional."

What they won’t say:
"Some of these are necessary to keep the business alive."

That’s where buyers get played.

The 5 Most Abused Add-Back Categories

If there’s a broker playbook for inflating valuations, this is page one.
These five add-back categories show up in almost every deal — and most of the time, they’re inflated, misleading, or total fiction.

1. Owner’s Salary (or Lack of One)

The move:
Add back the full salary because "you can choose to pay yourself whatever you want."

The problem:
Unless you plan to work for free — or be in two places at once — you’ll need to replace the seller.

Example:
They add back a $75K salary. But you plan to hire a GM at $90K. That’s not income. That’s payroll.

Rule:
If you’re not running it yourself, budget for someone who will.

2. Family on Payroll

The move:
Remove salaries for the seller’s spouse, kids, or cousin Jimmy who "doesn’t really do anything."

The problem:
They probably do something. And you’ll need to replace them.

Example:
$30K for the seller’s wife doing admin? You’ll need a bookkeeper or VA. That’s $25K right back in.

Rule:
If someone’s being removed, account for who replaces them — and at what cost.

3. Personal Perks Disguised as Business Expenses

The move:
Add back meals, travel, vehicles, phones — anything that smells personal.

The problem:
Some of it might be legit business overhead.

Example:
$12K in travel "add-backs" — but two supplier visits and a trade show were in there. That’s ops-critical.

Rule:
Ask: "If I cut this, does revenue drop?" If yes, it’s not a perk — it’s an expense.

4. Underreported Marketing Spend

The move:
Call marketing "discretionary" or "paused" — and add it back.

The problem:
If leads don’t come from nowhere, you’ll need to crank it back up.

Example:
$15K add-back because "we paused ads during COVID." But now you’re stuck spending $20K/month to restart the funnel.

Rule:
If revenue depends on it, it stays.

5. "One-Time" or "Non-Recurring" Expenses

The move:
Add back lawsuits, repairs, upgrades — anything labeled a one-off.

The problem:
Many "one-time" costs happen… every time.

Example:
$8K in "non-recurring" IT costs. It’s their third year of "non-recurring" tech fixes.

Rule:
If it happened more than once, it’s not a fluke — it’s a feature.

How Add-Backs Inflate the Multiple (And Fool the Math)

This is the valuation magic trick.

Step 1: Inflate SDE with add-backs
Step 2: Apply a multiple
Step 3: Call it a "deal"

Example:

• Claimed SDE: $300,000
• Add-backs:
  • $75K owner salary
  • $20K marketing
  • $15K "non-recurring" legal fees
• Asking Price: $900,000
• Implied Multiple: 3x

After teardown:

• Real SDE: ~$190,000
• Real Multiple: $900,000 ÷ $190,000 = 4.74x

That’s not a 3x deal. That’s a risky, overpriced job disguised as passive income.

Why It Matters

If you don’t vet the add-backs:

• Payback period stretches
• ROI tanks
• DSCR (loan coverage) implodes

Everything hinges on your real SDE — not the fantasy version on the broker’s slide deck.

What to Accept — and What to Reject

Usually Acceptable:

• Personal car lease not used in business
• Health insurance if you’ll use your own
• Charitable donations unrelated to ops
• Documented one-time legal settlements
• Excess owner salary if you’ll replace them for less

If it’s non-essential and fully documented, it’s fair game.

Reject or Discount Heavily:

• Family salaries for people you’ll need to replace
• "One-time" costs that happen yearly
• Marketing or sales expenses needed to grow
• Personal expenses that blend into ops (phones, meals, travel)
• Owner salary add-backs when you’re taking their job

Rule of Thumb:
If cutting it would break the business — it’s not an add-back.
It’s your new bill.

The Acquidex Rule: Rebuild It. Don’t Believe It.

Here’s how smart buyers avoid this trap:

• Rebuild your P&L from scratch
• Remove sketchy add-backs
• Re-add what you’ll actually need to spend
• Calculate your SDE, not theirs
• Run your payback, not their pitch

This is exactly what Acquidex does:
You plug in a listing → It questions the math → You see the real numbers.

Because in small business acquisition, the only thing worse than missing a good deal...
is overpaying for a bad one.

Disclaimer

Final Takeaways: Beat the Add-Back Game Before It Beats You

• Add-backs aren’t evil — but they aren’t neutral either
• The broker’s SDE is a pitch, not a fact
• Question every adjustment
• Build your own version of reality
• If it smells inflated — it probably is
• Don’t pay seller price for work you’ll still have to do

Ready to Vet Your Deal?

Acquidex tears apart inflated SDEs, rebuilds real profit, and tells you what the deal is actually worth — no spreadsheet BS.

Because once you sign the deal, there’s no Ctrl+Z.
Only payroll. Taxes. And consequences.

FAQ

What is an add-back in SDE?

An add-back is an expense a seller claims you won’t need to pay after taking over the business. Brokers use them to make SDE — and valuations — look bigger than reality.

How do brokers inflate SDE?

They pad SDE with owner perks, family salaries, “one-time” costs, or underreported expenses to make earnings appear higher.

Are add-backs always bad?

No. Some are legitimate (e.g., personal car lease, one-time legal fees), but many hide real operating costs.

How can buyers protect themselves?

Rebuild the P&L, verify every add-back, and calculate your own SDE instead of trusting the broker’s.

How do inflated add-backs affect valuation?

Inflated SDE means inflated multiples. You end up paying more for less — often turning a good job into a bad investment.