What’s an Add-Back (Really)?

TL;DR

An add-back is any expense a seller claims you won’t have once you take over the business. On paper, they boost SDE (Seller’s Discretionary Earnings) and make the deal look juicier. In reality, many are inflated, misleading, or outright fiction. Learn the five most abused categories, how they distort valuations, and how to rebuild a P&L to see the real numbers.

Understanding Add-Backs

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.x

Definition: Add-backs adjust net income to reflect the owner’s benefit. In theory, they strip out expenses you won’t have.

Reality: They’re also the #1 way brokers inflate valuations.

• Examples in Theory:

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

• Examples in Reality:

  • Necessary salaries disguised as “discretionary”
  • Marketing spend you’ll need to restart
  • “One-time” repairs that happen every year

The 5 Most Abused Add-Back Categories

If there’s a broker playbook for inflating valuations, this is page one.

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 work for free or clone yourself, you’ll need a replacement.
• Example: $75K owner salary added back, but you’ll hire a GM at $90K — not income, just payroll.

2. Family on Payroll

• The Move: Remove salaries for spouse, kids, or cousin Jimmy who “doesn’t really do anything.”
• The Problem: They probably do something you’ll have to replace.
• Example: $30K for admin work by seller’s spouse — you’ll need a bookkeeper or VA.

3. Personal Perks Disguised as Business Expenses

• The Move: Add back meals, travel, vehicles, phones — anything that smells personal.
• The Problem: Some of it is real business overhead.
• Example: $12K in travel “add-backs” includes supplier visits and a trade show — ops-critical.

4. Underreported Marketing Spend

• The Move: Call marketing “discretionary” or “paused” and add it back.
• The Problem: Leads don’t come from nowhere.
• Example: $15K add-back for “paused ads during COVID,” but now you’ll spend $20K/month to restart.

5. “One-Time” or “Non-Recurring” Expenses

• The Move: Add back lawsuits, repairs, upgrades — anything labeled one-off.
• The Problem: Many “one-time” costs happen… every time.
• Example: $8K “non-recurring” IT fixes — third year in a row.

How Add-Backs Inflate the Multiple

Here’s the math trick:

1. Inflate SDE with add-backs
2. Apply a multiple
3. Market it as a “deal”

Example:

• Claimed SDE: $300,000
• Add-backs: $75K owner salary, $20K marketing, $15K “non-recurring” legal fees
• Asking Price: $900,000 → Claimed Multiple: 3x
• Reality: Real SDE ≈ $190,000 → Real Multiple: 4.74x

What to Accept — and What to Reject

Usually Acceptable:

• Personal car lease not used for 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

Reject or Discount Heavily:

• Family salaries for people you’ll need to replace
• “One-time” costs that recur
• Marketing needed to sustain revenue
• Blended personal/ops expenses
• Owner salary add-backs when you’re taking their job

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

Smart buyers:

1. Rebuild the P&L from scratch
2. Remove sketchy add-backs
3. Re-add what you’ll actually need to spend
4. Calculate your own SDE
5. Run your own payback math

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

Final Takeaways

• Add-backs aren’t evil, but they’re not 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

Start smarter — upload your deal to Acquidex and get the breakdown before you sign.

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