Key Insight
In a small-business sale, one number sets the asking price, anchors the negotiation, and sizes the loan: adjusted EBITDA — or its Main Street equivalent, SDE (seller's discretionary earnings). It is also the one number in the deal that cannot be proven, because it is not a measurement but an argument. Reported earnings are the starting point; from there the seller "adds back" the costs claimed not to follow the business to a new owner. Because a business sells for a multiple of that number, every dollar reclassified from expense to add-back is magnified — at a 3x multiple, a $100,000 add-back is a $300,000 swing on price. The drift is visible in the data: roughly 90% of private deals now close with a post-close price adjustment, up from about half a decade ago (SRS Acquiom). The number moves, and it moves in one direction.
A word on scope
The plays described below are common patterns and standard quality-of-earnings practice, not any specific deal. The post-close price-adjustment figure is drawn from SRS Acquiom deal-terms data. Everything else is a description of how add-back schedules are constructed and how the underlying claims can be tested against records that already exist.
What one number actually sets the price?
Adjusted EBITDA — or SDE on smaller Main Street deals. Not revenue, and not reported net profit. It sets the asking price, anchors the negotiation, and sizes the loan. And it is the one number in the entire transaction that no one can prove, because adjusted EBITDA is not a measurement. It is an argument.
The argument starts with what the business actually earned and then "adds back" the costs the seller says will not follow the business to a new owner: the owner's salary, family members on the payroll, expenses labeled one-time, personal spending run through the company. Every add-back lifts the number. And the party constructing the argument is the party selling the business.
Why does a single add-back move the price by more than its face value?
Because a business does not sell for adjusted EBITDA — it sells for a multiple of it. So a dollar shifted from "expense" to "add-back" is not worth a dollar. At a 3x multiple, it is worth three. A $100,000 add-back is a $300,000 swing on the purchase price. The add-back schedule is the single highest-leverage page in the deal, and it is the one most often read without the suspicion it warrants.
The drift has a number attached. Roughly 90% of private deals now close with a post-close price adjustment; a decade ago it was about half. The adjustment moves — and it tends to move one way.
Which add-backs are defensible, and which are not?
The distinction that matters is whether the cost genuinely leaves when the seller leaves. The table below runs the common plays through that test — from the defensible to the aggressive.
| Add-back | The seller's claim | When it is real |
|---|
| Owner compensation | A $120k salary won't follow the business | When a market-rate replacement operator costs the same. A $50k manager penciled against a job that needs a $90k operator leaves a $40k phantom gap — a number to negotiate, not accept |
| Family on the payroll | A spouse's "admin" pay leaves with the seller | When the work itself leaves. If the books still need keeping, the cost was renamed, not removed |
| Related-party rent | A below-market rate from an owner-landlord transfers | It does not. The buyer pays market, or buys the building at market. The bargain walks out with the seller |
| "One-time" expenses | A cost was non-recurring | When it does not also sit in the two prior years. One-time, three years running, is an operating cost in a costume |
| Deferred maintenance / capex | A lean, profitable trailing year reflects real margin | When upkeep was actually performed. Skipped maintenance is a repair bill the buyer inherits in year one, not margin |
| Rent, utilities, insurance | (the most aggressive) costs the business cannot operate without are added back | Never. Put these back where they belong and a "$400k SDE" can collapse to a fraction of it |
Why are the revenue adjustments the most dangerous?
Because they dress up the top line, where a single distortion cascades through every downstream number. A bulk order from one customer presented as the new run-rate. A price increase booked the month before going to market, on margin that has never been tested. Channel-stuffing the final quarter — pulling next year's sales into this year's trailing twelve. A marquee customer still on the books who has quietly already given notice. Each one makes earnings look durable. None of it is.
Can any of this actually be checked?
Almost all of it — which is the part that should give a buyer confidence rather than dread. A claim about a cost leaves a trail, and the trail is already in the records. Pull three years instead of one, and the recurring "one-time" cannot hide from its own pattern. Re-price the owner, the rent, and the family wages at what they would cost in the open market, and the phantom earnings evaporate on their own. Tie the income statement to the bank statements — the deposits hold no opinion about adjusted EBITDA; they record what happened. And run every line through one question: does this cost leave when the seller leaves, or does it follow the buyer through the door?
It is a few days of unglamorous work against documents that already exist. It often does not happen — not because it is hard, but because by the time anyone is motivated to do it, the buyer has already told people they are going to own the place.
Most add-backs are honest. Owner-run businesses genuinely carry owner-specific costs, and stripping them out is legitimate work. But "most" carries real weight in that sentence, and the gap between the honest number and the optimistic one is where deals are quietly overpaid by six figures. One question reads the same from every seat at the table — buyer, seller, broker, lender: an add-back is a claim about what transfers. The number that survives that question is the number the business was always worth. Everything above it is someone's best case, waiting to be priced.
Sources & method
- SRS Acquiom deal-terms data — share of private deals closing with a post-close price adjustment (~90% now, versus about half a decade ago).
- Standard quality-of-earnings practice — the add-back categories and tests described are common diligence patterns, not any specific transaction.
