Add-back
An adjustment to reported earnings for an expense that a buyer will not incur, such as owner compensation above market or a one-time legal cost. Add-backs increase adjusted EBITDA and must be documented.
In a sale
What it changes in a sale
Every add-back is a claim that a cost will not follow the business to its new owner. The buyer's accountants test each one in the Quality of Earnings review, and an add-back without a contract, invoice, or payroll record behind it is the first to go. One that fails can cast doubt on the rest of the list, so the strongest list is built and documented before any buyer sees it.
Where it comes up
Read it in context
In the articles
- The 4.5x problemMost founders assume their business is worth the trade multiple. That assumption costs millions.
- Same business, two outcomesTwo identical businesses, one prepared and one not, sell for very different prices.
- An add-back is an argumentAdjusted EBITDA is built, not declared, and the buyer's accountants will rebuild it.
- When a buyer calls firstAn inbound offer is information, not a decision.
- Diligence yourself firstEvery business has issues. The question is who finds them.
- Work backward from the dateThe exit date is the one input everything else is solved for.
In The FNDRS Playbook
- PB11 The add-back defensibility matrixAn add-back is an argument. Some arguments win.
- PB12 The diligence flag triageEvery business has issues. Sort them by what they cost and whether they can be fixed.
- PB24 The inbound offer testAn unsolicited offer is information. Treat it that way.
- PB20 The exit timing windowThe exit date is the one input everything else is solved for.
See the terms with your own numbers
The Go-To-Market Analysis (GTMA) builds the file a buyer would build on your business, before a buyer does.