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Purpose of EBITDA Addbacks

• Addbacks adjust EBITDA to reflect the true earning potential of a business.
• They remove non-recurring, personal, or discretionary expenses not related to core operations.
• Proper documentation and justification are critical to increase the perceived value and ensure buyer trust.
• A skilled accountant or M&A advisor is essential for accurate presentation.

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1. Excess Owner Salaries and Bonuses

What it is:
When business owners pay themselves salaries or bonuses that differ significantly from what a typical third-party manager would earn.

Why it matters:
These payments are discretionary and not reflective of normal operating expenses. Buyers want to know what it would cost to replace the owner with a professional manager.

Example:
An owner pays themselves $300,000/year, but a market-rate manager would earn $150,000. The $150,000 difference is added back to EBITDA.

Buyer consideration:
Buyers typically deduct a normalized management salary from EBITDA, so it's important to justify what that market-level salary should be.

2. Revenue or Expenses Generated by Redundant Assets

What it is:
Assets owned by the business that do not contribute to its core operations.

Why it matters:
These assets are not necessary for running the business and likely won’t be included in the sale, so any associated expenses are not considered ongoing business costs.

Example:
A company-owned lake house used for employee retreats. The associated utilities, taxes, and upkeep would be added back.

Buyer consideration:
Buyers will not assume the cost of maintaining assets they do not acquire or need.

3. Non-Arm’s-Length Revenue or Expenses

What it is:
Transactions between the business and related parties (e.g., owners, family members, affiliated companies) that are not conducted at fair market rates.

Why it matters:
These can inflate or deflate reported profits. Adjusting to market rates gives a clearer picture of real performance.

Example:
The company buys raw materials from an affiliated business at inflated prices. The cost difference compared to market rates would be added back.

Buyer consideration:
Buyers want to see normalized operating costs to assess the real profitability.

4. Other One-Time Professional Fees

What it is:
Professional fees incurred for non-recurring situations.

Why it matters:
These expenses are not expected to continue post-sale and distort the recurring profitability of the business.

Example:
Legal fees for resolving a one-time regulatory issue, or accounting fees for restructuring.

Buyer consideration:
Buyers seek to eliminate non-operational, one-off costs from the earnings base.

5. Lawsuits, Arbitrations, Insurance Claim Recoveries, and One-Time Disputes

What it is:
Unusual legal or insurance events that don’t reflect normal business activity.

Why it matters:
They’re infrequent and unlikely to recur. Settlement costs are added back; large recoveries may be deducted.

Example:
A $200,000 legal settlement is added back; a $100,000 insurance recovery is deducted from EBITDA.

Buyer consideration:
They want to see financials that reflect what future operations will likely look like.

6. Rent of Facilities at Prices Above or Below Fair Market Value

What it is:
Rent paid to entities owned by shareholders or affiliates, which may be above or below market value.

Why it matters:
This distorts real expenses. EBITDA should be normalized to reflect market rent.

Example:
If you're paying your own holding company $20,000/month for space that would rent for $10,000/month on the open market, the $10,000 difference is added back.

Buyer consideration:
Buyers prefer EBITDA adjusted to reflect standard operating costs.

7. Repairs and Maintenance

What it is:
Capital expenditures misclassified as repairs, often to reduce taxable income.

Why it matters:
True capital expenses should not be recurring operating expenses. Reclassifying them increases historical EBITDA.

Example:
Replacing an HVAC system categorized as a “repair” instead of a capital investment. That expense is added back.

Buyer consideration:
They want to ensure only true operational expenses are included in EBITDA.

8. Owner’s Personal Expenses

What it is:
Expenses run through the business that are for personal benefit and not related to operations.

Why it matters:
These are discretionary and not needed to operate the business.

Example:
Cell phone for a family member, personal travel, or gym memberships. If they don’t benefit the business, they’re added back.

Buyer consideration:
Buyers will scrutinize this category carefully; well-documented personal expenses help validate the addback.

9. Severance Pay to Employees

What it is:
Large one-time severance payments.

Why it matters:
If not a regular occurrence, they distort the normal expense profile of the company.

Example:
$100,000 paid to a departing executive in a single year.

Buyer consideration:
As long as it’s truly a one-time event and not part of an ongoing trend, buyers accept this as a valid addback.

10. Charitable Donations

What it is:
Contributions made by the owner for personal or corporate goodwill reasons.

Why it matters:
If these are not integral to the business (e.g., not expected by customers or community), they can be removed from ongoing expenses.

Example:
Annual $20,000 sponsorship of a local event unrelated to the company’s success.

Buyer consideration:
Buyers will consider whether ending donations could harm customer perception or community standing.

11. Other Income and Expenses

What it is:
Miscellaneous or "catch-all" category in financials often containing one-off or miscoded items.

Why it matters:
Needs review to ensure all non-recurring items are added back and not hiding operational expenses.

Example:
Holiday party costs, one-time bonuses, or unique marketing events placed here.

Buyer consideration:
They’ll review this category closely. Transparency and detail are key to making your case.