The add-backs that kill deals.

Add-backs can raise your EBITDA, or blow up your credibility. The ones that survive a buyer's accountants are specific, documented, and truly non-recurring. The ones that do not invite a re-trade that costs you far more than the add-back was ever worth. Here is the line between the two.

An add-back adjusts reported earnings to show what the business really earns for a new owner: your above-market salary, a one-time legal bill, the personal truck run through the company. Done right, it is the honest bridge from a tax return built to minimize taxes to the profit a buyer is actually purchasing. Done wrong, it is the fastest way to lose a buyer's trust, and once they stop trusting one number, they discount all of them.

The three-part test

Every add-back we accept has to pass three gates. One, a real rationale: "the owner says so" is not a reason. Two, it is quantifiable with support: no source document, no add-back. Three, it is defensible: if we would hedge explaining it to a skeptical buyer, it does not clear. A useful gut check is the flinch test, can the owner explain it to a buyer's accountant without flinching? If not, leave it out.

The ones that hold

Owner compensation adjusted to what a market-rate manager would earn (with a comp study behind it). Genuinely one-time events, a lawsuit, a flood, a system migration, that will not recur for the next owner. Clearly personal costs run through the business, itemized, not estimated. Related-party rent trued to a market rate, with the comp to prove it. These hold up because each one is specific and documented.

The ones that get rejected

Recurring costs dressed up as "one-time", if the same "one-time" item shows up three years running, a buyer will catch it. Round-number personal estimates ("about $30K of personal stuff") with no itemization. "Marketing investment" or "consulting" that is really just the cost of running the business. Normal, recurring capital expenditure. These do not just get struck; they make a buyer wonder what else you stretched.

Eight to ten, not twenty-five

The instinct is to add back everything and inflate the number. Resist it. A $500K add-back schedule on $800K of reported EBITDA is itself a red flag, it tells a buyer the "real" business barely makes money without creative accounting. A tight schedule of eight to ten defensible add-backs, each with a document, is worth more than a padded list of twenty-five, because the buyer believes it. In diligence, credibility compounds: the cleaner your schedule, the less they dig everywhere else.

The move is to build the add-back schedule the way a buyer's accountant would test it, before you ever go to market. That is exactly what a sell-side Quality of Earnings does.