When it’s time to sell your business, your financial statements tell a story. But if you’re still running meals, cars, and wellness retreats through the P&L, that story might need a little editing. That’s where add-backs come in.
Add-backs are a crucial part of the business valuation process, especially in the lower middle market. For business owners, understanding how they work can make a seven-figure difference when it comes time to sell. We spoke with Viking M&A experts Andrew Rehwinkel (Dallas), Kyle Kerrigan (Nashville), and Mike Donahue (Charlotte) to break it all down.
What Are Add-Backs? (and Why They Matter)
Add-backs are expenses a business incurs, but a new owner likely wouldn’t. Think personal perks, one-time costs, or services the business won’t need going forward. When we identify valid add-backs, we remove them from the expense column and add them back to the company’s cash flow.
Why it matters: Most businesses are valued based on a multiple of cash flow (usually EBITDA). Generally speaking, the higher your cash flow, the higher your valuation. With that in mind, Andrew Rehwinkel points out, “Depending on the multiple associated with your operation, each dollar of add-backs could end up being five, maybe ten dollars of value added to the business.”
Two Main Categories of Add-Backs
Standard Add-Backs
Mike Donahue, former CPA and corporate CFO, explains, “EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Those last four letters — I, T, D, and A — are the standard starting point for add-backs. Most buyers are accustomed to seeing those added back into cash flow.”
These are commonly accepted and usually undisputed:
- Interest
- Taxes
- Depreciation
- Amortization
Discretionary Add-Backs
Beyond those standard entries, the add-back process often involves a deep dive into the general ledger to find and justify other expenses that shouldn’t count against the company’s earnings. Note that these are up for discussion and may or may not be accepted by a buyer or bank.
The following may be valid, but they’re subject to scrutiny:
- Owner perks and benefits
- Non-recurring expenses
- Inactive partners on payroll
- Rent adjustments on owner-controlled real estate
Common Add-Back Examples (and What to Watch For)
Owner Perks
- Personal vehicles, wellness expenses, meals, travel
- Life insurance or premium health plans for owners and spouses
- Note: If it’s used by the team (like leased vehicles for the executives), be careful. Disrupting team perks post-sale can be a problem.
Owner/Partner Payroll
- If the owner receives an above-market salary, you may be able to add back the overage. (And if the buyer is an individual, you may be able to add back all owner compensation.)
- If a silent partner is on the payroll and doesn’t work in the business, that’s typically an add-back.
Non-Recurring or One-Time Expenses
- Defense costs from a one-off lawsuit
- ERP/software implementation fees
- Severance or consultant retainers
Rent Adjustments
- When owners pay below-market rent to themselves (e.g., they own the real estate via a separate entity), expect a “negative add-back” to normalize the expense.
Professional Services
- Occasional consultants or advisors hired for specific, short-term projects often qualify as add-backs if they’re not essential to the ongoing business.
Interest
- Standard operating interest gets added back unless it’s tied to inventory financing (like floor planning for dealerships), which is integral to operations.
Depreciation
- Depreciation gets added back unless the underlying assets are essential to maintaining the company’s operations. For example, if $100,000 in depreciation includes $25,000 for equipment that’s vital to sustaining the business, then only $75,000 should be added back. (It depends on whether that investment is maintaining the cash flow or not.)
Supplemental Retirement Contributions
- You can add back contributions to tax-advantaged savings plans like a supplemental pension plan. Donahue says these types of contributions are a commonly overlooked opportunity — and are much easier to justify as an add-back than meals and travel!
NOT Add-Backs:
- Salaries for employees you’ll need to keep
- Overhead required to run the business
It Depends…:
- Charitable contributions: This primarily depends on whether your financial analysis begins with the owner’s tax returns or the income statement. Traditional cash flow analysis begins with the net income listed on your tax return. In this case, if the charitable contributions were taken as a personal deduction, then they aren’t reflected in the business’s expenses. As such, they can’t be added back. (You can’t add back what you didn’t take out.)
However, if your cash flow analysis starts with the income statement, and if the charitable contributions are listed there as a business expense that reduces cash flow, then you might be able to add them back.
At that point, like any potential add-back, you must confirm that the donation does not support the business in any way (for example, when a donation benefits a key customer’s personal cause). Bottom line: you can’t add something back that wasn’t taken out in the first place, and you can’t add back an expense that supports the business.
Clean Books vs. Add-Backs (and Why It’s Better to Start Early)
Cleaning up your financials early in the process can reduce the need for aggressive add-backs later. A big area of “cleanup” typically centers around keeping personal and business expenses separate, particularly in the years leading into a sale.
Rehwinkel acknowledges how easy it is for financials to get mixed up in the first place, especially for growing businesses. “As your business grows, typically, it starts as an LLC tied to your personal bank account and tax returns. When you’re doing that, there’s an intermingling of credit cards, expenses, bank accounts. So often, some personal expenses get lost in the fray. Or, quite frankly, you’re just trying to run down the least amount of profit or net operating income as possible. Many people have been there.”
He continues, “But now it’s not $100K in revenue, maybe it’s a million, maybe it’s several million. You’ve hired more people, the business is more complex. But you forgot to clean up some of those expenses.”
That’s why Rehwinkel emphasizes starting early: “Preparing for a sale isn’t just a six-month sprint. It should be a multi-year effort. Clean up the expenses in your P&L. Make sure the structure of your entities and the costs of things — whether personal or business-related — have a clearer wall between them.
Kerrigan explains, “If you’re not running it through the business, there’s no issue. But if it’s an add-back, it becomes part of the negotiation — and you may or may not win that negotiation.” In other words, cleaner books reduce debate, reduce friction with buyers and lenders, and allow you to present a stronger, more credible financial picture from the outset.
From the buy-side, Donahue warns that not having clean books is “a yellow flag.” He explains, “If someone’s stretching the rules with the IRS, the buyer starts asking, ‘Where else are they cutting corners?’ That triggers deeper due diligence and can spook buyers.”
Strategy and Scrutiny (and the Role of Your Advisor)
Add-backs are powerful, but they’re not magic. As Rehwinkel says, “Every add-back must be supportable. We go through the general ledger and build a supportable case for each adjustment.”
Buyers and lenders won’t just take your word for it. That’s why Viking works with multiple banks and provides documentation for each add-back. “Every bank is different,” Rehwinkel explains. “Some only allow a fixed list. Others are more flexible if you can show the logic and back it up.”
Kerrigan adds, “Add-backs are negotiating points, not guarantees. That’s why having someone in your corner who’s done this before really matters.”
Donahue agrees. “If the total add-backs are significant, we may recommend reclassifying those expenses as distributions (which doesn’t affect cash flow), paying tax on them, and going to market with stronger numbers. That demonstrates to a buyer that your cash flow is real — because you’re willing to pay taxes on it.”
“Remember, you want to increase your net income going into a sale,” says Rehwinkel. “That may mean higher taxes in the short term, but it can mean millions more in valuation.”
Final Thoughts
Add-backs can dramatically influence your business valuation, but only if they’re valid, justifiable, and strategically handled. They aren’t shortcuts or tricks. They’re tools. And like any tool, they work best in the hands of someone who knows how to use them.
A skilled advisor can help you spot the right opportunities, defend them with the right documentation, and present a stronger, more credible case to buyers and banks alike. The add backs you claim need to pass scrutiny and make sense to other parties involved in a transaction.
That’s how you maximize your value, protect your credibility, and walk away from your business on the best possible terms.
