EBITDA Owner Add-Backs – A Cautionary Tale

When meeting with sellers to discuss exit planning, some questions I often encounter are “What’s the big deal with add-backs?” or “My accountant says we can add back certain items to increase the business’s valuation (its EBITDA)… is that correct?”

Approach the notion of owner add-backs with caution. Sometimes, they can be more detrimental than beneficial.

When preparing for a sale, some business owners tend to inflate EBITDA by adding back personal expenses, such as:

• vehicles

• family salaries

• family-business travel

• “one-time” costs

While some adjustments are indeed valid, relying on add-backs too heavily can raise serious concerns.

Here’s why excessive or aggressive add-backs can undermine your sale:

• Buyer Skepticism: If your profitability hinges on numerous adjustments, buyers are likely to question the credibility of your financials.

• Diminished Buyer Confidence: An abundance of add-backs raises red flags about the professionalism of your business and its ability to operate independently of the owner. (Not a good look if your business is in an ultra-competitive industry.)

• Valuation Discounts from Lenders and Investors: In SBA-financed deals, only EBITDA holds significant value. Inflated figures won’t withstand due diligence scrutiny.

• Complicated Deal Structures: The more uncertain your actual cash flow becomes, the more you risk facing earnouts, holdbacks, or lower upfront payments.

Do not find yourself relying on excessive personal adjustments to demonstrate your business’s worth.

Key Tips:

Clean books = strong position.
Aggressive add-backs = buyer skepticism.