Add-Backs
Definition
Expenses added back to profit to show what a business really earns for a new owner, such as one-time costs, owner perks or above-market owner salary. They are used to calculate SDE and adjusted EBITDA.
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Formula
Adjusted Profit = Net Income + Add-Backs (one-time, non-operating or owner-discretionary costs)When you sell a business, buyers pay a multiple of earnings, so every legitimate add-back can be worth several times its value in sale price. That is why clean, well-documented books matter years before you plan to sell.
Buyers and their accountants will challenge every add-back, so each one needs evidence. Watch for: add-backs that are really recurring costs, like a "one-time" consultant you hire every year, because they get thrown out in diligence.
Example
Net income is $210,000. A one-time $35,000 warehouse move and $15,000 of personal car costs run through the business are added back, giving $260,000 of adjusted profit.