How to Check a Seller’s Add-Backs, Line by Line

The add-back schedule is where the asking price comes from.

A seller starts with net income, which is a small number, and adds things back to it: their own salary, personal expenses that ran through the business, one-time costs, depreciation and amortization, interest on debt you are not assuming. The result is seller’s discretionary earnings, and the price is a multiple of it.

That multiple is why the schedule is the first thing to check. At 2.5x, every dollar of add-back you accept without checking adds two and a half dollars to what you pay. A $20,000 line you take at face value is $50,000 of purchase price.

One question, asked of every line

Will this cost exist for me after closing?

That is the whole test. Everything below is a way of answering it honestly for each line on the schedule.

The ones that hold up

Expenses that belong to the seller personally and leave with them. The country club membership. The spouse on payroll who does no work. The family vacation booked as a business trip. A legal bill for the owner’s divorce. These are real add-backs, and finding them tells you something separate, which is that this owner runs personal spending through the company. Hold that thought for later.

The ones where the cost moves rather than disappears

This is the category that does the damage.

The owner’s salary is added back because you will not be paying them. Then you have to pay someone to do their work, including yourself. If the owner works 50 hours a week running operations and you plan to keep your job, the add-back is not $95,000 of profit. It is $95,000 of profit minus whatever a manager costs in that market.

Same pattern, different shapes. A family member working at below-market pay. Rent paid to the owner’s own building that sits under market. A building owned free and clear with no rent charged at all. The function is still there after closing, and the cost arrives with it.

Ask for each one: if this person or this arrangement goes away, what do I write a check for?

The ones that are not one-time

A one-time expense is one that happened once.

Pull three years of the schedule, not one. A legal settlement in 2024 is one-time. Legal fees in 2022, 2023 and 2024, each described as unusual, are a pattern. Equipment repair is the same. So is the website rebuild that happens every few years, and the consultant hired each time the same problem comes back.

Also look at what was deferred rather than spent. A roof that has needed replacing for three years kept those costs out of the P&L. That is not an add-back, and it is coming.

Depreciation and capital spending

Depreciation gets added back because it is not cash. That is accurate and it is also incomplete.

Trucks wear out. Equipment fails. Add back the depreciation, then ask what the actual replacement schedule looks like over your first three years, and subtract that. A fleet of aging vehicles turns an earnings number into a financing problem on a timeline you did not set.

What is not on the schedule

An add-back schedule shows you costs that exist and are being removed. It tells you nothing about costs that never appeared.

A set of 1099 contractors who work like employees means no payroll taxes, no workers comp, and no benefits anywhere in the financials. None of it is in the add-backs, because none of it was ever an expense. Reclassification brings all three at once.

Advertising that was turned off before the business went to market leaves the same kind of hole. The spend is gone from recent statements and the customers it produced are still counted.

An owner who does the work of two people and takes one salary produces the same effect. The missing cost makes the earnings look larger, and no line on the schedule will point at it.

How to check the lines you do have

Ask for documentation per add-back, not a summary. An invoice, a canceled check, a statement. A number with no support behind it is a number someone typed.

Tie the schedule to the general ledger detail, then tie the ledger to the bank. The P&L and the tax return are often prepared by the same person, which makes them one source rather than two. Bank statements come from somewhere else.

Run the three-year test on anything labeled one-time or unusual.

Ask who built the schedule. A seller, a broker, and an accountant each produce a different document, and knowing which one you are holding tells you how much of it is argument.

If the deal is SBA financed and the purchase price is $3 million or more, the lender orders a quality of earnings report under the rules effective October 1. Below that threshold, no one is doing this work unless you do it.

What to do with what you find

Rejected add-backs do one of three things. They lower the earnings number, which lowers what the business is worth to you at the same multiple. They change the structure, with the disputed amount handled through a seller note or an earnout tied to performance. Or they explain a price you were already comfortable with, which happens too.

A seller who walks through each line and shows you the support is doing what a prepared seller does. A seller who treats the question as an insult is telling you how the rest of diligence will go.