An add-back is an expense that is added back to the profits of a business (most often earnings before interest, taxes, depreciation, and amortization, or EBITDA), to show the profitability and value when you take out expenses that will “go away.”Add backs play a critical role in adjusting the bottom line when analyzing the valuation of a company.  A “legitimate” add back is an expense that is for owner benefit that would not continue after a transaction with a new buyer.Some examples of legitimate add-backs are:Legal FeesFacility updatingPersonal expensesAdjustments to the owner’s compensationOne time instances where it would add back to EBIDTA:One time fees: litigation that has now been settledSomething you wouldn’t close after a transactionThings that we would not consider an add-back:Owners salary if you are going to continue on after selling your business - adjusting compensation to the market priceBad debt expense. For example, you’ve done a lot of work for a client and they didn’t pay you so you write it off, this expense is not considered an add back. Rationalizing Staff - Let’s say you paid someone for the year and it was a bad hire and you fired them, it would not be considered an add-back as it impacted your profit.“I rented a space that is too big for my business.” This is an expense you can adjust, but you can’t say in the year “we should have had a smaller office so we should add this back.”If you’re acquiring a company read our add backs blog post.Think about add-backs to EDIBTA are for owner benefit that will not be there going forward, or one time expenses that hit your P&L that will not in the coming years. If you have questions about expenses you need to take a closer look at, we can help. Reach out at: [email protected]
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