Add-backs (also called adjustments or normalizing adjustments) are expenses on a business's income statement that are added back to net income when calculating SDE or Adjusted EBITDA because they will not recur under a new owner or do not represent ongoing operating costs. Legitimate add-backs include: the current owner's compensation (salary, dividends, profit distributions), personal benefits run through the company (vehicles, health insurance, travel, phone), non-cash charges (depreciation, amortization), interest expense on existing debt being retired at closing, and one-time non-recurring expenses (lawsuit settlement, storm damage repair, costs of a discontinued division). Questionable add-backs — those a buyer's advisor should challenge — include: recurring expenses rebranded as one-time, family member salaries for services that are actually being performed, accelerated owner compensation in the year before sale to maximize SDE, and capital expenditures misclassified as operating expenses. The due diligence process should include a line-by-line review of every add-back claimed in the seller's recast financials. Improperly accepted add-backs are the most common source of buyer overpayment in Canadian SMB transactions.
The seller of a Delta printing company claims $48,000 in add-backs: $24,000 owner's daughter salary (she manages the social media part-time), $12,000 convention travel, $7,000 personal gym membership billed to company, and $5,000 Christmas gifts to customers. The buyer accepts the travel and gym as legitimate add-backs ($19,000) but requires market-rate staffing for the daughter's role ($8,000 replacement cost), resulting in net add-back of $27,000 rather than $48,000.
Ali Sedighi uses this concept on every valuation engagement — cross-checking seller claims against third-party financial data and Canadian comparable sales before advising any buyer on price.