Add-backs
Definition
An add-back is a cost in the accounts that a buyer accepts is not part of running the business, added back to net profit to reach SDE. Owner salary, one-off legal fees and personal spending are the common ones. Any add-back you cannot evidence gets struck out, and the price falls with it.
An add-back is a cost sitting in a business's accounts that a buyer agrees does not belong in its ongoing running costs, and which is therefore added back to net profit to arrive at seller's discretionary earnings.
What add-backs mean at this size
At a $50,000–$150,000 close, add-backs are usually the difference between a business that looks marginal and one that looks worth acquiring. A solo founder's accounts are rarely a clean picture of operating reality, because there was never a reason to keep them that way. The work before listing is separating what the business needs from what the owner chose.
Where it bites
Buyers at this level go line by line. The test they apply is simple: will the new owner still have to pay this?
| Cost in the accounts | Buyer's likely view |
|---|---|
| Owner salary of $12,000 | Accepted in full |
| One-off trademark filing, $900 | Accepted |
| Accountant's annual fee, $600 | Challenged, the buyer needs one too |
| Design tool subscription, $480 | Challenged if the product still uses it |
| Founder's laptop, $2,000 | Often split, since a working machine is real |
Worked example
A seller presents SDE of $44,000, built on $35,000 of net profit and $9,000 of add-backs. Diligence accepts $5,400 of them and rejects the rest: a conference the founder would have attended regardless, and two subscriptions still wired into the product.
SDE settles at $40,400. On the market convention of 3× trailing annual profit, the asking price moves from $132,000 to $121,200. Three rejected line items, worth $3,600 between them, cost $10,800 of price.
Why it matters when you exit
Every dollar of add-back is a dollar multiplied, which cuts both directions. Claim aggressively and you invite a buyer to reprice the deal late, when your position is weakest. Claim what you can evidence, name each item plainly in your figures, and keep the receipts in the same folder as the accounts.
Related: sde, total-owner-benefit, due-diligence, profit-multiple
See what a business at this level is listed at.
Everything on sale between $50,000 and $150,000, on the same fields.