Glossary
Add-back
An expense the seller ran through the business that's added back to net profit to reflect the true cash flow available to a new owner.
What it is
An add-back is an expense in the seller's P&L that, in the buyer's pro-forma, will not recur (or will recur at a different amount). Adding it back to net profit produces a normalized SDE or EBITDA that better reflects what a new owner will realize.
Three categories of add-backs
| Category | Examples | Lender view |
|---|---|---|
| Almost always accepted | Owner salary + payroll taxes; owner health insurance; owner retirement contributions; owner auto; owner travel that is clearly personal; interest expense; depreciation; one-time legal fees (e.g. settled lawsuit) | Accepted — clearly discretionary, non-recurring, or non-cash. |
| Sometimes accepted | One-time relocation; one-time website rebuild; family member salary only if the role will be eliminated post-close; depreciation on a clearly obsolete asset; one-time regulatory compliance fees | Conditional — depends on documentation and whether the expense is truly one-time. |
| Rarely accepted | Ongoing capex required to maintain revenue (vehicles, kitchen equipment, laundry machines); rent paid to a related party below market; salary of family member doing real work; "one-time" expenses that appear every year under different names; marketing that drives ongoing revenue | Rejected — these are real operating expenses that the buyer will continue to incur. |
How to challenge an add-back
- Ask for the source. Every add-back should trace to a specific line in the tax return or P&L. If it can't, it's invented.
- Ask for the prior three years. A "one-time" expense that appears in multiple years isn't one-time.
- Ask whether removing it would reduce revenue. If the seller added back "marketing" but the marketing drives ongoing customer acquisition, that's not an add-back.
- Ask whether the buyer will bear it personally. If the seller added back their own health insurance and the buyer will also need health insurance, the buyer's cash benefit is overstated.
- Run a lender test. SBA 7(a) lenders reconstruct SDE their own way. If the lender won't accept an add-back, it doesn't matter whether the seller did.
The recurring "one-time" expense pattern
A common add-back abuse: a "one-time" expense that appears every year under a different label. For example: "one-time software upgrade" in 2022, "one-time system migration" in 2023, "one-time platform migration" in 2024. A QoE review catches this by asking for the prior three years of general-ledger detail and scanning for the pattern.
New York-specific notes
- NYS labor costs (workers' comp, statutory disability, PFL, UI) are real operating expenses — not add-backs.
- NYC taxes (Business Corporation Tax, UBT, CRT) are real operating expenses — not add-backs.
- Sales tax remittance is a liability settlement — not an expense, not an add-back.
- NYS license renewal fees are real operating expenses — not add-backs.
Where to go next
- SDE vs EBITDA guide + calculator — full SDE reconstruction with add-backs
- SDE definition
- QoE definition
- Due diligence checklist
Looking at a target's add-backs?
A free 20-minute call with Jason can flag which add-backs a SBA lender will accept and which they'll challenge — before you commit to a price based on an inflated SDE.
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