Glossary
Add-back
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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. |
What an SBA lender is actually allowed to adjust
Buyers argue about add-backs in the abstract when, for an SBA-financed deal, there is a published list. SOP 50 10 8.1 requires the lender’s financial analysis to justify additions and subtractions to cash flow, and enumerates what those look like [1] :
- Unfunded capital expenditures
- Non-recurring income
- Expenses and distributions
- Distributions for S-corporation taxes
- Rent payments
- Owner’s draw
Two things are worth noticing about that list. It runs in both directions. “Unfunded capital expenditures” is a subtraction — the lender takes cash flow away for capex the business needs but has not been funding, which is the single most common way a broker’s SDE overstates what a buyer can service. A seller’s schedule that only adds is not a reconstruction, it is an argument.
And rent is on it. Where an owner also owns the building and charges the business below-market rent, the lender adjusts to a market figure — which reduces cash flow. If the seller’s add-back schedule treats their own below-market rent as a benefit that continues, ask what the lease will say after closing.
The same SOP requires the lender to calculate EBITDA and to spread a pro-forma balance sheet, and to produce ratio benchmarks including the current ratio, debt to tangible net worth and debt service coverage. If you want to know what your file will look like to a credit committee, that is the list.
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.
Frequently asked questions
What makes an add-back legitimate?
One test settles most arguments: will this cost exist for you? If it will, it is not an add-back, whatever the listing calls it. Owner compensation, a genuinely one-off legal fee and clearly personal expenses run through the business usually survive. Family payroll for real work does not, because you will have to replace that person.
Why does the lender's add-back list differ from the broker's?
They are answering different questions. The listing is set up to show the business at its best; the lender is deciding what it can safely lend against. Expect the lender-accepted figure to come in below the listing figure, and treat the gap as a diligence list rather than an argument.
What documentation should I ask for?
Whatever proves the item was both real and non-recurring: the invoice, the bank entry, the board minute, the settlement agreement. An add-back with a plausible story and no document behind it is the one most likely to disappear under a quality of earnings review.
Sources cited on this page
Every mutable number on this page — program caps, tax rules, thresholds, filing deadlines — traces to one of these primary sources. Rules change; check the source before you act on the number.
- 1 U.S. Small Business Administration. SOP 50 10 8.1 — Lender and Development Company Loan Programs. https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs
Educational only — not legal, tax, lending, or investment advice. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. See the editorial policy and methodology for how sourcing and review work.