Add backs can lift your valuation, but only if they are clear and defensible. Buyers rely on Seller Discretionary Earnings to compare opportunities. The quality of your add backs tells buyers how much of your profit is truly repeatable after the sale.
What counts as a strong add back:
Owner pay above market. If you pay yourself more than a reasonable replacement salary, the excess can be added back. Support it with market data and a simple memo on role and hours.
One time expenses. Items that will not recur for the new owner can qualify. Examples include a single legal dispute, a one off equipment repair, or a relocation. Show invoices and explain why it will not repeat.
Personal expenses that run through the business. If the company paid for items that are personal in nature, remove them. Examples include personal travel, family phone lines, or a personal vehicle. Keep receipts and a clean list.
Non cash charges. Depreciation and amortization are typically added back when valuing on SDE. Keep the fixed asset schedule handy.
What usually does not qualify
Normal operating costs. Routine marketing, software, or maintenance stays in.
Growth investments that must continue. A new salesperson that drives revenue is not a one time cost.
Revenue declines. Poor performance is not an add back. You need an explanation and a plan, not a reversal.
How to prepare now:
Build an add back file with invoices, bank statements, and short explanations.
Reconcile add backs to your profit and loss and tax returns so totals match.
Use consistent labels across months and years so a buyer can trace every item.
Clean and defensible add backs reduce friction, shorten diligence, and protect your price. As a broker I can help guide on this topic as well as make recommendations to CPAs that are familiar with business transactions so that you can separate what is truly discretionary from what is necessary.