EBITDA Add-Backs:
A Seller’s Guide to What Holds Up (2026)

What is an EBITDA add-back?

An EBITDA add-back is an expense in your reported earnings that you ask a buyer to remove because it will not continue under new ownership, such as your personal car or a lawsuit that is over. Adjusted EBITDA is your reported EBITDA (earnings before interest, taxes, depreciation, and amortization), plus the add-backs, minus the adjustments that go the other way. Buyers multiply adjusted EBITDA to set the price, so each add-back is really a request for a multiple of its value. Accountants often call these normalization adjustments.

This guide is the seller’s working manual: which add-backs usually hold up, what proof each one needs, the adjustments that lower your number, and how to lay out a schedule a buyer’s accountant will trust. For what a buyer’s quality of earnings review (often shortened to QoE) does with that schedule, see our guide to the quality of earnings report. For how adjusted EBITDA and multiples set a price, see EBITDA and valuation basics.

What makes an add-back hold up: the two-part test

An add-back holds up when it passes two tests: the cost, or the income, will not continue after a buyer owns the business, and a document rather than an explanation proves the amount. Baker Tilly, an accounting firm, describes the buyer’s side of that test: the review should include “obtaining original documentation. Estimates should not be accepted and the rationale for each adjustment should be challenged.”

Mercer Capital, a valuation firm, sets out what a good adjustment looks like from the other direction: “A well-constructed pro forma analysis explains what was adjusted, why the adjustment is appropriate, whether it is expected to persist, and how it affects ongoing earnings.” If you cannot write those four things for a line on your schedule, a buyer will probably strike it.

The problem is rarely the idea of adding back. CLA, an accounting firm, puts it this way: “The problem is not the add-backs themselves; it’s when they are unsupported, inconsistent, or stretch the definition of ‘non-recurring’ beyond what a buyer’s QoE provider will accept.”

What changed in 2026: SBA rules now spell out add-backs

If your buyer is financing the purchase with an SBA 7(a) loan, common in smaller deals because a standard 7(a) loan is capped at $5 million, the rules taking effect October 1, 2026 (SBA SOP 50 10 8.1) turn add-back review into a requirement. For the purchase of a business (what the SBA calls an initial acquisition or business expansion) priced at $3 million or more, excluding owner-occupied real estate, the lender must obtain a quality of earnings report from an independent professional, prepared for the lender rather than for you or the buyer. The SOP says:

“The report must identify and document all add-backs and adjustments to the seller’s reported earnings, including non-recurring revenue or expenses, above- or below-market owner compensation, related-party transactions, deferred maintenance, and accounting methodology differences between cash-basis and accrual-basis reporting.”

For every SBA change-of-ownership loan, whatever the price, a lender that adjusts cash flow must justify each adjustment in its credit memorandum, and “Adjustments to cash flow without the Lender’s supporting analysis and justification will be ineligible” when it tests whether the business can carry the debt. The lender must evaluate the buyer’s projections but “may not rely on them” for that test. When a quality of earnings report is required and its earnings do not support the proposed debt, the SOP says the loan amount “must be reduced accordingly.” In practice that means a lower price or more buyer equity. A seller note (part of the price you lend the buyer) can help fill that gap only on full standby, with no payments of principal or interest for the term of the SBA loan.

Even if your buyer never uses an SBA loan, that list is a fair summary of what any buyer’s accountant will look at. Build your schedule to pass it.

Which add-backs do buyers accept?

Buyers usually accept five kinds of add-back when each has a document behind it: owner pay above a market salary, personal and family expenses run through the business, genuinely one-time costs, the costs of the sale itself, and rent paid to an owner above market. The table below lists the proof each one needs, plus two related items. Our quality of earnings guide has a companion table showing what the reviewer tests for each category and how it usually comes out.

Illustrative, drawn from the accounting and valuation sources cited in this guide. Treatment varies by buyer and by facts.

Can you add back owner salary?

Under adjusted EBITDA, you can add back only the part of your pay above what a buyer would pay someone to do your job, along with the employer payroll taxes on that excess. If you are paid less than that, the adjustment goes the other way. If two owners both work in the business, each role a buyer would have to fill needs its own market salary. Withum, an accounting firm, calls this “Perhaps the most common normalization adjustment,” and lists the salary data appraisers use, including the Economic Research Institute, the Risk Management Association, and the U.S. Department of Labor. Lutz, an accounting firm, puts the same limit this way: “Owner compensation (at market) is typically not considered an addback when the owner is actively involved in the day-to-day business and is essential to continuing business operations.”

Personal and family expenses

CBIZ lists the usual examples: “the purchase or use of personal assets, such as boats or vehicles; family entertainment; sporting tickets or club memberships for personal use; or personal life insurance.” It also covers family payroll: “some family-owned businesses may employ family members who do not perform business functions, or whose position may be eliminated following the close of a transaction.” BDO, an accounting firm, tells buyers to “seek supporting documentation (invoices, payroll registers, etc.) wherever possible to confirm the amounts.” A general ledger that mixes personal and business spending in one account makes this hard. Separate them now. Read the tax section below before you add any of these back.

One-time costs

A lawsuit that is settled, a consultant hired for a single project, or storm repairs covered by insurance can come out of earnings if they will not recur. Keep the invoices and the document that shows the matter is closed, such as a settlement agreement. If you had severance or layoff costs, expect the buyer to ask, as BDO puts it, “whether positions were back-filled” afterward.

Related-party rent

If you own the building and lease it to the business, the rent has to be restated at market. Withum calls related-party rent “generally among the more significant and impactful normalization adjustments.” Rent above market is an add-back. Rent below market, or no rent at all, is a deduction. If you are keeping the building, Withum notes that without an appraisal, “the proposed lease rate between the buyer and seller can be used as a fair market rent expense,” so the lease you negotiate becomes part of the earnings math. Our childcare multiples guide works through an example of below-market rent.

Income that will not recur

Some adjustments remove income rather than add back expense. GBQ, an accounting firm, lists “PPP loan forgiveness, Employee Retention Credits (ERC), Economic Injury Disaster Loan (EIDL) forgiveness” among the non-recurring income a quality of earnings review strips out. Insurance payouts and gains on selling equipment or property are treated the same way. If those items flattered a year you want buyers to focus on, take them out yourself.

Which add-backs do buyers reject?

Buyers most often reject “one-time” costs that recur, run-rate adjustments and savings that have not happened yet, and revenue lost in a bad year. Savings a buyer expects to create after closing are the buyer’s value, not yours, and are not added back at all.

Costs that are “one-time” every year

This is where most schedules lose credibility. Stout, a valuation firm, calls one-time and restructuring charges “the most subjective of all EBITDA adjustments,” and gives the classic example: “litigation expenses in an individual case may be unusual, but responding to lawsuits is a necessary cost of business.” A common yardstick comes from the SEC’s rules for public companies. As the law firm Gray Reed summarizes them, an expense is non-recurring if the event behind it “has not occurred within the most recent two years and is not expected to recur within the following two years.”

Patterns count against you. Mercer Capital warns that “A regular or predictable pattern of unusual or nonrecurring events in the same direction can undermine the credibility of a QofE analysis.” A consultant in three straight years, a “one-time” recruiting fee every spring, or legal fees that move from one dispute to the next will be treated as operating costs.

Pro forma and run-rate adjustments

A pro forma adjustment restates past results as if a change that has already happened, such as a new lease or a signed price increase, had been in place for the whole period. Baker Tilly notes these are “frequently overlooked and misunderstood by sellers,” and gives legitimate examples: adjustments made “to annualize a midterm rent increase or account for a new union contract.” A run-rate adjustment annualizes a recent stretch of results, and savings you expect but have not achieved are weaker still.

Buyers discount these heavily. PKF O’Connor Davies, an accounting firm, writes that sellers “routinely introduce excessive and subjective expense reversals with limited supporting evidence,” including “‘run rate’ cost savings that are largely aspirational,” and that buyers “are increasingly characterizing these as a matter of trust and credibility.” The evidence from larger deals supports their caution. S&P Global Ratings, in a study of add-backs at large, broadly syndicated M&A and leveraged buyout borrowers reported by PitchBook in 2024, found that for deals originated from 2015 to 2020, “95% of companies failed to meet their first-year EBITDA projections.” In a larger sample of 600 deals from 2015 to 2022, add-backs averaged 29.4% of management-adjusted EBITDA, and “expected synergies and cost savings” were the largest category. Those companies are far larger than the ones this guide is written for, but the lesson holds: buyers discount savings that have not happened yet.

Show pro forma items in a separate section below adjusted EBITDA, each with the signed document behind it, and let the buyer decide how much credit to give. A signed document beats a trend every time.

Lost revenue and bad years

A slow year is not an add-back. Gray Reed, writing about pandemic losses, put it bluntly: “Unfortunately lost revenue is very unlikely to be a permissible addback.” If a year was unusual, explain it in your materials and let the trend make the case.

Which adjustments lower adjusted EBITDA?

Sellers build schedules that only go up. Buyers do not. Mercer Capital writes that a thorough review “should seek to identify such adjustments regardless of whether they increase or decrease adjusted EBITDA,” and BDO reminds buyers that “adjustments can go both directions depending on the nature of the item.” The common ones:

• An underpaid owner. If you pay yourself less than a manager would cost, the buyer adds the difference as an expense. Aprio, an accounting firm, gives an example of a business reporting $500,000 of EBITDA while its owner took $75,000 against a $250,000 market rate. Normalized EBITDA fell to $325,000. At the 4.5x multiple implied by Aprio’s figures, that $175,000 gap meant that without the adjustment, “the value of the business would have been overstated by $787,500.” Our guide to reducing owner dependence explains why hiring that manager before a sale often costs less than owners fear.
• Below-market rent to yourself. The shortfall to market rent becomes an expense.
• An empty seat. Baker Tilly notes that “earnings that are not sustainable because of understated expenses due to an unfilled executive position, as an example, would overstate sustainable earnings.” If a buyer must hire a controller or sales manager you have been doing without, expect that salary to come off.
• Deferred maintenance and capital spending. Equipment you have not replaced and repairs you have put off lower what the business will really earn. The SBA rules name deferred maintenance explicitly. Some owners also expense repairs that should have been capitalized. Withum notes those get moved to the balance sheet and depreciated instead, which raises EBITDA, but expect a buyer to count that spending as recurring capital expenditure when it weighs cash flow.
• Cash-basis books. If you record revenue and expenses when cash moves rather than when earned or owed, a review will convert to accrual, and the change can go either way. CBIZ notes that “The most common cash-to-accrual adjustments are for payroll, insurance, and other large recurring expenses.” Baker Tilly flags bonuses that are recorded only when paid.

Put these on your own schedule. A seller who shows the negative adjustments first gets more credit for the positive ones.

Personal expenses and taxes: a question to ask before you add them back

Tax law allows a deduction only for business expenses. Section 162 of the Internal Revenue Code allows deductions for “ordinary and necessary expenses,” and the IRS’s guide to business expenses (Publication 535, last revised for 2022) states plainly: “Generally, you cannot deduct personal, living, or family expenses.”

In our view, that creates a question every owner should raise with their CPA before sharing an add-back schedule. A line that says a car, a vacation, or a family member’s paycheck was personal is also a written statement about deductions the company has taken. Disallowed deductions can bring back taxes, interest, and an accuracy-related penalty of 20% of the part of the underpayment it covers, where it applies. For a C corporation that tax sits with the company, and in a stock sale it stays there. For an S corporation, the income tax generally falls on the shareholders, so it can follow you however the deal is structured. Plante Moran, an accounting firm, notes that “tax debts remain with the business if the business is acquired in an equity transaction,” and that exposure found in diligence can lead to “price adjustments or establishing an escrow to cover the exposure.”

The practical answer is to stop running personal expenses through the business now. Buyers usually review three years plus the trailing twelve months, so one clean year will not erase the earlier ones, but it gives buyers a recent year they can price without adjustments. Our quality of earnings guide suggests stopping at least a full year before you go to market. For expenses already taken, ask your CPA how to present them and whether to amend any open years. The IRS generally has three years after filing to assess more tax, with no limit for a fraudulent return, and tax reported on a qualified amended return filed before the IRS first contacts you, or your S corporation or partnership, about an exam is generally excluded from the underpayment the penalty is figured on. Our guide to asset sales vs. stock sales explains which liabilities follow the company.

What happens when an add-back does not hold up

The first cost is price. Every dollar struck from adjusted EBITDA comes off the price at the multiple. The second is the deal. Axial’s Dead Deal Report on 75 broken letters of intent from 2025, where average EBITDA by buyer type ranged from about $1.3 million to $5.2 million, found that EBITDA discrepancies found by the quality of earnings review caused 21.3% of the broken deals, up from 10.6% in 2023. In Axial’s words, that share “more than doubled.” One buyer in the report said simply: “The banker had overstated EBITDA by 25%.”

The third cost is trust. Mercer Capital warns that “If adjustments are aggressive, unsupported, or inconsistent, buyers will identify that quickly. The result is often renegotiation or loss of trust.” After one weak add-back, a buyer’s accountants tend to re-examine the rest. What the buyer will not pay for at closing it may offer to pay later through an earnout, if the business earns it.

The last cost can be legal. Sellers almost always sign statements in the purchase agreement that their financial information is accurate. In Express Scripts v. Bracket Holdings, as Pillsbury, a law firm, describes it, a buyer claimed the seller had inflated the revenue behind a stated EBITDA of $29 million, and a jury awarded $82.1 million for fraud. In 2021 the Delaware Supreme Court reversed that verdict and ordered a new trial: the purchase agreement limited the buyer to an insurance policy except for deliberate fraud, and the jury had been wrongly told it could also find liability for recklessness. The case shows how directly an EBITDA figure becomes a promise in the purchase agreement. Our guide to the letter of intent explains how to make clear, before you give a buyer exclusivity, that the price assumes the financial information you have already shared.

How do you build an add-back schedule buyers trust?

1. Start from numbers a buyer can tie out. Begin with your financial statements or tax returns for the last three years and the trailing twelve months, and reconcile them to your bank statements.
2. One line per adjustment, per year. Give each its amount, category, a one-sentence reason, and a reference to the supporting document. GBQ describes the standard in a quality of earnings report: “Each EBITDA adjustment has its own tab indicating the value of the adjustment by month and explaining why the adjustment is being made.”
3. Show both directions. List the adjustments that lower EBITDA alongside the ones that raise it.
4. Keep pro forma items separate. Put them below adjusted EBITDA, each tied to a signed document.
5. Load the proof up front. CLA advises sellers to “Provide supporting documentation for every normalization adjustment in the initial data room submission,” meaning the first batch of files you post to the secure online folder buyers review. Our due diligence checklist lists what else buyers will request.
6. Keep the list short. Keystone CPAs warns that “The more add-backs you have, the less credible your numbers become. Buyers (and banks) get uneasy when they see a long list of adjustments, especially if the documentation is thin.” Drop the small, weak items. They cost more credibility than they add.
7. Consider testing it first. A sell-side quality of earnings review checks your schedule before a buyer does. In GF Data’s analysis of private equity deals, reported by ACG’s Middle Market Growth, “conducting a sell-side QoE had little impact on valuation for transactions valued at less than $50 million,” so the case for one at smaller sizes is fewer surprises and fewer re-trades (a buyer cutting the price after you sign the letter of intent), not a higher multiple.

Sample add-back schedule (template)

A hypothetical example. Here $335,000 of add-backs and $136,000 of negative adjustments raise EBITDA by a net $199,000, about 8%. At a 6x multiple that is roughly $1.2 million of price, which is why every line needs its support column filled in. Review lines like the family-member payroll with your CPA before sharing them, for the tax reasons above. Every business’s adjustments differ.

SDE or EBITDA: which number your buyer uses

Smaller businesses are often priced on seller’s discretionary earnings (SDE) instead. SDE adds back one owner’s entire compensation, including benefits and personal expenses paid by the business, as the International Business Brokers Association defines it and MidStreet, a business broker, quotes it. Adjusted EBITDA deducts a market salary for someone to run the business. Morgan & Westfield, a business broker, writes that “SDE is normally used with businesses that have less than $1 million in SDE.” Between roughly $500,000 and $1.5 million of earnings, buyers can go either way, so ask which number yours is using. Above that range, expect adjusted EBITDA. Never mix the two: adding back your whole salary and then applying an EBITDA multiple overstates the price, and buyers will catch it.

Checklist: before you share your add-back schedule

1. Three years plus the trailing twelve months, tied to financial statements and tax returns.
2. Every add-back has an amount, a reason, and a document.
3. Owner pay is adjusted to a market salary, in either direction, with payroll taxes.
4. Personal and family expenses are listed line by line, not estimated.
5. No “one-time” cost appears in more than one year without an explanation.
6. Related-party rent is restated to market, supported by an appraisal or broker opinion.
7. PPP, ERC, insurance proceeds, and asset-sale gains are removed.
8. Negative adjustments are on the schedule: empty seats, deferred maintenance, unaccrued costs.
9. Pro forma items are separate and tied to signed documents.
10. Your CPA has reviewed the personal-expense items for tax exposure.
11. You know whether your buyer will use SDE or adjusted EBITDA.
12. Supporting documents are in the data room from day one.

Frequently asked questions

What is an EBITDA add-back? An EBITDA add-back is an expense removed from reported earnings because it will not continue under new ownership, such as owner pay above market, personal expenses run through the business, or a one-time legal cost. Reported EBITDA plus add-backs, minus adjustments in the other direction, gives adjusted EBITDA, the number buyers multiply to set a price.

Which add-backs do buyers usually accept? Owner pay above a market salary, documented personal and family expenses, genuinely one-time costs such as a settled lawsuit, the costs of the sale itself, and above-market rent paid to an owner. Each needs a document behind it, such as payroll records, invoices, or an appraisal.

Which add-backs do buyers reject most often? Costs labeled one-time that recur, estimated personal-use percentages, run-rate and projected savings, and lost revenue from a bad year. A pattern of unusual items in the same direction undermines the whole schedule.

Can I add back my salary? Only the part above what it would cost to hire someone to do your job, if the buyer uses adjusted EBITDA. If you pay yourself less than market, the buyer will lower adjusted EBITDA by the difference. Buyers using seller’s discretionary earnings add back one owner’s full compensation instead.

Is PPP loan forgiveness an add-back? It works the other way. PPP forgiveness, Employee Retention Credits, and similar one-time income are removed from EBITDA because a buyer will not receive them again.

Does the SBA require a quality of earnings report for add-backs? Yes, for SBA 7(a) loans that finance an initial acquisition or business expansion priced at $3 million or more, excluding owner-occupied real estate, under SBA SOP 50 10 8.1, effective October 1, 2026. The lender obtains it from an independent professional, and it must document every add-back. On any SBA change-of-ownership loan, adjustments the lender cannot justify in writing are ineligible when it tests whether the business can carry the debt.

How many add-backs is too many? There is no set number, but a long list with thin documentation lowers buyer confidence in every line. Keep the adjustments that are large and well supported, and drop small, weak ones.

Are interest, taxes, depreciation, and amortization add-backs? Not in the sense this guide uses. Those four are removed to get from net income to EBITDA. Add-backs are the adjustments made after that to reach adjusted EBITDA.

What if two owners both work in the business? Add back what each owner is paid, then deduct a market salary for every role a buyer would have to fill. An owner who is only an investor needs no replacement salary.

Working with an advisor on your add-backs

Salt Creek Advisory is a family-owned investment bank, founded by brothers Jack and Connor Pitts, that advises lower middle market business owners on selling their companies. We help owners build an add-back schedule that holds up, decide which adjustments to defend and which to drop, and present adjusted EBITDA to buyers before their accountants arrive. Jack and Connor stay involved throughout, alongside your CPA. Owners preparing for a sale can schedule a confidential conversation with Salt Creek Advisory or start with a free preliminary valuation.