Add-Back

An add-back is an adjustment made to a business's reported net income to reflect the true earnings available to a new owner. Common add-backs include the owner's above-market salary, personal vehicle expenses, personal travel charged to the business, family members on payroll who perform no business function, and one-time professional fees related to the sale itself.

Add-backs are central to calculating EBITDA and Seller's Discretionary Earnings (SDE). A buyer multiplies the normalized earnings — net income after all legitimate add-backs — by an industry multiple to arrive at enterprise value. Overstating add-backs inflates the valuation and is one of the most common sources of disputes between buyers and sellers during due diligence.

The Canada Revenue Agency scrutinizes add-backs when reviewing business sale transactions, particularly when the seller claims the Lifetime Capital Gains Exemption (LCGE). Each add-back must be supported by documentation showing the expense was genuinely owner-specific or non-recurring.