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How To Identify Add-Backs For Your Business Valuation

Writer's picture: Robbins PellegrinoRobbins Pellegrino

Updated: Feb 7



If you're thinking about selling your business, one of the smartest things you can do right now is take a close look at your expenses.

Many business owners don’t realize that certain costs can be added back to their financials to show the true profit of their business.

These add-backs can make a big difference in how much your business is worth when it’s time to sell.

Buyers want to know how much money they can make from owning your business. By cleaning up your financial records and adding back certain expenses, you can make your business more valuable and appealing to buyers.

Let’s talk about how this works.


What Are Add-Backs and Why Do They Matter?
Add-backs are expenses that can be added back to your bottom line because they won’t continue under new ownership.

Think of it this way: if you’ve been running personal or non-essential expenses through the business, those costs won’t exist when someone else takes over.

By adding those expenses back to your profits, you give buyers a clearer picture of how much money the business actually makes.

This is important because buyers—and their lenders—use your profits to decide how much your business is worth.

If your financials make it look like your business isn’t making much money, buyers might offer you less than it’s really worth.

But if you show them the true cash flow, your valuation could go up significantly.


Common Add-Backs That Can Boost Your Value
Many business owners run personal expenses through their company to reduce taxes. Don't worry if that's youit's very common and often legal.

When it comes time to sell, however, those extra costs can hurt your valuation.

Here are some examples of expenses you might be able to add back:

  • Owner Perks & Personal Expenses: It’s common for owners to run personal costs through the business. This might include your personal car, health insurance, meals, or even family members on the payroll. If those costs won’t continue with a new owner, they can be added back to your profits.

  • Personal Travel and Entertainment: Have you taken trips that were more personal than business? Maybe you’ve attended industry conferences but turned them into family vacations. Buyers will understand that these costs won’t be part of their future expenses. These can be added back.

  • Buried Personal Costs in COGS: Sometimes personal expenses are hidden in the Cost of Goods Sold (COGS) to lower taxable income. Maybe you ran personal purchases through vendor accounts or categorized them as supplies. These aren’t part of the business’s operating costs and can be added back.

  • Excessive Owner Salary: If you pay yourself a higher salary than what it would cost to hire a manager, the extra amount can be added back. For example, if you pay yourself $300,000 but a general manager could run the business for $200,000, that extra $100,000 can be added back.


One-Time and Unusual Expenses Count Too
Buyers are also interested in your ongoing business costs, not one-off expenses.

So, if you’ve had any big, unusual costs recently, these can also be added back to show your business's true profit.

  • Moving Costs: If your business moved to a new location, that’s a one-time expense that a new owner won’t have to worry about.

  • Office Renovations: Major renovations or remodels can be expensive but are not something buyers will need to repeat right away.

  • Legal Fees: If you had an unusual legal issue, like a lawsuit or settlement, that’s not a normal cost and can be added back.

  • Consulting Fees: If you hired a consultant for a one-time project, like redesigning your website or marketing materials, that cost won’t carry over to the new owner.

These types of expenses make your business look less profitable on paper, but they aren’t part of the daily cost of running your company. Adding them back gives buyers a more accurate picture.


How Add-Backs Can Increase Your Business Value
As you may know, your business’s value is typically calculated by applying a multiple to your profits.

That multiple depends on things like your industry, market conditions, business size, and growth potential.

But here’s the simple truth: the higher your profits, the higher your valuation.

Let’s say your business shows $400,000 in annual profit. If a buyer uses a 3x multiple, your business would be worth $1.2 million.

But what if you find $100,000 in valid add-backs from personal expenses and one-time costs? Now your adjusted profit is $500,000.

At the same 3x multiple, your business would now be worth $1.5 million—that’s a $300,000 increase just by identifying and adding back non-essential expenses!


Be Honest About What Counts as an Add-Back
At the end of the day, identifying add-backs can boost your business value, but it’s important to stay honest.

Buyers will examine your financials closely, and if they spot questionable add-backs, it could damage trust.

For example, you can’t just add back every expense you don’t like. Regular costs, like rent, utilities, and employee wages, stay put.

You also can’t ignore the need for regular maintenance or future repairs.

Transparency is key. You need to be able to clearly explain why each add-back makes sense and why it won’t impact future profits.


Start Reviewing Your Financials Early
Add-backs aren’t something you should rush through. The earlier you start organizing your financials, the more time you have to clean up your records and highlight the value of your business.

Work with your business broker to carefully go through your financials. They can help you spot valid add-backs and avoid pushing the limits.

Taking the time to do this now can save you from headaches later and put you in a stronger position when you start talking to buyers.


The Bottom Line
If you want to get the best possible price when selling your business, identifying valid add-backs is a must.

By adding back non-essential expenses, owner perks, and one-time costs, you can show buyers the true earning potential of your business. This will make your business more attractive and significantly increase its value.

If you’re ready to maximize your business’s value and prepare for a successful sale, we’re here to help. Contact us today to get started.

About Robbins Pellegrino: Robbins Pellegrino is a Florida-based business brokerage firm led by Chandler Robbins and Joe Pellegrino, Jr. that is committed to redefining industry standards. We focus on creating meaningful partnerships and ensuring successful business transitions for both buyers and sellers. For more information, visit us at www.robbinspellegrino.com or call (239) 360-6273

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