Which add-backs belong in a small-business valuation

What is an add-back?

An add-back is an expense you add back to profit because it is not a cost of the business a buyer will run. The usual set is small. Owner pay above what you would pay a manager to do the job. Expenses that will not recur. Personal costs that ran through the company. Depreciation and amortization, which are accounting charges rather than cash leaving the account this year.

How do you add them up?

Start from net profit and add only the amounts you can point to in the books. Adjusted earnings equal net profit, plus owner pay above a market salary, plus one-time expenses, plus personal expenses, plus depreciation and amortization. A blank line is zero. Do not add a round number because you have heard other owners do.

Which add-backs get challenged?

Any add-back without a receipt, a payroll record, or a clear story. A buyer and a lender will ask you to show the personal car, the one-time legal bill, or the owner's extra salary. If the cost is mixed into a general expense account and you cannot separate it, it is not an add-back yet. It is a question.

What do you do with the total?

That total is the earnings figure you multiply. Once the worksheet is honest, multiply it by the low and high multiples you are using. The result is a range, not a listing price you are required to use. If the range is one you would not accept, the next step is to change the business, not the spreadsheet.

The same lines are on the exit value calculator. How multiples work is the companion piece.