Using Add-Backs to Enhance your Valuation

<p>An add-back is an expense that is added back to the profits of a business (most often earnings before interest, taxes, depreciation, and amortization, or EBITDA), to show the profitability and value when you take out expenses that will “go away.”</p><p>Add backs play a critical role in adjusting the bottom line when analyzing the valuation of a company.  A “legitimate” add back is an expense that is for owner benefit that would not continue after a transaction with a new buyer.</p><p>Some examples of legitimate add-backs are:</p><ul><li>Legal Fees</li><li>Facility updating</li><li>Personal expenses</li><li>Adjustments to the owner’s compensation</li></ul><p>One time instances where it would add back to EBIDTA:</p><ul><li>One time fees: litigation that has now been settled</li><li>Something you wouldn’t close after a transaction</li></ul><p>Things that we would not consider an add-back:</p><ul><li>Owners salary if you are going to continue on after selling your business - adjusting compensation to the market price</li><li>Bad debt expense. For example, you’ve done a lot of work for a client and they didn’t pay you so you write it off, this expense is not considered an add back. </li><li>Rationalizing Staff - Let’s say you paid someone for the year and it was a bad hire and you fired them, it would not be considered an add-back as it impacted your profit.</li><li>“I rented a space that is too big for my business.” This is an expense you can adjust, but you can’t say in the year “we should have had a smaller office so we should add this back.”</li></ul><p>If you’re acquiring a company read our <a href="https://www.revenuerocket.com/evaluating-addbacks/">add backs</a> blog post.</p><p>Think about add-backs to EDIBTA are for owner benefit that will not be there going forward, or one time expenses that hit your P&L that will not in the coming years. If you have questions about expenses you need to take a closer look at, we can help. Reach out at: info@revenuerocket.com</p>