The short version
- Buyers price your company on adjusted earnings, not on the profit line of your tax return
- Legitimate add backs are real, documented and tied to the owner or a one time event
- Cash that never touched the books is worth nothing at sale time
- Clean records let you defend each adjustment in diligence
Why Earnings Get Rebuilt
Most owners run personal costs through the company to lower taxes. A buyer wants to see the profit one working owner could take home, so the numbers get recast. This is one of the most misunderstood parts of a valuation.
The result is seller's discretionary earnings for owner run companies, or EBITDA when a manager replaces the owner. Either way, price follows the adjusted figure.
Add Backs Buyers Usually Accept
- Your own pay, payroll taxes and health insurance when you work in the business
- Personal vehicle costs and a phone plan that are not needed to run the company
- One time legal bills, moving costs or a lawsuit that will not repeat
- Interest and, for equipment heavy firms, part of depreciation
- Pay to a family member who does little work, if the role can be filled for less
Add Backs Buyers Push Back On
Buyers reject money that merely showed up once, such as proceeds from selling a company truck or a bank loan. Those are not operating cash flow, and presenting them as such damages trust.
Owner draws are not earnings either. Money moved to a personal account does not appear on the profit statement, so it must be recast properly before it counts.
For equipment heavy companies, buyers often haircut the depreciation add back. A fair planning rule is to treat at least half of depreciation as ongoing maintenance spending until you can show otherwise.
Cash That Never Hit the Books
Unreported cash does not count. A seller is paid only for profit that can be proven, and hiding income to save about twenty percent in tax can cost two or three times that amount in lost price at a normal multiple.
If your company has been underreporting, speak with your CPA before you list. Cleaning up several years takes time, and buyers look back three to five years.
Document Every Adjustment
For each add back, keep an invoice, a payroll record or a short written explanation. A schedule that ties to the return and to bank statements is far more convincing than a verbal claim.
Stale balance sheets also hurt. A vehicle you sold years ago still on the books suggests weak accounting. Have your CPA update the statements before the first buyer sees them.
See It in Your Trade
Different trades have different recurring add backs. Read how buyers treat a repair shop or a service contractor to see examples.
Concentrated sales can also shrink the multiple, which is covered in the customer concentration brief.
When you want to see the result, request a confidential valuation.