When selling a business, one of the key concepts you’ll encounter during valuation is “add backs.” Add backs are adjustments made to your financial statements (usually to the profit and loss statement) to reflect the true earning power of your business. Essentially, they are expenses that the current owner incurs which a new owner might not have to, or one-time costs that are not expected to recur. By adding these expenses back to the profit, you present a more accurate and often higher picture of your business’s cash flow. Understanding add backs – and using them correctly – is very important for sellers in Florida aiming to maximize their sale price.
Examples of Common Add Backs: A classic example of an add back is the owner’s personal expenses run through the business. Small business owners sometimes expense things like personal vehicles, travel, or cell phone bills through the company. While perfectly legal, these may not be necessary expenses to operate the business. So, if you deduct them from your earnings calculation, the adjusted profit shows what the business would make without those personal costs. Other add backs include one-time expenditures, such as a costly legal fee to settle a lawsuit or an unusual repair expense that isn’t expected to happen again. Depreciation and amortization are also frequently added back because they are non-cash accounting entries (they reduce taxable profit but don’t affect cash flow). The goal is to show the buyer the Seller’s Discretionary Earnings (SDE) or normalized EBITDA – a figure that represents the cash flow available to a new owner-operator after stripping out extraneous costs.
Why are add backs so crucial? Because many buyers value a business based on a multiple of earnings. In Florida’s market, small businesses often sell for a multiple of SDE (for owner-operated businesses) or EBITDA (for larger businesses with management in place). If you can legitimately add back $50,000 worth of expenses, and the market is paying a 3x multiple of earnings for businesses like yours, that could mean an extra $150,000 on the sale price. Add backs essentially help ensure you’re not undervaluing your company by basing the price on artificially low profits. They level the playing field by presenting what the business truly earns under normalized conditions.
However, it’s important to approach add backs carefully and honestly. Every add back you claim will likely be scrutinized by the buyer during due diligence. Savvy buyers (or their accountants) will want proof that these expenses are indeed personal or one-time. For example, if you add back a vehicle expense, be prepared to show that the vehicle was primarily for personal use and not essential to the business operations. If you add back a family member’s salary who was on the payroll but not actually working in the business, clarify that situation with documentation. Transparency is key – unjustified or overly aggressive add backs can erode a buyer’s trust and jeopardize the deal. It’s better to be conservative and factual with adjustments than to overreach and have to negotiate them later.
Calculating and presenting add backs is an area where professional guidance can be invaluable. Many Florida business sellers work with a business broker or accountant to recast their financials before going to market. These professionals know what buyers and lenders (like those offering SBA loans) will accept as valid add backs. Truforte Business Group’s experienced brokers often assist sellers in identifying appropriate add backs and compiling the evidence to support them. By doing this homework upfront, you’ll enter negotiations with credible financials that justify your asking price. In summary, add backs are a powerful tool to highlight your business’s true profitability – used correctly, they can significantly impact your valuation and help you get the best possible outcome when selling your business.
