EBITDA add-backs: which adjustments can you justify when selling a business?

An EBITDA add-back is an adjustment for a cost included in reported earnings that does not represent the ongoing cost of running the business. A buyer may accept a genuine non-recurring or owner-specific expense, but only if the adjustment is relevant, evidenced and not offset by another necessary cost.

The objective is not the highest possible adjusted EBITDA. It is a figure that a buyer can reconcile to the accounts and trust as a basis for discussion.

That means adjustments can reduce earnings as well as increase them. Ignoring an understaffed role while adding back the founder's salary is not normalisation. It is leaving out the cost of running the business.

EBITDA, adjusted EBITDA and cash flow are different things

EBITDA is earnings before interest, tax, depreciation and amortisation. Start by agreeing the period and reconciling that measure to the underlying accounts. Do not add those items back a second time if your starting number already excludes them.

Adjusted or normalised EBITDA then makes additional changes intended to explain ongoing performance. Terminology and proposed adjustments differ between businesses and transactions, so show the calculation rather than assuming the label is self-explanatory.

BDO's guide to normalised EBITDA discusses owner-related costs, changes in trading and the need to examine costs that EBITDA misses.

Even a well-supported adjusted number is not free cash flow. Capital expenditure, working capital, tax, financing and accounting policy choices still matter to the buyer's return.

Three tests for a proposed add-back

Ask these questions before including an item in your bridge:

1. Was it actually charged to the earnings period being adjusted? If not, adding it back may create profit that was never removed.
2. Why is it not part of the ongoing business? “Unusual” and “unwelcome” are not the same as non-recurring.
3. What evidence supports the amount and the replacement assumption? An invoice proves a cost occurred; it does not prove the business can operate without it.

You also need to consider the other side. Removing a related income item, adding a replacement employee or allowing for market-rate rent may offset some or all of the proposed benefit.

Common EBITDA adjustments and the questions behind them

These are categories to investigate, not a list of automatically acceptable claims. A business can incur professional fees, recruitment costs or bad debts regularly, even if each individual incident looks different.

Owner pay: add back the excess, not the job

Suppose an owner costs the business £180,000 a year and performs a management role that would cost £120,000 to replace on the same fully loaded basis. Subject to evidence and the buyer's agreement, the proposed adjustment is £60,000, not £180,000.

If the owner is paid £30,000 for a role that needs a £120,000 replacement, the adjustment goes the other way: £90,000 of additional cost reduces sustainable earnings.

Consider duties, not titles. A founder may perform sales, delivery and management work that cannot realistically be replaced by one generic salary assumption. Equally, do not charge the same replacement requirement in two separate adjustments.

Dividends are not salary expenses in the profit and loss account. Do not add them to EBITDA as if they had reduced the starting profit. The tax treatment of remuneration and expenses is a separate matter for your accountant.

A worked adjusted EBITDA bridge

The following is hypothetical. It shows the logic of a bridge, not adjustments a buyer must accept.

Assume the reported EBITDA below already excludes interest, tax, depreciation and amortisation. Each listed item is included in the relevant accounts except the missing ongoing cost, which the buyer would need to incur.

The net improvement is £20,000, not the £95,000 of positive adjustments viewed in isolation.

Keep the unadjusted number visible. If a buyer disagrees with one item, they should be able to remove it and understand the effect without rebuilding your model.

Adjustments buyers may reject

“It will disappear after the sale”

Prove why. If a buyer stops your spending on sales, technology or management, what happens to revenue and delivery? A cost is not unnecessary merely because the founder dislikes paying it.

“This happened only once last year”

A one-off invoice may represent a recurring category of cost. Several different disputes over several years can indicate an ongoing legal exposure, even though each case has a unique name.

“Next year's growth is almost certain”

Forecast earnings are not historical EBITDA. Signed contracts, implemented price changes or completed cost savings may inform a separately explained run-rate analysis, but that is not permission to treat a hopeful pipeline as earned profit. Account for timing, seasonality, delivery costs and evidence.

“The buyer can save this cost”

A buyer may have genuine synergies. They still belong in a clearly identified buyer-specific scenario, not disguised as the standalone business's historical performance. Whether and how those benefits affect price is a negotiation.

“We capitalised it, so it does not matter”

Capitalised development or other investment can create a real ongoing cash requirement even when it is outside current EBITDA. Check accounting consistency across periods, including the treatment of leases, before comparing earnings or debt. A larger EBITDA caused by a presentation change is not automatically a more valuable business.

What should your add-backs register contain?

Create one row for each proposed adjustment, with:

• Description, amount and the period it relates to.
• General ledger reference and supporting evidence.
• Why the item is not representative of ongoing trading.
• The replacement cost, offset or related income considered.
• Whether it is historical normalisation, run-rate analysis or a buyer synergy.
• Who reviewed it and what remains disputed.

Reconcile the total to the accounts and keep the original records. Avoid hiding a weak adjustment inside a large miscellaneous category. A smaller, better-supported bridge is more useful than a larger number that collapses under basic questions.

Questions about EBITDA add-backs

Can I add back my whole salary?

Not simply because you own the company. Establish what work is needed after the sale and its appropriate replacement cost. The difference may support an upward or downward adjustment. Owner-operator measures such as seller's discretionary earnings use different conventions; do not apply an EBITDA multiple to a different earnings measure without explanation.

Do add-backs change my statutory accounts or tax return?

A transaction adjustment schedule is an analytical explanation, not automatically a change to filed accounts or a tax deduction. Ask your accountant whether any underlying accounting or tax treatment needs correcting separately.

Does a buyer have to accept an accountant's adjustment?

No. Professional review can strengthen the evidence, but acceptance remains subject to the facts, diligence and negotiation. Record the reasoning and show the effect of disputed items.

General transaction-preparation guidance, not an accounting standard, tax opinion or guarantee of buyer acceptance. Financial examples are hypothetical.