EBITDA add-backs: what UK buyers usually accept, and what they question

What an add-back is, and why buyers care

EBITDA is earnings before interest, tax, depreciation and amortisation: roughly, operating profit with depreciation and amortisation put back. It is a common starting point because it shows what the trading business earns before financing and accounting choices.

Most owner-managed accounts carry costs that belong to the owner rather than the business, or that happened once and will not happen again. Adding those back gives what is often called normalised or adjusted EBITDA: the profit a new owner could expect if nothing else changed.

Buyers care because any price they discuss is usually built on that adjusted figure. Every pound of add-back a buyer accepts raises the earnings they are pricing; every pound they reject comes back off. The adjustment is multiplied, not just added, which is why add-backs get more scrutiny than almost any other line.

Capeq, an M&A adviser that sells sale and transaction advice, illustrates the point: at a multiple of six, a single £200,000 add-back moves the deal value by £1.2 million. That is their illustration of the arithmetic, not a multiple any particular business will get. Explaining what a multiple is, and why a number comes later, is covered in valuation vs readiness.

The add-backs buyers usually recognise

Guides on both sides of the Atlantic list much the same categories. They are the ones a buyer expects to see, provided each is evidenced:

• Owner costs run through the company: a personal car, a family phone contract, private medical cover for relatives, personal travel.
• Family members on the payroll who do not work in the business, or are paid well above what the role is worth.
• Owner pay that is out of line with the market. This works both ways. Many UK owner-directors take a small salary and the rest as dividends, which are not a cost in EBITDA at all; if your pay is well below what a replacement manager would cost, a buyer will deduct the difference, which lowers the figure.
• Genuine one-off events: a settled legal dispute, a restructuring, a one-time professional fee for something that will not recur.
• Non-arm’s-length arrangements, such as rent paid to a property company you own, adjusted to a market rent in either direction.

Note the two-way adjustments. A careful presentation shows the deductions as well as the additions; a schedule with only additions tends to invite a closer look at everything on it.

Depreciation and amortisation are not add-backs in this sense: they are already outside EBITDA by definition. Interest and tax are too. The add-backs discussed here are adjustments to the costs that remain once those are excluded.

The add-backs buyers tend to question

• “One-off” costs that come back every year. A restructuring in each of the last three years reads as a cost of running the business.
• Leaver costs where the role still needs doing. A buyer will usually net off the cost of a market-rate replacement.
• Forward-looking items, such as the cost of hires who have not yet brought in revenue. Capeq, the M&A adviser cited above, notes that lenders commonly cap pro-forma add-backs at around 20–25% of EBITDA, which matters where a buyer is borrowing to fund the purchase.
• Spending a buyer sees as ongoing: maintenance, marketing that keeps sales coming in, or development work that has to continue.
• Anything described loosely, with no invoice, contract or payroll record behind it.

The last point matters beyond its own amount. Capeq’s guide makes the point that vague or aggressive add-backs erode trust and can do a process more harm than the profit they add. A buyer who strikes out one weak item often looks harder at the rest.

A worked example (illustrative figures)

The business below is invented and the numbers are round on purpose. It reports EBITDA of £300,000 and its owner lists £110,000 of add-backs, presenting adjusted EBITDA of £410,000.

If the restructuring falls away, the adjusted figure a buyer works from is £380,000, not £410,000. If the first three items have no paperwork either, they move from “usually recognised” to “needs evidence”, and the conversation becomes about the schedule rather than the business.

None of these figures is a valuation, and the example does not say what any real business would be offered. It shows how an add-back schedule is read.

What evidence usually settles an add-back

Most disputes over add-backs are about proof, not principle. The documents a buyer’s accountant commonly asks for are plain ones:

• The invoice, contract or settlement agreement behind each one-off cost.
• Payroll records for anyone whose pay is being adjusted, with what they actually do.
• Lease or rent agreements, and some basis for the market rate you are comparing them with.
• The same nominal ledger codes for the prior two or three years, so a buyer can see whether a “one-off” recurs.
• A reconciliation from the filed accounts to the management accounts to the adjusted figure, so every number can be traced.

Owners commonly ask their accountant to review the schedule before a buyer sees it. Advisers who prepare sale documents usually build the same reconciliation, and a buyer’s due diligence will test it line by line; what buyers ask in due diligence covers the wider list.

Seeing your own add-backs the way a buyer will

The free readiness check asks for your profit before add-backs, the add-backs you would claim, and whether the same kind of cost appears in earlier years. It then names what a buyer is likely to question, such as add-backs that are a large share of the profit or ones that recur. It runs in your browser, needs no sign-up, and does not value your business.

The Exit Readiness Report goes further: it reads each add-back you list against the documents you attach and gives it one of three statuses, explained on how we check. None of them means a buyer has accepted it: that remains the buyer’s decision, and many owners still have their accountant review the schedule.