Add-backs are expenses you add back to net income to show buyers what the business actually earns under normal circumstances. They help calculate seller’s discretionary earnings or adjusted EBITDA, which is what buyers use to determine value. The higher your defensible add-backs, the more your business is worth on paper.

The key word is defensible. Buyers and their accountants will scrutinize every add-back you claim. If something looks like a stretch, they’ll discount it or question everything else on your list.

Start by understanding the main categories. Owner compensation is typically the largest add-back. Your salary, health insurance, retirement contributions, and any benefits that wouldn’t transfer to a new owner get added back. Personal expenses run through the business also qualify. The car you use for personal errands, your cell phone, meals that weren’t really business meals, family members on payroll who don’t actually work there.

One-time and non-recurring expenses are legitimate add-backs. A lawsuit settlement, moving costs, a one-time equipment repair, professional fees for something that won’t repeat. If it happened once and won’t happen again under new ownership, it can be added back.

Discretionary expenses that aren’t necessary for operations also count. Maybe you sponsor a local youth league or donate generously to charity. These are real expenses, but a new owner could eliminate them without affecting revenue.

The tracking itself needs to happen throughout the year, not when you decide to sell. Maintain a separate spreadsheet or use a specific class or tag in your accounting software to flag add-back candidates. Every time you record an expense that wouldn’t exist under new ownership, mark it.

For each add-back, keep supporting documentation. The receipt or invoice, proof of payment, and a note explaining why it qualifies. “Owner auto expense - vehicle used 40% personal” tells the story. “Various personal” does not.

Be conservative with your estimates. If you claim your vehicle is 90% personal use but you visit job sites daily, buyers will push back. If you claim a family member’s salary is entirely an add-back but they actually answer phones, you’ll lose credibility. Better to be modest and defensible than aggressive and questioned.

Working with a small business accountant in San Gabriel Valley who understands business sales makes this process smoother. They know which add-backs hold up under buyer scrutiny and which ones create problems during due diligence.

Start tracking at least two years before you plan to sell if possible. Business sale preparation works best when your financials tell a clear story over multiple years. A sudden spike in add-backs the year you list looks like you’re dressing up the numbers.

When you present add-backs to buyers, create a clean schedule showing each item, the dollar amount, and a brief explanation. Attach it to your financial statements. Transparency builds trust. Buyers expect add-backs. They just want to understand them and verify they’re real.