M&A & Due Diligence
What Are EBITDA Add-Backs?
Add-backs are one-time or non-recurring items subtracted from expenses to get from reported EBITDA to Adjusted EBITDA. Common examples include owner salary above market rate, one-off legal fees, and pre-revenue product launches. Buyers accept defensible add-backs but will cut aggressive ones during QofE, so document every one before diligence starts.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) Add-Backs are one-time or non-operating items added back to reported EBITDA to derive Adjusted EBITDA, the number buyers actually value off. The defensibility of each add-back determines how much of the bridge survives QofE (Quality of Earnings) scrutiny.
Common add-backs (and whether they survive)
- Owner compensation normalization, adding back founder salary above market rate. Survives if documented with market comp benchmarks.
- One-time legal / settlement, survives if truly one-time + documented
- M&A advisory + transaction fees, survives (clearly non-operating)
- One-time bad debt write-off, survives if non-recurring
- Founder lifestyle expenses (personal vehicles, family travel through business), survives if documented as truly personal
- Severance for terminated execs, survives if documented
- One-time marketing tests, usually rejected (look recurring on examination)
- Inventory write-down on discontinued line, split; one-time portion survives, recurring obsolescence pattern rejected
How buyers score add-backs
The QofE team rates each line: Accept (clean documentation, non-recurring), Accept with reduction (partially defensible), Reject (recurring or vague). Reported EBITDA $5M, total add-backs proposed $1.2M; QofE accepts $700K, reduces $300K to $150K, rejects $200K. Adjusted EBITDA: $5M + $850K = $5.85M. At a 6x multiple, $5.1M of enterprise value preserved versus the $7.2M the seller hoped for.
The most common mistake
Including add-backs that look one-time but reveal a pattern under examination. The buyer's team has access to 24-36 months of GL detail and reviews vendors, frequency, and recurrence. "One-time" items that recur quarterly are red flags that color the rest of the bridge.
Frequently Asked Questions
what's a defensible add-back?
Truly one-time, well-documented, not part of normal operations.
how are add-backs scored?
Accept / accept with reduction / reject. The split changes Adjusted EBITDA materially.
typical add-back % of reported EBITDA?
10-30% in most M&A deals.
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