Add-backs

Add-backs are expenses run through a practice's P&L that are personal to the owner or non-recurring, added back into earnings during a valuation because a new owner would not incur them going forward. Common examples include a personal vehicle, family travel booked as a business expense, one-time legal fees from an unrelated matter, or above-market rent paid to a related party the owner also owns. Removing them reveals what the practice actually earns as an operating business.

For a seller preparing for a sale, cleaning these items off the books for the two or three years before listing is one of the highest-leverage things they can do, since every unnecessary dollar removed from expenses can be worth several times that in the eventual sale price once a multiple is applied to it. For a buyer, the corresponding discipline is scrutinizing every proposed add-back rather than accepting a seller's list at face value: a legitimate business expense reclassified as personal is a red flag, not a bonus.

Add-backs should be documented with actual receipts or records wherever possible, since a buyer's lender and accountant will both want to verify them before financing closes.