Quick takeaways
- An add back is a cost removed from your books to show true cash flow, and buyers accept only what they can verify.
- Owner pay, one time costs and personal perks are common add backs that need paper support.
- Proceeds from selling a truck or taking a loan are not operating income.
- Equipment heavy firms should expect buyers to treat part of depreciation as real maintenance cost.
What an add back is
Your tax return shows what you paid yourself and what you wrote off. A buyer wants to know what one working owner could take out of the business, which is called seller's discretionary earnings.
Moving costs out of the books to reach that number is called recasting, and each item removed is an add back.
Add backs that usually hold up
- The owner's salary and benefits for one working owner
- One time legal or consulting costs with invoices
- Personal vehicles or trips run through the company, with records
- Interest and depreciation, with limits for equipment heavy firms
Each needs a paper trail. A buyer who cannot tie an item to a receipt or bank record simply removes it.
Add backs that get cut
Money that happened to arrive is not cash flow. Proceeds from selling a company truck or from a bank loan are one time items, and treating them as operating income erodes trust once diligence begins.
Owner draws also do not show up on the profit and loss statement, so they cannot be counted automatically.
Cash that never touched the books
Unreported cash does not count toward value. A seller is paid only for what can be proven, and hiding income to save about twenty percent in tax can cost far more at a multiple of two or three.
Equipment and the depreciation trap
Shops, fleets and contractors buy equipment that wears out. Buyers often accept only part of depreciation as an add back, treating the rest as maintenance they must fund.
Prepare before you list
Ask your CPA to bring the profit and loss statement current, reconcile the bank accounts and list every add back with support. Read price allocation in an asset sale for the tax side.
When the numbers are ready, find your price range.